Saturday, January 22, 2011

Inflation Nation

Anyone who goes to his local grocery store in the corner of the street realizes that the cost of basic food and vegetables have gone up many folds in recent months. The story is similar in almost all commodities across the various segment of people. Unfortunately it affects the poor people more than the rich people. This is because the percentage of money allocated for food is higher in the lower income group than others. Any price rise will affect the BPL (Below Poverty Line) and lower middle class segment of the population directly. Since the majority of Indians fall in this category its not a pleasant environment. Vegetables are part of regular Indian meal and they are consumed in abundance compared to other western nations. Onions and tomatoes are basic ingredients in any Indian food preparation. When the price of these items go from Rs. 20 a kilogram to Rs. 80, the ordinary people have the reason to be upset. It affects their monthly budget. Prices rises are significantly gone up for dhaal, oil, sugar and you name it. Even construction material cost have gone up making land, housing cost go through the roof over years now. Bottom line, the price rise is across board through out the country. We have the economist Prime Minister in Dr. Manmohan Singh, and its wondering what does he think conceptually on this. The recent press conferences from him merely reflects his political face rather than his economic thoughts.

The government as usual has come out against the rising pricing prices with more words, than actions, and has blamed it on the term "inflation". Inflation according to the government is the reason for price rises. Contrary to what the government says, inflation is NOT price rises. Price rise is the 'consequence' of Inflation. The Inflation itself is a concept of lose monetary policy (that is originally proposed by the government). The government completely hides this big elephant below the mat and propagates its version of story across the country. And in many ways succeeded. Inflation can be summed up as : too much money chasing too little commodities. People posses the money and are willing to pay more for the commodity that is in scarcity. lets take the example of onion price in reason days. The government is conveying a notion that the price of onions have shot up, because the of "more rain" in Maharashtra and Gujarat, the bigger producers of onions. This may be part of the reason, but not the entire problem. Politician always are comfortable to blame it on the seasonality factors. It suits them to hide the truth, and the listener for some reason buys that argument. If that was entirely true, it should always be true that people in a remote north Indian state of , Assam or Nagaland consumed a significant percentage of onions grown in Maharashtra or Gujarat. This is not the case. Bulk of the perishable items can only be locally grown and consumed in countries like India, where we lack huge storage facilities.
It would make sense to believe, the supply for the local community has come down because of loss in production or artificial demand creation facilitated by middle men and hoarders.
When the government managed to blame it on the rains for onions, what is the explanation it can give to the rise of price of cement, for example. It is just a chemical that is artificially produced. Its prices have gone up still. So the reasons for price rises are not what the ministers say in press interviews, the problem is bigger than what it is.

There are two kinds of inflation. Anticipated steady inflation and unanticipated inflation. The later is more lethal than the former. When people expect inflation to occur steadily over time, people are prepared for it. They make financial decisions based on that. The concept of leasing home dwelling is a good example. A family walks into a home, it pays the landlord a substantial amount, say 10-20% of the value of the house. They reside in the house for a predetermined period of time, say 5 years. After the lease expires the landlord gives back the same exact money. The assumption in this trade was the revenue generated on the initial principal equates to the rent on the property in the period. This is a classic case, where there are marginal inflation and no boom boom inflation. Both the owner and tenant benefit in the transaction. However these days, these deals are no longer common. It is because of unanticipated inflation prevalent in the recent decade. This crushes out the savers. Anybody who has money in the bank lose the value of money they hold. They do not anticipate the loss they make on risk free saving. It is just a wipe out and eaten out by inflation. Fixed income group of people lose their livelihood in the process, for example retires. The interest rates prevalent in the market and the ones published by RBI (Reserver Bank of India) do not do ample justice to these people.

For today's Indian problem of Inflation, the RBI does have a major role. It is merely a tool in the hands of the government. Usually the RBI publish and maintain interest rates on the market. As of now, the interest rate in India is around 6%. What it means is a person who has money in the bank, say Rs. 100/- gets a annual interest of 6%. So he ends up with Rs.106/- end of the year. It is the interest acquired on the principal. No risks, no hassle savings. The problem with that is - the real inflation is more than that. It is in double digits, with food inflation at 16%. So what it basically means is, the commodities he bought of Rs.100/- a year before is now worth Rs. 116/-. So basically the money has lost value in spite of the interest. The saver actually lost money by having it idle. Ideally interest rates must be higher than the inflation to encourage savings. Mathematically a 7% annual rise, doubles the value in 10 years. Savings are very important for the growth of the society. Savings create capital and create wealth and in turn create jobs. India really needs a high interest, low inflation society for a long term growth. In Brazil today, the interest rate is more than 11%. The Brazialian real has appreciated 35% against the US dollar in the last year alone. India should learn from Brazil.

The important thing that really really worries me is the RBI 'policy on inflation' where they "expect" inflation at 4-6% and consider that acceptable. Meaning they want a price rise of 5% a year on every Indian Citizen. How many of them make a pay rise of 5% a year at their work. Why can't we have it at less than 1 or 2 percent, like in most developed countries and in likes of China, Brazil. Economic principles are same across any nation of any size and richness.

When i mentioned the lose monetary policy followed by the government, it means low interest rates, and more importantly a lot and lot of printing artificial money, or fiat currency - rupees. The RBI prints money and it prints a tonne of it. This is the fundamental problem contributing to Inflation in India. It is just been 5 years, we have moved from abundant Rs.500 rupee bill to Rs. 1000 rupee bills. Until 5 years before the Rs. 1000 bill wasn't common. Now its everywhere. This is bad, and its going to cost the country dear. It is just a matter of time, they come up with Rs. 2000 or even Rs. 5000 rupee bills. This is the real problem. So now we know, why too much money chases too few goods. Countries create money out of thin air, and prosperity cannot be achieved through this. It generates a artificial period of growth, and eventually inflation will catch up, and will lead to ruins. The value of currency must go high and not low. These economist you see on TV say, the money losing value is a good thing because it encourages export to other countries. It is a void argument. It makes the exporters become poorer. The society becomes rich only on production and savings., and not by export based on cheap currency parity. If the government of India increase the interest rates significantly and STOP money printing, encourage production, the inflation will ease. The Prime minister Dr.Manmohan Singh, one of eminent economist the country has seen, realizes this? Isn't this basic economics. The counter argument, the RBI may make is to show the forex reservers accumulated by India that accounts to over $300 billions. Technically India can print as much money as the foreign reserve it holds. Unfortunately the foreign reserve itself is a fiat currency. Someone should ask Mr. Subba Rao, the RBI governor, how much Forex reserves does the Chinese have (they have 3 trillion), and why is the chinese yuan lot stronger than the Indian rupee vis-a-vis the US Dollar. (~6 yuan = 1USD).

For centuries, food production has been India's life blood. I am in all favor of food and farm subsidies in India. Agriculture is the primary occupation in the country and is monsoon dependent. The government must subsidize it and PDS (public distribution system) has to be made more efficient. This will reduce the inflation pressure on the BPL and middle class population. At the same time, i am against any other form of subsidizes like color tv sets, marriage funds, free housing, and other junk schemes these politicians come up at the time of elections. These are complete waste of money and affect the regular market structure. For example the cost of constructions materials have gone up after the Tamil Nadu government's "thoguppu veedugal" scheme, where the government gives free money to people to build homes. the government has no role to play in these things. It causes more problems than it solves. The other one is by the same government to pay insurance premiums to big health insurance companies for poor people to access doctors and hospitals when they get sick. This is a completely bogus scheme that is just a attention catcher than really benefit to people. If the government wants to give good health care to poor, it must refine the heath ministry and provide efficient and modern health care through the government hospitals that are already in place and are functioning inefficiently. That would give longer life for the poor.

The RBI and government have made India, an inflation nation. The government has to come up with policy that will encourage production and savings. Self-sufficiency in food can only be attained by that. Rationing everything is not going to solve the issue. It provides temporary relief but does not solve the problem. We need to move to an environment where prices remain stable, food production increases year after year. Printing money and pretending India is growing at a good rate, with such a huge inflation is very harmful. No growth is better than bad growth.

Thursday, January 13, 2011

Indian Judiciary : It is a big joke

One of the prominent failures of post Independent India, is its Justice delivery system. Even after 63 years of independence, the system never refined itself. Most of the time, justice is delayed, diluted, delusional and hence denied.

The country now faces a serious challenge in refining its slow judiciary process sooner or its going to regret on the consequences of it. The Justice delivery system is painfully slow, and for lack of better word, its incompetant. Justice delayed IS justice denied. Last week we had two important happenings, that managed to make it to the main page. One of which is the accusation that former Supreme Court Chief Justice K.G Balakrishnan's son-in-law, accumulating huge wealth disproportionate to known sources of income in Kerala., and other being the 40+ year old Rupam Pathak stabbing and killing the sitting BJP MLA Raj Kishore Keshari in broad day light in Bihar, in front of a huge gathering of people in his home constituency. To put it simpler, the former is the problem and the later is the 'consequence' of the problem. Let the Indian penal code define, who is punishable and who is not. I am pretty positive, nothing is going to come up significantly in either case. But everyone has to admit, the whole system is ripped of and needs drastic changes. The Chief Justice in Supreme court is a unique distinction and is the top post a Judge can ever make it to. He would know the law than anybody else, I would assume. How could someone close to the person who managed to be Chief Justice of India, be accused of unlawful activity. Did the CJ know about it. what is his role in this. what credibility does he have. who appointed him to be CJ and why. Looks as usual as it always happens in India, dishonest people go to the top of the beurocracy. K.G Balakrishnan may be proved innocent and he may have not a role in this. I am not trying to pre-judge him prior to active investigation being made.. It is not just about K.G.Balakrishnan being good or bad, but it is just a case that firmly suggests, not everything is good, with people who are supposed to fix the country's problem. In the Indian legal system, the judges are considered unquestionable, and their honestly and credibility not debatable. This is absolutely crazy. It may have been true at some point in the past, but not anymore. The country has to wake up to reality, and pin credibility into the judicial system. The whole system of working needs to be reworked upon, and made efficient and transparent.

Judiciary is a big joke in India. Remember the last person who was punished for crime ? Either he was so notorious to be left out in the open, or he did'nt have the money for his bail. Most people who are not financially viable often get caught in the mess. If you have the money power, you can get away with almost anything including multiple murders. This is a sorry state of the Indian justice delivery system now. The system fails to deliver justice, and the result of that is people take law into their own hands and punish each other. There is a tacit acceptance to this action in society. This will lead to uncivilized society. The case of Rupam Pathak is a classic case of it. There was a FIR filed against the local MLA by Rupam sometime back over sexual allegations. It appears, the case made no head-way forward. Preliminary reports indicate Rupam pathak was frustrated with no action being taken against the MLA and decided to stab the MLA herself as an act of revenge. In my opinion, violence cannot be a part of life. No one violent has a place amidst the society. They must be arrested and isolated from society. The trial may bring the truth out, and we will discuss then who is right and who is wrong. But the frustration with regular legal process is very active in minds of people who wait for justice in the Indian courts. This cannot be denied.

There are a tonne of legal disputes in Indian courts today, that will take generations to solve. what is the expectation for the person who is dependant on those verdicts. When a trial happens over long periods of time, people change stands, witness become hostile, the evidence no longer is fresh, people involved in trial lose motivation. Just dragging a case for years and years is judicial cheating. The whole justice system is flawed in the process when it does that. Land disputes and property disputes, needs to be solved as soon as possible, so that people can get on with life. So that they can make an investment on them, and bring in employment and create wealth. We have people going to the court with the intention of just to extend the problem for long. The ordinary people feel left out. The dishonest segment of the population benefit from the process. The lawyers and judges make money in this flawed process. In spite of huge backlogs of work, the judges go for summer vacations, just like school students, often leading to inefficient man-hours of operation. People launder in jails for years, because the judge hasn't had time to "get to the case". Murder cases that have solid evidence on the initial period lose steam over time, and the witness turn hostile, because often they are subjected to pressure. The Shankaraman murder case in Kancheepuram in which the Kanchi mutt was accused of being involved is an example. Almost all the witness have turned hostile and the proceedings have gone no where. The Judicial system neither helps the innocent or witness, but plays as a good tool for persons who are aggressively dishonest, and exploit the sytem to their advantage.

When the legal system doesn't delivery just like it is happening in India right now., it always leads to social unrest and revolution. It is high time the central government recognize this problem and enact laws and overhaul the system. The following are items that the people need in that.

1. Find resources to clear backlog of cases all over India. Ensure speedy disposal.

2. Atleast new legal cases, needs speedy verdicts., say vital cases like murder, rape, financial frauds are attended to and verdict executed in 4 years.

3. Protect witnesses.

4. Punishment, if found guilty.

5. Hold Judges accountable and punishable, if found involved in mal-practices.

6. Simplify the justice delivery system, and make it RELEVANT in society.

The whole appeal process is ridiculous. This has to be simplified and needs a time sensitive requirement in it. Punishment MUST be delievered if found guilty for all. Rich or poor, younger or older, man or woman, if found guilty in the eyes of the law, punishment must be executed without delays. Every court case should lead to a "logical" conclusion. Only strict punishments are going to help refine society. There are multiple clemency petition pending in the table of the President and Prime Minister. They must be attended to, and punishments enforced now. Only this will invoke confidence in people to go to courts seeking Justice.

The other face of the same problem is the multiple commissions that the government set-up after every tragedy. Those commissions take years to reach a conclusion and often go no where. At the end of the process, the people realize from the report that its just a FYI on what happened, but isn't serious about providing punishment to guilty. Indian politicians take honor in being named for bad reasons in those commissions. Any commission that runs for more than a year, is a complete waste of tax payer's money. Take the famed example of Bhopal Gas tragedy investigation/verdicts. It was a tragedy where thousands of people suffocated to death, and probably died thinking the world was coming to an end. The Indian court took the case, and delivered a verdict, a piece-meal compensation after almost 25 years of the tragedy. The case really deserves more attention than that. An the end of the day, the verdict sounded like a automobile accident case in some highway in India. What was the court doing with this case for decades? 25 years is really long time in anybody's watch except for the clocks in Indian courts. what many things happened in this 25 years, We had multiple governments, Olympics, football/cricket world cups, regime changes all over the world, wars, etc.... and the court was sitting on this investigation during that time. A delayed verdict like that is an insult to the people of India who have lived through those tragedy in the cold December of 1984. What is the intention of the verdict? It was just reduced to a formality. It is humanly unjust to treat it like that. What explanation does the court have for the thousands of people, who are living now but are physically impaired because of the gas leak. Somebody must be pinned responsible for it., don't you think. Not everything happened by itself. If the incident had happened in rich western countries, things would have been much different.

India has a lot to learn from other western countries, how the rule of law is enforced, maintained and safe-guarded. We have to admit, things are far better in advanced countries. The Indian society is a tolerant, obedient society by history. The family values are still very much intact. In spite of the vast diversity, there is a feeling of nationalism, patriotism, respect and moral values. So it is just a matter of enforcing law and winning back the confidence of the people.

For most of Independant india, the Congress government has ruled the country. So the Congress party is responsible for this judicial mess, relatively. It must have been fixed long before as it has become monster today. The people will wake up and we will have a law-less society in the near future, if the govenment does not act now. Manmohan Singh is credited with bringing back India to global stage economically in the 90s as the finance minister. Can he deliver again this time by refining the Indian Judiciary as a Prime Minister.

Sunday, January 2, 2011

New year 2011 : looking forward

The 2011 is here. And i believe its going to be a very interesting year as it is promising to be in all aspects of the society. In february we are going to have the cricket world cup jointly hosted by India, Sri lanka and Bangladesh. It is most likely Sachin Tendulkar's last ODI world cup. Can he win it for India. The long innings of Sachin as a best batsman the world has seen, and the records he created, most of them unimaginable till recently really deserves one. Australia had a good decade and looks it may not be able to repeat its performance this time. A lot depends on Ponting, if they have to pull it off one more time. As a Indian, i want India to win the world cup, and at the same time want the best team to win. Lets see how this works out. South Africa and England have been good recently, and they can pull it off. Can they pull it off in sub-continent pitches, is the dilemma. Sri Lanka has its young guns firing in Mathews, Pereira, Malinga. Can they repeat the 1996 experience? Who will be the Sanath this time ? Lets see. Bottom line, It is going to be competetive cricket. A good tournament is on the cards. The security in India is going to come under focus again. There could be possible scare tactics in the build up to the biggie, especially since Pakistan is left out as a host which is very unfortunate. It has to be seen, how the Indian government is going to deal with it. Everything looked fine, until the recent Varanasi bombing, which killed a child, and left dozens injured. There home ministry has to really have it under control. It is going to be a an uphil task for the security establishment. Any incident that is significant, can force countries like England, Australia and New Zealand to re-consider venues. They were already succesful in eliminating Pakistan venues from the tournament citing security reasons. The shooting incident against the visiting Sri lankan team was the final nail in the coffin for international matches in Pakistan soil. It is going to be years, before cricket matches return to its venues. Pakistan has had a bad year on and off the field too, with most people seeing their cricketers corrupt and with attitude issues. Its high time, they come in with a bang, and lets see their reverse swings and the fighting script when the coutry is not in best times.

Congress government has a string of state elections due. What in West Bengal. Can Buddha come up with a miracle, given the fact its trusted leftinent Jyoti Baasu is no more to help them out. It will be the first election without Baasu around in its 30+ year of successful election victories. Will the People of Bengal trust Mamtha Banerjee. Can left extend its record. I wont be surprised, if the Left manages to pull it off 'one more time' particulary if it could divide its opposition. Remember they told, the left is in bad shape in the 2006 assembly elections., but it managed a confortable win. The other question for Congress(I in Tamil nadu, what is going to happen with its alliance in DMK, which is going to have a tough election ahead. Will the congress stay with it? Will the freebies work? After the 2G spectrum scandal, DMK is viewed more corrupt. Can it do a image make over before May elections? Will the congress go with Jayalalitha this time around. Remember the famous "tea party" that Atalji and Advanji will never forget. Now that Sonia Gandhi's Italian origin is no longer an issue, things could change very fast than you think. Any alliance can happen. Current trends indicate, most likely the DMK will be voted out of power particulary because of ultra-inflation. The Congress is most likely to under perform until it get the price rise of essential commodities under control. The PM Manmohan Singh has told, the Government will go the extra mile to recede inflation. Lets see what happens. The interest rates are going to go up atleast two basis point in 2011. The supply side has to be taken care as well., now that we had a good monsoon.

Out of everything else, the world economy is probably one thing that stands out in 2011 expections list. Everyone has a opinion on them. In my opinion, it is going to be a very very interesting year. European union is being tested. The countries that came together under one banner in currency and trade, looks to be degrading because of political independancy of member nations. Can they stand to gether? The biggest challenge is what happens if Portugal and Spain look out for a bail-out from EU? This is a OMG moment for European union. Can the Austerity measures in Britain reap gains over time. Will its people accept those measure. We already have seen student protest getting out of hand in London. Is it going to spread to other demonstrations in the EU member nations. We are definetely going to see this evolve through out this year. Will the Chinese step into helping EU with its debit problems. If so, who is going to buy US debts? China can use this oppurtunity to diverse its investment away from US treasury bills. Is it a good investment for China in the long run, probably yes. The Markets around the world managed to reap some gain in 2010. According to suveys conducted by renowned journalist, it is going to be better year than 2011. But the Alarmist think the other way. The value of gold has gone up 27%. Where is it headed ? If the Alarmist are right, they it could make 30% more this year on gold. The value of oil is going to be interesting, as China and India grow rapidly in spite of Western economies boosting price. If the western economies dont come out of slow down, it is going to be hard on people. A $148/Barrel crude is payable during good times, but is terribly bad at the time of a down turn. The US economy has come out of coma, but still with 9.8% unemployment is nowhere near the normal. The way he is being playing this season, Tom Brady can win the Super Bowl, one more time for the Patriots.. atleast looks like, but Americans have something more to worry this year, that is how does the economy play. It is going to be closely watched, by markets around the world. Can it make a come back this year ? Will the QE2 be complete, most likely yes. Will there be QE3 in 2011, most likely yes. There are monetary benefits for the FED to do more QEs.

Wikileaks had made a significant mark on news reporting this last year. The publishment of leaked cables, has provided a new platform for news-savy people, who think they discover and expose new materials, that are not published by huge corporate medias. Wikileaks is probably going to come up with more articles of such sorts, and is capable of "displacing" world opinion on not only leaders and beaurocrats but also the people. what comes out of wikileaks is probably going to be more relevant here after than anytime before. The freezing of its funds, its founder Julian Assange's arrest and alienation is going to slow down Wikileaks, but whether the pressure can be sustained remains to be seen. All wikileaks would aspire for is 2-3 significant exposures in the year to have it credibility going.

One of my good friend, asked me, what would you like to happen this new year that is going to make me happy.... As a Indian, and cricket lover, no wonder i told him, an India win in world cup final 2011, at least for Sachin sake.