Tuesday, January 22, 2013

Import tax on Gold

News Article : India raises gold import tax to tackle trade deficit

The import tax on gold has been increased 50% this week. Anyone who buys gold for Rs.100/- has to pay Rs. 6/- as tax to the Indian Government. So the cost of Rs. 100/- value gold is Rs.106/-. It is more expensive to buy gold compared to last week. The expectation is that, this will discourage people from buying/investing in gold.

The trade deficit in India is negative. It means the total value of the exports is less than the total value of our imports. Healthy economies export more and import less. This helps balance of payment. It is like typical household, you don't want to BUY more than you can EARN.
Bulk of our imports as a country is Oil and Gold. This is contributing to trade deficit. If we leave out oil and gold while calculating trade deficits, we are having a deficit of less than one percent of GDP which is supposed to be better.

So the government has come up with this plan on increasing the taxes. The following are the reasons why it will not work.

  • Gold has appreciated eight times when measured in global currency (USD) in the past decade. Much more in Indian Rupees. So 2% is not a big margin.People will still choose it as investment.
  • Demand of gold in India is not price driven - The demand for gold has gone high even though the price went up many folds.
  • Demand of gold in India goes back centuries and it is more cultural. People buy it irrespective of its pricing.
  • Unlike oil which is imported and consumed., Gold is locked up and has value in global market anytime. It can be encashed any time in future. It is really savings of the nation. Government might argue that capital allocation to gold is unused resources. But it can help on a rainy day.
  • Black market to smuggle gold into the country will increase. It cannot be stopped.
  • Poor people will not be able to afford gold investment. They would get cheated by dishonest jewellers/merchants. (Rich people can afford the higher prices and shop at the honest merchant.)

 What should the government do instead?

  • Allow the India rupee to appreciate significantly, so that return on currency is equal (or more) to return on gold. This would encourage savings in cash and hence capital formation.
  • Stop inflation and lets go into a deflation period. Lowering prices is exactly what India needs. Growth with double-digit inflation is useless.
  • Allow the gold to be market based. Minimum tax is good for all. How wise is the government going to spend its money?
  • Set oil prices to market value. Abolish subsidies for it.  This will bring down trade deficit. When resources are scarce, proper utilization of those occur.

Thursday, May 17, 2012

Indian Railways and Air India

Recently the Union Railway minister in his annual Rail budget came up with marginal increase in ticket prices across all fares, including hikes in platform ticket. This was to shore up the Railways as a viable entity and increase operation efficiency. As expected reaction from the opposition (Including the party leader of the Union Railway Minister) were against the hike and protested it until a roll back was done. In the meanwhile, the rail minister lost his job. It was not a complete roll back. The high-end tickets like A/C coaches fare were left out from roll back. The low-end tickets were brought back to where it was, including the platform tickets. The mantra behind that was to leave out the aam aadmi (the common man). The leaders patted themselves on the back. They have rescued the common man.

The perception is the aam aadmi is happy and so called saviours of aam aadmin, the political leaders found some peace with great pride. It is an action to just oppose anything without a basic sense of reasoning.

But there are unintended consequences to this just emotional political posturing.

The actual increase of price was long due. As an institution that ferries people, Railways cannot afford with such a low price. Ticket prices are still at rock bottom compared to other means of transport. Railways is going deeper into debt and is not making money. Modernization plans are put on hold and safety of passengers is definitely not assured. In neighboring China, trains run in excess of 300 kilometers per hour., But in India the travel time has not come down in the past few decades. With this poor state of railways, even a marginal rise in price is not acceptable to politicians? Even though a majority of people think it is much needed and willing to pay more for better service.Unfortunately both are not going to happening now. Politicians have once again demonstrated they want the people of India to have a sub standard travel vehicle.

It does not hurt the rich people. They will find a means to get around the country in a better way. The masses have to cope up with sub standard, life threatening, uncomfortable, slow system of rail transport in the country. The people who voted these politicians deserved to be punished with these petty politics., some times it makes you think.

Now comes Air India. No one who is flying on that is Aam Aaadmi. But the government will still own it. because.. because... because... Sorry., I have no idea. Why would a government run an airline business? Government has no incentive to run an airport or an airline in the country. It is better done by private players rather than the government. It is impossible for a few government beurocrats to operate a airline. A lot of smart people have failed on that. The government beurocrat is no smarter. Now the government has allocated Rs. 30,000 crore to bail out Air India. You should be a fool to believe that money is going to bail out the airline. It is throwing good money after bad one. It cannot even be called Gambling. There is a possibility of getting back more in a casino. But here... you don't get anything back. It is a pure loss on investment. And it is being given to the same people who brought Air India to what it is now. Moreover the government of India doesn't have to run this business. Where are the aam aadmi helper politicians here? Just treat Air India as a rich people business and just let the government get out of it. Rs. 30,000 crore is lot of money in any scale. Even after 5 years, I am 100% sure Air India would still be a negative earning business. There can be a argument made, that other national carriers are successful, like the Singapore airlines, Malaysian airlines. The simple reason is this, they are not run by Indian governments. There is a system in place with proper oversight and more importantly a system that is well managed and works. Can we do it in India? We are not able to do it so far... there is no reason to believe we will be successful in future. Bottom line, the Indian Government does NOT NEED to own an airlines or airport for that matter. Airport and Airlines are used ONLY by the elite and there is no aam aadmi role in it. People who fly abroad are perfectly capable of funding their fares from their own savings. Who is the government trying to help ? It is just fooling the tax payer.

If the government of India does not take decisive action with a long term perspective in mind, more of people's money will be lost through Air India. Don't maintain airports. The AAI has been a failure. It is slow in implementing projects, there is lack of discipline and horribly behind its international peers. The best way forward to give the average Indian, a pleasant flying experience is to privatize the sector 100%. Let the market take over. 

Friday, September 9, 2011

Recent Market Movements : what it means

There has been and continues to be a shaky share market all over the world for the past three months. There has been high volatility and there is a sense of what can be simply referred to lack of confidence among the global business community. The market basically reflects reality most of the time, if not all of the time. So why is that now?

There are many significant things that are guiding the market uncertainty. Primary among them is what is being referred as sovereign debt crisis. In the financial crisis of 2008, even that was a debt crisis (remember?), but it was in big corporations. The huge corporations mostly in investment banking had took too many leverage and were overwhelmed with debt. The investments made against the US housing market went bust and the institutions were on the brink of failure. The US government stepped in and bailed out the institutions with tax payer money(read newly printed money). On this side of Atlantic the Euro and the UK did similar acts to shore up their own banks. At that time it was believed it was a wise decision. The recent market itchiness is really a consequence of those bail outs. It just turned out the banks were little bigger than the governments. The whole debt has been shifted from private corporations to the government. When the government has the debt its considered sovereign debt. The situation in 2008 and now in 2011 are the same. Both are debt crisis. This time the volume is lot larger. And there are not many way outs... The world economy is basically in uncharted territory.

When the bail outs of these multi billion institutions were done in 2008, it was famously called "too big to fail" companies. What it meant was - if these institutions incur huge loses or go bankrupt it will affect the overall economy and will have ripple effect in the country as a whole, causing a scenario where there is no growth for many years. That was the rhetoric then. Now it turns out these institutions are "too big to be bailed out too". Now that the corporations have been shored up., the governments had gone into deep debt. The Euro zone and US are going through the exact same problem. Euro has immediate problems and US has significant long term issues. The group of Euro countries standing behind the Euro are being challenged. The effect of having same monetary policy and different fiscal policy has become the focal point. very famously when the Euro came into existence, Milton Friedman, the noted free-market economist had predicted, it is not possible to have a economic union where there is a common monetary policy and not fiscal policy. This nightmare has come true for the Euro zone. Germany and France have come up with an idea to see Euro bonds instead of individual nation bonds. This is easily said than done. There are only two options - Euro gets more integrated and work based on common financial policy or they break up. The break-up could mean the weaker nations like Greece walk out of the Euro first. This may cause incentive for others to walk out "after they have debt problems". Both the Euro and US have stepped in to create new money and pump it in to the economy to solve previous debt and attempt to avoid going into recession again in what is famously referred as "stimulus". The recent downgrade of US sovereign debt from AAA rating to AA+ by S&P, is historic. Many years from now, we will turn back to see this moment and realize the country that prints the world's reserve money is not a credit worthy borrower. It is not going to have immediate effects and the ratings are sentimental. But these are definitely symptoms of a much larger problem as we head into the future.

Main stream media portrays there was a recession in 2008 in the US and there there was a recovery and now there is a possibility of another recession . Eminent economist who predicted the current crisis Peter Schiff says, there is no double dip, and the recession that started in 2008 is still intact.. and what has happened is the government really put a pause to recession by pumping in new money. Once the stimulus ended the recession is back. He refuses to acknowledge its a double dip but just a one long recession that started in 2008. You think about it., it sounds very true.

The global recovery and positive growth is what is going to get back the world economy on its foot. unfortunately there are no signs of it so far. All we see are new problems. Some of them long pending due even before the 2008 crisis. They have just come to the fore.Every country in the world has borrowed more than it can make. As a result everybody owes a lot of money to lot of people and no one wants to pay back now. It is particularly true in developed countries.

Usually when the expenditure of a government is more than its income the government makes effort to increase income by additional taxation. Did you ever realize why the government never runs out of money ? is that not impossible ? You cannot increase spending without increasing revenue. Since growth has stalled in most developed economies the incoming money as taxes have come down significantly. It is ironic, at the same time governments around the world particularly the Western nations have managed to increase spending many folds. You go and ask an ordinary citizen, his taxes have not gone up. So what it means is the government has conveniently chose the option of printing more "currency bills" instead of real productive income. This is more electoral friendly and post pones the initial pain for its citizen. Unfortunately the value of currency falls making everyone poorer in the long run. We cannot get out of the problem by printing more money. It just gives a temporary illusion of richness and will fade with more misery.

The whole concept of solving real economic issues by controlling the money supply was advocated by a noted economist Keynes. According to his theory, the government should primarily control "demand and supply" in the society. This is far away from Austrian economics which says limited government and sound monetary policy backed by commodities such as Gold. Unfortunately Keynes economic model is what is taught as economics around the world with emphasis that government will solve all of people's problem. When paper money loses value, people would realize the harmful effects of this ill culture perpetuated by the governments. If we go by history, the currency crisis in the world is long due and we may be on the brink of it.

The value of precious metals such as Gold, Silver are signalling the lack of confidence in paper money. Gold for example has went up from $250/ounce to $1900/ounce in the last ten years simply beating any other investments in those time period. Commodities such as food, oil are going up for the exact same reasons. Not because food production is going down, but there is too much paper money in the world that is going behind produced food products.

Recent astronomical rise in inflation in India are also the effects of the same problem. If the world prints lot of money the Indian Rupees has to appreciate against those currencies. But unfortunately the India government prints more money to maintain the weakness of the Rupee. This they say, will help exports and make Indian-made products competitive. It will not. Might help in short term but not long term. One day the developing countries like ours will come to senses on this and allow their own currency to appreciate. Remember, real economic growth comes from - production and savings. Not by printing more money or by exporting to nations that give a currency of more value and that currency just came out of their printing press.

One thing readers must know is the common definition of inflation given in media is rising prices. It is not. That is what the government wants you to believe. Inflation is "expanding monetary base" and price rise is a "consequence" of that action.

One of the analogy given by Peter Schiff goes like this, Just imagine an auction where everyone has Rs. 100/- only in their pockets. Whatever the product that may be auctioned -> they will not be worth more than Rs 100 whatsoever. Will they be?

Saturday, June 4, 2011

The new women CMs

The recent state elections threw in two women CM with decisive mandate - Ms. Mamata Bannerjee and Ms. Jayalalitha. A mandate that is absolute and conclusive and has the people's will and of course expectation. The CMs have hit the road in style. Their performance in the next five years remains to be seen. Looking forward to it. At least the start looks very promising with focus on good governance from both women CMs.

This election has been a historic assembly election in West Bengal. People are going to remember this election for long long time. Mamata Banerjee pulled off a landslide victory for the All India Trinamul Congress in West Bengal by defeating the world's longest-serving democratically-elected communist government, the Communist Party of India (Marxist)-led Left Front government, bringing to an end 34 years of Left Front rule in the state. The decades of left rule finally crushed to defeat. The 34+ years of communist rule coming to an end with a ultimate knock out. The Left Government facing the election without its sole mate Jyoti Baasu could not garner support for its policies and governance this time. With communist also losing a close election in Kerala where they lost the majority by a whisker is salt in wounds for the grand old labor party in India. It is time to go back to the table and re-think its policies and more importantly examine why its hand on the people for decades is slowing drifting out. The new India with a booming middle class, needs a refined socialist agenda and not the ones that are currently being pursued which are in some honest opinion little obsolete. The party has to redefine its agenda and bring in revolutionary changes to motivate its followers, particularly the youth.

The state is seeing a non-left CM for the very first time after a long haul. The youth in the state are getting used to this new phenomenon for the first time in their life. There were jubilation after the electoral victory in the streets of kolkata, and a new sense of life. Mamata Banerjee was sworn in as the Chief Minister with a huge gathering of well wishers and supporters. The dynamic leader walk to the writers building, a 0.5 km walk was unprecedented. With People flocking to see the walking CM, a non-left CM in the state of West Bengal in more than three decades was a mesmerizing visual. On the first week at job, the CM made surprise visits to the government hospitals, government offices causing a stir among officials. With the CM still going around in her black Santro, atleast the hard-working didi of WB is determined to change the ways stuffs happen in the state. With more power comes more responsibilities. It is a chance for the regional leader to create a image for herself with good governance. After the Singur episode, Mamata'a image as "development' oriented politician took a beating. Now those things are behind her. Rapid industrialization of the state and hence job creation is a necessity for the state now. Infrastructure and health being other top priorities. The Trianamul congress as a party has to prove, its worthy of a alternative government to the grand old left alliance. Lets see how this women who was running the Indian Railways until now., run this eastern state of West Bengal.

In the south, It was the AMMA storm that was back in the state. With all exit polls indicating a hung assembly, just majority and all those predictions aside, it was AMMA who came ashore with a thumping majority. The DMK facing a wash-out., with not even having enough seats to be the main opposition party. The power cuts in the state, alleged 2G scam involving its ministers, detoriating law and order in state, rising prices - everything bearing in the minds of the voters., did'nt have enough to offer for the sitting government. With most ministers losing, it turned out the DMK hardly put on a fight. The Congress and PMK its alliance partners not doing better either. It was just a losing alliance. Now AMMA is back as CM after 5 years. Now Tamil Nadu has gone between Amma and Ayya (Mr.Karunanidhi) for 3 times. Now Ms.Jayalalitha has become CM for the third time. With a full majority at hand, she deserves a full five year term ahead. The new set of ministers all taking oath the same day, the government was put in place and in action within days of victory. it is also notable the ministry did not include 'tainted' or 'controversially corrupt' former ministers. it had new faces instead. This is a good sign. It has always been true that Jayalalitha had a strong grip on her party ministers and elected representatives. In this government, the CM is everything... if things go good the CM is responsible., and if things go bad... its the same CM who is responsible. This is the way, the party and government is run by the AIADMK leader. In diverse state like Tamil Nadu., this kind of authoritarian leadership helps more that it hurts. The recent interviews the CM gave to the media looks she is determined to perform in her third term. The new proposals from the government are promising which also includes scrapping of schemes introduced by the DMK regime. of course there are controversial decisions of not shifting to the new secretariat building but opting for the old St.George Fort, rolling back Samachir kalvi. But as long as the new government has a vision to improve governance it is perfectly fine to have to its way. Recent reports strongly suggest the CM is determined to solve the power crisis in the state with more emphasis on renewable energy. Energy generation from solar and wind are being considered as effective problem solver which is a welcome decision. The Aim to provide surplus power in the state is a good indication of wise planning. The CM also introduced the free rice scheme for BPL families as part of the manifesto promises. Those are costly subsidies., but the party had to counter manage DMK manifesto which had its own set of freebies. With the state's economic situation in dire need of reform, it is hard to implement all freebies promised without raising taxes on people who can afford. How the CM handles these financial imbalance remains to be seen. It is a challenging job to be fair. The CM has to streamline subsidies. Avoid unnecessary wastage of tax payers money. Provide relief to those people who genuinely need help.

For the DMK, it really cannot do much at this moment. The party just have to manage its role in the state. With not much MLAs around, it cannot make a difference politically. Now all it has is the central ministers in the national government. Having lost its leverage on the Congress government., its up to the Congress to dictate terms with DMK from now on. Personally for the DMK leader, Mr.Karunanithy's daughter having been arrested in 2G scam, the DMK first family has more troubles ahead. With Dayanadhi Maran's name coming up in 2G scam, it is just making it worse.

The democratic India has thrown open two new women CMs apart from Mayawati, the current UP CM. The women politicians are making a mark in India politics. It also explains how regional parties still dominate state politics in this country. The main national parties in the Congress and BJP are not making in-roads into the regional party vote bank. This is good for democracy that regional parties with moderate views are sweeping polls. Both Mamata and Jayalalitha have majority in numbers and have a smooth road ahead. How they drive their car on them for the next 5 years remains to be seen. Ms.Jayalalitha being more experienced and having been a CM twice before has the wisdom, knowledge and is aware of the nature of the job. Ms. Mamata Banerjee does not have this luxury. The dynamic leader might have ups and downs as she kick starts her new job., and may finally settle over a year. Hopefully the aspirations of the voters are taken care of by these new leaders.

Sunday, April 17, 2011

Anna Hazare : The catalyst of new India

Joseph Stalin, the great leader of Soviet Union was once asked about his accent to power in the communist nation and he responded saying "Power was lying on the ground for someone to take it, and i took it". It was kind of exactly what Anna Hazare did in Jantar Mantar early this month. Obviously he did not do it for power, but he grabbed the opportunity to highlight the people's primary concern in Indian society nowadays -corruption. Now Indian people have a 'face' to show and deserve action from government. The Lok Pal bill is next land-mark now. The Aug 15 deadline proposed by Anna Hazare for passing the law is truly encouraging sign that finally we might have some response from the government to tackle the menace finally. The whole country was rocked with series of corruption scandals and the people were getting fed-up with that. The government denies or acknowledged late, all the allegations. It has become 'normal' in the society., and has reached a point were it is being considered no longer a sinful act. Corruption in Indian society has reached new frontiers in the last two to three years. From few crores, it has leaped and bound to thousands and thousands of crores. It cannot be denied it is the horrible reality. The problem is not that people are being increasingly subject to pay money for everything, but is being perceived as the law will never catch up with this, and you could go free. It is no longer sinful to be a corrupt and will never be punished for it. Either the law isn't there or the current laws will allow you to get away with it.

This created a increasing uneasiness among ordinary people that are genuinely concerned about the country. The recent revolutions in the middle east and Africa has made the world more vibrant. None of the rulers are safe. The revolutions are just a start and is going to spread across Europe next. With anti-government protests all around the world, India was no exception. Just that it happens to be a democracy the revolution is not to change the government, but to bring in some social change with the intent of just civil society. The government and other political parties were caught napping. It is very unfortunate that no political party had the credibility to take ownership for such a movement, that in my opinion was long over due and was destined to happen. Almost all parties are in way or other corrupt. The left parties have some credibility, but don't have the trust of the people because of their old-style politics. Politician who come to capitalize on the protest in Jantar Mantar were silently sent back. At last the people are coping up to reality were none of the politicians are clean. No one is trust able. This is the sorrow state of the political class in India currently. Congress has been in power for the past seven years and the system has only got worse. Unless it proves its worthiness by punishing the guilty or by passing stringent laws against corruption, its unlikely to gain people's trust.

It reminds me of the Indian cricket team some years back. (by the way congratulations Team India for winning the world cup. Great job. The way we played, we deserve it.) They had a small set of players and kept rotating among them. New talents were not given enough opportunities. The whole team was manipulated by few individuals who neither had the skills nor the attitude to think big and bring drastic results but were falling on their own weakness and just manage to be part of the team with some sporadic achievements. Just take fielding. it is mandatory now to be a good fielder, if you want to retain your place in the side. and Now India is a good fielding team. Most the times in history, the best batsman and bowlers India found were poor fielders and they got away with that for a very long time. Quality of cricket played by the team was sub-standard. Part of the problem was they were not world class batsman too... though some may had the skills, most did not have the attitude to be a die-hard winner. The whole selection process revolved between a few and new talent never really prospered. The selectors did not do anything radical and was experimenting with the same players for multiple years. It is called Insanity: doing the same thing over and over again and expecting different result. Once we crashed out of the world cup in the Caribbean four years before, the selectors really thought out about the whole process. The old stalwarts were left out and a brand new young team was built. New blood was induced into the team, and team approached the problems in a different way unlike its old players., The plan worked and now we are competing against all top level teams in the world. What we see now is the new India. The generation that is in school now is going to boost this country to new heights. The same is true for political parties in India right now. Almost all parties lack credibility. There isn't one honest soul the whole country can stand behind. Manmohan Singh's credibility has weakened with his age. BJP is completely off base and its come back is really questionable. It has no mass leaders any more., and its morale is still down. The Congress just happens to have an advantage because of that. The congress has taken the second term mandate from the people for granted. In the recent elections in Tamil nadu. People already knew AIADMK was a corrupt government in the past years of their rule, and thought DMK was better. Now DMK itself caught in many scams running into multiple crores, the people are really wondering where else to go. Lets see what the 78% voting percentage say on May 13. There is no party that will step up and assure people of good governance. Looks to me people are really really running out of options. None of the leaders have a place in people's heart, and there is no viable substitute. It is high time some one jumps in and takes the power for betterment of the people. The 72 year old Gandhian could just be that catalyst.

Anna Hazare lead a valiant effort, and great chance for the people of India to jump and cash in on the progress.The society in its current state cannot go on like this. The rule of the law must be implemented. Now that we are 1.2 billion people now, there has to be honesty, legality, law and order in the society within its citizens. If people are not punished, the country is being held captive by few thugs, then neither the country nor its people can prosper. The increasing middle class population in India realizes this and has silently jumped in to voice their concerns. We had notable rallies across India to support Anna Hazare in his fast unto death protest. This is really a good sign. If mass rallies will get things done, then we should do it.

The Lok Pal bill by itself is not going to unroot corruption in India. At least it will be a good start and people who accept bribes would realize they would be punished if caught. Aug 15 is going to be a important deadline. The congress government should take the date seriously and take all efforts to implement the panels recommendation without diluting it. Hopefully the energy among the people remains till then to take this country in the new direction. If the Indian politicians are not willing to take decisive actions before that, the people's power will force them too. So it is better for the Congress government to do something about it, and take credit for it long time.

Sunday, March 20, 2011

Japan's nuclear crisis and global energy

In 2004, i had chance to visit Japan and was there briefly. This was my first trip outside India and into the outside world. I remember the first time i walked out of the airport in the middle of the night and had a glimpse of this modern country i have always heard about, my first instinct was i saw lights everywhere and no people. There were no dark spots anywhere. The country was lit as though it was my house. It just took me off base for a moment. Then i learned later that the bright environment (powered by electricity) is true in all modern world. Then we took a bus from one part of the country to another, and the highway was flushed with lights for miles and miles. The first question that came to my mind at that time, was how can they afford it, and how do they generate all those electricity. So last week event kinds of answers those questions partly.

A significant portion of Japan's energy needs, come from nuclear power. There was a massive earthquake that rattled Japan of magnitude at least 8.9, that shook the north-east part of the country (Sendai) and a massive tsunami followed. Even though the nuclear reactors are designed to handle huge earth quakes, they were no answer to nature's fury of a huge earth quake followed by a huge tsunami all at the same time. The nuclear reactors were shut down, and the cooling process began. However the lack of electricity to channel the cooling was lost, and hence they had to resort to primitive means, like pouring water, and other chemicals (like borine) on the reactor to avoid a meltdown. Thousands of people have died in the tragedy and the country has lost valuables lives. In some cases, whole villages vanished. The relief effort has been complicated by radiation leaks from the nuclear reactors, and the situation is really bad. It is going to be years and years for Japanese to overcome the effects of this disaster and re-live normal lives. On a nuclear scale, the tragedy is given 6 out of 7 (Chernobyl was 7) and with the situation still unfolding, we will know more as the days progress. As a result of this nuclear accident, China has suspended its plans to build new nuclear plants in China. The whole nuclear energy generation and its safety is back in lime light throughout the world. Can the world really afford these accidents. There is a possibility that radiation might reach other neighboring countries. Even thought the nature's tragedy of earth quake and tsunami have come and gone, the man-made tragedy of the radiation leak is here to stay for a long long time.

There is a huge economic cost because of the tragedy. The global economic picture can get complicated and can re-balance global interest which can turn out to be economic aftershocks. Japan now has a herculean task of re-building the nation. The presence of radioactive elements in the atmosphere / food, have made it worse. Whether the regions are inhabitable any more is itself questionable. Japan makes a lot of money from tourism, and its going to miss that for years to come. Who would want to visit a nation, which has a possibility of radioactive materials present in atmosphere. Who would want to start a business there, or make an investment. The process of clean-up is going to cost the Japanese government a lot of money (in Yens) and it explains the recent rally of the Yen against all major currencies. Japan had its AAA ratings cut just couple of weeks prior to the tragedy. Its debt to GDP ratio is somewhere around 220%. So the borrowing cost of Japan is going to be high (interest), if it goes to the market for rebuilding money. At the same time, they hold US treasury bonds worth $900 Billion dollars. It is an asset, it can use. Countries have foreign exchanges reserves for a rainy day, and now its pouring outside. For now, Japan has stated it won't dilute its treasury reserves to calm the US bond market, but that will be short lived. It does not make sense to borrow money from the market at more interest rather than to sell the US treasury bonds and use it in reconstruction effect. If Japan is not going to use those now, when is the right time? This will create a new problem for United States. The T-bills available in the market by a Japanese sell-off is going to drive the price of T-bills down. The United States is borrowing money for low interest as of now through their t-bills. If there are no buyers, the US FED has to buy them which is most likely the case. This is usually new money supply, that will increase the inflation in the US and the world around. Even if this doesn't happen, at the rate at which the US FED is buying T-bills now, it will be the largest holder of T-bills in one year. So there is a possibility of a cascading effect in world economy because of this tragedy in Japan. We need to wait it out to watch.

The Japan nuclear tragedy has once again brought to light the hunger for energy for economical activity. The energy that everyone needs to sustain the current growth and improve their economy. But as the tragedy indicates, everything comes at a COST. There is too much energy consumption around the world, and humans are finding new ways to generate energy, and things go wrong because not everything works as we expect. The concept of fossil fuels like coal, oil are running out, and countries adopt off-shore drilling of them. The recent oil spill in the US gulf is the same problem in different format. The current rate of consumption of energy like oil is completely unsustainable. The assumption that nuclear energy is going to solve the energy needs have also come under the scanner., and looks it might even blow up the whole world. So basically, the world is running out of options on energy needs. It must be true, that oil and coal are running out, nuclear is not safe, wind and solar energy can supplement the supply and cannot be main sources of energy and still mankind needs energy for everything. The consumption driven model of economy needs a re-visit and new technology may address this issue in future may be. I strongly encourage readers to look for the concept of "peak oil" in the internet. It is worth a read.

As any other country, India too needs energy to fuel its growth. A bulk of its oil is imported. After the nuclear tragedy, questions are being raised on the safety of its own reactors. Plans to set-up new nuclear reactors all over the country with the help of other nuclear donor nations (as a result of civil nuclear agreement with the USA) will come under scrutiny. There are going to be more regulations, that are going to postpone implementations of projects. India also needs to modernize its Railways. India needs to encourage mass transport. Indian Railways are integral part of the development. It is impossible to provide a billion people with oil, if everybody has a car. We cannot sustain it with imports. Believe me, we cannot sustain even with "small" cars... its still needs imported oil. Only Railways can solve this problem. The recent Railway budget is just a election promise, and has no forward looking plans. It is just a bunch of jokers coming up with the same useless document year after year, and the media just has a talking point about it when the parliament is on. Not anything is changing and it doesn't needs any attention i think, it is just a yearly ritual. How about a budget that says, its is putting infrastructure in a year, for connecting the four big cities of South India - Chennai, Bangalore, Hyderabad and Bombay with dedicated rail lines. A passenger or a cargo train leaves every three hours from one destination to another round the clock. This is what is going to move Indians around cheaper. You could get rid of all oil dependent buses, cars from the roads. The Indian Railways can make more money in the process with quality service. This is what will bring economic success to India in the long term. It is really pathetic to see the Railways has not evolved much since Independence. The trains still resemble the ones we see on pre-independence black&white videos. The rail infrastructure has not made significant marks so far and as of now compared to its counter parts in Europe, Indian Railways can only be looked upon with sympathy. Lets hope the metro rail projects in major cities ignite expectation from public to demand equal quality service/facility for long distance travel. India needs a long term plan on its energy needs, and the current annual railway budget is a tool for the government for political publicity as of now.

Unlike other natural disasters, the crisis in Japan is going to have long term consequences because of the nuclear disaster. The revolutions in middle east and the bombing of Libya starting yesterday by western nations to enforce a no-fly zone, they are all consequence of the same problem of "satisfying ones energy needs". Governments around the world plan for innovative ways to solve their regional problems with the well being of local population in mind, the conflicts can be controlled or tolerated. Or it could get out of control anytime.

Saturday, February 5, 2011

Revolutions in the Middle East

Trends Journal is a reputed organization, that comes up with predictions or trends across the world. They rightly predicted the world economic crisis of 2008, and the ascent of Gold prices in the first decade of this century. Recently in December 2010, in their year end report, Trends Journal came up with predictions for 2011. Out there in the top predictions, was the youth of the world will unite, and there will be civil unrest across the world. It hasn't been too long since then, In January of 2011, rightly so, there was a revolution in the north African country of Tunisia and its President of 23 years was ousted in a matter of days. It all started with a self-immolation of a Tunisian youth Mohamed Bouazizi on December 17' 2010 citing unemployment and poor living conditions with no hope. What started as minor protest turned out into a huge revolution in the country and within a month, the leadership had to take an exile outside the country it had fondly ruled for more than two decades. As always as history repeats, a small incident in a part of region who no one notices, can overthrow mighty dictators and even could trigger wars. The assassination of Archduke Franz Ferdinand triggered the first major war in the modern world, namely the First World War. They often turn out to be the triggers, to long time issues faced by the people.

The major reasons for the revolutions, agreed universally across the press are
1. Rising food prices,
2. Rising unemployment,
3. Political corruption.

It is coupled with other problems, common to the middle eastern countries, lack of political change because of dictatorship, no freedom of speech or expression, lack of opportunity, and over all hopelessness. The Internet facilitated the revolution through social network sites like facebook, twitter, etc., where people came to know each other in cyber space, and realized people in the country share the same woes. It is not the technology that creates people's movement. But it just serves as a medium to bring out the aspirations of the people. The media often exaggerates the role of internet for sensation. In real-time, a successful revolution takes all people together, rich and poor, literate and illiterate who look for genuine change. If the revolution is just based on internet, it may fade in a matter of days, and wouldn't sustain the changes accomplished. Now there is a interim government in place which has promised to move out in six months, and lets hope we have a free and fair election in Tunisia, which represents the aspirations and has the confidence of Tunisians.

The Tunisian revolution took a sudden turn into other middle eastern nations., which have the same degree of the same problem. Now, there is a revolution in Egypt to oust the President of Egypt Mr. Hosni Mubarak who has been in power for 30 years now. The median age of an Egyptian is in mid 20s. This means half of the people of Egypt haven't seen a President other than Mr. Hosni Mubarak in their lifetime. Unlike Tunisia, Egypt is bigger in size and population, and is a strategic power in the region, with the Suez canal at its whim., it has trade importance. Bulk of the oil is exported to Europe through the Suez Canal. There have been street protests all over Egypt and yesterday we had a "Departure day" protest. In spite of that, Mr. Hosni Mubarak has still managed to hold-on to power still at least. He has appointed a new cabinet, a new Prime Minister, and new vice-President. The vice-President being a first of its kind in 30 years of Mubarak's presidency. This move suggests all is not well in the Egypt ruling class, and at least they acknowledge the protests are out of genuine anger. With the intensity of the protest, it looks like Mr. Mubarak, a close ally of western powers including the United States for 30 years, will be leaving or its safe to say, it is the "beginning of his end" of power in Egypt. The military is co-operating with him so far, and a lot depends on its role. We will wait it out to see how it unfolds in the next few weeks.

The revolutions in Tunisia and Egypt have created a domino effect on other middle eastern countries in Jordan,Lebanon, Yemen too. Jordan has a monarchical system of government, with the king appointing the Prime minister. The king has appointed a new Prime minister on Feb 1 2011, after initial protests. Most media have mentioned the Jordanian kingdom still has respect with the Jordanian people, and may survive this scare. But looks Yemen's ruler are not going to be that lucky. Unemployment is as high as 45% in Yemen and its President Mr.Ali Abdullah Saleh has been its ruler since 1978. Yemen continues to be a poor, impoverished, backward country in the middle east. Prior to this, Yemen has been in the news very often for bad reasons, like the frequent American drone attacks inside Yemen on suspected terrorists, and many evolving new radical splinter groups calling Yemen its home., which the western nations call it a serious and real threat. Recent attempts like the "underwear" bomber on the Detroit bound flight, had traveled to Yemen and may have been trained there. So it appears, there are inherent problems in Yemen with massive youth unemployment that people become radicalized. It is also a possibility, that religious extremist organizations can exploit the situation and rise to power in this uncertain period. The President of Yemen has went on record, saying he is not going to run for another term in office when his current term expires in 2013. This is a sign of him losing grip, and offering concessions to people. If the people manage to throw out Mr. Hosni Mubarak successfully in Egypt, then Yemen has high probability that it would take center stage of revolution next. On its western side, it could be Libya. Libya has authoritarian rule from its President Gaddafi for over 40 years, the longest serving living leader.

Almost all the governments in the middle east are authoritarian dictatorship or it is a puppet government of the western nations historically. There isn't freedom of speech or expression or an open society in this part of the world for a long time. Leaders have always not evolved from the masses but just appointed by powerfull segment of the population. Culturally all these countries are same., and go back in history for thousands of years. It is a normal reaction of the people to be inspired when people's movement in neighboring countries manage to throw over the leadership and ask for a increasing say, on who they should be ruled by. The current ruling class have no big legitimacy and they bank in on the oil wealth and have managed to survive politically, and have not earned its citizen's loyalty. The powerful rulers amaze wealth worth billions of dollars for their family, and it is just a matter of time they become targets of ordinary citizens, whose life has become more difficult than usual. The western nations, prefer a stable middle east and have helped the dictators be in power with money and weapons, for the sake of stability in the region, and hence oil supply to the growing world. Now that the western economies in financial crisis themselves, this set-up is being challenged.

What is next? It appears the domino effect is going to spread at least in "principle" to other parts of the world, not just in middle eastern countries. However the success of them isn't that clear and remains to be same. With capitalist governments being subject to scrutiny after the recent economic crisis in the world, people have become emboldened to revolt. Protest could hit Europe. We saw the protests in Greece, Ireland recently. Portugal, Spain have a debt problem, and in the days to come, we might see similar protest there too. Eastern European countries are in financial mess, and we could see massive movements there. The former soviet blocks are vulnerable. Increase in food production and labor market improvements are necessary. Youth employment must go up in any growth. Protest spreading to Pakistan is a realistic scenario, with the present government being inefficient, and unable to deliver. Violence is on the rise in recent years with sectarian clashes. The predator drone attacks in the country by US, has angered and raised anti-western feelings. The inability of the government to stop them, has made the government a target for the people. Inflation in the country is running at record levels. Recent handling of relief efforts in earth quake, floods by the government was poor.

India context:

The problems that created the unrest in middle east, namely, price rise of essential commodities, unemployment, corruption apply to India as well. If people come out and protest in the streets else where, it is a possibility it will happen in India too. Unemployment is masked with the family system intact. But the government of India is no safe either. The price rises and corruption are so rampant in the country, if a revolution is needed to stop them, then we should welcome it. It will be a revolution to refine the system and bring in significant changes to eradicate corruption in government and politics. Since its democratically elected, people have a chance to overthrow rulers every 5 years., but if the elected officials do not want to solve fundamental issues facing the people, then a revolution in place to make them do it, is not a bad option. If things don't happen voluntarily it needs to be enforced. I believe, the recent arrest of former telecom minister Mr. Raja in the 2G scam is just a congress government reaction, to let the people of India know, it is serious about corruption. Obviously the Congress government knows, the domino effect would come to India, if it doesn't react, and Mr. Raja is one easy target.

Revolutions happen through out history. It is very interesting, we often highlight the rallies in Europe as 'protests', rallies in middle east as 'revolutions'. Both have the same effect of overthrowing the current ruling class. In Europe its more "anti-capitalist" movements taking hold, and in middle east it is "anti-dictatorship" rallies. Usually the system gets refined when masses protest. At the end of a significant revolution, some of people's problem are solved, and some aren't. If the revolution leads to fundamental changes in society, then it is good. If the revolution merely changes leadership and there is no significant improvement in government policies, practices, standard of living for citizens, the revolutions merely fail like the Orange revolution in eastern Europe. In some case, they go from bad to worse. History will judge the merit of these revolutions and its after-affects on people. At least it is true that the current status quo is not good and deserve's people's movements across the world.