The many errors of C.P. Chandrasekhar and Jayati Ghosh

This morning, I went through the article by C.P. Chandrasekhar and Jayati Ghosh in ‘BusinessLine’. They make many erroneous claims in the article.

(1) They point out that India’s wealth Gini coefficient was 85.4% as per the Credit Suisse Global Wealth Report, 2018 released in October. That is true. They forget to point out that Sweden’s was higher at 86.5%!  Sweden’s was at 83.4 last year while India’s was at 83.0! Pakistan’s Gini coefficient for wealth was a shockingly low 52.6% last year and 65.0% this year. That would be clearly unexpected and one needs to look at data issues.

(2) They write:

The top decile increased its share of estimated wealth from 70 per cent in 2000 to nearly 82 per cent in 2016, and since then its share has fallen only marginally to 77.4 per cent in 2018

I am not sure Credit Suisse Wealth Report published data on the wealth share of the top 10% for the year 2000. I could not find it. Does not mean that they are wrong but their source could be different.

Credit Suisse data tell me that the share of wealth of the top 10% was 68.8% in 2010; it rose to 74.0% by 2014, it had risen to 80.7% by 2016 and had declined to 73.3% by 2017 (Effect of demonetisation?). This year had it jumped to 77.4% (data as of mid-2018, according to Credit Suisse).

(3) They take similar liberties with the data on the wealth share of the top 1%. They write:

Meanwhile the trend in the share of the top 1 percentile is even more shocking: from 39 per cent to as much as 58.4 per cent in 2016, going down since then (largely because of changes in stock market valuations etc.) to around 52 per cent.

It went from 40.3% in 2010 to 49.0% by 2014, had increased to 58.4% in 2016 (that part is true) but had dropped to 45.1% by 2017 (again, demonetisation effect?). It had gone back above 50% (to 51.5%) as of 2018 report.

Data for specific years will be influenced by the exchange rate of the Indian rupee vs. US dollar and by the performance of the stock market. Overall, the rising trend in the wealth share of top 1%, 5% and 10% is clearly established. But, cherrypicking the data to depict the present government in bad light is not rigorous research.

(4) Coming to income-tax matters, they write:

As it is, only around 1.7 per cent of the Indian population pay income tax.

I am dumbfounded.  Number of taxpayers is 74,127,250 as per the latest time-series data produced by the Income-Tax department. India’s population is around 134 crores. This number is 7.4 crores. Do the math! That is 5.5%. Further, the number 1.7% ignores the fact that nearly half the population that lives in rural India and relies on agricultural income, which is exempt from tax.

(5) They write:

The inability to tax high net worth individuals — or to collect corporation tax from profitable companies as expected — in turn means that the government has turned to relying more and more on indirect taxation.

That is not quite true. The direct tax/GDP ratio reached a peak of 6.3% in 2007-08 and it dropped to a low of 5.48% in 2011-12 (the lowest in recent time was 5.47% in 2015-16) but in the last two years, it has climbed nicely to 5.98%. See table 1.4 here.

(6) They write:

The share of direct taxes in total tax revenues has fallen from 38 per cent in 2009-10 (under the currently much-maligned UPA government) to only 32 per cent in 2017-18.

The share of direct taxes in total tax revenue was as high as 60.78% in 2009-10 and it dropped to 49.65% in 2016-17. It had since risen to 52.29% in 2017-18. Both numbers appear way off the mark. See table 1.3 here.

Now, let us ask why the UPA was ‘much maligned’?

(a) Annual percentage change in the official consumer price index (commonly but mistakenly referred to as ‘inflation) was in double digits for five years from 2009-10 to 2013-14.

(b) Fiscal deficit ratio shot up and so did the current account deficit;

(c) The external value of the Indian currency plunged big time in 2012-13 and in 2013-14

(d) The big farm loan waiver announced in December 2007 permanently damaged loan repayment culture and the fiscal balance. It has evidently not helped farmers. It has merely spawned many more loan waivers.

(e) Multitudinous corruption scandals

(f) Lastly and the most important, in line with the theme of the article by C.P. Chandrasekhar and Jayati Ghosh,

(i) the median wealth of Indians dropped to USD1016 in 2014 from USD1217 in 2010. It had since gone up to USD1289 as of mid-2018.

(ii) The wealth of the top 1% of Indians rose at a Compounded Annual Growth Rate (CAGR) of 6.77% from 2010 to 2014 while that of the bottom 90% shrank at a rate of 2.85% CAGR in the same period. From 2014 to mid-2018, the wealth of the top 1% has grown at a CAGR of 8.48% while that of the bottom 90% has grown at a rate of 3.45%

As I had said earlier in this post, there is clearly a worsening trend of inequality in India both with respect to income and wealth. But, I do clearly believe that the ‘much-maligned’ demonetisation, the introduction of GST and that of the Insolvency and Bankruptcy Code contain, in them, the seeds of change and reversal of the trend of worsening inequality over time.

Quality of public debate and public policy depend on rigorous analysis and reliable data.

Anthology of recent good developments

Happy Deepavali to all!

While much attention is focused on the ongoing saga of RBI vs. Government of India (my MINT column today too is part of that focus, I admit), the Sardar Vallabhai Patel ‘Statue of Unity’, one needs to focus on substantive developments too. I have done that in my MINT column today.

The data on direct taxes released by the Income Tax Department last week provides cause for cheer. One can see their press release here and the data table here. The press release is full of interesting and important information.

Just a sample:

While 88,649 taxpayers disclosed income above Rs. 1 crore in AY 2014-15, the figure was 1,40,139 for AY 2017-18 (growth of about 60%). Similarly, the number of individual taxpayers disclosing income above Rs. 1 crore increased during the period under reference from 48,416 to 81,344, which translates into a growth of 68%. [Link]

Indeed, the data help to recalibrate the costs and benefits of demonetisation exercise, if one were open-minded to recalibrate. Let us admit that the short-term costs fell disproportionately on rural India and especially those who relied on informal employment and cash payments for wages, etc.

But, at the same time, it cannot be denied that the rising tax buoyancy, rising share of direct taxes in the total tax collection, the jump in the number of taxpayers, in the number of those having an income of more than INR10.0 million (one crore of rupees) paying taxes, etc., mean more money available for development expenditure not just in one year, but year after year. That would help the poor and the marginalised. How does one square one’s trial balance that only shows costs now?

Second the Prime Minister’s twelve-point announcement for micro, small and medium enterprises (MSME) has one important nugget. His point no. 3 was this:

3. Cash flow certainty

It is now mandatory for companies with a turnover of more than Rs 500 crore to join Trade Receivables e- Discounting System (TReDS) so that MSME do not face trouble in cash flow, PM Modi said. [Link]

This is probably the most important of the twelve points the PM had announced for MSME. In fact, it may well obviate the need for flow of directed bank credit to MSME. Point numbers 9 and 10 are also highly laudable. Those are the things that would make India go up in the ‘Ease of Doing Business’ rankings in which it had climbed to 77 on the back of improvement in the ease of securing construction permits. That is the impression I have.

It is a happy coincidence that in the panel discussion on ‘Inclusive growth and prosperous India’ at the India Ideas Conclave in Delhi on Oct. 27, I had mentioned the importance of getting corporate buyers on the TReDS system as access to working capital was a big issue for MSME.

Earlier, on Oct. 26, I had received the B.R. Shenoy award for ‘Outstanding Economist’ announced by Swarajya. You can see the announcement here.

This morning, the BusinessLine reported the following good news on digital banking transactions:

As per data available with the RBI and National Payments Corporation of India (NPCI), the increase in digital payments has been profound in popular channels such as National Electronic Fund Transfer (NEFT) and mobile banking between September 2016 and September 2018.

The value of NEFT transactions had gone up from 988,000 crore in September 2016 (just two months before demonetisation) to 14,182,000 crore in September 2017, and to 18,015,000 crore in September 2018.

The value of mobile banking transactions, too, shot up from 2,700 crore in September 2015 to 104,300 crore in 2016, and to 186,200 crore in 2017. [Link]

Why did RBI make the dispute public?

I had written my MINT column on the speech by Viral Acharya on Saturday in Mumbai wherein he had teased, taunted and dared the government to undermine RBI independence, warning that the financial market dogs would ferociously leap on it, if it dared to do so. It was way over the top. Plus, independence is not just about independence from the political executive but also from financial market interests. Most global central banks are captured by finance.

Someone formerly associate with RBI liked the last line of my column but said that the RBI might have been pushed into a corner. I still think that a public fight does both of them no good and that country is the loser. Therefore, the country is the loser. Someone has to be wiser and  more mature and rise above their egos and turf issues and patiently whittle down the resistance.

But, that said, the government has made tactical errors. It has failed to realise that it simply cannot emerge the winner in a public battle with the central bank. That is probably the reason why Viral Acharya took it public, at the behest of the Governor, perhaps.

The optics are simply not in favour of the government. It will be seen always as a bully, abusing its powers, for its short-term political gains, riding roughshod over innocent professionals, with no political axe to grind, quietly performing national service and taking care of the country’s long-term interests. It is an unequal battle and public sentiment will seldom be on the side of the bully.

OF course, it is more so in the case of the suited-booted folks who would always come down on the side of ‘people like ’em’. There again, the government will lose in the battle for the affection of the so-called ‘opinion-makers’.

The Congress Party had internalised it very well. They were sophisticated. Their pressures were silent and subterranean. Remember what Rakesh Mohan wrote in ‘Business Standard’. I had blogged on it. He said that the number of government nominees on the Board was increased in 2012 when Department of Economic Affairs was split and the Department of Financial Services was created. It did not have a discussion in Parliament. I mention it in the MINT column too.

Then, there are substantive issues. By no stretch of imagination can it be said that there is no bad debt problem in India and that it is the concoction of RBI by its reckless application of Basel norms.  It won’t fly anywhere. The evidence is overwhelmingly against such an outrageous claim.

Second, if the government claims that it is the world’s fastest growing large economy, why is it worried about liquidity tightness?

Third, the government should actually be working with RBI quietly and even claiming that it is sacrificing short-term political gains for the long-term by pushing for the culture of bad, reckless and ill-judged lending by public sector banks, to end. Thus, it should back ‘prompt corrective action’ and make a virtue out of it.

This is what I said in my BloombergQuint interview and they had misrepresented it in the headline but got the bullet points mostly right:

Government Can Use RBI As A Shield, Says V Anantha Nageswaran

The government is using the central bank as a shield to get reforms in place,

(I said: the government should use RBI as a shield – fire from behind them, sort of, and use it as a bulwark to make the long-term case) instead of using it as a bulwark to make the case for long-term priorities, said V Anantha Nageswaran, the dean of IFMR Business School (Krea University).

  • Pressure on the RBI must be very high for Viral Acharya to have made the speech
  • Benefit of doubt will always go to central bankers, and not to political leaders
  • There’s a way to guide the central bank with finesse, without creating a crisis
  • The real issue with RBI’s reserves
  • The government wants comfort on fiscal deficit, RBI wants to maintain sufficient reserves
  • Government should be using the RBI as a bulwark to make the case for long-term priorities
  • In fact, the government can use RBI as a shield, to get reforms done
  • There are issues to reflect on from the RBI’s point of view
  • Obvious that both sides should react with more maturity [Link]

Fourth, regardless of whether the RBI has excess reserves, it cannot be returned to the government through a public dispute and through fractious Board meetings. Softly, softly has to be the approach. Having battering rams in the Board won’t help but hurt the image, hurt the currency and hurt the bond price, handing a defeat to the government in more ways than one.

All this being said, I liked the pieces by Mythili Bhusnurmath, by Saugata Ghosh and T.T. Rammohan on the ongoing dispute.

But, I think I have understood why RBI brought the issue to the public, no matter how bad it is for the national image. The government cannot win in a public battle because a public battle is a perception battle. The government has to show finesse and sophistication. But, those are two more of the deficits of this government – along with talent – and, come to think of it, they could be India’s deficits too.

Must read Mike Pence

It is hard for me to pick out the important parts of the speech of Mike Pence, America’s Vice-President, on China, delivered nearly a month ago. It is a MUST READ. I agree that it could be as significant as the speech by Churchill calling the Soviet Union as the country behind a ‘Iron Curtain’.

Brahma Chellaney says that Sierra Leone is the next country to pull out of the Belt and Road Initiative and that India is right to have stayed out of it.

America expresses concern over China’s attempts to take over Taiwan by non-peaceful means. Fair enough.

China’s manufacturing PMI and export data were weak [Link]

Today’s news links

The re-election problems of PM Modi [Link]

Suzuki commits to ‘Make in India’ with electric vehicles [Link]

Suzuki will test run its first electric cars in India in October! This news is from September. I do not know if it happened [Link]. If it did not, then we know how to read the previous link, though.

Japan is still struggling to come to terms with its relaxed foreign worker visa policies. The resolution passed but after a lot of doubts and scepticism were expressed [Link]

Philippines compromises (or, attempts to) with China on South China Sea [Link]

Two well-known Chinese economists-critics of China’s economic growth model actually blame China for the trade dispute with the United States. [Link]

A story in FT on how Mauritius still makes its revenues through assisting tax evasion although the African state confirms that it is compliant with all tax-evasion international laws and treaties. Indeed! India has scrapped its double-taxation treaty with Mauritius. Full capital gains tax will apply on capital gains earned by Mauritius-registered entities from 1st April 2019. Let us see.

China allows share buybacks to boost stock market – when in doubt, ape the West and yet claim superiority to Western model of economics and finance!

American college undergraduate students are now ambivalent on capitalism. Wall Street Journal is alarmed! While most of the points made by James Freeman are valid, he would have been more correct had he also exhorted capitalists to introspect on why things have come to such a pass.

The techypocrisy

The wheel has come back a full circle or is on its way – or so it seems. See two recent NYT articles here and here. The digital gap is not what you thought or think it is and that technology deprivation is no deprivation but a blessing!

Of course, I am not sure extreme answers are the right ones or that they would be effective with all children. To each children, each parent. In fact, I am wary of fundamentalist or extreme views with respect to technology – utopia vs. dystopia. But, evidence points to a compelling case that modern technology is shaping a dystopian world.

But, what psychologists working for tech. companies do and how tech. company executives themselves have discouraged their own children from taking up ‘screen’ habits are extremely illuminating and insightful. Of course, without mincing words or sentiment, they are most troubling and leave us fulminating, angry and helpless, all at the same time.

[On a related and unrelated note, read this piece about the forked tongues of tech. leaders.]

The march of progress be damned and perhaps, named something more appropriately for what it is.

These developments are consistent with ‘More is preferred to less’ axiom of neo-classical economics. That is why we have frequent updates to hardware, software and also so many clickbaits with man apps.

I would also recommend the 4-part (each approximately one hour) documentary on ‘The Century of the Self’. I have watched two parts. Very, very insightful. m/the-century-of-the-self/ (This is the link to the complete 4-hour video)

Those who teach consumer marketing should find it useful as to how it all began. You may draw your own conclusions as to the morality (or, lack thereof) of it all. On my part, I am clear. Consumer marketing – for most products (fast foods, soda, entertainment electronics, to name just a few) – sails close to the wind on ethics and morality or beyond it.

Why do you want to become an ‘insider’?

I had long wanted to write a detailed review of Yanis Varoufakis’ book, ‘Adults in the Room’ which I finished reading some six months ago. But, never got around to doing it. I shall post separately a long review of ‘Adults in the Room’ – a simplified and shorter version of which appeared as a MINT column. It appeared in MINT in April 2018.

As my good friend Gulzar Natarajan remarked recently, the drawback of YV seems to be that he does not seem to admit to any mistakes or frailties or failures on his part.  In fact, some in Europe have claimed that he failed not so much because the ‘Troika’ (European Commission, the European Central Bank and the International Monetary Fund) did not agree with him but that his personality was abrasive and somewhat insufferable. We will not know which version is true.

But, one of the first things that strikes you from the book is the question that Larry Summers poses to YV:

There are two kinds of politicians: insiders and outsiders. The outsiders prioritise their freedom to speak their version of the truth. The price of their freedom is that they are ignored by the insiders, who make the important decisions. The insiders, for their part, follow a sacrosanct rule: never turn against other insiders and never talk to outsiders about what insiders say or do. Their reward? Access to inside information and a chance, though no guarantee, of influencing powerful people and outcomes. So Yanis, which of the two are you?

This is a very profound statement. In the context of Greece, both Alex Tsipras and Varoufakis were outsiders who became insiders. But, Alex internalised his ‘insider’ role too much while YV retained his ‘outsider’ spirit and could not continue and came out to become an outsider, again. That Alex Tsipras chose to agree to the demands of the Troika after the referendum he called gave him the mandate to reject the EU conditions was a dramatic about-face. Notwithstanding everything that must have gone on before, including possibly YV’s personality playing a role in the debacle of negotiations with Europe,  this must be a sad moment for all those who harbour romantic notions of challenging power and coming out the better for it.

Actually, Larry Summers’ quote above might sound utterly cynical but is very close to the truth. All change agents succeed only when insiders permit them to. Otherwise, most end up as rebellions without success. Even if they succeed in overthrowing a particular regime and come to office and then turn into ‘insiders’ themselves, did their cause or the ordinary citizens who trusted them succeed?

‘Insiders’ are those who control the discourse, the narrative, wield power, influence and usually benefit smaller power centres and narrow interests than serve large interests. ‘Outsiders’ are like Don Quixote tilting at the windmills.

If you become an ‘insider’ by accident as YV did and if the ‘insiders’ already inside permit you – assuming that you retain the spirit of the ‘outsider’ in you, you may be able to achieve a few things that are consistent with your ideals. That is the bitter reality of the balance of power. All democracy in that sense is a fig leaf for the balance of power that rests firmly with the powerful. The power of power is powerful!

A rising tide might turn some boats into giant steamers andin the process may lift some boats. But, we mistake it for the power of our ideas, power of our persuasion and the triumph of the underdog, etc. It might simply be the case that you were allowed to succeed for various reasons.

The question, at a personal level, is whether one wishes to remain an outsider or an insider. IF one wanted to become an insider for the sake of ‘doing good’, then it is important to remember Summers’ advice. IT is sound, practical and true. The risk is that one might become a quintessential ‘insider’ oneself. The system digests you completely.

Or, one retains the spirit or remains loyal to it, remains untouched by the trappings of becoming an insider and achieves whatever possible. At the margin, he or she would have made the world a better place. It is possible theoretically but happens relatively rarely or to a few. It is possible for policy advisors and some technocrats but less so for politicians and for those who hold political office.

Or, one comes out; becomes an outsider again and remains true and loyal to one’s beliefs and values and sleeps soundly. If one were lucky, a crisis occurs and one’s ideas are sought and one pushes them through in a crisis. Otherwise, insiders would never permit them. One’s ideas see the light of the day and make a positive impact and one remains an outsider. That is the ultimate success story. But, it needs a lot of luck or divine will.

In India, many political parties started out as outsiders. The DMK in the South, the All Assam Students’ Union come to mind. Laloo Prasad Yadav started out as a Lohia-ite socialist. Tamil movie, ‘Achamillai, Achamillai’, is the story of how the insiders turned an outsider into one of them – a school teacher who joined politics to do good; becomes a politician, engineers a caste conflict and killings. His wife does not ‘recognise’ him any more and kills him in the end.

Tamil Novel, ‘Mayaman Vettai’ by Indira Parthasarathy is another tragic tale of a returning non-resident Indian becoming an insider – part of the system that he sets out to change.

Just right now, notice how in the tragic turn of events in Sri Lanka, Arjuna Ranatunga, the hero of their World Cup victory in 1996, has been arrested as his bodyguards fired at demonstrators or opposition supporters. He was the leader of the underdog team – an outsider – that challenged  ‘status quo’ powers.

One of the most brilliant articles I had read this year was about the current Pakistan Prime Minister and the brilliant cricketer cum captain, Imran Khan, who led his team to victory in 1992 World Cup. The story is that of an outsider for whom becoming the insider became an end in itself.

Very few remember why they became insiders in the first place. IF they do not truly become insiders – at least, they forget their original ideals and settle for their personal career advancement. That is, becoming part of the system becomes an end in itself. They may not be as harmful as true insiders usually are but they drift far away from their ‘outsider’ spirit. Very little of it stays with them. There is little public welfare gain from them becoming insiders. There are many in this category.

Personally, I feel very comfortable imagining myself as an outsider. I must consider myself lucky that, in my corporate career, I was allowed free reign of my ‘outsider’ spirit. That was partly a matter of luck for my role never really threatened the insiders and my research calls, predictions and views – out of consensu as they were – did not turn out to be systematically and persistently wrong. In fact, they were right, for the most part. It was a lucky confluence of many things that helped me remain an ‘outsider’ for most of my corporate innings.

Things became difficult in more ways than one, after 2009, with the engineered economic recovery. I never could come to terms with it, until today. No wonder I quit in 2011, feeling confused about many things! I still am.

[Cross-posted in]