BJP government in J&K

Of the many concessions that the Bharatiya Janata Party might have made to form the government in J&K with PDP, this one rankles:

The document, while referring to “reconciliation with Pakistan”, invokes former PM A B Vajpayee’s efforts to stabilise Indo-Pak relations and the peace process in Kashmir. It talks about “Insaniyat, Kashmiriyat and Jhamhooriyat” as the binding principle as propounded by Vajpayee and “seconded by Prime Minister Modi”. Sources said the BJP was not keen to include this “foreign policy’’ issue in the framework.

“But they were convinced once we explained that the worst sufferers of India-Pakistan hostility was the J&K state and its people. We explained that an environment of peace was necessary for development and that couldn’t be achieved without a process of reconciliation with Pakistan,” a PDP source said. The document, sources said, reiterates the need for “movement of people and goods across the LoC” and places efforts to encourage and widen this initiative on the BJP-PDP government’s agenda. [Link]

First of all, the rationale for reconciliation with Pakistan is unclear. Second, even if it is necessary, who should take the lead? India or Pakistan? Why should it be on the agenda of a coalition government in an Indian state?

 

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Sen’s many sins – the finale?

This blog has not made any secret of its displeasure and deep resentment of the flawed economic policy prescriptions of Dr. Amartya Sen. TGS had written on Dr. Sen about six times in the last two+ years. Unfortunately, on all the occasions, it only had the misfortune of documenting the pernicious effect he was having on India through his influence with the previous UPA government. India’s present Chief Economic Advisor Dr. Arvind Subramanian had written a brilliant Op.-Ed. on the man sometime ago. Here is the link to my blog post on his article. Here is another one I wrote on Dr. Sen’s many sins.

Now that he has had the gall to go public with his unhappiness at not being reappointed as the Chancellor of the Nalanda University, it is only appropriate that he has received extensive public scrutiny of his tenure. Well, he asked for it. I sincerely hope that he regrets not having left the stage quietly and grateful for not having been called upon to explain his many acts of omission and commission as the Chancellor.

Two pieces that document his ‘contribution’ nail the many myths are important reads. Alternatively, they offer concrete evidence of the man’s shallowness and incompetence. One hopes that India has seen the last of him or heard the last from him, unless it is for testifying before a Commission of Inquiry at the mismanagement of the Nalanda University project.

Gravediggers have not given up

On September 1, 2013 I wrote this post on the Land Acquisition Bill of 2013.  Read this to understand the culpability of the previous BJP leadership in passing the original Land Acquisition Bill.

The new NDA government now tries to pass some amendments to make the Act a little less problematic in implementation. It is far from a paradigm shift. If anything, the most troublesome aspects of the original legislation remain intact. The new BJP-led NDA government is tinkering at the margins.

[The BJP has put out a ‘Resource’ page on the Ordinance. The language is downright embarrassing. It is impossible to believe that they could not find some one to do a decent English version.]

The government is not changing any of the compensation provisions to farmers. It is merely trying to reduce the potential wastage of time involved in so many procedures that are embedded in the original bill. Read this factual article in THE HINDU.

The Ordinance does not really help improve or lower the direct costs of Land Acquisition. The compensation provisions remain untouched which are a multiple of the land values – clearly overvalued – in an inefficient market for land in India.

The non-partisan Parliament Research Service (www.prsindia.org) had put out an estimate of the time required to acquire Land under the bill, on September 6, 2013. It would take not less than 50 months assuming no extensions.

Yet, it has met with fierce opposition, including from the NDA coalition partners! We do not know the other reasons why everyone – including allies – want to gang up against the government. Clearly, some egos have been more than ruffled in the last nine months.

But, what can one say of others? Anna Hazare, for example? But, these people could be mere puppets while the ringmasters are elsewhere.

If the business of land acquisition is costly and cumbersome, no land will be acquired or far less than intended. Period. One can have the best R&R compensation on paper. Transaction volumes will collapse. Farmers and the country will remain poor. Mission accomplished.

Economic History Lessons 3

This is almost similar to the MINT article I wrote on Tuesday (Feb.9,2015):

I have read Peter Temin’s excellent paper on Economic Development and Economic History. I have referenced it in earlier posts. It was wonderfully insightful for me because it traced the British Industrial Revolution to the Plague of the 14th to 16th centuries in Europe. It had great insights on African slave trade and their economic performance. It gave me some good further references to follow up.

Then, I read the first two chapters of the New Economics Curriculum developed, through joint effort, at the Institute for New Economic Thinking. The Chapter 2, in particular, gave me a lot of reference material to download for later reading. [The chapters have been updated as of January 2015 and the number of chapters has gone up to 16. You can find them all here. There is a simple registration process.]

I then listened to the hour-long lecture by Prof. Robert C. Allen (in four parts), as I had mentioned in the 2nd post on Economic History. He says that North America and Western Continental Europe caught up with the British Industrial Revolution by adopting the following:

  • Internal free market (elimination of internal tariffs) – national single market (for India GST helps – no wonder so many are resisting – foreign hand too in the resistance?)
  • Stable domestic banking system
  • High external tariff
  • Universal Education
  • Infrastructure.

They did not catch up practising free trade and open capital markets. Surprise, surprise.

Up to 1750 AD, India and China contributed more than half the world’s manufacturing. These two nations contributed around 70% of 80% of the global population up to the 19th century. Naturally, their manufacturing was labour-intensive.

The West leapfrogged in the 19th century with capital and technology simply because real wages became too high in the UK and substituting capital made a lot of sense. Necessity became the mother of invention. Full credit to them. One must note here that other countries which did not have such high real wages (and cheap energy) as the UK were slow to get on to the industrialisation bandwagon.

Then, they used colonies to import raw material for their capital intensive production. For example, India supplied raw cotton and imported Manchester cotton fabric and clothing. Britain maintained fragmented internal market in India to collect revenues. It brought down India’ external barriers to allow free import of British-made goods. Nor did it invest in India’ education or banking. It invested in Railways to collect Indian raw material for transshipment to Britain at Indian seaports.

A good question to ask is why today’s developing countries did not emulate these above five points, after they became independent. They tried with half a heart, in most cases. Most likely because many of their policy and business elites would have found a way to profit from their association with Western growth as exporters of raw materials exploiting cheap local labour. There is also the elitism that comes with keeping economic growth and its fruits away from wider circulation. Well-meaning but eventually counterproductive emphasis on higher education after Independence also fed this elitism (e.g., India). Therefore, half-hearted attempts led to half-baked output.

Further, the capital intensity of production needed to serve large domestic markets became so high that high external tariffs unfortunately ended up creating fragmented and inefficient domestic industries of insufficient scale. Exceptions were to be found mainly in East Asia – Japan, Korea, Taiwan and now China.

Having grown with capital intensive technology and cheap capital, Western nations also turned against the labour cost advantage of the developing nations post-1990. It shows how morally hollow and inconsistent were the arguments advanced by the West against offshoring or outsourcing.

The recent collapse in fossil fuels will help developing countries to catch up. Of course, climate change concern is a big bummer. There too, they have put the current developing world in a bind.

That is why India has to find out how to capitalise on its Thorium reserves. Cheap energy played a big role in driving Western prosperity. Given its size, India needs one such source too. What is India doing about it?

But, short of a plague or War that creates a labour shortage, resistance of labour to technology and scale would remain in India and in other developing countries where labour is cheap relative to capital.

Therefore, the chances are high that countries such as India (and even China), given climate change risks and their huge sizes, may never indeed catch up. These two countries are short on energy resources and water too. North America and Europe were not constrained in this manner in comparative stages of development. Britain could burn coal copiously and industrialise without worrying about CO2 emissions.

Today’s developing nations are fighting very high odds of ‘making’ it. That is why it does not appear smart to wager on the outcome that India and China recapture their share of global economic and/or manufacturing output of the 18th century or early 19th century, by the end of 2100.

Comments welcome.

Banging the head #4

(1) Nawaz Sharif tells Obama that Pakistan opposes India becoming a permanent member of the UN Security Council [Link].

(2) Indian PM Modi calls up Nawaz Sharif the next day and offers to send his foreign secretary to have talk with Pak. Foreign Secretary [Link].

(3) He suspended the talks six months ago when the Pakistan Ambassador met with the leaders of the Hurriyat in J&K.

(4) A lot seems to have changed in the last six months.

(5) I hope I am wrong.

Banging the head 3

US Trade Deficit was higher than expected in December. Oil or non-oil, it does not matter:

U.S. ran a record trade deficit with China for 2014 as a whole ($343 billion, up nearly 8 percent from the previous record in 2013) and a record deficit in manufactured goods with the world as a whole ($734 billion, up 13 percent from the 2013 record).  [Link]

The answer for this was not exactly the strong dollar or weak overseas growth that does not attract American exports. What does America make cheaply and/or competitively now? Another data point released on the same day had the answer: Nonfarm productivity declined, in contrast to expectations for a small rise, in the fourth quarter.

What did US stocks do? They rallied more than a per cent.

Games Europeans play

When the European Central Bank announced its QE programme in January, I dedicated one of my columns in MINT to analysing that. You can find it here. A more elaborate piece with a provocative title can be found in ‘Pragati’. I must confess that John Hussman had a different angle that I had not thought of. Here it is:

This week, the European Central Bank will authorize a fresh program of quantitative easing in Europe. My impression is that the structure of this venture will be far different from what seems to be commonly envisioned (and priced into an exchange rate that is has already overshot to the downside). The political realities for Germany have led it to shift its focus from opposing QE outright to changing the structure under which QE will proceed. It’s that potential impact on the structure of QE that seems underappreciated. Germany has two primary interests here. One is to ensure that any losses are borne by the individual member states, and the second is that as few euros as possible are created with the backing of questionable sovereign debt. Put simply, Germany’s agreement to allow QE to proceed is likely attached to particular strings that limit its exposure to the sovereign debt of its less credit-worthy neighbors.

Under Article 16 of the Protocol that established the European System of Central Banks (ESCB), the ECB Governing Council has the exclusive right to authorize the creation of euros, but either the ECB or the individual national central banks can issue those euros. The ECB will authorize a large QE program this week, but my impression is that the details will leave the ECB itself responsible for executing only a fraction of the announced program, with the remaining majority of the program (perhaps 60-75%) being nothing more than the option for each national central bank to purchase its own country’s government bonds, at its own discretion, and its own risk. Moreover, that option is likely to be limited to something on the order of 25% of the outstanding government debt of each respective country.

With German government debt trading at negative yields out to maturities of 5 years, German buying of German debt would essentially guarantee a loss to the Bundesbank. As a result, the likelihood that Germany will act on the option to buy that debt seems rather slim. The same argument holds, if to a lesser extent, for other credit-worthy countries in the Eurozone, which means that the bulk of that option will be taken up by smaller and less credit-worthy members. With a cap of perhaps 25% of total government debt, the actual size of QE when implemented is likely to be dramatically smaller than whatever number is announced this week. That certainly doesn’t rule out an ebullient knee-jerk response to whatever massive number is announced, but pay attention to the details, because they are likely to have a significant effect on what happens next. We’ll see.

Bottom line – “authorize” is a slippery word. [Link]

However, he had to concede in his next post that the ‘authorise’ aspect of the additional asset purchases was omitted. In other words, national central banks in Europe have no discretion not to buy – thus far:

Fully 92% of these purchases must be made by the central banks of individual countries in the Eurosystem, with the ECB sharing the risk of losses on only 20% of it (12% being investment-grade institutional debt, and 8% being the sovereign debt of Euro-area countries). This was essentially as expected, but – thus far – without an option for national central banks to treat their share of purchases as discretionary. I still suspect that this shoe will drop in the weeks ahead, but there’s actually a much more important factor driving our outlook. [Link]

Last evening, the European Central Bank announced that it would not accept Greece sovereign debt as collateral from Greek financial institutions. See announcement here. The actual impact of this is likely limited, according to some commentators, because Greek financial institutions can post other collateral.

No marks for guessing that this is an act of gamesmanship. The question is not if the Troika (the European Commission, the European Central Bank and the IMF) wants to bend the will of the new Greek government and make it accept their terms but whether the ‘Troika’ want to negotiate with a government with Marxist leanings at all. In other words, the ‘troika’ might keep coming up with newer conditions to ensure that negotiations do not get started or fail, if they get off the ground.

Not very dissimilar to how Western governments have dealt with other regimes in other parts of the world that they did not like, except that it is happening this time in European heartland.

In the meantime, there is a scholars’ appeal for Greece. If you agree, you can sign it.