Vacation time

Travelling now. Back with the routine around the 14th of July. Until then, light or no posts. Not that the world is going to stop in its tracks for that reason. Much is happening, including the exit of Germany from the World Cup 2018. Does not augur well. Putin-Trump summit is due in Helsinki in July. Youth unemployment rate is still above 34% in Spain – double the rate that prevailed in 2007. China’s stocks are officially in a bear market. Indian rupee is declining again.

With oil price ruling firm, with the US government posing restrictions on imports of crude from Iran, with the RBI warning on NPA problem (just caught the headlines) and monsoon being somewhat erratic, India does not appear very well placed. Of course, had written about it more than once in the course of the year.

Errors of omission than commission

Amy Kazmin has a long-form article on the Modi government, ‘India: Narendra Modi hunts for more economic ‘firepower’’. The article could be behind a paywall.

On balance, it is not a terribly unreasonable article. That carefully guarded comment is deliberate.

The following is the comment I had left below her article in the pages of FT:

One correction: Arvind Subramanian is still India’s Chief Economic Advisor. He holds the position until August or September this year.

One of the biggest negatives – among many – of the previous government was that it brought down India’s potential growth rate by several notches – from around 8% to 8.5% in 2006-07 to between 6.0% and 6.5% by around 2013 when the IMF published its October World Economic Outlook.

This government’s actions have not brought down the potential GDP growth rate. If anything, they have enhanced them and it will show up over time. Surely, they could have done much more. But, their errors have mostly been of omission than commission. That is a big contrast to the previous government.

Yes, most would point to demonetisation as an error of commisison and a big one at that. Some have said that it is post-Independence India’s worst policy error. They have their reasons, perhaps but they need to spell out the criteria adopted, list all decisions that qualify to be judged against those criteria and show why demonetisation tops the list. The government could have avoided that measure, for sure. But, now it is too late to take that line. Indeed, on November 8, 2016, when it was announced, it was already too late to argue that it need not be done. Therefore, no matter what government’s goals and no matter how many times that they kept changing, one has to evaluate it on the basis of its net cost-benefits. The immediate question that pops up is one of horizon. What is the relevant time horizon to evaluate the decision especially when we know that economic decisions, in general, have long lags for their effects to be felt?

Take Bank Nationalisation done by Mrs. Indira Gandhi in 1969. In the first two decades, for the most part, it delivered on its financial inclusion goals. Take the next twenty five years. The ‘financial inclusion’ low-hanging fruits had been mostly plucked. Further, other agencies had come into existence to take up that job. What did government-owned banks do? They have run up non-performing loans every decade or so in the last three decades. The most egregious of them happened between 2006 and 2012, under the previous government when confidence about continued high economic growth combined with cronyism and corruption to ​cause​
many dubious loans to be made. India is still reaping the whirlwind.  So, what is the net score on bank nationalisation? It depends on your horizon. By 1990, it was positive. By 2018, it is negative.

My guess is that by 2025 or 2030, the score-card on demonetisation might look very different. Let me put it that way: the chances of that happening are at least as high as the chances of it being stuck with the label of the worst policy decision of this government or that of any government since 1947.

Yes, this government should have and could have acted to reform the government-owned banking system. The ‘bad assets’ crisis presented such an opportunity. This government has been slow to move. It tried many other peripheral measures – Bank Boards Bureau, Gyan Sangam, induction of some private sector talent (too few), etc. But, more far-reaching measures – even if it wanted to retain the government ownership of banks in most cases – were possible.  However, as I mentioned earlier, it is an error of omission than an error of commission.

When it comes to actual economic growth between April 2014 and March 2018, one should not forget that global economic growth has only been middling at best and trade protectionism had already begun, even before the administration changed in America in 2016. India’s inefficiently organised (too fragmented)  production system did not help it to capture market share opportunities created by a vacating China in some products, due to its high costs. The question is whether there is a political consensus in India in dealing with the romanticism of the small and micro enterprises? The answer is ‘NO’.

When it comes to economics, India’s problem is that there is only one party rule in India. All parties rule from the Left. There is no natural champion of free enterprise and economic choice among the current political leadership in the country. Notwithstanding that, this government has not brought down India’s potential GDP growth. It has probably enhanced it.

Therefore, despite the disppointment with the NDA government’s performance relative to the country’s requirements and the expectations created, it is a fair and reasonable bet, ​that ​ a coalition of Opposition parties led by or supported by the Congress Party will be considerably worse for the Indian economy. Actually, it might well be a disaster.

The myth of the liberal order

Just finished reading Professor Graham Allison’s ‘The myth of the liberal order’ in ‘Foreign Affairs’ (possibly behind a paywall). For the most part, Professor Allison has a very good essay on the antecednets of the liberal order that America supposedly constructed and it is now allegedly destroying.

He states categorically in one place:

Had there been no Soviet threat, there would have been no Marshall Plan and no NATO. The United States has never promoted liberalism abroad when it believed that doing so would pose a significant threat to its vital interests at home. Nor has it ever refrained from using military force to protect its interests when the use of force  violated international rules.

Similarly, in Europe, there would have been no peace and prosperity for seven decades but for the shock of the previous thirty-five years – a point I make in tomorow’s MINT column.

He is bang on target here:

Long before Trump, the political class that brought unending, unsuccessful wars in Afghanistan, Iraq, and Libya, as well as the financial crisis and Great Recession, had discredited itself. These disasters have done more to diminish confidence in liberal
self-government than Trump could do in his critics’ wildest imaginings, short of a mistake that leads to a catastrophic war.

and here as well:

When, in 2017, members of the World Economic Forum in Davos crowned Chinese President Xi Jinping the leader of the liberal economic order—even though he heads the most protectionist, mercantilist, and predatory major economy in the world—they revealed that, at least in this context, the word “liberal” has come unhinged.

‘Unhinged’ – bravo!

But, when it comes to concluding the article, he stumbles. No big mistake that is. It s true for all of us. We are good at analysis, examination and diagnosis (ex-post) but we are remarkably poor at anticipating and proposing answers. Most of the time, answers are reactive and responses to crises that force us to confront the situation. Then, we come up with some responses. If we are lucky and if the  ontext is right, the response works out well and one is hailed as a great leader. Otherwise, history condemns us. That is the truth. So, no shame on not concluding his article well.

The reason why the article does not conclude well is that there is no ‘liberal order’ for the sake of it. It is a myth, as he puts it. There is only the ‘order of power’ and sometimes a liberal order may be its consequence and sometimes, an illiberal order may be its consequence because the ‘power order’ can feature the chaos and tussle of transitions and vacuums from time to time.

Economic vision and strategy of the NDA government

If I were Narendra Modi, I would visit many State capitals and second tier cities and articulate the economic vision and strategy that his government had worked on, for the last four years, as below:

(a) During UPA years, India’s potential growth had come down. They had assumed that economic growth of 8% to 9% was on autopilot and spent on everything.

(b) We retained their socio-economic development model and goals but were clear that they should be sustainable.

(c) We set about restoring India’s potential growth rate. Private capital formation was in coma. Banks were not in a mood to lend. So, confidence of foreigners to invest in India was one priority. Hence, the whirlwind diplomacy in the first two years. It paid dividends.

(d) Second, was public investment focus and on infrastructure. Roads, railways, smart cities and renewable energy.

(e) Third, lower tax rates for more than 95% of businesses. Corporate tax rates reduced for businesses up to 25 crores.

(f) Putting government finances on sound footing. Oil windfall used to restore good health to government finances. The previous government had left us a true deficit of around 6% of GDP, not including State governments’ deficits.

(g) Hence, funding development expenditure cannot be reliant on higher GDP growth. That was no longer a given for domestic reasons mentioned above – banks and companies in bad shape. Monsoons had become erratic. Internationally, the world had changed since 2008 – low growth, weaker commtiment to trade and immigration, etc. Hence, high growth cannot be counted upon.

Public finances had to become sounder.

(h) Hence, use of technology, demonetisation and the information gathered from that exercise being put to use for nabbing tax evaders, implementation of Goods and Services Tax, Insolvency and Bankruptcy Code and Real Estate Regulation (RERA).

(i) Strengthening the foundation cannot be only about economic growth and finances. It has to be about health, hygiene and sanitation. Hence, we announced Swachh Bharat. Now, we have a national healthcare mission.

(j) Then, there was PM Jan Dhan Yojana. Access to finance happens when there is a record  and habit of savings and thrift. OPening bank accounts brings citizens into the formal economy and be able to tap formal sources of credit as they build a record of savings and transactions. It will be a game-changer in the years ahead.

(k) Agriculture is a State subject. But, we understood the risks that farmers faced both with respect to production and pricing uncertainties. Hence, the PM Fasal Bhima Yojana (CROP INSURANCE) and the National Agricultural Market (NAM).

Therefore, the last four years has been about cleaning up and laying a solid foundation for the economy for the next twenty-five years towards completing the centenary of India’s independence.

The next five years will be about execution and implementation now that we have laid a good foundation.

India’s tax base

Aarati Krishnan has a good article on India’s tax base. It uses some high-level data – available in the public domain – to make the case that the tax base in India is not all that small as many claim. I think it is a sound argument to make and two, the policy conclusions that she derives from them are also sound.

In the final analysis, best bet to raise more money is to keep it simple, reasonable and also bet on economic growth to create more income and hence, more income tax. As simple as that.

Of course, high altitude analyses can miss out on the details.

(1) Take her calculations on wage earners:

  • Population 132 crores
  • Working age population: 66 crores
  • Agricultural workers: 50%
  • So, non-agricultural working age population: 33 crores
  • Those with year-round work: 16.5 crores
  • Wage earners who file income tax returns: 4.3 crores
  • More than 25% and this is not a small proportion.

Straightforward stuff. But, two questions are still valid. 75% that is not paying is a big proportion. Two, we do not know how many of the 25% are in a position to and do report their true wage income.

(2) Take the case of self-employed. She reckons only 13% of the households have taxable income above INR20,000 per month. That is 3.2 crore households. 13% may be small but 3.2 crore households does not sound trivial or small. There are several accountants, lawyers, stockbrokers, doctors, engineers and consultants who are self-employed. There is considerable scope for under-reporting of income there, notwithstanding the mandatory service tax collections.

(3) Based on the numbers she reports, there appears to be plenty of scope for exploring better tax take from unincorporated enterprises.

(4) Of the incorporated enterprises (17 lakhs), only 7 lakhs file annual tax returns and 5.3 lakhs of them report annual income of less than Rupees 2.5 lakhs.

There too, considerable scope exists to examine the incomes of all the 17 lakhs registered (incorporated) enterprises and to check if the 5.3 lakh tax filers have only income of Rupees 2.5 lakhs per annum.

In short, where her article carries much weight is with respect to wage earners. There may be only limited scope to extract more tax-rupees from them, in comparison to other categories of taxpayers. But, scope exists with respect to other categories of taxpayers – self-employed professionals and both incorporated and unincorporated enterprises.

So, continued use of big data, matching of data available with the government in different departments to minimise tax evasion is fair game.

But, that does not justify ‘tax terrorism’ and two, she is also correct that tax growth comes from economic growth and income growth.

Importantly, continued emphasis on the revenue side also ignores the government responsibility to squeeze the maximum economic benefits out of every rupee it spends. Administrative reforms leading to greater accountability for performance, for expenditure, for outcomes is confined to op.-eds., and blog posts such as this.

This government too has stuck to the script of the previous governments in this regard.

Risk axioms

A good article by Gillian Tett on where risks lurk. She concludes that it lurks in places where we don’t look. Quite. It has been that way and it will always be that way. We are simply not wired to anticipate risk. We are poor predictors. Recall the post I had written two days ago from Sir Martin Rees’ book as to how little we were able to predict in 1937 about the things that actually materialised in the remainder of the century.

From the article flows the following ‘risk’ axioms:

(1) No crisis is, by definition, anticipated. If it is anticipated, it will be handled, very likely, before it becomes a crisis.

(2) There are no catalysts to a market crash that is known ex-ante. It is actually a corollary of (1) above. All catalysts are clearer only in hindsight.

(3) ‘Early warning’ indicators anticipate the last crisis well.

Who is a Liberal?

TIME magazine has the following cover in its July 2nd Edition.

TIME Cover_02072018

Sanctimonious hypocrisy.

The purpose of the cover is not better public policy. The purpose of the cover is not even to regain power in elections. That can happen only when one wins converts to one’s cause. This won’t or cannot win converts.

These are not liberals. They are D.A.D.D.I: Dangerous, Arrogant, Deluded, Double-standard Idiots.

Who is a liberal? See here. That is a covery story I wrote for the Dec. 2015 issue of ‘Swarajya’.

Also, it is a good time to recall John Gray’s article in July 2016 (a classic) in the aftermath of the Brexit vote. If you thought that the Brexit was narrow and lacked legitimacy, pl. check your facts again here. Take out Northern Ireland, Scotland and the Greater London Area. It was as clear as it could get.

As Tim Price reminds us in his latest note,

In recent debates, Quisling MPs and unelected peers have resorted to the purest sophistry, citing sources such as Edmund Burke’s speech to the electors of Bristol in their appeals to override the legitimate plebiscite held in the UK on 23 June 2016, in which 17.4 million people voted to leave the EU – more voters than have ever voted for anything, ever, in our country’s history. [Link]

By the way, Tim Price’ ‘Darkest hour’ is a very good read.

Back to John Gray:

As it is being used today, “populism” is a term of abuse applied by establishment thinkers to people whose lives they have not troubled to understand. A revolt of the masses is under way, but it is one in which those who have shaped policies over the past twenty years are more remote from reality than the ordinary men and women at whom they like to sneer. …

… The contradictions of the world-view shared by progressive thinkers and established elites are becoming acutely evident. There is constant talk about being in a time of unprecedented change. Globalisation is connecting the world as never before; our lives are being continuously transformed by disruptive technologies; old ways of life and hierarchies in society are fast dissolving . . . these are the ruling clichés of the age. What is striking is that they are deployed to prop up a failing ancien régime. …

… There is much that is ugly and threatening about Donald Trump – not least his divisive attacks on Muslims. But it is the parties that have been in power for the past thirty years that have created Trump’s main constituency. His appeal is to casualties of the American economy that mainstream politicians have chosen to ignore…

If Brexit has come as a great blow to many who think of themselves as progressive, it is because politics is undergoing a regime shift – several of them, in fact, at the same time – that they have not perceived….

…Like the financial elites shown to be so pitifully short-sighted in the early hours of Friday morning, politicians and pundits who bang on about adapting to change have been confounded by changes that they believed could not happen. [Link]

Liked or eyebrows raised

(1) Last six words of this article are unfortunate. No reasonable person has said that the payroll data released by EPFO in India has settled the jobs debate. Those data are only the beginning of the journey to get to reasonably reliable formal job creation data sometime in the future.

It is a lesson for all writers, including me. We want to end with a flourish. Therefore, we tend to resort to hyperboles. Better to end on a sober and mature note.

(2) No comments required:

Foreign direct investment is usually perceived as long-term strategic and stable investment reflecting fundamental location decisions of multinational firms. Such investment is often thought to bring job creation, production, construction of new factories, and transfer of technology. However, a new study (Damgaard and Elkjaer 2017) combines detailed statistics on foreign direct investment published by the OECD with the broad coverage of the IMF’s Coordinated Direct Investment Survey and finds that a stunning $12 trillion—almost 40 percent of all foreign direct investment positions globally—is completely artificial: it consists of financial investment passing through empty corporate shells with no real activity. [Link]

(3) Unlike in the case of Brexit, the force behind Italian parties that have come to power are the youth of Italy because they felt betrayed by the traditional parties. Could be behind paywall.

(4) India’s Chief Economic Advisor is leaving in two months’ time. Didn’t know that he is expecting a grandchild in September. On the whole, he has every reason to be satisfied with the job he did. He did make the annual Economic Survey a lot more interesting and readable. I am glad that I had a discussion with him in February for the Chennai International Centre and that it went down very well with the audience that day.

(5) Arvind Subramanian and his colleague from the Ministry of Finance wrote about revenue collection under India’s Goods and Services Tax and States’s share for ‘Indian Express’. They are happy with what they see. Chances are high that it gets only better. They are right to suggest that the cesses should go; excluded commodities be brought under the tax and that the rates can be lowered too. They don’t say so directly, however (‘scope for revisiting rates and cesses’ is what they write).

(6) Just saw the breaking news in FT that Atul Gawande has been appointed to chief executive of a venture between Amazon, JPMorgan and Warren Buffett’s Berkshire Hathaway to tackle US employee healthcare. Good choice.

(7) Sathya Nadella, CEO of Microsoft has sent a mail to his employees about the American immigration policy that is separating children from the adults who cross into the United States illegally. It has stoked a fierce backlash. I also happened to see this blog post last night. For some context, see this.

(8) IMF had a working paper published in March 2018 on the distribution of gains from globalisation. Some important conclusions:

The regulatory and economic dimensions of economic globalization contribute to increasing inequality.

Increases in foreign direct investments are significantly associated with rising inequality. For other globalization indicators, notably trade, there is no significant evidence for such an association. This supports the view that it is capital flows rather than trade flows that tend to drive the inequality-increasing effect of globalization.

These studies suggest that greater openness to foreign capital flows may exacerbate unequal financial access and can increase the likelihood of financial crises that raise income inequality. [Link]

Finally, the authors point out the impact of globalisation is non-linear. It is substantial and more positive if existing levels of globalisation are low; not if they are already high.

That is a favourite of mine. Relationships in economics are both asymmetric and non-linear. ‘Asymmetry’ (positive but not negative and vice-versa) and ‘non-linearity’ (like the example given above) are two different things.

Is there a problem for MSME in Tamil Nadu?

Andy Mukherjee has a useful ‘warning’ piece on the potential for India’s sub-prime. We have seen this movie elsewhere in the world and hence, early warnings are fair game. But, disappointing that he engages in a bit of hyperbole, with respect to GST and its impact in TN.

He cites a statistic that TN’s registered Micro, Small and Medium Enterprises (MSME) are down by some 20%. It is true. The information is available here.

Now, this note has no information on why registered MSME’s in Tamil Nadu have declined. We do not have a breakdown of which category of MSME have declined and which of them are GST paying and which have found it difficult to handle GST and hence, closed down.

If their only financial viability case was tax evasion, then I am not even sure if one needs to blame GST introduction for it – messy or orderly implementation of GST is immaterial.

As to the causes behind the reduction in the number of MSME units, there is a news-article in http://www.thenewsminute.com which cites a former President of the Tamil Nadu Small and Tiny Industries Association making some comments about the causes of this decline. To be fair to him, he cites delayed payments by big corporations for goods supplied by MSME as a major issue and not GST.

We know that it is an endemic issue and that is why the answer lies in Factoring and Receivables Exchange being made compulsory for big buyers. Receivables Exchange has to become active and MSMEs have to get working capital released as soon as possible. They do not have money, time and energy to keep chasing dues from big buyers. What big corporate buyers are doing is unconscionable.

Also, if we cast a glance at the MSME statistics, there is an unusual jump in the number of registered MSMEs from 2015-16 to 2016-17. It almost doubled in one year. Something that has not happened before in the data for ten years that the table in pages 3-4 presents. So, may be, there was some problem with the data and the data for 2017-18 is more accurate than the one for 2016-17 and that some cleaning up of the data has happened. In other words, there are myriad possibilities.

In fact, a ‘Times of India’ report on the same matter hints at data issue, citing a Tamil Nadu Government official:

A state government official, however, sought to brush it aside as a case of misinterpretation of data. “If you look at the number of units registered under the Udyog Aadhaar Memorandum (UAM), which is a kind of re-registration of existing units under the new system, it has shot up. This fact was not properly highlighted in the policy note. Further, these are dynamic numbers that keep changing,” a source in the state government told TOI.

Tamil Nadu started the UAM implementation from January 21, 2016. The number of MSMEs in the state has shot up, with nearly 5.27 lakh UAMs filed in Tamil Nadu as on March 31, 2018. As against 1.42 lakh registered MSMEs in the state as on January 21, 2016, it shot up to 2.67 lakh units for 2016-17 and stood at 2.18 lakh units at the end of 2017-18, indicating a drop of nearly 50,000 units. [Link]

The article in ToI cites one more businessman who cites high wages in Tamil Nadu as an additional challenge for MSME in Tamil Nadu.

Causality is important but it is also hard to establish. One has to tread carefully and with rigour. Else, we may expend precious energy finding solutions for non-problems while ignoring the real problems.

So, attributing the decline in Tamil Nadu registered MSMEs to the ‘tardy’ implementation of GST may be a leap (of logic) too many.

But, let me be clear. Warning of real estate loans to ‘sub-prime’ borrowers and their securitisation, even if it appears somewhat premature now, is the right thing to do and Andy has done well to do that. Credit cannot be a substitute for employment and income. The United States and other countries have done that before and the results have not been pleasant. So, Andy’s warning matters regardless of the interpretation of the data with respect to Tamil Nadu.

On reading ‘The future does not need us’

One of the delights of reading ‘The Final Hour’ by Sir Martin Rees was the discovery of the article by Bill Joy: The future does not need us’ published in ‘Wired’ magazine in April 2000. I read it for the first time today.

There were so many thoughtful observations by the man who was the Chief Scientist at Sun Microsystems. I will start with the footnote!

The footnote on the decision taken by New York Times and Washington Post to publish the ‘Unabomber’s manifesto’ is itself worthy of a separate case-study.  Bill Joy reproduces two paragraphs from the Unabomber’s manifesto that Ray Kurzweil had reproduced in his book. They are actually very perceptive.

For me, this was one of the most important passages in the article by Bill Joy:

Accustomed to living with almost routine scientific breakthroughs, we have yet to come to terms with the fact that the most compelling 21st-century technologies – robotics, genetic engineering, and nanotechnology – pose a different threat than the technologies that have come before. Specifically, robots, engineered organisms, and nanobots share a dangerous amplifying factor: They can self-replicate. A bomb is blown up only once – but one bot can become many, and quickly get out of control.

The second paragraph from Bill Joy that I liked:

I realize now that she had an awareness of the nature of the order of life, and of the necessity of living with and respecting that order. With this respect comes a necessary humility that we, with our early-21st-century chutzpah, lack at our peril. The commonsense view, grounded in this respect, is often right, in advance of the scientific evidence. The clear fragility and inefficiencies of the human-made systems we have built should give us all pause; the fragility of the systems I have worked on certainly humbles me.

He is referring to his grandmother in that paragraph.

This is a key proposal:

The only realistic alternative I see is relinquishment: to limit development of the technologies that are too dangerous, by limiting our pursuit of certain kinds of knowledge.

This is so thoughtfully funny:

Do you remember the beautiful penultimate scene in Manhattan where Woody Allen is lying on his couch and talking into a tape recorder? He is writing a short story about people who are creating unnecessary, neurotic problems for themselves, because it keeps them from dealing with more unsolvable, terrifying problems about the universe.

Bill Joy also cites a wonderful paragraph from Carl Sagan’s ‘The Pale Blue dot’:

Some planetary civilizations see their way through, place limits on what may and what must not be done, and safely pass through the time of perils. Others, not so lucky or so prudent, perish.

Bill Joy on Sagan and humility:

For all its eloquence, Sagan’s contribution was not least that of simple common sense – an attribute that, along with humility, many of the leading advocates of the 21st-century technologies seem to lack.

That is a good moment to end this blog post. Read or re-read that article again.