STCMA – 24th September 2019

From Srini Thiruvadanthai’s twitter handle, I wen to Jawad Mian’s twitter handle and came across this nice piece about Jim Grant. I identify with him in my investment advice. I do not get it right but my goal has to make people think. I do not succeed more often than I do, with the latter!

Obama productions’ documentary (‘The American factory’) about a Chinese-owned factory in America tells a lot about who practises ‘cowboy capitalism’. It is the Chinese communist party.

On the subject of documentaries, bookmark this page and check out some of the best documentaries produced by ‘Frontline’ (PBS).

It is funny that everyone is reading Martin Wolf’s piece on rentier capitalism. A piece that can comment on rentier capitalism and finance without acknowledging the role played by American and other western central banks’ policies is both incomplete and flawed.

JP Morgan’s Jamie Dimon might be talking of stakeholder capitalism now. But, his traders’ behaviour is inconsistent with his new-found enlightenment.

Bob Rodriguez’ interview titled, ‘The Fed is clueless’ makes for good reading although, as my friend Srini Thiruvadanthai notes, the Fed did partially redeem itself with a ‘hawkish’ rate cut last week. However, the interview is not just about the Federal Reserve however, but about the monetary policy paradigm that has prevailed in the last decade and is still ruling the roost. He is reading ‘A history of interest rates’.

My friend Anirudha Dutta shared this NYT opinion piece by Roger Cohen. Quite how NYT editors ‘allowed’ this piece to slip through their scissors and appear in print is beyond me as it praises Modi and reposes faith in him! What blasphemy!

A shallow article on the rise in American Personal Savings Rate. Surprised that WSJ chose to publish it.

What a time we are living through

Almost back-to-back shootings in the US – in Texas and in Ohio in the weekend prompts the American President to condemn racism, bigotry and white supremacy. Is it or is it not a tad too late? WSJ article linked in line 1 says that it was the 251st mass-shooting in 2019.

From 2006 to 2016, the number of public mass shootings each year was relatively flat, with about four or a five a year, according to the AP/USA Today/Northeastern University Mass Murder Database. That number has risen in recent years, with seven public mass shootings in 2017 and 10 in 2018.

The Government of India has abrogated Article 370 of the Indian Constitution that conferred special status to the state of Jammu & Kashmir. Useful links to read/listen are here, here and here.

On the face of it, the BJP had done what it promised in its election manifestos both in 2014 and in 2019. Many Indians have questioned the special status for the state of Jammu & Kashmir in the past. After all, the decision integrates the state with the rest of India. Of course, the Government of India has also divided the state into two Union Territories.

The fact is that Article 370 begins as follows:

Temporary provisions with respect to the State of Jammu and Kashmir

Also, Article 370 (1) (3) states the following:

(3) Notwithstanding anything in the foregoing provisions of this article, the President may, by public notification, declare that this article shall cease to be operative or shall be operative only with such exceptions and modifications and from such date as he may specify:
Provided that the recommendation of the Constituent Assembly of the State referred to in clause (2) shall be necessary before the President issues such a notification.[16]

There is no constituent assembly in J&K. The Government of India in the past has substituted it with the words, ‘Legislative Assembly’ and since the Legislative Assembly in J&K has been suspended, the recommendation of the Governor of J&K has been deemed sufficient.

A friend raised the question of whether Article 370 has indeed been abrogated. The Government of India appears to have done it indirectly (?) through amendment to Article 367 of the Constitution of India. But, in the gazette notification published in ‘Economic Times’ should clause 4(c) have come before clause 4(b)? See here.

The Presidential order issued on August 5, 2019 extends the Constitution of India, in its entirety, with all its amendments, to the state of J&K. Thus, it effectively neutralises Article 370. There is no direct reference to Article 370. However, the Presidential order, by superseding the Constitution Order 1954, directly abrogates Article 35A since that Article was inserted as per the Constitution Order of 1954, as per the Wikipedia entry.

It is interesting that the Wikipedia article mentions that the President of India has issued a series of orders since 1950 under clause (1) of Article 370. There have been at least fifty such orders extending the applicability of the Constitution of India to the state of J&K.

But, a few questions will remain for which no clear answer will emerge for a long time: the timing of this decision (why now?), the long-term consequence of this decision in the state of J&K, Pakistani reaction, the impact of incidences of terrorism in the state and in India and the legal admissibility of the decision if someone chooses to challenge it in the Supreme Court.

The Chinese yuan has weakened to over CNY7.00 per US dollar. This is seen as China’s retaliation to the latest round of tariffs levied by the American President. President Trump calls it a major violation.

If China uses the yuan as a lever against the American trade war, two questions arise: will capital not flee China somehow?

Second, has America (acting in concert or not, with the UK?) the Hong Kong lever? See here and here.

In the meantime, late in July, News that Huawei helped build the mobile phone network in North Korea, carried by the Washington Post, was cited by CNN here. A very long article from the Wall Street Journal published in May 2019 on how Huawei grew and the methods it followed is well worth a read.

This Reuters article on the 5G fight also published in May is well worth a read, for how Australia blew the whistle on Huawei. Two points from the article are worth noting:

The United States and its allies were derelict in not developing a 5G supplier, former Australian Prime Minister Malcolm Turnbull said in a speech in London in March. “With the benefit of hindsight it beggars belief that the countries which pioneered wireless technology – the United States, the UK, Germany, Japan and with wifi, Australia have got to the point where none of them are able to present to one of their own telcos a national, or a Five Eyes, champion in 5G,” he said.

What is 5G all about?

5G isn’t only about faster data. The upgrade will see an exponential spike in the number of connections between the billions of devices, from smart fridges to driverless cars, that are expected to run on the 5G network. “It’s not just that there will be more people with multiple devices, but it will be machines talking to machines, devices talking to devices – all enabled by 5G,” said Burgess, the Australian Signals Directorate chief, in his March address.

This configuration of 5G networks means there are many more points of entry for a hostile power or group to conduct cyber warfare against the critical infrastructure of a target nation or community. That threat is magnified if an adversary has supplied equipment in the network, U.S. officials say.

Lastly, Japan and South Korea are bickering more bitterly than they did before.

In short, my article in Mint published on July 26 appears to have been timed well, by sheer coincidence.

The maze of Maitreesh

As I had mentioned in a recent blog post, Maitreesh Ghatak and his coauthors painted a picture of solid economic performance in April 2014 – a month before national elections in India. That passed neither the credibity test nor the acceptance test by voters. In March 2019, he published another piece of research titled, ‘The Mirage of Modinomics’. He did it two months before the vote unlike last time. But, Modi’s margin of victory has increased.

It is ok for him to be biased against Modi and it is ok to present charts that buttress his bias. But, he has to keep in mind his credibility. There, he fails.

What is the theoretical basis of Figures 1 and 7? Global growth and global inflation are not like ‘risk-free rates’ in CAPM to present ‘excess growth’ and ‘excess inflation’. What is the point? That is the classic example of baseless empiricism and data mining.

India’s growth rate in comparison to growth rates in major emerging economies between 2014 and 2018 has been rather good, even if one were to make allowance for the fact that official growth numbers might be overstating economic growth.

Second, Figure 6 shows poor export growth and that explains, partially, Figure 1. India basked under global growth boom between 2003 and 2008 with 40% to 60% export growth rates.

Figures 4 and 5 cannot be read in isolation of the NPA crisis which was made in UPA! The decline in capital formation in recent years is entirely due to overinvestment and malinvestment in earlier years.

That is a bit like fund managers touting returns without disclosing the risks they took or leverage that they deployed.

Indeed, India’s growth performance between 2004 and 2014 came with a banking crisis, a big current account deficit and a rupee crash. The Indian economy is still hurting from the first of the three.

As for agricultural production, NDA 1 and 2 had worse luck with monsoon, intra-monsoon variability than UPA 1 and 2.

As for the tax regime, India is still settling down with GST rates. On direct taxes, the tax buoyancy has been much higher under NDA II than it had been in UPA 1 and UPA 2. Direct tax buoyancy was below 1 for the four years from 2008 to 2012 and barely above it in the next two years. In 2017-18, it reached 1.81 – highest in a decade. See here.

From a press release of the Indian Income Tax Department in October 2018:

The total number of taxpayers (including corporates, firms, HUFs, etc.) showing income of above Rs. 1 crore has also registered sharp increase over the three-year horizon. 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%.

The average tax paid by corporate taxpayers has increased from Rs.32.28 lakh in AY 2014-15 to Rs.49.95 lakh in AY 2017-18 (growth of 55%).

There is also an increase of 26% in the average tax paid by individual taxpayers from Rs.46,377/- in AY 2014-15 to Rs.58,576/- in AY 2017-18.

During the three-year period under reference, the number of salaried taxpayers has increased from 1.70 crore for AY 2014-15 to 2.33 crore for AY 2017-18 (up by 37%). The average income declared by the salaried taxpayers has gone up by 19% from Rs.5.76 lakh to Rs.6.84 lakh.

During the same period, there has also been a growth of 19% in the number of non-salaried individual taxpayers from 1.95 crore to 2.33 crore and the average non-salary income declared has increased by 27% from Rs. 4.11 lakh in AY 2014-15 to Rs. 5.23 lakh in AY 2017-18.

He (and his coauthor) concludes with, what he thought, a killer punch:

So here is what we have after four and a half years: job growth at multi-year lows, a farm crisis, a crippled unorganised sector, currency value at near all-time lows, a soaring current account deficit, high interest rates, a half-frozen banking system, a sputtering tax regime, a struggling corporate sector, sinking exports and a GDP growth rate that, for all the constant revisions and data controversies associated with it, does not stand out compared to the earlier decade.  

Farm crisis? Modi does not make monsoons. Monsoons are not necessarily made in India and global food prices are not determined in India. Soil cards and national e-markets are a start as was crop insurance. But, much more needs to be done.

Currency value at all-time lows? That happened in 2013. Nominal value of 69 or 71 is not how one determines if currencies are near the floor or at the ceiling. Both are undesirable. Inflation performance matters and on that, the contribution of UPA II to the crash in the Indian rupee is a tough act to emulate.

A soaring current account deficit? Did he check the numbers? That happened in 2012 and in 2013.

High interest rates? The 10-year government bond yield has declined since 2013 but not by enough.

Half-frozen banking system? Well, it was put in the deep freezer by UPA II and their cronies. Now, it is thawing and half-frozen.

A struggling corporate sector? – over-optimism, overinvestment and mishandling and sub-optimal allocation of national and natural resources.

Sinking GDP growth? Best to have slow and steady growth than stoke unsustainable booms. Statistics needs to be fixed, however. India is not growing at or above 7%, in my view.

The truth, as always, lies between extreme partisan views.

I wrote in my note, ‘Was NDA II an economic failure?’:

There is excessive scrutiny of the government matched by a spectacular underappreciation of the contribution of other institutions and other factors to India’s economic underperformance and uncertainties.

Commentators also fail to appreciate that governments have asymmetric impact. Governments’ ability to damage is far higher their ability to help. We saw that with UPA II. Making good things happen is a lot harder for the government.

Unfortunately, there is no election for commentators and so-called experts.

The biggest failure of this government is not that it hurt the economy (demonetisation did, for sure) but it did not help the economy enough because it did not understand what it was up against – locally and globally. When one is an incumbent and creates high expectations, then the failure to help the economy can be deemed a failure. Difficult to argue against that because NDA II was voted to office to help rescue the economy and the country hurt by UPA II policies.

In trying to paint Modinomics as a mirage, Maitreesh and his co-authors have been trapped in a maze of innuendoes. The risk is that their intellectual credibility is a mirage.

[Postscript: If you wish to read a thoughtful piece of writing by Maitreesh Ghatak, I recommend this.]

Was NDA II an economic failure?

What follows below was written on 15th May 2019, eight days before the official declaration of election results in India, to the 17th Lok Sabha and four days before the exit polls. I wrote it for my own clarity. But, it might also turn out to be a response to this long piece by Maitreesh Ghatak and two co-authors. It is a different matter altogether that one must write a separate rebuttal for some of the ‘strange’ figures that the note features. I shall do so separately. This was written and published in March 2019. It did not swing the elections in favour of the Congress or the UPA or whatever else.

One must note, here, that he and two other co-authors tried to pass off, before the May 2014 elections, the UPA II economic record as a good one. That did not swing the elections in favour of UPA and the Congress.

Not only did the Congress Party lose the elections on both occasions, he lost quite a bit of his personal credibility too, in my view.

As you read the file below, pl. remember that it was written on 15th May 2019. You are welcome to quote from it. But, will be grateful for attribution.

VAN_Was the NDA II government an economic failure_15052019


A friend sent me this tweet of Shri. Rahul Gandhi and asked me for comments:

Here is my response:

Congress, under PVN, built India’s growth story on a set of policy proposals that were prepared before PVN took office.
Congress, in the 1950s, did not do a bad job. India’s growth was comparable.
Congress, in the Sixties and in the Seventies screwed up India big time, barring a year or two in between.
The war with China in itself was a colossal policy failure.
On the positive side, Indira Gandhi’s ‘Green Revolution’ was a good example. Her overture to Ronald Reagan on inviting American technology companies to set up shop in India opened the way for I.T revolution. But, her negatives far outweighted the one or two good initiatives – undermining of institutions, institutionalising corruption, reversal of Federalism, etc.
Congress in the 1980s – Mrs. Gandhi, on her return, did a decent job from 1980 to 1982 – initiated economic liberalisation. R. Venkatraman played an important role in that period, as the Finance Minister. Tried to weaken the iron grip of the State on the country. She lost her way from 1983 to 1984.
Rajiv Gandhi meant well and did a few good things from 1985 to 1987. Telecom revolution should be credited to him. Initiated de-licensing by allowing broadbanding of licenses; But, lasted only two years. Lost his way from 1987 until 1989.
So, out of the 67 years up to 2014, the Congress ruled for 54 years (not counting the United Front coalition years). Out of those, it provided decent governance (only) in some areas for about fifteen to sixteen years. These fifty four years include the five-year term of PVN Rao.
From 2004 to 2008, the Congress Party did not contribute to India’s economic growth. It rode the global growth wave and India’s growth was aided by an unsustainble investment boom facilitated by equally unsustainable capital inflows. These investments were largely unproductive too.
From 2009 to 2014, the costs of the unsustainable growth of the previous five years became manifest. They are still being felt and incurred by the country. Double-digit inflation and the collapse of the Indian rupee are but two of the testimonies.  Tax terrorism started from the budget of 2012-13 (and, unfortunately, has continued under this government, with greater vigour).
From 2014 to 2018, India suffered monsoon failures and global growth slowdown. India had to use the bonanza from the crude oil price crash to repair the country’s finances, left in utter disrepair by the previous government.
Demonetisation was not thought through thoroughly and implemented badly. Yet, it is possible that its long-run benefits outweigh the costs. Goods and Services Tax will surely be a long-run success story as is the Insolvency and Bankruptcy framework. Short-term glitches are inevitable in a big country such as this and some of the glitches are due to external technology support from private sector.
Formalisation of the Indian economy is sorely needed. This government has made crucial beginnings – in many important ways – in this largely unpopular task. 
The development of the Northeastern region of the country and its integration with the rest of the nation will have huge long-run dividends. For example, the recently completed bridge in Assam was 21 years in the making. In the first seventeen years, there was scarcely any progress on its construction!
In sum, based on track record, incompetence is a charge more easily attached to the leadership of the previous UPA government. There is empirical evidence.

NDA and rural India: the untold story

Excertpts from the lead article by Raj Chengappa in ‘India Today’ 43rd anniversary issue:

In the other key areas impacting rural progress, both the Central and state governments have thankfully learnt from past errors. Providing rural housing for the needy is one such. Housing programmes have been around since 1985, but their implementation has been tardy, and corruption rampant.

When the NDA government under Narendra Modi came to power, it rev­am­ped the programme and ren­amed it the Pradhan Mantri Awaas Yojana. The size of the houses to be built was increased from 20 square metres to 25 square metres and the grant increased from Rs 70,000 to Rs 1.2 lakh. But what was critical was how corruption was curbed using digital and communications technology. At the time of the payment of the first instalment, the recipient has to upload his photograph along with pictures of the plot of land his house is to come up on. Then, the person has to send photographs of each major stage of construction stipulated to get the next instalment. The subsidy money is transferred directly to the recipient’s bank account, ensuring it is not diverted. This has cut down corruption by local officials from 50 per cent to around 12 per cent. It has also seen a record number of houses being built in the past four years. One fallout: with no slush money coming to them, many of the panchayat-level officials are not pushing the programme too enthusiastically.

Another welcome development has been the move to integrate the various services under diff­erent schemes. So, under the housing scheme, a person can also avail of the subsidy for toilets under Swachh Bharat, get a cooking gas connection under the PM Ujjwala Yojana and an electricity connection under the rural electrification programme. With all money transfers going to bank accounts, the opportunities for corrupt officials to withhold or divert payments has been dramatically reduced. It remains critical to ensure that, having provided these amenities, the quality of service is not compromised. It is not enough to bring electricity poles to a village, there must also be quality supply of power. In subsidised LPG, cooking refills have to be made easily available and not given as a premium.

In the PM Gram Sadak Yojana, an important innovation is that, apart from building the roads, there is a built-in five-year maintenance contract the constructor has to abide by. He has no choice then but to ensure that good quality material is used for making the road. Some of the other government schemes have provided amazing results in the past too. When M.G. Ramachandran was chief minister of Tamil Nadu in 1982, he introduced the mid-day meal scheme. I had written an article about it for the magazine at the time, dismissing it as a populist scheme. But its impact turned out to be revolutionary. Infant mortality rates in the state began to drop significantly a few years after the scheme was introduced. Then the government cleverly extended it to pregnant mothers who came to drop their children to school. They were not only given a meal package but also medicines to ensure a safe pregnancy. It was followed up with post-natal care and benefits. That saw maternal mortality rates drop perceptibly in the state. And to the astonishment of social planners, Tamil Nadu’s total fertility rates began to fall significantly within a decade, reaching levels only achieved by Kerala.

Maternal care has been another success story. When I visited Rajasthan in the 1980s for a health story, only two out of 10 babies born were institutional deliveries. The other eight were delivered at home with the help of the rudimentary equipment used by traditional midwives or dais. Today, eight out of 10 babies in Rajasthan are born under institutional care.

Two observations:

(1) Much has been done by the NDA government to deliver on promises to the rural poor and rural India, in general. They hardly get highlighted.

(2) I appreciate Raj Chengappa’s honesty in admitting that he dismissed MGR’s mid-day meal scheme as a populist gimmick. This is typical of elites. They have far too little respect for politicians’ instincts and smartness. In the end, they (the elites) make the situation difficult both for those who govern and the governed. In other words, elites punch too far above their weight.

In any case, the ‘India Today’ 43rd anniversary issue is a collector’s item. There are many inspiring and inspirational stories. People who are toiling to make life better for those around them with not much expectation except the intrinsic pleasure of it. God bless them!

Substantive vs. superficial change

A good friend forwarded this thoughtful piece to me.

To a degree, the BJP mimicked the Congress behaviour of yore that have brought the Opposition parties together and in bed with the Congress again! The mistake Modi made was not in creating a ‘Congress-culture-mukt’ Bharat. 

It is also a failure of any of the regional leaders to rise above their regional origins that, as a country, there is no real alternative to the Congress and the BJP.

The BJP should have presented a true alternative to the Congress – pragmatic and practical policy agenda, centrist but leaning towards less-distortionary and less interventionist attitude towards governance, true devolution to lower levels of government, true delegation with empowerment in the Union Cabinet, transparent performance evaluation annually, facilitating emergence of state-level leadership, etc.

In other words, the failure to institutionalise governance at all levels – a failure of the Congress Party for over the many decades that it dominated Indian politics and governance – has made the anti-Congress alliances of the past become the anti-BJP political formations.

One different but important final point:

What makes the prospect of an alliance this time of the Third Front that much more frightening is that an alliance with a much weaker Congress (than of yore) means that regional parties with narrower and more limited ambitions and goals will dominate. They won’t have a national perspective on many things. They may also be more vulnerable to capture by India-inimical forces. I hope I am very wrong on this.