Tagged: Economics

Capitalists in Poor Countries


Well, we are back at this fabulously greedy topic, aren’t we after a while?

There are many poor countries in the world, India being one with a per capita income of USD 1,581 as per World Bank data. This is GDP per capita and on the basis of purchasing power parity, India’s per capita income is estimated to be USD 6,088. On both measures, India ranks below more than 100 other nations. So, it is reasonable to assume that India is one of the poorer countries, though the GDP is growing at over 7% currently (the fastest for any of the largest 10 economies of the world).

One can argue that these low figures would have been even lower had the socialist policies of the erstwhile Congress governments continued to be in place. That would probably be true, but then the Congress government changed its long standing socialist philosophy in 1991 when India encountered an unprecedented balance of payments crisis. For the past quarter century or so, successive governments have improved their focus on economic development (though not at the pace required, and definitely not at the speed at which Communist China was able to pursue economic growth). Hence, it is also reasonable to say that India shifted surely and steadily towards a Capitalist model of economic growth, in simple terms. It was actually more complex than what I am stating here, but then we wish to understand the essential truth rather than analyze voluminous economics data.

So, we have now arrived at an inflection point in the GDP growth curve. In the process of the rapid growth over the past several years, India managed to create scores of billionaires, and Capitalism was no longer a bad word in the Indian lexicon. Startups mushroomed in Bangalore, Hyderabad, Chennai and Gurgaon. Venture Capital Funds flocked to India. The India IT Story was going great guns. More jobs were getting created. And what not?

However, one sad thing is the ignorance of our Capitalists on how to behave and live in one of the poorest countries on earth, and how to contribute to the less fortunate in society. In essence, it was a required tenet that Capitalists anywhere on the planet who have made billions for themselves need to become real philanthropists to aid society in ways more than just creating some jobs in the economy. Their role does not stop with just creating a few thousand jobs. And, they are not supposed to flaunt their wealth by building skyscraper homes in the midst of slums. Just look at the top few billionaires in the world, mostly in U.S. and Europe – they are all philanthropists and do not flaunt their wealth. They get engaged in issues which afflict societies all around the world – in Africa, in India, in South America, etc., They apply their minds to solving some of the biggest problems facing humanity.

What about Indian billionaires?

Except for one or two, you don’t hear from the rest on what they are doing towards alleviating poverty, improving water supply, providing power to villages, enhancing availability of quality education, etc., And, surely none seem to be heeding the advice of the Indian Prime Minister on moderation in everything. Nobody is even questioning the generation of wealth by these Capitalists (though there is enough talk on how it was done with the help of greedy government officials in most cases, but not all), or creation of jobs. What is sincerely needed is their application of mind to resolving some of the most intransigent challenges faced by India and its poor people who live below the poverty line.

Now it gets interesting. India moved away from Socialism to Capitalism sometime in the early to mid Nineties. Is it time for India to revisit Socialism (as Bernie Sanders tried to do in the recent U.S. Presidential Election Campaign)? Is it important for the Indian Government to become more interventionist than it actually already is? Is its pleading for Corporate Social Responsibility falling on deaf Corporate ears of the Capitalist oligarchy? Is it critical at all for the government to be involved in any kind of business?

Well, history is not a predicator of what is to come. With Social Media, the population (at least the younger ones which India does not lack in very good numbers) is “always” connected, and the injustices in society are being discussed more aggressively than in the past. The discussion is also different this time as it is not the corporate cookies afraid of losing their jobs who are talking in hushed tones. It is really the teenagers and the early twenty somethings who are very confident of their future, who are engaged in these conversations.

All these things presage a good development for India – if there is one country which can pull together its young people power into productive causes, it would be the Indian New Age Capitalists a.k.a. Startup Ventures. Such initiatives would eventually wrest control from the traditional oligarchs by implementing suitable business model innovations.

Interesting, right? Let us see what happens in the near future.

Cheers,

Vijay Srinivasan

6th November 2016

 

Brexit and its logic


The U.K. appears destined to leave the European Union. It is difficult to predict the close call of the forthcoming Referendum, scheduled for 23rd June 2016 in the U.K. Apparently, however, the “Brexit – Leavers'” Campaign is gathering steam and votes necessary to give the “Stayers'” a run for their money.

May be the European Union is economically stagnant. May be it has a porous territory which allows thousands of refugees from the Middle East to stream in, uncontrolled by borders. May be the European Union is going down the drain. It has inflation and serious unemployment problems. May be the Euro is getting into a big mess. And so on, and so forth.

But, the E.U. remains as the largest trading partner of the U.S. Will the U.S. sign a trade treaty with the “separated” U.K. quickly ? Not really, the U.S. President just said that the U.K. will slide back in the queue, and the E.U. will be at the top of the league as far as the U.S. trade is concerned.

The U.K. will surely lose its advantages of trade with the E.U. and most probably will not be treated kindly if the U.K. electorate chooses the Brexit to exit the E.U. It is too much to expect the passionate Europeans to continue supporting British trade when their accommodations to retain the U.K. have been so handily rebuffed by the U.K. So, the U.K. should not dream about getting “favoured nation” status either by the E.U. or the U.S. While it is no external country’s charter to influence the British electorate on the 23rd June referendum, it is only appropriate that facts are communicated without bias so that every citizen of the U.K. understands the real implications of a Brexit. It is not that the Prime Minister David Cameron has not achieved some compromise with the E.U. on his demands for reforms. He has achieved some success, and that needs to be recognized.

Well, the U.K. is surely doing better economically as compared to the rest of the E.U., and is most likely to continue performing well in the years ahead because of its economic dynamism and free market principles. However, it will lose a few percentage points of trade with the E.U. and a few basis points of GDP growth attributable to the E.U. But, on the other hand, it will attain economic and total political independence from the E.U. and will be free to set policies without regulation or interference from the E.U. The U.K. will also be happy to take back control of its destiny from Angela Merkel, the reigning super-queen of the E.U.

While I am nobody to suggest a solution, it is apparent that Brexit is gaining credence amongst the British electorate, and it will be interesting to see the close shave between the quitters and the stayers. Whatever be the result, the U.K. is dynamic enough to survive, and that’s for sure.

Cheers,

Vijay Srinivasan

24th April 2016

 

Why no progress ?


Here is the scenario:

Out of all the BRICS countries (Brazil, Russia, India, China and South Africa), India has been having the best GDP growth rate of around 7.5% (or higher than 7%) over the past few quarters. Brazil has fallen by the wayside, Russia is having insurmountable economic issues in the face of sanctions, China’s growth is decelerating and South Africa is in deep trouble. Only India seems to be the bright spot, and this has been acknowledged by the International Monetary Fund and other economic agencies.

But India is in a funny situation. Jobs are not getting created in a country which requires to place nearly 10M [yes, you read that right, it is 10 Million] new jobs every year, to satisfy the aspirations of the youth coming into the workstream. Agriculture is no longer an economic engine, the government is pushing manufacturing as its “Make in India” campaign apparently gathers steam. However, is India in good economic shape ?

Not at all.

There has been many analyses in the international media, some praise India’s commitment towards economic growth objectives, and some point out the inefficiencies in the economy which remain unaddressed. The Reserve Bank of India continues to maintain a watchful oversight of economic developments, and has kept the interest rates on a tight leash though the inflation has no reared its ugly head again. With all that, the economic story is still not a positive one.

India needs infrastructure to be urgently enhanced. It needs to pass several laws in the Parliament, and these are being held hostage by the acrimonious relationship that exists between Mr Modi’s Bhartiya Janata Party (BJP) and Mrs Sonia Gandhi’s Congress Party. The BJP has been losing State Elections, and that has not been good news for Mr Modi’s reforms-oriented agenda for the country.

But then, India is a democracy, and democratic institutions have to be upheld. There is no shortcuts possible.

The other major issue is that the Government’s economic progress has been halted in its tracks by the heavy distractions caused by student agitations in Hyderabad, New Delhi and many other parts of the country. Mr Modi could have taken a vociferous position and could have significantly reduced the negative impact of the talk on intolerance shown by government ministers and officials towards the student community. But he has still not spoken, and that is not good news. Whenever students are able to band together on a polarizing issue, the government will get into trouble. It has happened in the past to Congress Party-led governments, and it is happening now.

Given that Mr Modi is very politically savvy, he needs to resolve the simmering tensions and achieve a truce with the students. It is not appropriate to keep quiet when student leaders are beaten up by party functionaries, and the police chooses not to intervene, even if the venue of the attacks is the Delhi High Court premises !

India always has had multiple and serious issues to contend with. It is not like Singapore, or Malaysia, or Hong Kong. The magnitude of the issues to be tackled by India is huge, and cannot be compared with other countries. Hence, it is critical for the government to quickly resolve festering issues and move on. What is very important for India and the Indian Citizens is economic progress. There is no point in wondering why there is jobless growth. There is no concerted plan to drive jobs for graduating students.

India needs close to a 10% GDP growth rate for the next 3 decades, to reach a first world status. By 2030, it should be the third largest economy in the world with 1.5B citizens, the most populous in the world. For a GDP per Capita of USD 10,000 by 2030, it should be a USD 15T economy. Currently, it is just over USD 2.2T in size (almost similar to the ASEAN economic size, which is USD 2.4T).

Long way to go, but everyone’s focus should be on achieving economic growth and creating new jobs. Government should stay the course and drive the reforms agenda aggressively. All else can be sorted out or can wait.

Cheers,

Vijay Srinivasan

28th February 2016

 

 

 

 

 

The Gathering Global Economic Downturn


It is coming !

It does not require a lot of analysis !!

There are several strong indicators or events that everyone knows about. To study or understand fully the import of these indicators on the global economy, one does not need to be a trained economists. To tell the truth, economists have never really figured out economics – save a few of them who analyzed or forecasted correctly, like Dr Raghuram Rajan of the University of Chicago, who is currently the Governor of the Reserve Bank of India.

Economics is not all about just numbers. To start with, the Greek economic crisis is not about all the mountain of debt that we read about in the newspapers and the internet every morning. Simply put, it is all about the pride of a nation state which never liked to be at the fringes of Europe (geographically) or at the edge of the European Union (politically, socially and economically). Greece, considered to be a developed country, is actually a small nation of just 11 million inhabitants. How difficult it can be to manage the economy of such a country with a GDP of little over USD 230B – smaller than that of Singapore or Malaysia ? When Greece was pushed into an economic crisis in 2010, I am sure it swallowed national pride to take a bailout from the richer nations to the North – especially Germany. The foolish economic prescriptions of the IMF (International Monetary Fund) and ECB (the European Central Bank), imposing tough austerity measures on Greece have failed over the past 5 years. One has to just look at the history of IMF interventions around the world to see if their techniques of strangling countries have worked out successfully. We have the Malaysian example as a contra-success story when Malaysia rejected the IMF prescriptions outright and followed a different path to economic success after the 1997 – 98 crisis.

Then comes the China Stock Market implosion. Last week, the combined stock markets in China lost USD 3.5 Trillion (yes trillion) of investor wealth – a 40% wipe-out. The Chinese economy is unravelling, and the government prescriptions are not capitalistic to say the least. The Chinese government has been intervening in the stock markets, forcing unnatural behaviour from market participants. Fortunately, there is not much foreign participation in the domestic stock exchanges, saving some global troubles. However, the repercussions are being felt everywhere. If the giant China economy comes unstuck with decelerating growth, dropping stock markets, lower all-round domestic demand, reduced export volumes, closing off all avenues of external support mechanisms, you can imagine what would happen to the rest of the world. China has become a dominating global economic power, and if it goes down even by some 25% overall, there will be negative implications all around the world.

The third factor is the instability in the Middle East likely to be even more exacerbated by the Iran nuclear problem. The ISIS has already caused huge damage to Iraq and Syria. Egypt has had a series of challenges. Israel is not happy with Iran (and the U.S. for pushing through the nuclear deal). Saudi Arabia has a host of problems including a war with Yemen. Every other Middle Eastern country seems to be embroiled in some kind of trouble.

And, to cap it all, the Western nations and Russia are waging a battle of the minds. Russia is no longer a favorite of the European Union countries. The sabre-rattling by Russia at its borders and in the air by deploying its bombers, have unnerved the Western countries. Something might go wrong, and that would be the start of the Third World War.

Given all of the above, does any reasonable educated person think that all is well in the world ? I have not even listed the other global trouble spots, such as North Korea. If the above huge problems are not resolved, it is only reasonable to expect that the USD will appreciate, oil will appreciate, and gold will appreciate, and most of the other currencies will depreciate. Demand will drop all over the world. Discretionary spends will plummet.

Is economic trouble coming ? You bet. It has crossed the horizon and approaching. Watch out and make preparations.

Cheers,

Vijay Srinivasan

12th July 2015

Economic View


All of us are affected by the current state of the economy in which we live in, and also by economies of key nations around the world irrespective of where we live.

The recent elections in Greece is a case in point. The Greek people elected a left-leaning, anti-austerity party which is planning to remove the tough austerity measures which the previous government had imposed under the directives of the European Central Bank and the International Monetary Fund. This is good for Greece but bad for the European Union. The Euro was already under pressure and it worsened after the results of the Greek elections were announced.

Singapore is a small open economy and so major changes in the top economies of the world impact it ever so often. With the huge drop in oil prices, the U.S. dollar has climbed up significantly and like every other currency, the SGD has depreciated significantly. Inflation is still present in the economy, but it is almost impossible to raise the interest rates because the U.S. wouldn’t.

So, interest rates would continue to be almost negative in Singapore, adjusted for inflation. A banking acquaintance asked me yesterday about my view on interest rates, and I was very clear: the U.S. Federal Reserve is unlikely to raise the interest rates even though the unemployment rate is falling in the U.S. as it does not see a wage growth. President Obama is trying to push the minimum wage rate in the U.S. but the Congress would not allow it. So, wages are not under pressure, so why would the Fed raise interest rates ? The banking friend was surprised with my argument, but I find it logical. Given that there will be no increase in the U.S. interest rates, it will not be possible for highly linked economies such as Hong Kong and Singapore to manipulate interest rates.

This means that real estate prices are unlikely to fall much further in Singapore this year. Likely rate increases would be towards end of 2015, and by that time the real estate market would have softened any way and people will be ready for an increased interest rate regime.

We can go on discussing along these lines like what economists do, but I think it would be critical for the average Joe amongst us to decipher the economic lingo and make sense of the current economic view of our learned economists. It is not difficult to do that though, as long as you keep yourself informed on the state of the world economy, which I do almost diligently.

All of us can do it, and so here is to another year of ultra low interest rates !

Cheers,

Vijay Srinivasan

31st January 2015

Needs and Wants


The first economic theory anyone understands is about the demand supply gap and how our needs and wants create that gap. Any such gap, in economic terms, is called as “scarcity”.

In Indian society, there is a very large section of people whose most basic needs are not yet fully met – such as food, clean water, shelter, et al. The percentage of this section of people has been dropping in recent years, but it is still very large both in percentage and absolute terms – the biggest in the entire world.

We also have a significant section of society today (after 19 years of economic reforms and growth, though disjointed occasionally) who have already met their basic needs and are aspiring with their wants. This is an influential part of middle and upper middle class society, with millions of youngsters with long lists of “wants” – things like iPod, iPad, a stylish bike, the most expensive perfumes, and what not. It is a demographer’s delight, especially when that demographer is working for a rich FMCG company ! Above this strata of society, there is also a small though most influential section which comprises of the very rich people in this country for who the brands available in the country do not matter much – they seek what are not available today in the country. They can define or undefine their wants and get the same in a flash.

Such is the economic disparity in India. Most of government’s focus should be on fulfilling the needs of the largest section of the society, otherwise there might be social impact. There is most certainly the impending migration from rural India to the urban India, which will pick up in very large numbers as the rural India folks have now realised that it is possible to make it big in the urban India. If not big, atleast a decent income can be established quickly with literacy and educational investments.

This migration is going to put huge strains on what is already a creaky and decrepit urban infrastructure all over the cities of India. And when these people migrate, they are going to meet their needs in a few years, and look at wants !

When that happens, India will become one of the biggest consumer economies on this planet. That would also put big strains on the scarce resources available on this planet. Combined with the rather “controlled” Chinese brethren, Indians will consume the maximum resources and create scarcity elsewhere. This is a very likely scenario.

If and when Indian and Chinese wants create huge demand, that would eclipse the Western notions of demand for similar goods. Most Western companies will be then headquartered in India or China !

I do not know whether this is good or bad, but from an economic theory point of view, it is going to skew the demand supply gap enormously, and might, in fact, create new economic theories and curves.

Not a bad thought process on a Saturday evening with a strong cup of coffee, I guess.

Cheers,

Vijay Srinivasan
15th May 2010
Mumbai