Month: August 2013

Why BJP is right in politicising Vadra's shenanigans

Vadra3 (1) 

Vivek Kaul 

The Bhartiya Janata Party (BJP) disrupted the functioning of both the houses of Parliament yesterday (i.e. August 13, 2013). “Congress ka haath, damaad ke saath,” (hand of Congress is with the son-in-law),” chanted members of the BJP. The damaad they were referring to is Robert Vadra, son-in-law of Congress president Sonia Gandhi.
Kamal Nath, minister of parliamentary affairs, commenting on the issue said that Vadra’s alleged shenanigans were a state issue. “It is a state issue and parliament does not discuss state issues … if they (opposition) want to discuss, then Congress members will demand a debate on the mining scam in Karnataka and mining mafia in Madhya Pradesh. We must discuss issues of Gujarat,” he said.
This was an extremely lame duck defence. Sonia Gandhi, president of the Congress party, had written to the Prime Minister Manmohan Singh on the issue of the Uttar Pradesh government suspending IAS officer Durga Shakti Nagpal.
As a report in The Times of India points out “In a letter to Prime Minister Manmohan Singh, Gandhi said there is widespread concern that the suspended officer Durga Shakti Nagpal in the course of her public duties was seen to be standing up against vested interests engaging in illegal activity. It is reported that Nagpal has been hastily suspended for unsubstantiated reasons, she said. “We must ensure that the officer is not unfairly treated,” she told the Prime Minister.”
If one were to use Kamal Nath’s logic then Sonia Gandhi should not have written a letter to the Prime Minister on what is basically a “state” issue. If a national leader of the stature of Sonia Gandhi can write a letter to the Prime Minister on a state issue, why can’t the Parliament, which has many other national leaders, discuss a state issue?
Also, what is a national issue and what is a state issue? It is ultimately the states that constitute the nation. And if the son-in-law of the leader of the party that runs the government is accused of corruption, it is a national issue and a big cause for concern.
Several non Congress leaders have come out in the support of Sonia Gandhi, saying she can’t be held responsible for the actions of her son-in-law. 
Mayawati, the President of the Bahujan Samaj Party (BSP) said “I would like to say if Sonia Gandhi is held responsible for it, our party does not agree with it. If someone does something wrong, his or her relations should not be punished. On the allegations against Robert Vadra, how can Sonia Gandhi be held responsible.” 
A similar view was put forward by Samajwadi Party leader Naresh Aggarwal. “I don’t agree with the BJP’s slogan of ‘sarkari damaad’. We are not in agreement with the politicisation of the issue and dragging Sonia Gandhi in to the issue. I do not see how she can be held responsible for the whole issue,” said Aggarwal. 
Sonia Gandhi cannot be held responsible for the activities of her “damaad”, maybe a valid point, but that does not mean that the Parliament should not be discussing the issue. Allow me to elaborate.
Robert Vadra’s Sky Light Hospitality Private Ltd bought 3.53 acres of land from Onkareshwar Properties run by one Satyanand Yajee. The sale was registered on February 12, 2008. Vadra’s Sky Light Hospitality paid the money by issuing a Corporation Bank cheque. Yajee’s Onkareshwar Properties did not encash the cheque immediately. 
In the balance sheet of Sky Light Hospitality as on March 31, 2008, there is a book overdraft entry of Rs 7.944 crore. This includes Rs 7.5 crore that was to be paid for the 3.53 acres of land that was bought and around Rs 45 lakh for the stamp duty that was paid for registering the sale with the Haryana government.
A book overdraft is not an overdraft at a bank but essentially a record of cheques that have been issued by the company but not encashed minus its bank balance. 
The balance sheet of Onkareshwar Properties showed a sundy debtors entry of Rs 7.95 crore on March 31, 2008. What this meant was that the company had not encashed the cheque issued by Vadra’s Sky Light Hospitality and at the same time also helped pay the stamp duty. It need not be said that if it had tried to encash the cheque, the cheque would have bounced. Sky Light Hospitality had a negative cash and bank balance of Rs 7.94 crore.
The question is why did Onkareshwar Properties go out of its way to help Sky Light Hospitality, on what was a purely commercial transaction. As I pointed out in this piece yesterday, Yajee is known to be very close to Bhupinder Singh Hooda, the chief minister of Haryana. 
The Haryana government’s department of town and country planning issued a letter of intent to Vadra’s Sky Light Hospitality for grant of commercial colony license for 2.701 acres out of the total area of 3.53 acres, on March 28, 2008. This was done within a mere 18 days of application, IAS officer Ashok Khemka has pointed out in his 105 page reply to the report of the committee constituted by the Haryana state government (dated October 19, 2012) to inquire into the issues raised by Khemka when he was the director general of land records. 
The rules and regulations required the government to check for the capacity of the applicant to develop a colony. Vadra’s Sky Light Hospitality had no previous experience of developing a colony. At the same time as on March 31, 2008, the company had a paid up capital of Rs 1 lakh. Paid up capital is the total amount of the company’s capital that is funded by its shareholders. How was a company with so little money expected to develop a colony? 
Once the commercial colony license was in place, Vadra’s Sky Light Hospitality entered into into a collaboration agreement with with M/s DLF Retail Developers, on August 5, 2008. DLF as we know is the largest listed real estate company in the country. 
After this Sky Light Hospitality received a huge amount of advance or interest free loan from DLF. The balance sheet of Sky Light Hospitality as on March 31, 2009, clearly points out entries of Rs 15 crore and Rs 10 crore as advances received from DLF. 
Now as we can see everyone went out of their way to accommodate the business interests of Robert Vadra. Why was that the case? Not because Robert Vadra was a very promising entrepreneur and hence needed to be given all the help that the state government and the biggest real estate company in the country could give him. There are so many such entrepreneurs in the country who receive no help from the government. 
To conclude, lets go back to something that happened a few months back. Pawan Kumar Bansal, the union railway minister, was made to resign after his nephew was caught by the Central Bureau of Investigation (CBI) while accepting a bribe of Rs 90 lakh, for organising a cash-for-jobs transfer of a senior railway board official Mahesh Kumar. 
Bansal said after his resignation that “I welcome the CBI probe. I gave a statement right after the incident that I have nothing to do with this. Also, that I have no business relationship with my nephew. The truth will come out.” 
Fair enough, even though it is difficult to believe that the nephew could have promised transfers without the minister knowing about it. 
The basic point is that Caesar’s wife must be above suspicion. Or to put in simple English, the associates of public figures must not even be suspected of wrongdoing. 
And if Bansal had to quit because of that, then the Parliament can at least have a discussion on the shenanigans of Robert Vadra.

The article originally appeared on www.firstpost.com on August 14, 2013 

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Was Haryana CM Hooda, Robert Vadra’s political stooge?

Vadra3 (1) 
Vivek Kaul 
Crony capitalism has been alive and kicking in India for a very long time.
One of the original crony capitalists in this country was Sanjay Gandhi, son of the then Prime Minister Indira Gandhi. Sanjay was a Doon school drop-out and had apprenticed as a motor mechanic at Rolls Royce in Great Britain in the 1960s.
He wanted to build a low priced people’s car called Maruti. His mother was the Prime Minister of the country and her colleagues in the government and the Congress party went out of their way to fulfil Sanjay’s dream.
In November 1970, a letter of intent was handed over to Sanjay Gandhi by Dinesh Singh, the then minister for industries. As Vinod Mehta writes in The Sanjay Story “The letter of intent was granted ‘on the basis of a paper proposal with no tenders called for and no impartial study’ for the mass production of 50,000 ‘low-priced’ cars per year made entirely of indigenous materials. In short, Maruti was licensed to match the total output of the other three domestic car manufacturers.”
But just a letter of intent wasn’t enough to get the project going. Land was needed to build the factory where cars would be manufactured and before that money was needed to buy that land. In stepped Bansi Lal, the chief minister of Haryana. “To his credit it must be said that Bansi Lal was the first to spot Sanjay Gandhi as a man of the future, as a man to hitch your bandwagon to,” writes Mehta.
Bansi Lal offered land to Sanjay Gandhi for the Maruti factory and at the same time gave him a loan to buy that land. As Kuldip Nayar writes in Emergency Retold about Bansi Lal “He was unscrupulous; means never mattered to him, only ends did. From being a briefless lawyer he had risen to be chief minister in less than a decade, and he wanted to go still higher. It was he who gave Sanjay, a 290 acre plot for the Maruti factory at a throwaway price along with a government loan to cover the amount.”
Despite all the help from Bansi Lal and the union government, Sanjay Gandhi’s people’s car never got going till he was alive. Production started only when Japanese car manufacturer Suzuki was roped in after Sanjay’s death in 1980.
Something similar has played out in Haryana where the current chief minister Bhupinder Singh Hooda seems to have gone out of his way to help Robert Vadra, the son-in-law of Sonia Gandhi, the chairperson of the United Progressive Alliance (UPA).
The IAS officer Ashok Khema brings out this nexus in a 105 page reply to the report of the committee constituted by the Haryana state government (dated October 19, 2012) to inquire into the issues raised by Khemka when he was the director general of land records.
This is how the story goes. Sky Light Hospitality Private Ltd bought 3.531 acres (or 5 bighas 12 biswas) of land from Onkareshwar Properties Private Ltd for a consideration of Rs 7.5 crore. This sale was registered on February 12, 2008.
Publicly available data on the MCA 21 portal of Ministry of Corporate Affairs, shows that Sky Light Hospitality is a company that was incorporated on November 1, 2007. As on March 31, 2008, the company had a paid up share capital of Rs 1 lakh. Upto September 30, 2011, its total paid up share capital was Rs 5 lakh. Robert Vadra owned 99.8% of the company and the remaining 0.2% was owned by his mother Maureen.
The company selling the land i.e. Onkareshwar Properties was incorporated as a company on September, 28, 2004. Its paid up capital as on September 30, 2011, stood at Rs 25 lakh. Of this 98% was owned by one Satyanand Yajee and the balance 2% by Godavari Yajee.
Paid up capital is the total amount of the company’s capital that is funded by its shareholders.
Various media reports have clearly established the link between Yajee and Hooda. A report published in The Economic Times today points out that “Satyanand Yajee, director of Onkareshwar Properties, which sold 3.5 acre in Shikohpur village to Vadra’s Skylight Properties, is general secretary of the All India Freedom Fighters Organisation(AIFFO) and is in charge of constructing and maintaining a memorial in the name of Hooda’s father Chaudhary Ranbir Singh in Rohtak.”
A report published in the Business Standard in October 2012, goes into even greater detail about the relationship between Hooda and Yajee. It points out the strong ties that Hooda has with the All India Freedom Fighters Organisation i.e. AIFFO. “Haryana Chief Minister Bhupinder Singh Hooda, too, has strong ties to this organisation. Before his death in 2009, Ranbir Singh, Hooda’s father, was working president of AIFFO. And, Hooda is a founder-member and working president of AIFFO’s sister body, All India Freedom Fighters’ Successors’ Organisation(AIFFSO), according to his profile in the Haryana Vidhan Sabha website.”
The report also mentions that AIFFO had spent lakhs of rupees in full page advertisements which praised Ranbir Singh’s contribution to the freedom struggle. As mentioned earlier Ranbir Singh was Hooda’s father.
Of course, just because Hooda and Yajee share a relationship does not mean that Yajee could not have sold land to Vadra.
So let’s get back to the land deal between Yajee and Vadra. Yajee’s Onkareshwar Properties sold 3.531 acres of land to Vadra’s Sky Light Hospitality. The price of the land was worth Rs 7.5 crore and over above this there was a stamp duty cost of Rs 45 lakh, for registering the sale.
As per Khemka’s reply, Vadra’s Sky Light Hospitality issued cheque number 607251 of Corporation Bank on February 9, 2008, to pay Yajee.
The question is how did Vadra’s Sky Light Hospitaliy with a paid up capital of just Rs 1 lakh(as on March 31, 2008) manage to pay an amount of Rs 7.5 crore for the land and Rs 45 lakh as stamp duty?
The answer lies in the fact that Sky Light Hospitality’s balance sheet as on March 31, 2008, shows a book overdraft of Rs 7.944 crore. This is almost equal to the amount of Rs 7.5 crore that needed to paid for the land, plus the Rs 45 lakh that needed to be paid as stamp duty for registering the sale.
What this basically means is that even though Sky Light Hospitality issued a cheque to Onkareshwar Properties, but the latter never got around to encashing it. As a report in the Business Standard dated October 16, 2012 points out “A book overdraft is not an overdraft at a bank but an excess of outstanding cheques on a company’s books over its reported bank balance.”
The notes to the account of Sky Light Hospitality also mention the same. “The overdraft shown in Corporation Bank account is book overdraft due to cheque issued before balance sheet date but not presented up to balance date, which is cleared after balance sheet date,” it is stated in serial no. 6 of the Notes To Accounts.
This can be confirmed from the balance sheet of Onkareshwar Properties as well. “Onkareshwar’s balance sheet as on March 31, 2008, showed an entry of Rs 7.95 crore under ‘sundry debtors’. This corresponds to the entry of Rs 7.944 crore book overdraft entered in Sky Light’s books. The land price was Rs 7.5 crore, and the balance Rs 45 lakh could have been registration and stamp duty costs. It appears Onkareshwar happily footed even these costs,” a report in the Business Standard dated Ocotber 27, 2012 points out.
So not only did Yajee’s Onkareshwar Properties not encash the cheque (it would have bounced if it tried to do so), it also happily paid the Rs 45 lakh stamp duty that needed to be paid to register the transaction.
The question of course is that if money did not change hands can the sale of the land to Vadra’s Sky Light Hospitality by Onkareshwar Properties be considered as a sale at all? This is something that Khemka points out in his reply. “If there was no payment as alleged in the registered deed, can it be said that the registered deed No. 4928 dated 12.02.2008 conferred ownership title over the said land upon M/s Sky Light Hospitality by virtue of the sham sale? Section 54 of The Transfer of Property Act, 1882 defines “sale” as a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. There was no promise to pay in the future in the registered deed. No price was paid as claimed in the registered deed No. 4928 dated 12.2.2008. The “sale” registered in the said deed cannot, therefore, be called a “sale” in the true sense of the term, legal or moral, and it cannot be said that M/s Sky Light Hospitality became owner of the land in question by virtue of the “sale.””
On March 28, 2008, department of town and country planning of the Haryana government issued a letter of intent to Vadra’s Sky Light Hospitality for grant of commercial colony license for 2.701 acres out of the total area of 3.53 acres. This was done within a mere 18 days of application, writes Khemka.
He further points out that “Sub-section (2) of section 3 of the Act of 1975 mandates that an enquiry will be conducted by the Director of Town & Country Planning, particularly with respect to the title to the land and the capacity of the owner-applicant to develop a colony.”
The phrase to mark here is the capacity of the owner-applicant to develop a colony. In order to check this capacity the owner-applicant (in this case Vadra’s Sky Light Hospitality), under Rule 3 of The Haryana Development and Regulation of Urban Areas Rules, 1976, needs to furnish among other things, particulars of experience as colonizer and particulars about financial position as to determine the capacity to develop the colony, Khemka points out.
So what experience did Sky Light Hospitality have in developing colonies? If one looks at the memorandum of association of the company, stamped by the Delhi government as on October 27, 2007, the main objects to be pursued by the company on incorporation were as follows:
skylight


So this makes it very clear that building colonies was not among the main objects of Vadra’s Sky Light Hospitality, when it was incorporated. As the Memorandum of Association clearly shows the main object of the company was to be in hospitality business, as was suggested by its name.
Nevertheless that did not mean that the company could not build colonies. Just that it did not have any previous experience in doing so.
As far as the financials of the company go, as I have previously pointed out as on March 31, 2008, the paid-up capital of the company was Rs 1 lakh. The company did not earn any income upto March 31, 2008. It had an expenditure of Rs 43,380 which was met through borrowed money. Hence, the company really did not have any capacity to build a colony.
As Khemka puts it “The “capacity” of the applicant-Company was nothing else other than Mr. Robert Vadra. The man became the measure of everything and the entire statutory apparatus a castle of sand.”
Once Vadra’s Sky Light Hospitality got the letter of intent from the Haryana government for a commercial colony license on 2.701 acres out of total 3.53 acres of land, things got even more interesting. Vadra’s Sky Light Hospitality now had the land title as well as the letter of intent for grant of colony license in its possession. This made it possible for it, to enter into a collaboration agreement with with M/s DLF Retail Developers, on August 5, 2008.
After this Sky Light Hospitality received a huge amount of advance or interest free loan from DLF. The balance sheet of the company as on March 31, 2009, clearly points out entries of Rs 15 crore and Rs 10 crore as advances received from DLF.
And this money paid by DLF was finally used to clear the dues of Onkareshwar Properties. As Khemka points out “this funding from the DLF Group was used to clear the dues of Rs 7.95 crores, i.e., Rs7.5 crores towards cost of land plus Rs 45 lakhs towards stamp duty, to M/s Onkareshwar Properties, the vendor-company in registered deed No. 4928 dated 12.02.2008.”
This is how the transaction was completed. This could not have happened without the Haryana state government granting a commercial colony license within 18 days of application to Vadra’s Sky Light Hospitality, which had no previous experience of developing a colony. The license was renewed on 18th January, 2011 for a further period of two years up to December 14, 2012, Khemka points out.
Vadra’s Sky Light sold off the 3.53 acres of land to DLF for Rs 58 crore on August 18, 2012.
In doing this Bhupinder Singh Hooda turned out to be Robert Vadra’s Bansi Lal. The moral of the story is that behind every successful crony capitalist there is a successful politician.
The article originally appeared on www.firstpost.com on August 13, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

The Complexity of Money


indian rupees

Vivek Kaul

Over the last two weeks I have come to realise that people share a very complex relationship with money. A friend of mine who makes more than Rs 50 lakh a year, owns two homes, a couple of cars, and holidays abroad in exotic locations ever year, has constantly been cribbing about the 10% increment he got after the yearly performance appraisal.
“So were you expecting more?” I asked him. “Not really. The company hasn’t been in a great shape, so even 10% is very good. The average increments this year have only been around 6-7%,” he replied.
“So then what is the issue?” I asked.
“Well you know,” he said, such and such person, “who I tend to compete with got an increment of 11%.” This difference of 1%(actually I should be saying 100 basis points, but that sounds too technical) had been bothering him no end.
I tried telling him that his salary was nearly 50% more than the other person he was talking about. “So in absolute terms your increment is greater than his,” I explained.
“Yeah. But it would have been better if I made more in percentage terms as well,” my friend replied.
What this little story tells us is that people share a complex relationship with money. How else do you explain what my friend earning more than Rs 50 lakh per year was going through? There is no doubt that money motivates. An experiment carried out in 1953, showed just that. As Margaret Heffernan writes in Wilful Blindness – Why We Ignore the Obvious At Our Peril “Patients were asked to hang on horizontal bars for as long as they could; most could take it for about 45 seconds. When subjected to power of suggestion and even, in some cases, hypnosis, they could stretch to about 75 seconds. But when offered a five dollar bill the patients managed to hang from the bar for 110 seconds.”
So money does motivate people to work longer. And in many organisations that is equivalent to working harder. But as Heffernan puts it “money has a more complex influence on people than just making them work longer.”
Experiments carried out by behavioural psychologist Dan Ariely suggest that the less appreciated we feel our work is, the more money we want to do it. Ariely gave research participants a piece of paper that was filled with random letters. The participant were divided into three groups, and had to find pairs of identical letters on the sheets of paper given to them and mark them out.
While returning their papers, the the participants in the first group wrote their names on the sheets of paper and handed it back to the experimenter. He took the sheet, looked it over, said “Uh huh” and put it in a pile.
The participants in the second group did not write their names on the sheets of paper. The experimenter took their sheets without looking at them and without saying anything. He placed them in a pile. The sheets handed over by the participants of the third group were immediately shredded, as soon as they handed them over.
In order to be a part of another round of the experiment, those in the third group whose sheets were shredded wanted twice the amount of money in comparison to those in the first group, whose sheets were simply put in a pile. Those in the second group whose work was saved but ignored wanted as much as participants of the third group whose sheets were shredded.
As Ariely put in a blog on www.ted.com “Ignoring the performance of people is almost as bad as shredding their effort before their eyes.” And when that happens people want to be paid more.
The next question that crops up is that does paying people more money make them work smarter?This question is of utmost importance given the fact that some of the highest paid people in the world brought it to the verge of economic collapse a few years back in late 2008.
Ariely and a group of researchers tested this out in an experiment they carried out in India (to control the costs involved in running the experiment). In this experiment, research participants were asked to play memory games and assemble puzzles while they were throwing tennis balls at a target. One third of the participants were promised one day’s pay, if they performed well. Another one third were promised two weeks pay. And the final third were promised five months pay (the real reason behind conducting the experiment in India), if they did well.
The results were surprising. Those who were promised a day’s pay and two weeks pay as a financial reward, performed equally well. But those who were offered five months pay, performed the worst.
Ariely explained this surprising finding in an article he wrote for The New York Times. Very high financial rewards act as a double edged sword, Ariely wrote. “They provide motivation to work well, but they also cause stress and preoccupation with the reward that can actually hurt performance.”
Of course this in no way means that people don’t want to paid more, even though the prospect of earning more money starts hurting their performance beyond a point. Also, more money doesn’t always make people happier.
Research carried out by economist Angus Deaton and psychologist Daniel Kahneman (who won the Noble Prize in economics) in 2010 found that more money makes people happier upto an income of $75,000 per year. As Kahneman writes in Thinking, Fast and Slow “The satiation level beyond which experienced well being no longer increases was a household income of $75,000 in high cost areas (it could be less in areas where the cost of living is lower). The average increase of experienced well-being associated with incomes beyond that level was precisely zero…Higher income brings with it higher satisfaction, well beyond the point at which it ceases to have any positive effect on experience.”
So earning more money is not always directly proportional to greater happiness. But then why does money continue to bother people (as we saw in my friend’s case) so much? Nassim Nicholas Taleb perhaps has an explanation for it in Anti Fragile “The worst side of wealth is the social association it forces on its victims, as people with big houses tend to end up socialising with other people with big houses.”
Beyond a point the need for more money is an essential part of being seen at the top of the rat race. More money is also equated with higher intelligence and leads to greater respect from the society at large. As John Kenneth Galbraith, one economist who thoroughly deserved a Nobel prize, but never never got it, put it in A Short History of Financial Euphoria: “Individuals and institutions are captured by the wondrous satisfaction from accruing wealth. The associated illusion of insight is protected, in turn, by the oft-noted public impression that intelligence, one’s own and that of others, marches in close step with the possession of money.” Hence, money after a point becomes a measure of intelligence and success and that creates problems of its own.
The article originally appeared in the Wealth Insight magazine dated August 1, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 
 

How internet makes only a 'few' wealthy and destroys jobs

internet
Vivek Kaul
In 1996, Kodak was ranked as the fourth most valuable brand in the world by Interbrand. In January 2012, it filed for Chapter 11 bankruptcy. A major reason for its fall was the inability of the company to go ‘digital’ fast enough.
Ironically it was an engineer at Kodak who invented digital photography. As Mark Johnson writes in Seizing the White Space – Business Model Innovation for Growth and Renewal“In 1975, Kodak engineer, Steve Sasson invented the first camera, which captured low-resolution black-and-white images and transferred them to a TV. Perhaps fatally, he dubbed it “filmless photography” when he demonstrated the device for various leaders at the company.”
Sasson’s new product was shown to the top bosses at Kodak. He was told “that’s cute – but don’t tell anyone about it.” The reason for the reluctance of the top brass to what would become digital photography was very simple. Kodak at that point of time was the world’s largest producer of photo film. And any camera that did not use photo-film was obviously going to be detrimental to the interests of the company.
So ‘Kodak’ missed the digital revolution despite having invented the digital camera. As marketing guru Al Ries wrote in January 2012 column, just after Kodak went bankrupt “In 1986, Kodak announced the development of the world’s first megapixel digital sensor small enough for a handheld camera, one that had 1.4 million pixels. In 1994, Kodak introduced the first digital camera under $1,000. Between 1985 and 1994, Kodak invested some $5 billion into digital research & development. As a result of its massive investments, Kodak holds more than a thousand patents related to digital photography. Kodak recently received, in patent-suit settlements, $550 million from Samsung and more than $400 million from LG Electronics.”
Despite being a pioneer in digital photography, the focus at Kodak was always on trying to sell ‘more’ photo-films. And that finally led to bankruptcy in the end.
The new face of digital photography is Instagram, a company which was bought by Facebook in 2012 for a billion dollars. Computer scientist and philosopher Jaron Lanier makes a very interesting point comparing Kodak and Instagram in his new book Who Owns the Future? 
As he writes “Kodak employed more than 140,000 people and was worth $28 billion. They even invented the digital camera. But today Kodak is bankrupt. And the new face of digital photography has become Instagram. When it was sold to Facebook for a billion dollars in 2012, Instagram employed only thirteen people. Where did all those jobs disappear to? And what happened to all the wealth that those middle-class jobs created?”
So what makes Instagram so valuable, asks Lanier? “Instagram isn’t worth a billion dollars just because those thirteen employees are extraordinary. Instead, its value comes from the millions of users who contribute to their network without being paid for it. Networks need a great number of people to participate in them to generate significant value. But when they do, only a small number of people get paid. That has the net effect of centralizing wealth and limiting overall economic growth.”
And this is true not only for Instagram. Take the case of Google. It might be a great search engine but ultimately it’s the people (and not its employees) who are generating the content that Google helps throw up. What would Facebook be without the ‘time’ that people choose to spend on it? The same stands true for Twitter as well.
It is people like you and me who make these networks so valuable. As Lanier writes “An amazing number of people offer an amazing amount of value over networks. But the lion’s share of wealth now flows to those who aggregate and route those offerings, rather those who provide the ‘raw materials’…We want free online experiences so badly that we are happy to not be paid for information that comes from us now or never. That sensibility also implies that the more dominant information becomes in our economy, the less most of us will be worth.”
This concentration of wealth is one of the negative effects of the digital revolution. “The clamour for online attention only turns into money for a token minority of people, but there is another new, tiny class of people who always benefit. Those who keep the new ledgers, the giant computing devices that model you, spy on you, and predict your actions, turn your life activities into the greatest fortunes in history. Those are concrete fortunes made of money,” writes Lanier.
All that I have discussed till now stands true for music industry as well. It used to be a big industry until things started to go digital. “At one time, a factory stamped out musical discs and trucks delivered them to retail stores where salespeople sold them…There used to be a substantial middle class population supported by the recording industry, but no more. The principal beneficiaries of the digital music business are the operators of network services that mostly give away music in exchange for gathering data to improve those dossiers and software models of each person,” writes Lanier.
If all this wasn’t enough, the Moore’s law is still at work leading to negative consequences. As Lanier points out “The law states that chips get better at an accelerating rate…The technology seems to always get twice as good every two years or so…This means that after forty years of improvements, microprocessors have become millions of times better…As information technology becomes millions of times more powerful, any particular use of it becomes correspondingly cheaper…Moore’s law means that more things can be done practically for free, if only if weren’t for those people who want to be paid. People are the flies in the Moore’s law ointment. When machines get incredibly cheap to run, people seem correspondingly expensive.”
Lanier gives the example of printing presses and newspapers. “It used to be that printing presses were expensive, so paying newspaper reporters seemed like a natural expense to fill the pages. When the news became free, that anyone would want to be paid at all started to seem unreasonable. Moore’s Law can make salaries – and social safety nets – seem like unjustifiable luxuries,” writes Lanier.
The internet essentially destroys jobs, even though it ‘seems’ to make things more efficient.

The article originally appeared on www.firstpost.com on August 10,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 
 

Political suicide: Why UPA took so long to bite the bullet on reforms

State-of-Reform-twitter4
Vivek Kaul
 
The Congress led United Progressive Alliance (UPA) government has been talking about economic reforms over the last two months. This after more or less ignoring them since May 2004, when they first came to power.
The rupee’s rapid depreciation against the dollar which started towards the end of May 2013, and which could lead to a serious economic crisis, has forced the government to get a tad serious on the reform front.
The recent Indian experience is no different from how things have happened all over the world. It takes an economic crisis or the possibility of one happening, to get economic reforms going, more often than not.
Nevertheless, the question is why wait till things turn really bad and then start implementing economic reforms? As Alberta Alesina and Allan Drazen ask in a research paper titled Why are Stabilizations Delayed? “Countries often follow policies for extended periods of time which are recognized to be infeasible in the long run. For instance, large deficits implying an explosive path of government debt and accelerating inflation are allowed to continue even though it is apparent that such deficits will have to be eliminated sooner or later. A puzzling question is why these countries do not stabilize immediately, once it becomes apparent that current policies are unsustainable and a that change in policy will have to be adopted eventually.”
The government expenditure in India has exploded over the last few years and more than doubled(gone up by 133%) to Rs 16,65,297 crore between 2007-2008 and 2013-2014. An increase in expenditure has also led to an increase in the fiscal deficit or the difference between what the government earns and what it spends. The fiscal deficit between 2007-2008 and 2013-2014 has gone up by 327.4% to Rs 5,42,499 crore.
It was only recently that the government started taking steps to control the fiscal deficit by trying to control the subsidy it offers on cooking gas, petrol and diesel.
A similar thing has happened on the current account deficit front. The current account deficit(CAD) for the period of 12 months ending March 31, 2013, was at 4.8% of the GDP or $87.8 billion. The CAD is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances.
The level of the CAD at 4.8% of GDP was much higher than the comfortable level of around 3% of GDP. It did not reach such a high level overnight. In fact warnings were made as early 2010 on the mess India would end up in because of the high CAD. And that’s precisely what has happened over the last few months. A high CAD has led to a shortage of dollars, which in turn has led to the depreciation of the rupee against the dollar.
But it was only very recently that the government started to make serious efforts on this front to ensure that the dollars kept coming in. One such move was to increase the allowed level of foreign direct investment(FDI) into a host of business sectors.
What India has seen over the last few months is minor economic reform at best and that too has happened because of the ‘possibility’ of an economic crisis. “The fact that broad-ranging, fundamental economic reform is difficult is attested to by the simple observation that it is quite rare,” writes Val Koromzay in a paper titled Some Reflections on the Political Economy of Reform.
There are many reasons for economic reforms being as rare as they are. Lets look at some reasons which are valid in the Indian context.
A major reason is the fact that politicians do not see beyond their terms. As Dennis Arroyo writes in a research paper titled The Political Economy of Successful Reform: Asian Stratagems “A politician elected to a 3-year term may know that proposed reforms may bear fruit in 8 years. So why scuttle re-election by inflicting temporary economic pain? They would rather optimize over the short term. The benefits of reform do not ripen fast enough to fit the political cycle.”
Lets take the case of allowing FDI in multi-brand foreign retailing (in simple English allow Wal-Marts of the world to operate in India), a decision which was hanging for more than a decade. When FDI was finally allowed into multi-brand retailing in September 2012, it came with too many terms and conditions attached to it. Some of these conditions were done away with recently.
The benefits that India is likely to get in the form of better supply chains, elimination of middle-men, lesser wastage of food, greater consumer choice etc, will not happen overnight. Meanwhile, the government would have to face the heat from opposition parties, traders, and even the press. This largely explains why the Congress led UPA government took a long time to bite the bullet on this front. If the government had made this decision after being re-elected in 2009, the benefits of this reform would have started to become visible by now. As Arroyo puts it “The conventional wisdom is that politicians should use the early honeymoon period to embark on the difficult reforms. The latter will yield fruit by the end of their terms, just in time for the campaign period for reelection. Surprisingly, reform governments do not often take advantage of this window.”
The question is why is the Congress led UPA government so gung-ho now about allowing multi-brand foreign retailing now, given that its benefits are not going to become visible any time soon? One obvious explanation is that India needs dollars that the foreign companies are likely to bring in, if and when they decide to invest in India.
Then again, this is not going to happen overnight. Koromzay has a better explanation for this sudden commitment of the Congress led UPA government to encourage FDI in multi-brand retailing. As he puts it “There is, I think, a definite role for suicide in politics. When a government reaches the point in a reform process where the prospects for re-election become dim, one has much less to lose by continuing with the reform. Politics is a repeated game, and the political parties (if not, usually, their leaders) will be back to fight another election.”
Then there is also the political cost of reform. Take the case of various subsidies that the Congress led UPA government has been doling out over the years. While it is important to cut down these subsidies, it is easier said than done. As William Tompson and Robert Price write in an OECD study titled The Political Economy of Reform “Fiscal reforms in particular often impose risky political costs (Sobel 1998). They entail raising taxes, cutting program budgets, privatizing state enterprises, downsizing the civil service, removing subsidies on sensitive goods, and reallocating funds from one region to another. There will be winners and losers, but it is difficult to pinpoint who are the net gainers a priori. The people feel this short-term pain and ignore the long-term gain.”
It is also important that politicians pitching for reforms effectively communicate their benefits. As Tompson and Price point out “ The importance of meaningful mandates makes effective communication all the more important. Major reforms have usually been accompanied by consistent coordinated efforts to persuade voters and stakeholders of the need for reform and, in particular, to communicate the costs of non-reform.”
Now when was the last time you saw an Indian politician try and explain the benefits of economic reform to the citizens of this country? As economist Vivek Dehejia told me in an interview that I did for the Daily News and Analysis in August 2012, “What makes reforms more difficult now is what I call the original sin of 1991. What happened from 1991 and thereon was reform by stealth. There was never an attempt made to sort of articulate to the Indian voter why are we doing this? What is the sort of the intellectual or the real rationale for this? Why is it that we must open up?”
It is also important that politicians present a united front on the reform front. As Tompson and Price write “The cohesion of the government is also critical. If the government undertaking a reform initiative is not united around the policy, it will send out mixed messages, and opponents will exploit its divisions; defeat is usually the result.” Given that India has had coalition governments since 1996 total ‘cohesion’ has gone missing from its governments, making it all the more difficult to push through economic reform.
What makes reforms further difficult is the fact that there is a section of the population that benefits if the situation continues to be as it is. Take the case of labour law reforms in India. India has too many labour laws which have held back the growth of labour-intensive manufacturing business. Jagdish Bhagwati and Arvind Panagariya in their book India’s Tryst with Destiny estimate that there are as many as 52 independent Central government Acts in the area of labour. Over and above this there are some 150 state level labour laws in India.
And this has held back the growth of firms because the extra costs of satisfying labour laws are so huge that the firms choose to stay small. But the moment there is any talk of labour laws being reformed there are protests from labour unions and political parties (to which the labour unions are affiliated).
Bhagwati and Panagariya estimate that India has nearly 47 crore workers. And of this less than a crore (98 lakh to be precise) were employed in private sector establishments with more than 10 workers in 2007-08. And it is in the interest of these workers and the political parties their unions are affiliated to, that the status quo continues. As Koromzay puts it “reducing rents in the interest of greater efficiency is a task that can be counted on to evoke the opposition of those whose rents are at risk.”
Given these reasons economic reforms are rare and are only pushed through when a country is facing an economic crisis or is likely to face one. India is in a similar situation right now.
 
Disclosure: The idea for this article came from Vivek Dehejia’s column Why are Reforms Difficult?published in the Business Standard.
 
This article originally appeared on www.firstpost.com on August 8,2013
 
(Vivek Kaul is a writer. He tweets @kaul_vivek)