Rahul Gandhi is angry again. Yesterday, he barged into a press conference being addressed by Congress general secretary Ajay Maken and announced that the ordinance passed by the Union Cabinet to protect convicted legislators from complete disqualification as “complete nonsense”.
The Supreme Court had ruled on July 10, that an MP or an MLA, if convicted by a court in a criminal offence with a jail sentence of two years or more, would be immediately disqualified. On September 24, the Union Cabinet cleared the the Representation of the People (Amendment and Validation) Ordinance, 2013 to negate the Supreme Court ruling.
This ordinance allows convicted MPs and MLAs to continue in office to the condition that their appeal is admitted by a higher court within a period of 90 days and their conviction is stayed.
Rahul Gandhi felt that this was incorrect and said “I’ll tell you what my opinion on the ordinance is. It’s complete nonsense. It should be torn up and thrown away. That is my personal opinion.”
“I am interested in what the Congress is doing and what our government is doing. That is why what our government has done as far as this ordinance is concerned is wrong,” he went on to add, embarrassing the Prime Minister and his cabinet of ministers, which had cleared the ordinance only a few days back, in the process.
A lot of analysis has happened since yesterday afternoon, when the Gandhi family scion said what he did. Some people have suggested that “Rahul has his heart in the right place”. Some others have said “what is wrong with calling rubbish, rubbish”. A television anchor known for his loud and aggressive ways called it the “victory of the people”. And still some others have asked the obvious question “how could the government have cleared the ordinance without the consent of Rahul or his mother Sonia Gandhi?”
On the whole, Rahul’s decision to call the ordinance “nonsense” and something that should be “torn and thrown away” is being projected as a surprise. While nobody could have predicted what Rahul Gandhi did yesterday, at the same time this can’t be termed as a surprise.
Rahul Gandhi over the last few years has made a habit of raking up issues to embarrass the government and his party, by saying something controversial and then disappearing. In July 2008, Rahul visited the house of Kalavati Bandurkar, in the village Jalka in the Vidarbha region of Maharashtra. Her husband had committed suicide in December 2005, hit by crop failure and debt. He left her with a debt of Rs 1 lakh. After visiting her, Rahul highlighted her plight in Parliament and then quickly forgot about her. It was an embarrassment for the Congress Party given that it ruled the state of Maharashtra. Since bringing her into the limelight, Kalavati’s daughter and a son in law have also committed suicide.
In October 2008, while addressing girl students at a resort near Jim Corbett National Park, Rahul Gandhi referred to “politics” as a closed system in India. “If I had not come from my family, I wouldn’t be here. You can enter the system either through family or friends or money. Without family, friends or money, you cannot enter the system. My father was in politics. My grandmother and great grandfather were in politics. So, it was easy for me to enter politics. This is a problem. I am a symptom of this problem. I want to change it.,” he said. Where is the change? When was the last time the Congress party had an election for the post of its president? If the top post of the party is not democratic, how can the party be expected to be democratic?
On February 5, 2010, Rahul came to Mumbai and travelled in a local train both on the western line (From Andheri to Dadar) and the central line (from Dadar to Ghatkopar). A lot of song and dance was made about him defying the Shiv Sena, but nothing constructive came out of it. The local trains continue to burst to the seems.
On May 11, 2011, Rahul riding pillion on a bike managed to enter the Bhatta-Parsaul villages in Uttar Pradesh, giving the district administration a slip, and challenging the might of Mayawati, the then Chief Minister of Uttar Pradesh.
The villagers in Bhatta-Parsaul were protesting against the acquisition of land by the state government and the protests had turned violent. A few days later Rahul went to meet the Prime Minister Manmohan Singh to appraise him of the situation.
After coming out of the meeting he told reporters “The issue here is a more fundamental one with regard to these villages in particular and a large number of villages in UP down the Agra highway, where state repression is being used, where people are being murdered…quite severe atrocities are taking place there….There is a set of 74 (mounds of) ashes there with dead bodies inside. Everybody in the village knows it. We can give you pictures. Women have been raped, people have been thrashed. Houses have been destroyed.” These were serious allegations, but nothing ever came out of them.
On August 26, 2011, Rahul gave a speech in favour of Lok Pal in the Lok Sabha, where he said “why not elevate the debate and fortify the Lok Pal by making it a Constitutional body accountable to Parliament like the Election Commission of India?” That was the last we heard of Lok Pal. Meanwhile, Anna Hazare, continues to threaten to go on another hunger strike if the bill is not passed by the Parliament soon.
More recently, on April 4, 2013, Rahul addressed the Confederation of Indian Industries. It was a 75 minute speech, and one of the things he recounted about was about a journey he made a few years back on the Lokmanya Tilak express from Gorakhpur to Mumbai (Lokmanya Tilak is a station in Mumbai at which many long distance trains coming from the Eastern part of the country terminate). “I spent a large part of the Thirty Six hour journey moving across the train and talking to travellers – youngsters, weary families, and migrants moving from the dust of Gorakhpur to the glitter of Mumbai. Took us Thirty Six hours. It is called an Express!”
Some time later in the speech he said: “I am a pilot. I learnt to fly in the United States, I came back. I wanted to convert my license. So I went to the DGCA and I asked what do I have to do. They gave me the curriculum, I opened the book. A large section in the book talks about how to drop mail from aero-planes. How many of you are getting your mail dropped from airplanes in the sky?…And it’s not only in pilot training, it’s everywhere. Look at our text books, open them out. Most of the stuff is not really relevant to what they are going to do.”
The things that Rahul said were not only an embarrassment for the current government. The fact that Indian Railways takes so much time or our education system is not up to the mark, has not happened overnight. The degeneration has happened over a period of time, meaning Rahul’s great-grandfather(Jawahar Lal Nehru), his grandmother (Indira Gandhi), his uncle (Sanjay Gandhi), his father(Rajiv Gandhi) and his mother(Sonia Gandhi), who have been de-facto heads of government at various points of time since India’s independence, are responsible for it.
But then we all know that? How does just pointing out the obvious help anybody? Where are the solutions? As The Economist wrote after Rahul’s CII speech “Gandhi could have spelled out two or three specific measures, ideally in some detail, that he would support—for example, getting an Indian-wide goods-and-services tax accepted; promoting investment in retail or other industries; or devising a means by which infrastructure could be built much quicker. If he were really brave, he might have set out thoughts on ending bureaucratic uncertainty over corruption, or on land reform.”
But all Rahul seems to do is hit and run. He says something on an issue, embarrasses his party, his government or his ancestors and moves on. Rahul Gandhi is not a serious politician. He is in politics because he cannot do anything else or is expected to continue the family tradition and keep the flag flying.
One can only speculate on the reasons for his lack of interest, given his reclusive nature. From his father and grandmother being assassinated to the fact that the future generations are no longer interested in what their forefathers built, be it business or politics.
I am more tempted to go with the latter reason. Rasheed Kidwai, makes this point in the new edition of his book 24 Akbar Road. As he writes “It is said that the conqueror Taimur the ‘Lame’ once spoke to the famous historian and sociologist Ibn Khuldun about the fate of dynasties. Khuldun said that the glory of a dynasty seldom lasted beyond four generations. The first generation inclined towards conquest; the second towards administration; the third, freed of the necessity to conquer or administer, was left with the pleasurable task of spending the wealth of its ancestors on cultural pursuits. Consequently, by the fourth generation, a dynasty had usually spent its wealth as well as human energy. Hence, the downfall of each dynasty is embedded in the very process of its rise. According to Khuldun, it was a natural phenomenon and could not be avoided.”
Hence, evolution is at work. As historian and author Ramachandra Guha told me in an interview I did for Firstpost in December 2012 “I think this dynasty is now on its last legs. Its charisma is fading with every generation. And Rahul Gandhi is completely mediocre.”
That to a large extent explains Rahul’s hit and run mentality and his reluctance to take a more active role in government. After his yesterday’s statement, the least that Rahul Gandhi can do is take on more responsibility either by advancing the Lok Sabha elections or becoming a part of the government in some form.
But neither of these things is going to happen because Rahul Gandhi has said what he wanted to and disappeared again. His attitude is best reflected in an interview he gave to the Tehalka magazine in September 2005, in which he is supposed to have remarked “I could have been prime minister at the age of twenty-five if I wanted to.”
The statement created an uproar. The Congress party immediately jumped to the defence of its princling. Abhishek Manu Singhvi, specifically mentioned that Rahul had not said ‘I could have been prime minister at the age of twenty-five if I wanted to’.
(Tehakla initially stood by its story but backed down later. “This seems to be a clear case of misunderstanding. Mr Gandhi thought he was having a casual chat whereas our reporter took it to be a proper interview,” the weekly said in a statement(The ‘edited’ casual chatcan still be read on Tehelka’s website)).
The article originally appeared on www.firstpost.com on September 28, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Alan Greenspan, when he was the chairman of the Federal Reserve of United States, the American central bank, used to say “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.”
Greenspan was known to talk in a very roundabout manner, never meaning what he said, and never saying what he meant. Thankfully, all central bank governors are not like that. There are some who like calling a spade a spade.
Raghuram Rajan, the governor of the Reserve Bank of India(RBI), was in Frankfurt yesterday to receive the Fifth Deutsche Bank Prize for Financial Economics. In his speech he said things that would have embarrassed central bank governors of the Western nations, who are busy printing money to get their economies up and running again.
In the aftermath of the financial crisis that started in late 2008, Western central banks have been printing money. With so much money going around, the hope is that interest rates will continue to remain low (as they have). At low interest rates people are likely to borrow and spend more. When they do that this is likely to benefit businesses and thus the overall economy.
But what has happened is that the citizens of the countries printing money are still in the process of coming out of one round of borrowing binge. When interest rates were at very low levels in the early 2000s, they had borrowed money to speculate in real estate in the hope that real estate prices will continue to go up perpetually. This eventually led to a real estate bubbles in large parts of the Western world.
Eventually, the bubbles burst and people were left holding the loans they had taken to speculate in real estate. Hence, people who are expected to borrow and spend, are still in the process of repaying their past loans. So, they stayed away from taking on more loans.
But money was available at very low interest rates to be borrowed. Hence, banks and financial institutions borrowed this money at close to zero percent interest rates and invested it in stock, real estate and commodity markets all around the world. Some of this money also seems to have found its way into fancier markets like art. And this has again led to several asset bubbles in different parts of the world. As Rajan put it in Frankfurt “We seem to be in a situation where we are doomed to inflate bubbles elsewhere.”
Economists still do not agree on what is the best way to ensure that there are no real estate or stock market bubbles. But what they do agree on is that keeping interest rates too low for too long isn’t the best way of going about it. It is a sure shot recipe for creating bubbles. Even the once great and now ridiculed “Alan Greenspan” agrees on this. In an article for the Wall Street Journal published in December 2007(after he had retired as the Fed chairman), he wrote “The 1% rate set in mid-2003…lowered interest rates…and may have contributed to the rise in U.S. home prices.”
What he was effectively saying was that by slashing the interest rate to 1%, the Federal Reserve of United States may have played a part in fuelling the real estate bubble in the United States. Rajan in his Frankfurt speech for a change agreed with Greenspan. As he said “We should wonder whether lower and lower interest rates are in fact part of the problem, I say I don’t know.”
It is easy to conclude from the statements of Greenspan as well Rajan that central bank governors do understand the perils of printing money to keep interest rates low. Given that why are they still continuing to print money? Ben Bernanke, the current Chairman of the Federal Reserve hinted in May 2013, that the Fed plans to go slow on money printing in the months to come. He repeated this in June 2013. But when the Federal Reserve met recently, nothing happened on this front and it decided to continue printing $85 billion every month.
As Albert Edwards of Societe Generale put it in a February 2013 report titled Is Mark Carney the Next Alan Greenspa…? “I keep seeing Central Bankers saying again and again that QE(quantitative easing, a fancy term for printing money) and more recently, helicopter money is not only necessary but essential.”
So the question is why do central banks in the Western world continue to print money? Dylan Grice, formerly of Societe Generale, has an answer in his 2010 report Print Baby Print. As he writes “What’s interesting is that central banks feel they have no choice. It’s not that they’re unaware of the risks…They’re printing money because they’re scared of what might happen if they don’t. This very real political dilemma… It’s like they’re on a train which they know to be heading for a crash, but it is accelerating so rapidly they’re scared to jump off.”
Sometimes the withdraw symptoms are so scary that it just makes sense to continue with the drug. Dylan compares the current situation to the situation that Rudolf von Havenstein found himself in as the President of the Reichsbank, which was the German central bank in the 1920s.
Havenstein printed so much money that it led to hyperinflation and money lost all its value. The increase in money printing did not happen overnight; it had been happening since the First World War started. By the time the war ended, in October 1918, the amount of paper money in the system was four times the money at the beginning of the war. Despite this, prices had risen only by 139%. But by the start of 1920, the situation had reversed. The money in circulation had grown 8.4 times since the start of the war, whereas the wholesale price index had risen nearly 12.4 times. It kept getting worse. By November 1921, circulation had gone up 18 times and prices 34 times. By the end of it all, in November 1923, the circulation of money had gone up 245 billion times. In turn, prices had skyrocketed 1380 billion times since the beginning of the First World War.
So why did Havenstein start and continue to print money? Why did he not stop to print money once its ill-effects started to come out? Liaquat Ahamed has the answer in his book The Lords of Finance. As he writes “were he to refuse to print the money necessary to finance the deficit, he risked causing a sharp rise in interest rates as the government scrambled to borrow from every source. The mass unemployment that would ensue, he believed, would bring on a domestic economic and political crisis.”
The danger for central bank governors is very similar. If they stop printing money then interest rates will start to go up and this will kill whatever little economic growth that has started to return. Hence, the choice is really between the devil and the deep sea.
As far as Rajan is concerned he is possibly back to where it all started for him. The Federal Reserve Bank of Kansas City, one of the twelve Federal Reserve Banks in the United States, organises a symposium at Jackson Hole in the state of Wyoming, every year.
The 2005 conference was to be the last conference attended by Alan Greenspan, as the Chairman of the Federal Reserve. Hence, the theme for the conference was the legacy of the Greenspan era. Rajan was attending the conference and presenting a paper titled “Has Financial Development Made the World Riskier?”
Those were the days when Greenspan was god. The United States was in the midst of a huge real estate bubble, but the bubble wasn’t looked upon as a bubble, but a sign of economic prosperity. The prevailing economic view was that the US had entered an era of unmatched economic prosperity and Alan Greenspan was largely responsible for it.
Hence, in the conference, people were supposed to say good things about Greenspan and give him a nice farewell. Rajan spoiled what was meant to be a send off for Greenspan. In his speech Rajan said that the era of easy money would get over soon and would not last forever as the conventional wisdom expected it to. “The bottom line is that banks are certainly not any less risky than the past despite their better capitalization, and may well be riskier. Moreover, banks now bear only the tip of the iceberg of financial sector risks…the interbank market could freeze up, and one could well have a full-blown financial crisis,” said Rajan.
In the last paragraph of his speech Rajan said it is at such times that “excesses typically build up. One source of concern is housing prices that are at elevated levels around the globe.”
He came in for a lot of criticism for his plain-speaking and calling a bubble a bubble. As he later recounted about the experience in his book Fault Lines – How Hidden Fractures Still Threaten the World Economy, “Forecasting at that time did not require tremendous prescience: all I did was connect the dots… I did not, however, foresee the reaction from the normally polite conference audience. I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions. As I walked away from the podium after being roundly criticized by a number of luminaries (with a few notable exceptions), I felt some unease. It was not caused by the criticism itself…Rather it was because the critics seemed to be ignoring what going on before their eyes.”
The situation is no different today than it was in 2005, when Rajan said what he did. The central bank governors are ignoring what is going on before their eyes and that is not a good sign. Or as Rajan put it in Frankfurt “When they (central banks) say they are the only game in town, they become the only game in town.”
The article originally appeared on www.firstpost.com on September 27,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
The Down to Earth magazine has done an excellent expose of how village heads in Bihar have been siphoning off money from the various government run social scheme primarily MGNREGA (or Mahatma Gandhi National Rural Employment Guarantee Act). “More than 100 mukhiyas are learned to have become millionaires in the past five years. They have amassed wealth by siphoning off money from development projects related to MGNREGA, solar lights, rural roads, Indira Awas Yojana and the public distribution service (PDS),” the magazine points out.
The magazine gives the example of Sunil Verma, village head of Dakkin panchayat who has assets worth more than Rs 3.75 crore, investments over Rs 35 lakh in insurance policies and nearly 14 bank accounts. Village heads whose earn around Rs 8000 per month are purchasing guns, SUVs and appointing private guards for their security.
There are examples of village heads who were earlier construction labourers now driving around in SUVs. “We have discovered only the tip of the iceberg,” Director General of Police (DGP), Abhyanand, told the magazine. The MGNREGA scam is estimated to be around Rs 6,000 crore.
What is happening in Bihar and other parts of the country(which a simple Google search will reveal) as well is an excellent example of the “cantillon effect”. And to understand what it means we need to go back in history.
During the 16th century, the Spanish discovered gold and silver in huge amounts in the “New World,” the continent now known as South America. With all this silver/gold coming into Spain from the New World there was a sudden increase in money supply and that led to inflation in Spain.
Richard Cantillon, an Irish-French economist, who lived in the late 17th and early 18th century, studied this phenomenon and made some interesting observations.
What he said was that when money supply increased in the form of gold and silver it would first benefit the people associated with the process of money creation, the mining industry in general and the owners of the mines, the adventurers who went looking for gold and silver, the smelters, the refiners and the workers at the gold and silver mines, in particular. As Cantillon wrote “If the increase of actual money comes from mines of gold or silver… the owner of these mines, the adventurers, the smelters, refiners, and all the other workers will increase their expenditures in proportion to their gains.”
These individuals would end up with a greater amount of gold and silver i.e. money, before anyone else. This money they would spent and thus drive up the prices of meat, wine, wool, wheat etc. This new money would be chasing the same amount of goods and thus drive up prices.
This rise in prices would impact people not associated with the mining industry as well, even though there incomes hadn’t risen like the incomes of people associated with the mining industry had.
The situation that Cantillon talks about is very similar to what western central banks around the world have been up to over the past few years. They have been printing money and pumping it into their financial systems in the hope of keeping interest rates low, so as to encourage people to borrow and spend money, and in the process kick-start economic which has come to a standstill.
But this money printing has benefited those who are closest to the money creation. This basically means the financial sector and anyone who has access to cheap credit. Institutional investors have been able to raise money at close to zero percent interest rates and invest them in all kinds of assets all over the world, leading to huge bubbles. In the process, these investors have made a lot of money, while the overall economic growth continues to remain slow.
The modern terminology for this mode of operating is “helicopter money” i.e. the government and the central bank printing money and dropping it from a helicopter. So that people pick up the money that is being dropped, spend it, and thus help to revive economic growth.
But what this theory does not take into account is the fact that everybody can’t possibly be standing under the helicopter. Only a few people can. And those people who are standing under the helicopter are the ones who are likely to pick up the money being dropped and thus benefit from its purchasing power.
MGNREGA is no different from helicopter economics. The government has decided to spend a huge amount of money to guarantee jobs to citizens of this country. But there are very few checks and balances to figure out whether the money is actually being spent for what it is meant for. Turns out it is not and is being siphoned off in various ways.
Sanjay Dixit, a member of the Central Employment Guarantee Council (CEGC), explained the modus operandi of the scam while claiming a Rs 10,000 crore MGNREGA scam had happened in Uttar Pradesh. As he told India Today “This includes payment of wages against fake job card holders and fake construction works; creating fictitious purchase invoices, payment to ghost firms against the procurement of various items including hybrid seeds, calendars and publicity material; purchase of instruments used by labourers for construction works and purchase of photo copy machines and computers.”
The village heads in Bihar would have operated along similar lines. The people MGNREGA is benefiting the most, are the village heads and government officials, who are standing right under the helicopter from which the government is dropping money.
The article originally appeared on www.firstpost.com on September 25, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Gary Dugan is the CIO – Asia and Middle East, RBS Wealth Division. In this freewheeling interview with Vivek Kaul he talks about the recent currency crash in Asia, where the rupee is headed to in the days to come and why you would be lucky, if you are able to find a three BHK apartment, anywhere in one of the major cities of the world, for less than $100,000.
What are your views on the current currency crash that is on in Asia?
People are trying to characterise it as something like what has happened in the past. I think it is very different. It is different in the sense that we know that emerging markets in general have improved. Their financial systems are more stronger. The government policy has been more prudent and their exposure to overseas investors in general has been well controlled. I don’t think we are going to see a 12 month or a two year problem here. However, countries such as India and Indonesia have been caught out and the money flows have brought their currencies under pressure. So, it’s a problem but not a crisis.
One school of thought coming out seems to suggest that we are going to see some version of the Asian financial crisis that happened in 1998, over the next 18 to 20 months…
I totally disagree with that. The rating agencies have looked at the Indonesian banks and they have said that these banks are well-abled to weather the problems. If you look at India, the banking system is well-abled to weather the problems. It is not as if that there is a whole set of banks about to announce significant write down of assets or lending. The only thing could go wrong is what is happening in Syria. If the oil price goes to $150 per barrel then the whole world has got a problem. The emerging market countries would have an inflation problem and that would only create an exaggeration of what we are seeing at the moment.
Where do you see the rupee going in the days to come?
There is still going to be downward pressure. I said right at the beginning of the year, and I was a little bit tongue in cheek when I said that in theory the rupee could fall to 72. At 72 to a dollar, in theory, clears the current account deficit. I never expected it to get anywhere near that, certainly in a short period of time. But some good comes out of the very substantial adjustments, because pressure on the current account starts to disappear. Already the data is reflecting that. Where the rupee should be in the longer term is a very difficult question to answer.
Lets say by the end of year…
(Laughs) I challenged our foreign exchange market experts on this and asked them what is the fair value for the rupee? I ran some numbers on the hotel prices in Mumbai, relative to other big cities, and not just New York and London, but places like Istanbul as well. India, is the cheapest place among these cities. Like the Economist’s McDonald Index, I did a hotel index, and on that you could argue that the rupee should be 20-30% higher. But, if you look at the price that you have got to pay to sort out your economic problems, it is probably that the currency is going to be closer to 70 than 60 for the balance of this year.
One argument that is often made, at least by the government officials is that because the rupee is falling our exports will start to go up. But that doesn’t seem to have happened…
It takes a while. I was actually talking to a client in Hong Kong last week and he said that warehouses in India have been emptied of flat screen TVs, and they have all been sent to Dubai because they are 20% cheaper now. It is a simple story of how the market reacts to a falling currency.
But it’s not as simple as that…
Of course. A part of the problem that India has is that the economic model has more been based on the service sector rather than manufacturing. The amount of manufactured products that become cheaper immediately and everyone says that I need more Indian products rather than Chinese products or Vietnamese products, is probably insufficient in number to give a sharp rebound immediately. Where you may see a change, even though some of the call centre managers are a little sceptical about it, is that call centres which had lost their competitive edge because of very substantial wage growth in India, will immediately get a good kicker again. It would certainly be helpful, but I would say that it normally takes three to six months to see the maximum benefit of the currency adjustment.
What are the views on the stock market?
I am just a bit sceptical that you are going to see much performance before the elections. I always say it is a relative game rather than absolute one. If all markets are doing well, then India with its adjustment will do fine. Within the BRIC countries, India falls at the bottom of the pack, in terms of relative attractiveness, just because there is a more dynamic story for some of the other countries at the moment.
One of the major negatives for the stock market in India is the fact that the private companies in India have a huge amount of dollar debt…
It is definitely a reason to worry. It’s not something I have looked at in detail. But as you were asking the question, I was just thinking that people are dragging all sorts of bad stories out. When there were bad stories before, people were just finding their way through it. And India has a wonderful way of working its way through its problems and has been doing that for many many years. Remember that these problems come to the head only if the banks call them to account. I think there will be a re-negotiation. It is not as if a very substantial part of Indian history is about to go under because someone is going to pull the plug on them.
Most of the countries that have gone from being developing countries to becoming developed countries have gone through a manufacturing revolution, which is something that is something that has been missing in India…
It is. You look at the stories from the past five years, and the waning strength of the service sector in India, in th international markets, comes out. A good example is that of call centres that have gone back to the middle of the United States from India. A part of that came through currency adjustment. You can say that maybe the rupee was overvalued at the time when this crisis hit. But it is true, in a sense, that India has got to back-fill a stronger manufacturing industry and it has got to reinforce its competitive edge in the service sector.
What is holding back the Indian service sector?
A number of structural things. I talked to some service sector companies at the beginning of the year. And one of things I was told was that I have got all my workers sitting here in this call centre, but now they cannot afford to live within two hours of commuting distance. Why did that happen? That is not about service sector. It is about the broad infrastructure and putting people at home, close to where they work. There are lot of problems to be solved.
There has been talk about the Federal Reserve going slow on money printing(or tapering as it is called) in the days to come. How do you see that going?
Everyone has got to understand that the principle of quantitative easing is to generate growth. So, if there is enough growth around they will keep tapering, even if they get it wrong by starting to taper too early. They will stop tapering if growth is slow. Secondly, number of Federal Reserve governors are worried about imprudent actions of consumers and industrialists, in terms of taking cheap money and spending it on things that they typically do not need to spend on. A good example is speculation in the housing market, something which created the problem in the first place. So they want to choke such bad behaviours. They will probably start tapering in September in a small way. The only thing that may stop it from happening is if the middle Eastern situation blows up. The US didn’t think it was going to get involved a few weeks ago. Now it is.
Isn’t this kind of ironical, that the solution to the problem of propping up the property market again, is something that caused the problem in the first place…
That’s been very typical of the United States for the last 100 years. Evertime there is a problem you ask people to use their credit cards. Or use some form of credit. And when there is an economic slowdown because of the problems of non performing loans, then you get the credit card out again. So, yeah unfortunately that is the way it is.
Why is there this tendency to go back to the same thing that causes the problem, over and over again?
It is the quickest fix. And you hope that you are going to bring about structural changes during the course of a better economic cycle. So people don’t bring the heavyweight policies in place until they have got the economy going again and sadly the only way you can get the economy going again is to just to make credit cheap and encourage people to borrow.
Inflation targeting by central banks has come in for criticism lately. The point is that because a central bank works with a certain inflation target in mind, it ends up encouraging bubbles by keeping interest rates too low for too long. What is your view on that?
These concepts were brought in when central banks thought they could control inflation. If you look at one country that dominates the world at the moment in terms of product prices and in terms of the inflation rate, it is China. Your monetary policy isn’t going to change the behaviours of China. And some of the flairs up in inflation have been as a consequence of China and therefore monetary policies have no impact. Secondly, the idea of controlling inflation, the concept worked for the 20 years of the bull market. Then we got inflation which was too low. So we have changed it all around to actually try to create inflation rather than to dampen inflation. I don’t think they know what tools they should be using. The central banks are using the same tools they used to dampen inflation, in a reverse way, in order to create it.
And that’s where the problem lies…
For nearly two to three hundred years, the world had no inflation, yet the world was kind of an alright place. We had an industrial revolution and we still had negative price increases, but that did not stop people from getting wealthy.
Many people have been shouting from the rooftops that because of all the money that has been printed and is being printed, the world is going to see a huge amount of inflation, so please go and buy gold. But that scenario hasn’t played out…
Chapter one of the economic text book is that if you create a lot of money, you have got a problem. Chapter two is that there is actually another dimension to this and that is the velocity of money. If you have lots of money and if it happens to go around the world very very slowly it doesn’t have any impact. And that has been the point. The amount of money has gone up considerably but the velocity of money has come down. To date, again in the western world, there is little sign of the velocity improving. We are seeing this in the lending numbers. Even if banks have the appetite for lending money, nobody wants to borrow. Someone’s aged 55, and the job prospects are no wage growth, and the pension is tiny, I am not sure that even if you have gave him ten credit cards, he’ll go and use any of one of them. And that is the kind of thing that is happening in Europe and to some extent in the United States.
Yes that’s true…
The only money going into housing at the moment is the money coming from the institutional market, as they speculate. If you look at students coming out of college in the United States, they have come out way down with debt. There is again no way that they are going to go and take more loans from the bank because they have already done that in order to fund their education. So I do not seeturnover of money in the Western world.
There may be no inflation in everyday life but if you look at asset inflation, it has been huge.. That’s right. People just find stores of value. Gold went up as much as it did, in its last wave. If you look at Sotheby’s and Christie’s, in the art market, they are doing extremely well. The same is true about the property market. Places which are in the middle of a jungle in Africa, there prices have gone up to $100,000 an acre. Why? There is no communication. No power lines. It is just because people have money and are seeking out assets to save that money. Also, there has been cash.If you go to Dubai, 80% of the house purchases there, are in cash. So you don’t need the banks.
Can you tell us a little more on the Africa point you just made?
I did laugh when Rwanda came to Singapore to raise money for its first ever bond issue and people were just discovering these new bond markets to invest purely because they did not know what to do with their money. So someone said that I am building, you know in a Rwanda or a Nigeria, and people just ran with their cash, buying properties and buying up land wherever the policies of the government allowed. Sri Lanka again just closed the door on foreign investors because you start to get social problems as the local community cannot afford properties to live in. It was amazing how commercial many of these property markets became, even though in the past they were totally undiscovered. And as we have seen with many of them, you take considerable risk with the legal system. The world has got repriced. I always say that if you can find a three bedroom house below a $100,000-$150,000 in a major city, you are doing well anywhere in the world today.
In Mumbai you won’t find it even for that price..
Yes, though five years ago it was true. It is impossible now.
(The interview appeared in the Forbes India magazine edition dated Oct 4, 2013)
Ruchir Sharma is the head of emerging market equities and global macro at Morgan Stanley Investment Management. He generally spends one week per month in a developing country somewhere in the world. In 2012, his book Breakout Nations – In Pursuit of the Next Economic Miracle became a best-seller. The paperback version of the book was recently published.
The book among other things pointed out that the most important factor behind decade long economic boom in the emerging markets, a worldwide flood of easy money, had been largely overlooked. That era of easy money is now coming to an end, believes Sharma. “My entire case which I have even made in the book was the fact that the entire boom of the last decade, where the growth accelerated from 5-6% to 8-9% was totally global in nature, and that had nothing to do with India specific factors. And that boom is now unwinding. Now can we undershoot 5-6% for a year or two? Yeah we can,” said Sharma. In this free-wheeling interview he speaks to Vivek Kaul.
Recently you wrote an article in the Foreign Policy magazine titled “The Rise of the Rest of India”, in which you talk about Indian states that have done well over the past few years. What are the factors that make for a breakout state among the Indian states?
A very simple definition is that the state has been able to consistently grow above the national average over a five to ten year period. Often you can associate that growth to some change in policy or leadership which has taken place. It is the same as the concept that I have used in my book Breakout Nations.
What is the concept of Breakout Nations?
It is about which are the countries that are likely to grow faster than the emerging market average and compared to other countries in the same income group, over a five year period. The same concept I have applied to the states in India. The question I have tried to answer is which are the states which have grown above the national average for a five to ten year period. Often this growth is associated with some leader who has to come power.
Which are the states right now you feel are the potential breakout states or have already broken out?
The states where the most impressive results have been seen are Gujarat, Bihar, Madhya Pradesh Odisha, Chhattisgarh, Delhi etc. These are the places where typically you have seen growth. The ones where the most impressive delta or change has taken place, have basically been Bihar, Odisha, Madhya Pradesh, Chhattisgarh etc. That area has done well.
What about Gujarat?
Gujarat has done well. But Gujarat was already doing well in the previous decade. Its impressive that it has done better from a higher base. Similarly for Maharashtra, growth rates have been okay, but in the last couple of years they have begun to fall. And Maharasthra is so dependent on the legacy industrial base or the whole golden triangle of Mumbai, Pune and Nashik, that I don’t know how to call it a breakout state necessarily.
Does the Indian constitution need to be re-jigged to give Indian state more economic power?
I’d say that maybe later but to me that is not the big thing. India has three lists, central, state and the concurrent list. And the big thing in India which has happened is that a lot of the issues which were in the state list and the concurrent list have been usurped by the the centre over time. And this has got to do with environment, mining, labour and even things like food. The whole culture needs to be a collaborative culture rather than the centre deciding or one leader deciding that okay these are the five things that India is going to do. We have had centralised leadership in the past. We have had the Indira Gandhi days. Now you can argue that is that what you want? Economic growth wasn’t great during that period. You can argue that it sowed the seeds of secessionist movements rather than bringing the country together. So I am not sure this heavy handed centralised leadership is what works for a country like India, where the polity is so diverse.
How can this be tackled?
The first thing you can start doing is by giving the power back to the states. India’s constitution envisaged a federal structure. It is just that over time particularly the 1970s and the 1980s, a lot of the state powers were usurped by the centre in the name of centralisation and in the name of the the secessionists taking over. Using that kind of cover, a lot of power was usurped. The whole point is that when you have national schemes, you have to give much more flexibility to the states. For example, the planning commission is now talking about 10% discretion to the states. That can be increased to 30% or 50%, rather than the criteria and the mandates being set by the centre.
In a recent column for the Financial Times you wrote “The irony is profound…Voters are wondering aloud how their “breakout nation” became a “breakdown nation”, seemingly overnight.”
Can states be breakout states when the country is in a breakdown mode?
Of course not. The national average is ultimately summation of the states. The only reason for optimism that I still find is that at the state level things are a bit better. State level leaders understand how to succeed in various parts of India rather than having a one size fits all national policy. Having said that, there are issues at the state level as well. Many states have their own crony capitalists. At times they are autocratic and anti democratic. But my entire point is that there is a ray of optimism.
Five years ago we were drawing straight lines stating that India’s GDP growth has been 8-9% and if it continues for 10 years where will we be. If it continues for 20 years where will we be and so on. Today it is hard to be optimistic on the country because there is so much negativity which is going around. To me the breakdown is a perception thing more than a reality.
Are there things that can be done to set it right?
One flaw to me is this culture of lack of accountability. If you look at India today the lack of accountability starts of from this whole separation of party and government. This has really been one of the fault lines of India which is that to run a country with a division between party and government is really very difficult. It fosters a culture of lack of accountability.
Could you elaborate on that?
There is this perception that has been for years now that there are something things which when you ask the people in the party, that why they are not being done, they say its the government’s responsibility to do this. And you ask the government and they tell you we don’t have the political power to do it. That lack of accountability then just flows down, with everyone being busy protecting their own turf and not taking any collective responsibility for anything. So that fault line to me for one needs to end, which is that you can’t have the separation of the party and the government. Also the fact is that if you look at the world what you see is that technocrats have not been very good as heads of states.
What do you mean by that?
They have been very good as support staff. But as heads of states if you look at Latin America and Asia, in the past, there are more examples of mass based leaders being successful. This is because reforms are political in nature. You can’t have them being administered by technocrats. Technocrats neither have the political understanding nor the political capital to implement reforms. Reforms need to be sold to people. Hence they are political decisions. Given this, you need a mass based leader at the top.
So that brings me to the logical question. Is that leader Narendra Modi?
See I am not sure of that. I don’t want to get into this thing about who it should be or who it shouldn’t be. My entire point is the fact that you have mass based leaders at the state level. The states are not run by technocrats. The breakout states that I speak about are run by politically smart people, who understand what needs to be done for development, and who get that connection of what is good economics and what is good politics. They see the bridge between the two. To me its about mass based leaders. Whether India can have this at the national level, I am a bit more sort of doubtful about.
But do successful state level leaders transform into national leaders?
It has never happened. Never. That’s the staggering point. Many leaders have tried to go out. The list is a long one. From Sharad Pawar to Mulayam Singh Yadav and even someone like a Mayawati, they have all tried to build a national footprint but they have never been able to succeed. Often having strong regional roots is a liability at the centre because then they begin to associate you only with one particular state. Even in the Congress I find it fascinating that there is so much talk as to who could be the next candidate for Prime Minister. I would think that logically it should be a chief minister rather than any of the national leaders.
But no one comes to my mind when I think of the Congress chief ministers…
Exactly. Logically we should argue that by any chance if Sheila Dikshit wins the next election then she should be the automatic choice for being the next PM candidate assuming that Rahul doesn’t want the top job. Someone like her should be the top person for that job. You need someone with a mass base, who understands politics.
What has suddenly gone wrong with the rupee. Between January and May it yo yoyed between 53.5 to around 55.5 to a dollar. But after that it has fallen dramatically...
A lot of it has to do with this fault line across emerging markets which is the fact that all countries with a high current account deficit have really taken a big hit as far as their currencies are concerned. The whole game began to change, as is well documented by now, after the Federal Reserve decided that it wants to think about tapering off its quantitative easing. After that the the US interest rates have risen a lot. The 10 year interest rate has gone up by 100 basis points since May. This has obviously led to people evaluating how much money they want to put up internationally.
But is the rupee falling just because of the Federal Reserve thinking about going slow on money printing?
The fact is that we have our own domestic problems which are compounding the whole thing. There is a sense that no one’s in charge and that we have an election coming up. There is a sense that it will be very hard for the government to make tough decisions to remedy this situation. Also, some of the problems have not been fully appreciated or recognised. One thing that we are just about coming to realise is that corporate India has too much leverage. It is very concentrated leverage amongst a few companies.
Do you see the rupee falling more?
We are in the midst of a panic and magazine articles have their own time cycles. In panics I just can’t say where these things will stop.
Can we say that the rupee is falling because the rupee is falling?
It’s a global panic now. The train has left the station and you can’t now catch it. And where it stops I don’t know. That is the sense I get. This is not say that this is not our problem. If we did not have a large current account deficit we wouldn’t have this problem today. But the fact that we have a large current account deficit and are being punished globally for it, is just a reality.
Should the RBI try and stop the rupee’s fall or let it find its own level?
I don’t think that we have a local solution anymore. All that the RBI can do is to moderate the fall. But we have seen with other currency attacks that when currencies are under panic foreign exchange intervention can be very ineffective. The classic case was the British pound in 1992. What India can do is to figure out how to correct these things over a period of time, which is what we should think about. RBI or whoever it was in charge in Delhi was doing much worse before. They were following this bureaucratic impulse that you come up with this one decision all the time to show that you are doing something.
Is India anywhere close to Thai crisis of 1998, where the country more or less ran out of foreign exchange?
I don’t think that it is as extreme as that. What happened in Thailand was a very extreme situation. Their short term debts and current account deficit were larger than what we have. Having said that one thing that I have known about crises is that you only know about these things post facto which is that after every crisis you come up with new factors to add to the list of the things that you should watch out for. I think that is the whole point. If you look at the past crises this does not seem as dire as what we saw in East Asia in 1997-98 or in India in 1991. But my only caveat here is that you always come up with the real reasons post the crisis.
Economic theory has it that as the currency depreciates exports go up and imports fall. But in the last two years as the rupee has fallen, our trade deficit(the difference between imports and exports) has gone up dramatically. How do you explain that?
The recent fall of the rupee has been very sharp but before this the rupee was adjusting for the high inflation we have had for such a long period of time. Exports are dependent on multiple factors, exchange rate being only one of them. Global demand which is another major factor influencing exports, has been weak. If just changing the nominal exchange rate was the game, then it would be such an easy recipe for every country to follow. You could just devalue your way to prosperity. But in the real world you need other supporting factors to come through. You need a manufacturing sector which can respond to a cheap currency. Our manufacturing sector, as has been well documented, has been throttled by all sorts of local problems which exist.
What are the other impacts of a falling rupee?
One of the factors that has been under-appreciated in this drive to see the currency go lower is that there is a negative effect also on the huge foreign exchange loans taken by the corporates. So even though there is not much that can be done to stop the rupee’s fall you can’t at the same time wish that you can just devalue your way to prosperity because there is a negative feedback loop which takes place.
And a lot of exports are import dependent…
Yes. There is a negative feedback loop because the corporate sector is heavily indebted in foreign currency. So that is the problem.
So there is a corporate debt crisis brewing up. You have pointed out in the past one in four Indian companies does not have enough cash flow to repay its debt. How do you see that playing out?
Those companies are just going to be shunned for a long period of time. People are now just investing in the 15-20 big companies and keeping away from the rest. India has lost a major competitive advantage. India’s advantage that used to be quoted to foreign equity investors, particularly portfolio equity investors, was how we have a huge number of companies to invest in. That has shrunk incredibly now. Some of these companies are not going to be able to survive, that’s the harsh reality.
Oil prices are at an all time high in rupee terms. What sort of impact will that have on the fiscal deficit. The finance minister said today(on August 27, 2013, the day the interview was taken) that come what may the government will meet the fiscal deficit target of 4.8% of GDP. Can we buy that?
We achieved the target last year. But you have to understand how that was done. The government will have to really freeze spending, and that in turn will compress consumer demand. The issue is whether they have the political appetite to do that. Or the government will have to raise diesel prices. Currently, they are Rs 9-10 behind on the under-recoveries. They need to raise diesel prices by such a massive amount to stick to the fiscal deficit target. So can the government meet its fiscal deficit target? Of course they can. But the price unfortunately in this case will be economic growth.
If they don’t increase diesel prices they have a problem. If they do increase diesel prices they have a problem.
Exactly. That’s the negative feedback loop I talked about. The days when you could just move the exchange rate from x to y and hope that exports will pick up, is a very simplistic solution. It does not take into account the negative feedback loops that can arise in terms of corporate debt denominated in foreign currencies and also the fact that the oil import bill gets considerably worse.
There is a small cottage industry that has sprung up in trying to explain why the current fall of the rupee is due to international factors. How much of the rupee’s fall is due to international factors and how much of it is due to local factors?
Probably we can divide it 50:50. As I said, the fact of the matter is that if we were not running a current account deficit today, we would not be having this panic. Sure there would be some sell off because all emerging markets are under pressure. Growth forecasts across emerging markets have been downgraded regardless of their current account deficit. Nevertheless, it is ironical that the Chinese currency is up for the year. The currencies of some of the countries like Mexico and Philippines have fallen very slightly because they don’t have current account deficits. It is a very current account deficit centric problem that we are currently seeing now.
But the current account deficit did not appear overnight.
This is the irony, that the crisis has been badly managed. These fault lines have existed for a while. The current account deficit has been going up continuously over the last two to three years above levels which most economists consider to be sustainable. And we ignored that. In our desire to keep growth artificially high in 2009 and 2010, we engaged in a lot of stimulus government spending. We let our fiscal deficit blow out. We violated the FRBM (Fiscal Responsibility and Budget Management Act) and have never ever gone back to that. The Prime Minister has ignored so many fault lines.
Could you elaborate on that?
He dismissed crony capitalism as being something which possibly is the rite of passage that any country going through an early stage of development will have to go through. Every such country will have its own robber barons. So what is the big deal that India does? He dismissed the rise in inflation by saying that rise in food prices are a sign of prosperity. He kept on going on about how savings and investment ratios are so high that growth is unlikely to ever dip below 8-9%. And on each one of them any sort of serious economic analysis would suggest that these arguments were flawed.
And this had a huge impact?
We know that if you have crony capitalism it can lead to a backlash against wealth creation. Look at issues like the ban on iron ore exports, the mining of coal etc. Some of this is because we have had crony capitalism and that has led to a backlash against wealth creation and that has led to these bans to start with.
What about the inflation argument offered by Manmohan Singh?
The whole business about inflation rising because of a rise in prosperity is a real myth. Why has China not seen this massive inflation problem despite 30 years of great growth? Why did Korea and Taiwan did not see any sustained inflation pressure? Or even Japan during there very high growth phrases? Why? This is a total myth. India’s inflation rankings have deteriorated considerably. Our inflation used to be always below the emerging market average for the last 20-30 years. It’s only in the last three to four years that we have been way high than the emerging market average, not just bit higher, but way higher. Also, other countries with high savings and high investment have also seen a growth fall off. The Soviet Union’s investment to GDP ratio was 35% before the collapse. It was all bad investment. This is what happens when there is too much academic focus on things.
In a recent column in the the Financial Times you wrote “A not so funny thing happened while the world was watching for an emerging market crisis to erupt in China. The crisis erupted in India instead.” Could you elaborate on that?
For the first half of the year a lot of focus was on China. China has had a massive credit binge over the last five years. And in recent times we have seen in the US, Spain etc, typically countries which have had a massive credit binge are vulnerable because when you increase your debt over a short span of time of three to five years you accumulate a lot of bad assets. And that leads to trouble for the entire banking system. So people have been very worried about the high debt to GDP ratio in China. Even I have been concerned about it and written about it. There were people sending out alerts on a China crisis. I think very few people were sending out alerts about a India crisis.
Exactly. That’s the irony to me. Everyone was looking for a crisis in China and it ends up erupting in India, first.
The Indian economic growth has fallen to around 5%. Do you see us going back to the good old Hindu rate of growth of 3.5%?
No that’s not been my case. Hopefully things have changed there. There is a lot of natural buoyancy. What I do find more impressive compared to 30-40 years ago is the quality of state chief ministers. They have improved a lot in comparison to the 1970s and the 1980s. In fact even the 1990s. The moment we think of the third front we all get a bit scared because we think of the motley crew which ran the government in the mid 1990s. If you look at the state chief ministers today, they are generally better. My entire case which I have even made in the book was the fact that the entire boom of the last decade, where the growth accelerated from 5-6% to 8-9% was totally global in nature, and that had nothing to do with India specific factors. And that boom is now unwinding. Now can we undershoot 5-6% for a year or two? Yeah we can. We overshot for a while, we can undershoot for a while. That is still my base case scenario. I am not willing to give up on India and say that India is going to go down the route of 3% growth which existed till 1980. Also it is important to remember that the aspiration levels of the people here are too high now to tolerate that kind of an outcome. They will force something to happen to change that outcome.
Any view on the food security bill which was recently passed by the Lok Sabha?
I have no strong view on that. My concern is about the fact that you can’t keep writing cheques that which the country can’t cash. We need to understand that we can only spend that much. And if we have to spend extra then we have to show stuff that we can cut elsewhere. The big damage of the food security bill is not the bill itself but the fact that why was this not used at the very minimum by the Prime Minister as an excuse to say okay, if you want to pass this, you have to raise diesel prices by an ‘x’ amount, so that we offset some of the cost.
How much can the appointment of Raghuram Rajan as the governor of RBI, make a difference to the Indian economy?
India’s problems are far deeper than what a central banker can solve. But I think its a positive step. Someone like him is a global mind. Nevertheless, in India’s case the problems are much deeper. As we have discussed the whole fiscal side is a real problem. How do you get the centre to be fiscally responsible again? Who will implement the next generation of reforms? Also, in India’s case inflation is a problem, it would really help to outline what exactly is the RBI going to target. He can definitely help but it would be unfair to expect him to move the needle on India so dramatically where it will be all about him.
In a recent interview you said that you don’t see Brazil, Russia and South Africa growing faster than the US. So that has more or less killed the entire BRICS story. Albert Edwards at Societe Generale recently termed BRIC as a Bloody Ridiculous Investment Concept.
My point about BRIC is that why did it work? It worked in the last decade because every single emerging market was booming. When every single emerging market is booming you can stitch any acronym together and it will fly. BRIC flew because it captured the four largest emerging markets. Apart from that they have nothing in common. Their growth rates are very different. Their investment outlook is very different. What they need to do is very different. Clubbing these countries together was a very fancy marketing acronym and it worked when all emerging markets were booming. Today it is all about differentiation. Who has got current account deficit? Who has not? Who has got excessive debt? Who is a commodity exporter? Who is not? Who is a commodity importer? Who is not?
It was a like a great sales trick which has now run out of steam…
Exactly. It was a great sales trick which captured what was happening at the moment when all emerging markets were booming. There was no reason to it. You tell me apart from size what else do they have in common?
Another thing that you wrote in the Financial Times article was that “Contagion typically attacks weak links first”. What do you mean by that?
Look at the other crises. For example look at what happened in East Asia. It began in a country like Thailand and it spread to some of the larger economies like Korea in the end. By the time it was on its last stages people were even questioning China and Hong Kong. The whole idea is that the weak link gets taken out first and then the contagion gets to spread on and on. Even in Europe. It started in Greece. It was seen as a problem in Greece and then it started to spread to the larger nations. When it finally got to Spain and Italy, which are countries that matter in terms of their size that’s when we got a policy reaction. In the US it began as the subprime crisis and in the end subprime was a part of the larger chain. So that’s my point. All these things begin with exposing the weak links first before they finally take out the big ones.
This interview appeared on firstpost.com on September 24, 2013. It is a slightly longer version of the interview that appeared in Forbes India, September 20, 2013
Vivek Kaul is a writer. He tweets @kaul_vivek