Month: February 2015 | Page 2

17 February, 2015

Pahlaj Nihalani : Living in glass houses and throwing stones at others

pahlaj
Pahlaj Nihalani, the censor board chief, has aspirations of becoming the conscience keeper of the nation. The former film producer has issued a list of Hindi and English cuss
words that will be banned from films.
Earlier this year Nihalani had told The Times of India that “there is too much nudity on television and internet and it should be controlled,” going beyond his brief as the censor chief. He had followed this with an interview to The Hindu in late January where he had said that he did not “mind being called conservative” if it was “in national interest”. “The censor board is very liberal. But what is the modern generation watching? We are giving them the license to see anything. How is this projecting our culture?” Nihalani had added in the interview.
The irony is that all this comes from a man who gave Hindi cinema some of its crassest songs. Nihalani produced a film called Andaz in 1994, which was directed by David Dhawan. The movie had songs with lines like khada hai khada hai khada hai, roz karenge hum ku ku and main maal gaadi tu dhakka laga (later changed to ye maal gaadi tu dhakka laga). Any one who understands a little bit of Hindi will know what exactly these songs are trying to suggest. They clearly were not in national interest.
Before Andaz, Nihalani had produced Aankhen which released in 1992. This movie had a song with the line “khet gayil baba bazaar gayil ma, akeli hu ghar ma tu aaja balma”. The song starts with the heroine Shilpa Shirodkar lifting her ghagra to reveal her thigh. It is followed by the heroine and a string of women extras gyrating their chests and doing other suggestive movements.
Aankhen also had another superhit song called O Lal Dupatte Waali Tera Naam to Bata. This song had the heroes Govinda and Chunky Pandey chasing the heroines Ritu Shivpuri and Raageshwari. Somewhere midway through the song the heroines sing the line “har ajnabi ke liye ye khidki nahi khulti” and in a very suggestive way slightly raise the hemline of their white mini skirts. This clearly wasn’t a good projection of Indian culture that Nihalani now seems to be so passionate about now. Nihalani might defend himself by saying that these songs were a part of a phase in Hindi cinema where double meaning songs ruled. Subhash Ghai’s Khalnayak had the superhit choli ke peeche kya hai. Sawan Kumar Tak’s Khalnayika went a step further and had a song called choli ke andar kya hai. Prakash Mehra’s Dalal had chadh gaya upar re aatariya par lautan kabootar re. So, Nihalani in a sense was doing what everyone else was doing during that era.
But all these years later he has changed, he might tell us. As a line attributed to the British economist John Maynard Keynes goes: “When the facts change, I change my mind. What do you do, sir?”
Nihalani might have changed his mind but he needs to do a few things to change the facts, so that we can believe him. He should re-censor the films he produced and drop the songs which go against Indian culture and national interest, to start with. Further, in this era of remakes, if he ever chooses to remake or sell the rights of his biggest hit Aankhen, he should insist that the remake won’t have the khet gayil baba bazar gayil ma song. This should set an excellent precedent. Nihalani would be then putting his money where his mouth is.
Until he does that, it is worth remembering a dialogue written by Akhtar-Ul-Iman and spoken by Raj Kumar in the 1965 superhit Waqt, which goes like this: “Chinoi Seth…jinke apne ghar sheeshe ke hon, wo dusron par pathar nahi feka karte(Chinoi Seth…those who live in glass houses don’t throw stones at others).” Nihalani, being a film producer, would have hopefully heard of this.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])
The column originally appeared in the Daily News and Analysis(DNA) on Feb 17, 2015

17 February, 2015

Here is why the government should not forget about the fiscal deficit

When it comes to ideas to revive an economy which is not doing well, economists are essentially two trick ponies,They will first suggest that the central bank should cut interest rates. At lower interest rates people will borrow and spend more, businesses will benefit and the economy will grow faster as a result. QED.
And if that is not happening they will suggest that the government should increase public expenditure. As the government spends more money, that money will land up as income in the hands of people who will in turn and spend that money. The money that they spend will land up as income in the hands of other people, who will also spend that money. And so the multiplier effect will work, first leading to spending, and in turn creating economic growth.
The second trick seems to be dominating the debate currently in India. The mainstream view now seems to be getting around to the idea that the government should forget about the fiscal deficit, during the next financial year and spend more money, in the hope of creating more economic growth. Fiscal deficit is the difference between what a government earns and what it spends. The difference is made up for through borrowing.
The finance minister Arun Jaitley had said in his budget speech in July 2014: “My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17.” It’s now being suggested that the finance minister should abandon these targets for the time being.
The logic offered is very straightforward. The combined fiscal deficit of the central government and the state governments has fallen dramatically over the last few years. In 2009-2010, the number was at 9.33% of the gross domestic product(GDP) of India.
By 2013-2014 this had fallen to 6.78% of the GDP. During this financial year(i.e. 2014-2015) it is expected to fall to 6.03% of the GDP. Along with this the total liabilities of the central government have also gone down over the years from 48.8% of the GDP in 2009-2010 to 46.3% in 2013-2014. This number is expected to fall further to 45.7% of the GDP in 2014-2015, as per the government debt status paper released by the ministry of finance in December 2014.
So, what this seems to suggest is that the finances of the Indian government(s) are well placed at this point of time and given that, the central government can easily spend more. But is that really the case? Rajiv Shastri makes a very interesting point in a column he wrote for the Business Standard in December 2013: “In reality, quantifying deficit and accumulated debt only as a percentage of GDP has the potential to misguide. In isolation it distorts both, the true scale of fiscal profligacy and the government’s debt-servicing ability.”
What Shastri is effectively saying here is that the government does not have access to the entire GDP to repay its debt. It repays its debt only out of the money that it makes every year through taxes and other sources of revenue.
How is the central government doing on that front? In 2007-2008, revenue receipts stood at 10.87% of the GDP. By 2013-2014, they had fallen to 9.06% of the GDP. As far as tax collections are concerned, they have fallen from 8.81% of the GDP to 7.36% of the GDP. This year tax collections are expected to be at 7.59% of the GDP. This number is unlikely to be achieved given that the shortfall in tax collections is expected to be around Rs 1,05,084 crore or around 0.84% of the GDP.
The non-tax revenues of the government have also fallen from 2.05% of the GDP to 1.70% of the GDP between 2007-2008 and 2013-2014. During this financial year the number is expected to be at 1.65% of the GDP. Interestingly, the interest that the government pays on its accumulated debt was at 3.43% of the GDP in 2007-2008. It has jumped to 3.79% of the GDP in 2013-2014.
An increase in interest payments means lesser money gets spent on other important things. As economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out in a recent research note: “India’s central government spends nearly a quarter of its total spending on servicing the large debt burden…Bringing this down would create valuable space for other far more important expenditures.”
What these numbers clearly tell us is that the ability of the government to service the debt that it has accumulated has been coming down over the years, which is clearly not a good sign. Also, when compared to other emerging market countries, India has one of the highest government debt levels in the world, as can be seen from the following table.
DebtTable

Further, it is also worth remembering that a lot of other emerging market countries have already tried increased public spending in the aftermath of the financial crisis (as I said at the very beginning, economists have basically got only two ideas) and the results haven’t been great.
As Ruchir Sharma of Morgan Stanley points out in a column in today’s edition(Feb 16, 2015) of The Times of India: “Many big emerging nations including China, Russia and Brazil just tried a full-throttle experiment in stimulus spending, and it failed. The average growth rate for emerging economies excluding China has fallen to 2.5% today, from more than 7% at the height of the spending campaign in 2010. That is the lowest growth rate in four decades, outside of a global recession.”
Any government looking at increasing its spending in order to boost growth should keep this in mind. Also, at the end of the day what matters is not the quantity of spending but the quality of spending.
As Baig and Das point out: “Recent budgets have routinely allocated close to 5% of GDP in capital spending, a non-trivial amount by any measure. But these generous allocations have not materialized in a discernible pick up in the investment cycle…If the authorities aim at high quality, high multiplier projects worth 4-5% of GDP as opposed to simply ramping up the rate of spending, they will handily achieve the goal of providing a boost to the economy, in our view.”
Also, increasing public spending by the government takes away attention from economic reforms. Both can rarely be executed together. As Sharma points out: “A stimulus mindset is the opposite of a tough reform mindset, and governments can rarely do both as the contrasting experience of the 1990s showed. By the end of that decade, most emerging nations had no money to burn, no lenders they could turn to.”
Given these factors, increasing public spending by the government may not be the best way to go about reviving economic growth.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The article originally appeared on www.firstpost.com on Feb 16, 2015

16 February, 2015

Investing lessons from Aam Aadmi Party’s Delhi win

Last week saw David(read the Aam Aadmi Party(AAP)) beat Goliath(read the Bhartiya Janata Party (BJP)) in the Delhi elections. AAP won 67 out of the seventy seats in the Delhi assembly, leaving only three seats for the BJP. This led to one WhatsApp forward which suggested that Delhi should now allow tripling(three people travelling on a bike) so that BJP legislators could ride to the Delhi assembly on a bike. Another forward suggested that the BJP legislators could drive to the assembly in a Tata Nano.
Jokes apart, in the aftermath of this electoral debacle many reasons have been offered on why and how the BJP lost Delhi. Reasons have also been offered on why and how the AAP won Delhi. Let’s sample a few here. The ghar wapasi campaign launched by the Sangh Parivar backfired in Delhi. The BJP ran a very negative and a highly vitriolic campaign against AAP and that didn’t quite work.
The AAP supporters on the other hand have been pointing out to the fact that the party ran a positive campaign and that went down well with Delhi residents. Further, the 49 days that Arvind Kejriwal was chief minister of Delhi, the levels of petty corruption in Delhi had come down dramatically. And this, we are told, is something that the people of Delhi haven’t forgotten.
Long story short—the number of reasons offered on AAP’s spectacular performance and BJP’s wipe out, is directly proportional to the number of political pundits analysing the issue. Nevertheless, most of these reasons have been offered with the benefit of hindsight. Most political pundits had no clue about BJP ending with up three seats and the Narendra Modi juggernaut losing steam. But now that it has happened, they need to find reasons and explanations for the same.
As Gary Smith writes in Standard Deviations—Flawed Assumptions, Tortured Data and Other Ways to Lie With Statistics: “Through countless generations of natural selection, we have become hardwired to look for patterns and to think of explanations for the patterns we find…We yearn to make an uncertain world more certain, to gain control over things we do not control, to predict the unpredictable.”
Also, some political pundits have now even said that they saw the whole thing coming and offered explanations of the same. As Nassim Nicholas Taleb writes in Fooled by Randomness: “Things are always obvious after the fact…It has to do with the way our mind handles historical information…Our mind will interpret most events not with the preceding ones in mind, but the following ones.” This tendency is referred to as hindsight bias in psychology.
Daniel Kahneman defines this in his book Thinking, Fast and Slow: “When an unpredicted event occurs, we immediately adjust our view of the world to accommodate that surprise…Once you adopt a new view of the world(or of any part of it), you immediately lose much of your ability to recall what you used to believe in before your mind changed.”
This leads to a situation where one feels that one has understood as well as predicted the past and given that one further feels that one can predict as well as control the future. As Jason Zweig writes in Your Money & Your Brain—How the New Science of Neuroeconomics Can Help Make You Rich: “Hindsight bias is another cruel trick that your inner con man plays on you. By making you believe that the past was more predictable than it really was, hindsight bias fools you into thinking that the future is more predictable than it ever can be.”
This is exploited in particular by financial pundits. As Kahneman writes: “Our tendency to construct and believe coherent narratives of the past makes it difficult for us to accept the limits of our forecasting ability. Everything makes sense in hindsight, a fact that financial pundits exploit every evening as they offer convincing accounts of the day’s events. And we cannot suppress the powerful intuition that what makes sense in hindsight today was predictable yesterday.” That of course is not the case.
Hindsight bias also is also at work when we invest. An excellent example, is of investors saying after a bubble has burst, that they knew all along it was a bubble. But the thing is that if a bubble is obvious to enough investors at the time it is in its initial stage, there would be no bubble in the first place.
Zweig has an excellent example in his book of the link between hindsight bias and investing. As he writes: “In the fall of 2001, after the terrorist attacks of September 11, you tell yourself, “Nothing will ever be the same again. The U.S. isn’t safe any more. Who knows what they’ll do next? Even if stocks are cheap, nobody will have the guts to invest.” Then the market goes on to gain 15% by the end of 2003, and what do you say? “I knew
stocks were cheap after September 11th!””
The moral of the story here is that you may have been able to explain the entire situation to yourself, but you have missed out on the rally.
Then there is the case of missing out on a bumper initial public offering. Zweig offers the case of Google which first sold its shares in August 2004. At that point of time, an investor wanting to invest in the stock, would have thought back about the bursting of the dotcom bubble and the money that he had lost back then.
Using this logic he would have decided not to invest in the stock. He would have then seen the price of the stock jump from the initial price of $85 to $460 by end 2006 and told himself: “I knew I should have bought Google!”
And this would lead to a change in the worldview of the investor and may well make him “more eager to take the plunge” the next time he has “a chance to get in on the ground floor of a risky high-tech start-up.” But as Zweig puts it: “Of course, “the next Google” may turn out to be the next Enron instead.”
Given these reasons it is very important for investors not to become victims of the hindsight bias while investing.

(The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning on Feb 16, 2015)

14 February, 2015

One lesson from many lessons offered on BJP’s Delhi defeat

A small industry seems to have evolved around trying to explain why the Bhartiya Janata Party(BJP) lost the Delhi elections. A spate of reasons have been offered. One gentleman even went to the extent of saying that it was a weekend, and the BJP voters were not in Delhi.
And then there have been regular reasons like the fringe elements in the Sangh Parivar and the comments they have been making, costing BJP the election. It was also said that the BJP ran a very negative campaign in Delhi, where they targeted Arvind Kejriwal more often than they should have.
Some political pundits have done a complete turnaround and been telling us that they knew all along that the BJP would lose big time in Delhi. The best explanation for this came on one of the Hindi news channels on the day when votes polled for the Delhi election were being counted.
A journalist explained that he had covered the prime minister Narendra Modi’s rallies in Delhi and they did not attract the same kind of crowd that they had when the BJP organized rallies with Modi as the star speaker, at the time of the Lok Sabha elections. He further explained that he saw people leaving the rally even before Modi’s speech had ended. And that was a clear habinger of things to come.
The question is—if this journalist was so sure about all this, why didn’t he say so at the time the rallies were held. Or even other analysts and journalists who have been coming up with different reasons for BJP’s loss in Delhi—if they were so sure, why didn’t they say so earlier?
The “I already told you so,” explanations that have been offered in the aftermath of BJP’s Delhi defeat are an excellent example of what psychologists and behavioural economists call “hindsight bias”.
The Nobel Prize winning economist Daniel Kahneman defines hindsight bias in his book Thinking Fast and Slow, as follows: “When an unpredicted event occurs, we immediately adjust our view of the world to accommodate that surprise…A general limitation of the human mind is its imperfect ability to reconstruct past states of knowledge, or beliefs that have changed. Once you adopt a new view of the world(or of any part of it), you immediately lose much of your ability to recall what you used to believe in before your mind changed.”
Hindsight bias is also referred to as “I knew it all along effect”. As Nassim Nicholas Taleb writes in Fooled by Randomness: “Our minds are not quite desinged to understand how the world works, but, rather, to get out of trouble rapidly and have progeny. If they were made for us to understand things, then we would have machine in it that would run the past history as in a VCR, with a correct chronology, and it would slow us down so much that we would have trouble operating. Psychologists call this overestimation of what one knew at the time of the event due to subsequent information…the “I knew it all along” effect.”
This bias is clearly at work in the explanations that are now being offered for BJP’s shocking defeat in Delhi. One explanation that has been offered is that the freebies/sops offered by the Aam Aadmi Party, essentially led to BJP’s wipe out. But if that were the case then Ashok Gehlot would not have lost in Rajasthan and neither would have M Karunanidhi, the last time they faced the electorate. Oh, and what about Sonia Gandhi? If it were just about offering freebies to voters, would the Congress have been reduced to 44 seats in the current Lok Sabha?
This brings us back to the question, why did the BJP lose so badly in Delhi? One answer lies in the fact that the vote share of the Congress party collapsed and it moved lock, stock and barrel to the Aam Aadmi Party. Why did this vote share not move to the BJP? This is where all the explanations start to come in. But almost all these theories are a matter of conjecture because nobody really knows what’s going on in the minds of a huge number of voters.
The human mind likes explanations for what it does not understand. As Gary Smith writes in Standard Deviations—Flawed Assumptions, Tortured Data and Other Ways to Lie With Statistics: “Our inherited desire to explain what we see fuels two kinds of cognitive errors. First, we are too easily seduced by patterns and by the theories and discount contradicting evidence. We believe stories simply because they are consistent with the patterns we observe and, once we have a story, we are reluctant to let it go.”
In the context of the Delhi elections what this means is that if you are a BJP supporter you would like to believe that the BJP lost because the Aam Aadmi Party offered freebies to voters. If you are an Aam Aadmi Party supporter you would like to believe that the party won because of the positive campaign that it ran. But as Smith points out: “Order is more comforting than chaos…Our vulnerability comes from a deep desire to make sense of the world, and it’s notoriously hard to shake off.”
Further, the more unpredicted an event is, the greater is the hindsight bias. Kahneman explains this through the example of 9/11. As he writes: “In the case of a catastrophe, such as 9/11, we are especially ready to believe that the officials who failed to anticipate were negligent or blind.”
On July 10, 2001, the CIA received information that al-Qaeda was planning an attack on the United States. The CIA director George Tenet told the National Security Adviser Condoleeza Rice and not President George Bush.
When Ben Bradlee the legendary executive editor of The Washington Post came to know of it, he remarked: “It seems to me elementary that if you’ve got the story that’s going to dominate history you might as well go right to the president.” This is classic hindsight bias.
As Kahneman writes: “But on July 10, no one knew—or could have known—that this tidbit of intelligence would turn out to dominate history.”
Long story short—it is always easy to be wise after the event. And that is what is happening with all the lessons/explanations that have been offered for BJP’s defeat in Delhi.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on www.firstpost.com on Feb14, 2015

13 February, 2015

Jobs, jobs and more jobs is what India needs

Buried somewhere in the last financial year’s Economic Survey are some very disturbing data points, which the pink papers do not like to talk about. The usual news reports that you will read in the business newspapers published in the country are about professional colleges (MBA/Engineering) being flush with jobs.
None of the newspapers get into detail about how bad the overall job scenario in India is. The fact of the matter is that we just aren’t creating enough jobs for the youth who are entering the workforce every year.
The Economic Survey points out that between 1999-2000 and 2004-2005 the employment as measured by the usual status method increased from 398 million to 457.9 million. This was the period when the Bhartiya Janata Party led National Democratic Alliance was in power.
After this, the job growth just came to a complete standstill. Between 2004-2005 to 2009-2010, the employment increased by just 1.1 million to 459 million. The first term of the Congress led United Progressive Alliance was a period of jobless growth, despite the gross domestic product(GDP) registering solid growth. So, the size of the overall economy was growing but the jobs weren’t.
The situation improved over the next two years. Between 2009-2010 and 2011-2012, the number of employed individuals increased by 13.9 million to 472.9 million. Hence, the employment growth between 2004-2005 and 2011-2012 was at a minuscule 0.5% per year. In comparison, the employment growth was at 2.8% per year between 1999-2000 and 2004-2005.
Mihir S Sharma in Restart—The Last Chance for the Indian Economy looks at the data over a longer time frame and comes up with a similar conclusion: “In the years from 1972 to 1983—not celebrated as a time of overwhelming prosperity—the total number of jobs in the economy nevertheless grew by 2.3 percent a year. In the years between liberalization in 1991 and today, jobs have grown at an average of 1.6 percent a year.”
The trouble is that this is not enough. “13 million Indians will join the workforce every year from now on till 2030…But, if these young people have to absorbed, then jobs must grow at least 3 per cent a year—almost twice the rate at which they have since liberalization. This is simply not happening. In other words, one out of every two youngsters who starts looking for a job next year won’t find one,” writes Sharma.
What makes the scenario worse is that as per the last census nearly 47 million Indians under the age of 25 have been looking for a job, and not been able to find one.
So what is the way out? The Economic Survey provides what looks like an answer. As it points out: “The defining challenge in India today is that of generating employment and growth. Jobs are created by firms when firms invest and grow. Hence it is important to create an environment that is conducive for firms to invest…The ultimate goal of economic policy is to create a sustained renaissance of high growth in which hundreds of millions of good quality jobs are created. Good quality jobs are created by high productivity firms, so this agenda is critically about how firms are created, how firms grow, and how firms achieve high productivity.”
Theoretically the above paragraph makes perfect sense. But there are several problems with it. India grew at the rate of 7.4% per year between 2004-2005 and 2011-2012. Despite this the job growth came to a standstill. Between 1999-2000 and 2004-2005 the economic growth was around 6% per year. Nevertheless, jobs grew at a much faster rate than they grew between 2004-2005 and 2011-2012.
So, faster economic growth does not always create jobs. Further, the Economic Survey talks about highly productive firms creating quality jobs. The question is what portion of Indian firms are highly productive or want to achieve high productivity. A significant portion of big Indian firms are essentially run by crony capitalists who are more interested in short term gains rather than building a highly productive organization.
Then there is the question of labour laws as well. Sharma provides a comparison between Bangladesh and India, and how the countries stack up when it comes to their respective textile industries. As he writes: “Before the expansion of trade thanks to new international rules in the twenty-first century, India made $10 billion from textile exports, and Bangladesh $8 billion. Today India makes $12 billion—and Bangladesh $21 billion.”
So what happened here? The textile industry, explains Sharma, needs to turnaround big orders quickly and efficiently. “Really long assembly lines still matter in textiles: in some cases, 100 people can sequentially work to make a pair of trousers in least time. In Bangladesh, the average number of people in a factory is between 300 and 400; in the South Indian textiles hub of Tirupur, it’s around 50,” writes Sharma.
Why is there such a huge differential is a question worth asking? The answer lies in the surfeit of labour laws that firms in this country need to follow. And this ensures that most Indian textile firms start small and continue to remain small.
In their book India’s Tryst with Destiny, Jagdish Bhagwati and Arvind Panagariya point out that 92.4% of the workers in this sector work with small firms which have forty-nine or less workers. Now compare this to China where large and medium firms make up around 87.7% of the employment in the apparel sector.
In fact, the Indian Constitution allows both the central as well as state governments to pass labour laws. This has led to a surfeit of labour laws. As Bhagwati and Panagariya point out: “The ministry of labour lists as many as fifty-two independent Central government Acts in the area of labour. According to Amit Mitra (the finance minister of West Bengal and a former business lobbyist), there exist another 150 state-level laws in India. This count places the total number of labour laws in India at approximately 200.”
What leads to further trouble is that these laws are not consistent with one another. This has led to a situation where “you cannot implement Indian labour laws 100 per cent without violating 20 per cent of them,” write Bhagwati and Panagariya.
This explains why Indian textile firms continue to remain small and not enough jobs are created in the process. As Bhagwati and Panagariya write “As the firm size rises from six regular workers towards 100, at no point between these two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra cost of satisfying the laws”.
In fact, the textile sector is an excellent representation of the overall Indian business. Businesses which have less than 10 workers, employ more than 90% of India’s workers. What this clearly tells us is that the government of India needs to start simplifying its labour laws. At the same time this needs to trickle down to the level of state governments as well.
Sharma summarizes it best when he says: “[India] tried to protect workers instead of work; and it failed.” And that needs to change.

The column appeared on www.equitymaster.com as a part of The Daily Reckoning on Feb 13, 2015