Vivek Kaul
In a piece titled Farewell to Incredible India, which deals with the current economic problems in India, The Economist writes: “The Congress-led coalition government, with Brezhnev-grade complacency, insists things will bounce back.”
Leonid Brezhnev was the General Secretary of the Central Committee (CC) of the Communist Party of the Soviet Union (CPSU). He ruled the country from 1964 till his death in 1982.
I guess The Economist looked too far. They could have found someone right here in India to describe the complacency of the Manmohan Singh-led United Progressive Alliance(UPA) government. The man I am talking about is none other than Lalu Prasad, the former railway minister and former chief minister of Bihar.
Yes, you read it right. Before I get into explaining why I just said what I did, let us go back a little into history.
The lucky Lalu Yadav
Lalu Yadav re-entered politics in 1973, just by sheer chance. He didn’t have to struggle for it. The opportunity just fell into his lap.
As Sankarshan Thakur writes in Subaltern Sahib: Bihar and the Making of Lalu Yadav, “On the eve of elections of Patna University Students Union (PUSU) in 1973 non-Congress student bodies had again come together, if only for their limited purpose of ousting the Congress. But they needed a credible and energetic backward candidate to head the union. Lalu Yadav was sent for.”
The only trouble was that Lalu Yadav was no longer a student, but was an employee of the Patna Veterinary College. He had quit student politics in 1970, after having lost the election for the presidentship of PUSU to a Congress candidate. Before this, Lalu had been the general secretary of PUSU for three consecutive years.
But Lalu got around the problem. “Assured that the caste arithmetic was loaded against the Congress union, Lalu readily agreed to contest. He quietly buried his job at the Patna Veterinary College and got a backdated admission into the Patna Law College. He stood for elections and won. The non-Congress coalition in fact swept the polls,” writes Thakur.
And from there on Lalu Yadav went from strength to strength. In 1974, the students’ agitation against then prime minister Indira Gandhi spread throughout the country. As Thakur points out, “An agitation committee was formed, the Bihar Chatra Sangharsh Samiti to coordinate the activities of various unions and Lalu Yadav as president of PUSU was chosen its chief.”
These events catapulted Lalu Yadav into the big league. In the 1977 elections, Lalu was elected to the Lok Sabha as a Janata Party candidate at a young age of 29.
Chief Minister of Bihar
VS Naipaul once described Bihar as “the place where civilisation ends”. Lalu Prasad first became the chief minister of Bihar in 1990. Between him and his wife Rabri Devi they largely ruled the state till 2005, and almost brought civilisation to an end.
When India was going from strength to strength with economic growth rates that it had never seen before, the economy of Bihar was shrinking in size. As Ruchir Sharma writes in Breakout Nations – In Pursuit of the Next Economic Miracles , “Bihar was the only Indian state that not only sat out India’s first growth spurt but also saw its economy shrink (by 9 percent) between 1980 and 2003.”
Lalu and his wife Rabri ruled for the major portion of the period between 1980 and 2003. Economic development was nowhere in the agenda of Lalu and on several occasions when questioned about the lack of economic development in the state, he replied that economic development does not get votes. And he was proved right.
In fact such was Lalu’s lack of belief in development that even money allocated to the state government by the Central government remained unspent. As Santhosh Mathew and Mick Moore write in a research paper titled State Incapacity by Design: Understanding the Bihar Story, “Despite the poverty of the state, the governments led by Lalu Prasad signally failed to spend the money actually available to them: ‘…Bihar has the country’s lowest utilisation rate for centrally funded programs, and it is estimated that the state forfeited one-fifth of central plan assistance during 1997–2000.’”
Between 1997 and 2005, the Ministry of Rural Development allocated Rs 9,600 crore. Of this, nearly Rs 2,200 crore was not drawn. And of the money received only 64 percent was spent. Similarly, money allocated from other programmes was also not spent.
How did he survive?
Lalu survived by building a potent combination of MY (Muslim + Yadav) voters. The Yadavs are the single largest caste in Bihar. Such was his faith in the MY voters that Lalu did not even promise development, like most politicians tend to do. As Mathew and Moore write: “He finessed this problem…by departing from the normal practices of Indian electoral politics and not vigorously promising ‘development’. For example, if during his many trips to villages he was asked to provide better roads, he would tend to question whether roads were really of much benefit to ordinary villagers, and suggest that the real beneficiaries would be contractors and the wealthy, powerful people who had cars. He typically required a large escort of senior public officials on these visits, and would require them to line up dutifully and humbly on display while he himself was doing his best to behave like a villager. He might gesture at this line-up and ask ‘Do you really want a road so that people like this can speed through your village in their big cars?’”
So what was Lalu Yadav trying to do here? “Lalu Prasad Yadav was not trying to fool most of his voters most of the time. He was offering then tangible benefits: respect (izzat – a Hindi term that he employed frequently) and the end of local socio-political tyrannies
Where does Manmohan Singh fit in here?
Some time after Lalu Yadav became the chief minister of Bihar, India had a financial crisis. PV Narasimha Rao was looking for a technocrat for the Finance Minister’s position. He first approached Dr Indraprasad Gordhanbhai Patel, who was the Governor of the Reserve Bank of India(RBI) from 1977 to 1982. Patel refused and suggested the name of his successor at the RBI, Manmohan Singh, who had been the Governor of the RBI from 1982 to 1985. Singh had just taken over as the Chairman of the University Grants Commission (UGC) in March 1991. He was pulled out of there and made the Finance Minister of India. And thus started Singh’s second career. Like Lalu, Singh’s career got a second life.
And he, like Lalu, before him went from strength to strength and finally became the Prime Minister of India. A few days ago, Mamata Banerjee had even proposed his name for President. He would make for an excellent President given that the Indian President doesn’t really do anything, except what the government (in this case Sonia) wants him to.
If Pratibha Patil, who no one had ever heard of, could become the President of India, so can the much more loyal Manmohan. He fits all the parameters Sonia Gandhi is looking for in a President. But the trouble, of course, is she wants the same parameters in her Prime Minister as well. And he can’t be at two places at the same time. So Singh’s name as a presidential candidate has been rejected by the Congress party. It would have been a rather glorious end to an “illustrious” career.
The irony
However what is ironic is that a man, who once spearheaded the economic reform process in India, has now totally withdrawn himself from the same. In fact, at times one wonders whether it is even a priority with him and his government? Now that Pranab Mukherjee is leaving the finance ministry for Rashtrapati Bhawan, we will find out what Manmohan has in store.
There has hardly been any response from the UPA government to the recent low GDP growth rate number of 5.3 percent for the period between January and March 2012. Pranab Mukherjee has blamed the slow growth on the problems in Greece in particular and Europe in general. This is a typical Lalu response where the old adage “if you can’t convince them, confuse them” is at work. The problems of India are not because of problems in Greece or Europe, but because of the economic policies of the Manmohan Singh-led UPA government. (It’s not Greece: Cong policies responsible for rupee crash).
As The Economist puts it, “India’s slowdown is due mainly to problems at home and has been looming for a while. The state is borrowing too much, crowding out private firms and keeping inflation high. It has not passed a big reform for years. Graft, confusion and red tape have infuriated domestic businesses and harmed investment. A high-handed view of foreign investors has made a big current-account deficit harder to finance, and the rupee has plunged.”
In fact, there is a state of total denial within the UPA that there are serious economic problems facing India. The spin-doctors of UPA are even working overtime to sell the country that famous song from 3 Idiots “All is Well“. On a recent TV show, Montek Singh Ahulwalia, the deputy chairman of the Planning Commission, kept insisting that a 7 percent economic growth rate was a given. As it turned out the GDP growth rate fell to 5.3 percent.
Economic development doesn’t matter
The way the UPA government has been working over the last few years, it is very easy to conclude that economic development of this country isn’t really top of the agenda. Like was the case with Lalu Yadav.
The solutions to the problems are simple and largely agreed upon by everyone who has an informed opinion on the issue. As The Economist puts it, “The remedies, agreed on not just by foreign investors and liberal newspapers but also by Manmohan Singh’s government are blindingly obvious. A combined budget deficit of nearly a tenth of GDP must be tamed, particularly by cutting wasteful fuel subsidies. India must reform tax and foreign-investment rules. It must speed up big industrial and infrastructure projects. It must confront corruption. None of these tasks is insurmountable. Most are supposedly government policy.”
But then there is hardly any policy coming out of the government. So what is top of the agenda? To stay in power and enjoy its fruits? And by the time the 2014 elections come around, set the stage ready for Rahul Gandhi to take over? But the question that crops up here is this: like Lalu, does the Manmohan Singh-led UPA have a MY formula? And even if it does have a formula, will it work?
Lalu found out in 2005 that formulas become useless over a period of time. “We could not make it because of overconfidence and division in Muslim-Yadav (votes),” Lalu told India Today magazine after his defeat to Nitish Kumar in the 2005 election.
Overconfidence is the word the Manmohan Singh led UPA needs to watch out for.
(The article originally appeared on www.firstpost.com on June 16,2012. http://www.firstpost.com/politics/is-manmohan-following-lalus-no-growth-bihar-strategy-345933.html)
(Vivek Kaul is a writer and can be reached at [email protected])
Congress
Pranab Mukherjee does a Paulo Coelho
Vivek Kaul
The rating agency Standard and Poor’s(S&P) has warned that India could lose its investment grade credit rating. In a report titled Will India Be the First BRIC Fallen Angel?, the rating agency said “Slowing GDP growth and political roadblocks to economic policymaking could put India at risk of losing its investment-grade rating.”
The agency revised its outlook on India’s ‘BBB-‘ long-term sovereign credit rating to negative from stable. What this means is that India runs the risk of losing its investment grade credit rating and being rated as speculative or junk.
Let us try and understand what this really means for India.
What is investment grade?
In 1970, the Penn Railroad, the largest railroad in the United States, went bankrupt. This was something that the rating agencies did not foresee. One of the repercussions of this bankruptcy was that the Securities and Exchange Commission (SEC, the American equivalent of the Indian Sebi) decided to penalize brokers who held bonds of companies that were less than investment grade. But who would decide what was investment grade?
As Roger Lowenstein writes in an article titled Triple-A Failure “This prompted a question: investment grade according to whom? The SEC opted to create a new category of officially designated rating agencies, and grandfathered the big three – S&P, Moody’s and Fitch…Bank regulators issued similar rules for banks. Pension funds, mutual funds, insurance regulators followed…Many classes of investors were now forbidden to buy non investment-grade bonds at all”.
Every rating agency follows different ratings. The rating agency Moody’s has 21 different type of ratings of which the top 10 are deemed to be investment grade. The remaining 11 are deemed to be speculative by the rating agency and “junk” by the market.
S&P has 12 different level of ratings of which the top 5 are deemed to be investment grade. India’s rating is BBB-, which is the last rating in the ratings which are deemed to be investment grade. If India’s rating is downgraded, then the next rating is BB+. S&P defines it as a rating which is “considered highest speculative grade by market participants”. Hence BB+ is the first rating at the junk level. The ratings are essentially meant to be an estimate of probabilities. Hence, the bonds of a country which has a BB+ rating are expected to default more than the bonds of a country which has a BBB-rating, thus making them more risky.
What will be the impact if India gets downgraded?
One clear impact will be foreign investors who are not allowed to invest in non-investment grade securities staying away from India. This would mean that pension funds and other long term funds will stay away from India. It could also mean that for foreign investors who have investments in India exiting their positions and the stock market might go down in the days to come. This after the brief rally it has seen recently in expectation of an interest rate cut by the Reserve Bank of India.
The way foreign investors think about India is very important in deciding how well the Indian stock market performs. Since the beginning of the year foreign institutional investors have been net buyers (the difference between what they have bought and what they have sold) of stocks to the extent of Rs 34,551.33 crore. During the same period the domestic institutional investors have been net sellers of stocks to the extent of Rs 18,666.06 crore.
This buying by the foreign investors is the major reason behind the BSE Sensex, India’s premier stock market index, giving a return of 7.85% since the beginning of the year. The threat of downgrade to junk status obviously does not put India in a good light in the eyes of the foreign investors. Given this, the stock market is likely to go down, and bring down the overall economic confidence in the country as well. It would also mean that Indian corporates looking to raise money from abroad would have to pay a higher rate of interest.
The bond market in India will largely remain unaffected because it doesn’t have much foreign presence.
The Azhar Syndrome
But the threat of a downgrade by S&P according to me is a smaller worry than the Azhar syndrome. So what is the Azhar syndrome? The term was first used in a report of the name brought out by First Global more than three years back in March 2009. As the report pointed out: “The Azhar Syndrome is all about Azhar… the kid from the slums in Slumdog Millionaire. He flew to LA for the Oscars, slept on clean sheets in an air-conditioned hotel room, for the first time (and possibly the last time)…came to his Bombay slum home…and moaned to the press “It is so hot here, and the mosquitoes…I can’t sleep”. He is finished. A few nights in a clean hotel room, and the guy can’t adjust back to the reality of his slum existence.”
Like Azhar assumed that the “five-day” party that he had in Los Angeles would continue forever, so has the Congress Party led United Progressive Alliance (UPA assumed that all is well and the economic growth that India saw for the last few years will continue forever on its own. India enjoyed a GDP growth averaging 8.7% during 2004-2008 and 7.8% during 2009-2011.
Pranab Mukherjee, the finance minister, rejected the threat of the S&P downgrade. In a press release said that the Government is fully seized of the current situation and he is confident that there will be a turnaround in our growth prospects in the coming months. Mukherjee expects the Indian economy to grow by 7% in this financial year. “A reversal of interest rate cycle, weak crude prices and a normal monsoon were likely to improve the economic conditions and the slowdown would not be as sharp as widely feared, and that the economy would grow closer to 7 percent this fiscal,” Mukherjee told a conference of chief commissioners and directors general of Income Tax on June 11,2012.
The things that Mukjerhee expects will help India grow at 7% are things he has no control over. This is the Azhar syndrome, which has plagued the Congress party led UPA for a while now, at work. The confidence that come what may, economic growth will happen continue on its own. Mukherjee and the UPA seem to be big believers in what Paulo Cohelo wrote in the bestselling The Alchemist – A Fable About Following Your Dream “Here is one great truth on this planet: whoever you are, or whatever it is that you do, when you really want something, it’s because that desire originated in the soul of the universe. It’s your mission on earth… And, when you want something, all the universe conspires in helping you to achieve it.”
The world might conspire to give India its economic growth. Interest rates might fall. Oil prices might fall. And the country might have a normal monsoon. But this is no way of running a country.
And the assumption that economic growth will happen because Mukherjee and his ilk say that it will happen, is clearly worrying. As Ruchir Sharma writes in his recent boo k Breakout Nations – In Pursuit of the Next Economic Miracles: “India is already showing some of the warning signs of failed growth stories, including early-onset of confidence.”
To conclude
Hardly any constructive steps have been taken to revive economic growth which is falling. Just talking about growth does not create economic growth. The solutions to the economic problems currently facing India are simple and largely agreed upon by everyone who has an informed opinion on the issue. As the Economist put it in a recent article titled Farewell to Incredible India “The remedies, agreed on not just by foreign investors and liberal newspapers but also by Manmohan Singh’s government, are blindingly obvious. A combined budget deficit of nearly a tenth of GDP must be tamed, particularly by cutting wasteful fuel subsidies. India must reform tax and foreign-investment rules. It must speed up big industrial and infrastructure projects. It must confront corruption. None of these tasks is insurmountable. Most are supposedly government policy.”
But there isn’t much hope going around. As the S&P report explains: “The crux of the current political problem for economic liberalization is, in our view, the nature of leadership within the central government, not obstreperous allies or an unhelpful opposition. The Congress party is divided on economic policies. There is substantial opposition within the party to any serious liberalization of the economy. Moreover, paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no Cabinet position, while the government is led by an unelected prime minister, Manmohan Singh, who lacks a political base of his own.”
(The article originally appeared at www.firstpost.com on June 6,2012. http://www.firstpost.com/economy/sp-downgrade-and-indias-return-to-slumdog-status-340605.html)
(Vivek Kaul is a writer and can be reached at [email protected])
What the BJP can learn from Coca Cola?
Vivek Kaul
It was October 1990. I was thirteen. In a pre cable TV, multiplexes and mall era, just about the only thing that got a teenager in a small town excited, was the twice a week Chitrahar on Wednesdays and Fridays, broadcast by Delhi Doordarshan.
Unless of course there was a cricket match on! But cricket was not played as often as it is today. And not everything was broadcast on the state owned Doordarshan.
Hence it was very exciting when Lal Krishna Advani arrived late one night to stay “overnight” in the guest house in the colony I lived in. Advani, during those days, was going around the country as a part of what he and the Bhartiya Janata Party (BJP) called the rath yatra.
Early next morning, before he was supposed to leave, a small crowd which included me had gathered in front of the guest house. He came out and was requested to speak a few words. I don’t remember anything of what he said except the last line, which was “saugandh Ram ki khaate hain, mandir wohin banayenge”.
He was out of the place in five minutes. But the crowd that had gathered continued to mingle around. Some were happy at having seen him. Some were amazed to know that his rath wasn’t actually one. Some women spoke about the glow Advani ji had on his face. And some others were worried. “Mandir banega ki nahi?” they asked.
I pretty much had the same feeling as everyone else, but what I was most happy about was the fact that I would be a minor celebrity in the school next day, having seen Advani when none of my classmates had.
Advani was arrested a few days later before the rath yatra could enter Uttar Pradesh. As he writes in his autobiography My Country My Life “My yatra was scheduled to enter Deoria in Uttar Pradesh on 24 October. However, as I had anticipated, it was stopped at Samastipur in Bihar on 23 October and I was arrested by the Janata Dal government in the state then headed by Laloo Prasad Yadav (sic). I was taken to an inspection bungalow of the irrigation department at a place called Massanjore near Dumka on the Bihar-Bengal border (Dumka now comes under the state of Jharkhand).”
We all know what happened in the aftermath of the rath yatra. But as I grew older, I kept asking myself, why did Advani say what he did? Why was it so important to build a temple there? Didn’t the country have bigger issues which needed to be sorted out first? And so on.
Political party as a brand
All my questions were answered the day I realised that every political party is a brand and a brand needs to stand for something. It needs a story that can be told to people, so that people can go buy the brand by supporting it and by voting for it.
In the aftermath of Indira Gandhi’s assassination in 1984, the Congress Party had swept the Lok Sabha elections, with the BJP winning only two seats. Given the sorry performance the party needed to stand for something in the minds of the Indian voter.
Brand BJP was built on the war cry of “saugandh Ram ki khaate hain mandir wohin banayenge”. This ensured that the party was able to increase the number of seats in the Lok Sabha from 2 in 1984, to 88 in 1989 and 118 in 1991.
The party espoused for causes like making temples in Ayodhya, Kashi and Mathura. It talked about banning cow slaughter, having a uniform civil code, and doing away with the Article 370, that gives special status to the state of Jammu and Kashmir. All this was music to the ears of voters across Northern and Western India and the party catapulted from being a political front of the Rashtriya Swayamsevak Sangh (RSS) to having an identity of its own.
BJP’s story was that it stood for the cause of Hindus and Hindutva. And it was not the only political party that came with a story attached to it. Almost every political party that has risen in India in the last three to four decades has had a story attached to it.
The Kanshi Ram story
Kanshi Ram launched the Dalit Soshit Samaj Sangharsh Samiti or DS4 as it was more popularly called, with the war cry “Thakur, Brahmin, Bania Chhod, Baki Sab Hain DS4.” This left no doubt in anybody’s mind that Kanshi Ram and DS4 stood for everyone who wasn’t an upper caste.
Kanshi Ram probably realised the power of the slogan he had hit upon. He came up with another slogan along similar lines when he launched the Bahujan Samaj Party(BSP). “Tilak Tarazu aur Talwaar, inko maaro joote chaar” was the rallying cry of the BSP (with Tilak, Tarazu and Talwar being the representation of the Brahman, Bania and Thakur castes, the upper castes).
Or let’s take the case of Left Front in West Bengal. The front which comprised of various communist parties stood for what the Sonia Gandhi led UPA calls the aam aadmi. It positioned itself as being pro-poor and anti big business. When the Left Front first came to power, share croppers where handed over land after taking it over from wealthy landlords. Teak trees were planted in front of homes by Left Front members where a girl child was born, so that the tree could be cut when she was of marriageable age and money for the wedding expenses could be raised.
In the late seventies and early eighties the Left brand also stood for “trade unions” which bargained hard in the interest of the workers. This over the years ensured that most industrialists shut shop and left for other parts of the country. But this didn’t really have any impact on the voter base of the Left Front which remained committed because what the Front was doing was in line with the story it had sold to the voters.
Why the story is important
The story that a political party sells to its voters is very important and it should hold for a very long period of time. Take the case of Janata Dal which was formed by the merger of the various factions of the erstwhile Janata Party, which were the Lok Dal, Congress (S) and the VP Singh led Jan Morcha.
The story that the party successfully sold to the voters was that it would introduced 27.5% reservation for other backward classes (OBCs) in government jobs, as had been proposed by the Mandal Commission.
The story was lapped by the votes and the party won 142 seats in the 1989 Lok Sabha elections.
Despite student protests erupting all across the country, starting with Rajiv Goswami burning himself in front of Deshbandu College in New Delhi, reservations were introduced. No political party could be seen going against this legislation.
The trouble was once Mandal Commission became a reality what did the Janata Dal stand for in the mind of the voter? Nothing. This soon led to the regional satraps forming their own parties like the Mulayam Singh Yadav led Samajwadi Party in Uttar Pradesh, Lalu Prasad Yadav led Rashtriya Janata Dal in Bihar and the Nitish Kumar-George Fernandes led Samta Party also in Bihar.
The end of Janata Dal led to the coining of one of the most memorable though underrated slogans in Indian politics: “Thakur buddhi, Yadav bal, jhandu ho gaya Janta Dal.” (where thakur was in reference to VP Singh who was a rajput).
Hence a political party needs to stand for something in the mind of the voter. If it doesn’t it meets the fate of a party like Janata Dal.
If it ain’t broke don’t fix it
Buddhadeb Bhattacharya became the Chief Minister of West Bengal in 2000, taking over after Jyoti Basu had been the Chief Minister for 23years. Bhattacharya tried to get big business to come back to Kolkata, so that jobs could be created.
But the trouble was Bengal was not a state used to the ways of professional business. If BPOs had to set shop then they had to work every day their foreign clients were working. So was the case with IT companies. But in a state where bandhs were way of life, how would that be possible?
Buddha Babu asked his party carder not to disturb BPO employees on their way to work on “bandh” days. This was the first dint to the Left brand. Then the heavy industry companies wanted to set shop, given that labour in Bengal was cheaper than other parts of the country and the government was ready to welcome them.
This was where all the trouble started. Almost all land in Bengal is agriculture land. And every time an industrialist wants to set shop it leads to some farmers being put out of job. Things escalated when the party carder in Nandigram resorted to violence against farmers who were protesting. The same was the case with Singur, where the Tata Nano plant was supposed to come up.
When a communist party (or rather parties) start beating up farmers, it need not be said that it does do any good to the identity and brand and the story they have carefully cultivated over the years.
This in no way means that industrialization is not important or should not have been pursued by the Left Front government, but it was definitely not done in the way it was. This of course went totally against the anti industry image that the Left Front carried in the minds of people. The same Left Front whose trade unions went cholbe na cholbe na against industries and industrialists was now catering to their demands, felt people of the state. Communists had become capitalists. The practitioners of all that Karl Marx had espoused for were now vouching for the principles of Adam Smith.
There was clearly a branding problem. The gap was filled by Mamata Banerjee who now stands for everything that the Left Front had stood for, warts and all.
India shining
The year was 2004 and I was travelling in a local bus in Hyderabad, excited about the new mobile phone I had bought. The phone suddenly buzzed and it was a Delhi number, the first call on my new mobile. I picked up the call and heard the voice on the other end say “main Atal Bihari Vajpayee bol raha hoon”.
It took me a few seconds to realize that it was an automated call in the voice of the Prime Minister of the country asking the voters to vote for the BJP led National Democratic Alliance (NDA) in the upcoming Lok Sabha elections.
The party had decided to abandon its soft-Hindutva branding and decided to go in for what it thought was a more mass market campaign of “India shining”.
The party lost the elections and has been in opposition ever since.
What BJP can learn from Coca Cola
Donald R Keough, a former president of the Coca-Cola Company, in his book The Ten Commandments for Business Failure elaborates on what happens when the story associated with a brand is changed.
A slew of research and consultants told the top brass at Coca-Cola that people were looking for more sweetness in the product. This led to the launch the ‘New Coke’.
What followed was a disaster that went totally against what the consultants had predicted. People did not like the tinkering. And some of them started to hoard old coke, before the stocks ran out..
One day an old woman called a Coke call centre. Here is how Keough recounts this touching story.
. “It was an eighty-five year woman who convinced me we had to do something more than stay course. She had called the company in tears from a retirement home in Covina, California. I happened to be visiting the call centre and took the call. “You’ve taken away my Coke,” she sobbed. “When was the last time you had Coke?” I asked. “Oh, I don’t know. About twenty, twenty-five years ago.” “Then why are you so upset?” I asked. “Young man, you are playing around with my youth and you should stop it right now. Don’t you have any idea what Coke means to me?”
This made the top brass at Coke realise that they are not dealing with a taste or a marketing issue, but the idea or the story behind Coca-Cola. It was the “real-thing” and the consumers did not want any fiddling around with it. Immediately a decision was made to bring back the old Coke as “Coca-Cola Classic”.
To conclude
As marketing guru Seth Godin writes in All Marketers are Liars “Great stories happen fast. They engage the consumer the moment the story clicks into place. First impressions are more powerful than we give them credit for.”
Given this getting rid of first impressions in the minds of the voter is very difficult. This does not apply for the Congress Party, which has been around for so long that it doesn’t really stand for anything and hence can change forms like a chameleon.
So if the BJP has to pose any sort of challenge to the Congress led United Progressive Alliance (UPA) in the next Lok Sabha elections it needs to go back to what it has always stood for in the mind of the voter: Hindutva. Like Coca Cola, it has to go back to stand for what it used to in the mind of the voter.
What it needs to decide on is the degree of Hindutva? Does it want to follow the hard line approach that it did in the late 1980s and the early 1990s with slogans like “ye to kewal jhaanki hai, kaashi mathura baaki hai” or does it want to follow the soft Hindutva strategy that it did when Atal Bihari Vajpayee was at his peak.
Given this, there is no one better than leader than Narendra Modi who can project the attributes of the pro Hindutva line. The trouble of course with Modi is that he comes across as a hardliner. Hence it’s important for Modi and the BJP that the spin-doctors of the party get to work immediately trying to soften up his image, so that his acceptability goes up across sections he is not currently popular with.
(The article originally appeared at www.firstpost.com on June 6,2012. http://www.firstpost.com/politics/political-brands-what-the-bjp-can-learn-from-coca-cola-333964.html)
(Vivek Kaul is a writer and can be reached at [email protected])
Sonia’s UPA is taking us to new ‘Hindu’ rate of growth
Vivek Kaul
Raj Krishna, a professor at the Delhi School of Economics, came up with the term “Hindu rate of growth” to refer to Indian economy’s sluggish gross domestic product (GDP) growth of 3.5% per year between the 1950s and the 1980s. The phrase has been much used and abused since then.
A misinterpretation that is often made is that Krishna used the term to infer that India grew slowly because it was a nation dominated by Hindus. In fact he never meant anything like that. Krishna was a believer in free markets and wasn’t a big fan of the socialistic model of development put forward by Jawahar Lal Nehru and the Congress party.
In fact he realised over the years looking at the slow economic growth of India that the Nehruvian model of socialism wasn’t really working. This was visible in the India’s secular or long term economic growth rate which averaged around 3.5% during those days.
The word to mark here is “secular”. The word in its common every day usage refers to something that is not specifically related to a particular religion. Like our country India. One of the fundamental rights Indians have is the right to freedom of religion which allows us to practice and propagate any religion.
But the world “secular” has another meaning. It also means a long term trend. Hence when economists like Krishna talk about the secular rate of growth they are talking about the rate at which a country like India has grown year on year, over an extended period of time. And this secular rate of growth in India’s case was 3.5%. This could hardly be called a rate of growth for a country like India which was growing from a very low base and needed to grow at a much faster pace to pull its millions out of poverty.
So Krishna came up with the word “Hindu” which was the direct opposite of the word “secular” to take a dig at Jawahar Lal Nehru and his model of development. Nehru was a big believer in secularism. Hence by using the word “Hindu” Krishna was essentially taking a dig on Nehru and his brand of economic development, and not Hindus.
The policies of socialism and the license quota raj followed by Nehru, his daughter Indira Gandhi and grandson Rajiv ensured that India grew at a very slow rate of growth. While India was growing at a sub 4% rate of growth, South Korea grew at 9%, Taiwan at 8% and Indonesia at 6%. These were countries which were more or less at a similar point where India was in the late 1940s.
The Indian economic revolution stared in late July 1991, when a certain Manmohan Singh, with the blessings of PV Narsimha Rao, initiated the economic reform process. The country since then has largely grown at the rates of 7-8% per year, even crossing 9% over the last few years.
Over the years this economic growth has largely been taken for granted by the Congress led UPA politicians, bureaucrats and others in decision making positions. Come what may, we will grow by at least 9%. When the growth slipped below 9%, the attitude was that whatever happens we will grow by 8%. When it slipped further, we can’t go below 7% was what those in decision making positions constantly said. On a recent TV show Montek Singh Ahulwalia, the Deputy Chairman of the Planning Commission, kept insisting that a 7% economic growth rate was a given. Turns out it’s not.
The latest GDP growth rate, which is a measure of economic growth, for the period of January to March 2012 has fallen to 5.3%. I wonder, what is the new number, Mr Ahulwalia and his ilk will come up with now. “Come what may we will grow at least by 4%!” is something not worth saying on a public forum.
But chances are that’s where we are headed. As Ruchir Sharma writes in his recent book Breakout Nations – In Pursuit of the Next Economic Miracles “India is already showing some of the warning signs of failed growth stories, including early-onset of confidence.”
The history of economic growth
Sharma’s basic point is that economic growth should never be taken for granted. History has proven otherwise. Only six countries which are classified as emerging markets by the western world have grown at the rate of 5% or more over the last forty years. These countries are Malaysia, Singapore, South Korea, Taiwan, Thailand and Hong Kong. Of these two, Hong Kong and Taiwan are city states with a very small area and population. Hence only four emerging market countries have grown at a rate of 5% or more over the last forty years. Only two of these countries i.e. Taiwan and South Korea have managed to grow at 5% or more for the last fifty years.
“In many ways “mortality rate” of countries is as high as that of stocks. Only four companies – Procter & gamble, General Electric, AT&T, and DuPont- have survived on the Dow Jones index of the top-thirty U.S. industrial stocks since the 1960s. Few front-runners stay in the lead for a decade, much less many decades,” writes Sharma.
The history of economic growth is filled with examples of countries which have flattered to deceive. In the 1950s and 1960s, India and China, the two biggest emerging markets now, were struggling to grow. The bet then was on Iraq, Iran and Yemen. In the 1960s, the bet was Philippines, Burma and Sri Lanka to become the next East Asian tigers. But that as we all know that never really happened.
India is going the Brazil way
Brazil was to the world what China is to it now in the 1960s and the 1970s. It was one of the fastest growing economies in the world. But in the seventies it invested in what Sharma calls a “premature construction of a welfare state”, rather than build road and other infrastructure important to create a viable and modern industrial economy. What followed was excessive government spending and regular bouts of hyperinflation, destroying economic growth.
India is in a similar situation now. Over the last five years the Congress party led United Progressive Alliance is trying to gain ground which it has lost to a score of regional parties. And for that it has been very aggressively giving out “freebies” to the population. The development of infrastructure like roads, bridges, ports, airports, education etc, has all taken a backseat.
But the distribution of “freebies” has led to a burgeoning fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
For the financial year 2007-2008 the fiscal deficit stood at Rs 1,26,912 crore against Rs 5,21,980 crore for the current financial year. In a time frame of five years the fiscal deficit has shot up by nearly 312%. During the same period the income earned by the government has gone up by only 36% to Rs 7,96,740 crore. The huge increase in fiscal deficit has primarily happened because of the subsidy on food, fertilizer and petroleum.
This has meant that the government has had to borrow more and this in turn has pushed up interest rates leading to higher EMIs. It has also led to businesses postponing expansion because higher interest rates mean that projects may not be financially viable. It has also led to people borrowing lesser to buy homes, cars and other things, leading to a further slowdown in a lot of sectors. And with the government borrowing so much there is no way the interest rate can come down.
As Sharma points out: “It was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period…If the government continues down this path India, may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country’s economic boom.”
Where are the big ticket reforms?
India reaped a lot of benefits because of the reforms of 1991. But it’s been 21 years since then. A new set of reforms is needed. Countries which have constantly grown over the years have shown to be very reform oriented. “In countries like South Korea, China and Taiwan, they consistently had a plan which was about how do you keep reforming. How do you keep opening up the economy? How do you keep liberalizing the economy in terms of how you grow and how you make use of every crisis as an opportunity?” says Sharma.
India has hardly seen any economic reform in the recent past. The Direct Taxes Code was initiated a few years back has still not seen the light of day, but even if it does see the light of day, it’s not going to be of much use. In its original form it was a treat to read with almost anyone with a basic understanding of English being able to read and understand it. The most recent version has gone back to being the “Greek” that the current Income Tax Act is.
It has been proven the world over that simpler tax systems lead to greater tax revenues. Then the question is why have such complicated income tax rules? The only people who benefit are CAs and the Indian Revenue Service officers.
Opening up the retail sector for foreign direct investment has not gone anywhere for a long time. This is a sector which is extremely labour intensive and can create a lot of employment.
What about opening up the aviation sector to foreigners instead of pumping more and more money into Air India? As Warren Buffett wrote in a letter to shareholders of Berkshire Hathaway, the company whose chairman he is, a few years back “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down…The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”
If foreigners want to burn their money running airlines in India why should we have a problem with it?
The insurance sector is bleeding and needs more foreign money, but there is a cap of 26% on foreign investment in an insurance company. Again this limit needs to go up. The sector very labour intensive and has potential to create employment. The same is true about the print media in India.
The list of pending economic reforms is endless. But in short India needs much more economic reform in the days to come if we hope to grow at the rates of growth we were growing.
To conclude
Raj Krishna was a far sighted economist. He knew that the Nehruvian brand of socialism was not working. It never has. It never did. And it never will. But somehow the Congress party’s fascination for it continues. And in continuance of that, the party is now distributing money to the citizens of India through the various so called “social-sector” schemes. If economic growth could be created by just distributing money to everyone, then India would have been a developed nation by now. But that’s not how economic growth is created. The distribution of money creates is higher inflation which leads to higher interest rates and in turn lower economic growth. Also India is hardly in a position to become a welfare state. The government just doesn’t earn enough to support the kind of money it’s been spending and plans to spend.
Its time the mandarins who run the Congress party and effectively the country realize that. Or rate of growth of India’s economy (measured by the growth in GDP) will continue to fall. And soon it will be time to welcome the new “Hindu” rate of economic growth. And how much shall that be? Let’s say around 3.5%.
(The article originally appeared at www.firstpost.com on June 1,2012. http://www.firstpost.com/politics/sonias-upa-is-taking-us-to-new-hindu-rate-of-growth-328428.html)
(Vivek Kaul is a writer and can be reached at [email protected])
It’s not Greece: Cong policies responsible for rupee crash
Vivek Kaul
All is well in India under the rule of the “Gandhi” family. That’s what the Finance Minister Pranab Mukjerjee has been telling us. And the rupee’s fall against the dollar is primarily because of problems in Greece. And Spain. And Europe. And other parts of the world. As I write this one dollar is worth around Rs 55 (actually Rs 54.965 to be precise, but we can ignore a few decimal points). The rupee has fallen around 22% in value against the dollar in the last one year.
The larger view among analysts and experts who track the foreign exchange market is that a dollar will soon be worth Rs 60. And by then there might be problems in some other part of the world and the rupee’s fall might be blamed on the problems there. As a late professor of mine used to say, with a wry smile on his face “Since we are all born on this mother earth, there is some sort of symbiosis between us.”
So let’s try and understand why the underlying logic to the rupee’s fall against the dollar is not as simple as it is made out to be.
Dollar is the safe haven
As economic problems have come to the fore in Europe (As I have highlighted in If PIIGS have to fly they will have to exit the Euro http://www.firstpost.com/world/if-piigs-have-to-fly-they-will-need-to-exit-the-euro-314589.html) the large institutional investors have moved out of the Euro into the dollar. A year back one dollar was worth €0.71, now it’s worth €0.78. So the dollar has gained against the Euro, no doubt.
But the argument being made is that this is global trend and that dollar has gained in value against lot of other major currencies. Is that true? A year back one dollar was worth 0.88 Swiss Francs, now it is worth 0.93 Swiss Francs. So it has gained in value against the Swiss currency.
What about the British pound? A year back the dollar was worth £0.62, now it’s worth £0.63. Hence the dollar has barely moved against the pound. A dollar was worth around 82 Japanese yen around a year back. Now it’s worth around 79.5yen. It has lost value against the Japanese yen. The dollar has gained in value against the Brazilian Real. It was worth around 1.63real a year back. It is now worth over 2 real. So yes, the dollar has gained in value against the other currencies but not against all currencies.
What is ironic is that the world at large is considering dollar to be a safe haven and moving money into it, by buying bonds issued by the American government. The debt of the US government is now around $14.6trillion, which is almost equal to the US gross domestic product of $15trillion. But since everyone considers it to be a safe haven it has become a safe haven.
But let’s get back to the point at hand. So, not all currencies have lost value against the dollar and those that have lost value, have lost it in varying degrees. This tells us that there are other individual issues at play as well when it comes to currencies losing value against the dollar.
What is happening in India?
The Indian government has been spending much more money than it has been earning over the last few years. In other words the fiscal deficit of the government has been on its way up. For the financial year 2007-2008 (i.e. the period between April 1,2007 and March 31, 2008) the fiscal deficit stood at Rs 1,26,912 crore. This shot up to Rs 5,21,980 crore for the financial year 2011-2012. In a time frame of five years the fiscal deficit has shot up by nearly 312%. During the same period the income earned by the government has gone up by only 36% to Rs 7,96,740 crore. The fiscal deficit targeted for the current financial year 2012-2013(i.e. between April 1, 2012 and March 31,2013) is a little lower at Rs 5,13,590 crore. The huge increase in fiscal deficit has primarily happened because of the subsidy on food, fertilizer and petroleum.
The tendency to overshoot
Also it is highly likely that the government might overshoot its fiscal deficit target like it did last year. In his budget speech last year Pranab Mukherjee had set the fiscal deficit target for the financial year 2011-2012, at 4.6% of GDP. He missed his target by a huge margin when the real number came in at 5.9% of GDP. The major reason for this was the fact that Mukherjee had underestimated the level of subsidies that the government would have to bear. He had estimated the subsidies at Rs 1,43,750 crore but they ended up costing the government 50.5% more at Rs 2,16,297 crore.
Generally all the three subsidies of food, fertilizer and petroleum are underestimated, but the estimates on the oil subsidies are way off the mark. For the year 2011-2012, oil subsidies were assumed to be at Rs 23,640crore. They came in at Rs 68,481 crore. This has been the case in the past as well. In 2010-2011 (i.e. the period between April 1, 2010 and March 31, 2011) he had estimated the oil subsidies to be at Rs 3108 crore. They finally came in 20 times higher at Rs 62,301 crore. Same was the case in the year 2009-2010 (i.e. the period between April 1, 2009 and March 31, 2010). The estimate was Rs 3109 crore. The real bill came in nearly eight times higher at Rs 25,257 crore (direct subsidies + oil bonds issued to the oil companies).
The increasing fiscal deficit
The fiscal deficit has gone up over the years primarily because an increase in expenditure has not been matched with an increase in revenue. Revenue for the government means various forms of taxes and other forms of revenue like selling stakes in public sector enterprises.
The fact of the matter is that Indians do not like to pay income tax or any other kind of tax. This a throw back from the days of the high income tax rate in the 60s, 70s and the 80s, when a series of Finance Ministers (from C D Deshmukh to Yashwantrao Chavan and bureaucrats like Manmohan Singh) implemented high income tax rates in the hope that taxing the “rich” would solve all of India’s problems.
In the early 1970s the highest marginal rate of tax was 97%. The story goes that JRD Tata sold some property every year to pay taxes (income tax plus wealth tax) which worked out to be more than his yearly income. Of course everybody was not like the great JRD, and because of the high tax rates implemented by various Congress governments over the years, a major part of the Indian economy became black. Dealings were carried out in cash. Transactions were made but they were never recorded, because if they were recorded tax would have to be paid on them.
A series of exemptions were granted to corporate India as well, and companies like Reliance Industries did not pay any income tax for years. As a result of this India and Indians did not and do not like paying tax.
Various lobbies have also emerged which have ensured that those that they represent are not taxed. As Professor Amartya Sen wrote in a column in The Hindu earlier this year “It is worth asking why there is hardly any media discussion about other revenue-involving problems, such as the exemption of diamond and gold from customs duty, which, according to the Ministry of Finance, involves a loss of a much larger amount of revenue (Rs.50,000 crore per year)”.
As he further points out “The total “revenue forgone” under different headings, presented in the Ministry document, an annual publication, is placed at the staggering figure of Rs.511,000 crore per year. This is, of course, a big overestimation of revenue that can be actually obtained (or saved), since many of the revenues allegedly forgone would be difficult to capture — and so I am not accepting that rosy evaluation.”
But even with the overestimation the fact of the matter is that a lot of tax that can be collected from those who can pay is not being collected, and that of course means a higher fiscal deficit.
The twin deficit hypothesis
The hypothesis basically states that as the fiscal deficit of the country goes up its trade deficit (i.e. the difference between its exports and imports) also goes up. Hence when a government of a country spends more than what it earns, the country also ends up importing more than exporting.
But why is that? The fiscal deficit goes up because the increase in expenditure is not matched by an increase in taxes. This leaves people with a greater amount of money in their hands. Some portion of this money is used towards buying goods and services, which might be imported from abroad. This leads to greater imports and thus a higher trade deficit. The situation in India is similar. The government of India has been spending more than it has been earning without matching the increase in income with higher taxes, which in turn has led to increasing incomes and that to some extent has been responsible for an increase in Indian imports. But that could have hardly been responsible for the trade deficit of $185billion that India ran in 2011-2012. The imports for the month of April 2012 were at $37.9billion, nearly 54.7% more than the exports which stood at $24.5billion. So the trend has continued even in this financial year.
The golden oil shock
India exports a major part of its oil needs. On top of that it is obsessed with gold. Last year we imported 1000 tonnes of it. Very little of both these commodities priced in dollars is dug up in India. So we have to import them.
This pushes up our imports and makes them greater than our exports. These imports have to be paid for in dollar. When payments are to be made importers buy dollars and sell rupees. When this happens, the foreign exchange market has an excess supply of rupees and a short fall of dollars. This leads to rupee losing value against the dollar. In case our exports matched our imports, then exporters who brought in dollars would be converting them into rupees, and thus there would be a balance in the market. Importers would be buying dollars and selling rupees. And exporters would be selling dollars and buying rupees. But that isn’t happening in a balanced way.
This to some extent explains the current rupee dollar rate of $1 = Rs 55. The Reserve Bank of India does intervene at times to stem the fall of the rupee. This it does by selling dollars and buying rupee. But the RBI does not have an unlimited supply of dollars and hence cannot keep intervening indefinitely.
As mentioned earlier the major part of the trade deficit is because of the fact that we need to import oil. Oil prices have been high for the last few years, though recently they have fallen. Oil is sold in dollars. Hence when India needs to buy oil it needs to pay in dollars. But with the rupee constantly losing value against the dollar, it means that Indian companies have to more per barrel of oil in rupees.
The government of India does not pass on a major part of the increase in the price of oil to the end consumer and hence subsidizes the prices of diesel, LPG, kerosene etc. This means that the oil companies have to sell these products at a loss to the consumer. The government in turn compensates these companies for the loss. This leads to the expenditure of the government going up and hence it incurs a higher fiscal deficit.
No passing the buck
If the government had not subsidized prices of oil products and passed them onto the end consumer, their consumption would have come down. With prices of oil products not rising as much as they should people have not adjusted their consumption accordingly. An increase in price typically leads to a fall in demand. If the increased price of oil had been passed onto the end consumer, the demand for oil would have come down. This would have meant that a fewer number of dollars would have been required to pay for the oil being imported, in turn leading to a lower trade deficit and hence lesser pressure on the rupee-dollar rate.
So let me summarise the argument I am making. The higher fiscal deficit in the form of subsidies has pushed up the trade deficit which in turn has led to rupee losing value against the dollar. The solution is to get consumers to pay the “right” price. With this the fiscal deficit can be brought down to some extent. If these products are priced correctly, their consumption is likely to come down as well in the near future, given that their prices will go up. Lower consumption is likely to lead to lower imports and thus a lower trade deficit. A lower trade deficit would also mean that the fall of the rupee against the dollar may stop. This in turn would mean a lower price for the oil we import in rupee terms and that in turn help overall economic growth. A lower fiscal deficit will lead to lower government borrowing and hence lesser “crowding out” and so lower interest rates, which might get corporates and individuals interested in borrowing again.
The long term solution
What has been suggested above is a short term solution, which given the way the Congress led UPA government operates is unlikely to be implemented. The main problem is that while it’s quite a noble idea to provide subsidies in the form of food, fertilizer, kerosene etc to the India’s poor, it has to be matched with an increase in taxes. An increase in income taxes rates isn’t going to help much because only a minuscule portion of India pays income tax (basically the salaried class).
What is needed is to get larger number of people to pay tax to pay for all the subsidies that are doled out. This can be done by simplifying the income tax act. This was tried when the government tried to come up with the Direct Taxes Code(DTC), which was very simple and straightforward and had done away with most exemptions. In its original form the DTC was a pleasure to read. But of course if it had been implemented scores of people who do not pay income tax would have to pay income tax. In its current form the DTC is another version of Income Tax Act.
Another way is to target specific communities of people who do not pay income tax even though they earn a huge amount of money, but all in “black”. For starters the targeting property dealers that line up almost every street in Delhi might be a good idea. Once, people see that the government is serious about collecting taxes, they are more likely to pay up than not. And there is no better way than starting with the capital.
(The article originally appeared at www.firstpost.com on May 23,2012. http://www.firstpost.com/economy/dont-blame-greece-cong-policies-responsible-for-rupees-crash-318280.html)
(Vivek Kaul is a writer and he can be reached at [email protected])