Vivek Kaul
Having grown up on a staple of bad Hindi cinema of the seventies and the eighties, I have always associated people with ‘French’ beards as being villanious. Indeed, this is a stereotype of the worst kind, which I have been unable to get rid off.
But now comes the news that a Delhi court has set aside the closure report of the Central Bureau of Investigation (CBI) on Jagdish Tytler, in connection with the anti-Sikh riots of 1984 and ordered that the case against him be reopened. For those who don’t know, Tytler has had a rather impressive French beard, over the years.
Tytler along with many fellow Congressmen took an active part in inciting the anti-Sikh riots that happened in the aftermath of Indira Gandhi, the then Prime Minister of the country, being assassinated by her Sikh bodyguards on the morning of October 31, 1984.
As Tavleen Singh writes in Durbar “Mrs Gandhi (Indira) had set out of her house at about 9 a.m. And was walking through her garden towards her office, in a bungalow that adjoined her house, when her Sikh bodyguard, Beant Singh, greeted her with his hands joined together. Then he shot her with his pistol. Another bodyguard, Satwant Singh, opened fire with his automatic weapon.”
Gandhi was taken to the All India Institute of Medical Sciences (AIIMS) by her daughter in law Sonia, where she was declared dead.
Indira’s son Rajiv was sworn in as the Prime Minister in the evening of the same day. As Singh writes “We watched him on television. In a calm, emotionless voice, he said India had lost a great leader. Someone who was not just his mother but the mother of the country, or words to that effect. Then he stopped and stared sadly at the camera while Doordarshan showed shots of H.K.L. Bhagat (another Congress leader) and his supporters beating their breasts and shouting, ‘Khoon ka badlka khoon se lenge.’ Blood will be avenged with blood.”
In the environment that evovled the entire community of Sikhs were held responsible for the murder of Indira Gandhi. By the evening of October 31, the violence started. As Ramachandra Guha writes India After Gandhi – The History of World’s Largest Democracy “Everywhere it was Sikhs and Sikhs alone who were the target…In Delhi alone more than a thousand Sikhs perished in the violence…They were murdered by a variety of methods, and often in front of their own mothers and wives. Bonfires were made of the bodies; in one case, a little child was burnt with his father, the perpetrator saying, ‘Ye saap ka bachcha hai, isse bhi khatam karo’ (This offspring of a snake must be finished too).”
And this was not a spontaneous outflow of grief as it would be made out to be. It was mob-violence that was directed at the Sikh community in a cold and calculated way. “The mobs were composed of Hindus who lived in and around Delhi…Often they were led and directed by Congress politicians: metropolitan councillors, members of Parliament, even Union ministers. The Congress leaders promised money and liquor to those willing to do the job; this in addition to whatever goods they could loot. The police looked on, or actively aided the looting and murder.”
Jagdish Tytler was seen inciting one such mob around Gurdwara Pul Bangash near the Azad market in Delhi. Surinder Singh, the Head Granthi of the Gurdwara testified against Tytler on sworn affidavits. “On 1st November 1984 in the morning at 9am a big mob which was carrying sticks, iron rods and kerosene oil attacked the Gurdwara. The crowd was being led by our area Member Parliament of Congress (I) Jagdish Tytler. He incited the crowd to set the Gurdwara on fire and to kill the Sikhs…Five to six policemen were also with the crowd. On incitement by Jagdish Tytler, they attacked the gurdwara and set it on fire.” (Source: Tehelka).
And while Delhi burnt on those first few days of November 1984, Rajiv Gandhi and his ministers, sat on their bums watching the whole show unfold. Senior leaders approached the government to call out the army on the streets. But nothing happened. As Singh writes “But the new Prime Minister did nothing. Not even when senior political leaders like Chandrashekar and (Mahatma) Gandhiji’s grandson, Rajmohan Gandhi, went to the home minister(P V Narsimha Rao) personally to urge him to call out the army for help was anything done in those first three days of November to stop the violence.”
This is something that Guha also writes in India After Gandhi. “There is a large cantonment in Delhi itself, and several infantry divisions within a radius of fifty miles of the capital. The army was put on standby, despite repeated appeals to the prime minister and his home minster P.V.Narsimha Rao, they were not asked to move into action. A show of military strength in the city on the 1st and 2nd would have quelled the riots – yet the order never came.” Doordarshan, the only television channel in the country at that point of time, added fuel to fire by constantly showing crowds baying for the blood of the Sikhs.
A few week’s later in a public speech Rajiv Gandhi justified the pogrom(basically an organised massacre of a particular ethnic group) against Sikhs when he said “When a big tree falls, the earth trembles!”. Years later Sher Singh Sher, a Chandigarh based Sikh made the quip “Were there only Sikhs sitting under that tree?” (Source: The Tribune) Gandhi in several speeches in the months to come even alleged that the same extremist elements who had killed his mother had also engineered the riots.
Rajiv Gandhi like his mother was assassinated seven years later in 1991. Since then the Congress party has moved on and is now in the hands of his widow Sonia and their son Rahul. In December 2007, Sonia Gandhi, called Narendra Modi, the Chief Minister of Gujarat “maut ka saudagar”.
The irony behind Sonia’s statement was that the Congress party had many maut ke saudagars who had gone unpunished for instigating the riots of 1984. It was a situation of the pot calling the kettle black. But that doesn’t mean that nothing happened in Gujarat.
Sonia’s statement was made in the context of the riots that happened in Gujarat in 2002, where more than 2000 Muslims were killed. The riots happened after bogey number S6 of the Sabarmati Express caught fire on February 27,2002, on the outskirts of the Godhra railway station. Fifty eight people died in the fire. The bogey had kar sevaks returning from a yagna in Ayodhya.
As Guha points out “On their way back home by train , these kar sevaks got into a fight with Muslim vendors at the Godhra railway station…Words of the altercation spread; young men from the Muslim neighbourhood outside the station joined in. The kar sevaks clambered back into the train, which started moving as stones were being thrown. However, the train stopped on the outskirts of the station, when a fire broke out in one of its coaches. Fifty eight people perished in the conflagration…Word that a group of kar sevaks had been burnt to death at Godhra quickly spread through Gujarat. A wave of retributory violence followed.”
In fact the behaviour of Modi in the aftermath of the Gujarat riots was very similar to that of Rajiv Gandhi. He justified the violence, like Rajiv Gandhi had, as a spontaneous reaction. He said that the burning of the railway coach at Godhra had led to a ‘chain of action and reaction’.
(The original statement of Modi was in Hindi and was made to Zee News:
Kriya pratikriya ki chain chal rahi hai. Hum chahte hain ki na kriya ho aur na pratikriya…Godhra main jo parson hua, jahan par chalees mahilaon aur bacchon ko zinda jala diya, issey desh main aur videsh main sadma pahunchna swabhavik tha. Godhra ke is ilake ke logon ki criminal tendencies rahi hain. In logon ne pehle mahila tachers ka khoon kiya. Aur ab yeh jaghanya apraadh kiya hai jiski pratikriya ho rahi hai. (A chain of action and reaction is being witnessed now.We feel that there should be no action nor reaction. Day before yesterday in Godhra, the incident in which forty women and children were burnt alive had to naturally evoke a shocking response in the country and abroad. The people in this locality of Godhra have had criminal tendencies. They first killed the women teachers and now this horrifying crime the reaction to which is being witnessed). Source: Narendra Modi – The Man. The Times by Nilanjan Mukhopadhyay).
Guha finds man similarities between the two pogroms, the one against the Sikhs of Delhi in 1984, and the one against the Muslims of Gujarat in 2002. Both the cases started with stray acts of violence for which a generalised revenge was taken. “The Sikhs who were butchered were in no way connected to the Sikhs who killed Mrs Gandhi. The Muslims who were killed by the Hindu mobs were completely innocent of the Godhra crime,” writes Guha.
In both the cases there was a clear breakdown of law and order. More than that graceless statements justifying the riots, were made, one by a serving Prime Minister and another by a serving Chief Minister. And in both the cases, serving ministers, aided the rioters.
But its the final similarity between the two different sets of events that is the most telling, feels Guha. “Both parties, and leaders, reaped electoral rewards from the violence that they had legitimised and overseen. Rajiv Gandhi’s party won the 1984 general election by a large margin, and in December 2002, Narendra Modi was re-elected as the chief minister of Gujarat after his party won a two-thirds majority in the assembly polls,” Guha points out. Modi, the first RSS pracharak to become a chief minister, has won two more polls since then.
To conclude, if justice had been quickly delivered in the 1984 anti-Sikh riots and the Congress leaders who instigated the violence had been jailed, chances are the 1993 Mumbai riots and 2002 Gujarat riots would never have happened. And if they had, they would have happened on a much smaller scale. The original maut ke saudagars of 1984 set the tone for much of what followed.
The article originally appeared on www.firstpost.com on April 11, 2003.
(Vivek Kaul is a writer. He tweets @kaul_vivek)
India
Dear PM, those who live in glass houses don't throw stones at others
The nation came to the realisation yesterday that the Prime Minister Manmohan Singh actually has a voice. And then we all came to the conclusion that just because he decided to speak, he spoke well. One commentator even went onto christen the event as “Manmohan on steroids”.
The part that the media loved the most was when Singh told the Parliament ‘Jo garajte hain, woh baraste nahi(Thunderous clouds do not bring showers)’, a clichéd statement which was supposed to put the Bhartiya Janata Party (BJP), the main opposition party, in its place.
As far as clichés go, I would take this opportunity, to bring to your notice, dear readers, a dialogue written by Akhtar-Ul-Iman and delivered with great panache by Raj Kumar in the Yash Chopra directed Waqt. The line 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).”
Now Singh may not have time to sit through a movie which runs into 206 minutes, given that he is the Prime Minister of the nation, and probably has decisions to make and things to do. But he would be well-advised to watch this 18-second YouTube clip and hopefully come to the realisation that those who live in glass houses, like Singh and his government, do not throw stones at others.
In fact, Singh’s speech to the Parliament yesterday was riddled with many inconsistent and wrong claims. It is a real surprise that the BJP has not caught onto rubbishing the arguments presented by Singh. Let us examine a few claims made by Singh:
Even BIMARU states have also done much better in UPA period than previous period: BIMARU is an acronym used for the states of Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh. These are states which have lagged in economic growth for a long period of time. There has been a recent spurt in their economic growth and this claims Singh has been because of the UPA government.
Three out of the four states (except Rajasthan) have had a non Congress-non UPA government for the entire duration of the UPA rule in Delhi. Rajasthan has had a Congress government since December 2008.
So trying to claim that the growth in these states has been only because of the UPA government is misleading to say the least. The argument is along similar lines where Congress politicians and some experts have tried to claim over and over again that Bihar has grown faster than Gujarat. Yes it has in percentage terms. But what they forget to tell us is that Gujarat is growing on a much higher base, meaning the absolute growth in Gujarat is higher. In fact, it is three times higher than that of Bihar (The entire argument is explained here).
If we look at the MSP across various commodities, they have increased by 50 to 200% since 2004-05: The government offers a minimum support price on various commodities including rice and wheat. At this price, the Food Corporation of India (FCI), or a state agency acting on its behalf, purchase primarily rice and wheat, grown by Indian farmers. The theory behind setting the MSP is that the farmer will have some idea the price he would get when he sells his produce after harvest. What it has led to is that more and more farmers are selling to the government because they have an assured buyer at an assured price. The government now has nearly Rs 60,000 crore of rice and wheat in excess of what it needs to maintain a buffer stock. While the government is hoarding onto more rice and wheat than it needs, there is a shortage of wheat and rice in the open market pushing up their prices and in turn food inflation and consumer price inflation. It has also pushed up food subsidies and fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends. And if the government continues with this policy there are likely to be other negative consequences as well. (The entire argument is explained here)
The current slowdown in industrial growth is a concern: This was the most tepid statement in the entire speech. Is it just a concern? Some of the biggest Indian industrialists have gone on record to say that they would rather invest abroad than in India. As Kumar Manglam Birla recently said in an interview “Country risk for India just now is pretty elevated and chances are that for deployment of capital, you would look to see if there is an asset overseas rather than in India…We are in 36 countries around the world. We haven’t seen such uncertainty and lack of transparency in policy anywhere.” The Birlas have known to be very close to the Congress party for a very long time.
And numbers bear this story. Indian corporates are investing abroad rather than India. In 2001-2002 this number was less than 1% of the gross domestic product (GDP) and currently it stands at 6% of the GDP (Source: This discussion featuring Morgan Stanley’s Ruchir Sharma and the Chief Economic Advisor to the government Raghuram Rajan on the news channel NDTV). So the situation is clearly more than just a concern. If Indian industrialists don’t want to invest in India who else will? Is it time to say good bye to industrial growth? Maybe the Prime Minister has an answer for that.
The economic growth has slowed down in 2012-13, because of the difficult global situation: This is something which the finance minister P Chidambaram also alluded to in his budget speech. What it tells us is that there is very little acknowledgement of mistakes that have been made by this government led by Manmohan Singh over the years.
When India was growing at growth rates of 8% and greater, there was a lot of chest thumping by various constituents of the government, that look we are growing at such a high rate. Now that we are not growing at the same speed its because of a difficult global situation.
Ruchir Sharma in a post budget discussion on the news channel NDTV made a very interesting point. India has consistently been at around 24-26th position among 150 emerging market countries when it comes to economic growth over the last three decades.
We thought we were growing at a very fast rate over the last few years, but so was everyone else. As Sharma put it “The last decade we thought we had moved to a higher normal and it was all about us. Every single emerging market in the world boomed and the rising tide lifted all boats including us.”
But now that we are not growing as fast as we were it is because the global economy has slowed down. Sharma nicely summarised this disconnect when he said “When the downturn happens it is about the global economy. When we do well its about us.” India currently has fallen to the 40th position when it comes to economic growth.
Will bring the country back to 8% growth rate: This is kite flying of the worst kind. As Sharma of Morgan Stanley told NDTV “I see people in government today including the Prime Minister talking about 8% GDP growth rate as if that is the level we should be. There is nothing to suggest that is our potential.”
Singh said that the government was committed to achieving a 8% growth rate for the period of the 12th five year plan period of 2012-2017. In the first year of this plan i.e. the financial year 2012-2013 (the period between April 1, 2012 and March 31, 2013), the Indian economy is expected to grow at around 5%(numbers projected by the Central Statistical Organisation).
What that means is that if the 8% target is to be achieved, the economy has to consistently grow at 9% per year for the remaining four years of the plan. And India has never experienced such consistent high growth ever in the past.
Given that Singh’s statement needs to be taken with a pinch of salt. It is essentially rhetoric of the worst kind. As Nate Silver writes in The Signal and the Noise “Sometimes economic forecasts have expressively political purposes too. It turns out that economic forecasts produced by the White House , for instance, have historically been among the least accurate of all, regardless of whether it’s a Democrat or Republican in charge. When it comes to economic forecasting, however, the stakes are higher than for political punditry. As Robert Lucas pointed out, the line between economic forecasting and economic policy is very blurry: a bad forecast can make the real economy worse.” Singh’s 8% growth statement needs to be viewed along similar lines.
There were many things that Singh did not talk about. Among 150 emerging markets, the fiscal deficit of the Indian government is currently at the 148th number. When it comes to inflation, India is currently at the 118-119th position. The current account deficit (which Singh did talk about) will touch an all time high during the course of the financial year 2012-2013. Interest rates have stubbornly refused to come down. And so on.
To conclude, Manmohan Singh was in poetic mood yesterday. “Humko hai unse wafa ki umeed, jo nahi jaante wafa kya hai (We hope for loyalty from those who do not know the meaning of the word),” the prime minister said quoting the Urdu poet Mirza Ghalib, while taking pot-shots at the BJP.
It’s time the BJP got back to him with what are the most famous lines of the poet Akbar Allahabadi.
“Hum aah bhi karte hain to ho jaate hain badnam,
wo qatl bhi karte hain to charcha nahi hota.”
(badnam = infamous. Qatl = murder. Charcha = discussion)
This article originally appeared on www.firstpsost.com on March 7, 2013, with a different headline.
(Vivek Kaul is a writer. He tweets @kaul_vivek)
‘The average lifespan of good govts is just 7-8 years’
When it comes to the growth sweepstakes, it’s like a game of snakes and ladders. It’s not easy for any country to avoid all the snakes, says Ruchir Sharma, head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management. Most recently he has authored the bestselling Breakout Nations – In Pursuit of the Next Economic Miracles.He generally spends one week a month in a developing country somewhere in the world. Based on those experiences he even refers to his book as an ‘economic travelogue’. Sharma was speaking a literary festival in Mumbai on Sunday. Here are a few excerpts from what he said.
The past has no prologue
One of the first rules of the road that I would like to set at the outset is that the past has no prologue. Because what we do is extrapolation and we take what happened in the past and draw straight lines out into the future and say this is what is going to happen in the future. That is just one of the basic rules that does not work.
If you look at it, there are very few countries in the world that can sustain economic success. Only about one third of all economies are able to grow 5% or more for on an average in any decade. Only about one third of the 180 economies in the world. Of the 180 economies in the world only about 35 are developed economies, everyone else is emerging.
What this basically means is that there are these countries which grow for a short span of time and then come back down. It is like the game of snakes and ladders. You sort of go up and get bitten by a snake and come down. Some countries find a lucky ladder and leap frog and get to the top. Very few countries are able to get to the top and very few countries are able to sustain economic success.
Given this, one of the biggest negatives against India at this point is that they have had such an extraordinary decade. And after this extraordinary decade the complacency had set in where we thought of demographics and other factors we would be able to cruise control and nothing else matters as far as growth is concerned and that really has been thrown out of the window.
The average life of a good government is seven to eight years
The other rule is that the average life of a good government is about seven eight years. Typically governments tend to do well for seven to eight years, maximum to a decade and after that the performance of the governments typically tends to decline. This is true even for Russia where the first two terms of Putin was relatively fine. In the UK Margaret Thatcher did very well for about eight nine years and was booted out after that. François Mitterrand faced something similar in France.
There are some exceptions like Lee Kuan Yew of Singapore who are outliers. Usually the average life of good government is seven to eight years and which is why we are concerned about governments that remain in power for too long and very concerned about countries which try and change the constitution to hold onto power for too long. Then there interest is only in ensuring that there power and vested interests are taken care of and they run out of fresh ideas.
So that is the thing with the current government that it has been in power for a long period of time. But typically after seven to eight years governments don’t do well. That is the life cycle. There are very few who do well for a decade or more.
Markets reform when in crisis
The other sort of rule that I have figured about markets is that they only tend to reform when they have their back to the wall. Crisis is what focuses your mind. Otherwise you have a boom, you fitter the gains away and then you sort of slide away and then try and stop it.
That is why I said that of the 180 economies in the world today only 35 are developed because very few are able to grow for a sustained period of time. So you get these sort of growth spurts because they don’t reform.
India’s case is very interesting to look at it. Every 10 years at the start of the decade India seems to consistently have a some sort of a macroeconomic crisis. This was there in the early 1970s, early 1980s, 1991, the early 2000s period when we had the tech boom bust cycle and the growth rate slipped. You can argue that this year has turned out to be similar. The good news for India is that every time we have this macroeconomic crisis or a threat or a currency weakness that is when we take to reform. In 1981 we did that under the IMF, in 1991 we did that, 2001-2002 the same thing happened and we seem to be doing that now.
Very few emerging markets have taken to reform in a proactive manner. They tend to reform with their backs to the wall and that is what China did with such an exception. China pro-actively reformed every 4 to 5 years and came up with some big bang reform. They were proactive about it and not complacent about it. You can argue that complacence is setting in now. But the last thirty years has been a stream of pro-activeness.
Premature populism is a bad sign
The other sort of rule is to look for is populism. This is one of the things which is very hard to say because it is politically incorrect, but building a welfare state pre-maturely creates the wrong incentives. Schemes like NREGA keep too many farmers at the farm. A mass form of populism which has taken place in India over the last ten years. On the other hand if you look at the successful economies like Korea, Taiwan or even China, they did very little in terms of the welfare state at this stage of their economic development. There focus was lets get grow, and make the pie big enough. And then we will share the the pie later.
Today you can argue that countries like Korea and Taiwan don’t do enough of a welfare state. The Korea story is very fascinating. It is one of the most equal societies. And it is a very well educated society and Korean women are very well educated. Yet their participation in the labour force is very low. And that is because many of them are not able to leave their children at home and go to work because they don’t have a good enough child care support system. They don’t spend enough on those kids. In Korea’s case I can argue they need more welfare and in India’s case I can argue that there is too much welfare.
Social spending as a share of GDP for Korea and India is equal even though Korea’s per capita income is more than ten times higher than India’s per capita income. So to have too much populism prematurely is a bad sign.
The billionaire’s index
One of the popular parts of the book that resonated with many people was the billionaire’s index. Forbes publishes a billionaire’s list in March. It sort pours over across the world to see who are the good billionaires, who are the bad billionaires and stuff like that. I think the key dimension will be to look at the billionaire’s index which is that you need to figure out that in case of how many of these billionaires the wealth has been created because they are genuinely productive billionaires. They are creating wealth in sectors such as technology, pharmaceuticals, manufacturing etc. When you have wealth created in those sectors you are respected but when you have wealth created in so called sectors where the benefit has happened because you had a good government connection, that is just not good. In India’s case we saw many such billionaires rise over the past decade which is what made me somewhat concerned. It is a bad sign for democracy as well .
Other thing to see in the billionaire’s index is that you need churn, you need new people to come up the list. You don’t need holders of the past always there. The third thing is that you need the concentration of the billionaires as a share of the economy to not be that high. That leads to resentment. Having said that India respects its billionaires a lot.
The James Bond moment
When I go and meet billionaires in countries such as Mexico, Brazil, or even Russia, in all those countries you have all these billionaires with a whole bunch of armed bodyguards. There are scared to go out on the streets on their own because they fear that they are going to be attacked. In places like Brazil, you will find a sale of luxury cars is quite low for a country of that size, because people are scared to display that kind of wealth. And if there are luxury cars they are all bullet proofed because they are scared about what is going to happen.
On the other hand Brazil tops the list of maximum number of helicopters sold. The only time I feel like James Bond is when I go to Sao Paulo in Brazil. In Sao Paulo the traffic is really bad but the permission to fly helicopters is quite easy to get unlike what happens in Mumbai.
My sort of James Bond moment is after you finish your meeting they will take you to the roof of the building where there is a helipad waiting for you, you run to the helipad, you take the helicopter and go to the next destination. And you see the aerial view of Sao Paulo and there is a whole bunch of helipads up there on top.
That is a sign. It is a sign of poor infrastructure and you are using these helicopters to short circuit roads and to sort of not care about what is happening on the street and take a helicopter across it. And then you got gated community where they you behind these fortresses. And I think that is just a bad sign. Brazil is the most extreme and my James Bond moment will remain and therefore I relish my trips to Brazil.
The Four Seasons Index
What I do not relish going to Brazil let me tell you are the costs. And this is one my other rules in terms of the cost with the Four Seasons index. I am fortunate that I get to stay in the Four Seasons hotel in all these countries. And I think its good benchmark to look at a country to figure out whether its cheap or expensive?
In Brazil when I go I find the rates are exorbitantly expensive. To get a top hotel on a trip to Rio de Janeiro you pay $800-1000 a night. And that is really exorbitant. You go to East Asia, places like Jakarta and Bangkok, you pay about $200-300 a night, and that is pretty competitive. In places like Brazil and Russia you pay $800-1000 a night. And the currency seems very expensive. My colleagues went to Brazil last year and one of them bought a a t-shirt. The t-shirt cost more than $100 and it did not last even a single wash. So terrible quality and you are like paying a huge price for that.
Hence, Brazil has been one of the big laggards because of expensive currency. This year the Brazil’s growth rate will be only 1%. When you have expensive currency it is bad news. India on the other hand one of the positive would be currently is that the currency is extremely competitive at this point of time.
But isn’t a weak rupee a sign of weakness?
People are concerned that this is a sign of real weakness in India and whether India is about to face a balance of payment crisis? Is money going to leave the country in a huge way because is the currency is quite weak?
One of the rules of the road I watch out for is that one of the first people who take money out of the country when they think that the country is going to face a crisis are the locals. And this is counter-intuitive because most people like to believe that its the foreigners who flee when they sight trouble.
So I am always watching what are the locals doing? Are they taking money out of the country? Or are they bringing money in? This happened in India in 1991. Similarly in East Asia in the late 1990s.
The good thing for India on a balance of payment front is that we don’t have too much outflow on that front. We don’t have mysterious outflows which show up on the RBI balance sheet. You know that is going on when the hawala rates are way way more expensive than what your official rates are. You don’t see such signs in India. So it seems that the currency weakness is happening in an orderly manner. The currency is adjusting for the overvaluation because of our inflation.
Efficient Corruption
The businesses are complaining about investing in India. They are saying that listen we are better off investing abroad rather than India because the cost of India doing business has become very high. So they are even going to places like Indonesia etc. So I asked one businessman in India, that isn’t Indonesia also very corrupt? So why are you investing in Indonesia? His answer was very interesting. But Indonesia is something what you call efficient corruption compared to India which is like in Indonesia if you pay money to somebody the work is done.
And I have got first hand evidence of efficient corruption. I went to Indonesia and I was struck in Jakarta in a traffic jam. The person who was taking me around Jakarta called a number up and without me knowing police escorts arrive. What you do there you pay a $100-200, and call up a number, police escorts arrive, who clear the traffic for you and take you to the airport. That is efficient corruption for you as far as that country is concerned.
The second city rule
One of the other rules that I looked for is the second city rule. If you look at all the successful economies across the world that whenever there is a growth spurt you get the rise of second cities in that country.
As far as India is concerned we don’t have one prominent city and everything else below that. We have four to five mega cities. And here is the difference with China. You look at India’s mega cities with populations of 10 million, 16% of India’s population lives in these mega cities. And that is why these mega cities are bleeding because that is way too high a number. You take the case of China 5% of the population lives in the mega cities of China .
The question is why? Because there has been a huge rise in the second -tier cities in China. If you look at the last fifteen year or so more than 20 second tier cities have come up in China. And second tier I define as cities which had a population of a less than 100,000 but now have a population of a more than a million. In India’s case only six such cities have come up over the last forty to fifty years. And that is the real difference and so there is big pressure on the big cities in India.
A 5% growth rate is a big disappointment
So is India going to be a breakout nation or not? And here is what I find quite fascinating as far as India is concerned. When the book came out this year, the general response was that by giving India a 50% chance of becoming a breakout nation, you are being too pessimistic.
And how I define breakout nations? I define breakout nations as those countries which are going to do better than other countries in the same per capita income class and countries which will grow faster than expectations.
So those are two my major major definitions of breakout nations. And why those two? Because if people tell me that if India grows at 5% what is the big deal because that is still faster than the US or many of the European countries. And my response to it is that is the wrong way of looking at it because if India grows at 5% per year, India’s per capita income is really low and it is far too low to satisfy India’s potential and for India to get people out of poverty.
And which is why India’s case of a 5% growth rate is a big disappointment and specially when you take into account that at the beginning of the year there was an expectation that we will do 9% this year.
A bit conflicted on India
On most countries in the book I was quite categorical. Like I was quite negative on Brazil as you have guessed by now. Even on Russia. I had a fixed view on China. On India I was a bit conflicted. I came out with the book and the most common response here was that are you being a bit pessimistic by giving it a 50% chance. Fine. Six months later by August, the response of most people was that you are being too optimistic on India by giving it a 50% chance of being a breakout nation. So that is how dramatically sentiment has swung on India this year. We went from euphoria on a straight line extrapolation. And how great we are. And how are going to concur the world.
And then there was complete disappointment by August. Last couple of months sentiment has shifted back again. The needle has shifted again. The good news is that expectations are much lower now for India to be a breakout nation.
Indian democracy versus authoritarian China
Gone is the story that how we are going to be the next China out there. One thing I find do disturbing is that a lot of people respond to this by saying you know the reason India cannot be the next China is because we are democracy. And that is the price we pay for being a democracy. China is a authoritarian state. It can implement reforms the way it wants. It can displace people and acquire land. It can set projects up.
India is a democracy therefore we have to pay a price by accepting a lower growth rate. And this argument irritates me. If you look at the high growth instances of the last thirty years, a high growth instance is a situation when a country is able to grow at 5% per year or more in any particular decade. And there are hardly 120 such cases over the last 30 years. How many of them were democracies and how many of them were authoritarian? Its a 50: 50.
For every successful China following an authoritarian regime, there are failures like Vietnam, which was built as the next China, and which has turned out to be a real disappointment, following the authoritarian system. A whole bunch of countries in Africa including the dictatorship of Zimbabwe have failed.
So what matters is the quality of economic leadership and not whether you are democratic or authoritarian. A lot of democracies have done well over the last twenty thirty years. Democracy lets remember is a relatively new concept in much of the emerging world and that is something that we should celebrate.
India is 28 countries with almost distinct identities
There are some state leaders in India who are able to do quite well because they are focussed much more on economic growth. And that to me is a real positive about India as to how India is emerging as a land of 28 independent states, almost 28 countries with distinct identities. We have many good state leaders and the relationship between economic growth and getting re-elected is increasing.
If you manage to grow above the national average and at a past faster than the preceding five years the chances that you as a state leader will get re-elected are extremely high. I think that’s the big message. So therefore you get states like Gujarat where you keep getting victories and then you get a state like West Bengal where you finally get defeated after a very poor performance. This is being backed by data over the last five years.
The picture for India for me is still one that is mixed. But it is improving and improving principally because our expectations have been balanced compared to where we were at the start of this decade. Gone is the era of straight line extrapolations. India still has a reasonable shot at being a breakout nation. But if we got to do it we got to do it state by state. This really is a land of 28 countries like no other emerging market I know. For example China is a very homogeneous society where as India is a lot more heterogeneous. And this bottom up model of economic growth state by state gives up the best hope.
The article originally appeared on www.firstpost.com on December 11, 2012.
Vivek Kaul is a writer. He can be reached at [email protected]
Deficit Crisis: Hope Chidamabaram is praying to goddess Lakshmi
One of the many Diwali traditions that have come up over the years is the idea of leaving the doors and the windows of the house open. This is done to facilitate the entry of Lakshmi, the goddess of wealth, into the house.
The Union Minister of Finance, P Chidambaram, hopefully is a believer, and had left the doors and windows to his house open yesterday, in the hope that Lakshmi will come into the coffers of the government he is a part of.
The way the finances of the government of India are placed, it’s time for Chidambaram to do what most Indians do when they are stretched and stressed. Pray to god. And hope for the best. So if he isn’t a believer it’s high time he becomes one and starts praying that Lakshmi doesn’t give the government a slip.
The fiscal deficit of the government of India for the year 2012-2013(i.e. the period between April 1, 2012 and March 31, 2013) has been targeted at Rs 5,13,590 crore or 5.1% of the gross domestic product. Fiscal deficit is the difference between what the government earns and what it spends.
Targets need to be met and it’s unlikely that the government of India will meet the fiscal deficit target it has set for itself. As the Kelkar committee on fiscal consolidation recently pointed out “A careful analysis of the trends in the current year, 2012-13, suggests a likely fiscal deficit of around 6.1 percent which is far higher than the budget estimate of 5.1 percent of GDP, if immediate mid-year corrective actions are not taken.” The committee estimated if the government continued to function as it currently is it will end up with a fiscal deficit of Rs 6,15,717 crore.
In order to control this burgeoning fiscal deficit the government can do two things, increase its income or control its expenditure. But some recent developments show that the government is more than faltering on both the fronts.
Take the case of the auction of the 2G telecom spectrum. The government expected to raise Rs 30,000 crore from this. But the actual number is nowhere near that. The other big entry into the revenue figure was supposed to come from the disinvestment of shares that the government holds in public sector enterprises. Not a single rupee has been raised on that front.
Also what does not help is the fact that the amount of tax collected seems to be slowing down. As economist Shankar Acharya recently wrote in the Business Standard “By end September the government’s tax receipts amounted to less than 40 per cent of the year’s Budget target.”
So things are looking bad on the income front. The other big headache for the government has been the fall of the rupee against the dollar. As I write this one dollar is worth around Rs 55.
And this means increased expenditure on the oil front. Oil is sold internationally in dollars and when rupee loses value against the dollar that means Indian oil companies have to pay more in rupee terms to buy the same amount of oil. Currently the price of crude oil for the Indian basket is at $106.09 per barrel. At Rs 55 to a dollar this means Rs 5835 per barrel in rupee terms. Compare this to October 4 when the rupee touched a recent high against the dollar. On that day one dollar was worth Rs 51.5. At that price crude oil would have been at Rs 5464 per barrel in rupee terms, much lesser than what it is today.
Hence, as rupee loses value against the dollar, the oil bill goes up. This wouldn’t have been a reason for worry if products made out of oil i.e. petrol, diesel and kerosene, were sold at their market price. But they are not. The government subsidises the oil marketing companies (OMCs) for selling diesel and kerosene at a loss. It also subsidises the OMCs for selling cooking gas at a loss. As the rupee loses value against the dollar it means increased losses for the OMCs unless prices of the products they sell are raised. And in the process it also means increased expenditure for the government and hence a greater fiscal deficit.
Also recent numbers released by Controller General of Accounts project a worrisome picture. Fiscal deficit for the first six months of the year (i.e. between April 1 and September 30) was at Rs 3,36,00 crore. This means that for the first six months of the year the fiscal deficit stood at 65.6% of the estimated fiscal deficit of Rs 5,13,590 crore. This clearly is not a good sign. If the government continues at the same pace it will end up with a fiscal deficit of Rs 6,72,000 crore or 6.7% of the GDP.
A high fiscal deficit is worrying. As the Kelkar report points out “High fiscal deficits tend to heighten inflation, reduce room for monetary policy stimulus, increase the risk of external sector imbalances and dampen private investment, growth and employment.”
Over and above that a high fiscal deficit can also lead to a “likely…sovereign credit downgrade and flight of foreign capital.” As foreign money leaves India this would put further pressure on the rupee against the dollar, leading to a higher oil bill and in process a higher fiscal deficit. So a higher fiscal deficit will lead to an even higher fiscal deficit.
Hence, the government has to either increase its income in some way or control its expenditure. One way of doing that is controlling on subsidies which can be done by increasing prices of oil products as well as fertilizer. But that is unlikely to happen given that it is politically enviable.
So that leaves the government with only one way out and that is to get aggressive on the disinvestment front. Very little action has been seen on that front. But with the government getting a massive amount of bad press over the last few months for being involved in a variety of scams, whether investors pick up shares in public sector companies that the government decides to disinvest, remains to be seen.
In this scenario the government’s one and only hope is the Life Insurance Corporation (LIC) of India. The government can direct LIC to pick up shares of companies it decides to disinvest. When it comes to LIC it is best placed to carry out such operations in the last three months of the financial year (i.e. between January and March).
At that point of the year people start seriously thinking about their tax saving investments and in large parts of the country that means buying a new LIC policy or paying the premium for the existing ones. And that’s when the insurance behemoth has a lot of cash which can be used to rescue the government by picking up shares of companies that it decides to disinvest.
Till then Chidambaram can at best continue to pray to Lakshmi, the goddess of wealth and hope that it blesses the government.
The article originally appeared on www.firstpost.com on November 14, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])
Western central banks maybe holding less gold than they claim
The price of gold as on January 1, 1979 was $226 per ounce (one troy ounce equals 31.1 grams).
On August 6,1979, Paul Volcker took over as the Chairman of the Federal Reserve of United States. The price of gold on that day was at $282.7 per ounce having risen by 25% since the beginning of the year.
When Volcker took office things were looking bad for the United States on the inflation front. The rate of inflation was at 12%. The price of gold against the dollar had also been rising at a very past pace. The price of gold on August 31, 1979, at the end of the month in which Volcker had taken charge was at $315.1 per ounce, up by 11.5% from the day he took charge.
The world had clearly lost its faith in the dollar. By the end of September 1979, gold was quoting at $397.25 per ounce having gone up by 26% in almost one month. And so the dollar would continue losing value against gold. On January 21, 1980, five and a half months after Volcker had taken over as the Chairman of the Federal Reserve of United States, the price of gold touched an all time high of $850 per ounce. In a period of five and a half months the price of gold had risen by an astonishing 200%. What was looked at as a mania for buying gold was essentially a mass decision to get out of the dollar and buy gold.
The mania ended quickly and the very next day(i.e. on Jan 22, 1980) the price of gold was down by around 13.2% to $737.5 per ounce. The price of gold kept falling over the next two decades and reached a low of $252.8 on July 20, 1999.
The central banks of Western Countries (i.e. United States, Canada, Japan and Europe) were the largest hoarders of gold. With gold prices having fallen to levels of $250 per ounce, the value of their gold holdings had taken a tremendous beating over the years. Also sitting in their vaults gold wasn’t earning any interest either. Hence they started lending out this gold to banks known as bullion banks.
As Eric Sprott & David Baker write in a recent report titled Do Western Central Banks Have Any Gold Left? “It made perfect sense for Western governments to lend out (or in the case of Canada – outright sell) their gold reserves in order to generate some interest income from their holdings. And that’s exactly what many central banks did from the late 1980’s through to the late 2000’s.”
This allowed the Western central banks to put gold which is essentially a useless asset to some use. As James Turk and John Rubino write in The Collapse of the Dollar and How to Profit from It – Make a Fortune By Investing in Gold and Other Hard Assets “Lending, for instance, involves, the central bank transferring gold to a major private bank, known as bullion bank, which pays the central bank a small-but-positive interest rate, then sells the gold on the open market,” write the authors. This allowed central banks to convert their gold into cash and also earn some interest on it.
Sprott and Baker suggest that “Collectively, the governments/central banks of the United States, United Kingdom, Japan, Switzerland, Eurozone and the International Monetary Fund (IMF) are believed to hold an impressive 23,349 tonnes of gold in their respective reserves, representing more than $1.3 trillion at today’s gold price.”
While it did not matter what central banks did with their gold in the eighties, nineties and even in the 2000s, things have changed now. These countries now are highly indebted and are printing money left, right and centre to repay their accumulated debt as well as get their economies up and running again.
Given all the money printing that is happening it would be good for them if they do have some gold left in their vaults and haven’t lent out all of it. “The times have changed however, and today it absolutely does matter what they’re doing with their reserves, and where the reserves are actually held. Why? Because the countries in question are now all grossly over-indebted and printing their respective currencies with reckless abandon. It would be reassuring to know that they still have some of the ‘barbarous relic’(as John Maynard Keynes referred to gold) kicking around, collecting dust, just in case their experiment with collusive monetary accommodation doesn’t work out as planned,” write Sprott and Baker.
The central banks do not have to declare about the gold that they are lending out. So it continues to show as a part of their book even though they have lent it to bullion banks, which in turn have gone ahead and sold that gold. As the authors point out “Under current reporting guidelines, therefore, central banks are permitted to continue carrying the entry of physical gold on their balance sheet even if they’ve swapped it or lent it out entirely. You can see this in the way Western central banks refer to their gold reserves. The UK Government, for example, refers to its gold allocation as, “Gold (incl. gold swapped or on loan)”. That’s the verbatim phrase they use in their official statement. Same goes for the US Treasury and the European Central Bank.”
So the actual physical gold with the central banks might be much lesser than they claim. Also, Sprott and David feel that central banks are continuing to “lend” out their remaining gold reserves. This they conclude through a mismatch in the supply and demand for gold. The demand from the five main sources i.e. gold being bought by central banks all over the world, US and Canadian mint sales of gold coins, gold bought by exchange traded funds, Chinese consumption of gold and the Indian consumption of gold has increased by 2,268 tonnes over the last 12 years. Over and above this there is demand from private buyers of gold which go unreported.
“Then there are all the private buyers whose purchases go unreported and unacknowledged, like that of Greenlight Capital, the hedge fund managed by David Einhorn, that is reported to have purchased $500 million worth of physical gold starting in 2009. Or the $1 billion of physical gold purchased by the University of Texas Investment Management Co. in April 2011… or the myriad of other private investors (like Saudi Sheiks, Russian billionaires, this writer, probably many of our readers, etc.) who have purchased physical gold for their accounts over the past decade. None of these private purchases are ever considered in the research agencies’ summaries for investment demand, and yet these are real purchases of physical gold,” write Sprott and David.
Hence, the gold demand figures that are actually reported are actually underreported as many of the investments in gold aren’t taken into account. And thus demand is made to match supply of gold which is believed to be at 3700 tonnes. If more accurate demand numbers were to be used a huge discrepancy between demand for gold and the supply of gold, would be revealed. And the demand side would exceed the annual supply of gold. “In fact, we know it would exceed it based purely on China’s Hong Kong gold imports, which are now up to 458 tonnes year-to-date as of July, representing a 367% increase over its purchases during the same period last year. If the imports continue at their current rate, China will reach 785 tonnes of gold imports by year-end. That’s 785 tonnes in a market that’s only expected to produce roughly 2,700 tonnes of mine supply, and that’s just one buyer,” write the authors.
So the question is where is all this gold coming from? It might very well be that Western Central Banks are continuing to lend gold to bullion banks which in turn are continuing to sell this gold. As Sprott and David point out “They (i.e. Western Central Banks) are the only holders of physical gold who are capable of supplying gold in a quantity and manner that cannot be readily tracked… it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets_– completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past.”
What are the implications of this on the price of gold? As the Turk and Rubino write “Because the bullion banks have promised to eventually return the borrowed gold to the central banks, they are, in effect, “short” gold. That is, at some point in the future they are obligated to buy gold in order to repay the central banks.” And when this happens “the result will be a classic “short squeeze,” in which everyone tries to buy at once, sending gold’s exchange rate through the roof.”
Of course, the assumption here is that central banks demand their gold back. Whether that happens, remains to be seen. As Sprott and David conclude “At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely.We might also suggest that if a proper audit of Western central bank gold reserves was ever launched…the proverbial cat would be let out of the bag – with explosive implications for the gold price.”
The article originally appeared on www.firstpost.com on October 26, 2012. http://www.firstpost.com/economy/western-central-banks-may-hold-less-gold-than-they-claim-503343.html
(Vivek Kaul is a writer. He can be reached at [email protected])