RBI keeps repo rate at 8%: Lower interest rates are not a solution to slow economic growth

ARTS RAJANVivek Kaul

Ramachandra Guha in a wonderful essay titled An Anthropologist Among Marxists writes about what he calls a “possibly, apocryphal anecdote.” As he writes “When Indira Gandhi was assassinated, her ashes were sent to different cities to allow public homage. When her ashes lay lay in Calcutta’s Government House they were visited one evening by the state’s finance minister. In the previous year this man had delivered no less than two hundred and sixty-two speeches on the discrimination against West Bengal in the release of funds from the central treasury. As the minister came out of the Government House, he was asked how he felt when confronting the mortal remains of his most resolute political opponent. He replied in character: Centre Kom Diye Che (the centre has again given us less than our rightful share).”
In another essay titled
Political Leadership Guha writes “Jyoti Basu’s government, it was said, began every discussion on federalism with the words, “Centre kom diye che.
The communists who ruled West Bengal for more than three decades liked to blame all the problems of the state on the central government, which they felt did not give the state a fair share of the funds.
Dear Reader, if you are wondering why am I talking about West Bengal and its politics in a piece which has the term “interest-rates” in the headline, allow me to explain. Over the last few years, everyone from politicians to businessmen to bankers have called for interest rates to be cut as a solution for reviving economic growth in India. The assumption is that at lower interest rates people will borrow and spend more and that will lead to economic growth.
In that sense, these individuals are not very different from the communist politicians of West Bengal for whom “
Centre kom diye che” was an explanation for all the problems of the state. Along similar lines, individuals calling for a cut in interest rates seem to believe that higher interest rates are a major reason for the slowdown in economic growth, and a cut can really get people borrowing and spending all over again.
The former finance minister P Chidambaram was a major propagator of this belief. His successor Arun Jaitley has carried of where Chidambaram left. Other than the politicians, bankers have also regularly asked the Reserve Bank of India (RBI) to cut interest rates.
Today with the RBI deciding to keep the repo rate unchanged at 8% in the fourth bi-monthly monetary policy, the interest-rate-
wallahs will be at it again. Repo rate is the rate at which the RBI lends to banks.
The RBI had its reasons for not changing the repo rate. As it pointed out in a statement “Since June, headline inflation has ebbed…The most heartening feature has been the steady decline in inflation excluding food and fuel…to a new low. With international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding. Yet, there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly.”
Nevertheless, over the next few days you will see bankers, real estate company owners, industry lobbies and possibly even the finance minister Jaitley, wondering why the RBI did not cut the repo rate, to get lending going again.
The most recent occasion when the interest-rate-wallahs came out in the open was when the bankers asked the RBI to cut the repo rate, after the growth in bank loans fell to a five year. As on September 5, 2014, the one year growth in bank loans stood at 9.7%. During the same time last year the number was at a significantly higher 17.9%.
The belief as explained earlier is that at lower interest rates people will borrow more. But as the American baseball coach Yogi Berra once famously said “In theory there is no difference between theory and practice. In practice there is.”
Lower interest rates do not always lead to more borrowing and revival of economic growth. An excellent example of this is what has happened in the aftermath of the financial crisis that broke out in September 2008. Western central banks brought down interest rates to very low levels in the hope that people will borrow and spend more, and help revive economic growth. But that did not happen. All it did was lead to many stock market bubbles all over the world.
Closer to home let’s take a look at car sales. The sales have revived from May 2014, after having continuously fallen for nine months. In August 2014, car sales grew by 15.16%, in comparison to the same period last year. This has happened without much change in interest rates. Why is that the case? Let’s try and understand this through a simple example. Let’s assume that an individual takes a car loan of Rs 4 lakh to be repaid over a period of five years at an interest rate of 10.5%. The EMI on this loan works out to around Rs 8,598.
Let’s say that interest rates were to come down by a massive 100 basis points (one basis point is one hundredth of a percentage)to 9.5%, all at once. At this interest rate, the EMI would work out to around Rs 8,401 or around Rs 200 lower than the earlier EMI. Now how many people will go and buy a car just because the EMI is now lower by Rs 200?
Anyone who has the ability to repay an EMI of Rs 8,401 can also repay an EMI of Rs 8,598. Hence, what people look at while taking on a loan is their ability to service the EMI. This involves at looking at factors like job prospects, the prospects of the company the individual works for and some idea of how he expects the broader economy to do. A major reason for the revival in car sales has been the election of Narendra Modi as the prime minister of India.
People have bought his election slogan “
acche din aane waale hain” and hence, have taken on car loans and bought cars because for now they believe that their future will be better than their past. Interest rates have had no role to play in the revival of car sales.
Let’s consider real estate next. Here again the belief is that if interest rates are cut people will borrow and buy homes. This logic again doesn’t really hold. Home prices are now way beyond what an average Indian can afford. Let’s consider the city of Mumbai.  
A July 2014 report in The Times of India quotes Pankaj Kapoor of property research firm Liases Foras as saying “In Mumbai, the average cost of a flat is Rs 1.2 crore.”
An estimate made by Forbes puts the average income of a Mumbaikar at $5900 or around Rs 3.54 lakh (assuming $1 = Rs 60) per year. This means it would need nearly 34 years of annual income (Rs 1.2 crore divided Rs 3.54 lakh) for an average Mumbaikar to buy a home in this city currently. What this tells us very broadly that homes in Mumbai are very expensive. Similar calculations done for other parts of the country are most likely to show similar results.
Hence, the point is that homes in most parts of the country are now much more expensive than what most Indians can afford. Given this, lower EMIs because of lower interest rates aren’t going to help much. The real estate market has priced itself out.
This was the demand side of things. Now let’s look at what the economists call the supply side. Investments made by corporates have fallen rapidly over the last few years. As Sanjeev Sanyal of Deutsche Bank Market Research writes in a research report titled
India 2020: The Road to East Asia and dated September 2014, “Gross Fixed Investment by the private corporate sector dropped from a peak of 14.3% of GDP in 2007-08 to 8.5% of GDP in 2012-13 (and likely even lower in 2013-14) with investments in machinery and equipment being particularly hit.”
The interest-rate-
wallahs would like us to believe that this fall in investment has primarily been because of the high interest rates that have prevailed over the last few years. Nevertheless is that really the case? As Rahul Anand and Volodymyr Tulin write in an IMF Working Paper dated March 2014 and titled Disentangling India’s Investment Slowdown “Our results suggest that real interest rates account for only one quarter of the explained investment downturn. However, we find that standard macro-financial variables (interest rates, external demand, relative prices, global financial market volatility and others) do not fully explain the recent investment slump. Finally, using the new measure of economic policy uncertainty, the results suggest that heightened uncertainty and deteriorating business confidence have played a key role in the recent investment slowdown.”
Hence, if the current government really wants to get corporate investment going it needs to bring in a lot of much delayed structural reform. Also, it is worth remembering here that a some of the major business groups in India have already borrowed a lot of money and are having tough time paying interest on the debt they already have. Hence, where is the question of borrowing more?
Further, it also needs to be remembered that financial savings in India have fallen dramatically over the last few years. The latest RBI annual report points out that “the household financial saving rate remained low during 2013-14, increasing only marginally to 7.2 per cent of GDP in 2013-14 from 7.1 per cent of GDP in 2012-13 and 7.0 per cent of GDP in 2011-12…the household financial saving rate [has] dipped sharply from 12 per cent in 2009-10.”
Household financial savings is essentially the money invested by individuals in fixed deposits, small savings scheme, mutual funds, shares, insurance etc. The household financial savings were at 12% of the GDP in 2009-10. Since then, they have fallen dramatically to 7.2% in 2013-14. A major reason for the fall has been the high inflation that has prevailed since 2008.
The rate of return on offer on fixed income investments(like fixed deposits, post office savings schemes and various government run provident funds) has been lower than the rate of inflation. This has led to people moving their money into investments like gold and real estate, where they expected to earn more. If the household financial savings number has to go up the rate of interest on offer on fixed income investments needs to be higher than the rate of inflation. Only recently has the consumer price inflation fallen to levels below the rate of return available on fixed income investments. This situation has to be allowed to persist if the financial savings of India are to increase.
To conclude, calling for lower interest rates on almost every occasion is not a solution to anything. It is time the interest-rate-
wallahs understand this.

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

Why Advani must sometimes wish that he was a Nehru-Gandhi

lk advani

Lal Krishna Advani in his dreams must sometimes wish that he should have belonged to the Nehru-Gandhi family. Irrespective of what happens to the political fortunes of the Congress, the Nehru-Gandhis remain at the top.
Even when the party is not under the control of a Nehru-Gandhi, the Congress politicians keep conspiring endlessly till they have managed to install a Nehru-Gandhi at the helm of affairs. This was clearly the case between 1991-1996, after Rajiv Gandhi was assassinated and his widow Sonia refused to take over. Nevertheless the Congress installed Sonia as the president of the party as soon as she was ready.
As Rasheed Kidwai writes in
Sonia – A Biography “Throughout the Narsimha Rao regime, 10 Janpath[where Sonia continues to stay] served as an alternative power centre or listening post against him.” In December 1997, Sonia Gandhi indicated that she wanted to play a more active role in Congress politics. It took the party less than three months to throw out Sitaram Kesri, the then President of the party and put Sonia in charge in his place.
Advani has not been anywhere as lucky as Sonia. In fact, he has constantly been sidelined in the Bhartiya Janata Party (BJP) over the last five years. And unlike Sonia, who continues to enjoy the spoils of the hard-work of her husband’s ancestors, Advani built the BJP right from scratch.
The final nail in the coffin for Advani was the decision by the newly appointed BJP president Amit Shah to drop him from the 12-member Parliamentary Board of the Party. Advani though has been included in the newly created
margadarshak mandal, where he is unlikely to have any decision-making powers.
In fact,
Advani had to recently go through the ignominy of his nameplate being removed from his room in Parliament (the nameplate was put back later). This after being denied the post of the Lok Sabha Speaker, which he wanted. All this must be too much to handle for a man who is BJP’s senior most active leader, and refuses to retire.
The BJP was formed on April 5-6, 1980, after it broke away from the Janata Party. The Janata Party had been formed a few years earlier in 1977, with the merger of Congress O, Bhartiya Lok Dal, the Socialist Party and the Jana Sangh (the BJP’s earlier avatar), with the idea of taking on Indira Gandhi and her Congress party in the 1977 Lok Sabha elections.
The Janata Party won 295 seats in the elections, with 93 MPs coming from the erstwhile Jana Sangh. But trouble soon broke out and different constituents of the party could not get along with each other. This experiment against the Congress ended in 1980, and the BJP was formed. Atal Bihari Vajpayee became the president of the BJP, and Advani was its general secretary.
Interestingly, the party chose “Gandhian socialism” as its credo. Kingshuk Nag writes in
The Saffron Tide—The Rise of the BJP that a “consensus emerged…on Gandhian socialism being the credo of the new party; in other words, it would fashion itself like the Janata Party.”
Advani explains this in his autobiography
My Country, My Life: “The stress from the beginning was not on harking back to our Jana Sangh past but on making a new beginning.” The new beginning happened primarily because both Vajpayee and Advani had been influenced a lot by Jaiprakash Narayan, who was the main architect behind the Janata Party.
Also, what did not help was the fact that Indira Gandhi in her second avatar as the Prime Minister had in a way hijacked the “Hindutva” agenda, which the Jan Sangha had stood for. “Indira Gandhi had become religious with vengeance after coming to power in 1980 and began visiting temples with fervour. In public imagination, the impression created was that of a Hindu lady seeking the benefaction of the Gods. The policies in her tenure were also interpreted as being pro Hindu,” writes Nag.
This newly discovered “Gandhian socialism” did not work for the BJP in the Lok Sabha elections that happened in December 1984, after the assassination of Indira Gandhi by her bodyguard. The party won just two seats in this election. A committee was formed to try and understand the reasons for the electoral debacle.
As Nag writes “The committee…found a lot of lacunae in the working of the BJP. The committee also commented on the lack of political training of workers on political, economic, idealogical and organizational matters.” Or as a BJP insider told Nag “Basically, the committee politely said the party was going nowhere.”
Vajpayee resigned in the aftermath of the debacle and Advani took over as the president of the party. With Advani at the helm, the relations with the Rashtriya Swayemsevak Sangh(RSS) also improved significantly. In the years to come, the BJP went back to Hindutva and gradually junked “Gandhian Socialism” as its main credo. In fact, in 1990, Advani launched a
rath yatra in which he wanted to travel in a motorized van from Somanth in Gujarat to Ayodhya in Uttar Pradesh.
But before he could enter Uttar Pradesh, Lalu Prasad Yadav got Advani arrested in Bihar. As Advani recounts in his autobiography “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].”
Even though Advani could not complete the
yatra it was a huge success and Advani was greeted by huge crowds wherever he went. “At some places, charged-up followers applied tilak to the Ram rath while at other places, those moved by the movement smeared dust from the path of the rath on their forehead,” writes Nag.
Advani went around building the party on the ideology of hardcore 
Hindutva, taking the number of seats that the party had in the Lok Sabha to 85 in 1989 and 120 in the 1991. This fast rise of the party was built on slogans like “saugandh Ram ki khaate hain mandir wohin (i.e. Ayodhya) banayenge” and “ye to kewal jhanki hai Kashi Mathura baaki hai”. As Advani went about his job, Vajpayee took a back-seat for a while.
Nevertheless, Advani soon realized that temple and Hindutva politics could only get the party to a certain level. He also realized that he was looked at as a Hindu hardliner and as long as he led the party, it would never be in a position to form the government. Hence, in November 1995, at the end of his presidential address at the BJP national council meet held in Mumbai, he announced that “We will fight the next elections under the leadership of A.B.Vajpayee and he will be our candiate for a prime minister…For many years, not only our party leaders but also the common people have been chanting the slogan, “
Agli baari, Atal Bihari”.”
This was a political master stroke. At the same time it needs to be said that not many people would have been able to make the decision that Advani did, if they had been in his position. It is never easy to build an organisation right from scratch and then hand it over to someone else, to lead it.
With Vajpayee at the helm, other poltical parties were ready to ally with the BJP. The BJP led National Democratic Alliance first came to power in 1998. They were in power till 2004, when they lost the Lok Sabha elections. After the 2004 Lok Sabha elections, Vajpayee gradually faded from the limelight.
In these years, the spin-doctors of Advani had managed to tone down his image as a Hindu hardliner. This can be very gauged from the fact that Nitish Kumar had no problem with being in alliance with an Advani led BJP, but he wasn’t ready to work with a Narendra Modi led BJP.
The NDA fought the 2009 Lok Sabha elections under the leadership of Advani and lost. And from then on, the stock of Advani has constantly fallen in the BJP. The decision to drop him from the Parliamentary Board of the party, as mentioned earlier, is probably the last nail in the coffin of his political career.
Interestingly, Narendra Modi was also handpicked by Advani to play a greater role in the BJP. As Nilanjan Mukhopadhyay writes in 
Narendra Modi – The Man. The Times “From the beginning it was evident that Modi was Advani’s personal choice and he was keen to strengthen the unit in Gujarat because the state was identified as a potential citadel in the future.”
Advani also mentored Modi during his early days in politics. “It was Advani who mentored Modi when he virtually handpicked him into his team of state apparatchiks after recommendations from a few trusted peers in the late 1980s. Advani also gave Modi early lessons in how to convert the mosque-temple dispute into one of national identity,” writes Mukhopadhyay.
But in the recent years while Advani’s stock within the BJP and the RSS has fallen dramatically, Modi’s stock has been on a bull run. The
shishya has become the guru. The trouble is that the guru does not want to retire, and is probably still itching for a one-last-fight.
But there is not much that he can do about it. Advani’s side-lining is an excellent lesson of what happens when one overstays one’s welcome in politics as well as life. There is a time to work. And there is time to retire and move on.
To conclude, Advani’s one remaining political ambition would have been to become the prime minister of India. But that somehow did not happen. As Salamn Rushdie aptly put in
Midnight’s Children “This is not what I had planned; but perhaps the story you finish is never the one you begin.”
The article originally appeared on www.firstpost.com on August 29, 2014

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

In defence of Smriti Irani: Why Madhu and Maken are wrong

 smriti-irani

Vivek Kaul

So Smriti Irani cannot make for a good human resources development minister because she is not a graduate.
Or so we have been told by the likes of Madhu Kishwar and Ajay Maken.
In short, people who have degrees make for better politicians is the conclusion being drawn. But is that really the case?
Let’s take the case of a certain Lalu Prasad Yadav, who was the defacto Chief Minister of Bihar for more than 15 years. Lalu has a Bachelor of Laws and a Master in Political Science. How did his degrees make any difference?
During his rule Bihar went from bad to worse. In fact, when Lalu was questioned about the lack of development in the state, he was very open about admitting that development did not lead to votes.
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.’”
Interestingly, between 1997 and 2005, Rs 9,600 crore was allocated by the Ministry of Rural Development to Bihar. Around Rs 2,200 crore was not drawn. Of the amount that was drawn only 64% was spent.
During Lalu’s rule Bihar went from bad to worse and a whole generation lost out on progress. But yes, Lalu had two degrees.
Let’s take an even better example of former prime minister Dr Manmohan Singh, a PhD from the University of Oxford. Now compare his degree to the mess that we have ended up with under him. Interestingly, most of our politicians who have a degree, tend to have a degree in law. How does that help in anything other than running the law ministry or the ministry of corporate affairs or other similar ministries? And that is assuming that having studied law, the politician understands its intricacies (not every lawyer has the same command on the subject like Arun Jaitley does).
If we take this argument further, what it means is that to become a minister an individual should be an expert in that particular area. So, a finance minister should either be an economist or a finance professional. Arun Jaitley is neither. A defence minister should have experience in the area of defence. So, doesn’t that make General V K Singh an excellent choice for being the defence minister?
Further, in order to get an individual with the right experience or a degree to head a ministry, one would be looking at technocrats all the time. So, then why bother about electing MPs at all?
This would mean moving onto a more American form of government where the President is elected by the people and is allowed to choose his team, a lot of whom are technocrats who have the required experience.
Given this, insisting that a minister have a degree, doesn’t make much sense in the present system of government that we have.
That’s the general part of the argument. Then there is also the specific part regarding Smriti Irani and Congress’ criticism of her lack of a degree. To her credit Irani is a successful professional, who has risen on her own, in a very competitive television industry.
Also, what one needs as a minister is the ability to administer. Whether she has that or not, we will come to know in the time to come.
The Congress party is in no position to criticize her. One of their foremost leaders Rajiv Gandhi, never completed any degree after leaving the Doon School. He was the prime minister of the country. His mother Indira, never completed her degree at Oxford. Their current leader Sonia Gandhi’s educational qualifications are also nothing to write home about. So, they really are not in a position to criticise Irani. It’s like the pot calling the kettle black.
To make a totally different comparison, all the Ivy League MBAs, PhDs in Maths and Physics who worked on the Wall Street, created a major part of the financial crises that the world is currently going through.
To conclude, there is not much of a link between having a degree and having the ability to govern. Look at the mess Kapil Sibal, who held the human resources development ministry between May 2009 and October 2012, made in the education sector. He had got his LLM degree from the Harvard Law School.

 The article originally appeared on www.firstpost.com on May 28, 2014

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

Why Rahul Gandhi's Toyota Way is not working

 rahul gandhiVivek Kaul  
Rahul Gandhi is a fan of the famed Toyota Way. The Toyota Way is a series of best practices that underlie the managerial approach and the production system of the automobile company Toyota. This management philosophy grew out of the Toyota Production System.
As Aarthi Ramachandran writes in 
Decoding Rahul Gandhi “According to Dr Jeffrey K Liker, the author of theThe Toyota Way, one of the most authoritative books on the subject, its core principle was that ‘the right process will produce the right results. It aimed to do this by eliminating ‘waste’ in the production process to almost nil. It held that ‘standardized tasks are the foundation for continuous improvement and employee empowerment.”
Rahul and his team are trying to build a similar sort of system within the Congress which would make standardisation possible. The idea is to build systems and process which would keep working irrespective of whoever is incharge.
Or as Rahul Gandhi put it at a convention of All India Congress Committee(AICC) in November 2007 “If we are to truly develop leaders of whom this nation is proud, we need to do two things. The first is to build an organisation that is open and relevant to the broad range of Indians who believe in our values and seek to serve the nation. The second is to build a meritocratic organisation. Young people bring tremendous passion and energy into our organisation.”
The idea it seems was to move Congress beyond the appointment system, where only sons, daughters, relatives and loyalists of senior leaders could hope to make it through to the upper echelons of the party.
In order to do this Rahul and his team have gradually taken over the administration and the running of the Congress party, over the last five to six years. In the process, they have managed to alienate the old timers of the party. Also, the idea has been to bring some sort of measurement into political leadership.
As Rasheed Kidwai writes in 
24 Akbar Road “Team Rahul is also believed to be working on a plan that aims to reward performance and quick response. Ticket aspirants who can produce excel sheets on Aadhar cardholders and cash-transfer beneficiaries in their constituencies are likely to have the edge over those armed merely with recommendations from regional bosses.”
This has led to the old timers in the party getting very uncomfortable with Rahul’s 
laptopwallahsAs The Economic Times reports “A growing worry is Rahul’s penchant for picking teams which party veterans term strange. In some circles, Rahul’s personal team members such as Kanishka Singh, Sachin Rao, Kaushal Vidyarthi and K Raju are jokingly referred to as “aliens who want to do mass politics through data on laptops, just as those wiz kids who led Rajivji up the garden path.”
But whatever it is that Rahul is trying to do, doesn’t seem to be working. The party has lost elections in Uttar Pradesh, Rajasthan, Madhya Pradesh, Delhi and Chhattisgarh under his leadership. This means that the party has been been wiped out in the big states of North and Central India. In Uttarakhand the party just about managed to form the government, with the help of independents.
There are several reasons why Rahul’s Toyota Way isn’t really working for the Congress. It is worth remembering that the Congress is a party which thrives on dynasts and their 
chamchas. As Ramachandra Guha explains this in an essay titled A Short History of Congress Chamchagiri which is a part of his book Patriots and Partisans.“Most Indians are too young to know this, but the truth is that until about 1969 the Congress was more or less a democratic party,“ writes Guha.
But after that Rahul’s grandmother Indira Gandhi took over the party and made it a family run concern. As Guha writes in the essay 
Verdicts on Nehru which is a part of the same book “Mrs Gandhi converted the Indian National Congress into a family business. She first bought in her son Sanjay, and after his death, his brother Rajiv. In each case, it was made clear that the son would succeed Mrs Gandhi as head of Congress and head of government.”
While Gandhis were the dynasty at the top of the hierarchy, there were several other dynasties that kept the party running in different parts of the country. And this over the decades has led to the Congress party becoming a ‘property for dealers’.
Bharat Bhushan writing in the Business Standard uses this term quoting an anonymous Congress leader. As he writes “The same Congressman who saw hostile public sentiment reaching cyclonic proportions, lamented, “We are not a party but a property. A party has leaders; a property has only dealers. All the dealers are looking to their own benefit in the Congress. There is no public purpose left.” Now that is the way the party has evolved and suddenly expecting to start attracting public spirited individuals who care about the people of this country is rather naïve.
Over and above this Rahul has made it very clear that he is looking to induct youth into the party. As he has said in the past “our political organisations are designed in such a way that youth cannot enter them…The most important job in Indian politics is to get youth into Indian politics.”
During the last few years, Rahul and his team were working on this by trying to get internal elections held for the Youth Congress all over the country. In the first election which was held in Punjab, with the help of retired election commission officials, Ravneet Singh Bittu, the grandson of the late Beant Singh, a former Chief Minister of Punjab, was elected.
This was a trend that has since been repeated all over the country. Ramachandran gives a series of such examples in her book on Rahul. As she writes “In Haryana, Chiranjeev Rao, son of senior minister Ajay Singh Yadav won the polls. In West Bengal, Mausam Benazir Noor, niece of veteran Congress leader and former Union minister, the late A B A Ghani Khan Chowdhary was the victor. In Uttarkhand, Anand Singh Rawat, son of union minister Harish Rawat won the post. In Himachal Pradesh…Virbhadra Singh’s son, Vikramaditya, polled the most votes in a controversial election.” And this story goes on in other states like Maharashtra, Chhattisgarh, Goa, Jharkhand and Tamil Nadu.
So while Rahul might want to create a structure of internal democracy within the Congress, the senior leaders who are most hurt by this, wont let him do so easily. As Ramachandran writes “The results indicate that senior leaders have used the Youth Congress to extend or defend their turfs. By getting family members into Youth Congress, they attempted to get a foot into the new Congress under Rahul.”
The other big problem with this approach is how does Rahul expect members of the Congress to be serious about internal democracy, when there has been no democracy at the top levels of the party for many decades now. He and his mother, who are the top two functionaries of the party, are a symbol of that. So in that sense its really a chicken and egg problem.
At the same time, there has been a lot of talk Rahul’s team using measurement systems to select candidates that will represent them in elections. Whatever they are doing doesn’t seem to be working. An excellent comparison here is with the Aam Aadmi Party which used a lot of data analysis in the recently held, Delhi elections. And it did so over a period of around one year since its formation. As Aloknanda Chakraborty writes in the Business Standard “The AAP…is light years ahead of its opponents in the way it has collected, analysed and used massive amounts of data to identify, connect with and mobilise potential voters for the just-concluded Delhi elections.”
Also, it is worth remembering here that the Toyota Way talks about standardised tasks. Rahul Gandhi himself doesn’t seem to be following that. He likes to take a hit and run stand on issues that he espouses now and then. (You can read the detailed argument here). In fact this is something that comes out even in Rahul’s personal behaviour. As The Times of India reports “he (i.e. Rahul) alternately comes off as aloof and warm to his colleagues.”
Given this, Rahul Gandhi does not come across as a serious politician. To me a appropriate comparison seems to be a corporate scion who wants to be a painter, but is stuck with his or her family business. Ramachandra Guha put it best when he told Firstpost in an interview “He(i.e Rahul) has no original ideas, no heart for sustained and hard work. He should find another profession.”
There are other issues also about the Toyota Way being implemented in the Congress party. As Ramachandran writes “A political party is not a corporate organisation…Election nominations are specifically distributed on a number of factors ranging from right parentage, to money and resources, and clout with influential voter blocks. How would a corporate-style performance management system be able to capture it all?”
Rahul has always maintained that what he is trying to engineer is a long term process. But it is worth remembering that running a business is not always about strategy. It is also a lot about short term tactics, especially in times of trouble. A business which stays glued only to strategy in times of trouble has a huge chance of running itself into the ground. The same stands true for a political party.
Hence, it is time for the Congress party and Rahul Gandhi to cut their losses. As The Times of India reports “Party leaders don’t dispute the need for refashioning the party. Their concern is about the timing, with many holding that the fast approaching elections leave too small a window for the ambitious experiment that Rahul seems to fancy.”
Since Rahul is a fan of the Toyota Way, he should be trying 
nemawashi, which is a part of the Toyota Way. As Dr Jeffrey Liker points out in The Toyota Way, one of the most authoritative books on the subject “Nemawashi is the process of discussing problems and potential solutions with all those affected, to collect ideas and get agreement on a path forward.”
If Rahul wants the Congress to survive, he should now be talking to the party old-timers, before its too late.
The article originally appeared on www.firstpost.com on December 10, 2013

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

Note to Rahul: India sucks at producing rakhis and Ganeshas

rahul gandhi
Vivek Kaul
 
Economist Arvind Panagariya has  written an open letter to Rahul Gandhi, on the edit page of today’s edition of The Times of India. In this piece Panagariya answers Gandhi’s query to Indian industrialists, as to why India has to import ganeshas and rakhis from China and can’t produce them on its own.
Panagariya’s answer is very simple. India sucks at labour intensive manufacturing. As he writes “our top industry leaders are very comfortable doing what they do: invest in highly capital-intensive sectors such as automobiles, auto parts, two wheelers, engineering goods and chemicals or in skilled-labour-intensive goods such as software, telecommunications, pharmaceuticals and finance. The vast labour force of the nation stares them in the face but they look the other way.”
This is the major reason as to why India cannot compete with China in manufacturing rakhis and ganeshas. But some historical context also needs to be built in, in order to completely appreciate India’s lack of competitiveness on this front.
Prasanta Chandra Mahalanobis founded the Indian Statistical Institute in two rooms at the Presidency College in Calcutta (now Kolkata) in the early 1930s. He became close to Jawahar Lal Nehru, the first prime minister of India, and was appointed as the Honorary Statistical Advisor to the government of India.
As Gurcharan Das writes in 
India Unbound –From Independence to the Global Information Age “Mahalanobis had a profound effect on Nehru’s thinking, although he held no offcial position. His title, “Honorary Statistical Advisor to the Government of India,” certainly did not reflect the extent of his influence. His biggest contribution was the draft plan frame for the Second Five Year Plan…In it he put into practice the socialist ideas of investment in a large public sector (at the expense of the private sector), with emphasis on heavy industry (at the expense of consumer goods) and a focus on import substitution(at the expense of export promotion).”
Hence, big heavy industry became the order of the day at the cost of small consumer goods. The alternative vision of encouraging the production of consumer goods was put forward as well. As Das writes “It belonged to the Bombay (now Mumbai) economists CN Vakil and PR Brahmanand. It was neither glamourous nor as technically rigorous as Mahalnobis’s, but it was more suited to the underdeveloped Indian economy. Its starting point was that India lacked capital but had plenty of people…The thing to do was to put these people into productive work at the lowest capital cost. The Bombay economists suggested that we employ the surplus labour to produce “wage goods,” or simple consumer products – clothes, toys, shoes, snacks, radios, and bicycles. These low-capital, low-risk, business would attract loads of entreprenurs, for they would yield quick output and rapid returns on investments. Labour would produce the goods it would eventually consume with the wages it earned in producing the goods.”
But Mahalanobis’s vision of an industrialisted India sounded a lot sexier to the politicians led by Nehru who ran this country and hence, won in the end.
The Indian industrialists had done their cause no good by drafting and accepting the Bombay Plan in 1944. “In 1944, India’s leading capitalists had come together in Bombay and crystalllized their vision for a modern, independent India. They inclued the giants of Indian business – JRD Tata, GD Birla, Lala Shri Ram, Kasturbhai Lallabhai, Purshotamdas Thakurdas, AD Shroff and John Mathai – they produced what came to be known as the Bombay Plan,” writes Das.
The Bombay Plan put forward the idea of rapid and self reliant industrialisation of business in India. At the same time the businesses were willing to accept “import limitations on the freedom of private enterprise”. “Even more disastrous was their acceptance of a vast area of state control – in fixing prices, limiting dividends, controlling foregin trade and foreign exchange, in licensing production, and in allocating capital goods and distributing consumer goods. Without realising it, the Indian capitalists had dug their graves,” writes Das.
Hence, the government became the 
mai baap sarkar which gave out licenses for everything. And the Indian businessman if he had to survive had to become a crony capitalist to get these licenses. This was initiated during the regime of Jawahar Lal Nehru and perfected during the rule of his daughter Indira Gandhi.
The orientation of the Indian government was towards setting up big industries. What they did not want to set up themselves, they would give licenses to the private sector. And in order to get licenses a businessman had to be close to the government.
This ensured that both the government as well as the private sector set up and continue to set up capital intensive businesses. This is reflected in the slow growth of the number of workers working in private sector etablishemnts with ten or more people. As Jagdish Bhagwati and Arvind Panagariya write in their book 
India’s Tryst with Destiny – Debunking Myths that Undermine Progress and Addressing New Challenges. “The number of workers in all private-sector establishments with ten or more workers rose from 7.7 million in 1990-91 to just 9.8 million in 2007-2008. Employment in private- sector manufacturing establishments of ten workers or more, however, rose from 4.5 million to only 5 million over the same period. This small change has taken place against the backdrop of a much larger number of more than 10 million workers joining the workforce every year.”
Hence, an average Indian business starts off small and continues to want to remain small. “An astonishing 84 per cent of the workers in all manufacturing in India were employed in firms with forty-nine or less workers in 2005. Large firms, defined as those employing 200 or more workers, accounted for only 10.5 percent of manufacturing workforce. In contrast, small- and large-scale firms employed 25 and 52 per cent of the workers respectively in China in the same year,” write Bhagwati and Panagariya.
What is true about manufacturing as a whole is also true about apparels in particular, a very high labour intensive sector. Nearly 92.4% of the workers in this sector, work with small firms which have 49 or less workers. In comparison, large and medium firms make up around 87.7% of the employment in the apparel sector in China.
The labour intensive firms in China ensure that they have huge economies of scale. This drives down costs and explains to a large extent why India imports ganesha idols and rakhis from China. Everyone wants a good deal. And China is the country providing the good deals and not India.
A major reason for Indian firms choosing to remain small is the fact that the country has too many labour laws. Since labour is under the Concurrent list of the Indian constitution, both the state government as well as the central government can formulate laws on it. As Bhagwati and Panagariya point out “The ministry of labour lists as many as fifty-two independent Central government Acts in the area of labour. According to Amit Mitra(the finance minister of West Bengal and a former business lobbyist), there exist another 150 state-level laws in India. This count places the total number of labour laws in India at approximately 200. Compounding the confusion created by this multitude of laws is the fact that they are not entirely consistent with one another, leading a wit to remark that you cannot implement Indian labour laws 100 per cent without violating 20 per cent of them.”
This explains to a large extent why Indian businesses do not like to become labour intensive and choose to stay small. The costs of following these laws are huge. As Bhagwati and Panagariya write “As the firm size rises from six regular workers towards 100, at no point between these two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra cost of satisfying the laws.”
In fact, Bhagwati and Panagariya narrate an interesting anecdote told to them by economist Ajay Shah. Shah, it seems asked a leading Indian industrialist about why he did not enter the apparel sector, given that he was already making yarn and cloth. “The industrialist replied that with the low profit margins in apparel, this would be worth while only if he operated on the scale of 100,000 workers. But this would not be practical in view of India’s restrictive labour laws.”
This is the answer to Rahul Gandhi’s question of why India imports rakhis and ganeshas from China. Like is the case with almost every big problem in this country, even this is a problem created by his ancestors.

 
The article originally appeared on www.firstpost.com on November 18, 2013
 
(Vivek Kaul is a writer. He tweets @kaul_vivek)