A Humble Request to the Modi Govt: Paper Money Works on Trust, Don’t Destroy It


Money. Money. Money. It’s so funny. It’s a rich man’s world.

Or so sang the Swedish band Abba, many many years back. Rich man or poor man, money essentially functions on trust.

And the trust in Indian money has been destroyed repeatedly since November 2016, when demonetisation was unleashed on the hapless people of this country.

As we explained last week, demonetisation, the need of the Modi government to portray it as a success, and the lack of currency replacement at the pace it should have been replaced, has been responsible for the current currency shortage in large parts of the country.

Let’s look at Table 1, which basically lists the cash withdrawals made at ATMs using debit cards.

Table 1:Source: State Bank of India 

What does Table 1 tell us? It tells us that more cash is withdrawn from ATMs in the second half of the financial year (i.e. the period between October to March) than in the first half.

There are several reasons for it. The big festivals (Dusshera, Diwali, Christmas, Holi etc.) all fall in the second half of the year. So, does the procurement season for agriculture. This automatically means that the country on the whole withdraws more cash from ATMs in the second half of the year than it does in the first.

Now look at Table 1 carefully. The rate of increase in cash withdrawals has slowed down post 2012-2013. One possible reason for this has been the increase in digital transactions, which have gone up, but are still not big enough.

In 2016-2017, cash withdrawals in the second half of the year fell by 22.1%. This happened because in the aftermath of demonetisation there simply wasn’t enough cash going around in the system.

In 2017-2018, cash withdrawals in the second half of the year, are likely to be 12.2% more than the first half. (We use the term likely because the figure for cash withdrawals for March 2018, is an estimate).

This 12.2% growth is on a much larger base, than 2012-13. The cash withdrawals in the first half of 2012-2013 were around half of the cash withdrawals in 2017-2018.

Why have the cash withdrawals in 2017-2018 been much more? A major reason for this lies around the proposed Financial Resolution and Deposit Insurance Bill. At the core of this Bill, lies the suggestion that the deposits can be used to a rescue a bank or financial firm in trouble. But the truth is a little more complicated than that, as I had explained in a December 2017 piece.

The timing of this Bill coming after demonetisation was all wrong and created suspicions in the minds of people. And after that the university of WhatsApp struck, and many forwards started going around. These forwards wrongly suggested that the government had plans of seizing the money in banks.

But as is wont these days, people tend to believe what they read on their phones than logical and nuanced arguments offered elsewhere.

This fear of the government seizing deposits has to some extent led to people withdrawing more cash from ATMs than they otherwise would. In the four talks that we have given since November 2017 (in Greater Noida, Chennai, Mumbai and Hyderabad), the number one question that we got asked was, will the government seize our money?

This column originally appeared on Equitymaster on April 23, 2018.

This fear has been quite palpable, and the Modi government needs to address it.


The paper money that we use these days has no value of its own. It’s not like the money of yore, like gold or silver or tobacco or many other commodities, which had an inherent value of their own.


When it comes to paper money, it has value because the government of the day says so and people believe in it. It works purely on trust between the government and the citizens.

As Yuval Noah Harari writes in Sapiens—A Brief History of Humankind: “Money isn’t a material reality—it’s a psychological construct… Money is accordingly a system of mutual trust, and not just any system of mutual trust: money is the most universal and most efficient system of mutual trust ever devised.


And it is this trust that makes money go around. As Harari writes: “Because my neighbours believe in them. And my neighbours believe in them because I believe in them. And we all believe in them because our king believes in them and demands them in taxes, and because our priest believes in them and demands them in tithes.”


This trust in money was first destroyed during demonetisation, when the government set a last date (December 30, 2016) beyond which it wouldn’t accept Rs 500 and Rs 1,000 notes (For the record, the Bundesbank, the German central bank, still converts deutschemark, the German currency before euro became the currency of the Eurozone, into euros).
This trust continues to be destroyed with all the rumours around the FRDI Bill continuing to go around. These rumours need to be addressed, which they haven’t been.


Ultimately, any form of paper money works on trust. And if this trust is destroyed, nothing really is left because ultimately the only difference between a Rs 10 note and a Rs 2,000 note, is the quantity of paper and the ink, used in making these two notes, look different.






Why Robots Are Not Going to Screw Humans-At Least Not Yet


If you are the kind who reads the inside pages of newspapers carefully, you would know that these days stories around robots replacing human jobs are quite common. Most of these stories are written in a way that suggest that doomsday is upon us.

But is it as straightforward as the newspapers and the media makes it out to be? I really don’t agree. I had first written about this issue a few months back in the weekly Letter that I write, but given the importance of the issue, I am sharing my thoughts with the Diary readers as well.

In the recent past, there have been a spate of headlines in the media on the capabilities of robots having reached a stage wherein they can take on human jobs. Here are a few news items, along these lines, which I have come across over the last few months.

1) In May 2016, the shoemaker Adidas announced that it would start manufacturing shoes in its home country of Germany after nearly two decades. But it shall use robots and not human beings to do the same. The company calls its robot factory the speed factory. A second such factory is being planned in the United States as well.[i]

2) In another similar case, Foxconn, a company which manufactures mobile phones for both Samsung and Apple, is replacing 60,000 workers with robots.[ii]

3) In July 2016, HfS Research, a research firm based in the United States, predicted that by 2021, India’s information technology companies will lose around 6.4 lakh jobs to automation. This is something that high ranking officials of Indian IT firms have also said.

4) In mid-September 2016, the textile major Raymond said that it was planning to slash 10,000 jobs across its manufacturing centres all across India and replace them with robots and technology. The company currently employs 30,000 employees.[iii] Hence, robots are likely to replace one-third of its workforce.

5) Driverless cars have already arrived. As Ruchir Sharma writes in The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “The most common job for American men is driving, and one forecast has driverless smart cars and trucks replacing them all by 2020.”[iv]

6) And if all this wasn’t enough, on October 3, 2016, the World Bank President Jim Yong Kim said in a speech: “Research based on World Bank data has predicted that the proportion of jobs threatened by automation in India is 69 percent, 77 percent in China and as high as 85 percent in Ethiopia.”[v]

These are just a few examples of the expectation that robots will take over human jobs that I have come across over the last few months. As can be seen, this threat looms not just over India but over large parts of the developed as well as the developing world.

As Rutger Bergman writes in Utopia for Realists: “Scholars at Oxford University estimate that no less than 47 per cent of all American jobs and 54 per cent of those in Europe are at the high risk of being usurped by machines. And not in a hundred years or so, but in next twenty years.” He then quotes a New York university professor as saying: “The only real difference between enthusiasts and skeptics is a time frame.”[vi]

Indeed, the threat of robots taking over human jobs is nothing new. So what makes the threat this time around so different from the previous ones? As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “This is not an entirely new question. Ever since the Industrial Revolution erupted, people feared that mechanisation [which is what robots are after all about] might cause mass unemployment. This never happened, because as old professions became obsolete, new professions evolved, and there was always something humans could do better than machines. Yet this is not a law of nature and nothing guarantees it will continue to be like that in the future.”[vii]

The question is: What has changed this time around?

Human beings essentially have two kinds of abilities: a) physical ability b) cognitive abilities i.e., the ability to think, understand, reason, analyse, remember, etc. As Harari writes: “As long as machines competed with us merely in physical abilities, you could always find cognitive tasks that humans do better. So machines took over purely manual jobs, while humans focussed on jobs requiring at least some cognitive skills. Yet what will happen once algorithms outperform us in remembering, analysing and recognising patterns?

Hence, the robots used until now essentially replaced the physical things that human beings did in factories. The trouble is that now the robots have also started thinking (in the form of algorithms) and hence, many more human jobs are on the line. Harari feels that “as algorithms push humans out of the job market, wealth might become concentrated in the hands of the tiny elite that owns the all-powerful algorithms, created unprecedented social inequality.”

This argument along with the evidence offered before seems to be pretty convincing, if seen in isolation. But there is a lot more to this than just the evidence that is currently being offered. As Sharma writes: “While the robotics revolution could come faster than most previous technology revolutions, it is likely to be gradual enough to complement rather than destroy human workforce. A huge gap still exists between the size of the world’s industrial robot population—about 1.6 million—and the global industrial labour force of about 320 million humans. Most of the industrial robots are currently unintelligent machines, committed to a single task like turning a bolt or painting a car door, and indeed half of them work in the car industry.[viii]

As per the International Federation of Robots, South Korea currently has the highest penetration of robots. The country has 437 robots per 10,000 employees. Japan and Germany come in second and third with 323 robots and 282 robots per 10,000 employees, respectively. China has 14 robots per 10,000 employees.[ix]

The point is that there aren’t as many robots going around as there are made out to be. Also, it is worth remembering here that large parts of the Western world and Japan are currently seeing their population decline. China will also soon reach that stage as well. Hence, in that sense the robots will arrive at the right time replacing the decline in the labour force. As Daniel Kahneman the Noble Prize winning psychologist (he won the Economics prize) told John Markoff, a journalist, who covers science and technology for The New York Times: “You just don’t get it…In China, the robots are going to come just in time.[x]

The point is that when it comes to big predictions like robots taking over human jobs, there are always a few ifs and buts. The trouble is that these ifs and buts are not being highlighted as much as the core argument of robots taking over human jobs, currently is.

Other than these factors there is a basic law in economics which goes against the entire idea of robots totally destroying human jobs. It’s called the Say’s Law. One of my favourite books in economics is John Kenneth Galbraith’s A History of Economics—The Past as the Present (In fact, anyone who wants to understand economics should mandatorily make Galbraith a part of his readings). In A History of Economics, Galbraith writes about the Say’s Law.

This law was put forward by Jean-Baptise Say, a French businessman, who lived between 1767 and 1832. As Galbraith writes: “Say’s law held that out of the production of goods came an effective aggregate of demand sufficient to purchase the total supply of goods. Put in somewhat more modern terms, from the price of every product sold comes a return in wages, interest, profit or rent sufficient to buy that product. Somebody, somewhere, gets it all. And once it is gotten, there is spending up to the value of what is produced.”

Say’s Law essentially states that the production of goods ensures that the workers and suppliers of these goods are paid enough for them to be able to buy all the other goods that are being produced. A pithier version of this law is, “Supply creates its own demand.”

As Bill Bonner writes in Hormegeddon—How Too Much of a Good Thing Leads to Disaster: French businessman and economist, Jean-Baptiste Say, discovered that “products are paid for with products,” not merely with money. He meant that you needed to produce things to buy things.”

So what does this mean in the context of robots destroying human jobs? If robots destroy too many human jobs, many people won’t have a regular income. If these people do not have a regular income, how are they going to buy all the products that robots are going to produce? And if they are not going to buy the products that robots are producing, how are these companies driven by robots going to survive?

This is a basic question that none of the analysts, who are predicting doom on the basis of robots taking over human jobs, have bothered to ask. For capitalism to survive, it is essential that human beings work and earn an income, only then can they go around buying everything that is being produced.

The basic problem with the robots taking over human jobs argument is best explained through this example. As Bergman writes: “When Henry Ford’s grandson [Henry Ford II] gave labour union leader Walter Reuther a tour of the company’s new, automated factory, he jokingly asked, “Walter, how are you going to get those robots to pay your union dues?” Without missing a beat, Reuther answered, “Henry, how are you going to get them to buy your cars?””[xi]

Also, another point that most analysts seem to miss is that if and when robots actually do start destroying many human jobs, it is stupid to assume that the governments will sit around doing nothing. There will be huge pressure on them to react and make it difficult for companies to replace human beings with robots.

To cut a long story short, it will be interesting to see how the robots taking over human jobs trend evolves in the years to come, but it will not be as straightforward as it is currently being made out to be.  If we are still in business, we will surely keep a lookout!

The column originally appeared in Equitymaster on January 25, 2017

[i] Agence France-Presse, Reboot: Adidas to make shoes in Germany again – but using robots, May 25, 2016

[ii] J.Wakefield, Foxconn replaces ‘60,000 factory workers with robots’, BBC.com, May 25, 2016

[iii] TNN and Agencies, Raymond to replace 10,000 jobs with robots in next 3 years, September 16, 2016

[iv] R.Sharma, The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World, Allen Lane, 2016

[v] Speech by World Bank President Jim Yong Kim: The World Bank Group’s Mission: To End Extreme Poverty, October 3, 2016

[vi] R.Bergman, Utopia for Realists—The Case for a Universal Basic Income, Open Borders and a 15-Hour Workweek, The Correspondent, 2016

[vii] Y.N.Harari, Homo Deus—A Brief History of Tomorrow, Harper, 2016

[viii] Sharma 2016

[ix] Ibid

[x] A Conversation With John Markoff. Available at https://www.edge.org/conversation/john_markoff-the-next-wave. Accessed on October 12, 2016

[xi] Bergman 2016


Will Facebook also make our decisions in future?

facebook-logoMany of us spend more time on Facebook these days than with our parents, spouses and friends. As Cathy O’ Neil writes in Weapons of Math Destruction—How Big Data Increases Inequality and Threatens Democracy: “About two-thirds of American adults have a profile on Facebook. They spend thirty-nine minutes a day on the site, only four minutes less than they dedicate to face-to-face socialising.” While, I couldn’t find a similar number for India, it is safe to say that many middle class Indians are spending a significant amount of their daily time on Facebook.

On Facebook, we comment, respond to other comments or simply Like other comments. In the process, we are generating as well as giving away data about ourselves.

In fact, this data when mined properly, in some cases is a better judge of our ourselves than even we are. Interestingly, a study published in 2015 found that the Facebook algorithm is a better judge of individual personalities than even the individual’s friends, spouses or parents for that matter.

As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “The study was conducted on 86,220 volunteers who have a Facebook account and who completed a hundred-item personality questionnaire. The Facebook algorithm predicted the volunteers’ answers based on monitoring their Facebook Likes – which webpages, images and clips they tagged with the Like button. The more Likes, the more accurate the predictions.”

Further, the predictions of the algorithm were compared with those of friends, spouses, family members and work colleagues. Indeed, the results were very surprising. As Harari writes: “The algorithm needed only ten Likes to outperform the predictions of work colleagues. It needed seventy Likes to outperform friends, 150 Likes to outperform family members and 300 Likes to outperform spouses.”

This basically means that if you are married and have happened to click 300 or more Likes on Facebook, the Facebook algorithm can predict your opinions, desires and tastes, better than your husband or wife.

Interestingly, in some areas the Facebook algorithm did a much better job of predicting about the individual than even the individual himself. As Harari writes: “Participants were asked to evaluate things such as their level of substance use or the size of their social networks. Their judgements were less accurate than those of the algorithm.”

Hence, the algorithm was doing a much better job than the individual himself. Interestingly, Wu Youyoua, Michal Kosinskib, and David Stillwella, researchers who carried out this research, conclude in their research paper Computer-based personality judgments are more accurate than those made by humans: “Furthermore, in the future, people might abandon their own psychological judgments and rely on computers when making important life decisions, such as choosing activities, career paths, or even romantic partners. It is possible that such data-driven decisions will improve people’s lives.”

All this is possible because Facebook has access to our innermost thoughts through our comments and Likes. The interesting bit is that the Facebook researchers have also studied how different type of updates influence people’s voting behaviour. As O’Neil writes: “No researcher had ever worked in a human laboratory of this scale. Within hours, Facebook could harvest information from tens of millions of people or more, measuring the impact that their words and shared links had on each other. And it could use that knowledge to influence people’s actions, which in this case happens to be voting. That’s a significant amount of power.”

Of course, Facebook is not the only company which has this huge amount of power. As O’Neil writes: “Other publicly held corporations, including Google, Apple, Microsoft, Amazon, and cell phone providers… have vast information on much of humanity—and the means to steer us in any way they choose.”

And in large parts of the world which are democratic, this is something worth thinking about.

The column was originally published in the Bangalore Mirror on January 11, 2017

Why Capitalism Won

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After the end of the Second World War, the Soviet inspired communism and socialism started to spread through large parts of the world.

Some of it (the communism bit) was pushed by the Soviets themselves with the weight of their big army. And some of it (the socialism bit) the countries adopted on their own. India is a good example of the latter trend.

In fact, for a very long time, the bet was that the Soviets would win and the Soviet economy would become larger than the American one. But that never materialised. In fact, this idea was even a part of the most read economics text book during those days, written by the American economist Paul Samuelson.

As Daniel Acemoglu and James A. Robinson write in Why Nations Fail – The Origins of Power, Prosperity and Poverty: “In the 1961 edition, Samuelson predicted that Soviet national income would overtake that of the United States possibly by 1984, but probably by 1997. In the 1980 edition there was little change in the analysis, though the two dates were delayed to 2002 and 2012.”

But nothing like that happened. By the time Mikhail Gorbachev became the General Secretary of the Soviet Union in 1985, the Americans and the rest of the West, had won. Gorbachev was more practical than the previous Soviet leaders and even launched the policies of glasnost (“openness”) and perestroika (“restructuring”) to get the moribund Soviet economy going.

The story goes (and it is perhaps apocryphal) that Gorbachev sent a key aide to London to learn a thing or two about what the British were doing well, which the Soviets clearly weren’t.

The British played good hosts and Gorbachev’s aide was taken for a tour of the city with places like the London Stock Exchange and the London School of Economics being on the itinerary.

As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “After a few hours, the Soviet expert burst out: ‘Just one moment, please… We have been going back and forth across London for a whole day now, and there’s one thing I cannot understand. Back in Moscow, our finest minds are working on the bread supply system, and yet there are such long queues in every bakery and grocery store.”

Gorbachev’s aide was surprised that in London there were no lines in front of supermarkets and shops for bread, even though millions of people lived in the city. The aide ended up saying: “I haven’t seen a single bread queue. Please take me to meet the person in charge of supplying bread to London. I must learn his secret.”

Of course, it need not be said, there was no one in charge for supplying bread to the city of London. And this is precisely why there were no queues. As Donald J. Boudreaux writes in The Essential Hayek: “There is no overarching—no “central”—plan for the whole…That larger outcome is… spontaneously ordered.”

This is precisely the secret of success of capitalism. Unlike in communism there was no central processing unit to supply bread to the city of London. As Harari writes: “The information flows freely between millions of consumers and producers, bakers and tycoons, farmers and scientists. Market forces determine the price of bread, the number of loaves baked each day and the research-and-development priorities.”

And this is why capitalism won at the end of the day. As Harari puts it: “Distributed data processing works better than centralised data processing, at least in periods of accelerating technological changes…When all the data is accumulated in one secret bunker, and all important decisions are taken by a group of elderly apparatchiks, you can produce nuclear bombs by the cartload, but you won’t get an Apple of a Wikipedia.”

Or even a Facebook for that matter.

The column originally appeared in Bangalore Mirror on October 26, 2016


Of Tata Nano and why the customer is always right


The Tata Nano car was launched with great fanfare in January 2008, more than eight and a half years back. In fact, given its low price point, the car was supposed to disrupt the automobile market in India.

One of the fears on which many columns were written was that the traffic on the roads would increase dramatically. The assumption was that way too many Tata Nanos would be sold. Nothing of that sort happened. This was also a point of discussion among people who already had bigger cars. They were worried, now that everyone would be able to afford a car, the traffic on the roads would simply explode. In that scenario, how would they drive their cars?

But nothing of that sort happened.

In fact, over the last one year (between September 2015 and August 2016), the Tata Nano Gen X has sold 15,949 units. In comparison, the Maruti Suzuki Alto 800, the bestselling car in this category has sold more than 1.69 lakh units.

More than eight years after it was first launched, it is safe to say that the Tata Nano is nowhere near the success it was expected to be. Many reasons
been offered for it. One reason offered is that by talking about the Rs 1 lakh price point, over and over again, the Nano was projected as a “cheap” car.

As brand guru Jack Trout told The Economic Times a few years back: “People don’t want a ‘cheap’ car, which their neighbours can see. Especially in India, there’s a prestige thing about buying a car.”

Another reason offered was that with all the hype around the car, people were expecting something out of this world. What they got was a normal car.

Still others felt that the launch should have been small instead of the big bang launch that was carried out at the 9th Delhi Auto-Expo in January 2008. The press from the entire world descended on Delhi to cover the launch of the Tata Nano.

Nevertheless, as marketing professor Nirmalya Kumar put it: “When the product development is radical you always do a small launch. They did a huge launch for Nano. They should have done a smaller launch.” The idea was that any innovation which as radical in nature as the Tata Nano was, needs to be tinkered with and it gradually needs to be figured out what the customer really wants.

But with a big bang launch, the tinkering that Kumar talks about was no longer possible. Another reason offered for Nano’s failure was that the negative publicity that the company faced in the aftermath of some cars catching fire in 2010.

The one thing common with all these reasons is that they were all offered after the car did not meet the expectations that it was supposed to. Hence, there is a huge hindsight bias built into these reasons. Further, some of the reasons offered could have been offered even before the launch.

Take the case of the Nano being projected as a cheap car. This was a reason that could have been offered even before the car was launched because everyone knew what the likely price point of the car was to be.

The point is that in retrospect many reasons can be offered for a product not doing as well as it was expected to do. Nevertheless, there is only one valid reason. As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “In a free market, the customer is always right. If the customers don’t want it, it means that it is not a good car. It doesn’t matter if all the university professors and all the priests and mullahs cry out from every pulpit that this is a wonderful car – if the customers reject, it is a bad car.”

And when it comes to the Nano, that is the only truth. The customers rejected it. We can keep figuring out the other reasons till kingdom come.

The column originally appeared in the Bangalore Mirror on October 12, 2016