Wednesday, November 14, 2012

Where is the money going?

First of all, before I write anything, congratulations to President Obama for getting re-elected. It was really a hard fought campaign by both him and the republican opponent Mr. Romney. The campaigns by both men were a lesson in itself for anyone who closely followed this election. Now, throughout the campaign, I had many friends telling me how they disliked both the candidates. But I for one liked both of them and listened to many of their passionate debates and arguments about each other’s policy proposals. True that there were at times false, empty or just pure political arguments that clouded over the real issues. But bottom line: I always said to all my friends that I will be happy for anyone who wins and sad for anyone who loses. And that’s how I felt.
 
So now let’s gets back to the “fiscal cliff” and other tax breaks/increases that are supposed to be worked out before this year end. The statements from both sides so far is just like a deja vu to me! Increase taxes on the rich! Decrease taxes for everyone! Oh, by the way, who is rich here? – joint filers who earn above $250,000 annually? I am not sure how many living in big cities across the US would agree to that. But anyways, let me get back on track. Now, I have been hesitatingly on the side of increasing taxes on the rich (forget the 1% for now. I am talking about upper middle class – as $250,000 dollar family income, to me, in many big cities across US, is just that). As much as the other side of the argument was tempting and even made me rethink many of the policies that I thought was right, at the end of the day, I just had to give myself a gentle knock on the head and remind myself the word – “Demand!” And the aggregate demand has been low due to poor job growth and the overall gloom that hangs in the US and the world economy as a whole. And that gloom has prevented private corporations from stepping up investments as much as we would like. The few private capital spending we see from corporates is, to my knowledge, largely because of inventory replenishment. And so, though I am hesitant to say this, I still believe, government investments are needed now to push up growth in the US to a higher trajectory (the reason why I am hesitant is just due to the basic fact that government many times wastes money). And so this requires more revenue to the government in the form of tax reforms and some increases.
 
But recently, I have also started to fear and listen more carefully to the other side of the argument: that government does not create jobs! The reason: in the last four years, I have seen more printing of money than investing it. So, there goes my question - Policy makers from both sides of the aisle have been calling for reducing debt! The form varies. But ultimately, one thing would happen: government would end up with relatively more revenue for now. But let’s be careful – this might not last! Why? - because the government might just waste that money that would only add up to problems in the future. And maybe loss in revenue and higher debt again! So my question is – if we are going to follow the path of higher taxes, then where would that money end up going? What investments will be made? I would be willing to shout at my highest pitch to stress the word “Investments” here!
 
I know certain things have been promised – like higher spending on education, infrastructure, green economy, tax breaks to companies that invest locally, energy efficiency etc. But all this to me is as vague as it can get. All this sounds nice, but can we be more specific please? And I must say that I am little hesitant to just push forward the “tax increase” strategy without knowing what will be done with that money. I fear we are working in the reverse way of collecting money first by not telling the one who gives money on what we are willing to do with that. Maybe I haven’t followed the specifics much, but as far as I know, I am not satisfied that I have enough information on where the money would end up going by the government in the next four years. Can we please, please be more specific?

Thursday, September 27, 2012

De-colonize the mind!

The Indian government last week sent out final notifications to allow foreign direct investment (FDI) in the country’s huge retail sector, which by some estimates is more than a $500 billion market. Foreign companies like Walmart, Carrefour and such have been literally waiting at India’s door for almost a decade, hoping that someday the doors would open. The doors did open last week for the much awaited multi-brand retail sector allowing a maximum of 51% FDI in this enormous market in India, leaving individual states to decide on whether they would want this FDI in their states. The minimum investment that needs to be made to enter this market was set to $100 million, with a mandatory $50 million in backend investments that the government hopes would improve the rural infrastructure.
 
And as expected, there was a huge political backlash. While the concern of small retailers, popularly called “mom-and-pop” shops, was always the hot button in this issue, I was also struck by a very popular question among India’s masses. And this time the question came from none another than my own Dad, which I wouldn’t call “surprising”, but was a stark “reminder” on how much re-influence of minds is needed in a country that still carries the wounds of the ugly imperialism brought upon by the British, when India remained a British colony for more than 200 years until 1947. While my Dad did not oppose FDI in this sector, in the heated discussion on this topic over the phone, he put out a strong but worrying comment, with his voice giving way to a mixture of confusion, uncertainty, distrust and fear. The comment was – “I don’t know if this will lead us to a form of financial imperialism, where today’s independent small traders will have to work for or be a subcontractor for these foreign giants, completely dependent on the terms and conditions set by them.”
 
For some reason, while experts and economists have tried to explain the benefits of FDI in this sector, going to the extent of the prime minister himself appearing on national television to promise that the entry of foreign retail giants would not decimate local small retailers but rather would increase the trade for the very same segment of the population, no one has cared to explain and root out the fear of “financial imperialism” in the minds of the masses.
 
Will this really lead to India being financially colonized by foreign investors? I think, at this moment, that fear is unwarranted even though I would call that a genuine concern. First of all, the English East India Company that set foot in India in 1600, and that gradually colonized the whole country with the monarch of Britain finally taking charge of the entire administration of British India, is very different than the companies that the country is inviting today to invest. In those heydays of imperialism, companies like the English East India Company were directly backed by their Kings and Queens. These companies had monopoly rights when it came to operating on the soil of their colony. They had their own armed forces, police, judiciary and other agencies to carry out the dictate of their Kings and Queens in the name of protecting trade. In effect, this meant that the British Queen was directly ruling over India with a proxy trading company. When the local populace did not agree with their rules, they were subjected to the law and order set by the British high command, with enough financial and military resources to back them in case of a conflict. Many times in those days, the local traders were either decimated due to the insane rules of the colonizer or due to manipulation of the minds of the illiterate or by just pure force.

But that situation is very different from what is today. Today, we set the rules when the foreign companies want to come in and invest, not them. Today, the country has well passed the threshold of succumbing to any foreign military pressure. And today, these companies are not backed by their governments in military or even financial terms. The country is not devoid of intellectuals and think-tanks anymore. The country is not completely blind to what is happening in the outside world or what these companies’ interests are in. Above all, today, the country is well integrated into the global economic order, for the good. 
 
Debates can go on, but we also have to realize that the country is severely lacking the financial capital that it needs to augment the strengths of the huge human capital that is at its disposal. We tried in the past to use our own money and resources for everything. But that was not sufficient then. And it is not sufficient now. If we ever have to eliminate the crushing poverty, disease, illiteracy, malnutrition and ignorance that prevail in modern India, we need to realize that we have entered a “no-return-zone” in this integrated global economic order that defines and will define the 21st century. The ideologies of the past will not change this definition. And let us remember, this is for good!  
 
In today’s globally integrated economy, India is a major player. Capital flows in all directions. It is up to the populace of an area to absorb as much capital as possible to productive areas where there is a need. Else, that capital is not going to vanish in thin air, but would rather flow to other places where it is not desired, or would end up boosting our own neighbor’s wealth, thereby making us look poorer in the same street, even though what we earned yesterday is no different than what we earn today. And of the three forms of capital (FDI, Equity and Debt) – FDI is the most preferred, as that promises real investments in plant, machinery, human capital and other infrastructure. All this would lead to more jobs. This is much better than equity or debt financing through the Foreign Institutional Investment (FII) route that results in value of “paper” going up without a promise in the improvement of the lives of the people who deserve most. 
 
As I have said many times in this blog, the world is awash with liquidity, and it is in India’s best interests to attract as much capital as it can through the preferred FDI route, with promised benefits to millions of people, who deserve that capital the most. Of course, nothing comes without risk and it is the government’s utmost duty to protect the vulnerable,with efficient policies and regulations, who will initially be disturbed by the shake in the economy due to this inflow of foreign capital. But that shouldn’t prevent us from doing what is best for the country and the masses in the long run. We exercise today to remain healthy tomorrow. We were wrong yesterday to allow government backed monopolistic companies to dictate us their rules. We will be wrong today if we do not allow private capital to compete and flow to sectors where there is need and space. 
 
And my Dad finally calmed when I reminded him that by not allowing foreign capital to compete with local capital, we will be inviting imperialism by our own countrymen!

  
References:
1. http://www.thehindubusinessline.com/news/politics/article3922165.ece

2. http://timesofindia.indiatimes.com/business/india-business/Wal-Mart-eyes-51-stake-in-new-India-retail-arm/articleshow/16583338.cms

3. http://in.reuters.com/article/2012/09/14/india-fdi-reform-retail-facts-idINDEE88D0DM20120914 

Wednesday, July 25, 2012

Diesel is not Petrol!

These days, one can hear growing calls in India and from abroad to de-regulate diesel prices in India. Though this is what should be done in an ideal free market society, such a move will wreak havoc across a huge population of middle, lower, poor and very poor households across the country. It is agreed that the government supported oil firms have been facing quite a huge loss of revenue due to the fact that the government fixes the price and keeps it down (a subsidy). But at the end of the day, government compensates their loss by using the taxpayers’ money – which in turn is a huge expenditure to the government that balloons up the fiscal deficit. First of all, to be honest, I have been very uncomfortable with the government subsidizing diesel for all Indians for decades. Multi-millionaires and billionaires get a subsidy to ride their luxury cars. Not fair! So my point was always to find ways to eliminate these wrongful subsidies, but an all-out elimination of diesel subsidies will shoot inflation to unimaginable levels that the poor will find very difficult to cope with. And already, inflation is unbearable to many of India’s poor. Ultimately, the goal here of intellectuals asking for a de-regulation in diesel prices is to reduce government’s deficit and debt – which could then be used to serve the poor in better and efficient ways in the forms of jobs, opportunities and markets. I agree! But come on guys! In our intellectual thinking we got to mix practical facts as well! Do we really expect the government to come up with “immediate” steps to tackle the sufferings of the poor and the middle class with the rise in diesel prices ?– which will undoubtedly shoot up the prices of literally everything within a short period of time – literally everything that requires transportation – from food to building forts! And the international oil situation doesn’t look favorable now to determine this to be the right time to de-control diesel prices. (By the way, I have never supported petrol subsidy which was rightly eliminated sometime last year).

Unless the government and the population as a whole are clear about how the people would be protected by undue rise in diesel and other commodity prices that would follow as a result of de-regulation, the government should not de-control diesel prices across the board. It is understood that the markets would adjust themselves based on the factors of supply and demand - which, I agree, has a lot of favorable factors when looked at a broader angle (“green economy” comes to my mind).  But my point is that this adjustment should not come by breaking the backs of the middle income and poor people. The think tanks and intellectuals should be talking and thinking about coming up with a solution that would do no or less harm to all, rather than blindly following the text book line of market-based pricing. India is a unique country with “billionaires and “below-poverty line-ers” and hence the situation warrants unique models that are based on the principles of equity. And for small businesses across the country, they have a long way to go to catch up on technology to cope up with every day fluctuations in diesel prices. So giving them time, clarity and directions is a basic courtesy.

I personally think India should push more for sanity in international oil pricing in international forums such as G-20. There is enormous work that needs to be done from OPEC to plugging holes in international commodity futures trading. In the last few years, the trend has been such that oil prices would remain at around $90/$100 range, no matter if the economy is improving or declining, unrest in Middle East or democracy in Middle East, flourishing emerging markets or slowing developing economies. With traders becoming more and more tech-savvy and profit hungry, they have clearly found ways to manipulate markets that is so difficult to regulate correctly. At this point, I am unable to say if the markets have priced oil right or if the speculative powers have run wild, though I fear the latter. An article in Bloomberg.com caught my eyes that day – it read – “Oil rose for a third day, the longest winning streak in a month, as slowing growth in China fueled stimulus speculation and U.S. equities advanced”. Now, I am sure oil will rise for the fourth day as well even if the news read something like – “China’s growth is NOT slowing as much as it was predicted earlier”. So a slowing growth or roaring growth – oil prices somehow manage to remain at levels where it is “kinda” uncomfortable to the common man. I know that trading deals with high levels of sophistication that cannot be so simply explained or ignored citing speculation. But hey! It’s complicated, right?  So one has every legitimate reason to atleast “speculate” that speculators are running wild – either knowingly or unknowingly! And count me in that league.

But coming back to the India case, the country needs to focus on other methods of reducing debt and deficit – like selling stakes in government owned enterprises, opening certain sectors to more foreign investment, tax reforms, rooting out corruption and removing wasteful subsidies. And that does not, in my opinion, involve blindly de-controlling diesel prices all of a sudden for the entire population.

Finally, I understand the huge benefits of completely eliminating diesel subsidies in the long run, and I agree that at some point in time, diesel prices have to be de-controlled. But my opinion is that this is simply not the right time. And this is not the way we should do! We cannot dream of a prosperous 2020 economy by destroying the economic lives of millions of Indians in 2012.  


References:

  1. http://www.bloomberg.com/news/2012-07-13/oil-little-changed-in-new-york-reversing-earlier-gain-of-1-4-.html
  2. http://www.thehindu.com/business/Economy/article3662137.ece
  3. http://www.thehindubusinessline.com/industry-and-economy/government-and-policy/article1628103.ece
  4. http://www.indianexpress.com/news/diesel-deregulation-to-up-price-rs-14.3-ltr/937955/

Tuesday, July 10, 2012

The Next Step!

We have been seeing many major economies around the world struggling to grow – Europe: struggling with the sovereign debt crises of many of its “Euro” countries, United States: struggling to reduce unemployment and create jobs, China: struggling to stop the slowdown in growth, India: struggling to fight high levels of inflation and slow growth, other emerging market economies: struggling to face the fact that they need a stronger developed world and China for themselves to grow.
 
And what is the one common factor that is holding down so many economies? Fiscal climate. Every country has its own fiscal problems, but none have been able to address them efficiently. One common scenario in all major countries that are in trouble is the need to reduce the fiscal deficit. But how? – is the debate! And the debate has been going for so long without any decisive actions on the ground that we are entering a dangerous phase in the global economy. It’s not that the money that was present during the pre-crisis period has disappeared in thin air. The money is still out there, just not at the right place. In fact, all major economies of the world have poured more money (created money) in the last two to four years in the form of monetary stimulus by their central banks. So where is this money? Why don’t we see enough investments? Who is having this money? And what are they doing with this? Atleast during the peak of the crisis in 2008/2009, countries like China, India and Brazil were growing at impressive rates that kept the global demand for goods and services at an acceptable level. But, recently, even these emerging market economies have been slowing. 
 
In an ideal world of free markets, capital would have moved where it is needed and where there could be profits to those moving the capital. But what is that happening now that despite relatively low interest rates, the US government still does not want to use the investors’ money to invest in infrastructure and R&D projects that are direly needed in the world’s largest economy? What about Europe? Have the investors completely lost faith in the European people forever? And China? Do global investors think that China’s growth is unsustainable because they lost faith in European governments and losing faith in the US’? Or that China cannot domestically sustain itself? And India? What happened to the global attraction that India had in the last decade? Faded? Why? Inflation? Fiscal deficit? Current account deficit? Unemployment? Lack of investment sentiments? Well, in economics, one could easily mix and match these words in the same sentence to define the troubles of an economy. But underneath all this, there is one word that holds all the troubles together – Debt!
 
Huge national debts in many countries have caused enormous fear among people around the world (investors, mainly) such that the capital is not moving to places it should and people are holding it back! And when governments rely on such debt-financing to meet their capital needs, then the fear of unsustainable debt only grows further among investors and business people, thereby resulting in a sudden reduction of debt-finance. And if nations haven’t invested their capital at the right places, then this sudden reduction of debt flow to finance the capital needs of the nation causes disruptions in the everyday functioning of the economy – and widening of current account deficits, fall in the value of the currency etc. ensues.  So should nations borrow less from investors to stay out of trouble? Well, the better answer would be if nations invest the capital they get in productive areas rather than populist and ill-advised programs. But we have seen from experience that with a “power-struggle” to remain in power lingering always, and people’s sentiments so volatile and easy to capture, populist and ill-advised programs always pop up from the political spectrum.

So at this moment, all over the world, to get capital flowing again – to the right places – as the free markets dictate, it is extremely important to reduce debt in all major economies that are floating in a river of debt! And, though definitely not a fan of tax increases, I see that as a must – atleast temporarily, to gather cash resources to reduce debt, deficits and above all – to invest, productively! A wise government would do this without affecting the standard of living of its people – and yes, there are ways that could be done if the tax increases and/or tax reforms and removal of inefficient and ill-advised government programs are directed at the right section of the society (read: rich) – who won’t stand affected at the end of the day. After all, the struggle now to reduce debt globally is to provide a better future for all – which requires best investments in various areas of science, technology, education, health, climate and infrastructure. And the immediate challenge now is who is going to take the next step!? – Public sector or private? For one, even in the world of free markets, in my view, public sector is better organized to take the next step – even globally (read: G-20) - and I am sure the private sector will then leap forward! Increased tax revenue to many governments - US, India being the best examples - in the form of appropriate tax reforms, without affecting the long term private  investment climate - is an urgent need for today’s economy and tomorrow’s children.
 
Bottom Line: Government is a key player in free-markets and not an outsider! When it is time for it make the move in the game, it means the situation is ugly, and the move is not going to be perfect, but it still has to make the move for the game to continue – and that would require giving some resource to the government – for otherwise the game is stuck!

Wednesday, February 8, 2012

Does Aid = Business?

India recently finalized on the French made Rafale fighter aircraft for her Air Force on the deal to procure 126 Medium Multi Role Combat Aircraft that is worth initially around $11 billion - and with other related on-board procurement, maintenance and warranty the price tag is expected to almost double. After many contenders were dropped one by one – that includes US made F-16 and FA/18, Swedish Gripen, Russia’s MiG-35 – in the bidding process, Eurofighter Typhoon and Dassault’s Rafale were short-listed for the final selection. And in that, Rafale got the deal. Now this has clearly upset the British who form a part of the consortium of companies that make the Eurofighter Typhoon (the other nations involved in the design and manufacture of the Typhoon are – Germany, Italy and Spain). I am not going to go into what made India select the Rafale fighter aircraft as I am not an expert on that area (one can only hope that this was a decision taken with pure technical reasons and other compatibility factors in mind, without any corruption involved in it. So far, all reviews seem positive on this). But what’s been astonishing is the anger and the showcase of “feeling betrayed” expressed by some British politicians and the members of the British parliament.

As this article in one of India’s most famous newspaper notes - http://www.thehindu.com/opinion/op-ed/article2866369.ece many British politicians have made this a political issue and have directly questioned the need to provide India with aid worth nearly one billion pounds every year. This aid, as noted in their international development department, is considered an aid purely for economic development efforts to help the poor. Right or wrong, India still has the largest number of poor people in the world and international aid money keeps coming into the country for various development efforts concerning the poor, even though India itself is an aid donor to many poorer countries. While it is a genuine argument from the British public to question the aid in terms of priority when Britain itself is not doing well economically, the sad part is that some politicians in Britain have directly branded this action of India to buy French aircraft for its Air force as an insult thrown upon the British and have noted that France gives less aid than them. The article also states that last year, the British Secretary of State for International Development linked the aid program to selling Typhoon to India on this mega deal. Inferring from the article, I see that India had been unwilling to receive the aid for quite sometime due to the negative publicity that this aid program has caused among the British public. But it is the British who insist on continuing the program (I am not trying to question their intention here without any proof, but the arguments linking any kind of aid to business deals is tempting one to question their intentions on any such programs).

In fact, Britain has been one of the top arms exporters to India over the years. In recent years, India has bought advanced trainer jets, helicopters for VVIP travel and underwater surveillance systems from British firms. Reading from a news source, I also understand that as per the data from the Stockholm International Peace Research Institute, Britain has exported arms worth $15.4 billion from 1950 to 2010 and Britain stands as India’s third largest arms exporter after Russia and US. So why all this fuss in this deal? Well, one reason is this is the single largest defence deal that is in making at the current moment in the entire world. And the other reason is that this deal has pitched various defence firms against each other, directly getting them into competition that is watched all over the world. There could be other strategic reasons which I don’t want to go into. But then any business will have competition, some win and some lose. It’s part of the game.

Coming back to the aid program, I think it’s the responsibility of the British government to make clear to the public on why they would want to give aid to poorer countries. If it is for assuring business deals in the recipient countries, then No! Sorry, we don’t need your money. If it is purely for economic development efforts that would help lift thousands out of poverty, then it is up to the British government and its people to decide on the priority, when and how much to give. The recipient country cannot be blamed for decisions that are taken that do not favor the British, especially when the decision is made purely from a technical perspective.

References:

1. http://www.thehindu.com/todays-paper/tp-national/tp-newdelhi/article2873536.ece

2. http://www.thehindu.com/todays-paper/tp-national/article2873679.ece

3. http://www.thehindu.com/opinion/op-ed/article2866369.ece

4. http://www.youtube.com/watch?v=GF-67ShsSZ0

Friday, September 16, 2011

Inertia or Hangover!?


Anyone who has been following the Indian economy would have noted the growth momentum slowing and high inflation having adverse affects on the lives of the poor. There are two main reasons for this slowing growth momentum:
  1. External factors – US unemployment, Europe’s sovereign debt crisis and high oil prices.
  2. Internal factor – incomplete or stalled economic policies within the country.
While there isn’t much that could be done to the external factors affecting the economy, definitely a lot could be done on the internal policy making. In fact, on the external front, I would say, India has managed pretty well. Due to its high savings rate and a booming middle class, India was able to sustain the domestic demand to a considerable level during the last two years of tough economic climate. Indian exports rightly diversified and penetrated deeper into the South American, African and East Asian markets, which helped offset demand sluggishness from traditional western markets. But even exports to the sluggish western markets weren’t that adversely affected – thanks to supportive policies from the government and the entrepreneurial strategy of the Indian businesses to acquire, learn, consolidate and expand (and of course, the cost saving methodology of the western companies played a role here).

But on the internal front, very much expected (and needed) reforms were not done. This has caused not just the inequality to grow during the years, but has also resulted in the stalling of the growth in the quality of living standards for many Indians – and that includes the middle class. A reason to worry is the decline or lack-of-growth in the foreign direct investment (FDI) in the country. With western markets facing a sluggish demand, India could have attracted a lot more growth-oriented FDI from western businesses who seek to tap into the booming eastern markets. But for some reason, these concerns, though well known, weren’t addressed. And if the slowdown in FDI was rightly looked into and addressed appropriately, India could have used the world’s cash resources at the right time to seek its own growth through the attractions it has in today’s world economy.

One of the cases I would like to make on this is in allowing FDI in the multi-brand retail sector. It is true that millions of Indians all over the country are in the informal retail sector, called mom-and-pop stores. But it is also true that there are even more millions who have been very adversely affected with inflation that has remained at uncomfortable levels for more than two years. And not to mention the food inflation that has remained dangerously in double digits for the last two years. Initially, the food price inflation was attributed to poor monsoon in the year 2009. But subsequent monsoon seasons in 2010 and 2011 have been successful - yet, there has been no success in bringing down food inflation that affects the poorest of the poor much. Some would now argue that this proves that it is a genuine supply-demand mismatch. While that is true, what is also true is that this mismatch is not caused just due to natural factors. Yes, undoubtedly, I sense, hoarding is taking place, where a huge industry of “middle-men” are getting benefited. Food prices have gone up by unimaginable levels, yet farmers remain poor, to the level of committing suicide sometimes, and non-farming related poor too suffer unimaginable consequences due to these high food prices.

By not allowing a 51% FDI in the multibrand retail sector, government is not helping the mom-and pop store owners, but rather, either knowingly or unknowingly, is helping domestic big shots and corporations, where their entry into virtually every field, without prior experience, is seen these days. This has only further increased inequality, apart from affecting the standard of living for the Indian consumers – since the new entrants, who were not experienced in this sector before, offer poor training to its employees, poor services to the consumers, poor quality and incompletely provide the benefits that one would expect from such big corporations jumping into businesses. Having concerns for those mom-and-pop store owners in towns and villages across the country, I would suggest starting a pilot program by allowing foreign multi-brand retailers to setup stores in tier-I and select tier-II cities across the country (and yes, the allowable limit can be 51% - with rules and regulations favoring backend and long term investments, and the 49% is for the domestic companies to learn, adopt and further invest). After all, I think its time to concentrate on improving the quality of lifestyle for many middle-class and poor Indians. And I believe foreign investment (initially in tier-I and select tier-II cities) in this sector would help India achieve this.

My personal belief is - this will also help in addressing the deficiencies India has in the farm-to-fork structure. Food processing and cold storage can be expected to come up, that would reduce the amount of grains and vegetables from getting rotten - which will help in bringing down food inflation, more income to farmers, meeting demand, more foreign technology and training to domestic youth – all of which should improve the standard of living and reduce inequality. And this will also force public investments in roads and other vital infrastructure. While I am not finger-pointing the retails sector alone here, it is also becoming true for many other sectors.

And almost the same applies for the Infrastructure sector, where more than $1 trillion is needed in the next 5 – 10 years to meet the demand. When it comes to infrastructure, the FDI limit in the insurance sector being just 26% is preventing many foreign corporations to step up investments.

It is important that India stops calling itself poor for the sake of adopting polices, which in the name of “helping the poor”, isn’t really helping. While it is a fact that India has the world’s largest number of poor people, it is also true that some Indians (or Indian corporations) have extra-ordinary amount of money, with no experience in certain sectors. With lack of FDI, and thereby the lack of foreign competition and technology, these Indian corporations are tempted to jump into sectors where the demand is enormous from the booming Indian middle class – thereby reducing quality and increasing inequality. This sometimes makes me think that, though the night-out with “License Raj” is over, its hangover remains, in form or the other.  

Thursday, June 2, 2011

Inter(Euro)National Monetary Fund

As soon as it became clear that the International Monetary Fund (IMF) requires a new chief, Germany and other European council members jumped in to say, or rather assert strongly that the next IMF head should be a European (as always been). But such a public announcement of preference (or requirement) has rekindled the question of credibility and correct international representation in the IMF. With the amount of voting shares the European nations have in the IMF, it was unnecessary to go public in asking a European to be the next IMF managing director. All that they required was to talk to themselves and bring in US and few other countries on their side to select a European as the next IMF chief. And the reason that the European nations say for this - that with the amount of debt problems faced by the Euro zone countries it is only appropriate for a European to head the IMF, is inappropriate at best. No one recalls an Asian heading the IMF during the Asian financial crisis in 1990s.

IMF is an international institution with 187 member countries that is meant to be transparent to its member countries in its operations. And a single person at the top of the IMF cannot take decisions solely based on his thoughts. So why does Germany or any other European country think that only a European would fit in that post? How are the non-European countries supposed to interpret this? - 1. That non-Europeans are not capable to handle this post? Non-Europeans are not trustworthy to discharge duties without any bias? Europeans are using this institution in their favor in a biased way? Tradition should not be changed? The answer that the European nations give is that they need someone politically savvy to understand Europe's debt problems. But what happens after Europe's debt problems are brought under control?

Rather than controlling their fiscal problems within their own region (Euro) by forming strong Euro-institutions, the Euro zone countries are trying to leverage the power they have in an international institution. But anyways, all that one can say is - We knew this and we don't care for now. Now don't be surprised (or angered) if an Asian Monetary Fund (or talks of it) props up sometime in the future.