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.  

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.

Food Security - It's Time to Act!

When I wrote my first blog article in August 2009, I touched upon the topic "food-inflation" in India. And at that time, food-inflation was expected to arrive due to poor monsoons in India that year. And as expected, food-inflation kicked in. It went up all the way to around 20% (with some vegetables hitting triple digits), held steady around that rate for quite sometime and started coming down through the year-2010. But in the last month, due to enormous rise in onion prices (and many other food-prices such as those of vegetables, milk etc that never came down in reality), food-inflation started shooting up again and now stands at around 18% in India.

In South Korea and Thailand, food-inflation is felt. In Russia, due to heat-wave and drought that destroyed wheat crops last year, food-inflation is felt. In Pakistan, due to floods that damaged wheat crops, food-inflation is felt. In United States, even when everyone speaks about the fear of deflation, corn-prices have risen. In Australia, tomato prices are expected to go up due to the recent floods. The food of the poor - "rice" is in great shortage all over the world and its prices have risen.

And to beat this food-inflation, monetary policy is tightened in many countries for the fear that this food-inflation might slip into the broader inflation. But I should say that this is like taking cover under a tree when it's raining. These monetary policy solutions are very much temporary. To beat this food-inflation, a much broader thinking and a much greater investment model is needed.

What does a monetary tightening do? - Cool down a heated economy by slowing down the business activities in an economy. So, what happens when business activities slow down in an economy? People buy less and probably save more. As a result of this, a weakening in demand takes place that bring down the prices of many commodities. And with the general prices cooling down, it is expected, that a farmer or a retail food store would sell the food produce/products at a cheaper rate. But this kind of policy action will bode well for all goods except food. I don't understand what the governments are trying to do if they keep relying just on monetary policy tools to combat food-inflation. Do they expect people to consume less food through these monetary policy actions? Sigh..sick!

Policy makers need to understand (actually they do but are just dormant) that the food-inflation felt all over the world is not due to increased liquidity in the financial system but due to global shortages of food. And the weather has been increasingly non-supportive for food-production in the past two years in many key agricultural countries, though population and prosperity (and income inequality) keeps rising in the world. Let's assume (just assume) for our analysis sake, that an entire economy comes to a halt due to maximum monetary tightening (again, just for the sake of assumption). But food, being the most essential item, will still have to be bought even if that money has to come from a savings account. And food-inflation would still be felt if there are shortages in food-supply. It is as simple as that - this is a supply-side constraint and not a demand-side pull. And remember, it is the most basic food items such as rice, onions, wheat and tomatoes that are in shortage.

To combat food-inflation on a longer term, in a world of rising population, we need investments in food-production at a global level supported by global financial institutions like World Bank to increase productivity in food-production in poor and developing nations (Admission: I see this happening to a certain extent though the pace remains slow). It is also important that agricultural markets are opened more in developed countries to encourage investments and production in agriculture in poor and developing nations - for it is in that part of the world where there are a large number of farmers producing food at a cheaper rate. And to increase efficiency, countries like India must seriously study the benefits of opening retail trade (atleast in food and food-related items) to foreign investment. But I know I am touching on sensitive subjects when I speak about opening agricultural markets further in developed world or opening retail trade in India.

It is important that not just energy-security and financial-security, but also food-security becomes an important topic of discussion in the G-20 forum and beyond. As long as we see distorted patterns in agricultural investments (and subsidies) between the developed and developing world, and as long as monetary policy tools are used to combat food-inflation instead of fiscal policy tools, and as long as agrarian economies don't enact "better" and "efficient" farm-to-fork policies, it would seem, on one side, that we are pulling millions and millions of people out of poverty, but on the other side we will also be pushing millions and millions of people who already are in poverty, further down deeper.

A Challenge for Central Bankers in 2011

Stock markets are back up! Commodity prices are surging! Retail sales have climbed up impressively in the United States this holiday season! Unemployment claims in US has come down recently to a more than expected level! Hurray! We are back to normal! - is the feeling many are having these days. I hope and wish all these improve further and are sustainable. But when some common people and business persons would start to find some relief from this news, the central bankers, while equally feeling a little relieved, would also be counting in on the hard-work (and for that matter hard-thinking) that they will have to do this year.

Currently, the interest rates are relatively and notably higher in the developing world than the low interest-rate developed world. Capital has been flowing to the developing economies from the developed world throughout last year - only to be fought back by the developing countries to prevent hot money from coming in. But despite this struggle, considerable amount of capital has found its way through to the developing economies, especially into the stock markets. One result of this - a surge in real estate prices (not that foreign money alone was responsible but definitely played a significant part).

When the US economy stabilizes this year, the central bankers in the developing countries would be breaking their head to enact appropriate monetary policies and to prevent any drastic currency volatility since they know that there is a huge possibility for considerable amount of capital, especially from the equity markets, to flow out. At the same time, central bankers in the developed world will be breaking their head to ascertain if the growth that they see in the economy is sustainable. And one of the factors that they will be looking into to assure themselves is the unemployment rate. There has been some kind of fiscal policy support from US government (thanks to some kind of measure done in this regard recently in US - whether what done was right or not is a matter for discussion at some other point in time), that should act favorably for the economy. And moreover, times are different now than what was a decade ago. Even at the setback of the US and European economies, countries like China and India have grown at impressive rates. And as these countries grow, so does the consumption of raw materials by these huge populations. Oil is trading at around $90/barrel, food-inflation is felt all over the world (as per the data released today, UN Food and Agriculture Organization's food price index rose 32% in the second half of year-2010 (not adjusted for inflation), gold prices are surging and so does copper, silver and many other raw materials.

But how much of them are sustainable? Is a commodity bubble in formation? How much inflation and price-rise is attributed to speculators and hoarders? How much is attributed to genuine supply-demand mismatch? With all this and with corruption still having a large presence in the developing world, it is going to be increasingly difficult for central bankers in the developing world to enact monetary policies. And we have to remember that there is always a lag between the time a monetary policy is adopted and when the actual effect is felt in the economy. In the meantime, when deflation was the core concern in US in 2010, 2011's concern is yet to be established - and this will be the concern of US central bankers.

Now what about our European friends?! They will spend time in trying their best to preserve their monetary union and thereby the currency - Euro.With some Euro-zone countries like Germany growing at impressive rates (which will only further grow when US economy stabilizes this year) and some Euro-zone countries adopting fiscal austerity programs due to their heavy indebtedness, it's going to be challenging for Euro-zone central bankers to come up with coordinated policies.

So, with all this, my question of the day - What's going to be the biggest challenge to central bankers in 2011? Answer: Global coordination in adopting policies. If all goes well, we can expect US interest rates to gradually rise around the end of this year, when the developing world around that time might be reducing interest rates to heat up the economy after it finishes cooling as a result of fading of stimulus and monetary tightening during the course of the year. If global macro-economic policies are coordinated, as was done at the wake of the financial crisis, then the policy actions of upward-downward movement of interest rates could be better and smoothly handled without disrupting the growth in the global economy.

The Dragon-Elephant Trade Agreement!

When Chinese Premier Wen Jiabo visited India last week, he called for a Free Trade Agreement (FTA) between the two Asian economies. And this is not the first time China has called for a FTA with India. But India does not view this FTA as an agreement that would work in its favor. While both China and India have separately concluded or are in discussion on FTAs with multiple countries and trading blocs, why hasn't a FTA gone through between these two nations?

There are various reasons to this - both politic and economic. But it's mostly been economical than political factors. India does not consider that there is a level playing field for this agreement to be done. Now what's the level playing field that India is talking about? - 1. Chinese currency, the renminbi, is undervalued thereby giving an "unfair" advantage to its products; 2. Chinese import tariffs are already very low, the further reduction of which would not really turn into a benefit for Indian products to penetrate deeper into the Chinese market; 3. Chinese govt. indirectly subsidizes many of its industries thereby making it tough for the Indian companies to compete. 4. China's tough rules and regulations favoring procurement from Chinese companies. From China's side, it is also true that the Indians are increasingly wary of investments done by state-run or state-affiliated Chinese companies, thereby making it difficult for Chinese companies to operate freely in the Indian market.

The trade between the two nations has grown sharply in the last decade which now stands at around $60 billion annually. But many experts have long complained that this trade is unbalanced and more in favor towards China. If one looks at the trade basket, it can be seen that most of the Indian exports to China are raw materials (as per 2005 data, iron ore was at the top of the list) and most of the Chinese exports to India are finished or processed goods (as per 2005 data, electronic goods were at the top of the list). There hasn't been much change to the 2005 data even after five years in terms of the goods and their relative weight in the trade basket.

China has used its manufacturing expertise, the supply chains it built to become a global manufacturing hub, coupled with cheap labor, to increasingly source raw materials from India, process them, manufacture and ship the finished product back to India. While there is nothing wrong with that, this pattern of trade has also resulted in a huge trade gap, with deficit largely falling on the Indian side. So, a FTA would just open the flood gates for cheap manufactured products from China that might erase some Indian industries. Well, there is nothing wrong in efficient use of scarce resources - that is, making products where it is cheaply and efficiently produced. But then trade works as a two-way street. One country's strengths and expertise should be used to offset the other country's weaknesses and vice-versa. So, while China efficiently manufactures products, India efficiently provides services. But many times, services are hindered by language and geographic barriers whereas manufacturing is not. This makes it even more difficult for Indian companies to penetrate the Chinese market in addition to all the protection that the Chinese govt. gives to its own services industries.

One way or the other, both China and India, having a large number of poor people, still have lots of protectionist policies in place. Both countries provide some level of protection either in the form of tariffs or incentives to many of their domestic industries. And with China's dominant role in manufacturing and India's worry about the extent to which it's services can be taken to the Chinese market due to various barriers, getting a FTA done is becoming increasingly difficult - and all this is in addition to the complaints of the Chinese renminbi being undervalued.

But when you consider not just economical reasons but also political and strategic reasons (where the two countries still have a lot of mistrust on each other), it's the trade that should bring the two countries closer, which is vital for global peace and security in the twenty-first century. I have always thought that nothing brings two nations closer than people-to-people contacts. And people-to-people contact itself increases when the trade between the two nations increases.

So then, should they go for a FTA? Or is a FTA even possible? Well, the answer is - the situation is still not ripe for a FTA but definitely the two nations should go for a PTA - Preferential Trade Agreement. In a PTA, the two nations can identify each other's strengths and weaknesses by individual sectors and can facilitate trade accordingly through reduction in import-tariffs and greater market access. For example, when China can supply cheap but efficient computer hardware to India, India can provide cheaper but efficient software services to Chinese businesses. Going even deeper, the deficiencies within individual sectors could also be identified and rules worked out for the benefits of both the people. Starting with PTA, we can hope for a FTA sometime in the future.

The re-opening of Silk Road's Nathu La pass in 2006, after 44 years since it had been closed due to a brief China-India border war in 1962, had been beneficial to many poor traders and farmers who live in the border areas of both the countries and so would be a PTA to a greater section of the society in both the countries (together where around 36% of the human population live). It's worrying that trade between the two of the fastest growing economies is so little (compared to the actual size of the total trade in China and India) and it is even more worrying that there hasn't been a trade agreement between the two nations yet. A PTA would go a long way in making roads for achieving a FTA at the right time in the future. Increased trade between China and India would also connect the rest of the Asian community to this trade link and would possibly form a mega Asian trade zone. This is needed not just to bring the millions and millions of people, who live in those regions, out of poverty but also to achieve global prosperity, peace and security in the twenty-first century.

Microscopic watch needed in Microfinance

It's been really disturbing to see the news around Microfinance Institutions (MFI) in India these days. By definition, these MFIs lend to the poor who cannot get access to bank credit and these are usually termed micro-loans since the amount lent itself is in few thousands of rupees (few hundred dollars).

Now what happened that these MFIs are in news? In an Indian state called Andhra Pradesh, where the largest number of MFI borrowers exist, there have been around 50 suicides and many have blamed that MFIs have used coercive methods to collect interest on these borrowed loans from these borrowers that has resulted in these suicides. MFIs deny it. While it is hard to say if this is true or not, which only an honest investigation can reveal, the thing that's been troubling me is the lack of transparency, not just on activities but on factors leading to policy decisions, in these MFIs. These MFIs charge an average interest rate of around 20%-40% annually. And MFIs say that such high interest rates are due to the high loan servicing costs. Reasons they give for this - the volume becomes more when lent in small portions to many individual borrowers; reaching and collecting money at remote villages and then there is the high risk factor to be calculated on these loans and the interest charged by state-run banks from where these MFIs avail money to lend to the poor.

Alright, the reasons they give seem genuine. But that's only one side of the coin. It's not an easy task for a poor who has had no or very little education and no or very little business-experience to earn an income that would surpass these interest rates. From the news I read, I see that the interest on these loans is generally collected on a bi-weekly or monthly basis. But many of the poor people who live in villages are largely farmers whose income is seasonal rather than monthly. Even if you consider just the non-farming people, there aren't many businesses that could be done in a rural village by such poor people that would give returns surpassing the high interest rates.

So now, these are the questions that linger in my head:

1. How do the MFIs decide on the people to a whom a loan could be given? Many times it is said that the loans are given to Self Help Groups (SHG) but what constitutes a credible SHG and what kind of verification is done?

2. How much percentage of the total loans in a MFI is for people who already have a business and want to expand and how much is going to people who want to start new businesses? Who is validating the claims done by the borrower to check the creditworthiness and how? What kind of requests for loans are trusted, validated and approved?

3. Since MFIs have been recently allowed to access capital markets, why are the interest rates still so high?

4. How does a MFI which has accessed capital markets differentiate the interests of an investor to that of a borrower? During times of conflict, who is given a higher priority - investor or borrower? What policies are adopted in this regard?

5. I know many MFIs share information to prevent a borrower from obtaining too many loans that would hinder his/her ability to replay. But are all MFIs registered in a centralized database?

6. And many more such questions.....

There has been a hue and cry about capping interest rates from the industry since they say that that would hinder growth in the industry and thereby credit to more number of poor people. Alright, let's not cap interest rates with a fixed number but why not set a target range for these interest rates? How about capping interest rates with a range instead of a fixed number? Why not the MFIs be asked to NOT exceed an interest rate of +X% the average of all MFIs' interest rates within a region (state)?

I ask for this because here is the problem - many of the borrowers are very poor and they traditionally depended on local village loans given by relatively richer people of the village to meet their needs. But these relatively richer people sometimes charged/abused the poor with super high interest rates and coercive collection methods. MFIs were considered saviors of these poor people in this regard. But the interest rates are still enormously high. While it maybe much lower than the ones charged by the relatively richer people of the village, it is still high, which will make the poor to reach the relatively richer people of the village to borrow money just to pay interest on these loans borrowed from MFIs. There is no way one could track if the interest that is paid timely is from earned money or if it is just again borrowed money from some other loan-provider. This might not be from another MFI but maybe from the so called relatively richer people who might suck the blood if the loan is not repaid.

These kind of borrowed loans would then spiral up and would cause the poor to reach a stage where he has no one to reach to borrow money to pay interest on these multiple loans and then comes the time when the poor is left alone to make a decision - a decision that sometimes makes him take away his own life.

There are many psyclogical ans cultural factors involved in this - for a poor man of this stage and in a country like this, debt is not just a liability but many times considered a shame. And if he is not able to repay the debt and when there are persons from the loan institutions knocking the house in a "harsher" way, the shame and guilt the poor feels reaches unimaginable stages. And this is where I get the fear about MFIs accessing capital markets. So my question again - How does the MFI differentiate the interests of the investor and the borrower, especially when the quarterly statement is not going to look well for that particular quarter? But I also agree the benefits of these MFIs accessing capital markets - especially this would reduce the dependency on loans accessed from the commercial banks by the MFIs, which should also be a factor that will help in reducing interest rates on loans given to borrowers from MFIs. But again, here is my question and fear - are these funds, accessed through capital markets, used to improve quality (by reducing interest rates) or to improve quantity (reaching more people without reducing the risk factors)? And not to forget the system-wide risk , since the public sector banks are in the link through loans to MFIs (if we look at the data from the Mix Market site, that has data about global MFIs, one can notice that the growth in the gross loan-portfolio of these MFIs is climbing at high-speed).

Now one more thing that needs to be done, as many analysts have been saying, is to allow MFIs to accept deposits. This would help the MFIs to depend less on commercial banks and capital markets and use more money present within their own system. Currently, the hindrance to this is in the Indian policy - MFIs are classified as "NBFC" - "Non-Banking Financial Company", whereas only institutions classified as "Commercial Bank" can accept deposits. I think a waiver needs to be given to MFIs in this, while making them accept to additional supervision by the Reserve Bank of India (RBI) - India's Central Bank. Also, some kind of study needs to be done to see if deposits below a certain amount could be insured, by a combination of the central and state governments' money, to encourage more savings by the poor.

There are two sides of the coin here - MFIs cannot simply sit idle on a loan or interest not repiad timely. After all, it is business and it is a loan, not free money. But since poorest of the poor are involved in this, who many times do not even have a proper, transparent and secured access to the legal system of the country, for any wrong doing by the bigger player in the game (read: MFI) and with increasing link to the system-wide banking, I would like to have a microscopic watch by the RBI on the activities of these MFIs, even if that requires new policies or amendments in policies by the RBI.

Exporting to Aliens!

In these tough economic times, every country – be it developed or developing - is trying to export their goods and services to markets where there is demand. And this is the way the leaders of the world are looking to find a solution to bring the global-economy to pre-crisis levels and bring back jobs to millions of people unemployed worldwide. And where there is demand for this? Not on planet earth as far as I know.

Rich countries are increasingly trying to increase their share of exports to emerging markets. There is nothing wrong with that. But these rich countries wanted to use this increase in exports to offset their large debt-loads and deficits. There is something wrong in this. Emerging markets and particularly the export-dependent ones are increasingly trying to stick on to their pre-crisis growth patterns, that is, exporting their relatively cheaper goods and services to rich countries. There is nothing wrong with that. But they wanted to do it indefinitely without diversifying their economies that will give more weight to their own people’s consumption rather than the debt-loaded but rich consumers in the west. There is something wrong in this.

There are talks about “currency wars” these days and every sensible person is afraid of the so called “beggar-thy-neighbor” policy – which relies on consumption of one’s goods and services by another person who cannot really afford it, through artificial means. However you call it - “competitive devaluation” or “competitive undervaluation” of a currency, it simply is not right and will not work. And the reason is “un-coordination” or “under-coordination” of global micro-economic policies by governments across the world or should I call it the G-20 countries that constitute around 85% of the global output. Yes, you heard it right – not macro but micro-economic policies and I know many people would laugh at me for saying this – after all, some would ask me, is it not a sovereign issue of a government to decide on what is needed for their populations? And I would laugh back again.

Demand is very weak, but still countries like Britain have gone for a severe fiscal-austerity program. And they claim that this is the time to reduce-deficits. Alright good, but do they have any program to increase consumption through real-money instead of borrowed money? – No. Do they have policies in place that will help sell the goods produced by their companies? – No. Oh well wait, yes they do, not policies but dreams, dreams of selling it to emerging markets where middle-class consumers are growing at enormous rates. Enormous rates! – Yes, anyone who was earning $5 a day yesterday and who earns $10 today has grown at a rate of 100%. Isn’t that “enormous”? And yes, now the rich-world companies can sell their $100 goods to these people - right?

Demand is very weak, but still countries like China and other oil-exporting countries depend just on their exports (and for that matter even Germany). Yes, just on their exports to debt-driven rich world consumers. And when asked how you can depend on selling it to these consumers, they say – they are the ones who would buy our products. And I ask again - Why? Why not your own people? Answer – we are still not ready.

Alright, so it is clear. The global economies and particularly the G-20 countries came together and coordinated macro-economic policies (interest rates and stimulus packages) after the dawn of the financial crisis. But what happened to that effort of co-ordination? Two things happened –

a. Stimulus packages in some countries were not sufficient to address the scope of the problem.
b. Stimulus was spent to “replay” instead of “re-balance”.

It’s difficult to co-ordinate on micro-economic policies. After all, it is up to the individual governments and people to decide on what they want. But at the same time, there is difference between “I don’t want it ever” and “I don’t want it now”. This recession should have been the period where many export-dependent markets should have taken steps to diversify their economies and many over-consuming countries should have taken steps not just to reduce consumption but to re-balance their consumption.

Take this case – statistics say (although varies all the time) that around 60% - 70% of the population in India depend on agriculture or agricultural related activity for their livelihood. Yet, were there any investments in agriculture during this crisis period? – No. Infact, in 2009, poor monsoons made many poor Indians go hungry due to the enormous increase in food prices and which still exists and hovers with a food-inflation rate of around 10%-15%. And take this case, in US and Britain, where educational investments have not taken place during this crisis period but agricultural subsidies have remained. Now can you see where the distortion lies? Countries like India should have imported irrigation-related technologies from rich-countries using their stimulus money and countries like US should have invested in education and technology to make more people produce technology at increasingly cheaper and efficient rates. With this, the agricultural markets of western countries should have been opened more to benefit real growth in poorer countries like India when at the same time this growth in the large sections of the population should increase imports of quality rich-world products.

Now who can advise this to the governments? Aren’t they supposed to know this? Well, after all, every country has its own bright people. But I don’t get then why do we see distorted investment patterns in the global economy today? It’s perplexing to see the underlying reasons for governments to not know what their populations require. Is it the absence of a “long-term” vision or the presence of “short-term” ambitions? I don’t know. But without any domestic investments, if exporting to demand-existing markets is the way governments are going to bring the global-economy back on track, then we should be exporting to new markets – the markets where aliens live!