Productivity over Commission

The recent announcement made by Prime Minister Narendra Modi regarding the dissolution of “Planning Commission” acted as a catalyst in making the discussion and debates possible to ponder about relevant existence of the institution.

A think tank which was structured to guide the way for government in policy formulation and push reforms, slowly but steadily lost its sheen in this ultra-fast paced world, in terms of economic and technological changes. There have been questioned raised about its relevance in today’s time and so any major shuffle in the commission’s structure was jinxed by political procrastination but the majority backed Prime Sevak bit the bullet and scrapped the commission.

What did the commission fail to acknowledge that it became redundant? What did it ignore and why? Author Shankkar Aiyar hits the nail with his explanation “Centre allocated resources, the Planning Commission monitored/regulated/directed the deployment, and the states were tasked with implementation. The Centre had no responsibility to deliver, the commission no power to enforce and the states who had little say or incentive felt dumped upon. The Planning Commission represented a multi-polar disorder in the structure of governance.”

More than the Planning Commission’s execution failure it was the emergence of Individual States as a Distinct Business Unit which marred the long term plans laid down by the commission. From Gujarat to West Bengal and from Himachal Pradesh to Kerala each state found its mojo back and started attracting Domestic and International investors to invest on their land. And in the process, each state demanded autonomy in the execution of funds and the way resources should be utilized. The commission which laid the Five Year Plans could not accommodate these rapid changes in their long term plans for each state. This slowly started acting as a major glitch in the individual states’ working. Marring public sentiment and bureaucracy delayed the investment cycles. This was for me the imperative reason of why the Commission could not survive. When the world is changing every year how can a too long 5 year plan mechanism work in a growing country like ours.

Now is the time to look forward and yet again don’t establish another bureaucratic structure which would hamper the states or the Center to function effectively. Rather, this is the time to focus more on productivity of each Act or Policy which is being framed or implemented. There is news that a similar structure of what China has, called as “National Development and Reforms Commission” is being envisaged in India too, having complete autonomy and constitutional authority. But, I personally feel that again we would waste our precious time in miring another structure in political logjam by doing the same.

Rather, we should follow what Australia’s Productivity Commission does, reiterated recently by Economist Ajay Shah, focus more on productivity and not forcing upon its decision on the government. Encourage discussions within the contours of the government authorities and let the consent be earned. Don’t constitutionalize the structure so that it doesn't get dragged into the patchy waters of where the likes of CBI and CAG find themselves today. Don’t politicize the new structure. Use it as a catalyst that encourages Inclusive ideas for Inclusive Growth.

Post the Unconventional Monetary Policy and its effects on India

Since the time recession hit the shores of America and it repercussions spread across the globe, there has been a sudden drop in the Short Term Interest rates level to almost zero and large scale asset purchase became the survival plot for the mature economies.

Buying in long term bonds and Mortgage Backed Securities every month has boosted in the reserves for the banks in the industrial economies. This boost then was pushed to reap in on the interest rate gaps of the Emerging economies and the other investment opportunities which seemed attractive for large fund houses and banks. This formed the backdrop of Hot Money which poured in India aggressively. Our major indices touched all-time highs every day and gave great returns in first quarter of 2014 calendar year.

First half of 2013 calendar year was a nightmare for a country like India. Reeling with huge Current and Fiscal Deficits, rapid depreciation of the currency and depleting exports all made worse for the government and the central bank. Pushing them hard to take some serious steps before our sovereign rating gets a beating and investors’ confidence further dwindles. Few but important policy measures brought back the situation in control. And the investors’ confidence further got a boost. INR appreciated deficits under control and Forex reserve has ballooned.

In May, 2013 when the Fed hinted about their plan to reduce the asset purchases, the markets reacted aggressively, leading the Fed to clarify and pacify the situation. But the reality is it has to stop one day. And with successive reduction the complete pause in purchases of long term assets by Fed is not far away. How will the markets react? How will India handle such a situation? Will the new government put things in place before the fundamental scenario becomes unsustainable again?

Presently, the influx of external funds in indices, debt market and other assets of our country is led by factors not controlled by the domestic economy, i.e. spillovers of quantitative easing. There has been no major policy reform undertaken for the investors to believe in the long run story of India. The new government will take its position at a very critical stage of the year. When on one side USA’s economy is improving and Fed is reducing the asset purchase and on other side the overall global economy is coming back on track, luring the investors to invest for long in India need some serious policy changes.

If the new government fails to take some rapid actions and investors’ can't associate with the Indian story then the repercussions would be unimaginable. More than relying on external spillovers, it’s time for the economy to introspect and make necessary domestic policy changes to enjoy the perennial external investors’ trust and grow our domestic markets too.

Mt GOX’s Debacle: A definite learning

World’s largest Bitcoin exchange’s collapse has forced investors in this virtual currency to rethink about their investments. As per the reports, security system of Japan’s based exchange was compromised and lakhs of Bitcoins worth around $400 millions were lost/siphoned off.

It’s an eye opener for the developed and developing economies which were balancing their act together to introduce these “cryptocurrencies” in their economies for daily transactions. The volatility of this intangible currency was astounding, from $30 to $260 then touching $1000 and now dropping back to $550 within 8 months time is quiet tough for any economy to absorb.

In one of the conference, late last year, RBI Governor Raghuram Rajan explicitly highlighted the instability of such currency a threat for the economy. Although, never brushed away the reach-potency of such currency in a country like India where there are about 900 million mobile subscribers out of which 20% have internet connections on their sets but with a tighter control over Bitcoins.

As MT GOX has started counting its days before it completely perishes, similarly one day even Winkdex (active qualified U.S. dollar denominated bitcoin exchanges)would wink off completely until a tighter control is imbibed in its system.

Though one should never undermine the importance of such virtual currency, which would certainly have the next big transactional value as the world takes another leap virtually, a better control/regulation is something which would make such transactions more secure, reliable and worthy.

How to regulate such currencies? What are the steps involved in measuring inflation through these currencies? How to increase the transactional reliability among the users?  The world’s biggest economies should now take some comprehensive steps towards dealing with such issues and making such currencies a viable option for future transactions.

A step in this direction is a must now.

Digesting the Bitter Taper Pill !

Finally Fed Chairman Ben Bernanke along with his committee members decided to slow down their monthly $85 billion asset purchase programme by $10 billion to $75 billion. More than the quantum of the reduction it was the faith that Fed Chief highlighted in the economy's recovery. Lowering unemployment rate, growth in Gross Domestic Product and expected inflationary effects has been the reason behind the act.

When in May Mr. Bernanke hinted about lower purchases there was a palpable negative impact on the emerging economies. Indices plummeted across the region and governments started blaming the Fed for  harsh landing. Sudden sense of a pause in the flow of money in emerging economies and its impact shook the fundamentals of the region. And it seemed as if Fed was manoeuvring their economy and were not prepared for any kind of interruption.

But in past 6 months emerging markets understood and realized that the economic fundamentals of the country should showcase its solidarity and be prepared for the worse as far as hot/easy money is concerned.
And when finally Fed took its stand and started tapering, although in a justifiable manner, the emerging markets acted buoyantly. They were actually prepared.

In India though initially markets reacted negatively and plummeted but lately bulls overshadowed the bears. More than the external factor like Tapering it was domestic inflation data, political climate of the country and the corporate sector's performance that took the driver's seat and guided the markets. Domestic issues had more impact than the International external factors. And I feel in the next six months, the domestic factors would pave way for the economy than the extraneous ones, namely:

• Corporate Sector's third quarter earning
• General elections and the sentiments around it would guide the economy
• Desperate attempts by the ruling party to revive the economy (keeping CAD in control), and
• Central Bank's actions regarding the Financial year end Monetary Policy stance and Bank license issuances.

So keep gazing the domestic factors appropriately as more than the tapering effect it would be the above mentioned domestic issues that would pave way for the economy to moving forward. Tapering effects has been tapered away and it is the domestic events that one should observe to get nick of the economy's movement.

US shutdown: A blessing in disguise, if realised!

A political logjam between the Democrats and Republicans in America is a great opportunity for the Indian economy to focus on the fundamentally strong domestic market. Though majority of opinions and views circling in the virtual and print platforms outrightedly mark this event as a temorary euphoric phenomenon which translates into dropping of easy money in the economy but this occasion can be used to strengthen our reach in the domestic market.

In times where government policy framework mechanism is in bad shape and foreign investors are shying away from long term investments ('Walmart' the latest example ) its the appropriate time for the entrepreneurs to capture a stable market for their products and then expand their reach internationally. Heavy reliance on bigger and matured economies like America and Europe is highlighting the incresed volatile bottom lines of the company threatening the going concern phenomenon.

This shutdown is an appropriate event which should force the government to think about the fundamental policy alterations which can make it easy for an enterprise to survive and give masses an incentive to increase their dependence on domestic manufacturers. On the other hand its the desi and foreign entrepreneurs who need to focus more on domestic markets for stability and desired sustainablity.

Relying on export boom and dampening imports is not a sustainable existence formula neither does the debt raising mechanism. So its quintessential to have stability for existence which can be garnered through capturing the ever growing stable domestic markets.

Now its upto the government and entrepreneurs to either cherish the temporary boost or develop a perrenial existence. Looking at an event in what way would diffrentiate the prudent from the  mass.

Sentiment over Substance!!!

Incumbent government has felt the need of pushing the pro-policy sentimental wave across the country and revving up the fast track decision making mechanism for many ultra big projects. I must say that it is a step towards right direction and the govt. must be appreciated for the same. But a question pops up suddenly in mind: Why such swift actions are being taken now? Are only elections the real reason this time? Or is it something else that is pushing the government to take such steps? And will the steps taken prove to be really beneficial for the incumbents?

Definitely the juxtapose between elections and pro-policy wave can be easily linked but is it the only thing which is forcing the UPA to take some immediate steps? NO. Except elections what the congress is trying to do is to paint the tainted image of the legendary party with pro-poor balm. The party of historic greats is trying to polish its tarnished and sullied image by bringing in some phenomenon acts together.

Food for poor and right price for their land (if getting acquired by a corporate) is a great way a party can help the needy to sustain his/her living, the thought process should be applauded but the timing of bringing these processes into execution is ludicrous.

• On one hand where the Current A/c Deficit is becoming difficult to tame,
• Fiscal deficit is ballooning because of the currency depreciation and
• Oil prices soaring because of Syria issue

The government is not taking these factors into consideration and rolling out fat cheques for these good but ill-timed policies. These expenditure would make it difficult for the country to limit its Fiscal deficit numbers to 4.8% of GDP for this fiscal. Though Congress just got a breather with Mr. Raghuram Rajan taking over the helm at mint street which boasted the sentiments of investors and Rupee strengthened a bit but that is not enough.

Looking at the situation it's very easy to understand that the UPA led Congress today is betting over the sentiments of rural over the urban counterpart for the next general elections. As for these poverty stricken citizens the ballooning of deficit is not of much concern but their subsidised meal is of great importance.

 This time its the Ideological clash between the incumbents and the main opposition, if the present government is relying on sentiments for their votes then the biggest opposition should prove their substance to get the majority. 

Verdict of the next elections is in the hands of electorates now to choose either Sentiments or Substance!!!

Rajan a great choice but Subbarao made a mark…

Raghuram Rajan’s selection as the next RBI Governor is a significant step taken up by the Finance Ministry and Prime Minister in the times when the economy needs a strong push to retrace its growing phenomena. Rajan’s international monetary policies understanding and the global economist view would help RBI to take some immediate steps to enhance the country’s economic stance which could help in bringing stability and positive sentiment across varied global investors. That’s a huge advantage by Rajan’s appointment but on the other hand Subbarao’s tenure was a landmark period for the country’s economic sustainability amidst the global financial tremors.

Though there are some perennial problems which were faced by Subbarao and expected to be the same with Rajan are as:

• ·         Independence in taking decisions, as in, Governmental interference with the set objectives of RBI has always been on crossroads
• ·         Inflation versus GDP growth phenomenon has always been on a scanner
• ·         Monetary policies objectives hampering the Fiscal consolidation plan or vice versa has continuously been a debatable topic

Inspite of all the ideological clashes with the Government, Dr. Subbarao has always been unfazed by the Finance Ministry pressures and did what was essential to keep the Inflationary pressures in control. The global meltdown in 2008 was a character test for Subbarao where the RBI’s stringent policies made the so called globally attractive instruments unlucrative for the domestic economy, resulting in India being one of the countries who came out of the recession in a short span.

Wholesale Price Index has reached two to three years low in the recent past (CPI because of its base effect is still hovering in double digits), Gold Imports are touching new lows which will obstruct the widening of CAD, Dollar reserve has touched the all time high (but could have been a bit more higher) and coming out with proposals of having more banks which would help in achieving the financial inclusion objective.

All these outcomes really make Dr. Subbarao as one of the most revered RBI Governor in the years to come and his prudence and eccentric monetary policy reviews would always be remembered.

On the other hand many critics believe that Dr. Subbarao’s tenure was not that successful because our GDP growth has plummeted to around 5% from a 8% growing nation and corporates don’t get enough leverage to grow with tight monetary stance. But on the other hand, as Dr. Subbarao has always iterated that the Central Bank’s main objective is to cool off the inflationary pressures which would in an indirect manner provide impetus to growth and not directly impacting the GDP growth percentage. This could have happened only if the stagnant policy implementation by the government was avoided. Because both the Government and Central Bank has to work in tandem to achieve the desired growth. An institution on its own can not make the growth engine run for a nation which is so diversified and has more internally inflicted hurdles than the global phenomenon.

Raghuram Rajan will definitely feel a little uneasy with the next Lok Sabha elections nearing but he is undoubtedly a great successor to a great predecessor. There is a lot of action guaranteed on the Mint street in the months to come. Stay tuned.