Welfare schemes and the argument of Sociology vs Economics

India, like many emerging countries with poor being majority population, doles out many populist welfare schemes. Govt. subsidizes many services from education to healthcare to transportation so poor can afford and the burden on them reduces. It is not just the Central Govt. who regularly launches new schemes; State Govt.’s too do not fall behind in this race. One such scheme offered by State Govt. of Karnataka, distributing Rice at Rs.1 per kg, has become a hot topic of discussion. A noted writer in Karnataka opined that, Govt. should rather provide jobs to its people than subsidizing food grains. Few others hit back saying that those who oppose this scheme do not understand what poverty is and have not suffered the hunger like poor. While everyone agrees ‘teaching how to fish’ is better, supporters of the scheme ask how do you protect the poor from going hungry? They want ‘Sociology’ to be made a priority over ‘Economics’. So is the subject of ‘Sociology’ works against ‘Economics’?

Definitely not as both subjects are completely interwoven and influence each other heavily. Social progress always comes with economic prosperity. And you spoil the economy, there will be social unrest. In statistical terms, they are positively correlated. They do not work against each other. Then why do some people argue of Sociology vs Economics? It is their myopia. They only see immediate impact but fail to see (or rather not interested in) what lies ahead. Promoters of welfare schemes which appear extreme have some other agenda. Political parties who announce such schemes are more interested in shaping the opinions of public in the short term to win elections.

Let us see why many welfare schemes (which are extreme) do not achieve their intention though they seem to be working in the short term. For that we need to see how Govt. finances the subsidies. Govt.’s have incomes in the form of tax collection primarily but there are other incomes such as divestment, profits from the Govt. owned enterprises etc. There would be no problem if a Govt. balances its income with expenditure. Then there is no fiscal deficit. But with the new populist schemes they come up with, they would need additional funds that would demand raising taxes. Any populist Govt. would not raise taxes as it affects their image so they choose to borrow to spend on subsidies. You very well know borrowing and donating would make any super rich a beggar in no time. The same applies to Govt.’s too. For the borrowed money, Govt. will have to pay interest the next year. That would mean effective money available to spend in the next year’s budget will reduce. But Govt.’s will not reduce subsidies. So they will require more funds to be borrowed to keep the schemes going. When our leaders think politics is more about managing in the short term, they do not care about the increasing debt load. They simply roll it over, year after year. But a time will come to repay the debt and if Govt. finds it tough to get new loans, it will go bankrupt. This is what is happening in Greece. When Govt.’s default, disaster strikes their economy. Govt.’s assets will be put for sale at bargain prices but there will be no takers. There will be no more subsidies and unemployment starts bothering even those who work hard. All citizens end up paying the price for the subsidies they had availed. They cannot blame their Govt. as they only elected them to power. After all Govt. is representation of its citizens in a democracy. Now you tell me, do you still think you can achieve social progress by borrowing and funding subsidies?

Let us assume we Indians are sensible than Greeks (in fact we are). And the public debt remains at manageable levels. But yet these subsidies hurt everyone in the form of an invisible tax which haunts the poor more than the rich. It is termed ‘Inflation’. When any money is spent, it should produce the economical equivalent in the form labor, service or physical capital. If those subsidies do not pay back the Govt. in equal measure, it causes deficit. All wasteful expenditures of Govt. causes inflation. As Govt. goes on borrowing spree, it reduces the monetary liquidity in the banking system. When Govt. borrows the most money available in the money market or from banks, there will be less money available in banks to lend to private. Capital costs (interest rates) raise when the demand for capital increases. To ease the liquidity situation, central banks will have to run printing presses. When new money is created without equivalent economic value-add, it increases inflation. If Govt. borrows for foreign land, it affects Rupee that makes imports costlier and flaring up inflation again. Higher inflation coupled with higher capital costs ruins any economy, see how India fared during 2010-2014. Our GDP growth rates halved in that time frame and bad assets increased.

Higher inflation in the last five years has taken the prices up of all commodities, food grains and vegetables. Inflation had supply side problems too but monetary expansion (increasing money supply) had its role as well. Rice which was available at Rs.15-20 a kg five years ago went up to Rs.35-40 a kg by 2015. Now Govt.’s subsidizes rice. But inflation will not spare us. It will make other things expensive. You press a balloon on one side, air moves to the other side. Similarly subsidies funded with debt offer temporary relief but they do not solve the problem entirely. If our house rents go up, will Govt. subsidize it? Is not it better for market forces to take control than Govt. intervention?

Subsidies are for those who are extremely poor and aged who either don’t have means or ability to work. Definitely they are not for those who have affordability. If you have read this post till here, I expect that you would join with me in avoiding buying in subsidized market but rather pay the full price in the open market wherever possible, be it cooking gas cylinders or solar panels. And we would elect those who are sensible with subsidy spending. Poor need not just survive today. They need to live longer too.

My personal library and thoughts on reading statistics

Book reading is a hobby for most and for those in the field of journalism it would be part of the job too. In the current times of multimedia, when one can watch movies on cellphone, when TV has hundreds of channels, travel is no more a taboo and photography is attracting many enthusiasts, book readers are becoming a minority community. Reading a book for time pass is almost a gone thing. Those who wanted to read are reading. Probably you understand why publication is not a lucrative industry.

Keeping the business aspects apart, I wanted to discuss with you how many books one reads? Though it varies from person to person, if we assume that one reads two books a month, he/she would read around 24 books a year. If the person keeps this interest alive for lifetime (let us say he starts reading from the age of 10 till he is 60; that is 50 years!), there would be more than 1000 books he would be done with. But there are few rare (like Shashi Tharoor) who have a history of reading more than 300 books a year. Even at that run rate, one would reach the count of 15,000 books in life time. If you think these numbers look alright, what do you think of the 52,000 books in the personal library of Shrikant Jichkar, the most educated person in India? (Link: https://en.wikipedia.org/wiki/Shrikant_Jichkar). What would be his reading speed? LK Advani, a senior political leader, who is 87, says that his personal library, which is already more than 15,000 books is growing now too. (http://blog.lkadvani.in/blog-in-english/let%E2%80%99s-all-make-our-lives-meaningful). Those who love books find it difficult to get drawn into some other passion; it sticks almost for their lifetime.

You might say, those building huge libraries for personal use, may not be actually be reading all of them. If you think so, you should watch this video of Osho (Link: https://www.youtube.com/watch?v=j1h8-WvzexY). He says he has read each one of the books in his very vast library (150,000 books). His was not a library in the house but rather a house in the library as he puts it. He says the book ‘The Brothers Karamazov’ has more insights to offer than the holy book of Bible. What a compliment to Fyodor Dostoevsky!

Now, let me come to my personal library. It has around 500 books now. Friends, relatives visiting my house give it a strange look. They need not necessarily share the same passion of mine. Some of my good friends have not read a single book after they have finished their studies but we have many other things in common. So they stare at my library for a moment and it does not interest them. But there are others who take interest, peep into it and say it has more fiction than non-fiction and reading novels is a waste of time. If I say there is more truth in fiction they may not appreciate, so I do not say it. Few tend to think reading books makes one a learned person but they ignore my opinion that reading does not always translate into knowledge, and it takes many other behavioral traits to be a learned person. (Einstein said ‘’Imagination is powerful than knowledge”, what a learned person he was). But yet, there are a very few who touch the right strings, understand that reading is a compulsion for a person like me (forget the purpose of knowledge and entertainment) and our friendship strengthens.

So in summary, how many books one should read or what should be the size of a

personal library? Now I say forget statistics. We do not buy books or read to impress others. (If that is the reason, interest would not last long). Even if we have a collection of handful number of books we cherish, we would keep them with us for lifetime. Quality scores over quantity. With whatever collection we have, we can create a  grand Dolby-Digital theater in our minds by immersing ourselves into the world created by the author. The extent of imagination is only limited by the creative ability of yours and that of authors.

There are lots of finer things in life. But many of them are meant for our physical senses. The world created by books or by any other creative art, touches the psychological and spiritual aspects of us. If not books, get to know any art better. You would know how fine life is.

India’s economy to overtake US in 25 years (??? !!!)

Somebody opined today that India’s economy will surpass that of US in the next 25 years.

Do you think it is stupid? Yes, many good ideas look stupid in the beginning. Do you say Indians dream too much? No, this was told by a Japanese. Does he know how money is made? He is a multi-billionaire, second richest man in Japan and is a self-made man. Does he have institutional backing? He is the chairman of Japan’s SoftBank. Now that sets you thinking? You should do being more than that.

All forecasts may not always come true but one need to see the merits of the arguments. Masayoshi Son, Chairman of Japan’s SoftBank has committed $30B funds so far in the India’s growth story. He said “India's economy is on the cusp of the "hockey stick" curve before takeoff, and has the potential to overtake the United States within 25 years”.   

Read more at:

http://economictimes.indiatimes.com/articleshow/47776228.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

One needs to observe that he is a banker and he could identify China’s hockey-stick moment (or J curve in the chart) in time. He made good money when Alibaba, a Chinese e-commerce company went public. He has his set of failures too. He was caught completely unguarded and lost big money during dot.com crash of 2000. Now he has set eyes on India. He has already invested in many start-ups including Snapdeal, Housing.com and Ola. He is visiting India to discuss on new investments. He is mostly focused on e-commerce and renewable energy sectors.

More than arguing whether Masayoshi Son is right this time or not, and whether it is right to benchmark with US or not, and if 25 years is sufficient timeline or not, I would like to bring forward the positive aspects in his views. 

India has transformed a lot since it got independence and a lot of growth has come in the last 15 years. Now, unlike few decades ago, we do not have a cow tied outside the house to provide milk rather we have it delivered and the milk-boy calculates the sum we owe him on his Nokia phone. That means two things – we understand the benefits of work specialization and the productivity gains it brings. And we are making use of technology in daily lives and taking part in globalization. See the data. India’s exports were 5% of GDP during 1980’s and now it is 25% of GDP!

India's exports as % of GDP. Source:tradingeconomics.com

No wonder our wages (incomes) have gone up a few hundred times in the same time. We have more stuff in our homes than our grandparents had during their prime. So when looked from a distance, with a wide chart covering 25 years span, it looks like explosive growth. But what Masayoshi Son expects is even a steeper growth led by the use of internet and the access to information for everyone.

Trade increases when whole of India comes on a single of platform. There would not be any unmet demand. Price differences across the markets would reduce and efficiency would go up. Snapdeal (or Flipkart or Amazon) can sell goods at competitive prices and boost consumption. Ola can make taxi ride affordable for the common man with the use technology improving the utilization of cabs creating a win-win situation for both the consumer and the service provider. Gaps in the trade will be bridged and consumption will see a new high. And those investing in such businesses (like Masayoshi Son) would hit jackpot. But one need to have patience until the market develops and a few companies would fail in the war of efficiency too.

As the information asymmetry starts disappearing, it does many wonders to the society. Consumption in India will see a new high, with its billion-plus people and their rising incomes. And the new trends in the business will find new ways to reach their target customers and making money for the likes of Masayoshi Son in due course of time.

ಲೈಫು ಇಷ್ಟೇನೇ !

"ಹಿಂದಿನ ಜನ್ಮದ ರಹಸ್ಯ ತಿಳ್ಕೋ,
ಮುಂದಿನ ಜನ್ಮದ ಭವಿಷ್ಯ ತಿಳ್ಕೋ,
ಈಗಿನ ಜನ್ಮ ಹಾಳಾಗಿ ಹೋಗ್ಲಿ,  ಲೈಫು ಇಷ್ಟೇನೇ !"

ಮನುಷ್ಯನ ಮೂರ್ಖತನವನ್ನು ತಿಳಿ ಹಾಸ್ಯವನ್ನಾಗಿಸಿ ಯೋಗರಾಜ ಭಟ್ಟರು ರಚಿಸಿದ ಈ ಗೀತೆ ಜನಪ್ರಿಯವಾಯಿತು. ಅಂದರೆ ಜನರಿಗೆ ಈ ವಿಷಯ ಗೊತ್ತು, ತಮ್ಮ ಈ ಜೀವನದ ಸಮಸ್ಯೆಗಳಿಗೆ ಈ ಜನ್ಮದಲ್ಲೇ ಪರಿಹಾರ ಕಂಡುಕೊಳ್ಳುವುದು ಯೊಗ್ಯ. ಆದರೇನು ಮಾಡುವುದು ಸ್ವಾಮಿ, ಎಲ್ಲ ಪ್ರಯತ್ನಗಳಿಗೂ ತಕ್ಕ ಪ್ರತಿಫ಼ಲ ಸಿಗಬೇಕಲ್ಲ? ಎಲ್ಲ ದಾರಿಗಳನ್ನು ತಡಕಾಡಿ, ನಿರಾಶೆಯ ಕಾರ್ಮೋಡ ಬೆನ್ನು ಬಿಡದಿದ್ದಾಗ, ಕೆಲವರು 'ಹಣೆ ಬರಹ' ಅಂದುಕೊಂಡು ಸುಮ್ಮನಾಗುತ್ತಾರೆ. ಇನ್ನು ಕೆಲವರು 'ಪ್ರಯತ್ನ ನಮ್ಮದು, ಪ್ರತಿಫ಼ಲ ದೇವರ ಇಚ್ಛೆ' ಎಂದು ಭಗವದ್ಗೀತೆಯ ಸಹಾಯ ಪಡೆಯುತ್ತಾರೆ. ಆದರೆ ಸ್ವಲ್ಪ ಜನ (ಅಥವಾ ಸಾಕಷ್ಟು ಜನ) ಛಲದಂಕ ಮಲ್ಲರು. ಅವರು  ಈಗಿನ ಸಮಸ್ಯೆಗಳಿಗೆ ಮೂಲ ತಮ್ಮ ಹಿಂದಿನ ಜನ್ಮಗಳಲ್ಲಿ ಇದ್ದಿರಬಹುದೆಂದು, ಅವುಗಳನ್ನು ಜಾಲಾಡಿದರೆ ಸುಳಿವು ದೊರಕಬಹುದೆಂದು ಹೊಸ ಪ್ರಯತ್ನಗಳಿಗೆ ಇಳಿಯುತ್ತಾರೆ. ಇವರನ್ನು ಮೀರಿಸುವ ಸಂಖ್ಯೆ, ಜ್ಯೋತಿಷ್ಯ ನಂಬುವವರದ್ದು. ಯಾವ ಗ್ರಹಗಳು ಯಾವ ದಿನಗಳಲ್ಲಿ ತಮಗೆ ಶುಭಯೋಗ ತರಬಹುದು ಎಂಬುದರ ಲೆಕ್ಕಾಚಾರ ಇವರಿಗೆ ಬಹು ಪ್ರಿಯವಾದದ್ದು.

ಸಮ ಚಿತ್ತರನ್ನು, ಯೋಗಿಗಳನ್ನು, ಸಾಧು-ಸಂತರನ್ನು, ಫಕೀರರನ್ನು ಗಮನಿಸಿ ನೋಡಿ. ಅವರು ಈ ಚಿಂತೆಯಿಂದ ಮುಕ್ತರಾಗಿರುತ್ತಾರೆ. ಅವರಿಗೆ ಇದಾವುದು ಆಸಕ್ತಿ ಹುಟ್ಟಿಸುವುದಿಲ್ಲ. ಇದೆಲ್ಲ ನಮಗೆ, ಲೌಕಿಕದಲ್ಲಿ ಬದುಕುವವರಿಗೆ ಮಾತ್ರ. ಪುನರ್ಜನ್ಮದಲ್ಲಿ ನಂಬಿಕೆ ಇದ್ದರೆ, ನಾವೇಕೆ ಈ ಜನ್ಮದಲ್ಲಿ ನಮ್ಮ ಸಂಪತ್ತನ್ನು ಸಂಪೂರ್ಣ ಪುಣ್ಯ ಕಾರ್ಯಗಳಿಗೆ ವಿನಿಯೋಗಿಸುವದಿಲ್ಲ? ಮುಂದಿನ ಜನ್ಮ ಯಾರು ಕಂಡವರು ಸ್ವಾಮಿ? ನೋಡಿ. ಇವೇ ನಮ್ಮಲ್ಲಿಯ ವಿರೋಧಾಭಾಸಗಳು. ನಮಗೆ ಹಿತಕರವಲ್ಲದ್ದು ನಮಗೆ ಬೇಡ. ನಮಗೆ ತೊಂದರೆ ಇದೆಯೋ, ಗ್ರಹಬಲಗಳನ್ನು ಪರೀಕ್ಷಿಸಬೇಕು. ಸಮಸ್ಯೆ ಇದ್ದವರು ಮಾತ್ರ ಇದರ ಮೊರೆ ಹೋಗುತ್ತಾರೆ ಎಂದೇನಿಲ್ಲ. ಉಜ್ವಲ ಭವಿಷ್ಯದ ಕನಸು ಕಟ್ಟಿಕೊಡುವ ಜ್ಯೋತಿಷ್ಯ ಯಾರಿಗೆ ಬೇಡ? ಒಟ್ಟಿನಲ್ಲಿ, ಇದರ ಜಂಜಾಟದಿಂದ ನಮಗೆ ಮುಕ್ತಿಯಿಲ್ಲ ಎಂದಾಯಿತು. ನಮಗೆ ಗೊತ್ತು. ಈ ಪ್ರದಕ್ಷಿಣೆಯಿಂದ ನಾವು ಹೊರಗೆ ಬರಲಾರೆವು. ಇದರಲ್ಲೇ  ಜೀವನ ಸವೆಸುತ್ತ ಖುಷಿಯಿಂದ ಹಾಡುತ್ತೇವೆ 'ಲೈಫು ಇಷ್ಟೇನೇ !'

ಪುರಾಣ, ವೇದಾಂತಗಳ ಪ್ರಕಾರ 'ಮೋಕ್ಷ ಎಂದರೆ, ಹುಟ್ಟು-ಸಾವಿನ ಸರಣಿಯಿಂದ ಹೊರ ಬರುವುದು. ಇದನ್ನು ನಾನು ಅರ್ಥ ಮಾಡಿಕೊಂಡ ರೀತಿ, ಈ ಜೀವನದಲ್ಲಿ ಹಳೆಯ ನೋವು ಮತ್ತು ಭವಿಷ್ಯದ ಆಸೆಗಳಿಂದ ವಿಮುಕ್ತರಾಗಿ ಬದುಕುವುದು. ಇದನ್ನು ಹೇಳಿದ ಮಾತ್ರಕ್ಕೆ ನಾನು ಹಾಗೆ ಬದುಕುತ್ತೇನೆ ಎಂದುಕೊಳ್ಳಬೇಡಿ. ನಾನು ನಿಮ್ಮ ಹಾಗೆ. ಅದಕ್ಕೆನೇ  'ಲೈಫು ಇಷ್ಟೇನೇ !' ನನ್ನ ಇಷ್ಟದ ಹಾಡು.

Are central bankers fighting inflation or deflation?

Well, the answer depends on which country you are looking at.        

In India, Rajan has a clear mandate to control inflation to a target level of 4% (+/- 2% band). But if you look at US, Europe or Japan central bankers are struggling to bring back their economies from deflation mode to inflation.

It may sound strange for dummies to know few nations are fighting with inflation and others are staring at deflation at the same time. How can it happen? Here is my attempt to explain the matter. First let us understand inflation.

Is inflation good or bad?

Any price rise beyond tolerable levels hurts people. You would ask me to define tolerance level then. My answer is, if inflation rises beyond income or wage growth, it leaves less money at the hands of people. Let us assume incomes expand at 8% and the inflation is at 5%, you would still be left with surplus income and if the numbers are otherwise there is less disposable income. It becomes an indirect tax on the population.

One thing to note is wages too are components of inflation. When wages go up, inflation too would go up. If other components of inflation like the materials used, capital costs are not going up, inflation would not expand at the same pace of wage growth. Similarly productivity increase through improved skills in labor and better infrastructure will let the economy produce same or more with less number of employed labors. That would offset the effect of wage growth on inflation. So if we want to put it into a simplified mathematical equation, we can do like this:

Inflation growth = Wage/Income growth + Goods/Materials price growth (Agri, metals, all commodities) - Productivity improvements

What every country aspires is higher income growth at moderate inflation. But if we look at India, the price rise in imported goods like oil and gold were draining our incomes in the form of inflation at 8-10%. Now that gold prices are not rising and oil is at half price, we are seeing inflation being moderated to 5%.

Govt. and central bank’s actions can increase inflation

Inflation is dependent on international market forces (such as prices of imported goods, forex valuation etc.) as well as domestic policy stances by the local Govt. and the central bank. Many a times, it is the Govt.’s play a major role of inflation production factories. Here is how.

When we buy/sell a good or service for a price, it involves the exchange of money. Demand and supply of goods depends on market forces. But for the supply of money, there is only regulator – central bank deciding the things. If a central bank goes on printing new money beyond the economic growth demands it, there would surplus cash in the system. You have more cash to exchange for same amount of goods/services. Prices will go up though demand quantity for goods/services has not gone up.

For easier comparison, let us consider the land for which supply cannot go up. Compare the land prices to what it were 10 years ago and also take a look at the M3 money supply. You will notice that M3 money supply has gone up 5 times in the last 10 years. How many times the land prices have gone up in the same time? Does it look fair or not?

Chart for money M3 supply in India 2005 to 2015

Source: tradingeconomics.com

You would ask, why a central bank would print more money than needed? And no central bank in the world lends directly to the Govt. they are part of. Governments borrow money from banks by issuing bonds. Here is the catch. Banks can use those bonds as collateral to borrow from central bank which is RBI in India. If Govt. borrows heavily from banking system, it leaves less money with banks to lend to private. That leads to liquidity crunch. To avoid such a situation, central bank would print new money and put that money into supply through banks in exchange of the bonds issued by Govt. So coming to the next logical reasoning, a fiscally responsible Govt. would earn its income through taxes and other incomes. But a Govt. which spends more than it earns (fiscal deficit), sucks liquidity in the system. And if that borrowed money which comes at a cost is not put to productive use, it becomes a double edged sword. If some of the projects of the Govt. produce negative returns on the money spent who will pay for the losses and the interest which is due? Govt. will have to raise taxes or borrow more to repay. If the borrowed money (new printing) leads to wasteful expenditure, it destroys the value of money in the form of inflation. All the newly added money in the system did not produce any equivalent economic value-add so it results in inflation.

Fiscal Deficit numbers for India in the last 10 years

Source: tradingeconomics.com

What leads to economic recession or mild deflation?

We understand trade deficits, fiscal deficits leading to expansion of monetary base flares up inflation. But why the prices would remain same or go down and deflate? When the demand falls what else happens? Why the demand would fall? If there is unemployment and many do not have an income, how will they spend? Why there is unemployment? When big corporate make losses or are not earning profits, why will they hire?  

In the financial crisis of 2009, US went through a major setback as big corporate like Lehman Brothers went bankrupt and many big banks were in trouble as the derivatives they traded brought huge losses than they can normally digest. It burnt investors’ money and confidence. Losses in the banking system would mean there is less money in the system to lend for further economic growth. Reduced investor confidence would reduce new investments which results into higher unemployment in the country. That led to reduced consumer spending and took the economy through downward spiral of recession.

How the US central bank restored confidence?

Fed reduced the interest rates near to zero. So that corporate can borrow money to expand their business at negligible capital costs. It also ran quantitative easing (QE) program for years to buy bad debts in the banking system and replace it with liquidity and it also bought Treasury bonds issued by Govt. to infuse further liquidity in the banking system. This program expanded the balance sheet of Fed by trillions of dollars, most of it is electronic money and less printed currency in circulation. The losses in the banking system (bad debt in the form junk bonds) systematically got transferred to the Fed so that banks can resume operations normally. This along with lower interest rates helped US economy to come back to its knees and start hiring again. Unemployment rate have steadily came down (look at the chart) and its economy started showing revival. Though monetary base is expanded, inflation did not go up as that money did not end up as wasteful expenditure but it had increased the Govt.’s long term debt.

As the unemployment falls, wages will pick up as the competition in hiring heats up. That would increase inflation but Fed will raise rates in the same pace keeping the inflation in check. So for now, it appears Fed has successfully averted a recession.

Unemployment figures in the US

Source: tradingeconomics.com

Taking cues from Fed, European Central Bank (ECB) too has kept rates near to zero and has started a bond buying program to get out of the dangers of deflation.

Regression to Mean  

Inflation is cooling down in India and China but is seeing a tick-up in advanced countries. What we are seeing is ‘regression to mean’ effect. It appears like the dust of 2009 financial crisis has settled down. I hope in the coming years no war breaks out, a big natural calamity or unknown financial disaster strikes. In such a case, central banks around the world would run out of options to get their countries out of recession. But on the optimistic note, global economy is gaining momentum. Probably in few more months, all countries would be staring at inflation. That is the time you can buy Gold again.