Is Indian economy running out of gas?

The recent sudden increase in dollar value of rupee ruffled quite a few feathers. At least, my roomies who regularly send money to India have lost their sleep. In last month or so, the Rupee value of Dollars decreased from around Rs. 44 to Rs. 40. It means, Rupee is getting costly. There are bunch of reasons behind it. Most of the people believe that monetary policy is solely responsible for this hike but it is much more complex. And, getting perceptive on this issue will help us to understand the rising inflation in India too. If Government Of India failed to act on either inflation or on rising rupee, the over heated Indian economy will come to screeching stop. Of course, the effects won’t be too pleasing !

India became a service sector giant in last few years. More than 50% of India’s GDP is contributed by service sector. Instead of making standard transition from agricultural based economy to industrial and then to service sector, India jumped straight from agriculture to service sector. Thus Rupee is in heavy demand in international market as India’s exports of services are rising. Also, Indian expatriates are sending unprecedented amount of money back to their home land. That’s why Rupee is getting costlier i.e. it is taking less Rupees to buy a dollar. But if Rupee becomes costlier then we will loose our export advantage. For example, it will be expensive for American software companies to outsource to India and they will scale back on outsourcing if Rupee continues to gain strength. But populist policies is forcing Government of India to making Reserve Bank of India (RBI) to put more money in the market and dilute the Rupee value. It was doing that for all most an year but such forced treatment on an all ready sick patient is surely going to have awful side effect. So, we have rising inflation as there is more supply of money than demand.

In short - : As India’s exports are rising (service sector) Rupee value increasing in international market and to keep it artificially down RBI is printing more money which in turn is increasing inflation.

But recent increase inflation can’t be attributed solely to the lax monetary policy. Sustained GDP growth of last 25 years or so is more related to internal consumption than export based economy. There are various reasons for continuing increase in internal consumption. Of course, easiest of them is huge population. But other reasons are quite subtle India’s middle class is burgeoning and their apatite for luxurious goods is increasing rapidly. In the mean time, India is slowly catching up industrialization too. All though, government is waking up slowly to the realities of shabby infrastructure, the projects such as golden quadrangle road is consuming lots and lots raw material. But sadly, the supply side is unable to keep up with this rapidly rising demand. The second step of green revolution never took place. Hence, rising population is straining food supplies. Rigid labor laws and strict government control stunted the manufacturing industries. And now they can’t provide enough of cement, steel or tar. Thus inflation has more to do with demand than monetary policy.

All these signs are pointing towards over heating of the economy. Instead of loosening the bottle necks of the economy, government, admittedly because of useless leftist parties, is forcing more and more populist policies down economies throat. We need more fuel to keep economy running at this pace otherwise it is fast hurtling towards some serious trouble.

Bharat and Indian Government II

I am continuing my argument regarding to Mr. Prime Minister’s recent comments about conspicuous spending of rich Indians. I am throwing some facts that I got from recently published article of Mr. Guru Charan Das in Foreign Affairs. The facts and last Italic paragraph are of Mr. Guru Charan Das. The first three facts proves how much India has progressed in last 25 or so years. And, then how much of that progress is done in spite of Government of India rather than vice versa.

• The country's economy grew at 6 percent a year from 1980 to 2002 and at 7.5 percent a year from 2002 to 2006

• In the past two decades, the size of the middle class has quadrupled (to almost 250 million people), and 1 percent of the country's poor have crossed the poverty line every year.

• As a result, inequality has increased much less in India than in other developing nations. (Its Gini index, a measure of income inequality on a scale of zero to 100, is 33, compared to 41 for the United States, 45 for China, and 59 for Brazil.)

• For now, growth is being driven by services and domestic consumption.

• Consumption accounts for 64 percent of India's GDP, compared to 58 percent for Europe, 55 percent for Japan, and 42 percent for China.

• Only 10 percent of credit goes to the private sector in China, even though the private sector employs 40 percent of the Chinese work force. In India, entrepreneurs get more than 80 percent of all loans.

• Software and business-process outsourcing exports have grown from practically nothing
  to $20 billion and are expected to reach $35 billion by 2008.

• A recent national study led by Pratham, an Indian nongovernmental organization,
  found that even in small villages, 16 percent of children are now in private primary schools. These kids scored 10 percent higher on verbal and math exams than their peers in public schools.

• At government health centers, meanwhile, 40 percent of doctors and a third of nurses are absent at any given time. According to a study by Jishnu Das and Jeffrey Hammer, of the World Bank, there is a 50 percent chance that a doctor at such a center will recommend a positively harmful therapy.

Thus it is clear that privatization - one way or other - has helped the middle class carrying burden of growth. And sadly, Indian government failed in doing basic duties.

After India's independence, Nehru attempted a state-directed industrial revolution. Since he did not trust the private sector, he tried to replace the entrepreneur with the government -- and predictably failed. He shackled private enterprise with byzantine controls and denied autonomy to the public sector. Perhaps the most egregious policy was reserving around 800 industries, designated "small-scale industries" (SSI), for tiny companies that were unable to compete against the large firms of competitor nations. Large firms were barred from making products such as pencils, boot polish, candles, shoes, garments, and toys -- all the products that helped East Asia create millions of jobs. Even since 1991, Indian governments have been afraid to touch this "SSI holy cow" for fear of a backlash from the SSI lobby.

Fortunately, that lobby has turned out to be mostly a phantom -- little more than the bureaucrats who kept scaring politicians by warning of a backlash. Over the past five years, the government has been pruning the list of protected industries incrementally with no adverse reaction.

The last paragraphs proves the moronic ways the Labor Laws are administered in India. Since 1991 successive governments tried to dismantle these ‘legacy’ industries. The results were mixed until our beloved Mr. Manmohan Singh came to the power. The first thing his government did is to scrap the disinvestment commission that used to overlook the process of disinvestment under Vajpeyee government.

Possible Fallouts Of Recent Caste Violence

The recent caste violence of Gujjar community in Rajasthan is quite unsettling. This situation can be analyzed in two ways and unfortunately for India, both of them are harbinger of dark times ahead. The infuriating thing is that this particular ‘caste’ is not fighting for social justice but rather to prove its ‘backwardness’.
The suspicious pattern that emerges from controversy of Dera Sacha in Punjab and then Gujjar violence in Rajasthan is that, both of these states are ruled by non-Congress governments. Congress party since the days of Indira Gandhi can’t stomach non-Congress political parties ruling at state level. In her draconian quest of power, Indira Gandhi fermented trouble in North-Eastern states, Kashmir, Punjab and in Tamilnadu. Fortunately, Tamilnadu remained peaceful (and Sri Lanka bore the brunt) but Punjab paid dear price. While North Eastern states and Kashmir are still burning.

It was not only unthinkable but all most blasphemous to imagine India being ruled by a non-Gandhi person. Luckily, P.V. Narsimharao, the first non-Gandhi prime-minister to complete five years of tenure, didn’t continued this old tactics of destabilizing non-congress state government. But the old ‘gang’ of Indira Gandhi is back in the power. First we have central governments faltering in Naxal hit areas only because these states are ruled by non-Congress government. Then as this ‘gang’ is feeling more cozy in the power, they started trouble in Punjab and now in Rajasthan. I suspect either Madhya Pradesh or Gujrat will be the next target. We will either see communal violence flaring in these two states or perhaps, continuation of caste violence.

The second conclusion is more dark and of course, is fall out of policies implemented by current government only. This caste violence is tight slap in the face of anyone who supports limitless affirmative policy. It is surely sowing seeds of deep distrust between various Hindu communities. The worst thing is that the government which is inciting violence for few extra votes, will judge who qualifies for ‘backward’ status. Of course, this backward status has nothing to do with being backward. And, in any case what is the definition of ‘backwardness’? If economical status is the criteria then half of India regardless of caste lines can be labeled as backward. If not, then Hindu caste system is way to complex to draw clear demarcation lines various communities.

With rapidly increasing education and host of social movements in last seventy years, Hindu society was realigning itself internally. Obviously, such progressive social movements are quite complex to describe but our ‘secular’ government deeply distrust anything that is genuinely Hindu. With rise of vote bank politics it was quite obvious that government will do its best to destabilize Hindu society. The tiny minority of so called ‘Dalit’ activists and communist dominated media have literally made it impossible to have any sensible dialogue over social justice. The strategy is just to muddle the water rather than to debate honestly. Thus, instead of caste lines getting blurred, they are vigorously getting drawn again. Though, the current motive of distinguishing ones’ caste is political, the differences will soon be stark enough for us to see recurring caste violence.

In nutshell, even if the recent rampage over castes is politically incited or perhaps, new trend in the society to reap the profits of affirmative policy, the ultimate looser is Indian society.

On the lighter side if everyone tried to become ‘backward’ then no one will really be ‘backward’ !