WHY CORRUPTION AND BLACK MONEY ARE NOT MAJOR PROBLEMS MR. KEJRIWAL?

WHY CORRUPTION AND BLACK MONEY ARE NOT MAJOR PROBLEMS MR. KEJRIWAL? (By S Ramamoorthy)


Mr.Kejriwal wants us to believe that only corruption is blocking our way to become Super Power Nation.....Eradicating Corruption is the only solution for the all problems currently being faced by India.

Lets see in this article why Corruption and Black money in fact are not big deal?

WHAT DRIVES CORRUPTION?

In 2013 India has ranked 94th out of 176 countries in Transparency International's Corruption Perceptions Index....But if we analyse the Top 20 ranked & Bottom 20 ranked nations in that list, it becomes clear that countries which have strong "Democracy" and follow "Free Market Capitalism" economic Model enjoy less corruption and vice versa.

But Why India is  at 94th place even though we boast ourselves as world's largest democracy.

Reason is the absence of " Free Market Capitalism".

HOW FREE MARKET CAPITALISM CAN HELP TO CONTROL THE CORRUPTION?

As told by modi, duty of any government should be Minimum Government & Maximum Governance and It is not the business of Government to be in Business. Problem with India is Maximum Government and Minimum Governance..

Why USA is being called as Super Power Nation? Because its GDP is $ 17 Trillion with 32 Crores population ( Per Capita income is around $53000 ) where as India's GDP is just $ 2 Trillion with 1.2 Billion population ( Per Capita income is around $1500 ).12 millions people are entering Indian Labor Market every year for Job. Economy has to grow at least at the rate of 8 - 9 % annually to accommodate them and just to keep unemployment rate at the same level.

If India wants to become super power nation ( to overtake USA's GDP) by 2050 and to generate employment for its youth, it has to grow continuously in the double digit  for next 4 decades.

Only one well proven economic model which can help us to grow at double digit is "Free Market Capitalism".

According to " Free Market Capitalism", market force will determine "Supply & Demand " in the economy and will fix price. Government role in the "Free Market Capitalism" is just to ensure the conducing business climate by removing Red Tapes, Bureaucratic Delays and to maintain Lower & Easy Tax Regime , Transparent Policies & Vibrant Judiciary to resolve contractual disputes in short time.Government should not run any business (such as Air India, Coal India, Indian Railways.etc..) since it cant run it efficiently and compete with private players and it should privatize every thing.

But irony is that India has ranked 134 out of 189 in "Ease of Doing Business Index" due to the Red Tapes, Complicated Tax Regime, Bureaucratic Delays, Impractical  Laws.

Only way left for Entrepreneurs to come out of this mess and to do business is corruption...

...So this is the system which has to be overhauled completely if we want to remove the corruption....Lokpal is not the solution and in fact it will further worsen the Business Climate since Government Officials will be wary of taking necessary decision fearing backlash..

 IN CURRENT SCENARIO, CORRUPTION IS IN FACT GOOD SINCE IT AT LEAST SPEED UP THE APPROVAL IN THE ABSENCE OF STRUCTURAL REFORM.

HOW INDIA IS LOSING RS 4.8 LAKHS CRORES EVERY YEAR BECAUSE OF CORRUPTION AWARENESS:

Corruption is the catchy word for politicians like Kejriwal since it reaches people very well. But what people dont understand easily is the terms like "GDP Growth" and "Tax to GDP Growth".....

Till 2008, India enjoyed 9 % GDP growth rate. During UPA II, it started to gradually fall and registered 4.8 % growth in Financial Year 2013- 2014 mainly due to delay in  Environmental Clearances, Land Acquisition and pending approval from Government Agencies . What does it mean?

 1 % of Indian GDP is equal to Rs 1.2 Lakhs Crores ( India's total GDP is Rs 1.2 Crores Crores or $2 Trillion USD)......India's Current GDP growth rate is around 5 % which is very less from 9 % it enjoyed in 2008. It means that India is losing Rs 4.8 Lakhs Cores  money every year....India's Tax to GDP ratio ( income earned by government of India) is 10 % which means that Government of India is losing Rs 48000 Crores income every year because of less growth.

In contrast, loss projected in 2G scam is just Rs 1.76 Lakh Crores which made Head Lines. But Indian Economy is losing Rs 4.8 Lakhs Crores every year and Government of India is losing Rs 48000 Crores revenue every year due to slump in GDP growth which nobody seems to  care.

As informed earlier, if India fails to grow at the rate of at least 8 - 9 %, it cant accommodate 12 million people joining labor force every year. This surge in unemployment is dangerous and will result in social unrest.

This author has argued in one post titled " What India Should Learn from the Eurpoean's Secession Movement" that it is duty of government to ensure that its citizens are always running after money ( to consume more ) for the sake of unity of India.

Conclusion:

Only way to remove corruption is to overhaul the entire system which causes corruption. In the absence of any structural reform ( which will take several years and requires political will), corruption is in fact good since it will at least speed up the approval process resulting in GDP growth.

ENACTING LOKPAL WITHOUT STRUCTURAL REFORMS IS BAD FOR ECONOMY AND WILL FURTHER CAUSE CHAOS SINCE GOVERNMENT OFFICIALS WILL BE WARY OF TAKING DECISION FEARING BACKLASH.


lets see the following in Part 2 of this article:

1, WHY BRINGING BLACK MONEY TO INDIA WILL STROKE INFLATION AND NOT GOOD FOR ECONOMY?

2 . WILL  BRINGING BLACK MONEY TO INDIA KILL INDIA'S EXPORT SECTOR INCLUDING IT?

WHAT INDIA SHOULD LEARN FROM THE EUROPE'S SECESSION MOVEMENTS ?

WHAT INDIA SHOULD LEARN FROM THE ONGOING EUROPEAN CRISIS ? : IDLE MIND IS DEVIL'S WORKSHOP ( By S.Ramamoorthy)

Sir Winston Churchil once said that India will be split into pieces..But Irony is that it is UK which is splitting....In contrast, India with so much diversity ( 7 religions, > 1000 languages and 1.2 Billion Population) still remain as Single Country  boasting as World's Largest Democracy ( unprecedented in the world) without any major secessionist movements.

What is the status of UK & Europe which once upon a time ruled  almost the entire Globe?

                                             
                                                     ( Catalonia Independence Protest)

Scotland (part of UK) is set to hold referendum on 18.Sep.2014 to become independent Nation. Without Scotland, GDP of UK will be less than India. In Last Week, 1.8 Million people of Catalonia ( part of Spain) have protested in streets demanding Independence from Spain. Venice wants freedom from Italy and Some part of Poland also demand separate country. Even Survival of so called Euro Zone ( Economic Union of 18 Countries with 3.5 Crore Population and GDP of 9.5 Trillion USD ) is Big Question Mark after 2012 European Debt Crisis.

We all know about 2012 Arab Spring ( Demonstration and Protest of common people which thrown away the rulers) of Egypt, Libiya, Yemen & Tunisia.

WHAT INDIA SHOULD LEARN FROM THIS SUDDEN SURGE IN SECESSION MOVEMENTS IN THE WORLD? WILL IT HAPPEN IN INDIA ALSO ONE DAY? HOW TO PREVENT IT?

UNITY OF INDIA:

As  said by Mr.Cho Ramaswamy, three things which hold India together as one country with these kind of diversity are 1. Hinduism ( 80 % of people united by this irrespective of language and region)  2. Constitution ( IPC 124 - A which bans sedition) and 3. Congress Party ( due to its Pan India Presence).  All these Eurpoean Crisis, Arab Spring and Fall of Soviet Union teach us one thing that " Economic Policy" of a country also plays a vital role in the unity of the country. HOW?

THERE MAY BE SEVERAL REASON FOR THESE SECESSIONIST MOVEMENT. BUT HISTORY TELLS US THAT THERE IS ONLY ONE REASON FOR ITS SUDDEN SPIKE. THAT IS ECONOMIC RECESSION.

Unemployment rate in Spain, UK, Italy & Poland are 25.1%, 6.5 %, 12.3 % and 9.5 % respectively compared to 3.5 % of India and their GDP Growth rates are 0.6%,0.8%, - 0.20% and 0.6 % respectively compared to India's 5 %). In fact, Euro zone is inching towards Deflation which is much more dangerous than Inflation.

SO IT IS CLEAR THAT SPIKE IN SECESSIONIST MOVEMENTS ARE RELATED TO THE ECONOMIC PERFORMANCE OF THE COUNTRY. EVEN QUELLING OF INDIA'S KHALISTAN MOVEMENT AND NAXALISM IN ANDHRA (BY THEN CHIEF MINISTER YSR REDDY) ARE MUCH ATTRIBUTED TO THE ECONOMIC IMPROVEMENT NOT BECAUSE OF MILITARY.

BUT HOW?

ECONOMIC SLAVERY: WHY IDLE MIND IS DEVIL'S WORKSHOP:

Most Dangerous weapon in the world is not Nuclear Bomb. It is Human Mind. It is essential for any government to make sure that its own people are always running after money. When people are running after money to pay their Home Loan, Auto Loan & Personal Loan etc, they have no time to concentrate on other matters resulting in peace and Unity of Nation. All Government needs to do is that to create economic atmosphere in the country which will convert people into economic slaves.

There are two kind of economic system in the world ( Capitalism and communism). Both system agree that wealth creation is nothing but increasing the total production (GDP) of a country. But it differs only in the owning of means of production. ( Capitalism allows privatization which communism bans)

We have witnessed the fall of communism in Russia & China. Only "Free Market Capitalism" can create prosperity as it did in the Europe, Japan, USA & China. But problem with Free Market Capitalism is that it is not a complete economic system. It operates on two basic Human Behavior. (Greed and Fear). Economic Boom ( Greed of the people)  & Recession ( Fear of the people) are inevitable in the Free Market Capitalism.  But, Advantage of Free Market Capitalism is that its flexibility and capability to evolve.( For information, Globalization is the latest evolution of Free Market Capitalism).

Hence, India should follow the well proven "Free Market Capitalism" to lift its people from poverty and to prevent the Social Unrest. Only "Free Market Capitalism" can create the prosperity and generate employment in the economy which will always keep the mind of the people under the drug called Money preventing them to think in the unnecessary things.

If India fails to create sufficient employment for its youth, social unrest is imminent like what happened during Anna Hazare Movement which was compared with Arab Springs. ISI has been trying to divide India through Terrorism and Hindu Musilm Riots. But it keeps failing to do since it lacks major support.

But, it seems that ISI is now funding so called NGOs to block the Major Development Projects in the country in the name of Environment Protection. Why? It dreams to create the social unrest by creating economic recession. Social unrest created though the Economic Recession has the potential to divide India like what is happening in Europe.


ONE OF THE EASIEST WAY TO QUELL ALL SECESSIONIST MOVEMENT AND TO PREVENT IT FROM HAPPEN IN FUTURE IS TO CONVERT PEOPLE INTO ECONOMIC SLAVES WHERE PEOPLE WILL ALWAYS RUN AFTER MONEY, NEVER GET SATISFIED WITH WHAT THEY EARN ( GREEDY NATURE OF PEOPLE WHICH IS IN FACT GOOD FOR ECONOMY SINCE IT INDUCES PEOPLE TO BUY THING RESULTING IN INCREASING THE AGGREGATE DEMAND OF THE ECONOMY) AND HAVE NO TIME TO THINK ABOUT OTHER THING.

When People gives importance only to the money, it will automatically eradicate the social ills called  Cast System, Communal Violence, Poverty & untouchability but it also comes with side effects like Cultural & Environment Degradation. But, even cancer Treatments have side effects like Hair Loss etc.,

SOME TIMES SIDE EFFECTS ARE BEARABLE IN FRONT OF LIFE THREATENING DISEASES (IN THIS CASE SECESSION MOVEMENTS).

WHY " MAKE IN INDIA" IS "MISSION IMPOSSIBLE" MR. MODI?

WHY " MAKE IN INDIA" IS "MISSION IMPOSSIBLE" MR. MODI? ( By Sanjeevi Ramamoorthy)

In his first Independent Day Speech to the Nation, prime minister Modi has openly invited  world to "Make in India". But Why "Make in India" wont happen unless Mr.Modi does the following Reforms?

INDIA'S ECONOMY AT A GLANCE:

India's GDP is $ 1.87 trillion USD ( 10th Largest in the World). Contribution of Agriculture, Manufacturing & Services to the GDP are 14 %, 21% & 65 % respectively.

It is clear that Indian Economy is totally dependent on Services like Software, Banking,Hotels, Trade ( 65 % contribution to GDP) for its survival. But irony is that it employs only 20 % of People whereas  Agriculture ( Just 14 % of GDP) contributes to 60 % of Employment. ( It means that 60 % of Indian People are sharing 14 % Income where as remaining 40 % of people are sharing 86 % income of our country. Real Cause for Social Inequality).

11 Million people are joining Indian Labor Force every year. It means that India should create 11 Million New Jobs every year just to keep unemployment rate at the same Level. But fact is that India has only added 7.5 Million Jobs  between the year 2004 -2012 ( UPA Legacy).

OOPS..!!!!!!...... SOME THING IS GOING WRONG. WHAT IS THAT? 3RD FASTEST GROWING ECONOMY IN THE WORLD IS NOT ABLE TO CREATE ENOUGH JOB. WHO IS THE CULPRIT?

Culprit is the Manufacturing Industry. Countries like China, Japan, Germany & East Asian Economies grew only because of manufacturing not because of Agriculture & services. Only Manufacturing Industries can create Maximum & Sustainable No of Jobs required to eradicate the Poverty. As long as India depends on Services Industry and Agriculture for Jobs, it will remain as Third World Country and cant dream of becoming Super Power. MODI KNOWS THIS VERY WELL. This is the reason behind his open invitation to world to set shop in India and to Manufacture ( MAKE IN INDIA).

BUT WHAT STOPS INDIA FROM BECOMING MANUFACTURING HUB FOR THE WORLD LIKE CHINA DESPITE HAVING CHEAP LABORS AND DEMOGRAPHIC ADVANTAGE ( Age of 65 % OF POPULATION IS < 35) ? AND WHY WORLD IS NOT READY TO COME TO INDIA?


1. INDIA'S DRACONIAN LABOR LAWS:

 Forget MNCs. Even Indian Companies are not ready to open Manufacturing Plant in India due to it's century old Labors Laws and Land Acquisition problem.Even Existing Companies also want to remain as small as possible rather than to expand resulting in importing even Toys from china which depreciate our currency.

Another interesting Statics is that only 10 % of Indian Labors ( out of  435 Millions) are working in Organised Sector. Rest 90 % of employment is in unorganized Sector. WHY? WHAT IS THE PROBLEM WITH OUR LABOR LAWS?

HIRE AND FIRE POLICY

In ever changing, unpredictable & Seasonal   market scenario, companies need Hire & Fire Freedom inorder to remain lean and competitive. But, Industry Disputes Act (1947) disallows companies having more than 100 employees to fire any employee without state government consent.

Result: It gives indirect incentive for companies to remain small ( less than 100 employees) and they never want to expand inorder to escape from this law. (Only 9 Lakhs companies out of 83 Million Companies ( Total Registered Companies in India) are enterprises. Rest are very small)

UNLESS MODI REFORMS THIS LAW, MNCs WILL BE RELUCTANT TO COME TO INDIA AND EVEN EXISTING INDIAN COMPANIES ALSO WONT EXPAND. INDIA WILL CONTINUE TO IMPORT EVEN SMALL TOYS FROM CHINA INSTEAD OF MANUFACTURING THE SAME IN INDIA WHICH WILL GENERATE EMPLOYMENT HERE.

TRADE UNION ACT:

According to Trade Union ( Amendment ) Act 2001 of India, just 10 % of employees are enough to legally register a Trade Union. It means that companies having 100 employees can have 10 different Trade Unions resulting in Chaos.

There are some other Laws Like Contract Labors Act, Apprentice Act, Indian Factory act which make it almost impossible for Manufacturing companies to oblige all laws and still remain competitive.

THESE LAWS ONLY PROTECTS 10 % OF INDIAN LABOR FORCE STALLING THE EMPLOYMENT GENERATION FOR OTHERS.

2. LAND ACQUISITION ACT:

Last Year, UPA II passed the foolish Act called Right to Fair Compensation and Transparency in Land Acquisition ( Major folly of UPA II to get Farmers Vote).

Major absurd points of this acts are as follows

1. Companies should compensate the  Land Owners the 4 times the Market Price incase of rural land and 2 times the Market Price in case of Urban Land.

2. In addition to the compensation, companies should provide alternate House for Seller along with Job / annual payment of Rs 2000 per month for 20 Years ( adjusted to inflation)

3.80 % of Owners approval is need for Land Acquisition.

4. Approval & Clearance from State and Central Agencies for Various Stages of Acquisition( We all know How difficult to get clearance from these agencies even after paying Bribe).

The above law is totally absurd and  will increase project cost multiple times in addition to the delay.

CONCLUSION:

If modi really wants to make India as Manufacturing Hub of the World and to realize the dream of "Make in India", he should immediately amend the Land & Labors Laws at the earliest with out fearing backlash from Trade Unions and So Called NGOs for the sake of aspiring young generation of India which need jobs and same kind of life style like their counterparts in Western Countries.

"MAKE IN INDIA" WILL BE "MISSION IMPOSSIBLE" WITHOUT THE LAND AND LABOR REFORMS.

INTERNATIONAL CURRENCY WAR: WHY INDIA SHOULD DEPRECIATE IT'S CURRENCY IN LONG TERM?

INTERNATIONAL CURRENCY WAR: WHY INDIA SHOULD DEPRECIATE IT'S CURRENCY IN LONG TERM?( By S.Ramamoorthy)


We Indians always complain about the depreciation of Indian Rupee against USD assuming that Rupee Appreciation is directly related to the strength of our economy and to our pride. But most of the nations in the world are desperately trying to devalue their currency through money printing just to make their export very competitive. Our currency value against USD is Rs 61/- which we feel that very low...

But here are some statistics........

 1. Value of one Japanls (World's Third Largest & developed economy) Yen Against US dollar: 101 Yen
 2. Value of one South  Korea;s ( Developed Country) Won against 1 US dollar: 1032 Won
 3. Value of one Indonesian Rupiah against 1 US Dollar: 11789 Rupiahs
 4. Value of one China's Yuan ( World's Second Largest Economy ) against USD: 6.16

The above major economies are well developed and Major exporting economies in the world which are artificially keeping their currency value low against US dollar by printing paper money just to make their exports very competitive. Still they are very strong..Inflation is under control.

SO IF DEPRECIATION OF RUPEE IS GOOD, WHY WE COMPLAIN?....Let us discuss in detail

QUESTIONS ARE AS FOLLOWS

A. How International Currency Market is working?

B.What are India's  Problem? and Why India should depreciate our currency in long term?

C. What will be the consequences of International Currency War?


A. HOW CURRENCY MARKET WORKS? WHO DETERMINES THE VALUE OF OUR CURRENCY?

In a free market Capitalism, price of anything in the market is being determined by the supply and demand mismatch. So in the currency market also, value of any currency will be determined by the supply & demand of the dollar against local currency i.e difference between Import & Exports of that economy. If a country imports more than what it exports, demand for dollar will increase since dollar is defacto reserve currency and all imports should be paid in dollar. In case of India, we are net importer country ( our total import in June 2014 was $ 38 Billion USD and Export is mere $ 27 Billion).

In international monetary term, it is being called us "Current Account Deficit" or CAD ( Difference between Bill paid for imports and Revenue earned on exports). So when a country becomes net exporter, it earns revenue and vice versa.

Any country should aim for lower import since import is nothing but expenditure from pocket where export is income...

So Let us see How it affects the Exchange rate of currency?

They are two type of exchange rate control system. One is fixed exchange control system / managed exchange rate system in which government will permanently fix / manage the exchange rate of their currency against dollar which India, china, japan follows and another system is floating exchange rate system in which market pressure will determine the value of the exchange rate where government plays no role at all.

Advantage of Floating exchange rate system is that Market Factors will depreciate the value of currency if country becomes net importer and appreciate the value of currency if country becomes net exporter whereas in the managed exchange rate system, if value of currency depreciates, central bank will sell dollars from their foreign exchange reserves to arrest it fall and will buy dollars from market by printing local currency in case of appreciation of currency against dollar. This process is called Balance of Payment.

Let us see what is Balance of Payment. Before that there is another one fancy terms called as Capital Account which includes the following

1. Foreign Investments including FDI ( Foreign Direct Investment & FII ( Foreign Institutional Investment and Portfolio investment)

2. Loans ( External Commercial Borrowing (ECB), Loan received from other countries)

3. Bank Capital ( Net foreign assets and Liability of Banks & NRI Investments)

Balance of Payment = Current Account ( Revenue from Export - Revenue from import ) + Capital Account ( FDI flows + Loans +Bank Capital) .

If a country follows floating exchange systems, then no need to worry about balance of payment because market pressure will keep Balance of payment  always Zero  by adjusting the exchange rate. In the managed exchange system which India follows, it is the central Banks job  to maintain zero Balance of Payment since it wont allow market factor to decide the value of currency.  

In Case of Net Importing countries which follows Managed Exchange Rate System like India:

In these countries, market pressure will try to depreciate the currencies of these countries since import is high which will increase the demand for dollars. But since these countries are not allowing rupee to depreciate for unknown reasons following will be the impact.

As long as capital account surplus (Net  FDI, FII , ECB, NRI Deposit came into India in last year is around $ 100 billion ) matches the current account deficit ( Bill paid for Import - Revenue from export which is  around $100 billion in last year), there is no problem. But in the case of financial crisis, capital flows will start to flee from the economy as happened in 2009( only $ 6.8 Billion net inflow against $100 Billion now) by depreciating the currency value & increasing the dollar demand...So to stop the currency fall, central bank should be forced to the sell dollars from the foreign exchange reserves ( India current foreign exchange reserve is $320 billion). Once foreign exchange reserves got over, India will be in serious trouble as happened in 1991 Economic Crisis of India when India forced to pledge 67 MT of gold to International Monetary Fund. 1997 financial crisis of south east asian nations also teaches us the same.

Now another interesting question is that why USA which is net importer country like india is not being affected by Dollar Depreciation? Why case of USA is different from others? 

Answer is obvious. Dollar is defacto reserve currency of the world. 65 % of the world's Surplus money ( $ 6.8 Trillion ) is being kept in dollars. It is being seen as safe heaven in case of financial crisis. World has no other choice than to depend on Dollars. This is the reason why value of dollar got appreciated in 2008 financial crisis even though culprit was the failure of American Financial System.We call it as Triffen Dillema.

In case of Net exporting countries which follows Managed Exchange Rate System like china, Japan:

In these countries, market pressure will try to appreciate the currencies of this countries since export is high which will decrease the demand for dollars. But  these countries are not allowing rupee to appreciate for the following reasons

1. Rupee appreciation will erode the competitive advantage of their export.
2. Reduction in exports will kill the employment as exactly happened in 2008.
3. Redction in exports and unemployment will reduce the GDP resulting in social unrest


So these countries wont allow their currencies to appreciate against USD by artificially creating the demand for Dollars through newly printed local currencies ( money printing)......THIS IS CALLED CURRENCY WAR... All these countries are printing new money every year just to depreciate their currencies artificially inorder to increase their exports.

B.WHAT ARE THE INDIA'S PROBLEM ? WHY SHOULD INDIA DEPRECIATE THE CURRENCY IN LONG TERM?

Let us see the How exchange rate will affect our day to day lives

For example, if value of indian currency falls from Rs 61 to Rs 100, it is the good news for export sector like Software, Textiles since they will be paid in dollar from their client and their rupee realization  of that dollar will be huge for same work. So there will be boom for export sector which will create the employment as happened in software boom of south India(India's sofware export is just  $120 billion but it creates 50 lakhs direct and indirect jobs). At the same time it will increase the cost of imported items like petroleum, gold & coal resulting in inflation.

So Export means Income and Job Creation and Import means expenditure and erode of saving. India's problem is that it is net importer country. As long as it is net importing country,net advantage of rupee depreciation is null. So India should try to reduce it's imports and starve to become net exporter country in long term..But question is How?

India's Major exports are Oil ( around $ 125 billion in current FY), Gold ( around $30 billion) Coal & Machineries.

Import of Coal:

Worst Part is that india is having world's second largest coal reserve. Still, it is importing coal since Public sector Coal India is not able to mine more to meet the local demand.Real solution is to open coal mining to private players which will create local employment and even exports instead of imports.

Import of oil:

India imports 70% of oil from other countries even though it has sufficient reserves locally. What is needed is that opening the sector for private players and FDI. Technologies  from FDI and Competition will ensure the local oil production in india by creating job and reducing the dependence on imports.

SO INDIA SHOULD SHOULD TRY TO BECOME NET EXPORT COUNTRY VERY SOON  WITH BENEFIT FROM DEPRECIATION OF CURRENCY

 C. WHAT WILL BE THE CONSEQUENCES OF CURRENCY WAR?

We have seen so far that How countries are artificially keeping their currency value low against USD by printing money. What will be the consequences of this?

1, This newly printed fiat currency will create the asset bubbles in the world economy and will one day result in uncontrolled inflation.

2. It will encourage the carry trade ( where this money will find it's way to emerging economics like india where interest rate is very high) which will further increase the risk of financial system.

3, This new money will increase the volatility of Stock Market and Crash as predicted by Mr.Raguram rajan in his recent interview.

INDIA'S SELF INFLICTED WOUND: FOOD INFLATION..( By S Ramamoorthy )

INDIA'S SELF INFLICTED WOUND: FOOD INFLATION..( By S Ramamoorthy )

In his 6th Monetary Policy statement announced on 05.Aug.2014, RBI governor Raghuram Rajan has made his point  clear that his target of CPI (Consumer Price Index) inflation rate is 8 % by Jan 2015 and 6 % by Jan 2016 which means that Industry cant expect Repo Rate Cut ( rate at which RBI lends to Bank) in near term. With out Repo Rate Cut, recovery of GDP growth ( Last FY GDP growth rate is4.6 %)  is next to impossible.

Well, Let us look in detail about CPI Index....Question are as follows

A. What is CPI rate and how it affects common people like us ?

B. Whether Raghuram Rajan can tame the  CPI by just playing with Repo rate or at the cost of compromising the GDP Growth?

 C. What will be real danger of sacrificing the GDP growth for CPI Inflation?

A.WHAT IS CPI INFLATION?:

It is the  inflation rate being released by "Ministry of Statics and Program Implemention (MOSPI) " on every second monday of the month..CPI  inflation rate is believed to be the real inflation rate in the economy being faced by common people like us .CPI inflation rate of India in June 2014 was 7.31 %

Following are the major weightage given in the CPI Index

1. Food, Beverage & Tobacco : 49.71 %
2. Fuel & Light                         :   9.49 %
3. Housing                               :   9.77 %
4. Clothing & Foot Wear         :    4.73%
5. Miscellaneous                     :  26.31%

It is clear from above that Food & Fuel are the major constituents ( 60 %) of the CPI inflation Index

Mr.Raguram rajan believes to control the price of Food & Fuel by just manipulating the Repo Rate or by killing the GDP growth rate which will increase the unemployment and social unrest.....Let us see below, why it is impossible for Mr.Rajan to tame the CPI inflation as he desires and How he will finally end up killing so called Indian Growth Story

B. WHETHER RAGURAM RAJAN CAN TAME THE CPI BY JUST MANIPULATING THE REPO RATE OR AT THE COST OF COMPROMISING GDP GROWTH?

Agriculture contributes only 13 % to the $ 2 Trillion Indian GDP. Rest are Services ( 65 %) and Manufacturing ( 22 %)..But worst part is that agriculture employs 50 % of indian population compared to service and Manufacturing which means that 60 billion people of India is sharing the 13 % revenue of India where as remaining 60 Billion people are sharing 88 % of Indian revenue...This is the real cause for social imbalance. Real solution to the social imbalance is to move out people from Agriculture to Service & Manufacturing which  can only solve the social imbalances.

Now Big question is that why Food Prices are always high in India. Let us see....

We all know that inflation is nothing but supply, demand mismatch...When demand of a product surpasses the supply, it will result in inflation? Whether it means that India's agriculture production is very less compared to the demand of people.. BIG NO.........India;s Rice production in this year is 106 million MT and Wheat production is 95 million  MT..India is second largest producer of Vegetables, Fruits & Milk item in the world.....This production rate is more than sufficient to feed 1.2 billion .....So Supply side, we are infact producing more goods than what we can consume......If it is the case, interesting question is that How Prices of Food items increases every year?......Who is the culprit?........Main culprit is UPA government led by Sonia gandhi........Let see in detail


1. Indian Agriculture market is controlled by Government which is procuring more than 40 % rice & Wheat production in the economy without having sufficient warehouse facilities resulting in rotten of Wheat & Rice....This over procurement limits the availability of grains in the open market resulting in inflation where middle class people like us buy that ....For example, Food Corporation of India has stock of 67 million MT of Rice & Grain well above the requirement for Public Distribution System which requires only 30 million MT.....Extra 37 million MT grains are getting rotten every year.

2. Poor Public Distribution System: Even though GOI spends Rs 1.25 Lakh Crore rupees for Food Subsidy out of which only 43 % of the food grain reaches the people who are in need. Remaining 57 % are being looted...

3. Common sense is that why government is unnecessary buying more Grains that also at higher Prices famously being called as Minimum Support Price which is being revised every year regularly....Reason is pure vote Bank Politics......India spends Rs 1.25 Lakhs crores as food Subsidy every year and Indian Governement is currently spending Rs 143 for every Rs 100 it earns which means that Government is raising Rs 4.5 Lakhs Crores Loans from open market every year to spend in unproductive assets like this because of  Farmers Votes....

4.Since Minimum Support price is very attractive, getting revised every year and above the market price, farmers are more interested to produce Rice & Wheat rather than Vegetables, Cerals & Fruits resulting in  less production of Vegetables, Cereals, Fruits

5. Another main culprit for Food inflation is that NREGA ( National Rural Employment Guarantee Act) famously being called us 100 Days employment scheme....GOI spends Rs 33000 Crores every year for this scheme which is pulling Labors from Agriculture to this since work load is nothing here...This increases labor shortage for the farming & construction resulting in higher cost of production for Agriculture goods...This Rs 33000 Crores money in the hand of poors further increase the demand for food items without increasing the supply.

6. Another worrying fact is that 18 % of indian agriculture production are getting rotten due to insufficient Cold Storage Facilities resulting in loss Rs 44000 Crores...India has cold Storage facilities just enough to store the 30 Million MT of Agriculture goods which is 50 % less than the required capacity.....It will cost Rs 55000 Crores rupees to create the cold storage faciltiy which GOI is not ready to invest.

7. Problem of Middle Men: Indian Agriculture market is mostly controlled by Middle Man Mafia..This is very unregulated and they are indulging in Hoarding of Goods just to create artificial demand...

So India's food inflation is self inflicted wound which can only be healed by taking following steps

1. Government should not interfere in the Agriculture Market. Government should immediately withdraw the subsidy being wasted  here.Let Market Pressure determine the Price of the goods.

2. Allowing FDI in retail: Only FDI can make Investment Like Rs 55000 Crores to create sufficient Cold Storage Facility to prevent 18 % of Goods getting rotten every year. This entry of FDI will automatically curb the Middle Man role ending Hoarding Practices.

3. Allowing Corporate Farming: Small Farmers cant bring the best practices from the world..India's yield rate per Acre is very low compared to the International Standard.It is only corporate can bring theWorld Class practices to India resulting in higher production.


SO FOOD INFLATION SEEMS STRUCTURAL ISSUE THAT CAN'T BE CONTROLLED BY JUST MANIPULATING WITH REPO RATE

 C.  WHAT WILL BE THE REAL DANGER OF SACRIFICING THE GDP GROWTH FOR CPI INFLATION?

So far, we have seen that Food inflation ( 50 % of CPI) can't be tamed by controlling the Repo Rate as RBI thinks..As long as Repo Rate is high, substantial recovery in GDP growth is not possible....Let us see what are the side effect of Lower GDP growth?

1. 12 Million Graduates are entering into job market every year.To create employment for them, GDP should grow at the rate of 8 - 9 % every year or most of the 12 million will be job less and if it continues for 2-3 year, their future will be ruined

2. Lower GDP growth & Higher Unemployment growth will lead to social unrest and crime.....I correlate the support for Anna Hazare & Arvind Kejriwal with Lower Growth since when people lose faith in the system, they will seek change which may finally result in people springs as happened in Middle East.

SO IT IS VERY HIGH TIME TO CONCENTRATE ON HIGHER GDP GROWTH RATHER THAN DEFENDING THE INDEFENSIBLE.