Category Archives: Economics

Unjust retribution

Just as the Indian Govt. had placed a ban on commodities futures to control inflation, so has the US SEC [Securities and Exchange Commission] directed a ban on short selling on about 800 financial companies in a bid to arrest the deep slide faced by financial institutions in the US in the wake of the subprime mortgage crises.

Just goes to show how unfairly the only people in the world, who saw the bubble in the valuations getting built, get treated. While the executives who directed the funds to such fraudulent instruments walk away unscathed [at least financially] and the credit rating agencies which failed to mark the assets suspect remain ignored, the only guys who saw the true fundamentals [or the lack of them thereof] get blamed for the sorry state of the economics. What a shame and pity.

Ayn Rand vs Che Guevara

The past weekend, i completed a relatively unique double of reading through two distinct texts with strong communist influences; The Motorcycle Diaries and Animal Farm. The former recounts the journey carried out by Ernesto Che Guevara accompanied by his friend, Alberto Granada aboard ‘la Poderosa’ while the latter describes the Orwellian tale of an uprising staged by animals of various “classes” in a farm in England in hope of better living conditions.

While “The Motorcycle Diaries” chronicles the formative years of Che’s eventual revolutionary life, these very influences are presented in a very subtle manner wherein Che encounters deep class, societal, cultural and economic divides in his travels across Latin America while he himself battles tough medical and economic conditions. What essentially starts of as a humourous series of thoughts and situational anectodes penned down by Che towards the start of the journey eventually transcends into a soulful recording of the punishing conditions the native Latin Americans are subject to in their own lands. All this, while Che manages to keep the humourous thread running and at the same time, provide a poetic narrative of the mystic and enchanting lands that he visits as a part of his expedition. That the text might be called ‘Motorcycle Diaries’ while ‘la Poderosa’ gave up less that halfway through might appear strange. That is an academic anomaly in an otherwise thoroughly enjoyable book that does not give much of a scope for one to crib through.

In addition to these texts carrying deep socialist undercurrents, i have also had the privilege of reading throught the thoughts of one of the faces of capitalist societies: Ayn Rand. And the distinctions between the two are pretty easy to see. Reading through Ayn Rand’s Atlas Shrugged had left a lasting impact on my thoughts at that time and it was very difficult for me to think in any other terms other than those propounded by those in Ayn Rand’s utopian world. And in hindsight, i must admit that they tend to be quite damaging, especially given today’s glocalization and mass movement of economies world wide to a democratic setup. Ayn Rand’s societies consisted of few men [and women, yes ok!] of strong virtues pitted against a mass society that tended to be parasitic in nature. And this corruption of character manifested itself not solely in individuals in trade but also those who practiced and created art. And her argument against the corruption of such societies was to revolt against them through non-cooperation. And in this manner, it had a very Gandhian edge to the revolt. But while the Gandhian way of life talked about reformation of the instigator, Ayn Rand preferred to profess destruction of the corrupt society in the absence of the ‘prime movers’ of the world.

But coming back to why i felt this outlook could now present damaging consequences, the basic fault lies in the very utopian society created by Ayn Rand herself. The only parameter against which an individual was judged was by his/her virtues to individualism while leaving out a number of very pertinent factors [which are prevalent today] like culture, historical class bias and education. And these are the very factors [or biases] that caused Che to eventually don the revolutionary streak.

History has been witness to the vast social injustice inflicted upon various races by colonialism ranging from suppression to mass extermination of races. These consequences of colonialism are most apparent in some of the most troubled of states today like African states of Zimbabwe and South Africa, contensted territory like Kashmir and vast colonization of Australia by European colonists after mass extermination of native populace.

This note is not meant to serve as a treatise against colonialism; what i am trying to convey is that Ayn Rand’s vision of the world was extremely lopsided and could not account for a number of factors that would eventually present themselves to the global polity and economy in the times to come. And with the divides across the world today brought down to their knees by equalizers like the Internet, free trade and consumerist culture, Ayn Rand’s vision of individualism reeks of a defeatist attitude that would not do the world any good.

The world economy today needs new consumers and new markets. The success of an individual today depends upon another individual halfway across the world; the failure of one also brings down another equally antipodal. So the essential need to is general upliftment of peoples across the world, making them contributors to the world rather than subjects of charity and building a local market thus perpetrating general good. And in this, Che’s vision of upliftment of the suppressed classes makes more sense that Ayn Rand’s vision of their destruction.

Hungry kya?

George Dubya Bush has often been credited with having made political statements that have lacked either intellectual depth or logical sense or, as in most cases, both. Hence, it came as no surprise that when he, in the recent past, made a political statement, and this time concerning India, he was again criticized from all corners and this time, including India.

While Dubya was primarily defending his decision to use food grains like maize for the production of bio-fuels like ethanol, the additional point he was trying to put across was that rising per-capita income levels in emerging markets like India and China had given rise to additional demand to quality food grains from that segment of the population. And while he should be kicked in the rear for converting edible foodgrains in fuels, he is quite right when he says that India and China are contributing in a large way to the global food crisis.

Closer home, its not just rising demand from the burgeoning middle class that is sole contributor to rising food costs; studies have shown that per capita food production has fallen to the 1970s levels. That is, indeed, an alarming statistic and what is even more incredulous is the fact that the downtrend is not an overnight turn of events; the stagnation in the agricultural sector has been prevalent for the better part of the decade. That is a sorry tale to say of a country that still boasts to be agrarian and whose populace is largely deemed to be dependent on the farming sector. So what caused this dramatic turn around?

Since the very nature of the issue forms a vicious circle, it is impossible to point out just a couple of factors. The primary reason for the fall is the lack of irrigation water supplies at grassroots level available to farmers and the ill use to technology to aid in crop yields. As a result, farmers have to depend on erratic monsoons and age old techniques to boost crop yields. Bonanza schemes like loan waivers end up being zilch down the road since the basic problem still exists; the only effect of such schemes is to worsen the fiscal deficit.

Down the road, further problems arise due to the sales from the yields. The Govt. of India is the largest buyer of the food grains from these farmers and the price is, of course, dictated by the Govt. Termed MSP [Minimum Support Price], these prices are usually lower than global market prices [though, they are revised every year]. The differential between MSP and the global prices deny the farmers the true market worth for their grains. Their problems are also compounded by the restriction on exports of essential food grains like rice and pulses. In such a situation, most farmers reserve vast tracts of their land for the production of cash crops like rubber, sugar cane etc., the prices of which are entirely market driven and have no export restrictions.

It only needs to put two and two together to understand this does not foster a positive enviroment for a farmer; however, incredibly the problems do not end there. The food grains procured by the Govt. is distributed by an archaic channel called PDS [Public Distribution System]. While PDS incredibly suffers from manpower concerns [due to migration of unskilled labourers to cities aided by opportunities in real estate sector] for acts as simple as loading and unloading of foodgrains, the actual problems start once these foodgrains are collected into the distribution warehouses. After the foodgrains pass through various levels of rampant corruption, the supplies lying around in the warehouses are subjected to waste by the single largest consumer of foodgrains: rodents!

With limited supply from farmers and a pathetic system to distribute whatever little does get filtered through, its no wonder that inflation is climbing to double digits. Artificial counter measures like tightening exports and banning futures trading on commodities serve no purpose than to artificially set prices to hold down inflation. These, in turn, causes an imbalance in the global markets since supply from India is minimal; most countries have used this approach to contain inflation as a result of which globally prices have increased.

Hence, you would now assume that the fault does not lie at the doorstep of the United States. Of course it does. The most important factor in all this is the suddenness in the rise of prices globally; that cannot be the fault of India’s archaic PDS. That is due to the weakness of the dollar against all other currencies.

The dollar is weak because the US Federal Reserve has been relaxing interest rates over the last few months; this makes investing in other countries with higher interest rates more attractive. Which in turn infuses a larger supply of the greenbacks versus the local currency, hence devaluing the dollar.

And why is the Federal Reserve reducing interest rates? Try searching for sub prime.

Karamyudh begins

A new enterprise was formed yesterday. Like most of the speculation-based industries mushrooming in India wherein valuations reach sky-high limits even before the first brick of the enterprise is laid, this behemoth too claimed mouth watering revenue figures before its inception. Which, as i said, was yesterday.

i am, of course, referring to the Indian Premier League [acronymed IPL], which is now, deemed as the showcase for cricketing talents around the world. Either you are a part of it or you are no good. Period. IPL, but naturally, plays on the raw cricketing nerve that runs through any true blue Indian, of which, as odds favour, there are many. But what makes this enterprise different from most other sporting gimmicks we have been subjected to in the past is that IPL is backed up by a sound revenue model. And by that, i don’t just mean your run-of-the-mill game shows with advertising revenues grabbing for eyeballs. This, for once, truly sounds sound.

When unveiled, IPL was primarily seen as an altervative for the ‘rebel’ cricketing league, appropriately called Indian Cricket League [acronymed ICL] launched in a haste to make way for some head room. But when announcements kept trickling in and finally assumed the full blown shape that it took yesterday, one cannot but agree that this was no mean achievement. Ever since i read about the revenue structure of the IPL, i have been blown away by the sensibilities of the deal and the potential that it promises. The details of the deal are many, but i’ll particularly elicit my 2 cents on the most potent of the initiatives.

As any enterprise will agree, the three important [and often only] constituents of a successful venture are the employees, customers and the shareholders. The most profitable and promising venture keeps all the three constituents happy and promises each with growth potential as time goes by. IPL has managed to rein in all the three constituents almost perfectly, thus ensuring for themselves, at least on paper, a happy and a coffers-filled future.

Customers are a given. Cricket will always invite audiences and eyeballs. Give it a dash of the best players and you have managed to grab your customer. By inviting franchises per city, IPL had managed to drag in more shareholders to the venture. More shareholders means more capital and hence, grander scale for the venture which will drag in even more customers. Each of the franchise owners own the team representing the city and it is upto the franchise owners to monetize on the city crowd by creating brand loyalty and awareness. The first leg of the league will lay the foundation of the franchisees to eventually create the brand and the passion that supports it.

Which finally gets us to the players and probably, the most contentious issue of the entire initiative. The auction process, which allowed franchise owners to bid for players they wished would play in their team, has been criticized for more that one reason. Part of the criticism lies, of course, in the morals of the process. After all, no one would like to go under the hammer and be labelled as being “sold to this franchisee owner”. After all, players are no commodities. An even bigger issue with it all is that the price paid for a player does not reflect his capabilities as a player, rather it only reflects the marketability of that player and the potential for monetization that player would bring to the franchisee owner. Which explains a sum of $1.35m for Andrew Symonds and a comparably paltry $400,00 for Ricky Ponting

On a different perspective, quality and merits cannot be measured, especially in dollar terms. If so needed, the best way to get that answer is by throwing that question to other people who also have opinions on merit and quality and let them collectively come up with intelligent answers for quality on dollar value. Since there was no available yardstick to measure by, the first leg of the league used the market hype or pull metric and rewarded those with a larger pull on the Indian [this being the key] consumer. And as a result, i think that the valuations as a result are a good mix of hype [good for the franchise owners] and quality [good for the consumer]. With time, market forces will exert their pull and normalize the values of the players as well. And in more cases than less, the normalization would be on the lines of cricketing abilities.

All that jargonry aside, this venture could be a success only if the basics are satisfied; i.e. the consumer is left happy. And while all this was twirling in my mind while i sat in the galleries in Chinnaswamy stadium yesterday watching IPL unveiling itself, i could not help but realize that this would be the first truly Indian export that relies hopelessly on the Indian mass and frenzy that would show the world where the muscle of the new-age cricket sporting lies.

The model, by itself, is no genius; after all, it is followed by many sporting leagues [read English Premier League, etc.] around the world. The beauty, here, lies entirely in the complex marriage arranged by an archaic organization of an equally archaic sport, with the glitz and glamour of media and the passionate fervour afforded by a burgeoning mass of people who cheer every boundary and shake a leg to every Shah Rukh Khan’s number. A mass of people who, hopefully for the stakeholders of IPL, will shape the brand that they wish to be recognized with.