Our obsession with Western lifestyle and its consequences

I would like to start this post with Nobel Laureate Paul Krugman’s quote “Much of the past 30 yrs of study in Macroeconomics was spectacularly useless at its best and positively harmful at its worst”. 

The word ‘Globalization’ has been misunderstood by almost all of us.  Liberalization, Privatization and Globalization (LPG) does not necessarily mean that we must mindlessly follow the Western way of living and bluntly implement the economic policies formulated in the West (which are in any case proving to be a disaster).  Our policy makers fail to understand the Indian society and the Indian way of living.  India is different from the West (America and Europe) and policies formulated in the West before 30 years will not deem fit to the Indian economy which is structurally different.  

The economic policies that are declared obsolete in the West are being re-branded as big ticket ‘Reforms’ by our policy makers, the best example is FDI in retail.  The common man like you and me must go the extra mile to understand and question the policies that are thrust upon us, rather we like ‘herds’ accept whatever is propelled on us without any due diligence.  The present generation seems to be carried away by the western lifestyle, which is largely fueled by the new found so called ‘economic prosperity’.  

Sayings like “Live within your means”, “Save for the rainy day” have become old fashioned.  India that has traditionally been a savings driven economy is now fast turning to be debt driven.  I could see school / college students flaunting mobile phones that cost anywhere between 30k and 60k, young executives parading with 1500cc motor bikes and ultra luxury cars that cost a Bomb!!  Thanks to the easy availability of Credit (read EMI).  The culture of saving that has been the backbone and face saver of our economy is dying a slow death.  High disposable income in the hands of irresponsible youngsters has adverse impact not only on themselves but also on the nation at large.    

A young executive (from a middle class background) who earns Rs. 60,000 a month has a credit card outstanding of 3,00,000, car loan of 4,00,000 and a personal loan for 2,50,000 and savings….  ZERO!!  The new mantra is spend over and above your means, enjoy life and make merry.  Such reckless attitude towards money has larger implications that impacts the economy at large and not just the individual.  Read on.  

The Market driven economic policies formulated and propagated in the early 80’s by the then British Prime Minister Margaret Thatcher (Thatcherism) and American President Ronald Reagan (Reaganomics) that are proved to be the root cause for most of the current economic woes in the US and Europe, are re-labeled as ‘Economic Reforms’ in India.  To put it in simple words, Economic policies that are considered outdated and discarded to dustbins by the Western nations are cherry picked by our ivy league educated policy makers and put to use in India.

Free markets, foreign investments, control over public expenditure, huge tax cuts and rebates to multinational corporations, privatization and deregulation of the economy are the strategies of Thatcherism and Reaganomics to revive their respective economies from depression.  As a consequence, no doubt the West reached heights in terms of economic prosperity, but it is these very policies that perpetuated the current global economic meltdown.

Well, now let us understand the economic model for growth and development the west has been relying and advocating for decades.  Shop for growth, spend for development was the sole mantra of the US government, the policymakers and the so called intellectuals were literally running a campaign “Shop for America”.

As an extension to this, the Fed (like we have RBI in India) started to cut down the interest rates to near zero levels.  In the 1980’s the US prime rate was as high as 21.50% which has dwindled to 3%.  The policymakers were encouraging the alarming trend of not just spending, but even went to the extent of propagating “borrow and spend”, it is with this intention the interest rates were curtailed and brought down to near zero levels.

The infamous Fed chairman, Alan Greenspan once in his speech said that people in the 3rd world Asian countries like India save because they feel insecure, he further said that the government of such countries were not capable of providing social security to the poor, unemployed and the aged. 

Mr. Greenspan failed to recognize the fact that in countries like India and Japan unlike the west, it is the family and society which forms the basis for social security and not the government.  In India, the father takes care of his son till he finds an employment, the son takes care of his aged parents, the disabled siblings are taken care by the family, the orphans and the left alone oldies are taken care by the society.  Therefore people in India SAVE, they do so not because they are insecure of their future but to support their family and society.  A father saves because he has to fund his son’s education and daughter’s marriage; a son saves because he has to take care of his aging parents.  This family and society driven economic model is the structural difference between the West and the East.

In the West, we can find that the families are awfully disrupted, statistics say that 51% of the 1st marriages end in divorce, 65% of the 2nd marriages end in divorce and a whopping 70% of the 3rd marriage end in divorce, therefore there is no ownership or obligation for the citizens towards their family, neither a necessity to save.   

The savings to GDP ratio is a stunning 35% in India which is one of the highest in the world, whereas the savings to GDP is negative in the America.  There is absolutely no necessity for the Indian government to rely on foreign investments to fund the burgeoning fiscal deficit or to finance infrastructural, industrial development.  For all those who think it is the dollars from America that is fueling growth in India, the ground reality is different, it is a mere 2% of India’s investment which is funded by the FII’s and the FDI’s, the rest 98% is generated from within the country by “domestic household savings”, while the West is compelled to borrow money from India, China, Japan and other emerging economies to lend its citizens who are used to ‘borrow and spend’ culture.  It’s high time we take pride in being a savings driven economy unlike the west that is consumption driven.

It is our family, society and the culture of saving that saved us from all the economic catastrophes that our country had faced earlier.  Unfortunately the current generation seem to think and act like westerners, spending over and above one’s income is considered fashionable.  This culture of borrowing and spending is a perfect recipe for disaster.  There is no doubt that India is an emerging economic power, there are 100’s of reports that suggest that India will emerge as the supreme ‘soft’ power in the future.   In order to be a more matured and responsible super power, we must stick to our basics, learn from the mistakes of our western counterparts and not try to ape their way of life, a copy paste will prove to be a tragedy.

Try to live within your means, spend what is left after saving, avoid wasteful expenditure, never borrow to spend, be simple and charitable, appreciate and live the “Indian way of life”.  Jai Hind.

Euro Debt Crises - a discussion

This post is in continuation to my previous post "The euro area's debt crisis", below you can find a series of discussion I had with Karthick and Yeshwant.  I thought it is worth posting it for two reason, one, I could register our discussion so that it doesn't get lost, two, I felt the discussion would immensely benefit fellow readers too.  Happy reading :) as always, your comments, thoughts, questions are most welcome.

You didn't talk about the rise of Euro crisis. A Little of history of why Euro? could help. Why some countries opted out/were opted out ? I would like to know was Germany/France hesitant against Euro and if so why ?

The purpose of the write up (Euro Debt Crises) was essentially to highlight the mounting public debt by countries in the Euro zone and gross fiscal irresponsibility by the ECB.  We have discussed enough about the birth of the crises, it all started off with mortgage defaults which ultimately lead to failure of the banking system in the west, and that had a  contagion effect.  Still if you are interested, we can work on a detailed cover story analyzing the birth of the crises, well, “why Euro” is a topic in itself :), could not have done justice with just a para on it.

Well, Germany isn't opposing the Euro publicly, but somewhere the insiders want to dump the Euro as they feel it is an unnecessary financial burden, the fundamental question raised is, why the average German taxpayer should pay for making up the losses of Greece, Spain, Portugal?  which could otherwise be used to fuel their own economic growth.  Some even argue that the weak Euro is the reason behind Germany's recovery :-) (Very political and controversial).

The countries in the Euro zone wanted to leverage the financial strength of stronger Euro nations like that of the Germany and France to raise money from the international markets to fund their budget deficits (which is used for large scale bank bailouts), otherwise it is virtually impossible for Greece or Portugal to raise money at tolerable / sustainable rates of interest, given their fiscal position.

Restructuring a insolvent country's debt. What does this mean ?
 
Sovereign Insolvency is when a country is unable to service its debt obligations.  Restructuring is nothing but revisiting the rate of interest and bond tenure in order to make the debt repayable which would otherwise become a bad debt.

We cannot see this only in the light of Sovereign debts/Fiscal deficits. I guess UK, Italy too run huge deficits. The problem is unequal distribution of wealth and supply [goods, Man power]

Not just the UK, even the US runs mammoth deficits, but the US and UK have their respective dollar and pound to fall back upon.  Since the dollar is considered a global reserve currency, the global trade is dominated by the dollar and pound, hence it is easier for the US to raise money from the international markets to fund its deficits or even print money (though this would result in hyperinflation).  And the Euro was proposed to challenge the virtual monopoly of the dollar and rest is history.

This brings us to the fundamental question, how was the value for Euro as a currency determined ?  How is exchange rate determined for the first time? I understand later, it is the open market operations that determine. Still, How is china able to control it's remnibi internally ? Isn't it a violation to set currency exchanges if they were part of WTO ?

Well, there are primarily two ways by which value of a currency could be determined (This calls for a separate, more serious discussion in itself), one, exchange or market determined which is referred to as free float two, a fixed exchange rate regime also known as Pegged system.  A lot depends on capital account and current account convertibility as well.  Please be informed that interest rates, bond yields have a very important role to play in determining the value of a currency.

If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand (which is what is sustainable in my opinion).  A movable or adjustable peg system is a system of fixed exchange rates, but with a provision to devalue the currency.  For example, between 1994 and 2005, the Chinese renminbi was pegged to the United States dollar at renminbi 8.2768 to $1.  China was not the only country to do this, from the end of World War II until 1967, Western European countries all maintained fixed exchange rates with the US dollar based on the Bretton Woods system.

The China is able to control remnibi internally through open market operations, i.e the Govt would buy dollar from the currency market if it wants devalue remnibi and sell the dollar if it wants the remnibi to appreciate.  This is an internal issue and the WTO has no direct control over open market operations to my knowledge. 

Even India resorts to buying and selling of dollar through the RBI in order to avoid the Rupee from appreciating.  This is much politically motivated, we can have a separate thread to discuss its wide implications.

As in how can they value and devalue their currency just by buying/selling dollars. I am sure there is lot more factors into it like Balance of Payments, etc

Indeed, a country can very much manipulate the value of its currency by buying and selling dollars in the open market, but it is not as easy as said, this is just a stop gap arrangement.  In the long term, the value of a currency is purely dependent on the demand and supply mechanism which in turn is largely dependent on the Balance of Payments.  For example, if a country has strong export growth year on year, the aggregate demand for that country's currency grows in the international market, as a result the currency appreciates and if the vice versa happens, currency depreciates.

Because if that is the case, why does India and other 3rd world countries not go for a pegged system..?

I have clearly said that a pegged system is indeed not sustainable at all, unless and until the economy happens to be export driven like that of China, or if the currency is backed by a cartel of nations like that of the Euro.

A pegged currency makes the system more vulnerable to a Currency Crises, it's consequences are disastrous and unexplainable.  Such crises may result in hyperinflation or extreme deflation.  Therefore, for a domestic demand driven economy like that of India or any 3rd world country for that matter, implementing a pegged system is without a doubt "Suicidal".

China on the other hand has a very strong hold on exports, Chinese products have become household for the West, with such strong export growth and BOP, Current account & Capital account surplus, China is able to afford a pegged system.

A commentary on Union Budget 2012-13

Let me confess, I am not all the excited to write about Budget 2012-13, I am genuinely disappointed as a taxpaying citizen of this country, and I couldn't find a better way to express my disappointments but to write a blog and share my perspective.   Let’s look at the pre budget scenario before actually analyzing the important aspects of this budget, we will in particular discuss in detail the opportunities missed by the Government to set the growth trajectory on track.

These are no normal times to have a normal ‘status quo’ budget, in the last decade, India was considered a ‘low-cost high-growth’ economy and the present Government has been extremely successful in transforming it to a ‘high-cost low-growth’ economy.  For seven successive quarters, which aggregates to 21 months, India's has recorded a steady decline in GDP, from 9.4% in Jan-Mar 2010, to 6.1% in Oct-Dec 2011, and the worst is yet to come, going by the current trend, I expect India to register a sub 7% GDP growth in 2011-12.  Cost of subsidies is set to cross 2.5 lakh crore, borrowings are expected to hit the roof at 5 lakh crore, and fiscal deficit will surpass 5.6% of GDP.  While fiscal deficit of over 5% is tolerable (given the fact that we don’t have a choice) if the economy grows at over 9% and domestic savings rate at 35% of the GDP, alas, both seem a distant dream in the current scenario.

While the Government argues that the reasons for the slowdown are exogenous and driven by global factors, truth is that the crisis indeed is a ‘self made disaster’.  The Govt states that the reason for the worrisome fiscal situation is on account of the economic stimulus announced in 2008, but the fact of the matter is, it is the political stimulus (read sops to woo voters) that accounts for the major chunk of Govt borrowings. 

Now coming to Mr. Pranab Mukherjee, I have great respect for this man, no one can level any personal allegations against him, all leaders across parties have great respect and faith in him, well is that good enough qualification to be the finance minister of a dynamic economy like that of India? Read on. 

Pranab Mukherjee is better known as the troubleshooter for Congress than as the finance minister of India, he is the fire fighter for every ally and crises in the UPA.  He is the Chairman for largest number of EGoMs (Empowered group of Ministers), he is often reckoned by the party high command to solve political differences with its allies and the opposition, well he also ‘happens’ to be the finance minister. 

A complex economy like India which is need of a full time finance minster, ironically has the busiest politician of the UPA for the post.  Every minute and hour he spends on political schema, has an adverse bearing on the economy.  There is always an ongoing clash of interest between Pranab Mukherjee the FM and Pranab Mukherjee the politician, what can Pranabda do? How does he set his priorities?  FM Mukherjee is aware of the fact that there is a pressing need to curb subsidies, but the politician in him doesn't allow him to act in that interest.  Very unfortunate, isn't it.

High cost of money..

High interest rates restrain investment activities in the Economy, but to bring down the interest rates, the Govt has to reduce its borrowings.  The startling fact is, when the UPA came to power, the Govt's borrowings stood at Rs. 200 crore a day, the figure currently stands at a whopping 2,500 crore a day!!  This is freakin alarming and the situation demands bold measures to curb revenue spending, austerity measures which are quite easy to preach are seldom practiced.  The UPA regime hiked the interest rates by 5.25% in less than 18 months, which business can handle doubling of interest rates coupled with slowing growth? 

This budget offered Pranab Mukherjee a wonderful opportunity to leverage the crises and present an agenda for good economics by way of cutting exemptions to corporate sector, to initiate phased withdrawal of subsidies and to raise new stream of revenue.  But what we got from him was quite the opposite; the Finance Minister has indeed missed yet another opportunity to set the trajectory for growth, but what more can we expect from Pranab Mukherjee the cut throat politician?

The NDA Govt had earlier enacted the "The Fiscal Responsibility and Budget Management (FRBM) Act" in order to check the raise in Fiscal deficit, as a result the Fiscal deficit declined to a low of 2.5% of GDP in 2007-08 of which only 41.4% was revenue deficit.  The very next year the fiscal deficit was allowed to go up to 6% of GDP and revenue deficit from 1.1% to 4.5% of GDP.  In percentage terms, the share of revenue deficit in the overall fiscal deficit increased from 41.4% to an alarming 75.2%, it further rose to 80.7% in 2009-10. 

Fiscal deficit can arise either on account of Capital expenditure or Revenue expenditure.  Revenue expenditure in principle is considered to be unproductive in nature, it primarily comprise of consumption expenditure of the economy.  The so-called stimulus package announced by the Govt in the wake of 2008-09 crises, largely accounted for consumption expenditure of the economy which simply cannot be rolled back unlike a Capex focused stimulus package which could be rolled back once the economy is out of crises.  This has also eroded the credibility and moral authority of the Govt to advise the State Govt's to check their respective fiscal deficits. 

The ever-increasing deficit, on the absence of solid policy measures to remove supply side bottlenecks, has only resulted in sky rocketing inflation, especially on essentials, which has forced the RBI to raise interest rates and squeeze liquidity, thereby money becoming an unaffordable commodity for the private sector, and as a result, all planned investments were stalled, so were creation of new jobs.

Hike in Service Tax and Central Excise..

We saw how fiscal deficit and reckless Govt borrowings have fueled inflation.  For nearly three years our economy has been battling inflation and slow growth, high prices of essential commodities have continuously eroded the purchasing power of an average Indian consumer, high inflation and high rates of interest have been the primary cause for decrease in consumption and private investment.  Any reasonable common man would expect the Govt to announce stringent measures to curb inflation in the Budget speech, but look at what the Govt did to address issues pertaining to inflation and growth? It imposed a mighty 20% hike in excise and service tax on goods & services, from 10% to 12%, which will further induce inflationary pressure and thump consumption in the economy which is already battling a sub 7% GDP growth.. Poor economics? Read on.  

In an attempt to pacify the taxpayer, Govt has announced Direct Tax benefits for those who earn and are in a position to pay taxes to the tune of Rs. 4,500 crore, cheap applause..? And on the other hand levies Indirect Tax across board to the tune of Rs. 45,000 crore, which will directly impact every segment of the society, including the poorest of the poor.  You might argue that raising tax revenue is inevitable to bridge the gap between Govt Revenue and Expenditure, now that the taxpayer has done his job by agreeing to pay higher taxes, has the Govt reciprocated by curbing its spending on borrowed money?  The answer is NO, the economic survey states that in 2011-12, the Govt borrowed Rs. 1,397 crore every day; in 2012-13 the Govt will be borrowing Rs. 1,560 crore each day.  Interest payments which accounts for the largest portion in Govt’s revenue expenditure, will shoot to Rs. 3.19 lakh crore from Rs. 2.75 lakh crore!!  The Union Budget 2012-13 can be an ideal case study for “poor politics & poor economics”..

Taxing Derivatives...

We saw how the Govt has completely screwed the country's fiscal situation, now that calls for innovative ways & means to raise Govt revenue and cut unwarranted spending to check the burgeoning fiscal deficit, isn’t it.  The Finance Minister is expected to look at new sources of revenue to fix the plug rather simply tampering with the existing tax rates, like it did with Excise and Service tax. 

After the introduction of service tax by the NDA, there were hardly any innovative measure to raise revenue, tampering with existing rates of service tax, central excise will only increase the inflationary pressure which simply does not solve any purpose.  There is one such area which has huge potential, but seemed to have completely missed the FM’s radar, intentionally or unintentionally is a question which I am not equipped to answer.

While there is Securities Transaction Tax (STT) on all stocks bought and sold by retail investors irrespective of whether they makes profit of loss, why isn't the Govt taxing transactions pertaining to speculative Derivatives traded on Stock, Forex and Commodities market?  The total derivative turnover in stock markets is Rs. 1,92,48,200 crore, in forex markets its Rs. 3,46,00,000 crore, and in commodity markets, it's Rs. 1,37,00,000 crore.  The sum total of the derivatives traded is Rs. 6,75,48,200 crore..!!!    

Tax of 10 paise per Rs. 100 derivative will yield the Govt over Rs. 70,000 crore!!  It doesn't stop here, it is these feckless derivative transactions that distort the value of Rupee more than the actual transactions, and it is derivatives which cause huge swings in commodity prices, the resultant of which is skyrocketing inflation which drags the economy to the vicious cycle of high interest rates, low investment and poor job creation.  Therefore taxing derivative transactions will not only be resourceful in generating additional revenue for the Govt but will also check reckless speculation by traders who trade in derivatives.  I am cent percent sure that a tax of 10 paise on Rs. 100 derivative will not burn the hands of genuine users of Derivatives who use the instrument as a tool to hedge, but this will certainly work against the speculators who make money day in and day out trading derivatives. 

If only our finance minister been a little more imaginative and announced Derivatives tax in his budget speech, it would have opened up additional stream of revenue to the tune of Rs. 70,000 - 80,000 crore, which would have been instrumental in curbing the fiscal deficit, but our beloved Pranabda has again failed to act in the interest of the economy, yet another opportunity missed..?  This is a move which no ally would dare to contest on the floor of the house, Mamata inclusive.

On the whole, the finance minister and the Govt have collectively failed to capitalize a wonderful opportunity, both to raise new stream of revenue as well as to curb discretionary Govt spending on borrowed money.  On the contrary, it has taxed consumption by hiking the indirect taxes, which will invariably kill growth and fuel inflation.  If I were to sum up the Union Budget 2012-13, it is an “Opportunity Lost” by the finance minister to have set the growth trajectory back on track.  Is anyone listening..?

Jai Hind

"FDI in retail" - a disaster in making?

The principal argument for 'FDI in retail' is that the deep pocket and know-how of the multinational supermarket chains (read Walmart) to establish supply chain will make rural India and farmers prosperous. One needn’t be a connoisseur to discard this argument to dustbins.  This only showcases the 'Impotence' of the Govt, to be relying upon Walmarts and Carrefours to develop our agricultural infrastructure.. SHAME!! After 65 odd years of independence, do we really need MNC's to install cold storage facilities for us..?  Cold storage chain is neither a proprietary technology nor rocket science.  Is it not sheer sheepishness..?  Read on.

Let us not favor our country’s food security to be outsourced to foreign giants who are nothing but crony capitalists struggling with a slowing economy, with huge investable capital which is otherwise non-deployable.  I am not saying they are wrong, as they protect their interest, shouldn’t we be protecting ours?  They can operate for loss and can afford a gestation period of even 10 years or more before they break-even, now that is a good enough period to ‘wipe off’ the competition by eliminating all the marginal players.  And the so called “organized retail” players will be bought off, if not washed off.

I would wish to remind what Pepsi and Coke did to our domestic beverage industry.  All the local bottle manufacturing companies were acquired by these giants, empty bottle supplies were refused to the local players, the soda bottles in circulation were bought and crushed, fridges were given free of cost to all shops and forced not to stock any local brands, a few best selling brands like gold spot, thumbs up were acquired and killed despite huge popularity and demand.  Is this is what you call as “market expertise”..? my foot, isn’t this bloody unethical crony capitalism?  Pepsi and Coke broke even after I don’t know how many years, may be it took them decades, can our players afford that..?  Take it from me, the same will happen to Indian retail & food chain if the Walmarts, Sears and Carrefours are let in. 

Yet another huge threat, the market will be flooded with cheap Chinese products as the FDI clause allows them to source 30% from anywhere in the world and need not necessarily be sourced locally, there will be no mechanism to track how much is being imported, I wouldn’t be surprised even if 70% is sourced from China, that will be a huge blow to our already struggling domestic SME’s.  The need of the hour is reforms in manufacturing sector to nurture local Entrepreneurship and SME’s, if not nurture, at least don’t kill them for heaven sake.  Again you might argue why can’t we compete with the multinational giants, remember, you must first ‘live’ in order to compete.

Many argue the point that since we have already allowed big local players like Reliance, TATA and Birla, why should we really oppose foreign players.  Read on.

The homegrown supermarket chains does not control the food distribution chain unlike the foreign giants who propose & intend to.  Moreover, Domestic retailers source domestically whereas international retailers operate on the principle of buying internationally at the cheapest cost (read china).

Traditionally self-employment has been the largest source of bread earning in this country.  Agriculture and retail are the largest job providers in India especially, rural India, has the UPA Govt proposed any credible plan for alternate source of employment for the millions self employed in Retail Industry..? Has the UPA Govt initiated manufacturing sector reforms to make sure that we remain competitive vis-à-vis China (so that the Multinational retailers may source domestically)..? once all this is said and done, we may accept 100% FDI in retail, why just 51%.

Now let us consider the economic consequences.  In India, agriculture has been operating as a perfectly competitive market.  In economics, perfect competition implies a market where there are innumerable number of buyers and sellers.  In a perfectly competitive market like that of agriculture, everyone is a price taker and no one is a price maker, which essentially means that the market decides the price of the goods produced and not any individual buyer or seller.  Say if the multinationals are allowed to take stock of our agricultural sourcing and food chain, farmers will be forced to sell their entire proceeds to the cartel formed by a handful of foreign retailers, eventually farmers will be forced to cultivate what the MNC's want them to.

After installing their godowns and cold chains, they will have absolute control over agricultural procurement & marketing, and they will no more be price takers but 'price makers'.  In a nutshell, the perfectly competitive agricultural economy will be disrupted to become an oligopolistic market, where the cartel becomes the price maker and consumers will be price takers (similar to oil marketing companies, I am quoting this example since there are a handful of companies selling oil, whereas there are large number of consumers).  The entire management of the food economy will be in the hands of a few wealthy retailers like Walmart, Sears, Carrefour.  In a country like India where we have marginal farmers and population exceeding a billion, (which is ever growing), we simply cannot afford our food economy to be managed by multinational retailers who are only concerned about 'private profits'.

What we brand as ‘unorganized retail’ contributes a mighty 40% to the services GDP which is 60% of the total GDP.  These people are community entrepreneurs who make their livelihood without any dependence / help / support from the Govt, not even Bank credit and yet contribute 40% to the services GDP!! Is it not criminal to brand them as “unorganized”. .?  I am sorry, I don’t buy that..  I know I would be alone on this, what can I expect from a society where even the word ‘Local’ is synonymous to ‘Cheap’!!

Jai hind.

The euro area's debt crisis

The Euro Zone’s bail out  strategy to tackle it’s sovereign debt crisis is failing, indeed miserably.  A scheme was introduced in order to help the countries that otherwise cannot borrow at tolerable interest rates (due to high sovereign debt), well that did lower the risk but failed to eliminate the risk that the insolvent country may default for want of short term funds.  The only viable option that can visibly have a positive impact is to restructure the insolvent country’s national public debt.  As old debts are refinanced by issuing new treasury bonds (which is nothing but a result of the increased budget deficits), it will eventually result in increase in the share of such country’s debt held by official sources.

Now economists’ and noble laureates debate amongst themselves whether to restructure the debts of insolvent countries, if so, when? Sooner or later? The right indicator to determine whether  or not actually a debt burden is too heavy to borne is the public debt-to-GDP ratio. Most (so called) rich economies in the West which includes euro area’s most troubled (Greece, Ireland, Portugal, Spain) have large budget deficits which have been ever increasing, more so because it has been the model for their economic prosperity, which is tried, tested and practiced for decades. The larger question is, how huge the debt burden would be when their respective economies stabilize, say in 5 years time.

The Economist magazine has estimated the likely burden for the four most beleaguered euro-zone countries, taking into consideration assumptions about growth and interest rates. Because of the fact that all four countries suffer from lack of competitiveness, a recovery in real GDP in the face of fiscal austerity will probably require a drop in wages and prices. For that reason, it has been assumed that nominal GDP falls before recovering to its 2010 level.

(Source: The Economist)

Experts say that it would take five years of tax increases and spending cuts for each country to reach a primary budget surplus without taking into account their interest burden on public debt. 

In the above mentioned table, we can notice that Greece ends up with a debt-to-GDP ratio of 165% by 2015. Ireland’s projected burden is 125%, Portugal’s 100% and Spain’s 85%.  Only Japan which was driven by massive Govt spending (an explicit way to copy the West model which ultimately didn’t work) has a larger burden than Greece, but Japan is comfortably placed since it sits on huge pile of liquid assets and extremely healthy domestic savings, almost 90% of its public debt is held by domestic savers.  For a small country like that of Greece, a debt-to-GDP ratio of 165% is unbearable, amidst the fact that it’s domestic savings being negligible, well, the bubble can’t grow any longer.

Spain though looks comfortable, is a probable solvent. It’s projected debt burden is comparable to that of today’s Germany and France which are considered safe. On the other hand, Ireland and Portugal look as if they are comfortable, in the sense that a public debt in three figures might be tolerable at interest rates of 4% or so, but would be too costly to bear at today’s bond yields which is somewhere in between 9% to 11%.

If we look at the debt-to-GDP ratio of Greece (165%), we could comfortably conclude that it is better to restructure or write off debts which are unbearable, sooner than later. Greece is under compulsion to halve its debt burden to say 80% from current astronomical levels in order to enter the comfort zone.

To conclude, sovereign default by a rich country like that of Greece could be shocking but feasible. Questions like when and how they would write off or restructure to bring the debt levels to halve of what it is now (projected) remains unanswered. It is for the (so called) intellectuals and economists to devise and execute strategies accordingly, who invariably happen to be the “architects” (if I could call so) of this great economic soup.

Is the WEST on the Road to Recovery?`

Paul Krugman, the winner of the Noble prize for Economics in the year 2008, says “Much of the past 30 yrs of study in Macroeconomics was spectacularly useless at its best and positively harmful at its worst”..!!  

My concern is that, despite this fact, the WEST fails to recognize the failure of extreme consumerism and its largely appreciated spending driven economic model, more so because it is trying to correct its mistake by obligating the same mistake all over again.  

Well, now let us understand the economic model for growth and development the west has been relying and advocating for decades.  Shop for growth, spend for development was the sole mantra of the US government, the policymakers and the so called intellectuals were literally running a campaign “Shop for America”.

As an extension to this, the Fed started to cut down the interest rates to near zero levels.  In the 1980’s the US prime rate was as high as 21.50% which has dwindled to 3% for now.  The policymakers were encouraging the alarming trend of not just spending, but even went to the extent of propagating “borrow and spend”, it is with this intention the interest rates were curtailed and brought down to near zero levels. 

There is absolutely no incentive for the people in the US to park their savings in the Bank since his or her savings would yield a negative return (if inflation is taken into consideration).  The then Fed chairman, Alan Greenspan once in his speech said that people save in the 3^rd world Asian countries because of the reason that they felt insecure of their future and the government of such countries were not capable enough of providing social security to the poor, unemployed and the aged.  

Mr. Greenspan failed to recognize the fact that in countries like Indian and Japan unlike the west, it is the family and the society which forms the basis for social security and not the government.  In India, the father takes care of his unemployed son till he is on his own, the son takes care of his aged parents, and the disabled siblings are taken care of by the family, the orphans and the left alone oldies are taken care by the society.  

Therefore people in India SAVE, they do so not because they are insecure of their future but to support their family and the society.  A father saves because he has to fund his son’s education and daughter’s marriage; a son saves because he has to take care of his aging parents.  This family and society driven economic model is the structural difference between the West and the East.

In the West the families are disrupted, 51% of the 1^st marriages end in divorce, 65% of the 2^nd marriages end in divorce and a whopping 70% of the 3^rd marriage end in divorce, thereby there is no ownership or obligation for the citizens towards their family, neither a necessity to save. 

The savings to GDP ratio is a stunning 35% in India which is one of the highest in the world, whereas the savings to GDP is negative in the America.  There is absolutely no necessity for the Indian government to rely on foreign investments to fund its fiscal deficit or infrastructural, industrial development.  I would like to state the fact that it is a mere 2% of India’s investment which is funded by the FII’s and the FDI’s the rest 98% is generated from within the country by the domestic household savings, while the West is compelled to borrow money from India, China, Japan and other emerging economies to lend its citizens who are used to the trend of borrowing and spending.

With a national debt of $ 1 billion in the beginning of the 20th century, the federal budget deficit accelerated, topping out at $290 billion for 1992.  The total deficit for fiscal year 2009 was $1.42 trillion, a $960 billion increase from the 2008 deficit.  The US fiscal deficit is projected to touch a staggering $9.05 trillion in the next ten years forecasting the social security and healthcare commitments.

It is this attitude of extreme consumerism which is the prime cause of the current economic mess which the America has successfully exported to the world.  The consolidated Fiscal deficit of America runs to trillions and still growing, the US has been selling treasury bills and printing money to fund its deficit which is clearly an unsustainable model.  The US treasury bills which are considered the safest instrument in the world are not safe anymore as there are no real assets to back these bills.

Any rational economist would call for a structural change in the economic model to come out of the vicious cycle, now that would mean inculcating the habit of savings to its citizens, but the Fed and the policymakers don’t seem to even realize their mistake, forget rectifying.  That is why I said at the beginning of this post that the US is trying to correct its mistake by obligating the same mistake all over again.  

Trust me "the worst is yet to come", read on.

The US has been pouring billions of taxpayers money into the so called “Too big to fail Banks”.  Too much of fiscal stimulus does no good to an economy; rather it pulls down the sovereign rating as a result of increased Deficit to GDP ratio.  As a result people, banks, financial institutions and the world economy by and large would have lost faith in the US treasury bills and that would be the trigger for the 2^nd round of recession (well, not necessarily depression).

 I just burst into when Obama said that his Government had succeeded in stabilizing the US economy.  Nothing is going to change unless and until the people of the US start saving, they can’t go on a borrowing spree as the model in itself isn’t sustainable.  The government must incentivize savings by way of hiking the interest rates, now that calls for a paradigm shift in the way the US economy had been operating for decades.  Yes, it would lead to chaos in the short run as the consumption would take a hit, but it will be a blessing in disguise since people would learn to live within their means.

For decades the people in the US have been net borrowers, and to make debt available to its people the Fed borrows from other countries by way of selling treasury bonds.  When it comes to India, China or Japan the government borrows from its own people, it is the net savings of the people which funds the deficit of the government and not outside borrowings.

Therefore I am sure of the fact that the US is in deep trouble and the bubble can burst anytime, this time the reason for the muddle would be treasury bubble as it was the real estate asset bubble in 2008.

My words are highly influenced by Shri. Gurumurthy Ji, a charted accountant, economist, columnist and an investigative journalist.  

Your comments and thoughts are most welcome.

“Globalization” – Why is it a bad word in the West?

Once the Americans were propagating Globalization to whole of the world, all of a sudden after the recent slump in their economy and subsequent (Jobless) Recovery, it has become anti national which steals away high end American Jobs.

Globalization and Liberalization are not one and the same as many of us believe, these are two different phenomena which we mistook to be one and the same.. In 1991 when India was Bankrupt, what the country required was Liberalization i.e. the abolition of License Raj to encourage domestic entrepreneurs and industrialists, contrarily what the Narasimha Rao led Congress Govt introduced was pink Globalization which ultimately crushed many small and medium scale companies due to unfair competition by huge Multi Nationals which ultimately led to job losses across the country..!! We had to bear the human cost then in the early 90’s which was thrust on us.

The Americans advocated Globalization to India and other 3rd world countries in the 90’s so that they can expand the market reach for their products produced by American companies which were saturated otherwise. The same Americans resort to Protectionism by way of giving tax breaks to companies which doesn’t outsource, hike H1B fee to curtail Indian skilled professionals to work in the US, bans Govt projects being given to Indian companies.

So let us wake up and understand, the Americans imposed on us the so called growth engine LPG not to help us but to help themselves, to sell their products, to produce goods which they were tired and bored of producing so that they can happily consume. Since highly paid technology jobs are outsourced to India the same globalization has become a foul word for the Americans and they resort to protectionism..!! America is taking a different attitude. This is not a betrayal of an ideology. It is merely a re-definition of self-interest — and self-interest was always the name of the game anyway.

I might sound like a communist for my views but fortunately I am not :-), my point is that globalization is a great idea indeed, but all nations would do whatever furthers their own interests. Let us not get emotional and curse the Americans for their current policies or praise them as we did in the late 90’s for spearheading globalization, it’s better if we stick to our rationale and do what would best suite us.

Your views and comments are invited.