Praxeology: My Reflexions on India

As I opined in my previous article , the RBI governor Dr. Urjit Patel has now resigned finally after a long tussle with the Narendra Modi government. As I discussed earlier, Modi government is under intense pressure to boost the growth and employment figures in the run-up of its reelection next year. The only way in which governments know to boost growth is to increase spending on fiscal programs like the bullet train project or the smart city project or Swaccha Abhiyan etc., etc. And such increased spending is only possible when the central bank monetizes their ballooning fiscal deficit by printing currency notes and allowing commercial banks to boost their lending by relaxing regulatory norms. The problem of non-performing assets (NPAs) for Indian banks is very severe , and RBI was worried that situation will get out of hands if immediately something is not done about this explosive issue. That prompted RBI to tighten their lending norms, which Modi government didn’t l...

The Finance Minister of India Mr. Arun Jaitley at the National Conference on Public Procurement & Competition Law recently said that, We wanted multiple players because they would ensure the largest consumer interest. But there can be several other impacts. Excessive competition, at times, can result in pricing of a nature that that sector of the economy can itself face stress. Because everybody then tends to follow the leader, and therefore what do you do in such a situation?” “And these are all challenges that will emerge as the economy moves further and expands further. (emphasize added) Is this supposed “excessive competition” a problem? Should Mr. finance minister worry about the stressed entrepreneurs? Let us see. Market and its competition means the entrepreneurs are constantly striving to fulfill the most urgent wants of the consumers. And for that they are constantly innovating about new production technologies and new products. Competition makes sure that...

The RBI vs. Government battle is intensifying. The Narendra Modi government intends to keep pressing demands for the country’s central bank to relax lending curbs and hand over surplus reserves, amounting to whopping 3.6 lakh crore , even if it risks provoking a resignation by the bank’s governor. After the debacle of demonetization and GST, the Modi government is struggling to handle the economy of India. Modi’s pet projects require huge sums of resources, which only RBI can provide. It is thus important for the Modi government, who is desperate to win the reelection next year, to gain full control of the RBI. This battle has brought some important issues in open that I want to discuss here. Who owns the RBI? RBI’s deputy governor Viral Acharya started this war by saying that undermining central bank independence could be “potentially catastrophic” . The finance minister of India then fired back and since then the pressure is mounting on RBI. In all these back and ...

The Indian government has supposedly deregulated the determination of prices of petroleum products like petrol and diesel in India. Every time prices of these two products go up , the government plays this card of deregulation to answer the critiques e.g., recently the Modi government reduced the excise duty on petrol and diesel by 1.5 rupees to lower the daily rising prices of these two products in the shadow of coming 2019 assembly election, and when the share prices of oil companies started declining in the aftermath of this move, the ministers are now reassuring the market participants that the government would not go back to regulating fuel prices . How much truth is there in this claim of successive governments that the prices of petrol and diesel are deregulated in India and that they are determined by the market forces of demand and supply? To understand this we need to understand how market determines prices of various economic goods. A market is an organ...

The Modi government is embroiled in an alleged corruption case of  Rafale Jet deal with the French government. Opposition parties are now gunning for the resignation of prime minster Narendra Modi. They have accused him of personally influencing and altering the deal, which was originally put in place by the former UPA government, to benefit his crony Anil Ambani. The former French president Francois Hollande has now confirmed that it was the Indian government who didn’t give him any choice to choose their Indian partner, and only suggested Anil Ambani’s Reliance company name. We can’t and don’t want to investigate this alleged scam here. May be Modi did influence the deal, but that is not our concern here where we want to discuss the nature and cause of corruption. Nature of Corruption WordWeb online dictionary defines corruption as Lack of integrity or honesty (especially susceptibility to bribery); use of a position of trust for dishonest gain . One major...

IL&FS insolvency is rocking the Indian stock markets right now. The situation is so grim that the Modi government has now “ nationalized ” the company! They have bailed out a private limited company by using public money. The news is coming out that, as usual, LIC and state bank of India (SBI) are being coerced by the Modi government to bailout this beleaguered company. The government has bailed out IL&FS, but it is just a ‘canary in the coal mine’. This is the domino whose fall will start the domino effect. There are many such companies whose books are leveraged beyond limits. As the bubble bursts, all the mass insolvencies will come to surface one after another. The whole Indian economy is like a giant castle standing on a quicksand of artificial growth generated by these companies. Artificial because such growth can’t be sustained for long. These activities have to be unwind one day. Modi government has bailed out IL&FS, but how many more such companies...

A mud-slinging exercise is going on between the former Congress and present BJP government about who is responsible for the mounting non-performing assets (bad loans) problem. Political parties, as usual, are blaming each other for this mess. Former RBI governor Dr. Raghuram Rajan implicated bankers themselves for this problem. In a note on bank non-performing assets (NPAs) prepared at the request of Murli Manohar Joshi, Chairman of the Parliament Estimates Committee, Dr. Rajan said The truth is bankers, promoters, and circumstances create the bad loan problem…The RBI is primarily a referee, not a player in the process of commercial lending . He also said, the government should refrain from setting ambitious credit targets or from waiving loans . He also warned that the next crisis in India’s banking sector could come from loans given to the unorganised micro and small businesses, called MUDRA loans, and credit extended through the Kisan credit card. How much ...

The recent historic flooding in Kerala killed hundreds of people and damaged billions of rupees worth of property while displacing more than million people. Keralites are going to need some time to get out of this shock. This flood once again raised many important questions like who is responsible for this flood? Is this a natural or a man-made disaster? Why so many lives were lost? Why the danger was not averted? etc. Some people will say that this is a natural disaster where heavy rains resulted in flooding. Some will blame man-made climate change for this deluge. Some will say the mad rush of government for so-called “development” is responsible because in the name of development the state is destroying our ecology. There is a grain of truth in all these. It is a matter of fact that the government made a mistake of not releasing water from more than 30 dam earlier in phase manner when they knew water level will rise in future due to heavy rain forecasts. And the...

The turmoil in the Forex market continues and with it the collapse of Indian currency rupee. The Indian currency rupee breached the level of 70 against US dollar for the first time in its entire history. And this fall isn’t finished yet. The chances of it falling further are high. In the aftermath of this fall and panic that is ensuing, Modi government seems unperturbed! Modi’s economic affairs secretary Subhash Chander Garg said this about the falling rupee: the fall in rupee was due to external factors and there was no need to worry at this stage.”As currencies of other economies are also depreciating, intervention by the Reserve Bank of India (RBI), by selling dollars in the country, will not help much at this stage for stabilising the rupee. Even if the rupee falls to 80, it will not be a concern provided all other currencies depreciate . PM Modi and his team will not worry even if rupee falls to the level of 80! What is the truth behind his statement that rupee ...

The Informal sector is what keeps India moving. That part of the market keeps on working and so you get your daily milk, vegetables and newspapers delivered to your doorsteps.  According to ILO , close to 81% of the Indian jobs are in this informal sector. Informal sector is the backbone India’s economy. Since coming to power the Narendra Modi government is busy breaking this very backbone informal sector of the Indian economy. First they hit this sector hard with the hammer of demonetization . That exercise alone shutdown many small and medium businesses and unemployed millions of workers. Then came another blow of GST (Goods and Service Tax). This ill conceived indirect tax system again destroyed, and continue to destroy, many businesses and jobs. Not only this, many programs like the MNREGA or Pradhan Mantri Awas Yojana etc., are stealing workers from the productive sectors of the economy and diverting them to the unproductive sector e.g., in Surat city many ...

The Indian rupee is known to be the worst performing currency in the South Asia region. Continuing its worst performance it fell to its all time historic low level of 69 rupees against 1 US dollar few days back and again today. Why is rupee falling against dollar? The fundamental reason is its demand and supply vis-à-vis US dollar’s demand and supply in the international market. We have to understand that just like any other commodity, whose price is determined by its demand and supply condition in the market, Indian currency rupee is also just another commodity, and so its price i.e., its purchasing power is also determined by its demand and supply. The supply of rupee is solely determined by the Indian central bank RBI, which has monopoly over its supply. The demand comes from the people (both Indian and foreign). In the market when the supply of rupee increases, when its demand and US dollar’s supply and demand are unchanged, then that results into rupee’s ...

Two Arvinds, Arvind Panagaria and Arvind Subramanian , have resigned from the top economic positions in the Modi government before their terms ended. Arvind Panagaria was the vice chairman of the NITI Aayog, the former economic planning commission, and Arvind Subramanian was the chief economic advisor. They both resigned and went back to their former teaching and research positions at the American universities. Announcing resignation of Arvind Subramanian his boss the finance minister Arun Jaitley cited personal reasons for his departure, but obviously something else is going on as in the case of Arvind Panagaria. The case of Arvind Panagaria is quite revealing. After resigning from his position, he penned a scathing criticism of rising protectionist policies of the Modi government. His criticism is important because he was an insider and knew exactly what Modi government was doing. In an important article published in the Economic Times he said: When GoI raised...

Finally after a gap of 4 years the Indian central bank RBI raised its interest rate – the repo rate – by mere 25 basis points to 6.25% yesterday. RBI cited a concern for rising price inflation in the form of oil price shock as a major reason for hiking the interest rate. They said, while hiking rate will combat price inflation, its policy stance remains “neutral” i.e., it is ready to lower rate again if the hike in interest rate starts to hurt economic growth. The mainstream view of the role of the central banks in the economy and society is that they are the monetary institutions that stabilize the economy and help it grow. But the reality is exactly opposite to this mainstream view. RBI is the main source of all kinds of instabilities in India. Its policy of interest rate manipulation, via creation of money out of thin air, is the source which creates major problems like inflation, boom and bust cycles and the inequality of income and wealth. Inflation Moder...

Since coming to power the Narendra Modi government, in the economy sector, was helped by one big factor i.e., the low international crude oil price. Helped because crude oil import represents top import bill for the Indian government. Being the only major source of conventional energy, without which the economy cannot work, oil is the most crucial product for India. As India produces very little of its oil, it is mainly reliant on crude imports from the Middle East. And the Middle East is again facing Gulf war type of prospects after the US President Donald Trump pulled out of the Iran nuclear treaty. Instead of passing the benefit of this low international crude oil price, the Modi government pocketed all the profit in the form of higher excise duty on petrol and diesel. Thus the Indian consumer was deprived of low petrol and diesel prices. The excuse for this policy was to use this siphoned-off money for so-called “welfare” activities. Now with rising oil price, pe...

The Arvind Kejriwal government in New Delhi has just guaranteed unemployment for many unskilled, semi-skilled and skilled workers by passing a tough minimum wage bill recently. As newspapers reported , President Ram Nath Kovind has given his assent to the Delhi government’s Bill to amend the Minimum Wages Act under which employers violating labour rules in the city will now face fine ranging from Rs 20,000-50,000 and jail term between one to three years. Last year the Kejriwal government increased the minimum wages of unskilled, semi-skilled and skilled workers by 37%. According to this new Act, for an unskilled worker, the minimum wages is Rs 13,350 per month while for semi-skilled, it is Rs 14,698. The minimum wages for skilled persons is Rs 16,182 in the national capital.  Why we are terming this minimum wage act as a guaranteed unemployment act for the workers? A little understanding of how market determines wages of workers will go in a long way to understa...

James C. Scott has rewritten the history of the “civilization” in his recent book Against the Grain . He turns the mainstream narrative of civilization on its head with the help of evidences coming from various fields of sciences. In doing so, he rewrites the history of man himself. In rewriting  the mainstream narrative, Scott has twofold goals in his mind: first, the more modest one of condensing the best knowledge we have of these matters and then second, suggesting what it implies for state formation and for both the human and ecological consequences of the state form. The mainstream narrative of civilization that James Scott turns on its head goes like this: Domestication of plants and animals led directly to sedentism and fixed-field agriculture. Sedentism and the first appearance of towns were typically seen to be the effect of irrigation and of states. Sedentism and cultivation led directly to state formation. Agriculture, it was assumed, was a great step ...