Indian politics and economy

India has been touted as the new counter weight to China in Asia. India has its own advantages:  large arable land, a sizable population, a growing middle class, and its democracy. Till now, the path of growth that India embarked in 1990s has been well-documented and sometimes over-marketed. We have indeed made enormous progress since early 90s. But what is not discussed is the actual break through made during 1998-2004 period, which saw significant deregulation of several sectors, improvements in infrastructure (golden quadrangle project) and enhancement of corporate governance standards that increased confidence in India as a destination for foreign investments. BJP led coalition took  steps to liberalize the economy in 1998-2004 in infrastructure, consumer goods, and even divestiture of several government linked subsidiaries that were loss-making. These changes might seem not that imaginative or ground breaking policy frameworks, but surprisingly, these obvious policies were ignored in the first 50 years of rule of the government.

One of the disadvantages of an immature democracy that lacks strong economic development and an educated polulace was an administrative system that had become highly bureaucratic, inefficient, and stagnant. The politicians used rhetoric that would appeal to their constituencies and pursued strategies that would address some of the short term problems of people (such as distribution of feed, alcohol, and even household equipment to poor voters right before the election). The politicians in India have repeatedly exploited the lack of education and knowledge of the rural and poor voters by over-promising and under-delivering, using rhetoric based on caste and religion, and implementing short-term policies to win an election rather than actually driving real changes to the economy and community.

The result of the aforementioned actions is a dysfunctional democratic process in which decisions are not taken with the interest of  people in mind, but with benefits that would emerge from the decisions to the ruling clan. The election process has also evolved into a system where incumbents are highly advantaged to win an election than a new candidate from a non-mainstream political party. In India, to win an election requires monetary and political resources. The emergence of new leaders and radical views into policy making mechanism become more difficult due to this already rigged system of democratic elections.

The result of such an ineffective democratic system is a high level of corruption and the inclination to maintain status-co. . The process of growth and liberalization has actually slowed down since 2004. Congress has always been skeptical of privatization and whenever it has come to rule in Central government, the process of liberalization has taken multiple steps backward.The economy in India is suffering due to the politicians and the self-interested policies pursued by them. Inflation is the latest threat to the economy.  It is a devil manufactured by the Congress party, which prefers to maintain its populist programs, without much care to general health of the economy. Most of its programs are intended to help the poor, who happen to be their most loyal vote base, from subsidized food, unemployment wages, subsidies to farmers etc. These policies put a huge pressure on the government budget and increase fiscal deficit. In addition, it adds to the inflationary pressure. The reserve bank of India has  increased interest rate 15 times in the last 18 months to contain inflation. But with the central government taking such highly populist programs, it will be very difficult to contain inflation by using just monetary policy.

The private sector, which is driving the economy of the nation and is helping the poor people by providing them employment opportunities, is suffering the most from the short-term policies of the central government. Private companies not only deal with wage inflation but also with high cost of capital due to rate hikes and inflation. Their profitability gets squeezed and some might even get out of business, thus damaging already fragile economy further. Therefore, what we actually need is a more calibrated fiscal policy (by central government) and a more liberal monetary policy (by the central bank). This fundamental change will enable the principles of capitalism to work properly in our economy.

I do not believe in a pure capitalist model, but the current model practiced by the congress party, which has the objective of getting re-elected in its mind rather than the general growth and development of the nation itself, does not give us enough comfort to discard the model of capitalism either.

We need change and we need it quickly. We need a government that understands economics and makes sensible decisions for long term development of India. We need politicians who are less selfish and deliver at least some tanglible results unlike the circus that has given us CWG, Telecom scandal, etc.

Trip to Malaysia

My wife and I took a trip to Malaysia in the last weekend. We decided to go the old trading center in the west coast of Malay Peninsula, the State and City of Melaka . The city has a history of being ruled by Hindu kings, Muslim Sultanate, the Dutch, the Portuguese, and may be the  British. The trip was about five hours ride in the bus from Singapore . It was nice and comfortable drive. Apart from the sight-seeing, food, and culture, I made some observations regarding my favorite topic, Economics. Throughout the drive, Malaysia looked very green, landscaped and clean. There is a conscious effort to maintain greenery in the non-urban areas and these efforts are boosted by the Palm tree crops in most of the places. (I hope that this cash crop does its fair share to decrease Carbon Dioxide from the environment).

My impressions about cleanliness and hygiene in Malaysia were reinforced in the city as well. Malaysia is sparsely populated about 80 people/sq km compared with nearly 400 in India and 60,000 in Singapore . Melaka was as clean and well maintained as Singapore . I observed that people maintained a distinct civic sense and garbage was not scattered (even though I did not see many trash cans everywhere). Infrastructure in Malaysia left a positive impression in my mind. The roads were better than that of the US . Highways had a posted speed limit of 110 km/hr and cars were doing way more than that. I can imagine the efficiency that it creates for Malaysian economy. In India , such a system will unlock more efficiency and GDP growth. Another striking feature of infrastructure was the uninterrupted supply of electricity. I saw grids and electrical connection everywhere (even in rural landscape), a view that is a rarity in India , which is still struggling to provide basic infrastructure to 50% of its population.

I also experienced certain disappointments. It is bad to generalize, especially on the basis of limited experience. But, I am notorious for making misjudgments and forming biased opinions. I found the population in Malaysia lacked the entrepreneurial energy and drive that is visible in other countries in Asia such as Thailand , India , China , Indonesia , and Singapore . Some displayed a sense of lethargy and indifference towards their jobs and services they provide. Another aspect which was quite vivid was the amount of businesses owned by the Chinese ethnicity Malaysians in China. Many learned economists claim that nations become prosperous not because of the natural resources, but due to a usually neglected resource: its citizens. Therefore, a nation that develops its human resource and invests in its training and education wins the race out of poverty and ignorance.

Anyway back to Malaysia. Overall, I was impressed with the physical infrastructure in Malaysia and the opulence of the general population. My investigations further confirmed that the heavy investments in the infrastructure happened in the early to mid 90s (just before the Asian Financial Crisis). While, Malaysia suffered during the crisis, it can take some comfort from the fact that at least investments in the infrastructure have been a positive outcome of the wild ride.

The failure of the Government of India to develop  robust infrastructure in the last 60 years has hindered the economic growth of the country. Rural areas are still disconnected from the trade centers. The fast track displacement of the population to the urban areas, which are already overburdened, is a disaster waiting to happen.

It is sometimes very disheartening to realize that the poorest nation I have ever been to is my own country! I hope that situation improves in future with more responsible and honest political leaders taking the reigns from the bureaucratic Congress Party.

America An Empire of Wealth

Life has been crazy in the last three weeks. I heard the stories about the consulting jobs being hard on personal life and being very stressful. I can validate these horror stories with my experience at my new job. Life is always on “emergency” mode. Any mistakes in the project can crucify the firm. Negligence is not an option.

I think two skills are the most important for success in Business Consulting:

• Attention to detail

• Stamina (to work 14-16 hours a day without losing concentration)

America and its history of wealth

Not to mention, my new job has tremendously slowed my reading and has adversely affected my contributions to the blog. In the last ten days, I finished a rather detailed economic history of America. The book is titled “An Empire of Wealth” written by Mr John Steele Gordon. Mr Gordon, who reminds me of a cheap Vodka Brand sold in the US, is a very well respected American Historian. He has an uncanny ability to write in a simple language and to tell a story in an appealing manner.

American history of wealth is a detailed tale that starts with the colonialisation of the North American continent by the Englishmen and other Europeans. The initial attempts to settle were quite unsuccessful due to unpleasant weather, lack of resources to sustain life, and disease. Slowly, the settlers adapted and the real boom in the agriculture started with the introduction of a cash crop called Tobacco in Virginia. America for its initial 125 years of history was a net importer, most of the exports were agricultural commodities and the imports consisted of processed metals, machinery etc.

American industrialization developed on the foundation of stolen intellectual property from Europe. Most of the machinery for the industrialization such as clothing mills, weapon designs, smelting and steel furnaces etc. were copied from the European designs without paying any royalties towards these inventions.

US and other western countries never flinch to criticize corruption or inefficiencies in ruling associated with democracies. The book accounts the widespread corruption and crony democracy that infested in the US in the second half of the nineteenth century. Slowly but steadily, the system of governance improved and led to the current powerful (though not without corruption) institution of democracy and freedom. This book provides some hope and optimism to the sustainability of the democracy, especially for countries like India.

Another key aspect of the US’s development into a strong nation was its trade policy. For a significant duration of the US history, the trade policy was extremely protectionist, guarding the US’s domestic industries from the European industries that enjoyed large economies of scale. The distinction between the North and the South of the US becomes very clear in the discussion of the trade related policies. The North, which was highly industrialized, demanded tariffs and barriers on the foreign goods. The South, an agrarian economy, relied on the export of the commodities to other countries. Therefore, the Southern states were opposed to any tariffs on the trade. These dichotomynexits till date, the South being more conservative (read Republican) that the North (Liberal).

The story of the US economy is far from perfect. It was a system that took several iterations and painful series of failures to come to the current form. The main theme of the story always was pursuing self interest. The success of the US sometimes overlooks the high volatility of its economy and its vulnerability to producing bubbles and busts.

A good lesson from this book is regarding the role any Government should play in running the economic affairs of a nation. Trusting the direction of the economy on the “invisible hand” is not the best way to drive. The US history attests this theory with its endless cycles of continuous booms and busts that came to existence only because of the US’s policy of supporting Wild West style of capitalism.

America became an industrial and economic power first. The innovation and ingenuity that we associate with the US is a new phenomenon (post WWII). The achievement of large scale industrialization sows the seeds of invention and creativity. I think the next wave of large scale innovation and invention will come from Chine, which has been reaching industrialization scales once reached by the US in the nineteenth century.

India Unbound

I just finished reading the book India Unbound by Mr Gurucharan Das.

I began the book on a skeptical note after reading numerous books and articles projecting an overly optimistic future of India and its citizens. I must say the book did complete justice to the time and energy that I invested in reading over 350 pages in it. The author came across as a knowledgeable person equipped with keen observation skills. Now, some observations can lead to theories. Mr Das is very liberal to put forward his own theories. I believe that’s where the problems can arise. But, as far as the book in terms of original ideas and analysis is concerned, it is an inspiring work. The author utilizes various references to judge the state of Indian politics, economics, and society. For example, he compares India with China, Japan, the US, and sometimes India of the past. He nails the issues related to the lack of development of the capital markets in India and the way the Government and bureaucracy sabotaged the entrepreneurial spirit of Indians. I found his analysis related to the lack of progress and development in India quite intriguing and accurate.

My criticism is the sense of entitlement that he affords to claim through the access to politicians, his educated class upbringing, and knowledge through his business experience that the author claims in various parts of the book. It starts to rub on the readers face after a few references to his Harvahd education and exploits at P&G. To be fair, he does provide a good amount of original analysis to walk the talk.

The tone of the book can be described as politically neutral, socially liberal, capitalist by economic inclinations. The book has a lot of in depth analysis of the social order, politics and the economics in India. The author narrates with great faith and conviction the benefits associated with capitalism, liberalization, and equality. He has laced the book with rhetoric of the inefficiencies associated with the Government bureaucracy and the legacy of Indira Gandhi and Nehru. He has rejected the Nehruvian model of mixed economy as disastrous at best. His acerbity towards Indira Gandhi is very entertaining and enlightening.

Contradictions are inherent in the book and the author has failed to address several other models such as US, UK, Japan that grew and became industrial under the Government umbrella. These economies were protectionist and the Government bureaucrats played a significant role in the initial stages of the economic development in these countries. He ignores these facts and does not detail on why some models do so well and some did not. He also ignores the extreme capitalist versions implemented in Argentina that led to the bankruptcy of a nation and abject poverty of its innocent citizens.

He recommends that Venture Capitalists and entrepreneurs will revive India. He also glorifies the role of MNCs’s participation in the Indian economy. But, he again does not acknowledge the power of big corporations to wipe out the small entrepreneurs. The monopolies and inefficiencies associated with the capital markets do not make even the slightest mention in the book. I feel that just describing the benefits of capitalism is not sufficient to develop a strong economy in India. We need active participation of Government to bring out half of our population still stuck in the mud of dearth, poverty, and ignorance.

I think this is one of the better books written about India from a very broad perspective. This book has not only influenced mere mortals like myself, but powerful CEOs such as Mr Narayana Murthy of Infosys to write a whole book by developing some of the ideas mentioned in the book. On the whole, a very good book and a must read for young Indians.

Job Search Struggles and Arrogant Employers

Just look  (Click here) at the nerve of the Human Resource (HR) of P&G to submit a job description that only a code breaker can decipher. God have mercy on the soul who gets invited for the interview.  If a smart person was chosen as the goat for this interview, the conversation may develop into something like this:

HR: Do you have experience with POB and SPOA?

Smart Interviewee (SI): (SI is perplexed and has rejected any prospects of getting the job. At least she tries to extract some humour out of the situation) Yes, of course! Is it similar to the PORP system currently utilized by your competitor?

HR: (baffled) err...yeah. So how many MCS/LCS projects did you undertake in your previous job? What were the key KPIs?

SI: I succeed to implement the CBS platform in five MCS/LCS projects. They key KPIs were PI, PBT, EBIT, and NOPAT.

HR: Aha! Great, seems like you will be perfect for this challenging role of MRM in the CBD-TIR department.

SI: (SI thinks, “What in the world is wrong with this HR lady?” But slowly growing in confidence that she might actually get the job, SI decides to play along.) Well, thanks. It is really nice of you to say that.

This can go on for a while, but some interviewees are not as smart as our Smart Interviewee. The following interview is a 100% real story. The victim: yours truly. In this recent interview that I attended, the interviewer was the COO of a mid-size company. I prefer to call him: Jackass. Here are some of the excerpts from the gory meeting:

Jackass: We need someone with reasonable work experience for this role. How many years do you have?

Me: As you can see in my resume (which Jackass should have), I have four years of work experience and two years of research experience as a graduate student.

Jackass: Ah, you seem to be overqualified for this position. I am not sure if this experience is relevant at all.

Me: uh, OK.

Jackass: Tell me how you make your decisions?

Me: Being a scientist and an engineer, I am naturally data centric in my decision making process. But, in business environments, where lack of data is not uncommon, I believe my pattern recognition, methodical approach, and logical frameworks will be quite useful to make superior decisions.

Jackass: I don’t think so. You see, you are too analytical. We need someone who is intuitive for this position. Decisions must be made without data.

Me: Sounds like gambling to me. Anyway, do you have any more questions about my experience?

Jackass: Tell me about your leadership experience.

Me: (After going through a well rehearsed script) As you can see, I have demonstrated leadership and teamwork skills through my participation and accomplishments at both work and outside the job.

Jackass: This is all good. But, I feel there is something missing. You see, we are not looking for the “best qualified” person for this role. What we are looking for is the “best fit”.

Me: What are looking for in the “best fit”?

Jackass: This definition is pretty liquid right now. It is subjected to alteration based on case by case basis.

Me: (Exhausted by this tomfoolery) Well, please let me know about the outcome of this interview then. I appreciate your time and interest. (What I actually wanted to say was this “Why don’t you shove the chair up your backend as I can barely differentiate between your front and the backside”)

This is an insane environment for anyone to find a job. First, employers seek for relevant experience. Then cometh the skills set, especially the soft skills. Last but not the least, “fit” is the nightmare word for any interviewee. An evil word that can dash any hopes of getting a/the job. I hope the bloodbath in the job market is over soon. It is plainly ridiculous when HR of employers utilize arbitrary parameters to judge a candidate as described in the above narrative.

Asian Miracles Part II

Hong Kong

In the late 60s and early 70s, big corporations in the western, developed economies accosted a new problem: increasing operational costs. Labour costs in the US and other economies rendered the profits of businesses very thin. These developments motivated the management of such organizations to seek some viable alternatives. Enter the second wave or model of Asian miracle!

Hong Kong was a trading hub for decades after Britain attained its operating lease from the Chinese. Now, there was an abundance of budding entrepreneurs such as Li Ka-Shing, Lee and Fung etc , who were ready to jump on this opportunity to help MNCs cut their operating costs by offering them a manufacturing outsourcing option. China had always rendered a source for cheap labour. But, there were structural problems within the economy: lack of infrastructure, lack of skilled workers, and a communist Government. Some entrepreneurs from Hong Kong decided to overcome these hurdles and established manufacturing plants in the province close to Hong Kong. Soon, many companies followed this course and profited from the trade with Hong Kong and China. Hong Kong initially evolved into a manufacturing outsource center for large MNCs. Hong Kong and later China started to attract significant amount of foreign direct investments (FDI) and new factories opened up in Hong Kong. After the liberalization of Chinese economy by Deng Xiaoping in 1978-1979, China also started to benefit from the foreign capital and technology.

China

Hong Kong was operated on the free market capitalist fundamentals. In the 70s and 80s after China became the global manufacturing hub, Hong Kong became an international financial center. China, after the economic liberalization, allowed entrepreneurs and multinational corporations to open significant manufacturing establishments in China. Poor farmers from rural areas were lured to the highly paid manufacturing jobs. Government promoted further FDIs by allocating Economic Zones (EZs) for exports. Companies were encouraged to export goods and were offered subsidized land and electricity for such ventures. The export oriented approach combined with the FDI and technology transfer via MNCs enabled China to become a magnificent economic powerhouse in a time of two decades.

Singapore

After separation from Malaysia, Singapore inherited a wetland devoid of any natural resource. But, Singapore’s leaders were not deprived of visionary ideas and ingenuity. They put forward a plan to develop Singapore into a manufacturing and trading hub. MNCs were attracted and were presented with a superior infrastructure, un-unionized work force, and business friendly Government, which understood economics very well. These factors enabled Singapore to take initial steps to slay poverty. In the next wave of modernization, Singapore’s leaders realized that China’s emergence as a manufacturing hub would threaten Singapore’s competitive advantage. In the 90s, the Government visionaries shifted to transform Singapore into a services and technology center. Singapore currently hosts multitude of research centers for Biotech and Pharmaceutical companies. It also is slowly becoming a regional center for Information and Communication Technologies (ICT). Education is the new growth industry and Singapore has positioned its quality educational institutions and infrastructure to benefit from the increasing demand of quality education in other part of Asia such as India, China, and Indonesia.

Well, I tried my best to summarize the contents of the book “The Miracle”. Each Asian miracle economy has its unique features and story. Japan and Korea developed as more introvert and protectionist economies. Their focus on manufacturing created brands such as Honda, Toyota, LG, Sony, Samsung etc. But, they have not achieved global integration in the services sector as achieved by Singapore and Hong Kong. Singapore, Hong Kong, and China developed in a different path by attracting FDIs and MNCs. Steadily these economies diversified and developed a local ecosystem of entrepreneurs and businesses.

There are some lessons for India and other countries from these stories.

1. Government must play a significant role, at least in the initial stages.

2. Global integration of economy is a necessary condition. To manufacture products/services that are competitive in global markets should be an attainable goal for all the companies (public/private) in an economy.

3. Economy needs technology transfer and training of personnel, MNCs may play a critical role in garnering these pragmatic skills at a job.

4. Government needs to be create a business friendly environment: render good infrastructure, less red tape/bureaucracy, if possible low taxation, lower import and export taxes etc.

5. Government must develop strong law enforcement organization and a culture of respecting contracts.

I cannot refrain from the temptation of stating the obvious with a sense of discovery. In the current environment, there are certain natural advantages for the Indian economy. Large domestic market, growing purchase power, access to natural resources, entrepreneurial spirit among citizens are a few that come to my puny mind. The Government of India must employ a more economy friendly policy to harness these sources of development and growth. Indian citizens must also develop a culture of voting for the right economic policy, not for petty affairs such as state separation or menace to our culture by globalization. I think the change in a pseudo-democratic society like ours needs to come from the smallest unit of the structure: us!

“Its always economics, stupid!” – Bill Clinton(during his election campaign in the 90s)

Asian Miracles

Last week, I had an inspirational discussion with my wife, sister, and brother-in-law regarding the criticism of public policy recommendations prescribed by Mr. Narayan Murthy of Infosys Technologies. These conversations or I must say, messages/comments, motivated me to stretch myself to read more about policy related ideas in the Asian development. Here is an article authored by my South Korean friend Bin Kim Young, who is an amateur economist and an avid reader of the issues related to development and public policy. He outlines the architecture of these “miracle” economies.

Some background first. South South Korea, Taiwan, Singapore, and Hong Kong had per capita GDP equal to or less than that of India in the 50s and 60s. After posting unprecedented growth rates of over 10% for next two-three decades, these economies shattered the label of “developing economies” or “third world economies” and joined the prestigious and powerful group of OECD countries. Please find the illustration of to support the poverty obliteration in the chart below:

The story of this remarkable economic development and poverty eradication has been well documented in the landmark book “The Miracle” authored by Mr Michael Schuman. This book is a magnanimous endeavour to identify the mechanics of success of Japan, South Korea, Singapore, Honk Kong, Taiwan, China, and more recently India and Indonesia. This book is a must read for souls interested in the development and growth of economies. I will try to summarize the key points of this book in the next two blogs. I will primarily focus on the central features of each country’s economic policy and execution of these ideas. A detailed understanding of the success story of these economies shall pave a path towards forming a coherent economic development policy for our nation.

 

Japan

Japanese economy was in doldrums after the World War II. Most of the industries were paralyzed, Japanese Government was severely constrained with cash, and unemployment was running upwards along with poverty. In these situations, aid from the US and the vision of a few Japanese intellectuals became the turning point of the economic revival. The Japanese marvel was fundamentally based on strong Government intervention and a strategic vision of the Economic Development Board (EBD). Ministry of International Trade and Industry (MITI) was conceived and it dictated the growth policy of the nation for next half of the twentieth century. MITI selected companies and industries which were “winners” and subsidized their capital, input resources, and other requirements. Some of these industries were protected by high import taxes and trade barriers. In the next stage, export orientation to the US and other western economies became the mantra of MITI. Many infrastructure related industries such as steel, heavy machinery, and manufacturing were encouraged by the Japanese Government.

A dedicated team of bureaucrats at MITI guaranteed that most of these policies were successful. Japanese industries overcame lack of natural resources via discipline, efficiency, and competitiveness. In the later stages of development, entrepreneurs such as Mr Morita (of Sony) and Mr Honda defeated the MITI’s guidelines to develop innovative products and became pioneers of the electronics and car industry. The ecosystem developed by MITI led to the industrial wonder that we now know as Japan.

One place where Japanese fell behind was the integration of Japanese economy with the world economies. Service sector was not fully developed, at least in a comparison with the other developed economies in areas such as finance, IT, technology etc. The structural problem of Japanese economy of isolation and cultural protection discouraged immigration. Moreover, its success bred arrogance. With aging population and stagnated economy, Japan is considered a dog when compared with the China and India.

South Korea

Park Chung Hee, a dictator who ceased power from the South Korean democratic Government in May 1961, envisioned turning South Korea into an economic behemoth. His vision was very similar to that of Japanese bureaucrats. Immediately, South Korean junta and the economic bureaucrats copied the successful Japanese “model” of MITI and the state supported industrialization. Heavy industries and infrastructure were subsidized and developed at a rapid pace.

South Korea rejected the popular idea (at that time) of import substitution and adopted export orientation as the future direction for their economic growth. South Korean conglomerates, Chaebols, were at the heart of the South Korean miracle. Chaebols were required to compete in the international markets. This policy compelled them to become efficient and quality oriented. The vision and will of the benevolent dictator ensured that all the policies were implemented with utmost urgency and rigor. Smartly, South Korea did not bother to reinvent the wheel; it just copied the “proven” Japanese model. Now we hear about LG, Samsung, Hyundai, Kia, and many other South Korean brands. We better get used to these brands and Koreans as they are here to stay.

What can we learn from these two models?

1. Government must support basic industries, at least in the early stages

2. Industries must be coerced to compete in the international markets

3. Continuous improvement and advancement of technology is critical for sustainability

4. Execution is the most significant feature of any policy. Success of a policy desires conviction and commitment from the rulers towards the cause.

In the next blog, I will try to address the remaining economies: Singapore, Hong Kong, and China. These economies are deeply integrated with the global economy and propose a mutant of the Japanese model discussed in this article.