Being Poetic

Just a change from usual heavy posts. Something creative.
A Poem dedicated to all moms but written specially for my mom......
                                   Maa is the best

Being Poetic

My Poem penning down aspirations of a women. It expresses what my aspirations are and I believe of most women are.
Read it....... :)

Special Status and Bihar

A lot has been written and said about giving special status to Bihar. This issue has garnered so much attention that it might even be the game changer in who capitalizes over votes from Bihar in next general election. While personally I don't support the demand of special status for Bihar in its present form and maintain that it can proceed even without that. However, this article has less to do with this stand of mine and more to do with clarifying some questions Mr. Swaminathan Aiyar raised in his article "Bihar: Champion athlete does not need steroids" raised. 

Mr. Aiyar insists that Bihar's demand of special status is like:

                           " a top athlete demanding steroids to keep sprinting. 

                             No Olympics allows this, not even if an athlete is     

                             poor or historically deprived."

What Mr. Aiyar overlooks is that economic growth is not a competition where all of Indian states are competing to win a gold medal. It is more like education for overall development and as far as I know if a student is weak in studies teachers are always requested to take special care of those students. Bihar is just demanding that special care.

Next Mr. Aiyar talks of population explosion:

                             "Bihar has long been among the worst states 

                             in family planning and population growth.................

                             This has depressed its per capita income. But 

                             can this be a reason to demand more cash, which

                             will come at the expense of states that have controlled

                             their populations and hence improved per capita income? 

                             Should Tamil Nadu and Kerala subsidise Bihar's 

                             bedroom profligacy?"

What a beautiful choice of word by an economist "Bihar's bedroom profligacy". I guess there is nothing like the demographic transition theory and the fact that while most states in India moved to second stage of demographic transition due to economic development Bihar is still stuck in first stage due to underdevelopment. Bihar is underdeveloped and that is why still facing high population growth rate. What is so amazing or un understandable in it. Students of economics fill pages while explaining India's population explosion, how is it different from that.

Next he asks:

                              " Bihar provides only 2.8 per cent of national income 

                                but gets 8.6 per cent of central funds.That's misleading, 

                                says Bihar: we account for 8.8 per cent of the population, 

                                and it is the poorest 8 per cent, so we deserve more. 

                                Once again the question arises, should successful family 

                                planners have to pay more to the unsuccessful?"

What happened to the theory of vicious circle of poverty and talks of human development. I also didn't know that taxes were quid pro quo. I always thought taxes were a means of redistribution and rich are taxed so that state can finance its welfare spending. In order to break the vicious circle of poverty we need external help. Isn't that the reason we keep bugging the world bank for finance. To add to that I think we have stopped taking into account how the policy of freight equalization actually subsidized the same successful family planners. Let us look at how many mineral rich states with no developed port are developed state. Let me take a guess..... none. Why is the mineral rich region of India sinking in poverty when actually logic says they should be the place where factories should have been. There was a freight equalization policy but, no policy to negate the port advantage. When it came to minerals it was national wealth, when it was appropriated the principles of federation became irrelevant. Is it the case.

One more thing at the end of the day if Bihar remains poor then 8.8% of the country's population will be deprived of what is called economic development. With underdevelopment comes a lot of trouble and even if the state is the one facing it the most, nation too becomes a victim of it. So, unless we are planning to ignore that 8% of the population Bihar definitely will need additional funds to kick start its economy and yes that fund has to come from outside only as Bihar doesn't have enough of it.

All this doesn't mean I support Bihar's demand for special status but, I do believe Bihar needs special attention instead of small lollipops to develop. It hurt when such a good journalist says such hurtful thinks about people of a state, no matter how much sugarcoating is done by citing recent achievements in the same article. However I do believe that govt. should revisit the special status policy and may be look into doing something region wise as Finance minister talked in his speech this budget session. That way when funds are disbursed they are for underdeveloped regions and go there only. One more benefit will be that people in a particular region will not feel alienated and need not demand separate state to get govt. funds. Issues of Telangana and Vidarbha might be better addressed if we had special status for underdeveloped regions. So that funds meant for them went their only.

.

Where State Ought To Be

On its independence India decided to be a social welfare state. Such states by nature take upon themselves extensive functions, to bridge the investment gap created by private sector, for public good. However, such extensive involvement while desirable in a nascent state where private sector footprint is almost absent becomes fatal for economic stability as the nation progresses forward. Apart from this, such extensive involvement results in a less intensive engagement in more desirable sectors.
Indian govt. today has become 'Jack of All Trades, Master of None'.Although the govt. started to pull back on its extensive involvement in the economy on the eve of 1991 reforms,  it still has mammoth presence in commercial activities. Govt. sells milk, butter, petroleum, food grains, minerals, electricity and what not. Thank God it no longer sells bread. While the rationale behind such extensive engagement is to male the economy strong and ensure public good. It is doing more harm to economy in general and 'aam aadmi' in particular as ever increasing fiscal deficit is pouring inflation and feeding Current Account deficit. The stability of economy and prospects of growth are thus, hanging by a thread.
On the other hand, such extensive engagement means that several sectors like social infrastructure don't get enough govt. attention. Public expenditure on health care in India is only 1.4% of GDP. This is very low and a reason why out of pocket expenditure (private expenditure on health) was appx. 86% of total expenditure on health. This means that people have to spend a lot out of their pocket for health care. This hurt especially because around 25% of India lives below poverty line. How are they expected to pay from their pocket for healthcare. So, Health care is a sector where govt. should ramp up its spending ensuring both better preventive and curative healthcare. This will not only improve quality of life in country but, will also add to productivity thus, contributing to economic development.
Second sector that needs govt's urgent attention is education. Government's expenditure on education stood at 3.85 per cent of gross domestic product (GDP) in 2009-10. Education is empowerment and it single handed can bring out India's bottom of the pyramid mass from age of darkness and isolation thus, joining them to mainstream of progress. India still is struggling to achieve universal primary education while in order to take benefit of our demographic dividend we need skilled labor force that means not only universal primary education but, widespread professional training and technical education. This is where the govt. needs to focus. Although Education is state subject, central govt. can definitely take facilitating steps, increase financial support, setup better educational institutes and do a lot more. It should ensure that quality education is not a prerogative of elites rather it is available to all.

Third sector that requires govt. immediate attention is infrastructure and this sector has hijacked the limelight for quite a few years now. Still, the attention paid is not proving enough and we have huge infrastructure deficit. Be it transport or power generation and now even communication where we were growing leaps and bounds. These sectors need more than just govt. investment. These are the sectors where private sector will invest but, we need policy clarity and a vision for growth. So, with active private sector involvement govt. can reduce its investment in these sectors and use that money for education and health.

In my opinion what govt. should do is to try to wrap up its extensive involvement in sectors where the private sector is ever ready to fill the deficit like heavy industries, power generation and be more intensively involved in sectors where private sector can't do its due to nation's benefit like health, education, poverty eradication etc.

P.S.Looking forward to the next budget for economic engineering of FM and what he does to balance the need to reduce fiscal deficit with the need to be populist keeping in eye the General Elections 2014.

Takeaways from RBI's 3rd Quarter Review of Monetary Policy

RBI's third quarter review of monetary policy for 2012-13 came out on 29th January 2013. This is an attempt at reviewing RBI's review. The review saw Indian economy as slowing and hence RBI further reduced its growth forecast for the FY 2013 from 5.8% to 5.5%. This is a result of a no. of factors including a slowdown of investment, a weakening of consumer spending, persistent inflation and a recovering but still gloomy global economy with threats looming from all sides. While it seems RBI is finally comfortable with the inflation situation as the review mentioned inflation to be slowing down and stabilizing, the central bank is still cautious about the twin deficit. One area of concern that was highlighted in the report was slow growth of money supply despite RBI's easing of CRR a no. of times. This may be because of hawkish attitude of banks due to growing NPAs but, it definitely is one of the reasons of slowing growth.

As action measure RBI reduced its policy rate from 8.0% to 7.75% with immediate effect and reduced CRR by 25 basis points and it stands  at 4% of NDTL (Net Demand and Time Liabilities) from fortnight starting 9th February 2013. A no. of bankers and corporate executives have termed this action as per their prediction. However, most of them predicted rather demanded rate cut before every review and even the govt. had joined the chorus in last review. In fact this is one of the reviews before which RBI was least bugged to grace economy with rate cut. I suppose the governor with his tough stance had made clear that rates would be cut only when RBI was comfortable on inflation front. So, this rate cut fulfills expectations more than predictions.

Economic Times editorial on 30th January, 2013 mentions Central bank to be at odds with itself. This is so because RBI eased rates even as the CPI based inflation increased to 10.5% in December 2012. As I interpret it RBI gave a rate cut as it sees inflation as slowing down and stabilizing and so it wants to signal its inclination towards promoting Growth. Growth and Stabilization are twin objectives of Central Banks in developing countries. RBI now seems comfortable on inflation front and that is why it is focusing on growth front. CPI based inflation was mainly fueled by food inflation, a spur that has a lot to do with supply related bottlenecks that can't be guided via money supply. However, Core inflation showed stabilizing signs as gauged by both CPI and WPI and that is the reason RBI went ahead with rate cut to accommodate growth concerns. 

One of the major objective of RBI's monetary policy stance is to anchor medium term inflation expectation  through credible action and given the stubbornness it showed by refusing to reduce rates when growth was slowing, its credibility has been established. Markets know that this may not be start of an easing cycle if concerns regarding twin deficits are not properly addressed. This easing is only because inflation seems to stabilize for now. This will do well to anchor inflation expectation towards lower level despite rate cut if other economic variables remain under control. 

Other concern that led to rate cut was slow growth of money supply. Liquidity conditions have remained tight despite RBI's reduction of CRR as well as its open market operations. This has restricted credit flow and hence negatively impacted investment. Thus, impacting growth adversely. In an environment where banks are hawkish a rate cut will give them reason to increase credit flow. On the other hand CRR cut will ease liquidity pressure by pumping 180 billion of primary liquidity into system. Thus, both policy actions together will help in improving investment scenario.

RBI has initiated the play and set the stage for govt. to play its part via Annual Budget. Let us hope something magical comes from fin min's briefcase to revive the economy.