Thursday, June 28, 2012

Nepal - Never ending process of forming a constitution

The dissolution of Nepali Constituent Assembly (CA) is indeed a setback for the progress of democracy in the country.

The 601 member legislature, which was supposed to write a constitution for the nascent democratic republic missed the deadlines four times since 2008. As Supreme Court refused to accept another extension Nepal Premier dissolved the assembly.

Hurdles in forming the Constitution

One of the major hurdles was the criteria to create new states. Maoists (239 seats) and Madhesies (together 74 seats) want to create states based on singular ethnicity while Nepali Congress (119 seats) and CPN-UML (109 seats) prefers multi ethnic states. Even in the last moment both parties were not able to reach a deal to solve problem. It looks like finally there was some agreement on the total number of states.

Seat of Nepalese Government

Ethnic problems are nothing new. When people of different ethnicities are staying in a country, issues may arise. But the problems will aggravate when people are forming parties based on ethnicity and engaged in never ending bargains. Problems need to be resolved through creative discussions, adapting the highest standards of accommodation for the benefit of entire nation. If the representatives can't resolve the base for the formation of states in four years, when they are going to do that?

Elections will come again, and these parties may get votes more or less in the old ratios. Then, what the new assembly will do with these questions?

Representatives may be patient enough to have long discussions running over years, but the same may not be applicable for common people. They may not be patient enough to see the never ending discussions on constitution.

Moreover, if things are going on this way people may start wondering what they got after transforming the country from a monarchy to a republic. Already the power cuts are cutting around eight to ten hours per day.


It’s high time for Nepali politicians to wake up from the never ending deadlocks and engage in constructive discussions to form a constitution and lead the country in the path of development. Already Nepal achieved some developments in political front like the integration of Maoist cadres to Nepali Army and society.

Writing a constitution without wasting further time is essential to gain further momentum for development. Hope that the new CA will be able to resolve the problems soon.


Photo Courtesy: Wikipedia

Rising rental rates - dream of affordable housing is sinking further deep

Home is one of the basic requirements for any human being. At the end of the day what we need is some space to spend the night. It looks like this basic thing is also moving further away from us. For staying, people are using either their own home or rented one, for those who are working/ studying far away from home, the second one is a better choice. But in these days, rising cost in real estate, cost/rent for a home/flat/apartment is making it unaffordable.

According to recent Business Standard report, India witnessed 12% hike in housing price for January - March quarter of 2012; third highest in the world!!!

It's my fourth year in Bangalore, we don't have to see the graphs and studies to realise the cost of Real estate. During these years city witnessed a huge growth on rental rates. In the main areas now it is difficult to get a 2BHK (2 Bedroom, 1 Hall, 1 kitchen) house under 10K/month, even in the city limits rate is touching 10K. This comes with the added baggage of heavy deposits. Now, it is difficult to find even a 1 BHK flat for anything less than 5000-6000/month. Around four years back we got 1 BHK flat for 3500/month even though it was located far from the main road!!!

There is no doubt that, this will become worse. I can see the hurry of construction activities in some of the empty areas - where people didn’t even dared to walk around three years back. Now the same place is virtually transformed in to a crowded residential area. Still people are struggling to get a flat on rent. It looks like the building activity is much more intense than any other normal business activities; still the sector is unable to cater the needs of people - especially in the segment of affordable homes. After food, rent may be the biggest expenditure for a normal person.

Some solutions

1. Low cost but big housing projects are required in the cities - especially in the city limits.
2. Another one is to have an authority - like TRAI in Telecom - to regulate and streamline the real estate sector. This will help to save the customer from arbitrary increase in rent, deposits etc.
3. Plan the cities in such way, so that it can accommodate future expansions.
4. Methods like compulsory rain water harvesting and other innovative solutions should be used to save the resources.

Our lease will expire by the end of this year only. But now itself we have to start thinking about the possible increase in rent!!!


India sees 3rd highest rise in housing prices in jan-march - Business Standard
Photo Courtesy - Wikipedia

Wednesday, June 27, 2012

Some lights are blinking here and there – Daimler and IKEA in India

After a series of bad news there are some good ones in the horizon. 

One is Daimler's $889mn investment in Chennai for truck production. This plant - in Oragadam - will sell 25 metric tonne trucks under BharatBenz brand. This plant has an initial capacity to produce 36000 vehicles annually, employing 1400 people.

Second one is, Scandinavian furniture major IKEA's proposal to invest 1.5bn euro in India.

Both offers a ray of hope in this dry atmosphere, where we are experiencing declining capital inflows and stagnated manufacturing output. IKEA's big investment proposal was indeed a surprise, even though we cleared 100% FDI some time back in single brand retail.

IKEA's investment is not without strings. The big hurdle to resolve in this case is the policy of 30% mandatory sourcing from India. According to the IKEA's announcement, company is looking for 30% mandatory sourcing from India after a cumulative period of 10 years from the date of approval. This is against one of the major policy related to FDI in single brand retail. Will government dilute the policy for this big ticket investment or will it stick with the existing policy is yet to see.

Daimler's plant is indeed ray of hope. The good thing is it will add to India's manufacturing capacity and may be able to provide a solution for large scale commercial transportation in India.

What we need to do is creating a more investment friendly atmosphere and transparent policy guidelines. Hope that, this good news will give the necessary momentum for going forward.


Photo Courtesy: Daimler India

Tuesday, June 26, 2012

I am not wrong, but you certainly are. Solving economics problem through words?

One of the most striking lines I read recently was 'India may become first ‘fallen angel’ among BRIC countries'. Even though I didn't read that article, the headline was bad enough to disturb me for days.

Plunging growth rates,
Ballooning trade deficit,
Evaporating rupee,
Falling industrial confidence,
Pathetic growth in industrial sector,
Exploding import bill,
Reduction in ratings,
Political paralysis.

The list is long. But the core fact is somewhere we made some big spelling mistakes. Everything can't be blamed on low US growth rates or Euro zone problems or middle-east crisis as our government do. Many of the problems are our own creation. May be, we became more comfortable with the high growth rates and didn't work enough to sustain it. May be the frequently heard demographic dividend and other advantages made us lazy enough to think that economy will run on autopilot.

This picture clearly explains the problems in starting the reform process,

Still in love with command economy?

There is a problem with outlook, we often find the socialist ideologies and command economy so good that political parties often try to overdo that. But, when they reach a  stage from where there is no way to go forward they started thinking about buying one or two ideas from capitalism like opening up the markets, reducing the monopoly of state enterprises etc. When we reach a comfortable stage after opening up a little, we often forget the rest of the marathon and starts sleeping.

This is what exactly happened in India, when Goldman Sachs put a tag around our neck saying that you are an emerging market, we became so comfortable with the idea that we ran the beginning of marathon like a sprint and then started sleeping. Now when S&P and Fitch reduced the ratings, instead of analysing our own situation we are blaming them!!! It looks like the agencies are the problem not what we are doing.

High inflation, crisis in power sector, stalled reforms, mounting debts, huge corruption scandals, slow moving governments, poor economic situation of various states, falling rupee and investor confidence - the problems we are facing are numerous. I don’t think the credit agencies have some special problem with India. Ratings are not some arbitrary decisions; there will be a well defined set of parameters to define growth and decide the ratings.

Instead of blaming everyone else for our problems we should go for an introspection of what we are doing. When we carried out the last big ticket reform?

FDI in aviation, GST...

Consider the case of allowing foreign airline companies to raise the stake in Indian aviation companies to 49%. I don't understand what the political problem here is; foreign investors are already permitted to invest up to 49% in this sector. Moreover, it’s hardly a related to common man. Even if we allow foreign airlines to buy stake in Indian airlines, they will think hundred times before buying Air India or Kingfisher. Commercial airline service is hardly a critical one like water/power supply. Still we are not able to take decisions. This is the case with Goods and Services Tax reforms (GST) too.  If we can’t go ahead in issues like this how we are supposed to carry out the non-digestible but essential reforms?

Do it now

If someone tried to pull the reform off from the cold storage, there will be hundred others to push everything back to cold storage. Each time, reforms go back to cold storage FII's confidence in Indian market will plunge in to next low level. Corruption accusations are another spoiler in this area, now a day it is difficult to count how many zeros are there in the amount said to be involved in scandals. If the government is so paralysed now - when there is 2 more year to go for next general elections - when we will start these life saving surgeries? Next year it will be difficult for the government to carry out reforms as the one after that will be an election year. So whatever we need to do, we have to do it now.

Political leadership is also so paralysed that, they are not able to move forward with any reforms. Now only two years left, if they are not doing any true reforms which are difficult to sell to the people in this year, the chances for doing the same in the next tear is very long. Two years of full paralysis will assure that that India will be the first fallen angel in BRIC.


Announcement of one big ticket reforms and its clinical execution can act as a morale booster. This should be followed by continuous reforms in retail, supply chain, agriculture, infrastructure, governance etc.


Fitch revises outlook on Indian financial institutions to negative
Fitch lowers rating outlook of SBI, ICICI, PNB
Congress rejects S&P criticism

Photo Courtesy: Please note that I got this photo through a forwarded mail. I don't own copy right for this photo, nor i know who holds the copyright. 

Thursday, June 21, 2012

Government, Food grains, Common man and Monsoon - the Indian dilemma

India is always a land of contradictions, on top of that government is doing everything it can to increase it. What else you can say about the mountain of rice and wheat on one side and a skeleton, malnutrition body on another side?

Economists often say most of our problems are internal. Either we are not doing something which we are supposed to do, or we are over doing something. In short we often fail to find an optimal middle ground. Consider the case of farmers, harvest, minimum support price, procurement, public distribution system and inflation.

Government needs to make sure that farmers get a fair price for what they produce, in other words it needs to act as an agency to save farmers from the exploitation of middle men. Does it mean that government have to buy the harvest directly? Well, it ends up doing exactly that. In order to support farmers both central and state governments from time to time bought crops at minimum support price (MSP). This value can be more than that of market value. According to one report, over the past five years MSP for wheat went up by 80%.

Buying stocks in huge quantities will create another problem – Where we will store it? According to one report, central government ended up buying 40% of last year’s harvest. We are buying something in huge quantities totally forgetting about the availability of storage space. Over the years we tried to increase MSP but in the case of ware housing capacity improvement was pathetic. Obviously increasing the MSP will create a political advantage, but building storage capacity not. Shortage of warehouses means, we are storing around 20mn tonnes of grain in the open, that too at the time of monsoon!!!

Buying 40% of harvest, GOI is removing the same amount from open markets. In other words even if there is a bumper harvest, price for food items will not come down proportionately as a good percentage will go to government’s hand. A portion of this stock will go to the PDS, which is not so efficient in handling the huge amount of grains. So the wastage will be higher plus the price in the open market will not come down.

Moreover government needs to pay for whatever they are buying; this will stretch the public finance to the breaking point. Consider an e.g. for wheat GOI is paying 20% more than that of international price, means we can’t export it profitably. What more, grain lying in open won’t carry high price in international markets. In a recent attempt to sell the grain in international markets the highest bid received by GOI was 23% below the price it had paid for the procurement.

GOI will suffer losses even if it decided to sell the grains in Indian market. By delaying the decisions, grain lying in open will become prey for monsoon. In both ways, we will end up in the losing side. This mean even after clocking a record production of rice and wheat the price is still very high and in many places people are not getting enough food to eat as well.

What we can do?

First of all government in partnership with private/farming sector needs to create enough storage capacity in the production areas and villages. This will reduce the wastage and farmers will be able to store the grains for longer periods. Next step is, instead of providing a quick fix like increasing MSP government needs to focus on how to increase the agro productivity; our productivity levels are a far cry compared to developed countries; forget developed countries, even many developing countries are very much ahead of us in terms of agricultural productivity. Government needs to buy enough grain to ensure food security of our country, rest needs to flow to the open market. Creating an artificial scarcity will never help the consumers.