- This end 2008 we are in looks like doom and gloom everywhere.
- Sensex has dropped from 20,000 to 9,000 levels,
- Auto sector is teetering on the verge of declining sales,
- The inevitable American economy collapse is threatening employment in I.T.Sector.
- All hell is cutting loose on textile sector.
- Steel and other commodity prices are falling like a rock.
- Real estate bubble about to burst.
ARE WE DOOMED. WILL THE I.T.SECTOR COLLAPSE IN TURN COLLAPSING THE AUTOMOBILE AND REAL ESTATE SECTOR?.
What can the answer be?
IS IT YES? - Oh no. YES is too horrible.
- The consequences are beyond imagination.
- Millions of lost jobs.
- Skyrocketing divorce rates sans fat pay cheques.
- High delinquency rates in home loans bringing down the real estate prices.
- People taking extreme foolish decisions to end their lives.
- So on and on and on.
SCARED? Think the entire above are probable in India. Then you can claim to be the dumbest idiot in the world.
THEN IS IT NO? - Might be but there are a few strings attached.
- We cannot succeed without painful adjustments.
- Painful adjustments? What are they?
Okay. We will first try to understand the basic principles of economics, then identify the recent mistakes we made in the preceding years as well as chronic ones and then analyze the remedies.
Here we go with a simple question. - Note: I risk being mistaken for a communist or a socialist. I hate communism more than you do. Please do not come to a conclusion before reading the entire article.
When you travel outside the city limits have you noticed the slums. Almost 99% of those people are either the ones who constructed the house you are living in, the posh office you are sitting in or the people who grew the food you are eating or the people who laid the roads with bare hands for you to travel in a Honda car or something like that with full a/c on. Now tell me anyone of the above mentioned things without which you can survive.
Don’t say you will do without that car. Your wife may never have married you but for that sort of luxury. It may have happened only on the hope that she could lead a luxurious life with your fat pay pocket. You may be at risk of divorce.
Net net you were dependant on that slum dweller for mere survival but he never needs you a bit for his survival. Then have you ever wondered why you have a high standard of living while he and his children sleep in unguarded slums amidst insects and occasional visitors like venomous snakes, scorpions etc, etc. - If it was because your thatha's thatha or your father's father had amassed huge wealth and you are enjoying it by succession then say "Long live capitalism" and quit now. You are blessed by god and you cannot "feel" the contents of this article through your soul. No Buddy. No complaints. I only wish all Indians are blessed like you.
If you are not in the born rich category and if you think that your high standard of living is because you are highly educated and super efficient and all such nonsense then I am afraid you are seriously wrong. Try resigning your job (or) try closing down your business. In the first case, your company never goes to hell. Next day there is a new person doing your job. For the latter case there is another new business entity grabbing your customers. Then how is this party going on unabated forever?.
If you understand the principles of economics you will appreciate that the trick for your high standard of living and that slum dweller’s sub standard living is not in that MBA you hold but in fiat currency my friend.
Don’t know what fiat currency is? Rupees my friend rupees. .
The way it is created and circulated can change the entire way of our society. It can shatter the myth that you are entitled for a high standard of living and that poor person a sub standard living. Oh no stop muttering “Must be a communist or a socialist”. I am a pure believer of capitalism “Responsible and productive capitalism”. Not the reckless system we have in place today.
Confusing? To understand that we will have to start from a new rupee’s birth in nasik, where all it travels and how the heck did it land in your pocket even when you never did anything directly to the govt while that slumdweller could not even dream a small fraction of that amount inspite of so much of real value he has added to our nation. - Don't expect a straight forward answer in the next paragraph about that imbalance. I don't know how to answer it straight away.But in due course of this article I hope I can give you a better understanding.
- The govt has the right to print new rupees whenever it requires without anything of real value like gold backing it. There is no compulsion that if our govt prints some 10,000 Rs then it should keep 10 gms of gold or some other thing of equivalent value in place first and then only start printing. It needs only a few gms of paper and a few drops of ink costing roughly some 10 to 15 Rs to create those 10,000 Rs.
It is for this reason it is called fiat currency or in plain Tamil “dubakkur”.
There are good and bad effects of doing this. Moderate and prudent printing as and when it is required will ensure prosperity and growth.
Too much of printing will bring hyperinflation like what is going on in Zimbabwe now (Eg: 100 crore Zimbabwean dollar will buy only a loaf of bread today. Just a few years back one Zimbabwean dollar equaled one American dollar).
If there is no printing at all then deflation which is opposite to inflation results. At some point in the business cycle some tata, birla or ambani will hoard all the available cash and there will not be any money circulating in the economy and that 1400 sq.ft apartment which sold for 50 lakhs just last year might not have any takers for even 5 lakhs next year.
Similar is the case for all other commodities, your salaries, my business income, etc, etc. Print too much everything raises, don’t print at all everything falls.
Now don’t be silly. when the govt prints new money so easily don’t expect it to give it free to somebody or don’t expect some group of ministers to pile them up in their secret vaults. Our Indian system is very stringent. No nonsense of that sort. The only intolerable thing is the stupid and non productive way those rupees travel all the way from Nasik to your pocket.
The steps adopted by the govt in inducting those rupees into the economy are encouraging inefficiency, misguiding our younger generation and creating so much inequality between that slumdweller and your highness. Instead of flowing like Ganges River bringing prosperity all along the way it runs it is flowing like something else.
Even though the govt has lots of ways to induct the newly born rupees into the economy, Let me explain you two steps where the govt intended good but things got worse and increased inefficiency in transforming our nation into a developed nation.
The first step is govt spending more than what it collects by way of taxes. Then it balances the overspending with newly printed rupees.
Example:
Govt revenue = 100 Rs.
Govt expenditure = 120 Rs.
Deficit = 20 Rs.
If this deficit is because the govt laid 12 roads @ 10 Rs/road instead of 10 roads with that 100 Rs revenue then it is productive way of deficit spending. If the govt simply increased its employee compensation from 100 Rs to 120 Rs like that sixth pay commission recommendation then it is inefficient deficit spending.
Either way it has spent more than its revenue. What to do now. The bills have to be paid. Okay print 20 Rs and pay the difference. This is called Keynesian economics. This thing is not as easy as I write. Zimbabwe tried the same trick and they were freakingly doomed. As I said one loaf of bread costs 100 crore Zimbabwean dollars today and may be 1000 crore dollars tomorrow. The bottom line is this
“WITHOUT ENSURING SUSTAINABLE AVAILABILITY OF BREAD FIRST ZIMBABWE THOUGHT THAT IF IT PRINTS MORE MONEY, THEN BREAD WILL COME BY MAGIC.”
Everybody had bundles and bundles of money while nobody had the bread. Bread is simply an example. The fate of everything in Zimbabwe is the same.
Our Indian govt along with many other govts around the world is doing the same thing what Zimbabwe has done. But the only reason why we are escaping the same fate as Zimbabwe is, besides being a reasonably productive economy, we have lots of inflation suppressing tools like govt borrowing the already circulating currency instead of newly printing them. It can borrow from your fixed deposits or from that insurance premium you and I paid last week and spend it again thus avoiding printing new rupees.
These steps are not a solution. They can only buy some more time to post pone printing money and create a false illusion that everything is going great in our country (or) simply put pushing it into a credit card which our children and grand children have to pay for the luxuries we enjoyed today.
If the govt keeps on spending more than what it collects by way of taxes and without ensuring sufficient and sustainable resources in our economy then someday when your fixed deposit matures the bank will come screaming to govt asking the govt to repay the loan it took.- At that point the govt has no other option than to print new rupees and pay the bank so that you can redeem your fixed deposit and again alike Zimbabwe too much money and no bread anywhere if we are a full fledged inefficient and non productive economy at that point of time.
Imagine what will happen if your pension is 5000 Rs per month and one kg of tomato costs 6000 Rs. Thing is pretty dangerous and proper awareness has to be created in the society. BEWARE...BEWARE...BEWARE... the way our govt is handling the economy it is not at all an impossible near future scenario for India.
Now let me not beat the root. Simple common sense will tell us that we will have to be more productive in the first place and then gradually or say proportionately increase the money supply and ensure that productive and contributing people receive lion's share of that money to buy those goods produced.
Okay now that you have some idea about good and bad effects of printing and adding new rupees into the economy we will look into the areas where the govt spends and check up whether it is productive or inefficient and are our children going to be citizens of a super power India or a super Zimbabwe India.
Let me mark this induction of newly born rupees into the economy by way of govt spending as OPPORTUNITY A and before reserving it for discussion at a later stage I will give you a hint of what is inefficient deficit spending and how it relates to price increases of all the essentials.
Have you ever been to a govt office. If not then just hop into a govt office, sit and watch (or) just write “is 1+1=2” and ask for clarification. You may enjoy the real horror by watching how many table this paper moves and how many officers go through this paper and within a record time of six or seven months you may get an answer like this “your query seems to be correct. But this office holds no responsibility for the assumption made”. To get this answer I need not say that you should be the luckiest person in the world for not paying any bribery.
Stop. Don't laugh. I am writing this with a bleeding heart. The govt could have very well done that job with a single officer and got it done within a minute efficiently. Yet it has placed almost 10 officers with some 20 assistants, 40 clerks, humpty number of peons, drivers, etc, etc,.with so many mind boggling procedures and never ending paper work in place just to justify its blunder or pretending to have created so much employment.
A majority of these employees are personally good people like you and me. They too have big dreams to achieve something great. Only thing is opportunities here are not enough for everybody to succeed. I personally don't have anything against them. After all who will refuse a job offer so secure, highly rewarded and no accountability at all. It is the system's fault. There is absolutely no value added in the economy by making humpty number of people do a single person's job. yet they are given hike in the sixth pay comission.
Since that pay recommendation is backdated they will receive a huge sum in lumpsum as arreors from those rupees,newly printed to balance deficit spending, and they will start competing with the rest of us for an apartment, which you and I were dreaming all our life to buy.
But for these people's new buying power the demand for that apartment would have been far lesser and the price would not have risen so dramatically. They have easy money in hand and whatever the desperate higher offer you make for that apartment they can throw one rupee more than you and thus the increase in price. This argument holds good for all other essentials.
The salary expenditure is only a miniscule part of govt's inefficient deficit spending. There are lots of areas where our govt is committing criminal blunders. Yeah ofcourse "criminal blunders" is too high an unparliamentary word . But I don't find any other word suitable to explain the enormity of the govt's recklessness. We shall look into them at a later stage in this article.
The other innovative way our govt has found in the past decade, to somehow put that newly created rupee into your pocket, is building up forex reserves with other fiat currencies (dollar, pound, euro dubakkurs). Ah this topic! When I wrote for the first time about the topic “tcs salary cut layoff and the future wage hikes” in Feb. 08. I received tons and tons of abusive email. Suddenly too many people even started researching about my birth. Such a sensitive topic. I will explain this topic in part 2 of this article.
Disclaimer: I am not an economist by profession nor a professional writer. I am a simple small scale industrialist as well as a farmer. I am only trying to explain what I understood in economics as simply as possible. I need not be completely right or completely wrong in whatever I write. I recommend you to think over this on your own and of course I welcome your views so as to improve our understanding of the economy and raising a consensus as to what can be done to transform our nation from a third world country to a super power India.
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