Relation of Inflation with the Central Governments in India

One day I was wondering why inflation always become such a big issue whenever Congress party comes to power at the centre. To find the inherent reason, I search on the Internet for the consumer price index (CPI) over a period of 42 years, i.e., from 1969 to 2011. CPI shows how much the prices of commodities change during the time. It forms the basis for inflation. The graph below is obtained from a standard website on Economics. Along the vertical axis (Y-axis) we have rate of inflation and along the horizontal axis (X-axis) we have the time line from 1969 till August 2011.

 

There are some important periods of time that should be noted in this graph.

First is the great positive peak followed by a negative peak around 1975. This period represents the national instability in the country which occurred after the Indo-Pak war. The Congress government initiated policies such as poverty removal which was highly mismanaged. When the opposition parties started targeting the Congress government, the then Prime Minister, Mrs Indira Gandhi imposed a financial emergency which lasted from 1975 to 1977. During this period, a lot of trade and business restrictions were put in place which seriously restricted trade and business, and led to a negative growth of the country.

Next is the period from 1978 to 1980. We can clearly see the inflation of the country going down to less than 5%. During this period, the government was headed by Janta party. For the first time after independence, the nation had a non-Congress party holding the power. After Janta Party fell in 1980 and Congress came into power again, we can clearly see the inflation again shot up above 10%.  A period of high inflation continues till June 1998. Suddenly we see a drastic jump to zero during 1998. This point represents the beginning of BJP/NDA government at the centre. For the entire duration of 6 years in which they ruled, we see a relatively stable inflation rate of around 5%, which is very much bearable for a developing country like India. Suddenly, we see that this inflation gains a positive momentum from January 2005. It is very simple to guess. The Congress government came to power. In its full swing, the time is reverted back to pre-liberalisation era and the inflation is again floating higher than 10%.

Is this a policy of congress government to contain “Aam Aadmi” (Common Man) with high inflation. Is high inflation the strength of Congress government to rule India for the past 64 years. If it is so, then the Congress government surely needs an appreciation as the party which clearly knows how to rule a country.

Also Read:-

Corruption and Black Money
Money that changes color

Multi-facet consequences of Black Money

Jan Lokpal Movement showing muscles

Today was the biggest day so far in the Jan Lokpal Movement. People have come to the streets in all the big cities of India. There was no parallel for the crowds that turned up in Delhi and Mumbai. Over half a million people were on streets in Delhi and similar numbers in Mumbai that conducted 'Maharallies' (Grand Rallies). The procession of the people from India Gate to Ramlila Maidan was well timed and well disciplined. The streets were covered with a carpet of people. The day was a feast for photographers who took fabulous pictures of this huge movement.

Today was the sixth day of Anna's fast. In the evening he gave his half an hour long speech. Anna proved his mettle that he is determined to achieve what he is striving for. It would be the most foolish mistake to take Anna lightly by the way he speaks. Though he uses simple colloquial words, but the actions for this words have proved fatal for the government. I would like to highlight his two statements which have devastated all the legal technical arguments by the government.

a) The citizens of India became the owner of the country on 26^th January 1950. The politicians are the servants who are chosen by the citizens. How can politicians dictate on their masters?

b) If police stop me from protesting then I get myself arrested. If they deport me to some other place, then I will again come back to protest. This cycle will go on endlessly till my demands are met.

The first statement by itself destroys all the legal technicalities that government uses as a shield to protect themselves. It states that according to the Constitution, the citizens are supreme. First comes the citizens and everything follows them.

In the second statement, Anna destroyed all the whims of the use of force by the Government. Indirectly, Anna said, I don't fear arrest and I don't fear a lathi (baton). The Government committed the biggest blunder by not understanding his inherent message.

Today Anna made his demand concrete. He said to the government to pass the Jan Lokpal bill by 30^th August or leave the office. It is a straight demand which has serious implications. First of all, no political party will ever pass the Jan Lokpal Bill as it directly hits them to the place where it hurts the most, that is punishment for corruption. The present government headed by Congress will try its best to find a middle path, i.e. a bill which is not strict but somehow creates a nominal institution of Lokpal. However, according to the turnout of the people today, I don't think Anna should compromise anything less than the Jan Lokpal Bill. People on the streets show that they are with him. No political party can ever overlook a huge public outburst.

The other very subtle aspect of today's call is the demand to leave the office in case of failure to pass the Jan Lokpal Bill. If the UPA falls, then they will be forced to resign fresh elections will be conducted. But are we sure that the next government will pass the Jan Lokpal bill ? History suggests that after the fall of Congress in 1977, the new government couldn't bring any fundamental change in the governance. Practically, the fresh elections will delay the implementation of the Lokpal Bill by atleast 4 months. Even then, there is no guarantee that the new government would pass the Bill. However, one must not forget that the Jan Lokpal Movement is an 'apolitical'. Definitely it will prompt the parties to show their willingness to introduce a strong law when they go to people asking for their vote. I hope it will bring new equations in political game of India.

Also read:
Lokpal movement as of Aug 20, 2011
Why Lokpal movement is a must for youths …

Lokpal movement as of Aug 20, 2011

Click the image to enlarge

The bomb is India with all the frustrations packed inside. Lokpal is the detonator. India against corruption movement is igniting the fuse. However, sad to say, the government is dropping water to stop the fire. All efforts of the government are now to delay the decision making process so that people gradually lose their interest in the movement. Suddenly, a new proposition from Aruna Roy's camp for Lokpal bill has emerged. It is a mere hogwash. It is government's move to scuttle Anna's movement by creating confusion among the supporters of Anna.

Read also :-
Why Lokpal movement is a must for youths …

Why Lokpal movement is a must for youths …

India is witnessing the biggest revolution of all times. The current public demonstration in favor of a strong law against corruption has achieved its biggest support from the young section of the society. It shouldn't be surprising at all since 50% of the Indian population is less that 25 years of age and if a person of 42 years can be projected as a youth icon then more than 75 % of the population is young in India. But we need to understand this spectacular response from youth is a result of a very dangerous picture that nobody wants to discuss.

The population that belongs to the working age between 20-65 is more than 65 crore (650 million). Out of this gigantic figure, the number of people who are employed full time and those who can claim themselves to have a respectable job is no more than 3.5 crore which is roughly 5 % of the entire workforce. These jobs include banks, insurance companies, army, public sector enterprises, state level government entities. Rest of the population is engaged in jobs which are categorized as unorganized. The number of people who are earning their livelihood in unorganized sector are those who sell stuff on footpath, sell tea in stall, petty cleaners and all those menial job which goes unnoticed. There is neither any job security nor any respect for these jobs. Some get job for 2 months some get for 4 months. It is shameful to say that agriculture, that engages 70% of the Indian population comes under unorganized sector. After 64 years of independence, the government is unable to provide food to all the people, forget about clothing, shelter, education, health, security, road, electricity and water. The deficit in the performance of government has zoomed so much that it has become inevitable for people to live. In the end, it is the youth of India which is exposed to such a grim situation. With no jobs in place and an entire new generation ready to replace them, the youth is left with nothing but to agitate to the government to take concrete steps.

In the cities the situation is no good either. With students studying for 20-25 years are unable to get jobs in the area they wish to work. Whatever be the qualification, the talent is diverted towards writing software with monthly salaries just sufficient to live and no time for leisure. The students realise that their degree have no real value.

With no concrete plans or schemes for generating employment, the government should be taken to task. The movement against corruption gives the youth power to put pressure on the government. It is the time when the youth should come to front and press hard for addressing their grim situation. An end to corruption will allow the money which is lost in scams to generate hoard of new opportunities.


Also read
Corruption and Black Money
Multi-facet consequences of Black Money

Multi-facet consequences of Black Money

In this article, I have described how the black money generated in Indian economy has wide spread consequence that is endangering the very integrity of our nation. In very simple terms black money can be defined as unaccounted money which is generated though activities that are considered as illegal in the country. To get more understanding on black money, refer to the article “Money that changes colors”. Once this money is generated, it is required to be spent, otherwise, there it is of no use. People possessing enormous illegal sums can show their craziness by fitting air-conditioner in every room of their house, even their bathrooms. In this manner, black money inculcates a sense of reckless spending, since it is too much. But how this leads to moral degradation of the society is interesting to understand.

Moral degradation of the society

Black money increases the spending power of an individual. The primary needs such as food, clothing and shelter are already met for people who possess enormous amount of black money. Then these people spend money in purchasing luxurious goods such as fancy cars, jewellery, dresses, expensive trips, costly stay in 5-star hotels, etc. The blatant show off by these people for luxurious consumption creates immense stress in the minds of have-nots who want to have similar life-style. However, the Indian culture has always promoted spending for need and shun spending for desire. But the blatant exposure towards consumption based lifestyle inculcates greediness, and an appetite to earn more money by hook or by crook. The Indian society is gradually transforming to a state where moral values are sidelined whenever black money is concerned.

Economic Distortion

Black money slowly, but steadily distorts the priorities in our economic decision making process. With growing demand for luxurious commodities, the profit in the sector for these product greatly increases. The rate of return on the industries manufacturing luxurious good (such as air-conditioner, television, high end mobile phones, cars) becomes higher compared to other regular industries which serve the masses (such as agro-based industries). National priorities are subdued to serve a few big industrial houses or families. For example, plans to open shopping mall would get green signal, but plans to install fertiliser manufacturing plant would be given second hand treatment. This effect is already visible as the scarcity of agricultural inputs has increased the prices for raw materials such as seeds, fertiliser, etc. No doubt the rate of farmers suicide is increasing with the same pace as shopping malls are being opened. India which wants to become a developed nation cannot sustain this imbalance and biased decision making process where majority of its population is ignored in the light of few who possess the black money.

Inflation

Many people after reading this excerpt would be surprised that high rate of inflation for the past 4-5 years is artificial and is mainly due to black money. The enormous amount of black money is used to hoard food items in cold storage. An artificial situation is created where supply of food is curtailed to increase its demand. As a basic rule of economics, whenever the demand is more than the supply for a commodity, it's price increases. The loss incurred by not selling the goods is cushioned by black money. However, the return received after the prices are increased is much more than the loss. The government claims that it does not have any magic wand to control inflation is a big myth. A simple ban on hoarding goods will drastically bring down prices in the market, but hardly any such move is taken by the government.

Angle of national security

This topic is rarely discussed in the media and people hardly understand that black money can actually push back the country seventy years back when India was ruled by Britain. But this time it will be much worse as it will be ruled by Indians but they will be serving any other nation except India. As an example, people who deposit their black money do so via Hawala agents. These agents, carrying out the risky business of money transaction from one country to another, have strong connection with intelligence of different countries. Imagine a situation in which a Hawala operator leaks multi-billion dollar of black money transaction of an Indian politician or bureaucrat to Pakistan's secret agency ISI. Although the person may not be politically dis-aligned to India, but could easily succumb to an external blackmail. In this case, the Pakistanis who were unable to defeat India in a war field could now rule Indians by proxy via the corrupt official who will become a puppet in their hands.

The above ideas are obtained from the lecture by Subhramanian Swamy. Start at 7:00

Also Read:-
Relation of Inflation with the Central Governments in India

Corruption and Black Money
Money that changes color

Money that changes color

This article is about the process of interconversion of black money into white and vice versa. White signifies that the money is generated through legal means whereas black signifies otherwise. Great confusion arises between the two because the money is synonymously connected with currency notes. However, it is important to understand that money is a concept which is abstract whereas currency notes are physical entities that are real. To make things comprehensive, the concept of accountability is introduced.

When any economic activity is concerned where money exchanges hand, it is important to keep records from where the money came and where it goes. Accountability refers to all the necessary paperwork involved to keep these records. In this regard, it is very clear that money involved in illegal activities goes unaccounted. Nobody is foolish enough to go to bank with bundles of cash and say that this money is obtained through drug trafficking or prostitution or any other illegal activity. Thus in conclusion, black money is an entity where you cannot explain its origin or its destination where it is going to be spent.

Now comes the question of black money getting converted into white and vice versa. To answer this question we need to know that a trade off has to be maintained between accountability and easy of flow of money. If each penny has to be accounted, it can amount to a lot of overhead in terms of paperwork. It seriously restricts the easy of use of money as it comes at a cost of time to maintain records. In order to avoid a chaotic situation, the laws in the country provide some relaxation in terms of the limit of money which could be transacted in cash without asking for its origin or destination. So how does it work ?

Let me explain a real scenario. Any legally registered organization in India is allowed to do transaction in cash upto Rs 20,000 (Income-Tax Act 1961). Any amount higher than this has to be transacted through check/draft/e-banking. This regulation ensures that large sum of transaction should be clearly accounted while facilitating smaller transaction in cash. Now this limit of Rs 20,000 can be a very big machinery for converting black money into white. For example, you obtain some cash through illegal means which is black and invest in the company in chunks which are less than Rs 20000. In this manner, your black money gets accounted in the company and turns white. An economy which is 7-8 orders higher than this limit does not bother for this petty conversions of black into white.

In is interesting to highlight other scenario where white money gets converted into black. An example is inevitable. Suppose a shopkeeper works very hard and earns a profit of Rs 1000000. According to present income tax laws, he is supposed to pay a tax of Rs156,560 (refer tax calculator) which is about 15.6 % of his income. If the guy pays full tax then he possess white money of Rs 843440. However, by avoiding income tax completely, the guy's entire income becomes black.

Read the next article :- Multi-facet consequences of Black Money

Corruption and Black Money

I am highly tempted to write on this topic because not only it is currently a highly debated issue in the Indian media but it is also highly misunderstood topic as well. With this blog I would like to push forward my understanding on corruption and black money. In my subsequent blog I will highlight the quid-pro-quo scenario between them.

Corruption

This article is written keeping in mind the current laws in India. According to Prevention of Corruption Act, 1988, the corruption is defined as an act committed by a person holding a public office which directly or indirectly benefits him or other person apart from the remuneration received for holding the position (The exact legal statements could be read in the official act). In technical sense, this act sub-optimises the decision making process which ultimately leads to loss in revenues for the country from which it can benefit from. The act where money is not concerned, the decision making process favours nepotism instead of merit. It is important to note that corruption is strictly defined for people holding public office and the misuse of position and powers under the office. A public servant (person holding public office) accepting money (except from the remuneration in form of salary) for performing the regular job, delaying the process or taking biased decisions that undermines the office are the simplest form of corruption. There is huge difference between corruption and cheating. For example, an auto rickshaw driver denying to go unless you pay high price than normal is not corruption. It is cheating. This process does not involve a public office. Similarly, you pay to some agency for constructing a road and the agency constructs a poor road that wither away in the first monsoon. In this case, the agency has committed a financial fraud by siphoning off the money that should be used for constructing quality road.

Black Money

Presently, the issue of black money is gaining a lot of momentum. In general people ask – what is black or white has to do with money. Money is money in the end. A currency note does not bear any black or white colour. It is true. But the main point is how this money is generated. Money generated through any activity that is considered legal in the country is white and through illegal activities is black. This clause of legality plays the fundamental role in determining the authenticity of money. In this regard, money generated though activities such as smuggling, drug trafficking, prostitution, etc. is regarded as black because they are illegal. This difference is very basic and easy to define. But confusion arises due to the synonymous use of money with currency notes. Money is a concept which is abstract whereas currency notes are physical entity and are real. To create a link between an abstract concept and a real entity, the concept of accountability is introduced.

Accountability means the paperwork involved that defines the way the money was obtained/generated. Naturally, money involved in illegal activities goes unaccounted. The best way to move unaccounted is physical transfer in form of cash. Again, it is important to understand that every unaccounted money is not black . The money transfer that takes place between two parties where both know that it is going to be unaccounted is black.

To know more about black money read the new article :- "Money that changes color".

Rise of Swiss Francs (CHF)

Over the past 3 years, the world of currency exchange has witnessed an exponential increase in the rate of Swiss Francs vis a vis any other currency, whether it be Euro or Dollar. Switzerland is a part of Schengen area but is not signatory to Euro-zone. As a result, after the creation of Euro, CHF has always been pegged against Euro. The exchange rate between Euro and CHF was initially 0.67 Euro per CHF. But this rate was disturbed subsequent to the recession of 2008 in US. Since then, this rate has been continuously rising and the current situation is that with 1 CHF you can obtain 0.92 Euro as on 5^th August, 2011 in Switzerland. This significant rise of over 35 % for CHF means that the currency of Switzerland has become very strong in Europe. Naturally, several question arises, what is the cause for such an imbalance ? Is the strength in currency driven by economic progress ? Is this increase in ratio creating any stress in Swiss economy ?

To answer any of the above questions, we have to first accept that this is an imbalance because the rise in the currency has far outpaced the growth of the economy of Switzerland. This is an artificial situation which is called “bubble” in the vocabulary of Economics. An economic bubble occurs whenever a commodity is traded at a much higher “price” than its intrinsic “value”. This could be understood in very simple terms of demand and supply. Whenever the demand for any commodity increases in the market and the supply is fixed, its value increases. If the supply rises, and demand is reduced, the value of the commodity falls. This is a universal concept and it extends to any commodity that is being traded in the market. This is the reason for high price of limited goods such as gold and other precious metals. Now, coming back to currency trade with CHF in focus, presently there is great demand for CHF, and hence this demand is driving the rise of CHF with respect to other currencies. However, we need to understand how this particular demand for CHF arose and not other currencies.

In 2008, the world saw a global slowdown in economical terms, which we popularly call as recession. This happened because the largest economy, i.e., United States of America suffered from property crises. The crises dented the status of US Dollar which exposed its weakness during the rough times. The world started to search for alternative reserve currency in case Dollar falls. Although, the switch from Dollar to any other currency is not simple and straight, but the interest of the investors have grown considerably in other currencies. Presently, apart from US Dollar the other major reserve currencies are Euro, Pound, Japanese Yen and Swiss Francs. However, the global slowdown affected all these economies except the Swiss. Switzerland remained largely unaffected in the periods of crises which demonstrated its robust economy to the world. Switzerland emerged as a stable platform where investors could safely park their investments without much worries of losing it. Hence, there has been a constant buyout of CHF after 2008 which can be easily seen from the transaction chart of EUR/CHF given below.

Graph Showing exchange rate of EUR/CHF over past 3 years (Click the graph to see the clear picture).

Switzerland is currently in a very difficult economic situation with respect to its currency. Although CHF is strong, but it is becoming increasingly difficult for Switzerland to trade with other economies. Switzerland is primarily an export oriented economy with 50% of its GDP dependent on exports. Import is becoming cheaper while exports are falling. This has a very serious consequence on internal economy as the local producers are now facing the wrath of cheaper good that could be imported from euro-zone. The tourism industry is equally at its bottom as tourist have changed their preferred destination. The largest bank UBS has recently published its recommendation for Swiss investors to divest their assets in CHF into Euro or other currencies to free some CHF for the market's rising demand [read here]. The situation is critical and it is expected that Swiss National Bank would intervene to dissipate some heat. But is the Swiss economy ready to see an inflow of CHF from the bank which can have serious consequences at a later stage when the same CHF would return in the market leading to inflation ? Switzerland doesn't seem to be interested in printed more CHF as US is doing with Dollar. Indeed, it cannot afford to do the same as the scale of economy is incomparable to US. It is catch-22 situation. Time will tell how this story unfolds in the coming weeks.