What if Tamil Nadu does a Brexit?

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It may not happen. But growing inter-state diversities on multiple fronts can become unmanageable, if ignored.

People in the rich states of Kerala & TN earn 4 times more than the our friends in the poorest state of Bihar. Inter-state income disparity is rising.

Disparity in natural resources, like water for example, have ensured continuous inter-state disputes like the contentious water-sharing agreements between Karnataka & TN. Such disputes show no signs of abating.

State governments often pursue unique social welfare, industrial and other policies suited to local needs. But the implementation of these policies & the benefits realized are so uncertain & volatile that inter-state diversities are only bound to grow.

A natural outcome of a vast & growing diversity is a tendency towards self-protection. Why should TN endorse GST when it thinks it will lose more than it gains? Why should Karnataka share water with TN when its own people & farmers are facing severe drought? Why shouldn’t a state continuously increase job quotas for its own people? Will migrants from poor states be looked down upon and be relegated to low-income jobs not being taken up by the locals of richer states? Is the slowly escalating inter-state rivalry for investments healthy or will it distort incentives and become messy?

We shouldn’t be surprised if a few intractable inter-state or centre-state issues come up in the next 5-10 years.

Prime Minister Narendra Modi at the eleventh Inter-State Council Meeting

Source: PTI

How to improve our cooperative federalism? Should we revisit the union, state & concurrent lists? The central government has little say in critical subjects like water, education, law & order etc., which require standardized national policies & implementation drive. The state governments want more financial & administrative autonomy and hate interference from the centre.

The GST idea was mooted more than 10 years back and the bill has taken so long to be approved. Its full implementation will take another 2 years. That’s the state of our cooperative federalism.

Despite increasing inter-state and centre-state dialogues, if the rules of the game (aka constitution) are not changed, we should brace ourselves for some fantastic fireworks.

The gap between rich & poor states

Inter state council

 

 

 

Dispelling Income Inequality

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We want to add jobs, raise incomes, and over a period of time, reduce income inequality.  Government policies like ‘Make in India’ are geared towards these goals.

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But are these goals achievable? Perhaps not.

  1. We are largely dependent on the manufacturing sector to create more jobs. Unfortunately, the role and contribution of the manufacturing sector in creating jobs & incomes seems to be peaking and/or declining, not just in India, but globally.
  2. Assuming we somehow are able to create sufficient jobs in manufacturing & other sectors, can the incomes of the huge mass of low-skilled labor force be raised to satisfactory levels? Another herculean task. The experience of developed and other developing nations are not encouraging. Furthermore, this human experiment in industrial revolution, job creation & increasing incomes is still nascent at 100+ years. No guarantees on outcomes.
  3. We now have 2 events with low probabilities – our manufacturing sector may not create sufficient jobs and we may not be able to suitably raise incomes. Also, these two events are possibly inter-dependent. If so, our ultimate goal of reducing income inequality becomes more remote.

Citing examples of Japan & Scandinavian countries, which have been able to build egalitarian societies with low-income inequalities, may be futile as these countries are facing blizzards like aging, immigration, slowing economic growth etc. These challenges threaten the short run of egalitarianism they have enjoyed in the last few decades.

Modern economic growth is based on the twin engines of investments & consumption. But both these engines have their own minds and often don’t work in sync. They often speed-up, sputter & stall at different times, thereby destabilizing growth, which ensures periodic bouts of unemployment, reduced incomes and volatile income inequality. That seems to be nature of the beast.

Youth, entrepreneurship, selfish motives and innovations help drive economic growth. But the nature of the beast may not change significantly to allow us to achieve lasting income equality and egalitarianism.

We have a long way to go before we can generate enough jobs to feed our millions. We may not have the luxury to target income inequality for the next few decades. We need to generate enough income first. Even as we ride on the train of modern capitalistic wisdom, its worthwhile to observe how other trains, which had started much before us, are faring.

What can we learn from them?

Should we pursue their growth model? Are those models dying?

Perhaps the twin engines have to be replaced. If we need to be dependent on investments & consumption to keep growing, where & how do we end up? Are there limits to such a growth? Should we really worry about limits now, or just keep doing what we are doing?

What are the alternatives? Can we slow down investments and consumption? Can a slower, but equitable and inclusive growth be more sustainable? Can we afford such a slower growth? Is it doable?

Can India Develop Without Industrialization?

Immigration & Brexit

 

Is Politics The Only Way?

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Swaraj Abhiyan, a sociopolitical activist organization, is launching a political party, striking a path similar to AAP which had ousted the folks who formed this activist group.

This triggers the question – Is politics the only (or better) way to bring about big changes? The really big transformations we need desperately in various spheres, not small, mundane, routine or incremental changes.

AAP itself, a good example of a well-meaning social activist group turned political party, has been a disappointment. Its leaders, who were once hailed as idealist saviors, have become run-of-the-mill politicians, no different from other politicians they fought against. While AAP may still bring about some good changes, they may possibly fail to transform society, which was their original intention and promise.

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(Let us define a big transformation as a set of positive changes which impact our day-to-day lives in a visible manner, started & finished within 5 years, or within one term of an elected government. Changes could be in any or many spheres like agriculture, industry, utilities, welfare, etc.)

The Modi government is another example. While it has initiated some positive changes, the promise of a big transformation may not be realized within 5 years. While Modi has expressed dissatisfaction with small incremental changes half-way through his term and has called for a transformational change, he may need another term in office to achieve his big transformational goals. But big transformational changes spread over a longer 2-term (10 years) period may not have the desired impact, as the goal posts keep moving too. Any transformation has to be time bound. If it’s too slow, then it’s not a transformation at all.

So, can’t political action help bring about big transformations we need fast enough?

Yes, but history cautions us that’s possible (largely or, perhaps, only) when there is a crisis. Political action is perhaps the best way to achieve big transformations, especially in democratic societies. But it is also a high risk activity combined with high uncertainty. It can result in a big success, or a big failure, or just taper off.

Many strong but peacetime political leaders may not make history. They may not lead transformational changes. But crises, big & small, bring forth leaders who transform societies. Great political leaders were often made by the circumstances they found themselves in.

Are we in a crisis now? No. We have many problems, big & small, but no crises.

Our democratic politics is a system of compromises. Great political ideals & ambitions are quickly watered down. Activist politicians have to scale down their lofty goals. They need to be pragmatic to survive. And then, if they are savvy enough to garner the support of leaders, peers & others, which is a herculean task, they may have a chance to achieve some of their watered down goals. They can make incremental changes.

But, big transformational change? For that, we need the catalyst, a crisis.

 

We Need Unreasonable Men

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“The reasonable man adapts himself to the conditions that surround him… The unreasonable man adapts surrounding conditions to himself… therefore, all progress depends on the unreasonable man.” – George Bernard Shaw

Rains, drains & bad roads are subjects of recurring annual debates during monsoon times. While the debates have become more vocal and citizen activism more pronounced, nothing much has changed on the ground (or road!).

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This naturally leads to questions like “how to bring about change?” and “who are the right change-agents?”

Lets look at two examples.

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Lee Kuan Yew, who transformed Singapore from a dismal slum into a shining example of a progressive nation, was an unreasonable man. In his own words, and also how others described him, he was more pragmatic & rational, less emotional. But even when he was driven by reason & practical efficiency, he was unreasonable in many ways. He had lofty unreasonable goals which sounded impossible, at least initially, to people around him. He had unreasonable expectations of fellow politicians & bureaucrats. He was unreasonable even to his fellow citizens, who were often surprised, shocked, & rattled by the public policies he promoted. Yet, he prevailed, and Singapore is a success story today, largely because of him.

Adolf Hitler was an unreasonable man too. A radically motivated man, who was able to capture the imagination and support of millions & who caused what is perhaps the deadliest conflict in human history, was perhaps less pragmatic & rational, more emotional. But still his unreasonable ways swayed millions of men & women. A good example of how an unreasonable man can also lead us into a massive regress.

Closer home, Mahatma Gandhi was an unreasonable man, before other leaders & the masses got around to grudgingly acknowledge, and then support, his ideas & methods. The business world, especially startups,  has many unreasonable men & women, who have lofty goals & grand visions, and also the drive & energy to lead the change.

Many such change-agents may fail. But the truly unreasonable men & women, those endowed with the qualities of Lee Kuan Yew or Adolf Hitler, seldom fail. Unfortunately (or fortunately, if we consider Hitler), they are rare creatures. They are often not born as unreasonable men, but created by circumstances.

India is perhaps headed towards such circumstances, if citizen/social activism and business-led disruptions are any indication.

Till then, we may have to endure a painfully slow evolutionary change.

“People are always blaming their circumstances for what they are. I don’t believe in circumstances. The people who get on in this world are the people who get up and look for the circumstances they want, and if they can’t find them, make them.” – George Bernard Shaw

 

 

 

 

The Great Indian Malaise

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S.Radhakrishnan, the first Vice President and the second President of India, was perhaps the closest we have had to a philosopher king in recent times (as per Plato’s idea that only philosophers should rule the state).

He made the following observation which rings true even now.

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In our own country, we said that thinkers must be actors

Atma rati atma krida kriyavan

esa brahamavidam varisthah.

He must be a kriyavan, a performer of works. Similarly, it is said :

Viveki sarvada muktah kurvato nasti kartrta

alepavadam asritya srikrsma Janakau yatha

Even srikrsna and janaka were men not only of philosophical wisdom, but also of practical efficiency. We should also behave in the same way.

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What’s the Great Indian Malaise?

It is that we have more thinkers than actors.

We have more ideas & complaints, less initiative.

We have more arguments, debates & regrets, less action.

We need more doers.

A Big JAM?

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We are poised for a big leapfrog in financial inclusion. Can we manage it well?

(in the next 5 years)…. financial inclusion will reach everyone. Every adult will have a Smartphone, a bank account and Aadhaar number and with one click on his phone he will be transacting, buying, selling and transferring money all that is reality. – Nandan Nilekani (25-Jul-2016)

Jan Dhan, Aadhaar & Mobile (JAM), the new unified payment interface (UPI), savvy banks and new age financial institutions (like payment banks) will soon change the financial landscape of India. Folks in villages & small towns will have better access to money. The poor will receive more direct cash transfers to their banks accounts & easier access to credit. Many new entrepreneurs will come on board. SMEs will be revitalized. More jobs will be created. We all will have more money to spend. We will consume more. India will grow.

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That’s a good story and most of it may happen. Thats the beauty of capitalism. Money and business innovation fuel each other.  Money, innovation, profits and more money, more innovation, more profits.

A good story always has villains and that’s the dark side of capitalism. If this big thrust on financial inclusion is not well-managed, financial bubbles and disasters will strike. Such a massive financial inclusion exercise will inspire financial experimentation & innovation. Financial innovations, fueled by human greed & passions, often get out of control.

And like all good stories, the twists & turns will keep us spell-bound. Mini climaxes and anti-climaxes will stun us. The history of capitalism tells us that booms & crashes are inevitable. The system is only as good as the people who manage it.

We don’t seem to have an alternative path. The JAM juggernaut will roll. We need financial inclusion to rescue the masses.

Our only hope is to install the right people in government, businesses & regulatory bodies, and trust these heroes will pull us out of disasters.

JAM trinity & transformation

 

 

 

Wrong Lane On The Capitalist Highway

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25 years of reforms since 1991, and we are still on the wrong lane.

Capitalism is (perhaps) the best known system for human growth & development, but, as with any other tool or system, it can cut both ways.

We are blindly following the western capitalist model of development without taking heed of looming roadblocks which have forced even some developed nations to contemplate switching lanes.

What do we want to achieve?

  1. Eradicate poverty
  2. Basic needs for all (food, water, shelter, etc)
  3. Happy, active, healthy & productive citizens
  4. Peaceful, friendly, equal & secular society
  5. A system which supports citizens to realize their dreams & potential
  6. A sustainable environmentally friendly economy which can fuel our growth & development for the foreseeable future (say next 100 years)
  7. A friendly nation that promotes global harmony and peace

And maybe a few other goals. These certainly look utopian, but its useful to chase audacious goals.

So, what can go wrong?

Lane discipline

There are many reasons why a poor, large and fast developing country like ours can stumble & sputter, as we drive down the capitalist highway. But lets focus on just one big theme – consumption. We are largely dependent on consumption-led economic growth to achieve our goals. We are becoming more & more adept at promoting business & industry, and fast attracting wealthy investors worldwide. More business is expected to result in more jobs, higher salaries, more money to spend, which in turn will fuel more businesses. A nice virtuous cycle in theory which may turn vicious in the long-term. We are already seeing signs of strain in the developed world. Lets see how our goals will be jeopardized by runaway consumption.

  1. A consumption driven economic growth may not eradicate poverty. While we may indeed achieve poverty reduction in the short-term, the poverty line may simply shift over time. The poor may get jobs & benefits, earn higher income, but as their needs & consumption increase disproportionately, a vast majority of them will continue to languish in poverty and/or low incomes. And as the rich garner a disproportionate share of wealth generated, the poor may be pushed back even more. While a few smaller countries (like Singapore & Switzerland) have done well on this front, it’s too early to conclude their model is right. They may have to run twice as fast to keep poverty at bay. As long as our poor & rich are driven to consume more, poverty will stay.
  2. The problem with basic needs is that they change with time. What were basic needs a few generations back are now essential needs. Also what was a basic need a few years back is now not sufficient. We need bigger houses, more clothes, more gadgets, more everything. Our innate desires & needs are fueled further by rampant capitalism. The more we consume, the more we need. The more we need, the more we consume. Another vicious cycle. Consumption driven growth cannot satisfy basic needs. All the smart cities we build now will not be sufficient 50 years from now.
  3. Are we happy, healthy, active & productive in today’s fast paced urban jungles? Certainly not. Most of us are stressed in unhappy & unsatisfying jobs. Lifestyle diseases have become common. We may be productive in our jobs, producing & serving, making profits & earning salaries, but are we being productive in the way we really want to? Consumption driven economic growth will not create happy, healthy, active & productive citizens.
  4. Income or wealth inequality is possibly the primary cause of social disruption. Obscene income inequality and conspicuous consumption are the norm today. These are bound to disturb peace & friendship across social groups. It’s increasingly difficult to maintain equality & secular norms. Will income inequality go away over time? Not really, if we continue to drive down the lane of consumption-led growth. The rich will get even richer. The poor may do slightly better. The rich-poor gap will remain, and perhaps even widen.
  5. The present education system and employment market are not conducive for citizens to realize their dreams & potential. Kids are forced to take up studies which will help them earn well. An artist, sportsperson or musician cannot hope to indulge in his interests alone and live well. A consumption driven economy is typically controlled by a few key players (businessmen & politicians) and it is they who realize their dreams & potential. The rest of us just play a supporting role, compromising our own interests, dreams & potential.
  6. The rate of environmental & climate disruptions accelerated after the industrial revolution, when we started consuming more than we need. It’s quite clear that a consumption driven economic growth agenda and sustainable environmentally friendly businesses cannot co-exist. If we want environmentally sustainable businesses, we need to consume less. If we continue to consume more & more, we will not have a livable environment pretty soon.
  7. We certainly are not a peace-loving nation (see link below). We are not qualified (or prepared) to promote global harmony & peace.

Unbridled consumption can lead to our downfall, not immediately, but after the next few generations. Some developed countries are already facing challenges.

It can be dangerous (and sometimes stupid) to focus on ‘consumption’ as the only cause of all ills, but its hard to deny that it is the single biggest cause.

There are many ways to switch to a safer & sustainable lane on the capitalist highway, like consumption tax, welfare state, opting for slower growth, etc.

But the first step is to recognize the problem and accept the diagnosis.

Overconsumption (aka materialism) was shunned by all great wise men for good reasons. Lets not forget their lessons.

Are we a peace-loving nation?

 

 

Why Can’t We Let Banks Fail?

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The government wants to spend Rs.70,000 crores to recapitalize the ailing public sector banks. This plan, called ‘Indradhanush’, includes a few other schemes to revamp the banks.

Ideas like the Bank Board Bureau (to prevent government interference in bank appointments), improved systems (of empowerment, governance, accountability), and bank consolidation are welcome.

But the big question remains – why should government spend huge tax payer money to recapitalize banks which deserve to fail. These ailing banks were mismanaged, poorly governed and had little accountability. While these public sector banks have important national/social obligations (like financial inclusion & lending to priority sectors), why can’t we allow a few banks to fail and shock the sector into functioning more efficiently and profitably? In a capitalist system, even a public or social sector business cannot sustain itself without being efficient & earning profits. And, importantly, this is not the first time our public sector banks are facing stress. They have a history of functioning unsustainably.

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It’s not easy to argue against an IIM professor who supports the government’s plan to spend this humongous amount on bank recapitalization (see link below).  But, let’s try anyway.

  1. While banks require capital infusion to maintain capital adequacy a few points above basel norms to remain ‘safe’ and ‘strong’, why did they get into the present situation at all?  Why did they lend recklessly to risky projects?  Were they forced to be imprudent? Are they not responsible to regenerate profits for their shareholders (including GOI and indian citizens)?
  2. Will allowing a few dirty banks to fail really cause a banking crisis, reduce output and impose other fiscal costs? Why can’t we fail some banks, keep others, and publicly demonstrate our intention to clean up the sector?
  3. PSBs have indeed sinned by failing to sustain themselves financially (they need to operate profitably to continue to fulfill their national/social obligations)
  4. The fallout of a few bank failures (like displaced employees) can indeed be severe and it is the government’s job to stand up & manage the situation.
  5. If we are hoping the expected bank consolidation will be an indirect way of letting bad banks disappear and that it will help root out inefficiency, we may be venturing out on unchartered waters. Consolidation of large, bureaucratic and government controlled entities may take years (if not decades) and may fail. Do we really want 15+ PSBs to be mired in the throes of consolidation & mergers for many years? Management will be diverted and day-to-day operations will suffer.

Indradhanush will usher in clear blue skies to the banking sector only if we let a few banks to fail dramatically and publicly.

Myths about recapitalisation…

Indradhanush

Centre injects…

 

What’s Not Smart About The Smart Cities Mission?

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This mission is perhaps the best thing that should happen to India, but a few glaring wrinkles need to be ironed out.

  1. Flawed Planning

About 80% of the budget is to be spent on ‘area-based plan’, rather than for the entire city. A few chosen areas within a city will get a big chunk of funds. Such unequal infra development within a city may lead to social, economic, administrative and other problems later. How will government prevent a gold rush to these parts of the city and justify lopsided development to people living in other areas? Will the ‘area-based plan’ be a silo development within a city, or will it fit into a larger master plan for the region & city? What are the potential socio-economic impacts of such a limited area development within a large city and what actions are being taken to manage potential political & administrative chaos? What’s the 20 year roadmap to develop all parts of the city in an equitable way?

2. ICT vs physical Infra

Smart cities are not just about mobility, information & communication technologies. About 40% (or more) is to be spent on these areas. How about essentials like low-cost housing, sanitation, waste management, water, energy etc., which are perhaps more important and have gotten lesser share of attention & funds?

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3. Financing

About 25% of the budget is expected to be footed by private sector. When our history of managing public finances municipalities is dismal, will the private sector be eager to jump into these PPP projects? Most of our 4000+ municipalities (including metros) do not maintain balance sheets, are not mandated to do internal and external audits, & do not publish financial statements. We need many trillions to build infra country-wide, but all these municipalities generate just about a trillion of revenues. Sustainable financing of infra build-out is still a question mark, even as the central & state governments are financing the first phase of the smart cities mission.

4. Governance & accountability

Will the envisioned smart city SPVs run the cities (or a few smart areas within big cities) in a silo? What happens to the rest of the city? Who is ultimately responsible or accountable – the municipal body, state government, or SPV? Will a separate city government be a better governance model (as in NY & London)?

5. Citizen participation

How will the SPV & government mobilize and promote citizen participation to build these smart cities, almost from scratch? Without (at least) some citizen participation, this project will fail. Citizen participation is critical in areas such as contributing ideas, participating in development discussions with government, making adjustments to their lives as the cities are being built, contributing to making the cities vibrant & livable etc. We have little experience in mobilizing such citizen participation for large public projects. This requires cultural, political, & social changes, which take time. Importantly, it requires seasoned & committed leadership. Do we have such leaders?

Cities will be built. But, how smart will they be?

Smart city exclusions