"Interesting Times" let it stay.

While the world economies are tumbling down, slipping on Oil I suppose; by a miracle of sorts the WPI (Wholesale Price Index) in India - a measure of inflation has fallen to ZERO in December of 2014. It's hard for me to believe that 'cause even the vegetable and grocery vendors must be working in tandem with the statisticians; so, while the prices of items forming a part of the index have come down - most other items have gone up - making me feel poorer by the day. 

Around 20.12% of the basket consists of primary essentials; these includes food articles such as cereals, meat, fish, fruits and vegetables. It also includes non-food articles such as cooking oil, cotton, jute and minerals. The next big group is fuel and power (14.91%) and this includes elements such as electricity, mineral oils and coal. Items such as kerosene, diesel, liquefied petroleum gas and petrol also fall in this category. However, the biggest group is manufactured goods (64.9%). There are many sub-groups in this category; some of the main ones are chemical and chemical products, basic metals, alloys and metal products, food products, machinery and machine tools and textiles. It just goes to say that at a household level, the impact of inflation reduction is unnoticable.  

The Finance Minister wants to see me and most of the wage earning class poorer too and it's trying very hard to force the Governor of the Reserve Bank of India (RBI) to cut benchmark interest rates based on the supposed lowering of the inflation level a to tame numbers; and thereby set in motion a domino of events in the back offices of the banking community to cut interest rates on savings and lending. The borrowing community would be of course be delighted if the rates come down; and those borrowers not intending to return the money would be in a state of ecstasy. But; for the average "Joe" who does not have many avenues to grow his money to keep up with or beat inflation, except maybe keeping it securely (hypothetical view nowadays) in a bank saving account or bank instrument - or investing in a debt fund; seeing interest rates come down would be a big hit. To be fair; it may be benefit first time home buyers. I disagree (and it's my view) as the real beneficiary is the real estate developer who can now push more of his over priced inventory at an even higher price. High interest rates have been the sole barrier to cooling off  a real estate market which actually deserves a massive downward correction to make homes affordable for the real user. 

With weak global cues creating a run on the stock market and our currency; the guiding star call WPI may suddenly show a very different picture next month and hopefully in his infinite wisdom, the Governor of RBI will not yield to the pressure.

In my view, the high interest is not the real culprit for the woes of the service and manufacturing sector. It is the way the financial institutions lend and the lopsided taxation and administration policy that should take the blame for lower production and higher inflation numbers that are haunting the nation.

First of all; India is not the only emerging economy with a high interest cost structure. In fact at times it is the high rate of savings encouraged by the high interest rates that has drawn money to financial instruments raised for funding social infrastructure. Then again, Indians have never been averse to paying high interest rates or returns to lenders either; else, private equity players would not have set up camp in India. To make high interest rates effective for borrowers; banking has to consider a long repayment cycle (10+ years) with a step up repayment plan based on the project completion, start and ramp up life cycle of the project funded.

Second, national statistics always remind me of an "Akbar - Birbal" story where the emperor asks his minister "tell me how many crows on the tree?" The reply is a specific and exact number which baffles the emperor; who asks again "how can you be sure?". The clever minister says "if there are less then some just flew away and if more some may have just flown in". So does a falling IIP (Index of Industrial Production) suggest that industrial output is really falling? If that be the case then inflation should have cooled long back. But reality suggests just the opposite. Consumption patterns have remained virtually the same if not increase, despite the increasing costs. Did the "black" economy have something to do with it? For those with plenty of unreported incomes, does it really make a difference if tomatoes sell for Rs. 10 a kg or Rs.100? By the same token, was the IIP under-reported because a lot of goods and service production was "diverted" to the underground economy? Or then again, are the statistics being thrown at us some intelligently fixed numbers to justify a particular action (in this case cutting of interest rates). If you think it's not possible, read what Michael Lewis had to say on how Greece got into the European Union (http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010#)  by "fixing" its economy with the help and advice of a gold plated US Banker.

There is no doubt that the current government is trying to force more than a couple of issues to usher in the "Good days". First; cut imports without raising duties (as a member of WTO raising duties would be unfair practice). Second; raise exports as well without technically violating WTO norms. A forced depreciation of currency helps both of the above. Third, increase domestic manufacturing capacity to satisfy the "Make in India" dream which in turn drives up employment. Fourth, drive up domestic consumption to force up demand that encourages producers to set up shop to produce; and do it without decreasing taxes. To do so make interest the culprit.

This may be a simplistic view, but the focus should be on dismantling the unnecessary harassment systems put in place for producers which add the cost of corruption to goods and services as much as affect quality of the produce itself. Next, the direct and indirect tax system needs to be linked to the "Indian" psyche which loudly says two facts:

First; my taxes are not used productively so why pay it?

Second; why should I pay for what I do not use?

India is an ideal nation for indirect and not direct taxes when it comes to taxing an individual; and there are a billion plus of them. By reducing personal taxes there is no reason to cheat the "unfair" system where 95% of the population eligible to pay taxes does not pay a single rupee in direct taxes. Interest on the other hand is a form of assured social security for most of the wage earning nation where the earning differential between the super rich and supposed middle class is something that even statistics will find it hard to put a percentage on.