On Economy

I see very emotional debates on economy – whether Modi ruined it or saved it. By reading first two paras, one can judge whether the writer is from NDA or anti-NDA camp.

Here is my take:

1. As children we would play Snake & Ladder and even claim some of us were ‘experts’ and some play ‘bad’. The reality however was that neither I played or you played. The roll of dice played. Ludo still had some scope to show ‘my’ existence. Snake & Ladder just made me roller of dice with no control over what would come out.
Economy is exactly the same.

There has been no major policy shift in economy since 1991 at least. It does not matter who is in government. Economy is behaving the way it would behave even if there were President’s Rule. Unless there are fundamental changes in policies, economy depends on environment, and not on government.

2. In an ideal scenario, we assume that a stable economy will grow at exactly same rate as last time-period. When the actual rate exceeds, we say government is good. When it falls, we abuse government for ruining economy! Reality is that the probability of getting exactly same number twice on a real number space is exactly ZERO.
All this debate and fight is time-pass.

3. Another irrationality is to pursue some very approximate misleading numbers like GDP. Ask most people who praise or abuse governments this question – why should GDP be taken with such paranoia? How can one number capture all the finesse and complexities and long term vision and happiness in economy?

Truth is GDP is just a convenient number – often nothing to do with actual economic robustness. Inflation rate is another such simplistic number.

Irony is that most governments and analysts end up just tracking these and few more simple numbers.

They are good, they give something to measure. But just because something about you can be measured does not make it represent you. Creatinine level shows how good your kidney functions. If it is high, it means permanent kidney damage. I had it few months ago. Kidney specialist recommended dialysis and what not. Had thorough ultrasound done. Came out that kidneys were healthier than normal. What was the cause? Turned out that I was doing extreme workouts. Muscles would break and raise creatinine levels. To end all speculations, I stopped workout for a few weeks. Levels came back to normal!

Every professional athlete has this fictitious creatinine alarm. And yet many nephrologists will not know because they mostly deal with serious kidney cases and not healthy athletes.

Bottomline is that – to conclude government is doing horrible because some numbers came low is unreasonable. It may be doing good instead if you look at complete picture and not such one number. Vice versa is also true.

4. I do believe Indian economy has some fundamental flaws. I firmly believe we have been pursuing a wrong path for economic growth since 1991 (and in fact since 1950). To me, economy is all about wealth-creation. Wealth is not just goods and services you sell now. It is the intellectual property and competitive advantage you create in short, medium and long run. It is the dependency you create for rest of the world on what you can offer. It is also about being self-reliant in internal matters.

This vision cannot be pursued by smaller economies. But India is a world in itself. Even if earth was cut to size of India with zero dependence on rest of the universe, India would comfortably sustain itself. We have everything whole world needs. Apart from, probably some hobby items.

Also, India had a unique regional self-sustaining ecosystem – clusters of villages and towns meeting all major needs. This is a wonderful concept. Reduces costs, creates immunity from larger shocks, and yet provides that linkage with rest of the nation and world.

Our economic vision should be honest to our realities
– self reliance
– creating dependencies
– creating internal immunities via micro-self-sustaining ecosystems

5. Unfortunately, these nuances get swept away in pursuing big approximate misleading numbers. We pursue self-defeating paths. We get desperate to create employments and invite every junk company to pollute us. Instead of creating dependencies, we become dependent. We do not pursue a roadmap where employment is created not to strengthen some time-pass foreign company, but strengthen our own nation. We refuse to create dependencies.

6. Another defeatist approach is to rely overtly on tax. It is like trying to generate electricity by putting windmills on highways that move when vehicles run. The problem is that electricity is generated at cost of increase wind resistance for vehicles. Many scientists tried such models that look awesome on paper, but failed miserably.

These GST, Demonetization are fine, so far they do not impact ease of doing business. It is a myth that black money is villain, or not paying tax is greatest sin. What about tax-free economies?

If we are really honest about tax-collection, the first and only step needed is to simplify the tax-laws. Why do you need CAs to do special courses to understand Indirect and Direct taxes? Why not make it a simple flat rate that anyone who has passed class 5 can calculate?

The government that does it will be a brave government, in my perspective.

Keep things simple and straight – no complex rules, no special incentives, nothing. One simple rate for either direct or indirect tax. And make it mandatory for everyone above a certain income.

7. If after this, people still try to cheat the system, live with it or find other ways to address it. But not at cost of complicating ease of doing business. Whenever you make complex rules for GST or demonetization, it only impacts the small ones. Big fish always finds jugaad.

8. Pareto law talks of 80:20 rule. Target 20 percent for your 80% benefits. Not vice versa.

9. I agree with Swamy – increase FD rates and reduce loan rates. That is a way to have more liquidity and incentivize wealth creation. Eliminate income tax so that people can focus on wealth-creation

10. Ideally, laws should be simple to need no CAs unless you are a multi crore company. That would be good use of CAs and motivate people to start business. Be liberal about it. Accept that entrepreneurship means failures and even attempts to beat the system. Encourage that so that innovations can come out.

11. Cashless is not king, cash is not villain. Lets face it. Cashless also means more frauds and more dependence on things we cannot control. Go slow. Do own homework first. Put robust easy secure systems in place and people will automatically adopt it.

12. Many people evade tax because tax-laws are complex. Hassles in system are not worth it. And they do not see any benefits of giving tax around them. Putting danda on them will not work. Instead make laws simple, reduce dependency on whims of IT officers, and show government’s commitment to change things around them. People will happily pay tax and focus on generating more money instead of wasting time on saving taxes.

We must realize that almost all charitable activities in nation happen by same people whom are blamed for tax evasion. Cash is not bad. Tax evasion is a symptom. Real cause is something else.

13. I do not believe genuine efforts to revive economy will see results in 2-3 years. But someone must put efforts. And till then, ignore all this misleading discussion on blaming or glorifying governments for some GDP numbers.

14. I believe Narendra Modi has a genuine intention to revive the economy. I do not doubt his intentions. But I do believe he needs to shift gears from 1991 model of economy, and not miss the big picture in the noise that surrounds him. The economy model of BJP till 1996 was in right direction, and must be adopted without delay.

15. I am thoroughly convinced that economy can be totally transformed in 5 years in unimaginable ways. The current era of globalization and IT revolution is a golden opportunity for this.

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