The war and its cruelty: A stark reality By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

The world is turning out to be an inhuman place filled with fear and hatred. Recently in the name of religion, hundreds of Iraqi’s citizens were killed. Several thousand were also displaced. A pitiable sight which is shown live on TV especially when women and children are sitting in the hot desert, not knowing when the Sunni insurgents will come on the scene and slaughter people. The same thing is happening in Ukraine where innocent people are butchered because of the political ambitions of Russia. We need to look at history to understand how the destruction and pain continue to persist. Jan 28, 1914, exactly hundred years ago, the First World War began in the Balkan town of Sarajevo. A 19 year old Serb nationalist, Gaurilo Princip fired fatal bullets at Archduke Franz Ferdinand, the heir to the Austro-Hungarian imperial throne and his wife. Within a matter of weeks, the leaders of Germany and Austro-Hungary used the assassinations as a reason to justify a war which grew to become what then was called as World War 1.

What happened? Before it ended in November 11, 1918, 37 million people were killed. The Ottoman and Austro-Hungarian empires were destroyed. The imperial throne of Germany and Russia crumbled into bloody revolution. One hundred years later, another region that has been forcibly held together for centuries by the British and later the Americans is on the verge of disintegration. Iraq and Syria were once prominent ottoman provinces are becoming slowly extinct.

The middle-east as we know today is an artificial creation by the Britain and the French through an agreement referred to as Sykes-Picot agreement. This created countries such as Iraq, Syria, Lebanon, Jordan and Israel. This was done much against the wishes of the areas Arab inhabitants. Within months of agreement, the war broke out and the British were fighting the insurgents of Iraq. The so called war lasted nearly 50 years until Saddam Hussain appeared on the scene.

America entered into Iraq in 2003 unsolicited and stayed until 2011. Nearly 250000 people of Iraq died in the war. Why would the US get involved in Iraq? Is it a fight to retain democracy? Hell no. Is it oil? Yes. The American senate and Congress are currently debating as to whether to reenter Iraq to maintain peace among the various religious sects. People who study history will clearly understand that any war initiated by an outside country will not be winnable especially if it is a civil war. Iraq is the second largest producer of oil and so is strategically important to the US and so are playing a role in the internal politics of Iraq.

The war among the various sects in the middle-east stated 50 years ago is an ongoing affair. So it will continue with for many years to come. The aspirations of Sunnis and Shias who live everywhere in the country will not rest until one is eliminated and in the end like in 1914 hundreds of thousands of people will have been killed for no other reason other than holding a different religious belief.

For the free world, it is the output of oil and the price per barrel is of concern. Death of fellow human being never mattered and never will. As it stands, the middle-eastern countries would keep buying weapons both from the US and Russia, by using their oil money only to kill each other, while in our parts of the world hunger and poverty will continue to ravage our citizens. Every time you put a diesel or petrol in your vehicle, think for a minute where the sale proceeds of your purchase is finally heading to. Of course to fight a war among themselves. Can any peaceful country make efforts to stop it? No, because there is money to be made out of the situation. With war, oil prices will continue to go up. Traders in oil will make a fortune. Defense contractors will enjoy the bonanza. The middle-eastern children in the meanwhile look to the sky to protect themselves from the US drone dropping on their head. This indeed is a stark reality of today. Finally, let us at least pray for a minute to save the lives of these innocent people.

Where have the good hearted people gone?

 

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Argentinian Bond: Default Lesson in History By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

Student: Sir, can a country default on debt? If so what recourse does the lender have?

Professor: Difficult question. But let us look at what is happening now. Argentina owes 2.3 billion dollars to foreign bond holders and has just announced that it cannot pay. This is the default on debt.

Student: Scares me. What happens to the country’s credit rating?

Professor: What can the country do? They simply cannot repay. Argentina has done this before in 2001. At that time, it froze all bank accounts, devalued its currency Peso. This lead to country wide riots and a recession followed. Now this time recession may not be the outcome but a hike in the inflation rate is possible which will lead to a hike in the interest rate. In fact President Cristina Fernandez Kirechner government has called the investors, to negotiate a settlement.

Student: This means what?

Professor: You can take Argentina to court. The investors know this and will accept settlement. This could include

  1. Paying off the debt over a longer period of time
  2. Reduce the payment amount by offering discount
  3. Lower or cancel the interest rate and revise payment
  4. Give more loans to ensure that the previous loan is returned

Student: Professor, should India worry?

Professor: Yes slowly, but we are getting there. The debt level around $ 430 bln is increasing but we have foreign reserves to pay the interest. As of now we have $ 310 billion dollars of which nearly $ 200 billion dollars is FII money which could move out if the stock market doesn’t produce the return they want.

Student: I will keep my attention to these developments. Thank you sir.

 

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Japan’s multifaceted crisis: Is there a solution? By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

Prime Minister Shinzo Abe is slowly running out of options to get his economy which is in permanent recession. The discussion between the professor and the student follows

Student: Professor, what seems to be the problem in Japan? Their GDP is struck around 5 trillion US $ for the last 15 or so years.

Professor: No, growth literally due to the host of problems. First is the issue of ageing population. Because the workforce is shrinking, by 0.5 percent, a year, nearly all growth must come from productivity gains. Labour is a serious problem here. How do you augment the workforce? Japan must persuade women and pensioners to get back to the job. First the Japanese government is not enthusiastic about bringing more immigrants. With nearly 40 percent of the labor in the low paid jobs is not the cure all for the situation. Without action in this regard, the GDP growth rate will be around 0.5 to 1 percent. Second, Abe decided to pump the prime and wanted to double the monetary base with an inflation target of 2 percent. Last year Japan spent 110 bln dollars extra and this nudged the economy growth rate past 1.5 percent. But he also increased consumption tax from 5 to 8 percent and this is pushing the economy back into recession. The announcement of tax increase pushed the consumer to do front load purchase and this helped the GDP to grow by 6.7 percent in the first quarter. But it has since run out of steam. Third Japan decided to lower the corporate tax to 35 percent. This is to attract new investment which is not happening immediately. We need to wait and see. Fourth Japan has loosened rules for agriculture land ownership by breaking the stranglehold of the agricultural co-operative. So you see any government can go so far to revive the economy but the ball is currently in the consumer’s court. Will the Japanese change his or her life style and start spending to push up the economy? It remains to be seen.

Student: You think the government policies will work?

Professor: Hard to say. Pumping the prime pushed the yen from 78 to 104 to a dollar, a massive devaluation. The growth didn’t take off. They pumped in more money. The growth took off but started tapering off. They are trying hard to push the inflation up to get the economy out of recession. Having said that, Japan must accept now that it is a fully grown economy. They don’t spend much on defense probably that is where the solution is. Let us wait and see.

Student: Thanks Professor.

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Macro Economics: A dismal science By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

Student: Professor, in the class you mentioned that macro-economics is a dismal science. You didn’t mean it. Did you?

Professor: I meant. I will explain. Currently there is a civil war raging in Iraq. The Sunni insurgents are fighting a non-winnable war with the Shias. In the meanwhile, the output of oil in Iraq is dropping rapidly to fall below 3 mln barrels a day. The prices of WTI and the Brent Crude today are around 108 $ and 115 $ a barrel respectively. While the oil exporters are gloating over the price increase, the oil importing countries are hurting badly. As far as we are concerned, we spent $ 165 bln dollars on oil imports last financial year. Given the price increases, we will see both our trade and budget deficits piling up for FY 14-15.

Student: Is oil that important component in our inflation rate?

Professor: You better believe it. The government has a choice. The government can either pass on the increased cost directly to the consumer, in which case the rate of inflation will increase further. Alternatively, the government could continue to subsidize by increasing the budget deficit which eventually have to be paid with interest by your generation. Dr. Rajan has targeted to keep the inflation rate at 8% for FY 14-15 and 6% for FY 15-16. His target will be missed certainly. He may be forced to increase the Repo rate at a time when the economy is faltering.

Student: Professor, can the inflation rate go up?

Professor: It is difficult to judge.  We have a big supply chain between the producer and the final consumer. There are too many intermediaries including the transportation and warehousing. The cost of goods produced will increase at each level of intermediaries and the resultant final product cost at the retail level will have spiralled up significantly. You just need to look at the vegetable prices today. There are almost double as that of last year.

Student: Professor, they say that el nino effect will also be negative news as far as the rate of inflation is concerned. Is it true?

Professor: In the first three weeks of June, we have been told by the meteorological department that the quantum of rainfall for this period is 46 percent deficient. This will push up the cereal prices substantially. Besides, all cereal prices are correlated. If the price of rice go up, it will push the prices of wheat, Ragi, Bajra, etc.

Student: Sir I understand now why you call the macro economics a dismal science. We always believed in the traditional demand supply theory along with the price equilibrium. You are telling us now that there are things beyond that.

Professor: You must understand that macro economics is about the price giver and the price taker. When a scarcity is created due to a host of reasons, the price giver (For example, producer) is jumping with joy. He can push up the cost and pass it to the price taker (For example, consumer). This is a continuous process. There is never an equilibrium and everything is transient. We need to be prepared for these volatility. For example, if the civil war becomes a full scale war involving the Kurds, Sunnis and Shias across the Syrian, Iraqi, Iranian and Turkish countries, there is no telling how high the oil prices could go up. All predictions therefore should be accepted with a pinch of salt.

Student: Thanks for the informative session. I understand now as to why it is such a challenge to predict the future prices of any commodity.

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Corruption and Economic Growth By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

This is the ongoing conversation with Joe and Swami.

Joe       : I recently read ane Indian paper  in the internet which contained news mostly about scams, corruption and the court trials about accumulated wealth of individuals.

Swami: I am not fully informed on this topic. But it is clear that the amount involved is almost the size of GDP growth rate of India.

Joe       : Can you tell me why this is happening and how it is attractive as a news item?

Swami: Generally in India, the paper readers enjoy news that can create a conversational topic. Movie and corruption news is at the top of the list. We don’t talk much about the weather since it is always the same most of the time.

Joe       : Psychologically how do you justify corruption? Isn’t it shameful for an individual to engage in this?

Swami: We don’t view it that way. The other day I was in Singapore. In front of every immigration officer, there is a tray filled with candies and passenger, if they do desire, can take one or two for his or her personal use. But I saw an Indian lady, grabbing a handful of candies. I also saw the immigration officer noticing this with a big grin on his face. I found out later that she was a co-passenger in my flight. I asked her out of curiosity whether she was a low sugar patient and needed this amounts of candies to bring her sugar level to a comfortable level. She answered and I quote “I picked it up to distribute it to my grandchildren”. I said I understand but then I asked myself what I understood.

Joe       : Really. Why would you ask this question when it is not your business and what did you understand?

Swami: It was my impetuous behavior. I am always nosy and don’t get good sleep if I don’t get involved in other people’s affair. But I can explain to you as to why corruption is a big economic activity in India. If you have some patience, listen to me.

Joe       : Go ahead.

Swami: In India it is a common habit to save heavily to meet future expenditures namely for children’s education, retired parents upkeep and to meet ones retirement expenses. This is an enormous responsibility and the salary will hardly meet the current expenses. This puts a pressure to hoard. This culture of saving for the rainy day meeting different types of family obligation puts a great pressure on us to cheat wherever and whenever possible.

Joe       : Sorry to hear that. Can this not be stopped?

Swami: It is easy for you to say. Obama care takes care most of everybody’s medical expenses. Your social security system offers a decent sum of money for old people to survive and they don’t have to depend on their children. Your medicare program takes care of their medical needs. We do not have any social security program. So while in power, we use the opportunity  to gain some extra money by violating the rules and we justify saying that this is the only way to accumulate enough money to pay for our future expenses, says the civil servant. The politician spends enormous amounts of money for his election. It is not that every candidate wins the election and when it happens they try to amass as much money as they can. There is never an upper limit on corruption. They take away together hundreds and thousands of crores of rupees illegally from the government budget. The money taken away reduces our growth rate substantially.

Joe    : Now I understand. Thanks Swami.

 

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Indian Economy and the Railway Fare Hike By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

We Indians are the most optimistic people with a very high irrational expectation. We think that a public sector undertaking company can continue to do badly as long as the deficit financing is possible. Look at the case of the railways which is incurring losses in many crores every day and the earlier UPA government allowed this to continue. Finally, Modi government decided to bite the bullet and Jacked up the passenger train fares by 14.2 percent and the freight rate by 6.8 percent. The season ticket holders using the suburban trains have been asked to pay nearly twice the amount for their monthly season tickets.

Why did this have to happen? The new government was expected to bring down the cost of living including travel. Those who believed this are completely out of touch with reality. Our railways are in a big financial stress. They are strapped of cash. Their effort to use the public-private partnership to raise revenue for them has not worked well. The question that should be asked is how to run the trains without adequate financial support. Mr. Chidambaram’s budget provided 30000 crores in the vote on account budget. Obviously this is not enough. Why? Nearly 70 percent of the budget is already earmarked for salaries. Further the measure of operating expenses as a percentage of revenue has gone up to 90.8 percent of revenues as against the expected 89.8 percent in FY 14-15. This is primarily due to the increased tariff on electricity.

When the hike was announced, the opposition parties raised an alarm in a chorus. They know well, that the railways require huge investments outlay to upgrade the signaling system and to strengthen the railway tracks.

What then is the lesson for a common man?

  1. There is no free lunch. In order for the trains to run we need to increase the revenue through higher ticket prices and freight rates.
  2. If the increased cost of running the trains is not reflected now, it will have to be done later. At that point in time the travel cost will have to move up significantly higher.
  3. Don’t blame the present government. They are only trying to bring the reality home.

Even after the increase, the Indian railway travel costs are miniscule by the global standards. It has one of the biggest networks in the world and we citizens enjoy our travel immensely and hence the volume. Let us not become peevish and in fact, we should be willing to pay the price which is required. If sufficient funds are not allotted, there will be a major compromise in the security and the quality of service. Let us accept the price hike without complaining.

There are certain things the railways can do to enhance its revenue. They can for example add a compartment with 50 to 100 seats to each important train and offer the seats in auction. For example, an airline ticket becomes very costly, if the ticket is bought near to the travel date. The highest bidder should be allotted the seats. To improve the utilization of the compartments, they can develop a turnaround model by minimizing the travel time between destinations. This will increase the number of trips the rolling stock (compartments) can be used during the financial year and hence higher revenue. The airlines in India are already doing this.

The basic motto in all pricing activities is at least to recover the operating cost by periodically adjusting the fares. The price of ticket closer to travel should become more expensive and market driven. Also there must be an end to all subsidies and the railways must build a sinking fund to replenish the trains and for maintenance of tracks. They can issue bonds, name it infrastructure railway bonds and use the proceeds for improving the productivity and efficiency of services. Some public-private sector partnership will go a long way in this regard. The railways can also bring in FDI.

 

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The continuing saga of Iraq civil war By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

This is an ongoing conversation between President Obama and the Secretary of state Mr. John Kerry.

President: John, do you think that it is a good idea to talk to the President of Iran? After all we have a shared common interest in Iraq.

John    : I don’t think it will be easy to have a meaningful dialogue with the president of Iran. We have already called his country “axis of evil”. The middle easterners are strongly emotional. They will remember our remark for a long time. Sir, we need to really look into the intentions of Iran before we talk to them. Our dialogue needs to be carefully calibrated to understand where they come from.

President: Where do you think they come from?

John    : Sir, I have this hypothesis. In the middle-east religion and its practice occupies foremost and the country comes only after that. The middle-eastern people are mostly Shias, Sunnis and Kurds. Their infighting is always related to creating a caliphate, a state where their religious practices could be continued without the others bothering them. The Shias and Sunnis haven’t seen eye to eye on any issues over their long history. They are born fighters and will sacrifice their life for the cause of their religious belief. Now why is this relevant?

The Sunnis (ISIS) are coming after Mr. Maliki, the current Prime Minister of Iraq who is a Shia. Mr. Maliki, since in office for the second term has treated the Sunnis badly and expected them to be meek. Yes they were for a while. After all Saddam Hussain, a Sunni was their leader and he bestowed all good things to them. We killed Saddam, destroyed his party Baath and installed a Shia leader. We dismembered the army and created a new army committed to preserving the Shias majority. But these soldiers had mixed feelings about their role and so was not seriously committed to defending the country. They ran for their life when attacked and gave up their military postings. Sir, you see the Sunnis onward March to Baghdad is intact and so we can expect a big battle in the next few weeks.

President: You mentioned about Kurds. Who are they?

John    : Sir, Kurdish Regional Government (KRG) manages rich oil fields. They earlier seized power and captured Kirkuk, a major city in Baghdad. Mr. Masoud Barzani, the KRG President has long coveted Kirkuk which is seen by many Kurds as their Jerusalem. After Saddam Hussain, they bickered over how to share the ostensibly federal wealth. However most of Iraqi’s valuable oil fields are located in the South and currently controlled by Shia.

President: You are adding a new dimension to the Sunny Shia conflict.

John    : Kurds story involves Turkey. Turkish Kurds, a very large number want to be a player in the dialogue is if there is any between the Sunnis and the Shias. Mr. Ahmet Turk, a Kurdish nationalist, a major of the border forces, wants to have a tête – a – tête with Mr. Maliki regarding the share of land and resources.

President: As I see it, there are many countries involved directly or indirectly with this resurgency.

John    : Yes sir. The players with whom we need to discuss have different agendas and they have strategies to achieve them.

President: It is late in the evening and so we will continue this conversation as I need time to assimilate it. Good night.

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