More money than sense

Cropped Thinking 500x144Daniel Kahneman, the 2002 Noble laureate in economic sciences, proved that value is a relative concept1. Marketers of luxury goods are very successful at using Kahneman’s ideas. In the stores that cater for people with more money than sense, you will find at least one item that even the wealthiest won’t buy. Those highly overpriced items are there to establish the relative value, so that a $12,000 handbag, is a good deal in relation to the one placed ostentatiously in the center of the store, priced at $37,000. They make huge profits using that technique.

That’s until Oprah, believing she is the world’s wealthiest woman, wants to buy the $37,000 handbag. The store assistant has been told not to sell that bag – it makes the store a lot of money just sitting there – but she can’t tell Oprah that, so she says it’s not good value, and that Oprah can’t afford it.

Actually, the wealthiest woman in the world is the Queen of England, who is also a very astute businesswoman. It also helps that for most of her life she was not liable for tax. She only appeared on Forbes’ list of wealthiest people once in the 1990s, and immediately afterwards ‘arranged’ her affairs so that she never appeared on the list again. She certainly would not buy a handbag costing $37,000.

Perhaps that’s because she has more sense than money.

More at:
Daniel Kahneman, Thinking Fast and Slow
Oprah Winfrey ‘racism row’ a ‘misunderstanding’

  1. Daniel Kahneman, Thinking Fast and Slow chapter 16 []

Getting team India to win again – the plan

The situation today is not nearly as dire as the one that India faced in 1991. But the plan it should adopt must be as courageous as the one it took then.

Bureaucracy and corruption need to be faced head on. Like a cancer the solution is targeted surgery that removes the diseased elements quickly.

India’s reliance on foreign oil is also an issue that can be readily addressed. The country has huge coal deposits, and by adopting South Africa’s coal to oil technologies, there is a ready solution. Joint ventures with the large oil conglomerates who are desperately looking for new partners and will happily provide the skills India needs to develop its oil and gas reserves, which the Boston Consulting Group believes are the world’s 15th largest.

Nehru, India’s first prime minister, had the dream of renewable energy 60 years ago, using hydro electric power. That dream must be renewed, together with India’s huge potential for other renewables.

The controversial subject of nuclear energy needs to be balanced against the county’s desperate need for more energy.

The overloaded rail system will benefit from the sophisticated software that makes Switzerland’s train network the envy of the rest of the world.

There is a growing belief that rail is more efficient than road. With it’s huge population, India needs to expand its rail network instead of succumbing to the vested interests of the motor industry that have polluted the air and clogged the roads in so many other countries.

Technology is changing education, and Massive Open Online Courses (MOOCS) offers an opportunity for India to find a solution to the challenges of trying to educate 230 million students.

The broadband network will have to be expanded so that the whole population has affordable connectivity. And the students will need to have inexpensive tablet computers, that India’s education department is already distributing, on which to work.

India has a huge unexploited potential for tourism. But it needs to learn how to treat its visitors well.

India’s business people have already proved their skill in the international markets. By allowing foreign direct investment (FDI) into the country, they will be able to prove themselves at home.

India must swallow its pride and go to the markets to borrow the money it needs to invest in its economy. India’s government has taken a conservative view to borrowing, fearful that a dramatic drop in the value of the rupee will leave it unable to meet its debts. But the currency already reflects the world’s poor expectations. By surprising them, the country will be rewarded with a stronger currency and discounted debt. It will take a bit of courage, and strong leadership at the Indian Reserve Bank.

In Raghuram Rajan, India’s newly appointed head of the Reserve Bank, they have one of the world’s leading economists. In 2005 Rajan warned the world’s central bankers of the dangers of some of the new financial innovations. At the time they were a little disparaging of his views. Not so much now. No doubt he has quite a few of good ideas how to revive the Indian economy.

Let’s hope the Indians listen to him.

More at:
Getting team India to win again
Getting team India to win again – poverty
Getting team India to win again – infrastructure
Getting team India to win again – The 1991 financial crisis
Getting team India to win again – fiscal consolidation
A price worth paying
Ideas coming down the track
Opening learning
Out of the frying pan
Supermajordämmerung
The attack of the MOOCs
The screen revolution
Unleashing the Potential of Renewable Energy in India

Getting team India to win again – fiscal consolidation

Revenue
The fiscal deficit, the amount by which the Indian government’s expenditures has exceeded it’s revenues is 5.5% of GDP over the last 5 years. Over that same period the revenues have averaged 9.6%, so the fiscal deficit as a proportion of the revenues is 57%.Expenditure

In 2012-2013 India’s subsidies ballooned to almost ₹2.6 trillion (2.5% of GDP), almost 30% of government expenditure. The government’s decision to steadily reduce the fuel subsidy, at 40% of the total subsidy bill, was overdue, and will help the government towards it’s aim of fiscal consolidation. With 250 million Indians living on less than $1.25 per day, the food subsidy is sensible, but widespread corruption results in food not reaching the intended beneficiaries. Subsidies

India is allowing it’s demographic dividend to lapse. Young Indians are not getting the education required for them to compete against the youth from the other Asian tigers. The government is aware of this. It introduced an act in 2009 giving the right of education to every child, 50 years after the constitution said it should. But the fiscal deficit divides intent from achievement. There are 230 million Indian children aged between 6 and 14. There are not enough schools and teachers, or the money to pay for them.

Increasing taxes is also a challenge. The super wealthy are already taking advantage of the agreement with Mauritius, and the proximity of Singapore and Dubai to minimize their taxes. The nightmare that is India’s bureaucracy is already chasing away foreign investment, without adding punitive taxes to the list of disincentives. Taxes on tourists are so punitive that India ranks alongside little Switzerland for revenue earned from its visitors. Indirect taxes hurt the poor.

The government was relying on growth to save the day, and now that hope is disappearing fast.

In anticipation the 2014 election no-one is expecting a solution soon.

But India needs a plan – now!

More at:
Getting team India to win again
Getting team India to win again – poverty
Getting team India to win again – infrastructure
Getting team India to win again – The 1991 financial crisis
Getting team India to win again – the plan
A billion brains
A passage to Mayfair
A price worth paying
A tale of two villages
Asian Development Outlook 2013 pg190
Can India become a great power?
Cash, with strings
Made outside India
The Right of Children to Free and Compulsory Education Act, 2009
What a waste
Will India Be The First BRIC Fallen Angel?

Getting team India to win again – The 1991 financial crisis

The 1991 financial crisis in India is instructive. Having tried to save the embattled rupee, India was left with sufficient reserves to cover three weeks of imports and was on the verge of default. The newly appointed government approached the IMF for a $2.2 billion loan that would hinged on a set of conditions demanding that India reduce its budget deficit, open its markets to foreign competition, diminish its maze of licensing requirements, cut subsidies, and liberalize investment. India was also required to provide 67 tonnes of gold as collateral.

After a decade of decline, India was left no ‘soft options’, and the economic liberisation was the turning point. Manmohan Singh, the Finance Minister at the time and now Prime Minister, was credited with unleashing the ‘caged tiger’ that led to India’s sustained economic growth.

In a 2012 report in which Standard & Poor’s voiced the potential that India’s credit standing was on the verge of downgrade, they concluded “It would be ironic if a government under the economist who spurred much of the liberalization of India’s economy and helped unleash such gains were to preside over their potential erosion.1

More at:
Getting team India to win again
Getting team India to win again – poverty
Getting team India to win again – infrastructure
Getting team India to win again – fiscal consolidation
Getting team India to win again – the plan
Economic Crisis Forcing Once Self-Reliant India to Seek Aid
India 1991 Country Economic Memorandum
What Caused the 1991 Currency Crisis in India?
Will India Be The First BRIC Fallen Angel?

  1. Will India Be The First BRIC Fallen Angel? pg13 []