Archive for March, 2012

West Bengal Budget: Kite sticks, balloons and browbeating

Tuesday, March 27th, 2012

Mint, 26 March 2012

The day after the West Bengal state budget was presented, Mamata Banerjee announced that her government would never burden the common people. “When we find it is absolutely not possible, we will seek alms from the people,” she said.

This sort of rhetoric is hardly new in West Bengal. In the 1980s, in the most bizarre economic development strategy I’m aware of, the Left Front government decided, after Central support was not forthcoming, to build a thermal power plant with “the blood of the people”. Literally. Thousands of citizens queued up and donated blood. How this was going to pay for the turbines remained an unexplained mystery (the plant was finally built with Japanese assistance).

But how was the Mamata budget, coming as it did, right after the partial rollback of the proposed passenger hikes in the Railway Budget? Well, on vagueness, it beat the Union Budget, and equaled it on the Micawber factor—hope that “something will turn up”, in Mamata’s case, that the people of West Bengal will get more honest about paying their taxes.

In the meantime, Didi quietly extracted another Rs950 crore from the Union government—cocking a snook at the Fiscal Responsibility and Budgetary Management Act (FRBA), which Union finance minister Pranab Mukherjee had stressed in his Budget speech 10 days ago.

Coming back to the Mamata budget, well, surprise!—it raised some taxes. For example, on luxury items like cars priced at above Rs10 lakh, and television sets with MRPs higher than Rs25,000. But finance minister Amit Mitra was silent on how much money he expected to raise through the rate hike. The only contentious issue is a proposed entry tax on goods coming into West Bengal from other states. The funds, Mitra explained vaguely, would be invested in “roads, infrastructure etc”. Logic indicates that this new tax would affect consumer prices, but Mamata vigorously denied that as a possibility. She pointed out that 19 states impose such a tax: “We’ve been giving money to our neighbours, so they will also now give us a bit.”

But a Mamata budget can always be expected to have its quirks. In a touching though economically baffling move, taxes were lowered on kite sticks and balloons! Empty gas cylinders have been exempted from VAT, and no one, not even the Finance Minister, has been able to explain how—if at all—this would benefit the LPG consumer.

Overall, Mamata and Mitra are relying more on tax compliance—an amnesty scheme for traders has been announced—than on higher taxes to generate more revenues. This may be rather optimistic, since the government missed its tax collection targets for last year of Rs27,690 crore by about 15%. But Mitra is hoping for a 30% rise in revenue collection.

The truth is that the Left Front left Mamata a state that was more or less bankrupt—today, its annual debt servicing bill comes to nearly Rs20,000 crore. About 94% of revenue receipts are spent just on salaries and interest payments. But Mamata also dug herself into a deep hole with her lowest-common-denominator promises. So her browbeating the Union government to raise West Bengal’s borrowing limit will get the state a breather. Mamata has also been insisting that since she has inherited—not contributed to—this high debt burden, the Centre should find a way to waive these loans or settle the debt. This is of course not possible, since, one, most of loans are market borrowings, and two, any such move by the Centre will open up a Pandora’s box the likes of which have never been seen.

But then, Mamata can’t be expected to bother about these details.

Kakonomics and the elephant

Tuesday, March 27th, 2012

Mint, 22 March 2012

Among books I have read recently, I must recommend—for those interested in the history or unique facets of Indian business—Kshama V. Kaushik and Kaushik Dutta’s India Means Business: How the Elephant Earned its Stripes (Oxford University Press). The authors have not allowed their clearly enormous research to bog down a narrative that begins from a Mauryan financial instrument called adesha (the progenitor of the hundi) to the present day, as Indian companies seek to become multinational corporations in the true sense.

Throughout, the authors seek to situate the “Indian” way of doing business in a changing global environment. For instance, the deeply ingrained concept of dharma and how it remains relevant to business thinking, especially among communities such as the Jains. We meet the Jagat Seths, bankers to kings and foreign traders, and without whose behind-the-scenes plotting, Robert Clive may never have won the Battle of Plassey. We see how the licence-permit raj created a politician-businessman nexus, and how that relationship has returned to centre stage in the era of coalition politics. We watch the rise of the information technology (IT) industry, principally due to the fact that the government ignored it, and how transnational firms integrated their Indian operations as a vital part of their global road map.

Much of this may be well-known or already extensively documented, but the authors have managed to paint a tight yet comprehensive picture in language that never turns academic (despite a 15-page bibliography). I would think that anyone considering investing in India would get the outlines of all that he needs to know from this one source. Kaushik and Dutta have also packed their book with case studies, from the venerable ICI (now Akzo Nobel India) to the astonishing story of Sunil Bharti Mittal, from cycle shop owner to telecom monarch.

But for readers who worry about the Indian economy, the authors pose some important questions. Why is India a laggard in innovation? Could our IT-ITeS bonanza turn out to be a bubble? Can India make the transition from labour-cost arbitrage to idea and thought arbitrage? And, finally, is India a sustainable dream?

I believe any attempt to credibly answer these doubts must consider a way of life that we are all familiar with, but didn’t have a term till now to describe it. This much-needed term, coined by Gloria Origgi, Italian philosopher of the mind, is “kakonomics” (the best translation of the Greek word “kako” is, well, “screwed up”)—the apparently strange preference for low-quality outcomes. Simply put, in a kakonomic transaction, both parties implicitly agree that both the product delivered and the pay-off will be low quality.

Rationality—and game theory—suggests that in any exchange, people want to receive high quality pay-offs. In fact, even a man offering a low-quality product would prefer a high-quality pay-off— that’s what hucksters are about. But kakonomics is the triumph of mediocrity—low-expectation exchanges about which no one complains.

Suppose a newspaper asks me to write a 1,000-word article but will pay me only Rs. 1,000 for it. If I agree to this (Rs. 1,000, being far less than I think I should be paid, is a low-quality pay-off), I’ll quite likely pick up chunks from articles I wrote years ago, string them together and knock the whole thing off in half an hour. So I provide a low-quality product, assuming that the newspaper would also not expect me to wrack my brains and spend six hours over the piece. In most cases, my assumption would be correct, and it would be a classic kakonomic transaction. We would have connived on a mutually advantageous low outcome.

But what if my piece goes to a conscientious editor who is unaware of the tacit agreement? She points out errors and requests a rewrite. I would see this as a breach of trust and refuse. She, being conscientious, may then offer to work on the piece herself and improve its quality. But I would still feel betrayed. For, I would now have to see the piece again in its final shape—after she has made her changes—and will possibly need to make some further changes from my side. Our well-meaning busybody is threatening the soothing mediocrity equilibrium that kakonomics provides.

For, kakonomics—cooperation for the bad—dispenses peace and stability for all concerned in the short term. It’s also equally obvious that in the long term, the outcome can only be bad. As Origgi puts it: “each low-quality exchange is a local equilibrium in which both parties are satisfied, but each of these exchanges erodes the overall system in the long run.”

We are proud of our indigenous ability of jugaad, but we should also see it in terms of kakonomics. Surely, kakonomics significantly affects almost everything around us. From our electoral politics to our business philosophies, from important life decisions to the most mundane of economic transactions, we constantly sign kakonomic contracts, faithfully maintain achalta hai harmony, and resent anyone who tries to rock the boat as disruptive and irrational.

It is essential that many of the big questions about India’s economic future are examined through a kakonomic prism.