The Banality of Corruption

Hi all,

Reproduced below is an email I had sent originally to an egroup of my ex-colleagues from the State Bank of India (sbi91@googlegroups.com) and later to my school egroup (loba83@yahoogroups.com) and other friends on 12 June 2011. This has been taken from my Gmail "Sent mail" archive (and therefore is verifiable).

Incidentally, I had first talked the idea of "inclusve loot" in my blog post titled 'Inclusive growth and its necessary corollary “inclusive loot"' dated 20 December, 2010 which can be read at this link:

http://ranjansr.wordpress.com/2010/12/15/inclusive-growth-and-its-corollary-%e2%80%9cinclusive-loot%e2%80%9d/

The difference between the above post on Wordpress and the later email version dated 12 June 2011 was the introduction of the idea of banality of corruption with a reference to Hannah Arendt's "banality of evil".

Today (7 October, 2012), I happened to come across an article by Udayan Namboodiri (posted on 7 December, 2011 on the website of the newspaper Pioneer) titled "The banality of evil" which also looks at corruption from the perspective of "banality" and which also makes a reference to Hannah Arendt.

In this context, as will be apparent from the time sequence given above, I had first referred to Hannah Arendt (in the context of the "banality of corruption") in my emails to my bank and school egroups on 12 June 2011, i.e., well before publication of Udayan Namboodiri's article in Pioneer. (Incidentally, about 80 odd people in all would have received this email (reproduced below) and many would probably still have it in their inbox archive.)

Therefore, I can confirm that my reference to Hannah Arendt and the extension of her idea to corruption was not borrowed from anywhere else. However, I also notice that the term "banality of corruption" itelf has been around for some time (a cursory google search shows it was used as early as 4 January 2006 ( http://econlog.econlib.org/arc... ) suggesting that many others have made the same connection.


Best regards,
Ranjan Sreedharan

---------- Forwarded message ----------
From: Ranjan Sreedharan
Date: 12 June 2011 11:28
Subject: Inclusive loot as the other side of inclusive growth
To: sbi91 sbi91@googlegroups.com

Hi all,

Some time back, I had talked about the link between inclusive growth and inclusive loot. Since then, I've developed the idea further and now it's become a full fledged article. Some of you here who have been casually following my posts in this forum would perhaps believe that the reason I keep predicting dire things for India is because of NREGS. That would be a mistake. The fact is, there have been a lot of things going wrong with the UPA government, which I keep summing up under the umbrella term "intelligence deficit".

Besides, a common deficiency in the way our debates on economic policies are conducted has to do with a failure to understand that good policies take time, say, three and four years, to be revealed as "good", while bad polcies may appear "good" for one, two and even three years, but usually not beyond. (An exception is land reforms which appeared "good" for about 30 years).

Anyway, in this article, I take a look at one of the larger forces that have been unleashed in India over the past few years, i.e. corruption. I argue that given the core philosophy of this government, corruption is a very natural outcome, that there really is no cause for suprise.

I welcome your comments.

regds, ranjan

Inclusive loot as the other side of inclusive growth

Ranjan Sreedharan

Notwithstanding the general consensus in India, the idea of inclusive growth is a fallacy, even with its powerful tug at the heart in ways that makes us all want to believe in it without troubling ourselves too much by having to dissect its logical foundations. We are happy that it makes us happy because we feel this warmth in the heart and that warmth itself becomes a delusional destination. It is delusional because in the realm of economic policy, the only thing that ultimately matters is the long term consequences of the policies that you happen to put in place. The original intent behind the policy is ultimately irrelevant. For instance, the original intent behind socialism was that workers of the world should unite and create a “worker’s paradise”. That the reality it gave birth to had no correspondence with the original intent is well known and to this day remains one of the greater tragedies of recent history.

The idea of inclusive growth is flawed because it presents a choice that is just not there on the table in real life. The only available choices are between fast growth and less fast (or slow) growth. In practice, inclusive growth can only mean slower growth compared to your potential. This is a point I have already dealt with in detail in my essay, “The fallacy of inclusive growth”.

Recent events in India have added a new dimension to this debate. Is all the talk about inclusive growth a mere façade for “inclusive loot” by a class of self-serving politicians? Or, is it that even if the original intent was not so, things are turning out this way?

Now that there is a fair amount of evidence, the logical link that binds the two together is not hard to figure out. Inclusive growth is necessarily about spending huge amounts of public money on welfare, ostensibly with the aim of doing good to the poor of the country. At the same time, it is common knowledge that higher outlays on welfare are accompanied by greater pilferage and more money lost to leakages. In simple terms, the more money you spend, the more it gets siphoned off.

However, this is not the end of it. A little thought would suggest that given the context of how governments in India function, when you double the expenditure on welfare, corruption would more than double because the level of oversight and control that can be exercised over how the money is spent is not simultaneously doubled. For example, where an efficient set-up restricts pilferage to 10 percent out of a budget spend of, say, ten million rupees, the same set-up would likely see a 15 percent siphoning off when expenditure doubles to twenty million rupees. In the doubling from ten to twenty million, the amount lost to leakage increases more than proportionately from one to three million rupees.

There’s also another powerful reason why, given time, this would indeed turn out to be the case. No one is born corrupt. People become corrupt for a variety of reasons, perhaps most important being that when we see the many examples around us of people who are corrupt and merrily getting away with it, it conveys a seductive message that there is an easy way to an easy life, well worth the “minor” risks.

Link it further to the environment created by an activist government where spending on multiple“welfare” schemes is forever on the rise, which generates ever more examples of people around you who are “merrily getting away” with it. Corruption now becomes a self-fulfilling prophecy. Mrs. Sonia Gandhi was recently heard bemoaning the “shrinking of the moral space” in India’s political class today. Actually, a lot of it is intrinsic to the path she has laid out for the country and therefore is of her own making.

The German-Jewish political theorist Hannah Arendt coined the phrase “banality of evil” to describe the actions of the Nazi war criminal Adolf Eichmann. Conventional wisdom was that evil men do evil things. Hannah Arendt offered the insight that there are occasions when evil can also be a function of thoughtlessness; particularly the tendency of ordinary people to obey orders and conform to mass opinion without critically thinking about the consequences of their action or inaction (Wikipedia). In the same way, I believe there is also a “banality of corruption”that takes it beyond the simplistic notion that corruption is a stand-off between the uncompromisingly honest versus the fundamentally dishonest. It is not. In real life, it is more often about ordinary people conforming to prevailing standards of a lax morality, untroubled by their conscience because even the conscience operates within a frame of reference. This is to say that in a tribe of cannibals, the individual cannibal will never ever suffer the pricks of conscience.

Now, despite all the leakages, the money spent by the government does give rise to a sizable constituency of free riders who are privileged to live off the handouts from the government. Sooner than later, between the free riders and the looters—whose numbers are also substantial because loot takes place at the bottom of the pyramid as well—the numbers swell into a critical mass that becomes a powerful vested interest dedicated to maintaining the status quo, no matter what the larger costs to the country are.

This then becomes a reform-resistant country where the cracks (when they appear) are promptly papered over and bad policies keep piling up because any kind of course correction would involve making too many people unhappy. And since economics based on delusion has a strictly limited shelf life, matters cannot go on like this indefinitely. Typically then, reform-resistant economies wake-up into a nightmare with a full-fledged crisis on hand which now makes reforms imperative. All of a sudden, the political will to carry out reforms is also easier to muster.

By this logic, India would soon be running into another “1991” moment, maybe not so severe, but serious enough to give rise to the next set of real reforms, as opposed to the tinkering at the edges that passes off for reforms these days. And yes, all the recent talk about our deteriorating “macro-economic fundamentals”has to be seen as the beginning of this process of heading into a wake-up call; another 1991 moment that will force our hands into the next set of far-reaching reforms.

INDIA’S LEFT LIBERALS AND ITS SELF-HATING LEFT LIBERALS

INDIA’S LEFT LIBERALS AND ITS SELF-HATING LEFT LIBERALS
By Ranjan Sreedharan, April 14, 2012

This post is about the class of left-liberals in general and the ones in India in particular, because these days they are ones who call the shots.

In essence, left-liberalism is an economic world view that starts off by beating one’s chest and wailing out loud because there is so much poverty around. It ends by prescribing solutions that tend to be the same, no matter which part of the world you live in. It is the “duty” of the government to step up and provide free food, jobs, education, income, healthcare—you name it— to whosoever needs it, and that all this can be done easily if only the government would lean harder on the rich. After all, don’t the rich enjoy so many undeserved benefits from the government anyway? Of course, between the starting point and the end point it generates a lot of verbiage as well, but all that can be safely ignored.

Within this left-liberal class, there is a sub sect, the class of the self-hating left-liberal. How do you know you hate yourself? Here’s a test. Imagine you are in a crowded public place and someone out of nowhere lands a hard punch right into your face. And your response is, “Oh, I’m sure I must have done something that caused the offence. Maybe, something’s wrong with my face.”

The self-hating left-liberal looks at all conflicts and all crimes from an underdog versus top dog perspective and further holds that the historical underdog—once identified as such—is never wrong. In other words, in all conflicts, the blame lies invariably with the side identified with the top dog, the dominant side, the majority etc. In a criminal act, if the perpetrator happens to be from the underdog class, without doubt the victim is to blame. If the evidence is overwhelmingly to the contrary, be sure there are extenuating circumstances to explain why the perpetrator behaved the way he did. Of course, part of the delight of being a self-loathing left-liberal is a perverse pleasure in knocking down and demeaning your own people. After all, it is easy to convince yourself that you are being fair and dispassionate when you are harshest on your own kind. Isn’t the tendency to overlook the faults of your own people and lay the blame on others an all-too-common human failing? The self-hating left liberal therefore seeks to rise above this commonplace fallacy by going overboard, to the other extreme. The preferred narrative is that the fault is always ours, we are the ones to blame, and never “they” who’ve been the historical underdogs.

Not surprisingly, India’s left-liberals and their self-hating kindred go ballistic when the talk is about the riots that followed Godhra (which is a valid concern) but curiously, they would continue to cherish the belief that the train caught fire by a process best described as “self-combustion”.

Internationally, the most prominent example of a self-hating left-liberal is Noam Chomsky (professor of linguistics at the MIT) who traces all the ills in the world today to America and the deviousness of its successive presidents and governments. In India, the best example that I can think of—someone who runs ahead of even Arundhati Roy—is a frequently published international writer and journalist by the name Pankaj Mishra. He’s a good writer—incidentally, left-liberals are often good writers—and I’ve seen him on the NYT, Guardian and Bloomberg websites. I also understand he has a ready audience among the state controlled newspapers in the Gulf for obvious reasons.

I first noticed him sometime after the year 2000 when the Indian Express published a full page “expose” authored by him. It made the startling claim that the massacre of thirty-odd Sikhs at the village of Chhitisinghpura (J&K) in 2000 was actually the handiwork of the Indian Army, with the intention of maligning the militants. Recall that the year 2000 was before 9/11 and Pakistan’s role in fomenting terrorism was far from being the open and shut it is today. Those were days when we were desperately trying to make our case against Pakistan to an international audience that was still sceptical and it was a hugely damaging piece.

Looking back, we now know there was no shred of truth in his claims, but, at a delicate moment in our history, he damaged our credibility. Since then, his political writings have continued in the same vein, generally shedding copious tears at the plight, variously, of the poor, the minorities, the caste oppressed etc. with the recurring theme that the Indian state always represents elitist or corporatist or upper caste interests.

Not surprisingly, the greatest harm caused by the self-hating class is to the country’s minority population who end up with the facile notion that this lot actually speaks for their interests. And that is another fallacy. True friends stand for me when they also have the courage to tell me the truth when I go wrong. If someone flatters me insistently, tells me I do no wrong, can do no wrong, that all my problems have roots in conspiracies hatched by “them” who are my enemies, surely, he’s up to no good!

At the same time, there’s no denying that in a democracy the deluded left-liberal has as much right to his delusions as anyone else. But the truth is also that when left-liberal delusions run rampant and take over the national psyche, the entire country suffers, as India suffers now. So, what can be done about it? For an answer, we only have to go to America and look at how that great country has so effectively addressed the issue. For instance, Noam Chomsky is considered one of the foremost intellectuals in the world today. The left leaning British newspaper Guardian had once compiled a list of the leading intellectuals of the world and Chomsky was at the top. But go to America and the overwhelming majority of Americans have not heard of him. What is happening? Well, the truth is, as far as the mainstream American media is concerned—and it reflects mainstream opinion in America as well—Noam Chomsky does not exist. Between 1995 and 1997, I spent two years in America with a subscription to the New York Times and the New Yorker and I never heard his name. In contrast, a Chomsky in India would have monopolised our television airtimes and every evening, countless Indian middle-class homes would listen in rapt attention to his self-flagellating drivel.

I mentioned in passing that left-liberals tend to be rather good writers. It’s certainly true for India where most of them have come to their ideology after a start in literature and the fine arts where you are obsessed by aesthetics, and where the quest is for beauty and justice. In contrast, economic right-wingers have little interest in outward appearances. They don’t care for beauty because their priority is to try and figure out things that work (as opposed to things that don’t work) and what is the efficient way (versus the inefficient).

The left-liberal quest for beauty, symmetry and justice has absurd implications when carried into economics. Here’s an example. Imagine you’ve been made to hold up one your hands for a long time. It hurts a lot now. The simple remedy is to just bring the hand down. But the left-liberal will not stop here. He will say that the left hand has suffered for so long that in the interests of justice and equity, the right hand too must be held up for an equal length of time. In the meantime, it never strikes him that it is your own body that suffers. With all the passion he brings to the cause of justice, he’s only too happy to inflict more pain on you.

As I’m fond of repeating over and over, delusional thinking and left-liberalism go hand in hand.

Inclusive growth and its corollary “Inclusive Loot”

I have always been suspicious of this whole idea of “inclusive growth”. In fact, one of my essays is titled “The fallacy of inclusive growth” where I make the point that you only have a choice between fast growth and slow growth and that in practice inclusive growth can only imply slower growth as compared to your potential. Recent events in India have added a new dimension to this debate; we now have to seriously consider whether “inclusive growth” is just a façade for “inclusive loot”.

Now that the evidence is out, the logical link that binds the two together is not hard to fathom. Inclusive growth is all about spending huge amounts of public money, ostensibly with the aim of doing good to the poor of the country. In reality, the greater the outlay on such schemes, the greater will be the pilferage and the money lost to “leakages”. In other words, the more the budgeted expenditure, the more the money that gets siphoned off.

However, this is not all. A little bit of thought would suggest that when you double the expenditure, the scope for pilferage would more than double, simply because the level of supervision and control that can be exercised over the money spent cannot be simultaneously doubled.

What this means is that when government spending on any particular scheme is doubled (and in these days of the Sonia raj, there is so much of doubling and tripling all around) it cannot be accompanied by a doubling of the monitoring mechanism or the systems and procedures in place to check corruption. Therefore, where an efficient set-up restricts pilferage to 10 percent out of a budget spend of, say, Rs.10 lacs, the same set-up would see a 15 percent siphoning off when the expenditure doubles to Rs.20 lacs. In this example, in the journey from a Rs.10 lakh spend to a Rs.20 lakh spend, the “outflow” increases more than proportionately from one to three lakhs.

Incidentally, I believe I may have framed a new law of corruption in government circles, call it Ranjan’s law of corruption in public spending.

Expressed in the form of a simple scientific forumula it says: Inclusive growth = Inclusive loot (with a minor time lapse)

India's inflation problem and the elephant in the room

There’s a lot of talk in the Indian media about why inflation should be so high and the general consensus seems to be that last year’s poor monsoon is the culprit.

Is there an elephant in the room here that we all refuse to see? I mean, isn’t there a link between the high inflation that we are seeing now (particularly food inflation) and the recent vastly increased outlays on social “welfare” schemes? Is it not best understood as the reverberations from that chest-thumping moment in parliament when finance minister Pranab Mukherjee got up to declare so grandiloquently that for the first time, India’s budgeted expenditure would cross Rs.100,000 crores.

Take the example of all that money going down the NREGA drain. This has the immediate effect of injecting a lot of extra purchasing power into the economy without doing much on the output side (neither the short nor the long term). Naturally, inflation follows and this should be a no-brainer. And if you look at the kind of activities financed by the NREGA, they are actually not very far from simply digging trenches only to have it filled up the next day (all in the name of “employment generation”).

A while back I read a news story purportedly about the “success” being achieved by the NREGA. It mentioned that farmers in Punjab were facing a shortage of labour to harvest their crops because of a slow-down in the hordes of seasonal migrants from U.P. and Bihar that earlier used to turn up for this kind of work. And this was because the NREGA, by providing them work near their villages, had made the trip to Punjab less worthwhile. Yes, this is heart-warming stuff.

Unfortunately, economics has very little time for warm hearts. What is actually happening is this. Instead of doing economically productive work (harvesting crops), labour is being diverted into unproductive work (digging trenches), and getting paid in the bargain. It pushes up the costs for Punjab farmers, which invariably finds its way to the government in the form of higher minimum support prices, and it does nothing to increase output in the economy which might otherwise have absorbed the extra purchasing power created. Costs have gone up, output is stagnant, and at the same time, people have more money in their hands.

And this is just so much about what has happened. What is in store for us is perhaps even worse. Wait till the Food Security Bill and its promise of food grains at Rs.2 (or Rs.3) a kilo becomes law. The government will then necessarily have to acquire a lot more rice and wheat from the market for supply to the “poor”. A lot of it will get pilfered or wasted in the logistics and in the hands of the end-user (knowing what happens to things given away for free), and importantly, it will also cut down on the supply available in the open market for purchase by our “aam aadmi”. At this point, it is simple demand and supply.

Anyone who has a doubt about what I have just said should feel free to look up the inflation rate in Venezuela where our Comrade Chavez has lately been into a lot of social “welfare”. Okay, let me save you the trouble, it's close to 30 percent. Alternatively, you can go back in history and check out why Indira's "Garibi Hatao" was such a resounding failure. As a matter of fact, it had degenerated into "mehangai lao".

I believe one reason why America went into Iraq (remember 70 percent of America was with George Bush on this one) was that the lessons from Vietnam were about 30 years old and, on the whole, forgotten. In India, the national consensus about "inclusive growth" suggests we have begun to forget how we got stuck with a "Hindu" rate of growth. We are now due for another rude awakening

Health Care Reform Will Help Everybody

By Barbara O'Brien

Many Americans assume the new health care reform act will benefit mostly the poor and uninsured and hurt everyone else, according to polls. As Matt Yglesias wrote, “Basically, people see this as a bill that will take resources from people who have health insurance and give it to people who don’t have health insurance.” Those who still oppose the reform say that people ought to pay for their own health care.

We all believe in the virtues of hard work and self-reliance, but these days it’s a fantasy to think that anyone but the mega-wealthy will not, sooner or later, depend on help from others to pay medical bills. And that’s true no matter how hard you work, how much you love America, or how diligently you take care of yourself. The cost of medical care has so skyrocketed that breaking an arm or leg could cost as much as a new car. And if you get cancer or heart disease — which can happen even to people who live healthy lifestyles — forget about it. The disease will not only clean you out; it will leave a whopping debt for your survivors to pay.

And the truth is, we all pay for other peoples’ health care whether we know it or not. When people can’t pay their medical bills, the cost of their health care gets added to everyone else’s bills and insurance premiums. When poor people use emergency rooms as a doctor of last resort, their care is not “free.” You pay for it.

Another common fantasy about medical care is that the “free market” provides incentives for medical companies to develop innovative new drugs and treatments for disease without government subsidy. It’s true that private enterprise is very good at developing profitable health care products. But not all medical care can be made profitable.

For years, the U.S. government has been funding medical research that the big private companies don’t want to do because there is too much cost for the potential profit. This is especially true for diseases that are rare and expensive to treat. An example of a recent advance made possible by government grants include new guidelines for malignant pleural mesothelioma treatment developed by MD Anderson Cancer Center researchers. Another is a blood screening test developed by mesothelioma doctors like thoracic surgeon Dr. David Sugarbaker. The health reform act provides for more dollars for such research, from which even many of the tea party protesters will benefit.

The biggest fantasy of all was that people who had insurance didn’t have to worry about health care costs. But the fact is that in recent years millions of Americans have been bankrupted by medical costs, and three-quarters of the medically bankrupt had health insurance. And yes, insurance companies even dumped hard-working, law-abiding patriots. But the health care reform act will put an end to that, and now America’s hard-working, law-abiding patriots are more financially secure, whether they like it or not.

The irrelevance of the Scandinavian model

With America in crisis, there is a lot of talk about the alternatives to the American way. Even within America, people have begun to sit up and take notice of the way things are done in Western Europe. And some look wistfully towards the more egalitarian model of the Scandinavian countries.

As an outsider, and as an Indian, here are my thoughts about the Scandinavian model being the sensible way forward, in preference to the “crisis-exposed” American way.

At the outset, I must confess to some prejudices in favour of America. The fact is, even as I live out my life thousands of miles away from both America and Scandinavia, not a day passes when I am not grateful to America (and to Americans) for some aspect of my life that is now infinitely better thanks to their talent and creativity. I really cannot say the same for Norway, Sweden, Denmark or even Finland. (Disclosure: I make use of a Nokia cell phone but not Ikea furniture; I do not drive a Volvo car and have never been the recipient of a Nobel Prize.)

To begin with, the Scandinavian model of a comprehensive “cradle-to-grave” welfare state is financed by high levels of taxation with a steeply progressive income tax regime.

In terms of ethnic composition, these are all very homogeneous societies and generally closed to immigrants, especially from the third world. Therefore, citizens who pay out large amounts of taxes always have the implicit assurance that the benefits are going to their own countrymen. (Think of the reaction if India becomes a welfare state and word gets around that Bangladeshis are flocking in to claim benefits here.)

Besides, all these countries consistently rank as the top performers in the various surveys about levels of corruption, transparency and the efficiency of public services. Therefore, taxpayers in these countries have the further assurance that the money they pay is actually being put to good use, and not lost to waste and graft. In turn, this means there is far less resistance to the idea of paying more taxes.

It will now be obvious that the conditions existing as above are not those that can easily be replicated elsewhere. The model may therefore have less relevance for America and almost none for India.

From India’s point of view, there is the other issue that being an expensive model, it presumes the existence of a prosperous majority who can then pay for those who fall behind. In fact, any welfare state presupposes a minimum level of prosperity; you cannot go about building a welfare state on a foundation of unrelenting poverty. That should take India out of the picture (for the foreseeable future, at least) as far as following the Nordic footsteps go.

As for America, despite all the evidence of heartlessness in its workings, there is something special about this country I have only recently come around to appreciating. This is the idea that the idea of America is not just for the Americans, it is for every one of us.

In America, it’s called the “American Dream”. We know for a fact that this is not a carefully put up mirage meant to lull and buy peace with its underprivileged. Examples abound of people rising from the dirt and living the dream. And perhaps the most wonderful thing about the American dream is that it is open, in some degree or other, to just about everyone around the world. We know of so many ordinary folks in our own midst, born into modest circumstances and now living the dream in America.

As for the Scandinavian model, the last time I checked, I did not come across a “Scandinavian Dream”. And if there is one I happened to miss, I know for sure it’s not meant for me, my family, or my friends.

Critics make the point that for a wealthy country America’s social indicators are well behind those of its peers. There is a reason. When you have been letting in millions of the dirt-poor from all around the world, and with many millions more having let themselves in, averages—and social indicators are, after all, averages—are bound to suffer. A classic example is Germany today. During much of the eighties, West Germany was among the top European countries in terms of GDP per person. These days, Germany figures behind Britain and pulls in behind even Ireland. So, did the German economic miracle run out of steam? Not quite. In 1989, Germany let in about 17 million of its poor cousins from the former East Germany and the average has been depressed since then.

This is not to deny that the Scandinavian model takes good care of its own citizens. The American model takes less good care of its own citizens, but it also cares for millions of poor from around the world who were allowed in with honour and dignity. Every year, nearly one million immigrants to the country are granted American citizenships. This is over and above the fact that all children born in America, even to foreigners and illegal immigrants, are ipso facto American citizens.

The choice then is a no-brainer. If you happen to belong to one of the Scandinavian countries, yes, yours is the way ahead. For the rest of the world, it is the American way that holds promise.

And then, when you think of a Swede, a Norwegian, a Dane or a Finn, you think blond, and you think blue eyes. Think of an American, and you suddenly realize you just cannot think along these lines. To me, that is the explanation why the American Dream has such a powerful resonance across the world.

(This blog post was originally posted on another of my blogs in January 2010)

For a friendly EMI

(This article was published in the Open page of The Hindu dated November 22, 2009 and is available at the link: http://beta.thehindu.com/opinion/open-page/article53118.ece?css=print)

One of the reasons why ordinary people who survive on salaries have ended up borrowing so much from banks and financial institutions is the simplicity of the repayment mechanism that goes by the name “EMI”, i.e., Equated Monthly Instalment.

The EMI is a fixed payment amount made by a borrower to a lender at a specified date each month. It is used to repay both the interest and the principal each month so that over a given time period, the loan is fully repaid. In practice, the early instalments repay more of the interest component with the later instalments taking care of the principal amount. The advantage with the EMI is that the borrower knows exactly how much is to be paid towards the loan each month and this makes the personal budget easier to manage. When you get your monthly pay-cheque, you also pay out the EMIs on all the loans you would typically have taken, from the now mandatory home and vehicle loans to the sundry personal loans.

However, as much as the EMI has simplified the business of borrowing and repaying, it also wields an unwelcome and unyielding hold over your finances. The cheques have to be paid on the dot, month after month, no matter what contingencies stare you in the face. If the cheques bounce, you pay more by way of charges and penalties. Salary earners get paid roughly the same amount each month. But, anyone who runs a household would know that expenses are just not the same over the months. It could be the start of a school year when so much extra fee is to be paid out, or a festival like Deepavali when money goes up in smoke, as it were. In the West, this could be the extravagance of the Christmas shopping season or the annual vacation.

Flexi-EMI

Here, then, is a suggestion. Instead of insisting that EMIs be paid religiously every month, the banks can offer a “flexi-EMI” plan, where the borrower is allowed the right to default in one month of his choice every year. In return, the EMI amount will be proportionately increased so that the remaining 11 months will together amount to the annual repayment obligation. For instance, if your current EMI is Rs.1,100 a month, under the revised plan you will be required to pay Rs.1,200 a month for 11 months. The annual repayment in either case amounts to Rs.13,200, but the borrower will now be free not to pay anything during the one month — when you expect your finances to be under strain.

This is the basic plan, and from this starting point, variants can be devised. Thus, if for any reason someone wants a two-month default or “vacuum” option, it can also be worked out. Another version would be to offer the product in two options, one allowing a fixed month vacuum where the month in which the EMI is skipped is pre-defined and the other being a variable month vacuum option, where the borrower is free to choose when to skip repayment. Obviously, the second option will be priced a little higher because a beginning-of-the-period default has a higher interest burden.

Simplicity has a lot to do with why the EMI has become so popular. In that sense, the advantage with the changes I have suggested here is that even as the simplicity is retained, the customer is offered an additional convenience at no extra cost.

(ranjan.sreedharan@gmail.com)

America's secret competitive advantage is a dirty secret

What follows is the abstract of a paper I have e-published as a research paper on the website of RePEc (Research Papers in Economics). The full text is available at the link below:
http://mpra.ub.uni-muenchen.de/22024/

Abstract

The noted management guru Michael E Porter identifies seven unique competitive advantages for the U.S. economy to explain the country’s pre-eminence; they range from (among others) its environment for entrepreneurship, its institutions of higher learning, its technology and innovation machine, to its commitment to competition and free markets.

In this article, I argue that there is another critical competitive advantage exclusive to the U.S. that arises from its electoral system characterised by consistently low levels of voter turnout in national elections and with disproportionately large numbers of its poorest and least educated citizens not voting. I begin by looking at reasons why the poor in America vote in far lesser proportions than their numbers, and particularly, at the various formal and informal impediments that prevent voting by the poor. I then consider the impact this would have had on America’s economy and its competitiveness.

The core idea of this paper is that when an electoral process effectively filters out significant sections of the poor, the country would find it far easier to put in place (and sustain) sound free-market economic policies focussed on long term objectives with generous incentives for creation of wealth and with a tight leash on welfare and other entitlement programmes. I contend that America’s undeniably greater acceptance of the rigours of the free-market system is not (as is commonly believed) a product of a unique history or culture but, in truth, is closely tied to a discriminatory and exclusionary electoral system that has strong historical roots.

India's inflation problem and the elephant in the room

There's a lot of talk in the Indian media about why inflation should be so high and the general consensus seems to be that last year's poor monsoon is the culprit.

Is there an elephant in the room here that we all refuse to see? I mean, isn’t there a link between the high inflation that we are seeing now (particularly food inflation) and the recent vastly increased outlays on social “welfare” schemes? Is it not best understood as the reverberations from that chest-thumping moment in parliament when finance minister Pranab Mukherjee declared so grandiloquently that for the first time, India's budgeted expenditure would cross Rs.100,000 crores.

Take the example of all that money going down the NREGA drain. This has the immediate effect of injecting a lot of extra purchasing power into the economy without doing much on the output side (neither the short nor the long term). Naturally, inflation follows and this should be a no-brainer. And if you look at the kind of activities financed by the NREGA, they are actually not very far from simply digging trenches only to have it filled up the next day (all in the name of “employment generation”).

A while back I read a news story purportedly about the “success” being achieved by the NREGA. It mentioned that farmers in Punjab were facing a shortage of labour to harvest their crops because of a slow-down in the hordes of seasonal migrants from U.P. and Bihar that earlier used to turn up for this kind of work. And this was because the NREGA, by providing them work near their villages, had made the trip to Punjab less worthwhile. Yes, this is heart-warming stuff.

Unfortunately, economics has very little time for warm hearts. What is actually happening is this. Instead of doing economically productive work (harvesting crops), labour is being diverted into unproductive work (digging trenches), and getting paid in the bargain. It pushes up the costs for Punjab farmers, which invariably finds its way to the government in the form of higher minimum support prices, and it does nothing to increase output in the economy which might otherwise have absorbed the extra purchasing power created. Costs have gone up, output is stagnant, and at the same time, people have more money in their hands.

And this is just so much about what has happened. What is in store for us is perhaps even worse. Wait till the Food Security Bill and its promise of food grains at Rs.2 (or Rs.3) a kilo becomes law. The government will then necessarily have to acquire a lot more rice and wheat from the market for supply to the “poor”. A lot of it will get pilfered or wasted in the logistics and in the hands of the end-user (knowing what happens to things given away for free), and importantly, it will also cut down on the supply available in the open market for purchase by our “aam aadmi”. At this point, it is simple demand and supply.

Anyone who has a doubt about what I have just said should feel free to look up the inflation rate in Venezuela where our Comrade Chavez has lately been into a lot of social “welfare”.