Thursday, July 15, 2010

Who Wants to be a Gideon Gono

Dear Readers

These days there are talks about KBC, a game show on Indian TV based on famous "Who Wants to be a Millionaire". I thought we should think on bigger line and create a game "Who Wants to be a Gideon Gono". Don't ask me who is Gono, I can't tolerate ignorance of one of my favourite great characters that ever happened in human history. Here is a brief introduction first, anyways.

When it comes to managing economy the best of the best tend to do worst of their worst as the more one tries to control economy and natural market forces, the more it gets complex and out of control. However, despite being fully aware of this knowledge, there are people and institutions that do try their 'best' and end up in a mess. One such great in contemporary period is Gideon Gono - current Governor of the Reserve Bank of Zimbabwe (RBZ). He may not be in headlines for some time but he deserves at least a real Nobel Prize in Economics and National Money Management (in fact, they should add National Money Management as a new and separate category in Nobel) although he did manage to get Ig Nobel. I sincerely think he should at least (or we should, the followers and fans of Gideon) register a protest to Nobel Prize Committee and even accuse them of partiality for awarding the prize to Paul Krugman who is only a theorist and ignoring the real man - the man who practised more than what Krugman preached!

Gideon Gono's accomplishments are not small in any way. Some of his achievements include following:

  • increasing money supply by 20 MILLION TIMES! That's something! He managed to increase money supply in Zimbabwe from $45 billion to more than $900 QUADRILLION. That's no typo! And for those who never heard about quadrillion, one quadrillion equals 1000 trillion! so, 100 more quadrillions and it is QUINTILLION Dollars of money supply!
  • printing currency notes of $100 trillion!
Apart from Economics, he should be considered for a Nobel in Mathematics as well, for his contribution to the subject by making every Zimbabwe citizen learn to calculate astronomical figures on finger-tips. And kindly don't forget an important trait he possesses - he is God fearing and extremely religious person. Following piece from wikipedia describes my point - "Critics have noted that most of Gono's monetary policy statements in the past have had biblical references. Notably, he usually ends in policy statements to the Parliament of Zimbabwe thus: "In the Lord's hands, I commit this Monetary Policy Framework for our economic turnaround."   I apologize dear readers but I can't help. I am a die-hard fan of this great person.

Now, let us begin the game. All central bank heads of the world are potential participants but in terms of significance there remain only five - Ben Bernake of US, Jean-Claude Trichet of European Union, Mervyn King - man of the "Old Lady" of UK, Masaaki Shirakava of Nichigin of Japan and team Pranab Mukherji - Subbarao of India. Actually 'team India' is confused and playing this game as if it were "How to Become Prosperous with Inflationary policies" as they pretend to be 'worried' about inflation! The game is on and here is a running merit list for the time being:

He is also known as "Helicopter Ben" for the disclosure of his intention to throw money from helicopter to fight deflation. However, despite his enormous efforts he is so far unable to push up any inflation. He is actually worried about the Japanese Disease and has even tried monetizing, euphemism for printing dollars, not to mention zero-interest-rate policy. But, pundits like Mark Faber are sure he is the most likely candidate to win this game and one day make even Gideon Gono blush.

He is head of an entity that does not have much reliability as EU is more a political outfit than financial one. It was proved when last month Trichet took a U-turn in less than a week after pressure from strong EU members. He was against buying govt debt of countries like Greece by ECB and then when pressured reversed his stance. So, he is in this game but like a toothless tiger he can't do much on his own. 

He is one of the likely candidates to win this game. He is trying to push up inflation the 'best possible way' and does not seem to be worried too much. His advantage is the currency he deals in - Pound Sterling. His efforts to devalue pound are on and there is added advantage of a devalued pound - better numbers in their exports. At least that's what he and his political masters plan there.

He is doing the most efforts and his predecessors have been doing those efforts for about 20 years! If past 20 years record of failure in bringing up inflation is any guide then he is most likely to loose this game. However, if he may have some surprises up his sleeves, then he can be the dark horse.

Team India
Although India is not significant enough to be considered in this game as participant, the fact that India is a bigggg country population wise, gives team India a wild card entry to the game.
Pranab babu, the politician and Subbarao, the bureaucrat, are working hard but are confused. They are worried about inflation in India but at the same time their policies of higher taxes and lower interest rates / low CRR are leading to the other direction. Pranab babu even opened the pandora box of fuel-price deregulation and subsidy cuts at a time when food price inflation was already shooting up. Subbarao, though shouting a lot against inflation, is actually doing nothing, perhaps fearing a 'slowdown' in economy if he tightens too much. Or, it may also be possible he is under pressure from industry and ruling politicians. Whatever, one thing is clear - Team India is so far the leader in this game as inflation in India is running in two digits already and if they continue their 'efforts' they are going to win this game by a good margin. 

The Chinese refused to participate for unknown reasons. They hinted they would  better manage (read manipulate) the 'numbers' rather than participate in a silly game. 

The game is still on and it will be interesting to see who turns out to be the winner. Long live dear Gono.

Friday, July 2, 2010

Indian Reform Story - Oil in Storm

Dear Readers,

The govt of India decided last week to partially deregulate fuel prices as a step toward financial reforms which started widespread dissent among opposition parties as well as common people . India is a net importer of Crude Oil and it burns up a big hole in Indian budget every year. Govt of India subsidizes refined petroleum products like kerosene, LPG, petrol and diesel in the name of serving the poor and middle class people. Fuel is retailed mainly by PSU (Public Sector Undertaking) firms and these firms are compelled to take losses owing to this subsidy (there are measures taken like 'oil bonds' from time to time to offset some of the losses though). This is an important issue and I felt compelled to post my views on it.

Some Facts

let me start my analysis with some interesting facts about Indian Oil Story.

  • Petrol, Diesel, LPG and Kerosene are main fuels. Except petrol, the other three are considered 'fuel for common man' by political class. 
  • Govt of India controlled fuel prices till 2002 through Administered Price Mechanism (APM) and then after abolishing APM, it continued subsidizing 'sensitive' fuels. Today, losses incurred due to subsidy by PSU Oil Marketing Companies (OMC) is partially offset by upstream PSUs (ONGC, Gail etc) which is not sufficient enough though.
  • Taxes on fuel are very high but still well below European Developed Countries. These taxes, most of which are imposed by state governments, make a fuel cost about double its actual price.
  • India is one of the largest buyers of crude oil in the world (In 2009, India imported 2.56 million barrels of oil per day!).
  • Fuel subsidy costs about USD 40 to 50 million per DAY losses to just three major OMCs - IOC, BPCL and HPCL ! (this figure depends on USDINR exchange rate and so is changing all the time)
The Debate

After these facts its clear that crude oil import cost is a big drag on Indian budget. All this subsidy is in the name of poor and middle class citizens and so becomes politically tough issue. All parties when in opposition protest any subsidy cut, although if they were in power, they may well themselves find this subsidy a burden. Bajpai led NDA and I K gujral led JF have shown their intent to do away with subsidies when they were in power. So, all this protest is nothing more than cheap game of politics. Talking about common people, why would they like anything costly? They don't care about budget deficit or oil pool deficit, all a person wants is freebies - as much as can be taken.

Then it comes to taxes on fuel. Yes, its quite puzzling why does a govt subsidize something and then taxes it heavily. The petrol that costs about a dollar a liter to consumers, costs only about half a dollar before taxes! Why this nonsense? Well, whatever be the reason, fuel prices remain costly for Indian people despite subsidies.

Now, let us think about how these subsidies actually help the poor and at what cost. Subsidy is never a good idea as any item that is subsidized gets misused instead of getting to the 'poor'. Its an open secret that heavily subsidized kerosene is used first as an 'industrial adulterant' with diesel and then 'export item' for smuggling into Bangladesh which has higher price of kerosene. The poor hardly use it and the ration dealers who are authorized to sell kerosene only fill their ledger with fake sales(no wonder there is always a shortage of quantity). 

Similar is the case for diesel - the fuel of transport in India. Because diesel is subsidized, more and more people want to buy diesel powered cars and SUVs - net result? misuse. Also, it is used in power generators as there are frequent and long power cuts in most of India. 

Another heavily subsidized item is LPG and its also misused 'efficiently' by 'innocent' Indians. Commercial LPG users (restaurants etc) are required by law to use a non-subsidized version of LPG cylinder but they somehow manage to get the domestic version which costs almost half of what a commercial cylinder costs. Then, there are 'smart' car owners, who get their cars fitted with cheap LPG kits and use subsidized LPG cylinders for 'better fuel economy'. All in all, govt subsidies are helping all walks of life! (though that is not what it is intended to do).

There are three groups of people when there is a debate on fuel subsidy in India. First are those who think all fuel should be subsidized so that it remains cheap. Second are those who would not mind non-subsidized fuel provided govt reduce taxes on it so that in the end there is cheap fuel available. Third are the ones who dislike subsidies and actually want even more taxes on all petroleum (read fossil fuel) products. NOT SURPRISINGLY, I fall into third category.

Why We Don't Need Cheap Fuel

I understand many of my readers think I must be crazy, but I have my reasons. Let us first discuss the economics of fuel cost. Fuel is one of the most important ingredients in an economy and its price does affect overall production and consumption and thus economy as whole. If fuel is costly then industry has higher manufacturing cost for goods and higher running cost for services which makes goods and services costlier for consumers. This cost appreciation results in lesser consumption of goods and services which in turn affects bottom-line of businesses negatively. When businesses earn less, they employ lesser number of people which in turn means even fewer consumption of their goods and services. A vicious cycle starts and overall economy suffers. So, is that all about it? NO. Let me elaborate why its not exactly that way. 

First, if there is costlier fuel, people and businesses start consuming less of it and if it is left to market then reduced demand of fuel should result in lower cost. This is simple - law of demand and supply. Some people don't accept this logic as they say a lone attempt by a small country like India can not affect fuel prices as international demand for crude oil is much larger than that of India alone. These people are partially right but given the size of import of crude oil by India, I find there should be at least some pressure on international crude price. 

Second, and more important, I am an environmentalist and have openly expressed my feelings about greenhouse gases and anthropogenic global warming. India is FIFTH LARGEST CO2 producer in the world and most of this is generated by burning petroleum products. When govt of India subsidizes diesel and other petroleum products, it indirectly encourages global warming. This is a moral crime. There is no point in paying people to produce excess CO2. If these products are costlier than there are good chances people would use them judiciously. Also, higher cost of energy through fossil fuels means there will be more attention towards alternative fuels like solar energy and hydrogen fuel cells which are comparatively costlier today. What govt of India does to promote alternative energy? It subsidizes them too! This is ridiculous at best. A better solution is to keep high taxes on petroleum products and low taxes on alternative energy products.

Does this mean I want govt intervention? NO. I am never in favor of govt poking its nose in business affairs and economy and that's why I am against subsidies. However, if it has to be 'something' (and this is the case, govt will always want to do something) then let it be only a policy framework at the heart of which is discouraging fossil fuels and encouraging alternative energy. The best way is to let people decide for themselves and let market do its work independently and freely.

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