Fallacy of Theories – Financial Crisis

Recently, my class had a guest lecture in which the faculty was trying to impose “Books and Theories are non-relevanat and fail?” Does the proposition hold true in the present scenario? Do the propounded theories like Decoupling, Elasticity, Demand theory etc fail in the real world scenario? How can theory explain an sudden upsurge in Oil Prices? How does one interpret the sub-prime crisis?

Interestingly, the people behind  the crisis and the regulatory bodies around the world are well acquainted with economy and financial theories infact are the top brains in the field of economy and finance. Can we infer that the theories which underly the financial and economical markets are absurd and do not find relevancy in crisis situations?

My opinion on the questions put forth in the prefatory section is “NO”. The theories in existence today are relevant and can correctly define the fundamentals behind the crisis. However, its humans natural instinct of greed and fear that deviate the consequences of the policies from the intended consequences put forth by theory. Economy theories reject sub-prime loans,  very high risk ventures etc but it is the mans’ avarice that has caused him to follow actions which are not as per economy theory.

I believe that economy like any science evolves over a period of time. As economy evolves we shall discover the newer fudamental facts behind crisis which are not defined by the present theories.

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BUDGET 2008

Finance Minister will have myriad issues to address to in his last budget for the current government. Indian economy achieved an economy growth rate of 9.25% for the period 2006-07, incorporating measures for the sustenance of such growth in the coming fiscal would be a Herculean task given the slowdown cues in the world economy. For the current fiscal year there are many concerns like US slow down, rupee appreciation and forex reserve standing at 250 billion US dollars. Crude price hovering near to 100$ is indicating a higher inflation in the days to come. Fiscal deficit needs to be scaled down to 3% of the GDP.

Better infrastructure incentivizing measures coupled with revamps in direct tax rates and structure are expected from the FM. An excise of direct tax on corporate from 33.6% to 25% will incite the corporate world. A 45% growth in tax collection gives the FM leeway to ease tax slabs. Constant pestering from the corporate world about the FBT (Fringe Benefit Tax) can result in FM reviewing the FBT. Excise duty retrenchment is on the anvil as the duty is higher in India than the global benchmark for the duty. Banking and pension sector may attract more reforms. As a part of commitment of India towards Global Warming Reduction one can observe subsidies on equipments of alternative source of energy.

Being a minister cum politician cum an astute economist one can expect a very streamlined People’s budget from the Finance Department. Soft on the household taxes and subsidies for the agriculture sector might be the highlight of the budget. In Toto, a Soft Budget is on the radar as FM needs to safeguard the vote bank of his party.

Solutions to Indian Farmers’ Woes

This article is a proposed solution to suicides of farmers in Western Maharashtra which is reported in the TIMES OF INDIA 7-Feb-2008

Amazingly a large portion of suicides reported are from farmlands having good irrigation facilities. Farmers report that the suicides are because of the decline in the cooperative movement not because of the irrigation reasons. Condition of agriculture share is quiet pathetic in India as 70% of Indian population related to agriculture contribute only 20% of the Indian GDP. Following are the some of the solutions are I propose for the problem.

  • Public Private Partnership: PPP can go long ahead to solve rural problems. Financial institutes in collaboration with government agencies can percolate themselves to rural segment and educate them of the various microfinance schemes available. Such collaboration can save the private brands from getting tarnished by allegations like rural exploitation. As government agencies have deeper roots in rural society this would help private firms to reach people and needy easier. PPP can also be formed with fertilizer and farming equipments manufacturing companies who can educate the farmers of the new technologies that can be employed for better productivity. Grameen Bank of Bangladesh and SKS Finance are some of the examples working for rural segments. Financial PPPs can be a good substitute for Cooperative banks.

  • ALID (Agriculture Lead Industrialization and Development): ALID also stands as a major tool for emancipation of farmers. Read more about ALID in my post (INDIA VERSUS BHARAT).

  • Additional Source of Income: ALID advocates additional sources of income for farmers which can act as support for farmers under dire situations. Developing manufacturing units in rural areas can provide employments to farmers during non agricultural seasons.

  • Increasing Savings: A recent study stated that only 3% of households in India put their savings in small savings account, insurance related products and equities. A strong awareness needs to be spread about these financial instruments which can help households and farmers harvest growth on their savings which otherwise is stashed in corners of home. PPP, Financial Institutes and NGO need to educate farmers of such growth opportunities. Indian government has recently directed financial institutes to work towards ‘Inclusive Banking’ which targets absorbing rural areas in the gambit of banking. No Frills accounts directed towards rural section of society are some of the options available with banks. “How India Earns and Saves” study clearly indicates the preference of Indian households towards post offices as saving agents. Government can bank upon such preferences and sell equity linked saving schemes through them. Selling of IPO forms through post offices is an innovative initiative but it needs to substantiated with awareness.

INDIA VERSUS BHARAT

India’s 70% population is dependent on agriculture for its source of income but ironically the population contributes only 20% to the GDP of the nation. India today with growth rate around 9% faces the pseudo war between urban India and rural India which has been christened as “INDIA VERSUS BHARAT” in the article. Our finance minister refers to “Inclusive Growth” in nearly every summit related to India’s economy growth.

India’s poor population which earns less than 1$ a day faces the major brunt of the divide which is easily consolidated in the term inflation. Hence, you can see RBI cracking down heavily on inflation even in the face of slowdown in the industrial growth rate. What India today needs is inclusive growth which includes nearly every section of Indian population.

Indian population needs to adopt growth percolating stories like ALID (Agriculture Lead Industrialization and Development). The decoupling between agriculture and industrial growth which is highly apparent in the present scenario has to be eliminated.  Agriculture share in India’s growth in 1950 was judged to be around 50% but today it has declined to 20% giving way to service sector which makes about 60% of the revenue.  Agriculture and manufacturing needs to be aligned to make India a more domestic consumption lead growth story. IT sector needs to explore opportunities to cater business opportunities in rural segment like agriculture etc. Manufacturing units developing equipments, fertilizers etc needs to operated in rural. Such units will help farmer to look for additional income opportunities. Opening up of BPOs in rural segment is also a good alternative. This inwards looking outlook will lead to domestic consumption lead growth which can decrease the currency risk associated with export oriented industries like IT.

Government needs to facilitate and fabricate SEZs which target facilitation of industry targeted towards agriculture. India needs to look up to China which has used ALID effectively to alleviate the conditions of poor in the country and where agriculture contributes more to GDP of the nation. I believe the Indian growth story will surely not be termed as “INDIA GROWTH STORY” or “BHARAT GROWTH STORY” but will surely be termed as “UNIFIED INDIAN GROWTH” with the adoption of inclusive growth strategies like ALID.