Manmohan working on his epitaph

On February 12th, I wrote, of our PM,

"If he is to hang up his boots with any sense of achievement, visibly combating corruption could be his chance to go down in history."

 And, that,

" If my speculations are correct, then Manmohan Singh  has sent word out that the fight is joined. 10 Janpath has been warned. There is little Sonia can do but back him. She has no power to restrain him; the worst she can do is sack him. Since he has no political dynasty to perpetuate, and no skeletons in his cupboard, she has no hold over him. However, his departure at this time would threaten the stability of her government."

 

Since then, the Anna Hazare gang has tried to create measures to become super-cop and super-judge. Between the rifts in so-called civil society and the inevitable assertion of the establishment, the powers of the Lokpal will not be quite as far-reaching as this petty autocrat wants. 

 

Meanwhile, I continue to get he sense that Manmohan is coming down harder and harder on corruption. 

 

1.Sanjay Chandra, the CEO of Unitech, is in jail, in connection with the 2G scam. And, even while their boss is out, 3 of Anil Ambani's senior executives are behind bars. If the case against Reliance Telecom has merit, he will join them; if not, they will be sprung.

2. The favour Mukesh Ambani has received from one dispensation after another is being withdrawn. The Directorate General of Hydrocarbon (DGH) is openly censuring his company's operations in the KG Basin, and talking of levying fines on him. Barely 2 years ago, when our Comptroller and Auditor General compiled findings to the effect that RIL's expenses in the KG basin were 'gold-plated', the report was put aside. Today, the DGH is openly talking of not structuring RIL's return to compensate for these questionable investments. And, to make their intent clear, they have asked RIL to dig 10 more wells. Oh, and when RIL declared two petroleum finds in a PR exercise to reduce atention to their below-par quarterly numbers, the DGH was incredibly fast off the blocks in declaring that these finds were not commercially viable.

Clearly, the knives are out against Mukesh Ambani. I have been getting a sense of this estrangement between 10, Janpath and Sonia for over a year now. I have been speaking about this to others in the investment business' one well-connected investor said this was not a tenable surmise, as 10 Janpath is heavily invested in RIL. But. to his credit, he sniffed around and got back, saying that something had changed.

3. This morning's front-page story in the Delhi edition of the TOI spells out the steps that the department of Revenue Intelligence is taking against those who keep money in tax havens abroad. Direction came from the Supreme Court, but the depth and width of work that has been done speaks of major support from the executive:

 

- 18 lakh trips to destinations known as tax havens have been identified.

- 2 'individuals' who have made 60 trips each during the last year have been identified. That is an amazing amount of sifting.

And, this paragraph: "Among the legitimate travellers, officials don't rule out presence of corrupt bureaucrats and politicians who have someone else footing their credit card and hotel bills during their stay abroad. All such cases are being identified".

There are more than stirrings afoot. The pot has been poured into a mixer, and the speed will be turned up.

I hope.

Why Bernanke is unconcerned about inflation

 India is wrestling with inflation, and much of this is attributed to the flood of global liquidity, wrought by a US Fed, which is determined to create asset price inflation in the home country. This determination is rooted in:
- the surge in bank 'assets' in 2003-07
- the rapid depreciation in the value of these assets in the 2008 meltdown
- Fed support for these assets through unprecedented bail-outs for the sector

Now the US banking system desperately needs clarity on the value of these assets, which are currently marked-to-model (convenience) rather than the more rigorous mark-to-market that can be the only prudential norm.

The question, then is whether the US, too should not be concerned about inflation feeding through to the economy, especially when so many are unemployed. The literature is full of studies that show this will not happen.

I am not convinced:

http://www.bostonfed.org/economic/ppb/2011/ppb111.htm

The barbarous relic may have some use - yet

Indians own an estimated 18,000 tons of gold, the World Gold Council estimated in October 2010. On the last trading day in April 2011, gold traded at a little over 50,000 dollars a kg, or 50 mn USD per ton. Rounding the numbers off for simplicity, that's roughly 1 trillion dollars of gold.

A lot - that's roughly 3 times our FX reserves, which actually only just balance our FX borrowings.

I have had this thought for a while that, if the global financial imbalances lead to further currency volatility, one of the fall-outs will be much higher gold prices. A nation as dependent on commodity - particularly petroleum - imports as ours will be badly hit if raw material prices continue to surge. If the crisis gets really deep, I have this gut feel that our private holdings of gold will have to be mobilised to bail us out.

Our government is grossly under-prepared.

Low interest rates distort the economy

Rajiv Kumar, who heads an industry association, and Surjit Bhalla ("What inflation?") joined their pens this weekend to Deepak Parekh's plea for a dovish stance on monetary policy in response to surging prices. 

I will not join with them on theoretical discussions about flaws in our price collection mechanisms, except to say that past experience doesn't suggest that official data systematically pegs price rises too high. And I will agree with them that higher interest rates run the risk of slowing down investment in our economy.

However, I do not agree that concern about the latter should trap our policy makers in getting into a cycle of higher prices, higher government spends, higher deficits, and higher inflation expectations. In its role as the nation's biggest borrower, the government could easily settle into a cosy relationship with higher prices, leading to higher nominal tax collection, combined with negative real interest rates. This reduces the cost of being fiscally indisciplined.

From the viewpoint of the real economy, though, it increases the chance of a greater misallocation of funds - going into expenditure that does not increase productivity, but drives up demand, a la NREGA; or encouraging consumption of scarce resources being distributed at prices below cost, such as food, petroleum products and fertiliser.

When all nominal prices are rising, a sensible economist should be looking at how relative price movements drive the misallocation of resources. In India, ca. 2011, low real interest rates have encouraged a 7-year boom in up-market homes in our largest urban agglomerations. Today, they have stacked up to unsold stocks worth several years of sales at peak volumes. Similarly, cheap finance and cheaper diesel have encouraged a boom in sales of diesel cars.

These are gross misallocations of resources into a still poor nation. If our economic leaders will not discipline themselves, it is the role of our columnists and free-standing economists to do so. But the two I mentioned are respectively playing their lobbying role and talking their book.

Pity.