Why war with Pak is a bad idea?

An economist's decision on going ahead with a full fledged war (or controlled fisher attacks) on Pakistan’s terror camps and establishments may be very different from a populist decision of a politician. Not with standing the war hysteria being created in our bedrooms daily by the breed of new age news channels, an economist will perceive this situation very different and that can have catastrophic effects on Indian Economy

A brief on current economic situation brings out a vibrant picture of a country with high GDP growth rates for the last couple of years coupled with a well developed and functional system of capital and money markets ably supported by a strong banking system. On the flip side, increased government spending on infrastructure and high farm/ oil subsidy ensures that India is one of the few Asian countries with a current account deficit, which gives it little leverage on the fiscal front. This is precisely the reason why the stimulus package of the central government to counter recession is merely cosmetic in nature.

Now lets see what happens if India goes to war with Pakistan. Since this will be a full-blown war or even if it is a fisher attack the warring parties are official armies (and not proxy army or militia as happened in case of Kargil or now with Hamas in Gaza). A war in such circumstances is likely to be a prolonged offensive with collateral damage to both countries in terms of human and physical capital. While loss of human capital would require increased spending on medical aid and rehabilitation, physical capital damage will require much more spending both in time and money to be restored to its original glory. Another cost will come in term of increased military spending and internal policing. Business is likely to be disrupted both within the country and with the outside world. There may also be a cost in terms of sanctions from certain foreign countries and a medium to long-term suspension of trade with them.

While this sounds like a heavy cost burden on the economy, let’s see what options does India have to finance this cost. On the fiscal front, as already discussed we have little headway. Another couple of thousand crores in war spending will send the current account deficit reeling and put both the currency and the country at the risk of hyperinflation. Lets see How?

India will either borrow from Britton Wood institutions to finance its war expense or under desperate and extreme circumstances, print additional currency. While debt may not be forthcoming considering there may be some sanctions in place and even a depressed world economy will not help. In war times, foreign investors will frenzy for their funds and there will be capital drain, which may be in excess of India’s current foreign reserves. Printing additional currency, though the last of resorts will increase the money supply and shoot up inflation. In such a situation inflation will take big leaps and an era of hyperinflation may be experienced. A similar hyperinflation was experienced in Germany during World War in 1920s and Zimbabwe is encountering it in current times by deleting zeros from its currency, which already has issued some billion and trillion dollar notes.

Pakistan is looking into an era of hyperinflation even without war, as its economy has failed and its political and military set up does not command any confidence. It’s being seen as a den of terror activities world over and any kind of foreign investment (both institutional and capital) may not be forthcoming. There may even be a freeze on grants by US and other western allies. Pakistan incidentally is one of the nations that queued recently in front of IMF asking for relief to prevent bankruptcy.

This is a time for economic offensive against Pakistan stopping all trade and commerce with it. Diplomatically India should ensure that countries across the world are appraised of Pakistan flip flap on terror. India has a strong case to push for a “Terrorist State” tag for Pakistan. The first tactics in any warfare is to cut enemy supplies and that’s exactly what India should be doing. Nip the terror in the bud.

Equality and Efficiency

Equality and Efficiency which form the base of economic theory rarely finds a mention in basic elementary education. The biggest reason for the growing despair, discontent and extreme activities like hate crime, terrorism and racial and communal clashes find its roots in the basic issue of equality v/s efficiency in the economy.

Before going to equality lets see how wiki describes inequality "Economic inequality refers to disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among nations. Economic Inequality generally refers to equality of outcome, and is related to the idea of equality of opportunity. It is a contested issue whether economic inequality is a positive or negative phenomenon, both on utilitarian and moral grounds.

Now lets consider whats equality and more specifically what's "equality of outcome" and "equality of opportunity". "Equality" or "Economic Equality" fails to find any specific meaning when 'Googled' is reminiscent of the fact how these words got distorted in our lust for money and power. Equality which ought to be the backbone of a welfare state is broken and the concept foregone.

Two basic theory of economic equality are Utilitarianism and Equality of Opportunity.

While one propagates greatest good for the greatest number, i.e. make the economic cake bigger so that the pie can be bigger. Other one propagates equality for opportunity for all.

The concept of a modern nation is based on neither. A person's birth determines his levels of advantage or disadvantage in life. A rich may have a clear advantage of better education, good health facilities, better sources of entertainment and enjoyment of civil and social rights even before he is born. This in turn ensures better employment and earning capacity and thus the vicious circle is complete when the advantage carries on to the next generation. This cycle is not broken unless there is there is a spate of bad luck or bad decision making on the part of the advantageous.

On the other side, a person born poor has low chances of surviving in infancy on account of malnutrition, hunger and non existent medicare. Education is non existent and very low or non existent level of income drive them to social ills like prostitution, begging, petty crimes and suicides.

Economists are divided in their opinion over the best course of action for equitable distribution and allocation of resources in the society. Most of them agree on private ownership of assets and state protection of ownership rights. Orderly transfer of assets / resources takes place in the market place through an orderly market mechanism. Those who start poor in this model are disadvantaged and have little room to moneauvre or step up the ladder. The other theory advocates excessive taxation of the rich and redistribute the collected taxes among the poor. They say tax them till they die, but ensure equitable distribution of resources. There are enough leakages in this system as costs of tax collection is very high and excessive taxes act as a demotivate for the rich to produce (which eventually would lead to lesser over all taxes) .

An alternate model is suggested by the machine loathe operator turned President Lulla of Brazil. He suggests in a society rich and poor can coexist and we can have public policy and regulations that are advantageous both to the rich and the poor. Rich need to be told that the market for their goods and services will expand if the poor gets money in his hand . The well being of poor and their uplift is advantageous for the poor as well as for the rich (who gains by having excess to a wider market). The poor need to be told that favorable policy for the rich is important as they are in a better position to utilize the resources optimally and generate employment opportunities for the poor. State will spend on the poor by taxing the rich and more taxes can only be collected and spent on pro poor schemes when the tax revenues. For incremental tax revenues a pro rich policy is required. Its not as myopic as giving away poors' agricultural land to the rich for constructing a shopping mall but if the bigger picture envisages employment in the mall for the poor and the government ensures through proper regulation for equitable transfer of resources and prevent future downturns in the market by reducing overcapacity and speculation everyone in the society will be better off. Well said President Lulla lets hope Mamta didi is listening.

Bailout Economics

This is just another term future economists and management students have to deal with in their text books. A lot of post Morten analysis of different country’s booster dose of Viagra to their economies will be done in due course.

Let’s try to unfreeze this entire prescription of a stimulus package for the economies and evaluate effectiveness and modus operandi. If Keynesian Economics is what doctors advocating a stimulus package follow, then what they mean is “when there is spare capacity in the economy, demand and employment can be boosted by Government Spending, Borrowing and cut in direct and indirect taxes. So stimulus package necessarily follow Keynes advice on Government Spending, but did Keynes specified where to spend and are the Governments necessarily following his advice. Well he said employ people to dig holes and later tell them to fill the holes, so that they have employment, and when they have money, they will demand and thus consumption and demand will be boosted in the economy.

So is the “Booster Dose of Viagra” doing that or is it just going around protecting big industries by offering them fancy bailout packages as Christmas Gifts. The stimulus package in US (TARP) is more of a Bypass Surgery for their financial sector, wherein the clogged arties are being cleared. But what concerns me is the nonchalance towards the basic problem of unemployment. People are being clobbered and churned out in big numbers by the private companies and they have no where to go, but look for jobs while making a living out of their savings. Bailout for financial institutions, automakers or sundries will no way help the basic problem of low levels of demand in the economy. The reason given for of these industries is that they are too big to fail and any stumble of these institutions will not be good for the economy and increase the problem of unemployment.

Well I say who allowed them to get so big, as that their sheer size is putting the entire US economy at risk. The size is giving them an advantage of creating a financial mess and being able to get away with it. In order to restructure their companies with bailout money they will anyways issue a lot of pink slips. Another thing baffles my mind is, the interest of internal stakeholders like employees not being taken care of by US government when offering the companies bailout money. Is it being ensured that the companies will not fire in the near term in order to restructure. If you are giving money to save a company only to find the company retrenches a lot of staff later in order to restructure, the Keynesian Economics certainly is in unsafe hands.

A better way out would have been strengthening of social infrastructure (by developed countries) with investments in educations, healthcare and security (yes you can actually employ more policemen and increase the size of your army). Instead of helping rich and famous save their companies focus should be to put money directly in the hands of consumers. Ensure the TARP funds generate employment opportunities by investment in the Public and Government sector. Let’s not reward companies who lack financial prudence by helping them out with tax payer’s money. Instead lets spend this money on the tax payer it self by putting the money directly in his pocket. By helping troubled banks and car makers we are indirectly penalizing the good performers of this industry as their financial prudence and good performance is ignored. Rich and Famous seem to been the mantra for Keynesian Economists of modern times.