Money and its value – Purely economic

September 25, 2013

There are some things about currency that always confuse me. Paper has value just because we all come together and agree that it does. What about the standing of Gold? Here are some things that can shed some light on many questions. Most of the information has been taken from RBI website and other information comes from the internet.

Authority regarding currency in India

The Reserve Bank of India (RBI) manages currency in India. The Reserve Bank derives its role in currency management on the basis of the Reserve Bank of India Act, 1934. The Government, on the advice of the Reserve Bank, decides on the various denominations. The Reserve Bank also co-ordinates with the Government in the designing of bank notes, including the security features. The Reserve Bank estimates the quantity of notes that are likely to be needed denomination-wise, and places the indent with the various presses through the Government of India. The notes received from the presses are issued and a reserve stock maintained. Notes received from banks and currency chests are examined. Notes fit for circulation are reissued and the others (soiled and mutilated) are destroyed so as to maintain the quality of notes in circulation.

Currency notes are printed at

  • Currency Note Press in Nashik,
  • The Bank Note Press in Dewas,
  • The Bharatiya Note Mudra Nigam (P) press at Salboni,
  • The Bharatiya Note Mudra Nigam (P)Mysore, and
  • The Watermark Paper Manufacturing Mill in Hoshangabad.

Only GOI can mint coins. Coins are minted at the five India Government Mints at

  1. Mumbai,
  2. Alipore(Kolkata),
  3. Saifabad(Hyderabad),
  4. Cherlapally (Hyderabad) and
  5. NOIDA (UP).

To facilitate the distribution of notes and rupee coins, the Reserve Bank has authorised selected branches of banks to establish currency chests. These are actually storehouses where bank notes and rupee coins are stocked on behalf of the Reserve Bank. At present, there are over 4368 currency chests. The currency chest branches are expected to distribute notes and rupee coins to other bank branches in their area of operation.

Printing additional currencies

The Reserve Bank estimates the demand for bank notes on the basis of the growth rate of the economy, the replacement demand and reserve requirements by using statistical models. The Reserve Bank decides upon the volume and value of bank notes to be printed. The quantum of bank notes that needs to be printed broadly depends on the annual increase in bank notes required for circulation purposes, replacement of soiled notes and reserve requirements.

The Government of India decides upon the quantity of coins to be minted. The responsibility for coinage vests with Government of India on the basis of the Coinage Act, 1906 as amended from time to time. The designing and minting of coins in various denominations is also attended to by the Government of India

Gold backing to print money

There is no external foreign or IMF control on the estimation, printing or circulation of Indian rupee notes and coins. But the only external control on the value of Indian money in the international circulation is the “Exchange rate”, with reference to various other national currencies. Officially, the Indian rupee has a market-determined exchange rate. However, the RBI trades actively in the USD/INR currency market to impact effective exchange rates. Thus, the currency regime in place for the Indian rupee with respect to the US dollar is a de facto controlled exchange rate. This is sometimes called a “managed float”. Other rates (such as the EUR/INR and INR/JPY) have the volatility typical of floating exchange rates, and often create persistant arbitrage opportunities against the RBI. Unlike China, successive administrations (through RBI, the central bank) have not followed a policy of pegging the INR to a specific foreign currency at a particular exchange rate. RBI intervention in currency markets is solely to ensure low volatility in exchange rates, and not to influence the rate (or direction) of the Indian rupee in relation to other currencies.

The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold and all currency issuance is to one degree or another regulated by the gold supply. To protect the public and guarantee the nation against any bankruptcy, the RBI keeps a certain percentage of gold in their own safe deposit vault, in proportion to the additional currency minted and directed into the circulation. The quantum percentage of gold kept in the deposit is not exposed in any documents or in the Websites of RBI or the Government of India.

In modern mainstream economic thought, a gold standard is considered undesirable because it is associated with the collapse of the world economy in the late 1920’s. That aggregated the need for the supply and demand in a far better means of regulating interest rates, money supply and monetary basis. However, many other theories have been advanced for the turbulent economic conditions that existed at this time. While the gold standard is not currently in use, it has advocates for its resurrection and forms part of a basic theory of monetary policy as a standard for comparison for other monetary systems. Advocates of a variety of gold standards argue that gold is the only universal measure of value, that gold standards prevent inflation by preventing the creation of unlimited money supply in a “fiat” currency, and that it provides the soundest theoretical basis for a monetary system.

Fiat currency

In today’s  economics the fiat currency (a legally binding command or decision entered on the court or government record ) or fiat money is money that enjoys legal tender status derived from a declaratory fiat or an authoritative order of the government. It is often associated with paper money because, without government fiat, bank notes are not a legal tender in payment of debt, and only specie (metal money) has unlimited legal tender for money debts. (Note : This is not universally true, as some currencies, notably sterling issued by Scottish banks, is not legal tender but is accepted by longstanding confidence in the Scottish banking system).

A Fiat currency or coin is guaranteed by the RBI and the Government of India that :-

  • A unit of paper or credit money (a “rupee”) can be presented to the issuing bank in exchange for a physical amount of gold, silver, or some other commodity.
  • A rupee can be returned to the issuing bank in exchange for a rupee worth of the bank’s assets.

To enable this guarantee, the RBI and the Government of India create adequate assets in the nation with assured value, equal or more than the additional notes and coins minted and sent in circulation. This is in addition to the percentage of gold kept in the safe deposit vault of the RBI.

The term “fiat” currency is also used specifically to refer to a currency that is not pegged or fixed to a mass of precious metal, and similarly the term “gold standard” is used to refer to fiat currency with a gold bullion exchange system, or to a parallel gold coin/fiat currency with a law that requires that the fiat currency bank of issue to pay in gold coin.

The fiat currency is explicitly circulated in the form of paper money. The inherent value of paper money is zero, except when it is measured against the value of consumables the bearer of such worthless paper can exchange for each unit of currency in his or her possession. Additionally; paper money has an intangible value that is directly related to the condition of need of its bearer. While a one hundred rupee currency may be inconsequential to a person with little material need the same may be the governing factor between homelessness, health, and even life for another with lesser means.. In other words,  paper money is valued at the maximum amount of consumable for which it can be traded either directly or indirectly.

Finally, there is no external power controlling the Indian money market or world money market who decide how much & how India should make currency in circulation other than the market forces.


Compulsory voting – an analysis

November 21, 2012

With great power comes great responsibility – Uncle Ben, Spiderman

This is one of my favourite quotes and I think it applies here. The gift of the Greeks, Democracy, is very old and highly experimented concept. The fact that almost all Democracies vary in their implementation is a testimony to this. But the core values of a Democracy remain the same everywhere. In the Athenian Democracy (One of the first and most well documented Democracy) it was held that every citizen has a duty to participate in decision-making. The key word here is “duty” and not “a right”. This core value has is the basis on which Democracy as a concept grew. This value is central to the success of any form of Democracy else the “people’s power” will never be expressed. Without the participation of the people there can be no legitimacy to the power conferred upon a representative.

The average voter turnout in India is around 55% and it was 58% in the 2008 General Elections. Before analysing this lets talk about the significance of voter turnout. There has been a lot of debate about the meaning of higher or lower voter turnout. High voter turnout is often considered to be desirable, but many argue that it might be coerced, fabricated or due to threat of violence like in 2005 Iraq elections or the 2002 Saddam Hussein’s referendum claiming 100% participation. On the other hand, low turnout is a reflection of indifference by the public and may not accurately reflect the “will of the people”. However, it has been argued low turnout reflects the contentment of the public about the likely winners, so as long as there is Right to vote a low turnout is still legitimate. These arguments made by experts are in effort to generalise things across all cultures. But, there is always local factors which will decide the optimum turnout required to get a legitimate government. I am no expert but I think 55% is hardly that number. Another concern is the socio-economic status of the voters, i.e., their income and their literacy. Some statistics might help us in further discussion

In 1988 the voter turnout was 62% but the breakup of the population was as follows. Non-literate voter turnout was 57%, Up to middle school voters turnout was 83%, College educated voters turnout was 57% and Post-graduate voters turnout was 41%. This has not changed even today for example, in the National Election Study findings as reported in Alam (2004), the average turnout amongst the college educated in the 1971 elections was 61% This was 6% above the national average turnout of 55%. For the same elections, the average turnout reported for the non-literate was 51.5%, 3.5% below the national average turnout of 55%. This had changed in the 1996 elections with the college educated voters reporting a turnout of 55% (2% less than 1988 election as mentioned above). This was 5% below the national average turnout of 60%, where as for the same elections the turnout reported by the non-literate respondents was 60.5%, 0.5% above the national average turnout of 55%.

This trend is suggesting that as literacy is increasing the voter turnout is decreasing. Turning to the debate about the voter turnout, here in India there is no dictator like coercion or threat of violence. The cases of poll booth capture and rowdy elements forcing people to vote for them are region specific and very few to become a major factor. The other argument was that people are content with the likely winners so they wont vote. The public opinion about politics and politicians leads us to believe in the contrary. I would deny even this argument and conclude that people do not vote because of indifference and disenchantment. There is no real motivation in the public to vote.

One more statistic to consider here is that in any given State there are on average 3 parties at least contesting elections. In some States like Manipur, Goa, Himachal Pradesh there are mainly two political parties. Where as Andhra Pradesh as 6 parties, Tamil Nadu, Assam Bihar have 4 parties and Maharashtra has 6 parties. So a national average of 3 candidates per constituency can be safely made. So, to win an election that candidate has to get 1/3rd plus one vote of the 55% of the voters who have turned up to vote, which is about 18.5% of the total electorate. Even if only two candidates are contesting you will need only 28% of the total electorate to win. Clearly this will not reflect the majority in any way. Besides, it is easy to coerce such a small percentage of people by various means (money, caste, religion, language, force, etc). Hence my argument, low voter turnout in India is a sign of bad Democratic practices.

Once we have established that voter turnout is important, we can now proceed to the central argument of this article, Compulsory Voting. A word of caution though. The reasons behind low voter turnout are very complex and will take many pages to discuss. I will discuss the compulsory voting not as the solution but rather give the positives and negatives. I will try to shed light on the complex problems while I discuss this main issue.

Compulsory voting is not a new Idea. There are many countries that have enforced it. They are Argentina, Australia, Belgium, Brazil, Democratic Republic of Congo, Ecuador, Luxembourg, Nauru, Peru, Singapore and Uruguay. Schaffhausen, a canton (like a State) in Switzerland has also enforced compulsory voting. Lets see what are the arguments for this system

  • There is a high level of legitimacy to the elected candidate. He does not under-represent any section of the society because almost everyone has voted and different sections (economic and social) of people give power to this representative which would mean that he would not be biased towards one particular group, say his caste or religion.
  • It can be argued that due to compulsory voting the influence of external factors such as weather, transport, restrictive employers in villages, etc will be minimised. Countries with compulsory voting generally hold elections on a Saturday or Sunday. Postal and pre-poll voting is provided to people who cannot vote on polling day, and mobile voting booths may also be taken to old age homes and hospitals to cater for immobilized citizens. Belgian voters can vote in an embassy if they are abroad or can empower another voter to cast the vote in their name; the voter must give a “permission to vote” and carry a copy of the eID card and their own on the actual elections.
  • If voters do not want to support any given choice, they may cast blank votes or, if provided, choose “None of the Above” option. This ensures there is no possibility that the person has been intimidated or prevented from voting should they wish to. The Election Commission of India told the Supreme Court in 2009 that it wishes to add such an option but the government is generally opposed to this. The “Right to Reject”, though looks logical, has practical problems. There are many variations and in one if the none of the above is 50% of the total voter turnout then the elections must be held again. But given the mentality of Indians and their attitude towards politics they might purposefully vote None of the above because they were forced to vote in the first place. Careful debate is necessary in this case. This article gives a lot to think about.
  • Compulsory voting may encourage voters to research the candidates’ political positions more thoroughly. We have become so lazy and detached from politics that we don’t even know who are contesting from our constituencies. Hence, if voting is compulsory at least an effort will be made to know about the candidates and many people will engage is discussions about the merits of each candidate. Since they are voting anyway, they will at least try to vote for the better person
  • A result of this setup is that it is therefore more difficult for extremist or special interest groups to vote themselves into power or to influence mainstream candidates. The logic here is that since everyone will vote, you cannot win an election based on just one group of people. Hence, your election propaganda will have to include a broad base. Hence you will be unable to play divide and rule card as easily as you used to. This will lead to greater integration of the population because that will be in the interest of the politician. This might also reduce the role of money in elections.
  • The increased participation in voting will in some way motivate many to engage in other political activities and take interest in the National matters and not just be a mute spectator. It acts like civil education and political stimulation, which creates a better informed population.

Coming to the arguments against the system,

  • Voting, it is argued, is more of a right than a duty. It is argued that compulsory voting may infringe on other rights of the citizens such as religious rights of Jehovah’s Witnesses allow them to practice their religion. In their religion they are not to involve in politics and forcing them to vote would be equivalent to taking away their rights. However, an exception can always be made in such cases while forming the law. Or they can always use blank vote to escape from such a predicament.
  • Most US legal scholars argue that right to speech and expression also inherently includes the right to not speak and subsequently the right to NOT vote. However, in the Indian constitution every fundamental right is accompanied by reasonable restrictions on these rights. Meaning that under certain “reasonable” conditions one must give up their fundamental right to the “greater good”. Same concept can be applied to this argument too.
  • Donkey votes. As mentioned above, people may vote at random simply to fulfill legal requirements either because they have no interest or they do not have any preference. Donkey votes may account for 1-2 % of the votes in this system, which may affect the electoral process. Similarly, citizens may vote with a complete absence of knowledge of any of the candidates or deliberately skew their ballot to slow the polling process or disrupt the election.
  • Principled non-voters. A group of people who see the government as “gang of thieves writ large” (Murray Rothbard) will not vote on principle.
  • In general, this system is seen by many as a coercion and hence against the democratic principles. Former Australian opposition leader, Mark Latham, urged Australians to hand in blank votes for the 2010 election. He stated the government should not force citizens to vote or threaten them with a fine.

After seeing the various arguments we will quickly go over the checks on the people who will not vote. We can look at the various countries who follow the system. Belgian voters who repeatedly fail to vote in elections may be subject to disenfranchisement, meaning that they will lose the right to vote. Singapore voters who fail to vote in a general election or presidential election will be subjected to disenfranchisement until a valid reason is given or a fine is paid.Goods and services provided by public offices may be denied to those failing to vote in Peru and Greece. In Brazil, a person who fails to vote in an election is are barred from obtaining a passport until after they have voted in the two most recent elections. This method might be particularly effective given that Brazil too is a developing nation. If a Bolivian voter fails to participate in an election, the person may be denied withdrawal of the salary from the bank for three months. Other countries impose a nominal fine for non-voters. This method of penalties does give support to the argument that this system is coercive. But this must be seen as a positive motivator and there should be the option to register a blank vote which will make sure you are not coerced into choosing a candidate whom you don’t approve of.

Also, there can be legitimate reasons to not being able to vote. In Australia and Brazil, providing a legitimate reason for not voting (such as being sick or outside the country) is accepted. In Argentina, those who were ill on voting day are excused by requesting a doctor to prove their condition; those over 500 km (310 mi) away from their voting place are also excused by asking for a certificate at a police station near where they are. Such measures will save people who have genuine reasons. Thus the laws must be carefully drafted taking into the account every possible scenario. We can use the experience of the countries who have implemented this system and implement it with context sensitivity.

In conclusion I say this – This is not the best system to counter the problem of voters’ motivational issues. But this has produced good results in terms of voter turnout which averages about 90% in the countries with compulsory voting. Taking the immediate need to reform the attitudes of citizens towards politics and the above mentioned benefits like increased involvement of public in politics and minimization of role of money and vote bank politics, this system can help us. This will also sort out other related problems like names missing from electoral rolls, logistical factors that prevent people from voting, etc. As an experiment this can be introduced in the Local Government elections like Village Panchayat and Municipal Corporation elections. This would act as a testing ground and will also improve our responses to the general and state level elections.


Democracy and India

July 4, 2012

In 326 BC Alexander the Great invaded India but he had to abandon his campaign in between on account of his soldiers demands to return back to their homes. Many have written about his conquests but one we are interested in written by Arrian called “Anabasis of Alexander”. Here, in this treatise he talks about India as Alexander and his troops saw it. In a particular account he talks about how the troops met “free and independent” Indians during their conquest. One example is that of “Nysa” which, according to him, is a city at the border of modern Afghanistan and Pakistan. This city was ruled by a president named Aculphis and a council of 300 and not by a monarch. Nysa was supposed to be an Oligarchy and a single city state. Apart from this, he talks about the Malli or Malhi clan of the modern Multan and Punjab area and calls it Mallian republic comprising of multitude of cities. There is also the mention of Sabarcae or Sambastai which is said to be consisting of 60,000 foot soldiers and 500 Chariots and was estimated to be even larger than the Greek Polis. This was corroborated by historians like Rufus and Siculus. So, the conclusion I wish to draw from these facts is that at least in the North-Western part of  India, Republicanism and Democracy was the norm. But, if we move two decades ahead we will then meet Megasthenes who served as Greek Ambassador to the court of Chandragupta Maurya. He travelled all the way to Patna and from his accounts it becomes clear that the entire northern part of India had republics.

Let me take a small break here and clarify two things here. In today’s world, Democracy means a government that is chosen by the people of that land. Republic, again in today’s sense, is representative democracy with an elected head of state like President who serves only for a limited term unlike that of UK where the head of the state is a Monarch. Republics may not be truly democratic and they sometimes can be oligarchic. The philosophy of republicanism it self is long and often confusing and hence we will use only the reduced modern meaning of it.

The use of Greek accounts is necessary because the Origin of Democracy is often credited to them. So, accounts from their historians show that the idea was not necessarily spread to the far east but had been developed on their own in India. Anyway, now we turn to our own sources, the Indian sources. Three important sources are quoted in this context, Panini’s work of Sanskrit Grammar Ashtadhyai, Kautilya’s Arthasastra and the Pali Canon. These describe ganas and sanghas that were either single cities or ones with larger expanse, even bigger than the Greek Polis. There is of course difference of opinion about the nature of these Republics. Many scholars argue that these were not truly democratic but oligarchic (meaning a small group of people, wealthy and powerful, controlling the affairs). But, there is lack of hard evidence to get to a conclusion since there is much research that needs to be done. But, many Indologists around the world and many Indian scholars do believe that Republics co-existed with Dynasties as long ago as 500 BC.

First purpose of this article was to make amply clear that Democracy was not thrust down our throats but had been part of our culture and heritage, and having done that we can now move to the second purpose of this article, understand it in a better sense. Aristotle says, “In a Democracy the poor will have more power than the rich, because there are more of them, and the will of the majority is supreme”. The true essence of democracy is contained in this statement. This statement speaks of the purpose and working of democracy in its most basic sense. There are two types of democracies, direct and indirect or representative. In direct democracy, every stake holder is present for deliberations and voting. This is possible only in small population like a village or city. In more populous areas, like in our country, we practice indirect or representative democracy. In this form of democracy, a group of people elect one person to represent them in the deliberation and voting process of policy formation and execution.

The working of democracy is very simple. Let me take India as the example and explain it. Currently in India we have three tiers of democracy. One at the center, one at state and the last at local level (village and city). Lets take central government as reference and the same thing can be extended to the state government as well. The local government differs slightly in its working. The whole country is divided into 543 parts consisting of roughly equal population. These parts are called constituencies (same is the case in the state where they will be state constituencies). Every constituency will have a seat in the Parliament and for the same elections are conducted. This means, all the eligible voters in that constituency will elect, by means of voting, one person to fill the post of “Member of Parliament(MP)” from that constituency. This elected MP is a representative of all the people from that constituency. By rough calculations one MP represents about 22 lakh people. Same is applied to the States where the elected representative will be called “Member of Legislative Assembly(MLA)”. Also, if you live in a village you will elect a Panchayat member and if you live in a city you will elect a Corporator for your ward. In essence, you as a citizen will be represented by three different people in the three level of democracies in India.

What one needs to understand here is that the representative is elected by you and he is duty bound to fulfill your demands and wish as a community (not individual wishes). As a community of voters you tell that representative of your demands and your opinions about the policies under discussion in the Parliament and Assemblies and the representative must voice the same there. Of course, a representative is also a leader and in that capacity he will have to right to make certain decisions against the tide but more often than not, he must and should have the confidence of the people of his constituency. When you consider the Parliament or Lok Sabha in particular you will see 545 members sitting there and deliberating and deciding the policies again by voting on the bills. What you must actually see is that these MPs are actually voicing the opinions of 100 crore Indians and voting FOR these 100 crore people. Same applies to State Assemblies and that of Panchayat and Corporation meetings. Elections is the greatest power given to the citizens where by they are free to elect a good and honest leader.

After the elections what next? Are we helpless for the next 5 years? The answer is no. There are many more mechanisms available to the citizens to exercise accountability and control over these representatives. One logical method is to approach these representatives directly. Many employ this method and go to their representatives with grievances and have them addressed. This can be called a pressure group. But this is not organised at all. Everyone goes to them individually and sometimes they go to bribe these representatives for personal gains like educational seat, jobs, contracts, etc. What needs to be done instead is that the people of the constituency must form association and make a formal request to the representative with the backing of all the people in the form of signature sheet, digital or otherwise. This adds weightage to the request and the representative will take it seriously since he too wishes to get re-elected. This is a better and organised and effective way than a haphazard, short-lived and violent protest. When it comes to local government such association are already provided in the form of ward meetings in cities and gram sabhas in the villages. Here each and every person may take part and give their input and the Panchayat and Municipality will have to take these inputs seriously.

So, next question will be how we can control the bigger things like affecting the policy in a positive way? For this we will have to take a bit of time out and read. Read about the mechanisms with which the legislature and executive (that means the MPs and Ministers) can be made accountable to the public. Many number of mechanisms exist when it comes to the Parliament. There are mechanisms like Short Duration Discussion, Zero Hour, Question Hour, various Motions and Parliamentary Committees. To explain all of them will take a long write up so let me take one example. Many will be familiar with Question Hour and Zero Hour. These are the time periods during which the MPs can ask questions to the government about any and everything related to policies and implementations. So, say we are not getting proper ration supply in our area then we can, through our pressure groups, request our representative to ask this particular question in the Parliament. By this we can effectively take part in Policy implementation process. Here, imagination is the key and you can achieve great results with proper approach. To investigate a corruption you can request that a Parliamentary committee be set up and report be submitted in the public domain for everyone to read. Thereby you are effecting control and accountability. Apart from these above methods, you always have the Judiciary to help you with your problems. This goes on to show that Democracy is a PROCESS and not an EVENT. People cannot vote and forget, they must constantly keep up with their representatives and make sure your opinion, in its full strength, reaches to him as regularly as possible.

There is a concept of “Recall” which does not exist in India. Here, a non-performing representative can be called back, or sacked, before the completion of his term if majority of the people agree. This makes sure that the representative will be continuously responsible to his people else he will lose his job. Earlier mentioned pressure groups exist currently. Many of the associations of farmers, Rights Activists like Anna Hazara and his group of supporters and very recently the signature campaign conducted by Aamir Khan of Satyamev Jayate. These have definitely have had effects on the policy decisions and implementations of the same. But these, as I mentioned earlier, are not well organized. For example, in almost all elections the typical voters turnout will be around 50%. In each constituency, lets take best case scenario and say that only two people are competing. So, if a person gets 26% of the entire votes in that constituency he will win the election. Similarly when the pressure groups are created there is not enough participation by the people and they fail to generate good results. So, when only 50% people bother to participate in the process do the rest of the people really have the right to question the government?

This actually points to an inherent moral corruption of general populace where they are not ready to take the responsibility but want to enjoy the rights. This same corruption is carried by the representative of such population and he too will try and avoid his responsibilities. Besides, how much pressure can the 26% of people who elected his can apply? The most popular response to these statements is that every representative is corrupt and nothing is going to change anyway so why waste time. If that is the case then why complain? Why the double standards? When you wont work honestly and take the responsibility then why talk about others who are doing the exact same thing? I think it is clear from my above discussion that we have to continuously engage ourselves in Democracy. Abraham Lincoln said, “Democracy is a government of the people, by the people and for the people”. Every citizen is part of this big system and the system will be only as efficient as its parts. When half of its parts stop functioning then how can you expect the system to perform?

So, I reject the response that all politicians are corrupt. Its actually the reverse. All voters are corrupt. We have become greedy and have developed apathy towards everything. How many have a working knowledge of the constitution? How many have understood the potential of RTI, heck how many know what is RTI? How many consider Politicians to be aliens who have no connection with the general public. How many see them as Masters and not as representatives? How many read the bills in the public domain and make suggestions and comments on the same? Of course the web and papers and books are filled with what representatives and politicians do not do. How many pages highlight what the people do not do? How can we say we are in democracy if we act as helpless as the person who is under monarchy? People under the rule of a Monarch need not work, but people in democracy are the rulers of themselves and they have to work, a LOT. These may seem far fetched and romantic notions, “These things wont work anymore” they say these days. But guess what? They said the same things even before; when men, women and children fought for freedom. But the children grew up and went to their deaths with heads high and poetry on their mouths and then the world took them seriously. What people say cannot be done can be done after a motivation session. But in the long run it takes faith in one self and hard work towards the purpose at hand.

In conclusion I would say this, Democracy is a participatory form of government which requires people involved to actively and deliberately participate and develop keen interest in the affairs of their nation and region. Lot of literature is available where people can learn about the government and their own role in it. Unless you take personal interest in the government I think you do not have the right to criticize it. Besides, even if you do criticize you must do constructive criticism where you provide an alternative solution to that particular problem and to do this we need a working knowledge of the government. To develop this we must first get involved in the government and develop general interest in its affairs. That is the only way in which a democracy can truly become successful else it is always doomed to failure. I leave you with one last quote that will sum up my last few paragraphs

“It has been said that democracy is the worst form of government except all the others that have been tried” – Winston Churchill


Bharath Bandh

May 31, 2012

Disclaimer : I am not affiliated to any political parties and I am not writing this on their behalf. Expressed here are my personal opinion on the matter at hand. If there is any discrepencies in the data provided then please do point it out for me to correct them

 

The title is pretty familiar when it comes to Indian Politics. A pan India “bandh” is more of a political tool to fulfil populist agenda of certain political institutions. When we look at the real meaning of this process, it means complete shutting down of the country and bringing it to its knees. Often said to be employed when the crusaders are fighting for the oppressed and helpless people of India, it mainly affects these exact same people in the worst possible manner. Besides, the reason behind completely stopping the entire nation must be quite revolutionary rather than just a populist measure as is the case for today’s bandh called by NDA in protest of increase in the Petrol price. Now the already harassed public are being harassed in yet another manner. Sure, there is also support from a section of people who are on the street, but how genuine is that support is highly questionable

It was in 1997 that Kerala High Court had ruled that these type to “bandhs” are illegal. That was the first time that political parties recieved a blow to their populist tactics. Of course this was challenged in the Apex court to which the Supreme Court in 1998, upholding the Kerala HC verdict, said that these “bandhs” are “illegal and unconstitutional” means for protest. The rational behind this is simple, it infringes the rights of other people and it is also mentioned in Constitution that gathering must always be peaceful and this we must extend to protests as well. Besides, Art 19(3) and 19(4) provides reasonable restrictions on such rights, for gathering and forming associations and unions, as interest of sovereignty and integrity of the country, public order or morality. Besides, these “bandhs” affect the most supreme of the Fundamental Right, Right to Life and Liberty (Art 21) which is affected since most people will be denied the opportunity to go to work and get access to food and medical help thereby fundamentally affecting their lives and liberty. Even without the technicality behind the verdict, it is easy to see the logic in it and yet these “bandhs” go unabated.

Even after the verdict, there have been many occasions when the Judiciary is openly ignored and the Judiciary too has stepped out and tried to protect the rights of citizens. In 2002 the Supreme Court went a step further and declared all forced hartals illegal too. The idea behind this was that we must not give into coercion or force, i.e., we must not stop our day-today lives just because a goon is threatening us to participate in a protest. In July 2004, the Bombay High Court told the Shiv Sena and the BJP to pay a fine of Rs 20 lakh, for organising a Mumbai bandh in July 2003 to protest against the Ghatkopar blasts. It was estimated that the bandh had cost the city Rs 50 crore. This had caused a lot of stir and was a slap on the face to illogical protests. In November the same year, the Calcutta High Court declared illegal and unconstitutional, the Bangla Bandh called by the Trinamool Congress. The court directed the party to withdraw the call and publish the decision in the media. By this time it was clear that these political parties were not lending their ears to what Judiciary had to say. I think such acts of defiance by these political parties had to be taken as contempt of court but that was not done. Anyway, in the year 2006, the Kerala High Court asked the Election Commission to deregister political parties calling bandhs. In June 2007, the Supreme Court took notice of the bandh called in Delhi on the Gujjar issue and described the government’s inaction as a ‘national shame’. The bandh cost the national capital region around Rs 700 crore. The July 2010 “bandh” called by opposition for the same reason of fuel price cost the economy an estimated Rs 13,000 crore loss when the “bandh” lasted for 12 hours. According to a March 2011 report of Indian Chamber of Commerce (ICC) the state of West Bengal was said to be losing Rs 8,000 crore every year due to “bandhs”. Incidentally, West Bengal is called the “Bandh Capital” of India as it sees many such protests every year.

All the above data shows one thing very clearly, such type of “bandh” is not exactly helping us as much as we want it to. The ICC report went on to show the magnitude of the loss in West Bengal. The conservative estimate of Rs 8,000 crore is 2.5% of the net state domestic product of Bengal. This is close to 5% of the total debt stock of the state government of Rs 2,00,000 crore and 50% of the interest payment on debt by the state every year. I hope the magnitude is apparent now with these figures. So, we can expect the same kind of damage after today’s “bandh”. Apart from the loses due to stoppage of work and transport, there is also the property damage by rowdy crowd. Three buses have already been torched in Bangalore and one allegedly in Hubli, they have also stoned a lot of buses and causes damage. These buses come from the money paid out of public pocket and I dont understand how these stupid people dont realise that. How hard can it be? They say they torched the bus to get the authorities to stop the bus service. Is it really necessary to burn the bus? cant you just block the road while you are disrupting the lives of people? Some people even harm the private properties, vehicles parked on the side of the road. When people buy a car or a bike, they have emotional attachment to it since most of the times it comes from their first salary or it will be a gift. But these mindless brutes just turn these vehicles into wrecks as we have seen in many protests previously. I sometimes feel such people join the protest only to plunder everything in their way without even knowing what they are protesting. So, in the end, these political parties call for “bandhs” even after being aware of all these facts which is “illegal and unconstitutional”

Just to highlight the hypocrisy behind this I will tell you one more tale. Remember the great crusader against graft? Anna Hazare? Out of all the negative publicity one that was prominent towards the declining peak of the protest was how the methods employed by him was “unconstitutional”. These were the same methods employed by Gandhi during the freedom struggle. At that time it was justified by the fact that British did not and would never have had the best interest of Indians and therefore needed to be ousted. After Independence, such methods were not to be employed as was said even by Dr. Ambedkar. But, was the method employed by Anna Haraze as extreme as that of Gandhi? I dont think so. There was no widespread non-cooperation or civil disobedience in case of Anna Hazare. Besides, the ineptitude of successive governments has made it clear that such extreme methods are necessary to move the government to do its job honestly. When all these political parties condemned Hazare of employing unconstitutional means and holding the government hostage, what exactly are the same politicians doing right now? Ignoring multiple rulings of High Courts and Supreme Courts and trampling on the constitution to achieve what? Bangalore has the highest price for Petrol and is being governed by BJP, a Key partner of NDA which has called for this “Bandh”. Why is the price so high? because of the high taxes. And what did they do to alleviate the burden on the public? They have proposed to shut down the country and incur more loses which will be later paid up by the same public. That is what is the definition of Hypocrisy.

In conclusion, I call everyone to know your country and your law. Know your system before you blame it or say it cannot be changed or improved or saved from ultimate doom. A system is only as good as its components put together and that is us. Dont let anyone eye wash you by saying that the fuel price hike is necessary due to loses incurred and “bandh” organised in the protest of this fuel price hike is in best interest of “common man”. A very distorted term this “common man”. It is he who truly wields the power in the system of Democracy and yet it is he who is being marginalised today and the tragedy is not that. The real tragedy is that he himself is responsible for this situation that he is in. A true transformation can never be provided by one person acting as a leader and everyone as sheep and following him. A true transformation comes from being aware, individually and collectively. That alone will lead to liberation.


Fuel pricing – My Analysis

May 24, 2012

Disclaimer : I have not done a lot of research on this, at least not up to my satisfaction and therefore the data I present is not exhaustive and at places an approximation rather than the accurate value. I have tried to be as close to reality as possible but any major deviations from the actual is due to the lack of deeper research. Please feel free to correct the figures if necessary

Today the petrol price was hiked by Rs 7.50 inclusive of tax or Rs 6.28 exclusive of tax as has been reported. This reminded me of the various price hikes in the recent past and the discussions associated with them. So, I decided to assess the situation and did a bit of googling myself. So, what I present here is my logic and what data I could mop up from the search. First, I want to analyse the price of Rs 81 that we will be paying here in Bangalore for Petrol.

The most recent quote of an IOC (Indian Oil Corporation) official says that the base price (i.e., production cost) of Petrol is about Rs 36.53 per litre. Now, lets add the hike of Rs 6.28 to this and it comes up to Rs 42.81. This is the actual cost of Petrol produced by the Refineries. Now comes the various taxes.

The central government levies

  • Rs 6.35 per litre basic cenvat duty
  • Rs 6 per litre special additional excise duty
  • Rs 2 per litre additional excise duty towards highway cess (Cess means “tax on tax” for special purpose, in this case the Highways. The entire 2 rupees is invested in the Highway projects)
  • A 3 % education cess. The total of previous 3 comes up to 14.35 and cess of 3 % on this will be Rs 0.43 (Cess = tax on tax) Hence, total comes up to Rs 14.78 per litre. The amount 14.35 before education cess is fixed in the budget and does not vary.
  • A Central Customs duty on Petrol of 7.5 % on base price (42.81) which is Rs 3.21.

State Governments also levy taxes on fuel and they vary from State to State. In Karnataka there are two more taxes to be added

  • A 5 % entry tax or Octroi on the base price (42.81) which is Rs 2.14
  • A 25 % sales tax or VAT on base price (42.81) which is Rs 10.7

Over and above this there is a dealer commission of Rs 1.05 and Approximate Transportation charges of Rs 6. So, the total approximate price of Petrol becomes (42.81 + 14.78 + 3.21 + 2.14 + 10.7 + 6 + 1.05) Rs 80.69. Please note that this is the approximate price which is pretty close to the average Petrol price from various dealers. There is difference of Rs 30.83 between base price and cost price (Excluding transportation and dealer commission). This means that we are paying about 38 % tax on the Petrol we are using. At this point I can definitely point out how USA taxes approximately about 10 % and China about 20 % on Petrol. But I dont think comparison is necessary here to say 40 % tax is pretty high. Even income tax is not so high.

Another aspect related to this tax is the subsidy part where I lack clarity. So, this analysis will be inconclusive, yet it may give some perspective on the problem. In 2010-11, Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation paid Rs 92,176 crore to the central government in customs duties and excise taxes plus an additional Rs 78,690 crore in sales tax or value-added tax (VAT) to state governments. In the same year 2010-11, these companies under-recovered (that is what they call the losses incurred due to subsidies) Rs 78,190 crore because of the government order that they sell petrol, diesel, LPG and kerosene at prices below cost. 2010-11 was not a unique year. Every year for the past five years, these three companies have seen an erosion in their net worth. Oil Marketing Companies (OMCs) hit an all-time highest under-recovery of Rs 1,38,406 crore in 2011-12. They are said to be losing Rs 500 to 550 crore every day. This is all mind-boggling but what does it all mean?

What is this under-recovery? In layman’s words it is the difference between the government subsidised price and the actual market price. But for more formal analysis we can listen to what Government says about it. The government measures under-recovery as the loss that an OMC would make if it imported a petroleum product, say Petrol, from the international market and after paying ocean freight, import charges and customs duty and incurring inland transport and marketing costs, sold the product to a dealer at the government specified price. Some questions arise when this is read. This is not done to Petrol in its entirety, crude is bought and then refined here on our land. So, it is my inference that the price fluctuations in Petroleum products must happen due to refining capacity shortages. Basics of economics, demand-supply relations. When demand is more and supply is less due to shortage in refining capacity, prices will rise. So, refining costs here and elsewhere will definitely differ and that is why when you calculate for “under-recovery” using international prices there will be a difference since its a refined product you are taking into account and not crude oil. Same concept applies to the international market as well where the Petrol price may increase due to higher demand and we will sit here and calculate the under-recovery based on inflated prices in international market thereby exaggerating the amount of under-recovery. This is where I stopped since I noticed a lack of transparency in calculations of these values. I have to dig deeper to get the details, I got some figures about the subsidies though. The Excise duty paid by the companies and the subsidies given is shown below

Excise and subsidy comparison for 2010-11 (Rs crores)
IOCL BPCL HPCL TOTAL
Excise 30861 12394 9743 52998
Subsidy 24282 10048 9727 44056

So, as we can see from above it looks more like tax refund than subsidy. Now we will take a little detour and learn about the Oil companies in brief

There are three types of oil companies:

  • Upstream companies (Indulged in exploration of hydrocarbon)
  • Midstream companies (indulged in refining of hydrocarbons)
  • Downstream companies (indulged in retailing and marketing)

There is no issue of losses in case of Upstream and Midstream marketing companies. The losses are made by the marketing and retailing companies. In-fact because of Import Parity Prices, the Upstream Companies make heavy profits. (Import Parity Prices make the prices of both domestic production as well as imported price at par. Thus the increase in global prices improve the profitability of Upstream Oil Companies). Thus it is the Marketing and retailing companies that has to bear the burnt of the losses between the international prices and the retail prices in the country. In order to bear this losses the government gives the budgetary allocation in the form of fuel subsidy while a part is now shared by the Upstream Oil companies like ONGC, OIL, etc. So, what does this mean?

Private oil producers like Reliance, Cairn, etc get rights to oil fields after signing production-sharing contracts with the government. These contracts mandate selling oil to Indian refiners at no less than the prevailing international prices. The contracts are structured such that government’s share of production will increase if the producers get a higher price for the oil. While providing the government with another source of revenue, these contracts, by locking Indian oil produce to international prices, ensure that the Indian public does not enjoy the benefits of local production since the oil we find in our land is still as costly as the one we import. This does has a reason that this will attract private investors to help in exploration but how genuine is this reason I am not sure. The government treats the public sector oil producers like ONGC, OIL, etc somewhat differently, based on historical imperatives. They must sell their oil at a ‘discount’ to international prices to the public sector refiners. The ‘discount’, however, is not tied to the rise in international prices or the windfall profits made when this happens; it is fixed every quarter, at the government’s discretion.

After having understood the mechanism lets see how these companies are doing. The Q1 results of 2011-12 showed a combined loss of around Rs 9000 crores by the OMCs. Then, the government delayed the Q1 subsidy cash payments, forcing the OMCs to borrow from banks and pay high interest charges to finance crude oil imports since they did not have enough liquidity to buy. This resulted in them posting a loss of around Rs 14,000 crores in Q2 results of 2011-12. Again, this time the announcement of Q2 subsidy itself was delayed. Apart from this the public sector oil producers provided sharply lower ‘discounts’ to the OMCs on crude oil price in Q2 compared to Q1 and showed sharply climbing profits. Remember that this ‘discount’ is at government’s discretion. While Oil producers showed sharp profit OMCs posted huge losses. Isn’t this a very favourable climate for price hike of retail petrol citing that the under recoveries are mounting and the OMCs are in huge losses? This is somewhat suspicious behaviour and I did not get much material for the more recent times which has lead to price hike of Rs 7.50. I tried to find the data for the past few months but I didnt get lucky yet I didnt dig deeper. Hence, this whole analysis will remain inconclusive beyond any doubts. But the policy and procedure of this whole “under-recovery” business will remain the same even now. So, an approximate conclusion can be reached that this policy is neither transparent enough nor sound enough to continue like this.

The central government has several revenue streams from petroleum products collected at different stages of processing. At the crude oil stage, it collects royalty, a share of the production (from private producers), and excise on oil produced and customs duty on the oil imported. At the refining stage, it collects excise on the refined products such as diesel and petrol. Oil producers, refiners and marketers also contribute to the central exchequer by way of taxes on their profits, dividends and tax on the dividends. State governments collect royalty on crude oil and sales tax on petroleum products. Sales tax rates range from 18-25 per cent on diesel and 19-33 per cent on petrol, with a few exceptions. Last year, the central government’s income from the public sector oil & gas producers, refiners and marketers alone was in excess of Rs 1,00,000 crores. State governments were not far behind, collecting over Rs 80,000 crores. In fact over the past five years, the government has collected Rs 3,48,987 crore in customs and excise duties. Over the same period, companies have under-recovered an almost equivalent amount (Rs 3,54,043 crore). Taxes on petroleum products add to the cost of all goods and services and reflect in their prices. Far from subsidising the public, governments made the public bear a substantial part of their expenditure.

This is where I get confounded as to what is subsidy and what is tax. There have been many suggestions to deregulate the prices but there are apprehensions as to the huge fluctuations of crude oil prices (it had crossed $ 150 mark once) can affect this adversely and rightly so. The subsidy mechanism cushions us from such market fluctuations but at the same time the current mechanism too is not helping us in anyway. Indian consumer pays more for petrol compared to many other developing and developed countries. Both the Centre and states levy taxes on the petroleum sector. But increasingly, the sector has attracted attention not only for its taxes but also subsidies, reflecting the tangle of taxes and subsidies in which we are caught up in terms of collecting revenues, subsidising consumers and encouraging investment in the sector. Even the proposed goods and services tax leaves the petroleum sector out of its ambit. Many questions arise out of the above discussion. Should upstream companies use their resources for new investments to find fuel for the future? Which expenditures would the government have to reduce to meet the additional subsidy bill? Should cheaper diesel benefit the use of luxury automobiles (as it is basically for farmers)?

This issue is embedded in a larger question that has an impact on an already delicate fiscal position. With the current status of our fiscal deficit reduction of tax revenues, and that too in Petroleum sector which is a major contributor, is not a viable option ; how will the government meet the revenue shortfall? Obviously, it cannot touch subsidies in the sector at the same time it reduces the taxes. This will not help the consumer. It may need to cut some other expenditure or run higher deficits. Also, we wake up to this problem only when there is a price shock through higher crude oil prices or Rupee depreciation. Without a more comprehensive approach to addressing at least the fiscal implications, merely cutting taxes on petrol would not lead to any real benefits. So, the issue when looked at on the surface appears to be simpler than it really is. Only a comprehensive change in the policy will be able to provide a lasting solution to this problem. Periodic price hikes or tax cuts will only be short term patches rather than solution to the problem and it might also increase the problem over time.

Since this is only an analysis I will end this here. Any attempt to find a solution requires deeper knowledge of the dynamics involved in this sector. Any different perspective on this is always welcome.


Child Sexual Abuse

May 13, 2012

I remember how Childline (1098) was being propagated as institution that would pick up leftover food from parties to feed homeless children. It was shared by millions on Facebook and many others by emails and other social networks. Ignorance and apathy is what rules these days. I am saying it again just go to http://www.childlineindia.org.in and see the popup. How many calls would they have got and maybe even getting now. That aside, there is a subtle discussion in this show about the real problem our system is facing when it comes to laws. Protection of Children Sexual Offences Bill, 2011 has been passed in Rajya Sabha about 2 days back (It was not passed when this episode was shot I think).

Now this is a commendable task accomplished by the Government. However, TOI has put up a news article saying that this Bill is draconian since it has increased age of consent from 16 to 18 and to quote them, “…but it also seeks to criminalize teenage sex, making any intercourse below 18 years of age an offence”. As has been the reputation of TOI I was not inclined to believe them and took a look at that bill. The clause reads as below (Click here to see the bill)

“…..Provided that where such penetrative sexual assault is committed against a child between sixteen to eighteen years of age, it shall be considered whether the consent for such an act has been obtained against the will of the child or the consent has been obtained by use of violence, force, threat to use force, intoxicants, drugs, impersonation, fraud, deceit, coercion, undue influence, threats, when the child is sleeping or
unconscious or where the child does not have the capacity to understand the nature of the act or to resist it.

Explanation I.— For the purposes of this section,—

(a) “consent” means the unequivocal voluntary agreement where the person has by words, gestures, or any form of non-verbal communication, communicated willingness to participate in the act referred to in this section;

(b) “unequivocal voluntary agreement” means willingness given for specific and be limited to the express act consented to under this section.

Explanation II.— A child, who does not offer actual physical resistance to penetrative sexual assault is not by reason only of that fact, to be regarded as consenting to the sexual activity.”

The bill never talks about consent when it comes to children below 16 and it qualifies what consent is for age 16 to 18. Explanation I gives you the right for consent and Explanation II tells you what is not accepted. After reading this just read the comments on the TOI article and you will see that I am right when I say ignorance and apathy rules these days. This piece of legislation definitely has loop holes like the Dowry Law that can be exploited and used against the innocent but it definitely does not seek to penalize all teenage sexual acts. Ladies and gentlemen, this is journalism in this country and the citizens who believe everything they read in newspapers like TOI or watch on shady news channels.

Below is the video that inspired a part of this article


Defence vs education

April 24, 2012

Over the time you have been researching some issues, you would have visited 100s of articles and more often you come across articles written by normal public and not experts. For example, you start off with articles on defence spending in India, and you dig deep into the subject and reach a page “India tops in illiteracy and Defence Spending” on a Pakistani blog. Its the comments of such blogs I enjoy most. The article is honest with no data manipulations and the tone is, as expected, not so friendly. The comments however try to discredit the author and he defends it well. But sooner or later he turns on the pro-country arguments. This is after repeated assaults on Pakistan’s state of affairs. My point is, the article and some of his comments made very important points. A new way to view the problems. India has a literacy of 74% but in absolute numbers the illiterates are about 300 million which is close to the population of USA which is 312 million.

According to UNESCO estimates, there are about close to 1 billion illiterates in this world. We can say that one in every three illiterates in this world is an Indian. its all in data representation. Lets compare our results with that of China (since that is what we do after Agni-V launch), Brazil and South Africa.

China – literacy rate (Adult) – 95.9% according to 2009 report
Brazil – literacy rate (Adult) – 90% according to 2008 report
South Africa – literacy rate (Adult) – 89% according to 2008 report
India – literacy rate (total) – 74.04% according to 2011 report

(Adult is above 15 years)

China – literacy rate (youth) – 99.4% according to 2009 report
Brazil – literacy rate (youth) – 97.84 according to 2008 report
South Africa – literacy rate (youth) – 97.6 according to 2008 report
India – literacy rate (youth) – 82% according to 2009 report

(youth is 15 to 24 years)

Lets see how much is spent by the countries

China on the other hand spent close to 190 billion US dollars on Education and about 92 billion US dollars on Defence. (irrespective of the rumour that it spends nearly double the declared amount on defence, its still less than that of education)

Brazil Spends about 90 billion US Dollars on Education and about 34 billion US dollars on Defence. (Less for Defence and more for education)

South Africa spends about 24 billion US dollars on Education and about 5 billion US dollars on Defence. (Less for Defence and more for education)

India, in its latest budget spent close to 11 billion US dollars on Education and about 36 billion dollars on Defence. (More for Defence and less for education)

You know that population of India is 120 Cr, China is about 140 Cr, Brazil is about 19.4 Cr and that of South Africa is 5 Cr. Even if you do a crude per-capita expenditure calculation we can see that China, Brazil and South Africa spends more on each person than India does. Also, it spends more on education than on defence. Leave corruption aside and still these numbers are so not encouraging.

note : I have used the US dollars as a common currency for comparison. If there are any discrepancies in the data provided please do point it out.