GIS Business : An Overview is a peer-reviewed scholarly journal and aims to publish original articles, review articles, case reports, short communications, etc. Journal indexed in SCOPUS, papers are not indexed. Send papers to editor@gisbusiness.org

  • GIS-Business Journal is Indexed in Scopus, papers are not indexed. UGC approved journal. Send papers to editor@gisbusiness.org

The bonanza / disaster of 2014

As the year draws to a close it is customary to review the year gone by. What do you think was the most significant event of 2014 ? Some would say Ukraine. A few might vote for Ebola. Still others might say ISIS. What about the missing Malaysian Airlines plane ? Others might say the Indian elections. Many in my part of the world might even say Lingaa :)

In my opinion however, the most significant happening of 2014 was the steep fall in the price of oil. In June 2014, Brent crude stood at $110 a barrel. Today it is at $ 60. This has profound ramifications on both the economics and politics of the world.

Because of the world's dependence on oil as the primary source of energy, there has been a massive transfer of wealth over the last decade or two from the poor to the rich. Most of the world's nations are oil importers. A few, blessed by sheer geographical luck are oil exporters. Wealth has gushed from the former to the latter for years now.

With the step decline in the price of oil, the tide has turned. The oil exporters are facing economic disaster. The hardest hit is Russia - a kleptocracy that has frittered away the oil boom years, now suffering from the twin effects of falling oil prices and the sanctions over Ukraine.  The rouble has crashed and they have been caught pissing in to the wind  (apologies to this blogger !). Next in line is Venezuela, another country that wasted the good years. Iran is yet another sufferer. Even mighty Saudi Arabia is vulnerable. The following chart shows the lot that is in trouble.

The rest of the world is a winner. Inflation, world over, has come down. Global GDP may raise by 0.5% or so, purely on account of oil price. The US and China are the biggest beneficiaries. In fact the booming shale gas production in the US, coupled with weak economic growth globally has caused the fall in price of oil. As an aside, the tree huggers in the UK and elsewhere in Europe who have been blocking every move to frack in Europe must be forced to pay $110 a barrel for oil and not benefit from the effect of the shale gas revolution in the US.

Poor countries across the world have benefited from lower oil prices and have been able to curb inflation. India is the biggest beneficiary of them all. Inflation in India has steeply fallen solely on account of oil prices. Petroleum subsidy has fallen so much that the government has raised taxes on petroleum products and at the same time decontrolled diesel prices without a squeak from the public. The fiscal situation would have been a far greater disaster but for the unexpected bonanza. 

Oil prices will probably recover, but are unlikely to go back to three figures in the near term. That might have larger consequences. Inflation can be held in check. Funding to the Islamic jihadists, which has largely flown from oil money is likely to be constrained. Russia is unlikely to repeat its misadventures as in Ukraine. The oil producers such as Venezuela and Nigeria, who are most affected will be forced to adopt more sensible economic policies which can only benefit them in the long run. All in all, we can ring in the new year with a feel good factor.

PS : This blogger owes an apology for going AWOL for 2 months and is deeply thankful to his readers who have all been very kind and encouraged him to "come back"

    Make in India

    India is an outlier in terms of economic development. Traditional economic theory suggests that in the beginning all economies are dominated by agriculture. As the economy develops, manufacturing becomes the predominant sector. Further up in the stage of development comes services. The linear development is the model for all countries, including China. The one exception is India.

    India has never been a manufacturing economy and has leapfrogged to becoming a service economy. A full 55% of India's economy is the service sector. This is all fine, but for one problem. Where are the jobs for the teeming millions of Indians going to come from ? You need a big manufacturing base to absorb the youth coming into the job market every year. India has to create 12 m new jobs every year. Hence the Make in India need.

    India actually has a huge competitive advantage now - it is actually cheaper as a manufacturing destination than China. China has become expensive, but retains its predominant position simply because there is no real alternative at that scale. Countries like Vietnam or Bangladesh are small. The only big competitor is India. 

    Achieving real manufacturing scale and , thereby jobs, will need concerted action over 20 years. Mere slogans will, of course, achieve nothing. This has to be backed up by proper policy action.

    What is needed to be done ?  Quite a lot actually, but let us begin with three things that do not need to be done

    - Tax incentives to manufacturing. This is the soft option, but must not be done. Neither is it necessary nor is it equitable to do so.

    - Lowering interest rates. All the pressure on the RBI governor is self serving bullshit. No serious company makes investment decisions based on short term interest rate

    - Diluting labour laws. Actually this is hardly needed. Labour laws, other than when factories are closed, are actually sensible, fair and progressive in India today. It is better than, say, in France. We should not dilute labour laws and allow the Rambo manufacturing that  happened in China.

    The key elements that need to be tackled are

    - Amending the Land Acquisition Act. The last Act completely swung the other way and as it stands now it is almost impossible to acquire land to set up a factory. The government, realising this, is acting through an ordinance

    - Infrastructure - Ports, Roads, Railways and Power. This will take time, but must be done largely by the government, although partnership with the private sector will also be key.

    - Single window clearance from the government. All clearances within 3 months for setting up a factory.  Doesn't matter if a mistake or two is made.

    - Remove all caps on foreign investment in manufacturing. Who cares where the money is coming from as long as jobs are created. 

    - Rein in Ramamritham. If possible chop him into bits and throw him into the sea. You just have to drive through Sriperumbudur, on the outskirts of Madras to see the havoc Income Tax Ramamritham has caused. Shut factories - Nokia, Foxconn ...... Any industrialist who now starts a factory without a cast iron defence against Ramamritham is an idiot.

    - Enforce contacts and the rule of law speedily. Perhaps even a separate judicial process for business matters. One of the sad facts in India is that despite the rule of law, contracts, especially with the government, are practically unenforceable.

    - Make India, one India. Each state competes with others to create bottlenecks and roadblocks, because of the preponderance of local Ramamrithams. National laws, such as the GST are an imperative. The Centre cannot dictate this, but should simply go ahead with the willing states and leave the outliers either to join the bandwagon or suffer.

    - Stay the course. Create the framework and then don't change it for a decade at least. Let a thousand flowers bloom !

    None of this is even politically contentious in a major way. Start and build  momentum. Investments will come. Money will be found. A juggernaut, once started, cannot be stopped - there is already the example of the IT industry.

    Motor ahead, India.

    No french fries in Japan

    If you go to a McDonald's in Japan, be prepared for no french fries (freedom fries ?). Or, at best, if you smile nicely at the young girl, you might get a small fries. No wolfing down the one tonne abomination called large fries. The end of the world has arrived !! What on earth has happened ?

    Well, the problem is not in Japan, but in the US. There is a big mess in the ports on the US West Coast. McDonald's ships frozen fries to Japan through these ports. Shipments are getting massively delayed. McD don't make french fries in Japan at all - all of it is sourced from the US. Hence the problem in Japan.

    What is the mess on the US West Coast ports ? Well, almost everything is a mess. They account for more than half of all US maritime trade and the two ports of Los Angeles and Long Beach account for some 40% of US shipping.  There are are a number of problems across all these ports.

    Firstly there is a labour dispute going on. The union and the management of these ports have been negotiating for 7 months now and have made no headway. As usual, pay, working hours, etc etc are in dispute. Now the Pacific Maritime Association, the management group, wants President Obama to intervene and appoint a mediator. As if the President has nothing else to do. Solve your problems yourselves, you lot. I thought businesses wanted governments to leave them alone, not intervene. Well, this speaks of the real demands of businesses from governments - leave us alone when the times are good and come in and pick up the pieces when times are bad.

    Secondly, as is happening in almost everywhere in the US, infrastructure is not keeping pace. Container ships have doubled in size and yet US ports have made little investments to handle such behemoths. This is a general problem with US infrastructure everywhere - ports, airports, roads, whatever. Everything is slowly going down and there is little money to spend on them. The citizens of the US would rather spend on dropping bombs on others (Defence),  doling themselves out (Social Security) and cossetting the elderly, even if they are comatose (Medicare). The crumbling of infrastructure is slow and therefore incrementally not noticed. It takes an infrequent visitor to see how far the US has slipped. Today, the drive from JFK to Manhattan, is inferior to the drive from Bangalore Airport to Whitefield - and that really says something.

    The third problem, of all things, is a shortage of truck chassis to haul containers in and out. I have no idea why this is so. And apparently there are more factors, unique to the region and specific to the industry.

    This is a real shame. When economic growth is at a huge premium, surely you cannot afford to lose because of bad planning, poor infrastructure and intransigent unions.

    Ah well; Mr Tamaguchi has to simply control his craving for fries. Perhaps the union workers in Long Beach are concerned about his cholesterol levels ! It just goes to show, how in today's interconnected world of business, a completely unrelated problem in one corner of the world might have repercussions in the other corner. And "drastic repercussions" if you are like Mr Tamaguchi looking for his fix.

    Oink Oink; I am taking over the world

    What do you think the purpose of agriculture is ? To feed people, right ? Wrong ! The purpose of agriculture is to feed pigs. Very shortly more than half the crops grown in the world will be used to feed pigs. This was the astounding revelation I read in The Economist here.

    The problem is  China.  The staple diet of the Chinese is not rice or wheat – it is pork.  Pork is eaten in astounding quantities, every day, every meal.  In India, governments fall over the price of onions, in China they will fall over the price of pork. So much so that the Consumer Price Index is jokingly referred to as the Consumer Pork Index !

    The Economist article throws out mind boggling implications of this Chinese fixation with eating a pig. The Amazon rainforest  is being cleared in Brazil to grow soya to feed Chinese pigs. The Chinese are buying up land all over Africa and Latin America, not to feed their people , but to feed their pigs. One of the biggest source of water and soil pollution in China is pig waste. One fifth of the emissions produced in the world is from livestock and the biggest contributors to this are American cows and Chinese pigs, through their flatulence of all things. Pig farming has become so intense in China that they are like factories – pigs are born and live all their life in metal pens, they never see sunlight, they are all artificially bred, they are given antibiotics with every feed , they are fattened beyond their natural size and they are killed as soon as they become big. Because of the routine dosing of antibiotics, they are also one of the sources for the emergence of antibiotic resistant bacteria.

    The Chinese government is so obsessed with pork prices that it appears to be having a “pig bank” to stabilize pork prices. This comprises both of pork and live animals. Presumably the live  animals form the porcine wing  of the Communist Party.  They also have to subsidise pork production – by an astounding $22bn in 2012 , it appears.

    There is little chance of turning the Chinese into vegetarians. They don’t even have a word for vegetarianism in Mandarin – this blogger knows to his cost !!  Their gobbling up of pigs is only bound to increase. Hollywood should forget about movies such as The Zombie Apocalypse. Instead, they should try The Porcine Apocalypse !!

    Oh No, you too China ?

    The United States believes, sometimes, that it is so unique that it exists in Planet HIP 116454b (discovered yesterday). Some of its laws and practices are completely unintelligible to other members of the species Homo Sapiens. Chief amongst them is its laws relating to guns. A lesser dramatic field is the one on taxing global incomes of Americans (and now even green card holders). This blogger railed about it in the past here.

    Now it appears that the Americans are no longer alone in Planet HIP 116454b, at least in regard to the taxation law. The Chinese are also joining them there.

    World over, the principle of taxing income is that you pay income tax in the country where you live and not in the country you are a citizen of. So, if you are an expatriate living in another country, you pay taxes in that country of residence. This seems reasonable. You utilise the services of the state where you live - infrastructure, police, defence, healthcare, etc etc. It is therefore only right that you pay taxes to enjoy those facilities.

    America believes differently. It believes that you pay taxes where you live (it can do precious little about that) AND pay taxes in America. To control and monitor this, America has enacted the draconian FATCA, which can be considered reasonable only in Planet 116454b.

    Now China is proposing to engage in the same stupidity. Actually , it appears the law was always like that in China, except that it just wasn't enforced. Considering that the "law" in China is not what is enforced by the judiciary, but what is the prevailing interpretation of the Communist Party, this in reality is a change in the law. They are going down the same path as the Americans - demanding that other countries hand over information relating to their citizens, and starting to hound them with Ramamrithamesque legislation.

    It actually is quite stupid of China to be trying this. The wealthy Chinese who are emigrating abroad all want to give up their Chinese passport as fast as possible and become citizens of America or Australia or wherever. The majority of their overseas citizens who will be affected are the poor migrant workers working in Lesotho or Burkina Faso building roads or constructing buildings. If the attempt is to get at local Chinese stashing their wealth abroad (of which there are plenty), they can already do that and in any case this move is not targeted at those who are Chinese residents anyway.

    A real danger is that our own home grown Ramamritham is eyeing all these moves with undisguised glee. Its probably a matter of time (next budget ?) that he will make a similar move. This blogger is least affected - he lives in India and pays his taxes here anyway. It is his overseas friends , who are readers of this blog and have retained their Indian citizenship, who must start to quake in their boots.

    Deflation: a curse or a boon ?

    Stock markets tumbled last Monday. Investors claimed they were worried by two things - Deflation and the possibility (yet again) of a Greek exit from the Euro. Even Rajalakshmi, she who is sitting in front of CNBC doing day trading, claimed to be concerned about deflation. Assuming that she can spell it, this is pure stuff and nonsense.

    Deflation refers to a sustained trend of falling prices. When this happens, demand tends to fall as people expect prices to reduce further and postpone purchases. Falling demand leads to unemployment, lower wages and therefore still lower demand and prices. When this is sustained over a period of time , economic growth collapses , much like what Japan has experienced over decades.

    But to consider the current circumstances as deflation and therefore hammer down stock prices is incomprehensible to this blogger. Yes, price indices have been falling in recent months, but that is solely on account of one factor - the price of oil. The dramatic drop in the price of oil is actually largely a good thing as this blogger blogged about only a week or so ago. Maybe it needn't have dropped so soon and so fast, but a sustained drop in oil prices is actually great for the economy. The massive transfer of wealth that has happened from all over the world to the sheikhs in the Middle East and to Russia has hardly made the world a better place.

    There is no reason to believe that economic growth is going to suffer in any sector, other than oil. The US economy is actually doing quite well. Europe may continue to be stagnating, but almost every other region in the world is seeing an upturn. China's growth may be slowing down, but it is still at levels which every other country in the world would give an arm and a leg to achieve. India is at least looking positive even if it does not have much result to show for as yet.

    Armchair analysts who plot consumer price indices and proclaim that when it declines there is deflation are deluding themselves. Price reduction brought on by innovation, productivity, technology and cost reduction are actually great for any economy. Witness the IT and consumer electronics industry where prices fall all the time and demand booms. The current bout of price index falls is because of cost reduction - reduction in the cost of oil. My good blogger friends who are filling up their gas guzzlers in the US are feeling pleasantly surprised. My good friend was so surprised filling 5732 gallons into his tank, that he even blogged about it. There is a bit more in the pockets of most citizens of the world, except those of the oil exporting and mismanaged countries (read Venezuela, Iran, Russia).  Not one of those good citizens gives a rat's ass to fears of deflation.

    When equity markets fall again and when they mention deflation scares, that's the time to invest.

    The tortoise may overtake the hare

    Sometime in 2015, or more likely 2016, or maybe 2017, India will overtake China as the fastest growing large economy in the world.  It could potentially be a historic moment, for India and the world. The opportunity is India's to grasp, or equally likely, drop.

    China's economy is slowing. Its GDP growth for 2014 (announced in an incredible 19 days after the year end) was 7.4 %. For the first time in 30 years, its GDP growth is below its own target of 7.5%. China's statistics are to be taken with a pinch of salt. Apart from the gargantuan task of measuring GDP for such a large country and number of people, its numbers are also, let us say, "approved" by the Communist Party. It was very likely that in the heady days, for a long period, China actually under reported its GDP. Growth was at such a frenetic pace that the Party was doing all it can to dampen the numbers. Now, its quite likely that the announced 7.4% is probably a tad overreported.  China's is a huge economy. Growing at that breakneck speed is no longer possible. The economy is slowing. Make no mistake; the growth rate , for its size, is still stunning, but the inevitable slowdown is starting. China is starting to slowly transform into a more mature economy.

    Enter India. Its financial year ends in March and for 2014-15 and for the first three quarters it grew by 5.3%. That is still a full 2% below China's. But the trajectory is upwards. The World Bank last week estimated that India's growth rate would overtake China's in 2017. Goldamn Sachs estimates that it will happen in 2016. The IMF has just announced that it expects that to happen in 2015 itself. It is estimating India will grow by 6.5% and China by 6.3 %. We shall see.

    Maybe, just maybe,  India's time in the sun is about to come. It has a strong government which is betting on development as the plank for reelection. It has a young and large work force. It is a slow elephant prone to many stumbles and disappointments in the past and could flatter to deceive again. But something tells me that this time India may actually do well. If there is a sustained period for say 10 years, when India is the fastest growing large economy, it will have profound consequences both for the country and for the world. 

    For Indians, it may be the chance, finally, to start winning on "Garibi Hatao" (eliminate poverty).  For the world, somebody must take China's place in leading global growth. India is the natural, and preferred choice. Geopolitically, a rising India will also contribute to a multipolar world and manage the "risks" of the China ascendancy. Just as China's rise from the 1990s transformed the world, the same could happen all over again with India.

    Wishful thinking ?? Maybe. But for reasons this blogger cannot explain, this time, it looks different. Its India's turn to "win the World Cup". It's cricketing fortunes may be on the wane but its economic fortunes couldn't be better.  The first step will be on February 28th when the first real budget of the BJP government is presented. If its a cracker, then that might be the start of India's ascent.

    It may be the best time to be an Indian.

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