Sage Thoughts On Modi's Beard

It was recently remarked upon that Modi has been seen with a longer beard than his usual trimmed one. It was also speculated, with good reason, that this is part of a deliberate PR strategy to make him appear like a wise old rishi (sage), so as to make him even more venerable to his devout followers.

The old trimmed beard, giving Modi the efficient and deadly look that suits him so well (OK, he may not be efficient, but he is deadly, as his many victims would attest (if they're still around))

The new, longer beard - an attempt at cultivating a sage-like image. Does it work?

I must say that the rishi look reminded me of so many less-than-complimentary episodes from Hindu mythology that I simply couldn't understand how this was supposed to be a positive image makeover.

Let me illustrate.

1. Shakuntala and the curse of Sage Durvasa

When Sage Durvasa visited the ashram of Sage Kanva in the latter's absence, his adoptive daughter Shakuntala attended on him. But she was lost in daydreams about King Dushyanta, which enraged the sage. He cursed her saying Dushyanta would forget her. (Of course, it all ended well eventually, but this is the bit that we're interested in.)

After all the talk about Vikas (development) during his pre-2014 election speeches, can one blame a poor nation for daydreaming about it? Apparently yes. The Modi curse has taken effect, most dramatically.

2. Ravana and his abduction of Sita

Ravana's devious plan to abduct Sita consisted of having his henchmen lure both Rama and Lakshmana away from their cottage deep into the forest, while he approached Sita disguised as a mendicant and begged for alms. He hadn't reckoned with the lakshman rekha, a charmed line drawn with the tip of an arrow by Lakshmana around the cottage, which acted as a barrier to the demon king. Ravana then realised he would have to lure Sita out of the magic circle through sweet words and deceit. Gullible Sita trusted the cunning mendicant and stepped outside the protective circle. Once the deed was done, nothing could save her, and Ravana carried her away.

Once voted in, the man proved impossible to dislodge, helped amply by the fact that he has no credible opposition. Even those who can now see that he is a demon are resigned to his perpetual rule.

3. Vishwamitra and the creation of Trishanku Swarga

King Trishanku approached Sage Vasishtha with a request to be allowed to ascend to heaven in his earthly body, and the sage outright refused his outlandish request. Trishanku then approached Vasishtha's arch-rival, Sage Vishwamitra, with the same request. Vishwamitra took on this task with relish as a way to stick it to his rival, and performed a ritual to enable Trishanku to rise to heaven in his earthly body.

Things came unstuck when Indra, king of the gods, pushed Trishanku out of heaven, and he tumbled back to earth. Vishwamitra halted his fall, but couldn't push him back into heaven. So Trishanku remained stuck, upside-down, between heaven and earth. As a consolation, Vishwamitra built an alternate heaven around Trishanku ("Trishanku Swarga"), but he remained upside-down.

The Indian economy has strong fundamentals, and can potentially grow at double-digit rates under a wise government. Alas, Modi's government is anything but, and so the economy is stuck, unable to progress in spite of its inherent entrepreneurship and pent-up demand.

4. Vishwamitra's temptation by Menaka

During Vishwamitra's penance, Indra (the king of the gods) sent Menaka, an apsara (nymph) to distract the sage and prevent him from attaining formidable spiritual powers. She succeeded, for a while at least.

Modi has claimed more than once to be unattached to the loaves and fishes of office, but betrays an unbecoming fondness for them all the same.

5. Vishwamitra's refusal to accept his daughter Shakuntala

Well, what do you know? The story comes full circle because the daydreaming damsel we saw earlier was none other than the daughter born to the apsara Menaka and Vishwamitra. He didn't want anything to do with the baby, so Menaka handed him over to Sage Kanva, who adopted and brought her up.

For a man who was acerbic in his barbs against the Congress government before the 2014 election, Modi shows a curious reluctance to take responsibility. He is quick to claim credit for all successes, even if their seeds were sown by previous governments, but equally quick to pass the blame for his failures onto any convenient scapegoat.

6. Bhasmasura and Shiva's imprudent boon

The demon Bhasmasura prayed long and hard to Shiva, and when the latter appeared before him to grant him a boon, Bhasmasura asked for the ability to reduce anyone to ashes by touching their heads. A careless Shiva granted the boon, then was horrified to see Bhasmasura attempt to touch Shiva's own head. Shiva ran for his life, and it was only Vishnu (in the guise of the temptress Mohini), who managed to trick Bhasmasura into following her dance moves, culminating in her touching her own head...

Modi (and his followers) have made much of his "muscular" foreign policy combined with a highly personalised style of diplomacy, and he devoted a great deal of effort towards wooing China's Xi Jinping. But things went horribly wrong when Modi's failure to adhere to his agreement with Xi (the so-called "Wuhan Consensus") led to a military confrontation in June 2020. While the Indian army acquitted itself creditably during that episode, Modi's own behaviour was disappointing. In his speeches following the confrontation, he did not mention China by name even once!

Conclusion

I don't think a longer beard is going to do Modi's image any favours. His new look only reminds one of several episodes from Hindu mythology when sages did less-than-wonderful things.

I think he should go back to the trimmed and deadly look.

An Early Prediction For India's 2019 Election

In financial markets, two types of analysis are common. Fundamental Analysis goes into all the factors that affect markets, and attempts to predict them, and thereby their impact on the prices of assets. But Technical Analysis completely ignores fundamentals. Operating under the idea that "price discounts everything", Technical Analysis looks purely at the movements of prices, and attempts to discern patterns from time series data.

I've decided to do some Technical Analysis of the Indian Lok Sabha (parliamentary) elections. I'm going to look at vote shares and seat shares, without worrying about the fundamentals that impact them. We will see that this approach has some merit too.

The Indian parliamentary elections of 2019 are likely to be the biggest in the world, as usual

First off, I noticed a curious fact, i.e., that the sum of the seats of the two main parties, the Congress and the BJP, has been virtually the same in the last two elections, suggesting that the gains of one come mainly at the expense of the other and not any third party.

[In 2009, the Congress had 206 seats to the BJP's 116, for a total of 322. In 2014, the BJP had 282 seats to the Congress's 44, making a total of 326. The strength of the house is 543.]

I then plotted the correlation between the BJP's vote share and its number of seats between 2009 and 2014, interpolating for all the percentages in-between. A screenshot of the spreadsheet is below.

A straightforward analysis with some stark results

In interpreting this spreadsheet, I made two fundamental assumptions.

1. The BJP's vote share of 31% in 2014 is unsustainably high, since it represents a swing of 12% in a single election. It will have to drop in 2019.

2. However, the BJP's vote share is unlikely to drop below its 2009 level of 19%. That represents its core base.

Hence, we have to look at all the vote share percentages from 20% to 30% (inclusive) to assess the likely outcomes.

And two facts are immediately obvious from this analysis:

1. The BJP will not succeed in replicating its absolute majority in 2019. Even a 1% drop in vote share will take its seats tally to 268, which is below the 272 required for an absolute majority. Hence a coalition government is virtually guaranteed even if the BJP does return to power. It will have to be as part of the larger NDA coalition.

2. It is highly unlikely that the Congress-led UPA will return to power. The BJP's vote share will have to fall from 31% all the way down to 22% or less, for the UPA to have a chance at returning to power. In no case will the Congress get an absolute majority on its own.

In spite of these fairly certain outcomes, the power dynamics after the results are out are likely to be very interesting. A lot depends on the personal characteristics of Modi himself. His flexibility, humility and ability to reach out to different groups in a spirit of compromise will be on test. So far, he has shown discomfort in dealing from anything but a position of absolute power.

Those days now look numbered.

The RBI's Silence Means Modi's Demonetisation Was An Even Bigger Miscalculation Than Anyone Realises

On July 12, 2017, almost 8 months after the announcement of demonetisation, RBI Governor Urjit Patel told a Parliamentary Standing Committee that the RBI was still counting the money that had been received by the banking system, and hence he could not state how much money had actually come in.

This was doubtless an extraordinary admission. It speaks pretty poorly of India's banking system that there cannot even be a rough estimation of this amount, since all exchanges were stopped on December 25, 2016, giving the banks more than 6 months to count the cash.

I'm going to make a bold guess here and say that the RBI Governor is lying. Yes, you read that right. The RBI Governor is lying. He knows exactly how much money has come back into the system, but is unable to reveal it. Why?

Urjit Patel - Stuck between a rock and a very hard place

At the time of the demonetisation announcement last year, the amount of money in circulation in 500 and 1000 rupee notes was estimated to be 15.5 lakh crores. There was talk that the government was expecting about 13 lakh crores to come back into the banks as a result of the forced exchange, and that the remaining 2.5 lakh crores was "black" and could not be returned in the full glare of publicity. It was thought that black money holders would throw these worthless notes into the river (some of that did happen). This was how black money was going to be "hit".

Further, since 2.5 lakh crores of (in essence) promissory notes ("I promise to pay the bearer") were never going to be presented, it meant that the RBI would be absolved of 2.5 lakh crores worth of debt to the general public! This extinguished debt was going to be a one-time windfall that the RBI could transfer to the government as a huge budget surplus that could then be used to fund so many initiatives.

Now here's my theory.

I believe that the expected shortfall in currency returns did not materialise. On the contrary, I believe more money than the expected 15.5 lakh crores has come back into the system. It implies that far from demonetisation having struck a blow against black money holders and counterfeiters, the system has been cheated, and it has been cheated in more than one way.

1. Black money has been effectively turned white using demonetisation, since virtually all the deposits made have been under the no-questions-asked limit of 2.5 lakhs per bank account. A lot of private deals between black money holders and ordinary account holders must have been struck to enable this laundering, and the government is none the wiser. Minus a commission to the account holders, the original owners will eventually get back all their money. The whitewashed money will therefore largely return to the black economy, and the taxman will remain empty-handed.

2. Counterfeit currency in 500 and 1000 rupee denominations has been successfully exchanged for genuine currency in smaller denominations. Think about it. If the money that returned is more than what the RBI had put into circulation, it only means a large number of counterfeit notes have also been submitted and exchanged for genuine notes in smaller denominations. Demonetisation has unwittingly devalued the currency. By how much is anyone's guess. The RBI surely knows but is not telling.

3. Not only has the government not got its bonanza from the RBI in the form of the expected extinguished debt of 2.5 lakh crores (and hence no funds to spend on its pet initiatives), it is now in greater debt because of the demonetisation exercise. The increased deficit, as any economist will tell you, will add to inflationary pressures.

4. It means poor people have suffered for nothing. It was remarked during the months of November and December 2016 that the Indian people were demonstrating exemplary patience. Poor and lower middle class people underwent great hardship during these months, standing for hours in bank and ATM queues, and managing their lives with a chronic shortage of cash. Yet the thought that it was all in a good cause, and that holders of black money were suffering even more, kept them in relative good humour. But now, if it turns out that black money holders have managed to have the last laugh, and that common people have suffered for nothing, won't the voting public be outraged?

5. Paradoxically for a move that caused such widespread suffering, demonetisation boosted Modi's personal popularity. He was seen to have struck a blow for the common man against corruption, and the people were willing to suffer to see his efforts successful. The word "masterstroke" was often used, along with the phrase "He has delivered!" Modi seemed like a clever and decisive leader who had outwitted the enemies of the country and placed India on a path to growth and prosperity. Now everything has been turned upside-down. Modi no longer looks clever. He looks like a fool. The crooks have taken him for a ride.

Outwitted - an uncharacteristic look for a perpetually smug politician

This is politically explosive stuff. If it becomes common knowledge, Modi will be politically weakened, perhaps so badly that he may lose the 2019 election.

And that is why I believe RBI Governor Urjit Patel is trying to dissemble, obfuscate and delay his way out of the mess he has been forced into. His political masters have forced him into this sorry situation.

India's Coming Stagflation Shock

The Background

On November 8, 2016, Indian prime minster Narendra Modi announced a shock decision that he claimed would strike a blow against "black money" in the economy. He announced at 8 PM that 500 and 1000 rupee notes would cease to be valid by midnight, and that the only way to preserve one's cash would be to have these notes converted at a bank. This move promised to flush out all the unaccounted wealth held by people.

There were a few potential problems with Modi's approach, however:

• "Black money", or money that has been unaccounted for for taxation purposes, is estimated to be around 20% of the Indian economy, although that percentage has been reducing over the years. Many economists have been of the view that as the country's economy improves, black money will form a smaller and smaller fraction of it, and therefore should not be a source of worry in the future in any case. Modi's move may not have been necessary at all.

• Most of the unaccounted wealth in India is not held in cash. It is held in real estate, gold or as foreign currency, a lot of it in overseas tax havens. Striking at cash would only hit a small fraction of all unaccounted wealth.

• Poorer Indians deal only in cash, and the bulk of the cash in the economy is used by the poor. Indeed, the bulk of the Indian economy runs on cash. The 500 and 1000 rupee notes that were declared invalid overnight accounted for 86% of the total value of cash in the country, most of it in the hands of the poor, not the rich. It was the poor, and small businesses, who found themselves suddenly insolvent after Nov 8.

• Most Indians have no bank accounts. They would have to open bank accounts and deposit their cash, before they could withdraw part of it in 100 rupee notes. This again hit the poor hardest.

The turmoil was further compounded by poor execution.

• A cash economy needs denominations spaced at regular intervals - 1, 2, 5, 10, 20, 50, 100, 200, 500, 1000, 2000, 5000, etc. Before Modi's announcement, there was a gap in the Indian currency line-up. There was no 200 rupee note, and the jump from 100 to 500 was quite steep. The demonetisation exercise, far from plugging this convenience gap, worsened it by removing the 500 and 1000 rupee notes and introducing a 2000 rupee note!

• If higher denomination notes (like 500 and 1000) were suspects in the black economy (because they're easier to store and transact in shady deals), then the introduction of an even higher denomination note (2000) as part of a strike against black money was mystifying.

• There simply weren't enough 100 rupee notes to replace the withdrawn 500 and 1000 rupee notes. It could be argued that printing these in large numbers beforehand would have destroyed the element of surprise that was necessary. However, there were other logistical problems that compounded this problem.

• ATMs had not been recalibrated to dispense enough 100 rupee notes, nor to dispense the new 2000 rupee notes. In any case, banks soon stopped stocking ATMs so as to conserve the precious supply of notes for their own customers.

• The rules kept changing on an almost daily basis. To some, this indicated a lack of foresight and planning. To others, it indicated agility and an ability to adapt to changing circumstances. In any case, these frequent changes reduced people's faith in the system and the wisdom of those in authority. The Reserve Bank in particular lost a certain amount of credibility.

Along the way, as the government saw that most of the 500 and 1000 rupee notes were re-entering the system through bank deposits that appeared legitimate, it realised that its objective of exposing black money had failed. Either most of the cash in the economy was actually legitimate, or those with black money had succeeded in laundering it by using poor people as fronts.

About a month after the initial announcement, the government changed its tune to claim that the objective of the demonetisation exercise was actually to push India into becoming a "cashless" economy. In subsequent days, this claim too was toned down in the face of obvious logistical challenges, such as poor penetration of electronic payment systems, mobile networks and sometimes even electric supply. The currently stated objective is a "less cash" economy, which is a rather tame and uninspiring one when compared to the sound and fury that accompanied the initial announcement.

Where We Are Now

At any rate, what matters is that the Indian economy has been hit hard, and that brings us to the topic of this post. There are those (mainly upper class, city-dwelling folk) who believe that the situation will ease in the next couple of months as more cash in the form of 100 rupee notes is printed and released into the economy. Some have even argued that the economy is healthy because prices have stayed stable. But they are missing what has actually happened to the economy in the meantime.

Prices are stable today only because demand has been suddenly choked by a lack of cash. This is technically a period of recession, and it has been brought about by one executive decision. But supply has also been hit, and the full shock will be felt as the pipeline dries up. The economic hinterland has essentially locked up. Factories have closed due to lack of demand as well as the inability to pay workers in cash. Workers have returned to their villages to a lifestyle of subsistence while they weather the storm. Farmers have had no cash to buy seeds, and that has drastically reduced planting of the Rabi (winter) crop. There may not be an actual famine when the crop is due for harvest in February-March, but food prices will rise sharply because of the agricultural shortfall.

In short, the Indian economy is heading for a period of stagflation - the worst of all possible worlds. There will be high unemployment and prices will rise steeply. Many of the small business shutdowns today will end up being permanent because of creditors forcing asset selloffs. The shock will probably hit the country with full force after April 2017, once agricultural shortages from the inadequate Rabi harvest begin to be felt.

At that point, everyone (whether a supporter of Mr Modi or otherwise) will see what destruction he has wrought.

When a strong leader with little understanding of economics and a baseless faith in his own abilities takes such drastic decisions, an entire nation pays the price. In the past, we have only seen such tragedies play out in communist dictatorships (under Stalin, Mao and Pol Pot).

India is about to give the world an example from the ranks of the democracies.

As a postscript, it will be interesting to see who within Modi's BJP party fires the first arrow of revolt. I predict it will be the old patriarch, LK Advani, who will then be joined by several others who will snipe at Modi while taking cover behind Advani. If he survives the revolt, Modi will spend the last two years of his term as a lame duck prime minister, and it is very likely that he will have to return to his home state of Gujarat in disgrace after the 2019 election.