India -Taxing the super rich more


Recently there is a talk about taxing the super-rich more. At present there are In India only 3 rates i.e 10%, 20% and 30% of taxable income, for taxing the income of people in India. These slabs can be increased to 5 or 6. In several countries there are 5 slabs. In several developed countries, the maximum rate of income tax exceeds 50%. India can introduce tax rates of 40% and 50% for higher income groups. In countries like Italy and Netherlands, everyone has to pay income tax irrespective of the income. It is only fair that those who enjoy more benefits from government viz low income people should also be made to take some responsibility to pay at least a token contribution for the benefits. The lowest tax rate could be nominal –may be 1% or 2%. Cost of collection of income tax in the lowest slab would be high but ways can be found to minimise the cost of collection. Alternately indirect taxes like excise duty and sales tax rates should be increased.

Income from agriculture should also be taxed. However farmers should have the freedom to fix prices for their produce in the same way as industrialists fix prices for their products. Government should not interfere by regulations like procurement prices, ban on exports, export duty etc. Of course, governments can do away with the grants and subsidies.

The minimum wages should be so much that it is sufficient to meet all the basic needs and tax payments.

Overvalued and undervalued currencies


In India Rs.25 can get one kilogram of good quality rice. In United States of America US$ 1 can buy one kg of comparable quality of rice. The rice being same in both cases, US$1 should be equal to Rs.25. But one can get in the banks or elsewhere about Rs.50 for 1 US$. This means that Indian Rupee is undervalued by 2 times. In some other cases 1 US$ may be equal to Rs.50 or Rs.20 or so. When we take the value of the total production of goods and services, i.e. GDP.we get an idea of how much the currency of a country is undervalued or overvalued. International Financial organisations like IMF, compute the GDP of a country both in nominal terms ie. on the basis of rates of exchange and on Purchasing Power Parity (PPP) terms. From these figures we find that while currencies of most of the developed countries are overvalued, the currencies of the developing countries are generally undervalued.

The major countries whose currencies are undervalued are:

1.India by 2.8 times
2.Iran by 2.2 times
3.Taiwan by 2.2 times
4.China by 1.9 times
5.Mexico by 1.7 times
6.Russia by 1.6 times
7.South Korea by 1.6 times
8.Poland by 1.6 times
9.Turkey by 1.6 times
10.Indonesia by 1.6times

The overvalued major currencies are those of:

1.Australis 1.4 times
2.Canada 1.2 times
3.Japan 1.2 times
4.Italy 1.2 times
5.France 1.2 times

In the past Indian Rupee was undervalued by 3-4 times. As the economy expands,the currency becomes stronger. May be in the coming years, as the economy expands,Indian Rupee may not be so much undervalued as now. This will mean that the imported goods may not be so much costly as now.

Employment generation is easier in developing countries


There is a lot of scope in developing countries for creation of employment avenues. In developed countries, the scope for laying new roads is limited as they already have sufficient roads. Similarly, there is very limited scope for laying railway lines, drawing electricity and telecommunication lines, in building houses, in building lakes and digging canals, laying sewerage, expanding supply of piped gas etc., as saturation point has already reached. But in developing countries, the scope is unlimited. In other words, while it is difficult to generate employment in advanced countries, it is very easy to do so in developing countries.

All the works mentioned above, will not only eliminate unemployment, but would lead to labour shortage. However, priority should be established for undertaking the different works. Irrigation and agriculture should get the top priority. After digging lakes and irrigation wells around the lakes, it takes only about 4-5 months to get additional production of food grains. The second priority should be to set up cotton ginning, spinning and weaving mills and ready made garment units.

Funds should not be a problem as currency notes can be printed. This will not lead to long term inflation as with the digging of lakes, wells and canals, the production of food grains and other agricultural produce will increase which will lead to decrease in prices. Inflation would be there only for a short time, between the start of the work for digging lakes etc and the harvesting of the agricultural produce.

Developing countries should undertake more research


While the entire people of the world benefits from research, major research is undertaken mostly by the US and other developed countries. According to the Government of India, at present India spends less than 1% of its GDP on research and development in the field of science and technology. According to UNESCO, China spends around 1.5%., Japan 3.4%, South Korea 3.5%, Singapore 2.6% and Finland 3.7%. The US spends around 3% of its GDP.

Developing countries, particularly large ones such as China, India, Indonesia, Brazil, Pakistan, Bangladesh and Nigeria should feel that it is in their interest also to engage in research and try to spend at least 2% of their GDP on research. India and China being large countries with large economies, should take initiative in this case.

Similarly a larger number of scientists should engage in both scientific and industrial research. In the year 2006, it was announced in the Parliament of India that there were only 120 (0.012% of  population) active scientists per million of population in India, as compared to 2,691 per million of population in United Kingdom i.e. 0.26% of the population. According to UNESCO, there were about 7.1 million researchers in the world which works out to a little over 0.1% of global population. Developing countries have only 2.7 million or 0.05% of population in research while developed countries have 4.4 million or 0.5% of the population.

Paucity of funds should not be a reason for such low number of scientists in developing countries. Scientific and industrial research should be given top priority.

The world will be a much better place to live, if all developing countries particularly the large one, encourage at least 0.2% of the population and 2% of their GDPs  for research and development.

This is one way of changing the world order.

Copenhagen Meeting on Climate Change


By 2025, India will be the largest country in the world ahead of China. Every fifth person in the world will be an Indian. More than 4 out of 5 persons in the world will be from the present developing countries. This should be kept in mind in the negotiations between the developed and developing countries.

While the developed countries should be requested to transfer technologies to reduce carbon and other harmful emissions into the atmosphere by the developing countries, the developing countries should not make their commitments to reduce emissions on the developed countries making financial and technological contributions. There is no doubt that the lifestyle of people in developed countries contribute to large scale emissions. But sadly developing countries, imitate the life style in developed countries. India for example could do with much less than the present number of vehicles, two wheelers as well as four wheelers. India could introduce two wheeler taxis as in Vietnam and Thailand which would save huge quantity of petroleum products. India should find ways for avoiding feeding of the chicken and cows with grains as in developed countries

India however, is contributing to the cleaner atmosphere, by not consuming as much meat as in developed and other developing countries. It is estimated that if people give up non-vegetarian food, the arable land required in the world would be just one third of the present area. Of course, it is not suggested that non-vegetarians should become vegetarians. Instead, people should invent technologies to increase the yield of food grains.

There is a lot of talk on planting trees. There should also be emphasis on deepening existing lakes and digging new lakes- water reservoirs-to conserve water. Trees need water to grow.

Subsidies to Farmers in Developed Countries


Food and Agriculture Organisagion (FAO) says that about one billion people, i.e. about 15% of the world’s population, are suffering from hunger. The people in this group are unable to feed themselves as food prices are high, which restricts access.

Most of the world’s grains are exported by developed countries and imported mainly by developing countries with a few exceptions. India is among the countries which import food grains, occasionally, if not regularly. In the years to come, India’s imports of food grains will increase. In such a situation, India should argue for ways and means of making food grains cheaper in the international market.

However, at the World Trade Organisation (WTO) negotiations of Doha Round, India, along with a few developing countries, is opposing the subsidies given by USA and Europe to their farmers. This approach seems to be wrong. Farm subsidies in developed countries make food grains cheaper in the domestic and international markets.  Food-importing developing countries, including India, should be happy that the food-exporting developed countries make their produce cheap in the international market by subsidizing their farmers.

What goes around, comes around


During the past few years till 2007, the economy of almost every country has witnessed significant growth. According to data from the International Monetary Fund, global GDP grew from around US$51 trillion in 2004 to around US$65 trillion in 2007 – more than 25% in 3 years. The GDP growth rate in 2007 was 5%, which is considered to be a good rate. The economies of developed countries, such as tthe US, Japan and those  of the European Union, grew by 2- 3% in 2007. This is solid given the large base of these countries. In the case of developing countries, such as India and China, growth rates of 7-10% are considered solid given their low base. These  countries have registered such growth rates over the past 4-5 years.

GDP growth rates peaked in most countries during 2007 and since then there has been slower growth. It is important to note that most countries are witnessing a decline in growth rate, not negative growth. The decline is expected to last for the next 2-3 years before the trend is reversed. The Indian economy registered a growth rate of over 9% in 2007 and despite news of an economic crisis,  the economy is expected to grow at around 7% in 2008. The US economy grew 2.2% in 2007 is expected to decelerate to less than 2% in 2008. In 2009, even if the growth rate is less than that in 2008, it should not be cause for alarm. For a large , developed economy, even a 1% growth rate is positive considering population growth is less than 1%. So in this perspective, the current economic situation is less of a crisis and more a slowdown. The sensational news stories of  economic meltdown are exactly that, sensational. The actual concern should be on the future and how growth rates develop over the next few years.

The stock market situation is somewhat similar in its lack of fundamental change. Take for example the Bombay Stock Exchange in India; its Sensex benchmark rose from around 10,000 in early 2006 to over 20,000 in early 2008, doubling in 2 years. Naturally, such an increase motivates initial investors to take profit by selling their shares. The Sensex is again around the 10,000 level. I expect investors, both new and old, to start entering the market at this level. We have to remember that since 1978-79 when the Sensex  was at 100, the index has reached to 10,000 in 2008, a 100-fold increase in 30 years. The price of gold has increased only by 20 times in the same period.

I believe that both the global economy and stock markets will face pressure in the short term, with industry being hit. However, with prudent intervention, I believe long term trends are positive.