The Modi government has delivered on Infrastructure Projects

 

Actual data on Revdis, Subsidies and Deficits of the Modi Government

 

The investment drought of the past two decades is catching up with us

Martin Sandbu in The FT

In all the talk of “building back better” and making economies “match fit”, “strategically autonomous” and “resilient”, there is an unstated but tragic premise. For decades, most advanced economies did not build their future but languished in an investment drought, the scandal of which is greater for being unacknowledged. 

Between 1970 and 1989, the share of gross domestic product devoted to investment by six of the world’s seven biggest economies averaged from 22.6 per cent for the US to 24.8 per cent for Germany. The seventh, Japan, was an outlier with 35 per cent. 

Of the G7, only Canada has sustained this level of investment: its 22.5 per cent in this millennium is barely down from 22.8 back then. All the others have only managed to match their 1970-89 investment levels in four instances: the US in the boom years of 2000 and 2005-06, and France in 2021. 

Yet these past 20 years have been the era of lower-than-ever financing costs, first because of market exuberance, then thanks to central banks’ ultra-lax monetary policy. And what do we have to show for all that cheap credit? Two lost decades for investment. As economics writer Annie Lowrey concisely puts it, “we blew it”. 

France and the US have invested nearly two percentage points of GDP less this century than they did in the 1970s and 1980s; Germany and Italy about 4.5 points less; the UK and Japan 6 and 10 percentage points less respectively. These are enormous numbers. The G7 account for about $45tn in annual GDP. Restoring their investment ratios could fill nearly half the global shortfall to the $4tn the International Energy Agency calls for in annual clean technology investment if we are to meet net zero by 2050. 

Those are total investment numbers, but a similar story holds for the public sector on its own. In the US, net government investment (after accounting for depreciation of the existing public capital stock) fell by almost two-thirds in the decade to 2014, when it dropped to 0.5 per cent of GDP. 

In the eurozone, net public investment went negative in the same year, thanks to extreme fiscal austerity in the eurozone periphery and chronic under-investment in Germany. 

Some will be tempted by claims that we need not worry. It is normal to invest less as you get richer — so one argument goes — because adding to an already large capital stock is increasingly useless. The cost of capital goods has fallen, so the same money buys you more real investment, goes another. A third is that the current economy needs intangible, not physical capital, and while this is harder to measure, countries seem to be doing better on that front. 

Yet such reassurances, even if factually true, are no use. No one who takes a close look at most western countries’ physical infrastructure can think it fit for purpose — not when that purpose expands to include decarbonising our industries and energy and transport systems. 

Why have we lived for so long off past investments and failed to make enough new ones? Financing costs have clearly not been the problem, with interest rates at record lows. (Crisis-hit eurozone countries in the sovereign debt crisis were the exception, but even Spain and Italy have out-invested Britain for decades.) 

More likely culprits are a lack of demand and cheap labour. Businesses that don’t expect enough demand to absorb expanded output have no reason to invest. And when they are permitted to treat workers as cheap and disposable, they may choose that over irreversible capital investments. This is why faster wage growth and the so-called “labour shortages” (really competition for workers) are something we should embrace if we are to prod businesses into productive investments. 

Something similar may have been true for cheap energy in Europe. The 2010s were a time of unusually low-cost natural gas and hence electricity. This may have undermined the urgency of investing in both greater renewable generation and geopolitically safe natural gas developments. Oil prices, too, were low for much of the decade. 

But underneath these economic factors, I think our failure to invest is profoundly political. Raising the investment-to-GDP ratio, whether through boosts to private or public investment, or both, means that a smaller ratio of GDP is left over for consumption. Even if this prepares a better future, it can feel like a measlier existence today. And that is something a generation of politicians across the rich world have been afraid to inflict on their voters. 

That is true in good times, when transfer payments, tax cuts and immediate public goods are all politically more attractive than capital investment. (Something equivalent is at work in the private sector: witness companies’ choice to return cash to owners through share buybacks rather than invest in their own growth.) It has also been true in bad times, when investment is the easiest expenditure for belt-tightening governments and companies to cut. 

European countries have come to rue how they used the “peace dividend” of 1989 to cut defence spending. The same moment pushed the west as a whole to forget the broader idea of short-term sacrifice for a more prosperous future. But this is not inevitable, as exceptions such as Canada and the Nordics’ sustained investment show. Western voters and governments have both unlearned the virtue of delayed gratification. They have to relearn it, and fast.

$30 Trillion Debt Gimmick

 

Why is the Indian Government Monetizing National Assets?

 

Whither free market? Carillion the Government's preferred private contractor maybe bailed out.

Aditya Chakrabortty in The Guardian



You may never have heard of Carillion. There’s no reason you should have. Its lack of glamour is neatly summed up by the name it sported in the 90s: Tarmac. But since then it has grown and grown to become the UK’s second-largest building firm – and one of the biggest contractors to the British government. Name an infrastructure pie in the UK and the chances are Carillion has its fingers in it: the HS2 rail link, broadband rollout, the Royal Liverpool University Hospital, the Library of Birmingham. It maintains army barracks, builds PFI schools, lays down roads in Aberdeen. The lot.

There’s just one snag. For over a year now, Carillion has been in meltdown. Its shares have dropped 90%, it’s issued profit warnings, and it’s on to its third chief executive within six months. And this week, the government moved into emergency mode. A group of ministers held a crisis meeting on Thursday to discuss the firm. Around the table, reports the FT, were business secretary Greg Clark, as well as ministers from the Cabinet Office, health, transport, justice, education and local government. Even the Foreign Office sent a representative.


Why did Chris Grayling give the HS2 contract to a company that was already in existential difficulties?

That roll call says all you need to know about the public significance of what happens next at Carillion. This is a firm that employs just under 20,000 workers in Britain – and the same again abroad. It has a huge chain of suppliers – and its habit of going in for joint ventures with other construction businesses means that a collapse at Carillion would send shockwaves through the industry and through the government’s public works programme.

To see what this means, take the HS2 rail link, where Carillion this summer was part of a consortium that won a £1.4bn contract to knock tunnels through the Chilterns. If Carillion goes under, what happens to the largest infrastructure project in Europe? What happens to its partners on the deal, British firm Kier, and France’s Eiffage? The project will need to be put back and the taxpayer will almost certainly have to step in.

Imagine that same catastrophe befalling dozens of other projects across the UK and you get a sense of what’s at stake. Jobs will be cut, schools will go unbuilt (just a couple of months ago, Oxfordshire county council pulled the plug on a 10-year schools project) – and the government’s entire private finance initiative (PFI) model for building this country’s essential services will be shaken to the core. The dirty secret of PFI and all government attempts to pass public services into the private realm is that the shareholders make profits while the taxpayers remain on the hook for any losses.

After all, this isn’t the only case where the public sector’s reliance on one giant private-sector player endangers the provision of basic services. As my colleague Rob Davies reports in today’s paper, crisis-hit Four Seasons Health Care has run into yet another roadblock in its rescue talks. If those negotiations fail, then the big question will be who will look after the 17,000 elderly and vulnerable people in its care.

Carillion crisis: fears major government contractor is on the verge of collapse



Or look at rail, where as I wrote this week, transport secretary Chris Grayling has come to a disastrous deal (sorry, “pragmatic solution”) to allow Virgin Trains to get out of their contract to run the East Coast mainline three years early. The public will have to step into the breach with some makeshift arrangements and will forego hundreds of millions in lost franchise payments. The train operators will be able to go about their business and even take on new franchises.

Should Carillion go down, there will be another truckload of questions for Grayling. He awarded the firm its £1.4bn HS2 contract last July – by which time the writing was already on the wall. That job from the Department of Transport may have helped tide Carillion over for a bit – but why did the transport secretary give the work to a company that was already in existential difficulties? A firm known to have grown too quickly by borrowing hundreds of millions. A firm that just a few months later came under investigation of the Financial Conduct Authority. I have long thought that Grayling is less serious minister and more an unexploded landmine. I just wonder what the trigger will be.

But what happens to that minister is just one debacle of many as far as Carillion is concerned. Today you may never have heard of Carillion. Soon you may wish it had remained that way.

Public luxury for all or private luxury for some: this is the choice we face

George Monbiot in The Guardian


Imagine designing one of our great cities from scratch. You would quickly discover that there is enough physical space for magnificent parks, playing fields, public swimming pools, urban nature reserves and allotments sufficient to meet the needs of everyone. Alternatively, you could designate the same space to a small proportion of its people – the richest citizens – who can afford large gardens, perhaps with their own swimming pools. The only way of securing space for both is to allow the suburbs to sprawl until the city becomes dysfunctional: impossible to supply with efficient services, lacking a sense of civic cohesion, and permanently snarled in traffic: Los Angeles for all.

Imagine designing a long-distance transport system for a nation that did not possess one. You’d find that there is plenty of room for everyone to travel swiftly and efficiently, in trains and luxury buses (an intercity bus can carry as many people as a mile of car traffic). But to supply the same mobility with private cars requires a prodigious use of land, concrete, metal and fuel. It can be done, but only at the cost of climate change, air pollution, the destruction of wonderful places and an assault on tranquillity, neighbourhood and community life.

This conflict is repeated in financial terms. In order that the very rich can pay less tax, public playgrounds are allowed to fall apart. The beneficiaries might use the extra money to build private play barns for their children. Public toilets are closed so that some people can install gold-plated taps in their bathrooms. Public swimming pools are put on restricted hours so that the very rich can turn up the thermostats in their private pools. Public galleries need to charge for entry so that billionaires can expand their own art collections. Wealth that could be shared and enjoyed by all is sequestered by a few.


Public luxury for all, or private luxury for some: this is the choice we face at all times – especially at this election

It is impossible to deliver a magnificent life for everyone by securing private space through private spending. Attempts to do so are highly inefficient, producing ridiculous levels of redundancy and replication. Look at roads, in which individual people, each encased in a tonne of metal, each taking up (at 70mph) 90 metres of lane, travel in parallel to the same destination. The expansion of public wealth creates more space for everyone; the expansion of private wealth reduces it, eventually damaging most people’s quality of life.

  ‘Look at roads, in which individual people, each encased in a tonne of metal, each taking up (at 70mph) 90 metres of lane, travel in parallel to the same destination.’ Photograph: Matt Cardy/Getty Images


This is a global issue, as well as a national one. According to the Global Footprint Network, every person in the UK uses the equivalent of 5 hectares of land and sea through the food we eat, the products we use and the carbon we release, which has to be absorbed somewhere if it is not to accelerate global warming. Yet the UK’s “biocapacity” (our ability to absorb these impacts) is a little over 1 hectare per person. Our extravagance is a cost that others must bear.

Public luxury available to all, or private luxury available to some: this is the choice we face at all times, but especially at this election. It is the conflict between these two visions that defines – or should define – our political options. There is a significant difference between Labour and the Conservatives in this respect, but I wish it were stronger.

Labour, through its proposed cultural capital fund, will reinvest in public galleries and museums. It will defend and expand our libraries, youth centres, football grounds, railways and local bus services. Unlike the Conservative manifesto, which is almost silent on the issue, Labour’s platform offers a reasonable list of protections to the living world.

But it also promises to “continue to upgrade our highways” (shortly after vowing to “encourage and enable people to get out of their cars”) and to provide new airport capacity. The conflicts are not acknowledged. Progress in the 21st century should be measured less by the new infrastructure you build than by the damaging infrastructure you retire.

Labour also misses a wonderful opportunity in its plans to expand affordable housing, to promote accommodation that both revives community and makes better use of space. In co-housing developments, people own or rent their own homes but share the rest of the land. Rather than chopping the available space into coffin-sized gardens in which a child cannot perform a cartwheel without hitting the fence, the children have room to run around together while the adults have space to garden and talk. Communal laundries release living space in people’s homes. Carpools reduce the need for parking. Isolation gives way to conviviality.

More importantly, and less surprisingly, the Labour manifesto fails to acknowledge the left’s great conundrum: the environmental damage caused by efforts to create jobs through economic growth. Like the Conservatives, like almost every party everywhere (the Greens are a notable exception), Labour’s economic vision is based on the presumption that there are no limits. Both conservative and social democratic parties see the world as a magic pudding that can never be exhausted. They build their economic programmes on a fairytale.

Kelvingrove Art gallery in Glasgow. ‘Labour, through its proposed cultural capital fund, will reinvest in public galleries and museums.’ Photograph: VisitBritain/Britain on View/Getty Images

And they have another unexamined premise in common: that money legitimately buys you the power to take what you want from the world. There is an almost universal assumption in politics that you have the right to help yourself to as much of the global commons (atmosphere, soil, water, fish) as you can afford, though this reduces what is left for other people to share. You have the right to occupy as much physical space as your money can buy, regardless of the restrictions this imposes on others.

Where does this licence arise? Even if private wealth were obtained through the exercise of virtue (an unlikely proposition at the best of times) or through enterprise and hard work (ever less probable, in this new age of inheritance and rent), it is hard to discern the just principle that translates this money into permission to acquire the space and resources on which other people depend for a decent quality of life. When and by whom was this permission granted? How does it correspond to our notion of equal rights, or our concept of democracy, which is based on an equal power to decide?

You will not find these questions asked in this election or in any other. They are fudged by recourse to the magical belief that there is enough space and resources for everyone to do as they wish, that infinite growth ensures that no one – when the parties’ economic promises are fulfilled – will need to intrude on the interests of others. Yet, on this finite planet, they are the questions that will determine not only the quality of our lives but our security and, eventually, our survival. The primary task of all far-sighted politicians should be to decide first how much we can use, then how it can best be shared.

When the questions that count above all others are beyond the scope of politics, when almost everyone in public life is either too blinkered or too frightened to answer them, when – even in this great, defining election, which at last offers people meaningful political choice – neither large party can even name them, you begin to recognise how much trouble we are in.

There is a plan: Brexit means good riddance to austerity

John Redwood in The Guardian

As we leave the EU, the UK can turn its back on the austerity policies that have been the hallmark of the euro area. My main argument against staying in the EU has been the poor economic record of the EU as a whole, and the eurozone in particular. The performance has got worse the more the EU has developed joint policies and central controls.

Housing gets £4bn boost to increase number of new homes


The UK public warmed to the idea of spending our own money on our own priorities in the referendum campaign. The main issue between leave and remain was the money. Remain tried to dismiss its importance by claiming there was in practice little money at stake, and disagreed strongly with any reference to the gross figure for UK contributions.

The public did not take away one particular figure from the debate, but did believe that we contributed substantial money that it would be useful to spend at home. Cancelling the contributions would also make an important reduction in our large balance of payments deficit, as every penny we send and do not get back swells the deficit, just as surely as if we bought another import.

During the campaign I released a draft post-Brexit budget, showing how we could scrap VAT on domestic fuel, tampons and green products, and boost spending substantially on the NHS.

The government will be able to choose what to do once we have stopped the payments. The autumn statement showed a saving of a net contribution of £11.6bn in 2019-20 once we are out of the EU, as well as additional domestic spending in place of spending in the UK by the EU currently.

I am glad the chancellor has also adopted more flexible rules for the budget deficit. There is no need to genuflect to the Maastricht debt and deficit criteria once we leave, nor to pretend that we are about to get our overall debt down to 60% of GDP, as is required by those rules. The UK economy needs further stimulus, as the autumn statement acknowledged. There are roads and railway lines to be built, new power stations to be added, more water storage, schools and hospitals to cater for the rising population.

The government is right to say the UK needs to invest more. We need to make new provision for all the additional people who have joined the country in recent years, and to improve the efficiency of our infrastructure. The country is well behind in meeting demand for train and road capacity, and in energy provision.

The UK also needs to make, grow and provide more for its own needs. Leaving the EU will enable the UK to undertake a major campaign for import substitution. When we have our own fishing policy we could move back to being net exporters, instead of being importers. The common fisheries policy means too much of our fish is taken by other member states, leaving us short for our own needs. Designing our own agriculture policy will mean we can put behind us the quotas and regulations that have held back UK output during our years in the EU. We can change our procurement rules, so that the government when spending taxpayers’ money can ensure more is bought from home suppliers.


Why do we have a balance of payments surplus with the rest of the world but a deficit with our EU neighbours?

The UK is embarking on a substantial expansion of housebuilding. Too many materials and components for our new homes are imported. The lower level of sterling provides an opportunity for the UK to put in more brick, block and tile capacity, to prefabricate and manufacture more of the components and systems a new home needs. If more of the home is fabricated off-site – as happens in Germany and Scandinavia – we reduce the impact of bad weather, of labour shortages and other inefficiencies on the building site. Industry by industry there are opportunities for suitable investment and entrepreneurial activity, to meet more of the UK’s own demands. This will be good for jobs, and better for the environment, when more is produced close to the place of consumption.

One of the great unanswered questions of our time in the EU is: why do we run a balance of payments surplus with the rest of the world but a deficit with our EU neighbours? Why has it been so large and so persistent? Part of the reason rests in the way the EU rules were organised.

Early liberalisation was designed to help the sectors the continent was best at, rather than the sectors where the UK had a relative advantage. The continental competitors soon outpaced us in their better areas, leading to UK factory closures and job losses in areas like shipbuilding steel production and cars in the early years of membership. The special designs of the common agricultural and fishing policies also led to larger import bills for us.

Leaving the EU has coincided, so far, with a fall in the value of the pound. The UK should now be very competitive. It is time for business to respond to the favourable levels of domestic demand, and to work with government to put in the extra capacity we need to meet more of our own requirements. Prosperity, not austerity, should be the watchword.

China's economic woes extend far beyond its stock market

Michael Boskin in The Guardian

The Chinese government’s heavy handed efforts to contain recent stock market volatility – the latest move prohibits short-selling and sales by major shareholders– have seriously damaged its credibility. But China’s policy failures should come as no surprise. Policymakers there are far from the first to mismanage financial markets, currencies, and trade. Many European governments, for example, suffered humiliating losses defending currencies that were misaligned in the early 1990s.

Still, China’s economy remains a source of significant uncertainty. Indeed, although the performance of China’s stock market and that of its real economy has not been closely correlated, a major slowdown is under way. That is a serious concern, occupying finance ministries, central banks, trading desks, and importers and exporters worldwide.

China’s government believed it could engineer a soft landing in the transition from torrid double-digit economic growth, fuelled by exports and investments, to steady and balanced growth underpinned by domestic consumption, especially of services. And, in fact, it enacted some sensible policies and reforms.

But rapid growth obscured many problems. For example, officials, seeking to secure promotions by achieving short-term economic targets, misallocated resources; basic industries such as steel and cement built up vast excess capacity; and bad loans accumulated on the balance sheets of banks and local governments.

Nowhere are the problems with this approach more apparent than in the attempt to plan urbanisation, which entailed the construction of large new cities – complete with modern infrastructure and plentiful housing – that have yet to be occupied.

In a sense, these ghost cities resemble the Russian empire’s Potemkin villages, built to create an impressive illusion for the passing Czarina; but China’s ghost cities are real and were presumably meant to do more than flatter the country’s leaders.

Now that economic growth is flagging – official statistics put the annual rate at 7%, but most observers believe the real number is closer to 5% (or even lower) – China’s governance problems are becoming impossible to ignore. Although China’s growth rate still exceeds that of all but a few economies today, the scale of the slowdown has been wrenching, with short-run dynamics similar to a swing in the U S or Germany from 2% GDP growth to a 3% contraction.

A China beset by serious economic problems is likely to experience considerable social and political instability. As the slowdown threatens to impede job creation, undermining the prospects of the millions of people moving to China’s cities each year in search of a more prosperous life, the Communist party will struggle to maintain the legitimacy of its political monopoly. (More broadly, the weight of China’s problems, together with Russia’s collapse and Venezuela’s 60% inflation, has strained the belief of some that state capitalism trumps market economies.) 

FacebookTwitterPinterest Pedestrians in Hong Kong walk past an electronic board displaying the benchmark Hang Seng index. Photograph: Philippe Lopez/AFP/Getty Images

Given China’s systemic importance to the global economy, instability there could pose major risks far beyond its borders. China is the largest foreign holder of US treasury securities, a major trade partner for the US, Europe, Latin America, and Australia, and a key facilitator of intra-Asian trade, owing partly to the scale of its processing trade.

The world has a lot at stake in China, and China’s authorities have a lot on their plate. The government must cope with the short-term effects of the slowdown while continuing to implement reforms aimed at smoothing the economy’s shift to a new growth model and expanding the role of markets. Foreign firms are seeking access to China’s rapidly growing middle class, which the McKinsey Global Institute estimates exceeds 200 million. But that implies a stable business environment, including more transparency in government approvals, and looser capital controls.

With these goals in mind, China’s government recently engineered a modest currency devaluation – about 3% so far. That is probably too small to alter the country’s trade balance with Europe or the US significantly. But it signals a shift toward a more market-oriented exchange rate. The risk on the minds of investors, managers, and government officials is that currency markets – or government-managed currencies buffeted by market forces – often develop too much momentum and overshoot fundamental values.

As China’s government uses monetary policy to try to calm markets, micro-level reforms must continue. China must deploy new technologies across industries, while improving workers’ education, training and health. Moreover, China needs to accelerate its efforts to increase domestic consumption, which, as a share of GDP, is far below that of other countries.

FacebookTwitterPinterest A bank clerk counts Chinese banknotes in Huaibei, Anhui province. The government recently engineered a modest currency devaluation. Photograph: AP

That means reducing the unprecedentedly high savings rate, a large share of which accrues to state-owned enterprises. If private firms and households are to replace government-led investment as the economy’s main drivers of growth, the state must reduce its stake in major enterprises and allow more profits to be paid directly to shareholders, while providing more of the profits from its remaining shares to citizens.

The shift away from excessive state control should also include replacing price subsidies and grants to favoured industries with targeted support for low-income workers and greater investment in human capital. In addition, China must reduce administrative discretion, introducing sensible, predictable regulation to address natural monopolies and externalities.

Back at the macro level, China needs to reallocate responsibilities and resources among the various levels of government, in order to capitalize on their comparative advantage in providing services and raising revenue. And the country must gradually reduce its total debt load, which currently exceeds 250% of GDP.

Fortunately, in facing the difficult adjustment challenges that lie ahead, China’s $3.6tn (£2.3tn) in foreign-currency reserves can serve as a buffer against unavoidable losses. But China must also avoid reverting to greater state control of the economy, a possibility glimpsed in the authorities’ ham-fisted response to the correction in equity prices. That approach needs to be abandoned before it does any more damage to China’s quest for long-term stability and prosperity.

Falling oil prices offer the west a great chance to refashion itself. Let’s seize it

With the black stuff cheaper than it has been in years, Europe’s governments must invest in their infrastructure

• 
• • Will Hutton
  • The Observer, Sunday 30 November 2014

A fracking drill rig in America, which is now the world’s biggest oil producer. Photograph: Jim Lo Scalzo/ EPA/Corbis

For the past 18 months, the world’s biggest oil producer has been the US. Saudi Arabia, eat your heart out. Courtesy of the fracking revolution, the US will maintain this new standing for the foreseeable future, according to official projections.

The world as we’ve known it for the past 50 years is being stood on its head. Which provides cause for optimism. But an international landscape increasingly dominated by nationalist firebrands, conservative zealots and policy makers in thrall to austerity economics is always apt to waste opportunities.

One first good result of this oil price shift, however, was witnessed at Opec’s meeting in Vienna last week. The once feared cartel of oil-exporting countries, with Saudi Arabia at its core, a cartel that at one time commanded more than half of global production, is now a shadow of its former self. Opec’s members were unable to agree to cut production because most are strapped for cash and had no choice but to maintain levels.

With the US needing to buy less oil on international markets and China’s growth sinking to its lowest mark for 40 years, there is now, amazingly, the prospect of an oil glut. The oil price instantly nosedived to its lowest level for four years, around $70 a barrel – down more than a third in three months. On Friday, there was mayhem in the markets as investors reassessed the sober prospects for oil companies, and banks suddenly realised that they were exposed to a new round of write-offs to distressed energy companies and even to governments. But although particular companies may lose out, the first-round effect of this fall should provide good news. High oil prices depress economic activity. They suck money from consumer spending and redirect it to oil-exporting countries, which typically hoard it in elephantine foreign exchange reserves or unspent  bank deposits. It is a tax by the few on the many.

It should be no surprise, then, that in the past rising oil prices were associated with recessions and falling oil prices with booms. If the oil price carries on falling back towards $50 a barrel, and if history is any guide, the western economy should respond – to the good. Already, petrol prices are below 120p a litre, with supermarkets announcing another 2p off.

The European economy, in particular, dependent on oil imports, is an obvious and immediate potential beneficiary. Suddenly, the balance of economic advantage with Russia, no less dependent on oil and gas exports, will flip. Russia’s 2014 budget was based on an oil price of $100 a barrel. At $70 a barrel, the economy will contract by at least 3% in 2015, the country will run a balance of payments deficit and the government’s finances will spin out of control.

The doubts about Putin’s foreign policy within the Russian financial, political, security and business establishment will surely increase: his hold on power is becoming less secure. The chances of Russia sustaining a surrogate war in Ukraine have suddenly been reduced. All good news.

But western governments cannot hope that economic benefits will arrive automatically. These are new times. It has been obvious since the 2008 financial crisis that the economic landscape is wholly different. Digitisation is gnawing away at established companies’ business models and empowering new insurgents at an escalating pace. And this is happening in a world in which there is a massive overhang of private debt and where banks are still nursing damaged balance sheets.

Uncertainty and fear abound. Interest rates in Britain alone have been pegged at 0.5% for more than five years. But still business is reluctant to invest, not knowing what technologies to back or not knowing how much demand there will be for new products and services. We live in an era of stagnation, “secular stagnation”, as former US treasury secretary Larry Summers has described it.

So falling oil prices offer the world economy a great opportunity. But if it is not leapt upon purposefully by aggressively expansionary economic policy, secular stagnation might worsen. Because energy prices affect all goods and services, their fall could reinforce the trend for the general price level to fall further and so accelerate deflation and all the ills that go with it.

This is the moment for the EU and the European Central Bank to throw down the gauntlet to Germany. Last week, the European Commission launched a plan with at least an eye-catching top line – to trigger an additional ¤300bn spending on vital infrastructure across the continent. Except it was a phantom ¤300bn, with Germany insistent that it should involve no extra spending by the commission, nor by governments, nor extra borrowing by the European Investment Bank. Why? Because there was an alleged risk of inflation.

However, with oil prices falling by a third in a few months, the risk is non-existent. Rather, the problem is of the opposite order: not seizing the moment to launch a genuine economic stimulus of some scale.

The world needs to be no less purposeful about how Middle Eastern politics will now play out. US engagement in the region has been driven by the need to secure its oil supplies: as it becomes an oil exporter, that need is removed. The US has played its role as global policeman unevenly and often counterproductively. But at least it has played it, acting as some constraint on Israel, mindful that war will damage the flow of oil to the US.

An isolationist, disengaged US would be much more worrying. Into the vacuum would step a new array of nationalists, terrorists and religious fundamentalists. China will become the new great power in the Middle East, involving itself in a region with now declining oil revenues, intensifying rivalries and endemic religious enmities.

Ukip and the Tory Eurosceptic right complacently invite Britain to deal with the world as it once was, in an imagined utopian past. No need to counter stagnation either as a country or together with others; we British can act alone in a world where economic growth is certain. No need to marshal what remains of British power together with others to create international architecture that forces common responses to common problems. The world is safe and everybody is our potential trading partner. An oil price that falls a third in a few months is a reminder of just how perilous our new world is – and how vital it is to have friends.

Pricing Public Transport - India

Editorial in The Hindu 

The launch of the metro railway service in Mumbai, which has enhanced public transport options in the teeming city, would have normally called for unqualified appreciation. However, the row over fares between the State government and Reliance Infrastructure, the latter holding the majority share in this public-private partnership project, has dampened the enthusiasm and in fact raised serious concerns. The outcome of this dispute, which the courts will determine, could affect the future functioning of the project and have a significant bearing on other metro rail schemes that seek private funding and participation. The 11.4-km elevated Mumbai Metro line has improved connectivity and reduced travel time for thousands of passengers. Just before the service was launched, Reliance Infrastructure steeply revised the fares and increased the range of fares, originally fixed at Rs.9 to Rs.13, to Rs.10 to Rs.40. The government has opposed this since it is higher than the pre-agreed fare and decided without any consultation. Reliance Infrastructure has defended the action, stating that under the Metro Railways Act it has the authority to fix fares. The increase in the project cost from Rs.2,356 crore to Rs.4,321 crore and higher operational costs had warranted the change, it asserted.

Almost every metro rail project in the country has overshot the projected cost. Companies often tend to underestimate the cost and inflate user-figures to convince funding agencies that travel by metro rail would be relatively inexpensive. Later, they complain of cost overruns and demand higher allocations. Ticket prices are then raised and the travelling public bears the burden of such poor planning. Fares should be affordable, particularly to the large number of lower-income group users, and should factor in the less visible benefits that accrue from the service. Increasing the use of public transport relieves road congestion, reduces pollution and cuts fuel consumption. Realising this, cities such as Tallinn, the capital of Estonia, have made public travel free for its citizens. Even if Mumbai and other Indian cities do not want to take such a radical route, and decide periodically to review fares, the process should be transparent and fair — more so when the private sector operates public transport. Striving to balance subsidy and revenue is understandable, but high prices should not affect transport choices. Alternative financing options must be explored. Many countries have mobilised funds by imposing additional charges for using private cars, which pollute more and occupy road space disproportionately. The urban future lies in promoting good public transport, and its success depends on fair pricing and quality service.

Ed Miliband isn’t offering socialism – but the Tories are still terrified

Owen Jones in The Independent

The rule of capital is “unimpaired and virtually unchallenged; no social democratic party is nowadays concerned to mount a serious challenge to that rule.” If he was still with us, the socialist Ralph Miliband would have noted two big changes since he wrote these words not long before his death in 1994. Firstly, he’d observe – with little surprise – that capitalism has plunged itself into yet another almighty mess. Secondly, he would undoubtedly be consumed with pride that his youngest son had assumed the leadership of one of these social democratic parties. Momentous events indeed: but his wistful conclusion would have remained the same.

That in mind, I wonder what Ralph Miliband would have made of his son’s transformation from a “laughable blank sheet of paper” to “frothing-at-the-mouth Communist who is going to nationalise your mother quicker than you can say ‘Friedrich Engels had a cracking beard'”. Ed Miliband’s suggested crackdown on land-banking (once endorsed by Boris “Commie” Johnson) and a temporary freeze on energy prices (backed by arch-Leninist Tom Burke, the former Tory special adviser on energy) have provoked comparisons with undesirable elements ranging from Robert Mugabe to the Bolsheviks. After he stood on a soapbox in Brighton and indulged a bystander asking when he would “bring back socialism”, the British right have behaved as though Labour are planning to finish what Lenin was doing before he was so rudely interrupted.

In part, it is the sinister red-baiting of Ed Miliband through his dead father, culminating with the Daily Mail accusing the Labour leader of planning to drive “a hammer and sickle through the heart of the nation so many of us love”. Pass the spliff, Mr Dacre. “Like a good Marxist,” writes The Daily Telegraph’s Charles Moore, “he detects the cowardice latent in capitalists,” accusing Miliband of being “part of an ideology” which is “ultimately pauperising and totalitarian.” Jeremy Hunt odiously endorsed the Mail’s lunacy, arguing that “Ralph Miliband was no friend of the free market and I have never heard Ed Miliband say he supports it.” George Osborne, meanwhile, accuses Ed Miliband of making “essentially the same argument Karl Marx made in Das Kapital.”

This is what is really going on. The right are so drunk on three decades of free-market triumphalism, so used to the left being smashed and battered, that they believe even the mildest deviation from the neo-liberal script is unacceptable. They thought all of these battles had been won, that they were rid of all their turbulent priests, and now they are incandescent at the alleged resurgence of defeated enemies. Don’t you know you’re supposed to be dead? It’s not even the most moderate form of social democracy that the right are trying to drive from political life. Anyone who does not advocate yet more aggressive doses of neo-liberalism – more privatisation, more cuts to the taxes of the wealthy, more attacks on workers’ rights – is liable to come under suspicion, too.

The British right’s strategy is pretty clear. They want to do to “socialist” what the US right have done to “liberal”: turn it into an unequivocally toxic word that no-one in public life would want to associate with, and use it as a means to smear political opponents deemed to deviate from Britain’s suffocating neo-liberal consensus. Bemusing, to say the least, given Labour first officially declared itself a “democratic socialist party” under Tony Blair in 1995 as a sop to the left in the party’s new revised Clause IV. He even wrote a Fabian Society pamphlet entitled Socialism. Yes, granted it meant nothing more to him than motherhood and apple pie, and he had more leeway than Miliband because it was rather more difficult to pin him down as a heartfelt lefty, but the point is even New Labour could happily bandy “socialism” about.

But let’s get a bit of perspective here. Socialism? I don’t think so. Labour have – wrongly – committed themselves to Osborne’s spending plans in the first year of a new government. As Michael Gove gobbles up the comprehensive education system for dinner, Labour’s response has been, to say the least, muted. Medialand may be wailing about 1970s socialism being back with a vengeance, but given polls show 69 per cent want the energy companies nationalised, the Labour leader still found himself to the right of public opinion. No commitment on rail renationalisation, either, which some polls show is even the preferred option of Tory voters. There’s suggestions Labour would hike the top rate of tax up to 50 per cent again, but polls show the public would be happy to take it to 60 per cent. Not exactly the full-scale expropriation of the bourgeoisie, is it?

In truth, Ed Miliband strikes me as an old-style social democrat, perhaps what would have been described as the “Old Labour Right” before Blair’s Year Zero. He generally seems well-intentioned about dragging the political centre of gravity away from the Thatcherite right, but appears to fear a lack of political space to do so. He has made moves towards a mild social democracy in limited areas – but it is just that, mild, although even that is too strong for those now imitating the hysterical rhetoric of Barack Obama’s Tea Party opponents.

It is difficult, sometimes, not to be overwhelmed by the  hypocrisy of the right. They don’t mind a bit of statism, as long as, generally speaking, it’s propping up the wealthy. Banks bailed out by the taxpayer, not free-market dogma; infrastructure, education, and research and development that all businesses depend on, paid for by the state; private contractors who owe their profits solely to state largesse; even mortgages now underwritten by the state. It is only when it is suggested that the state might help those near the bottom of the pile that the right cries foul. In their world, “moderation” means the biggest cuts since the 1920s, the driving of over a million children into poverty, privatising the NHS without public consent and dropping bombs on foreign countries. “Extremism” is curbing energy prices, asking the booming wealthy to pay a bit more tax, and stopping construction firms squatting on land during a housing crisis. So let’s start telling it as it is: they are the extremists, however much they squeal disingenuously about the “centre ground”.

Real democratic socialism would not mean the odd curb on energy prices. It would mean a living wage instead of subsidises for poverty pay, and allowing councils to build housing rather than taxpayers lining the pockets of private landlords. It would mean arguing for social ownership – from banks to the railways – giving real democratic control to workers and consumers.

That is not currently on offer from Labour. But the right fear that, if even mild social-democratic populism proves popular, the door might open to more radical ideas. Their whole Thatcherite consensus could prove imperilled. And that is why the British right are starting to sound like bad-tempered Joseph McCarthy clones who stigmatise even timid social democracy as dangerous extremism to block any further shift away from free market extremism. But a word of warning to the right. Look across the Atlantic. How has the Tea Party-isation of the US right worked out for them? Because that is exactly where you are heading.

India's FDI Reforms - A risky strategy, born of panic

SIDDHARTH VARADARAJAN

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TOPICS

macro economicsinflation and deflation
investments
politicsnational politics

Building ‘capitalism with Indian characteristics’ means decisions cannot ignore concerns of voters and communities

As the economy slows down and the rupee wilts, Manmohan Singh has bitten the ‘reforms’ bullet with both eyes on the credit rating agencies whose negative reports have done much to dampen the ‘animal spirits’ of investors, foreign and native.

Last November, when the Congress party made a push to introduce foreign direct investment in multi-brand retail, protests in Parliament forced the government to back off. Pranab Mukherjee, who was Union Finance Minister at the time, said the FDI plan was being put on hold until a political consensus emerges.

I asked a senior member of the Prime Minister’s Cabinet what had changed between November 2011 and September 2012. There is still no consensus on FDI in retail, yet a decision has been taken to go full steam ahead. “What has changed is the value of the rupee,” the Minister replied. Every rupee that the dollar gains adds Rs 8,000 crore to India’s annualised oil import bill. “Of course, Manmohan admitted to us that not even one dollar may flow into retail or airlines right now”, he said. But this decision to open the sector and raise diesel prices has to be taken in order to stop the rupee from going into free fall.

SELF-SERVING AND DECEPTIVE

Signalling is not an unknown tactic, both in economics and in war. Signals can radiate strength and resolve, but they can also connote weakness. How will those whose ‘animal spirits’ are being propitiated look at the petard the UPA has just pinned upon the door of small retail across India? Dr. Singh must not be fooled by the applause he has garnered from editorialists, TV anchors and corporate leaders for being “tough” and “decisive”. These perfumed words may wash the stain of the Washington Post’s ink on his hands — a recent article in the American paper about his indecisiveness seems to have particularly stung the PMO — but they are self-serving and deceptive. From their vantage point in the White House or on Wall Street, the champions of American finance and enterprise see an Indian Prime Minister who is not tough but vulnerable: a man who believes the only way he can revive the economy and save the rupee is by doing what it takes to pull in foreign institutional investors and even hot money.

There is no doubt that foreign capital inflows, including FII monies, have played a big role in India’s success story over the past decade. But the problem with the Manmohan Singh strategy today is three-fold. First, it leaves untouched the very structural imbalances in the Indian economy that are responsible for the onset of the slowdown and, worse, stagflation. Second, by pinning all hopes on the revival of foreign inflows, those imbalances will most likely get exacerbated. Today, instead of being used for productive investment, capital is getting locked up in property, gold and other ‘safe’ outlets. A revival of the Sensex on the back of renewed FII interest may breathe some life into the stock market. But the risk is that this may trigger speculative demand and have no impact on the real economy. The third problem with the Prime Minister’s current approach is that the appetite of finance capital will not be sated so easily. One concession must necessarily beget another in order for the foreign investor to keep the faith in the India story.

A few weeks ago, we were told that the dilution and postponement of the General Anti-Avoidance Rules (GAAR) on tax — an important initiative taken by Mr. Mukherjee in the last budget — is necessary so as not to scare off investment. The same reason was cited to argue against the ‘Mauritius route’ of inbound investment being shut down. Today it is said that the bait of FDI in retail must be thrown to the rating agencies, or else the rupee will sink. Sure, the rupee has recovered against the dollar by around Rs 1.50 in the past few days but what happens if and when these gains get eroded again by structural factors? Foreign investors will demand more liberalised norms for entry into banking, insurance and pension funds. They will demand a friendlier patent regime for drugs so that generics can be blocked in the name of “incremental innovation.” They will rail against the ‘wasteful’ subsidies on food and employment going to India’s poor.

MISMANAGEMENT

The slowdown of the Indian economy today is essentially due to manufacturing. This, in turn, is largely the product of poor governance and mismanagement by the Central and State governments and their systematic neglect of basic infrastructure like roads and power over a long period of time. It is also the product of corruption and rent-seeking. The sub-optimal utilisation of the railways and coastal shipping — under the influence of one private lobby or another — raises the cost of long-haul cargo and increases the inflationary impact of any diesel price hike. Thanks to poor monitoring of contractor works, road projects remain unfinished for years on end, even after the land acquisition process is over. Industry is plagued by chronic electricity shortages even as would-be power producers find it more profitable to squat on their allocated coal or gas blocks.

Why is it that the Prime Minister didn’t think about being tough and decisive when it came to allocating coal blocks through a transparent auction? Why weren’t such auctions seen as a way of plugging the fiscal deficit? And we haven’t even begun talking about the allocation of bauxite, iron ore, granite, sand and water. How much revenue is the state continuing to forego by not charging proper prices from the businessmen lucky enough to land concessions for these resources?

The other structural problem the Indian economy faces is the mismatch between a national political culture that is democratic and a model of resource allocation that resents dissent. All those who are busy denouncing Trinamool Congress leader Mamata Banerjee for her decision to withdraw support to the UPA should remember that India is perhaps the only country in the world to have established universal adult franchise and a mature parliamentary system well before it turned to building capitalism in earnest. In virtually every other country, capitalist industrialisation came first and democracy followed, or the two developed side by side. If we are to build ‘capitalism with Indian characteristics,’ this requires a reimagining of the economic decision-making process. This means decisions cannot be taken in a peremptory, top-down manner, ignoring the views and concerns of voters and communities whose land, resources and labour industry needs to utilise.

At the event to relaunch Frontline magazine on Thursday, the noted economist, Prabhat Patnaik, spoke of the social contract of fraternity which lay at the base of the freedom struggle and of the Indian state which emerged. Springing from this are five universal rights which he said were non-negotiable: the right to food, employment at a living wage, education in good quality neighbourhood schools, healthcare and pension security for the elderly and disabled. None of these rights can be realised by granting concessions and subsidies to the corporate sector.

It is the failure of the system to deliver these basic rights that lies at the root of the current crisis in Indian political economy. And the current political crisis is also a reflection of the same deficit.

LAUDABLE

On Friday, Ms Banerjee delivered on her threat to withdraw support to the UPA. She deserves applause, if only for being one of the few politicians to stick to her stand even at the cost of surrendering her share of power in Delhi. Her other faults need not detain us today — most notably her intolerance. Nor should too much time be spent wondering whether the UPA government will survive her departure. It will survive, and do so handsomely, thanks to the outside support it receives and will continue to receive from the Samajwadi Party and the Bahujan Samaj Party. The Opposition Bharatiya Janata Party is in no position to face a snap poll, whatever L.K. Advani may say or want, nor is the Left. In the weeks and months ahead, there will be skirmishes in the Lok Sabha and some moments of tension too. But Dr. Singh and Congress president Sonia Gandhi — who have proved to be superb tacticians — will survive the bumpy journey to 2014.

What happens after that, of course, is anyone’s guess. It is one thing to master the tactics of survival on the battlefield, and quite another to have a strategy that can win a war. No Congress minister sees the party winning more than 150 seats if general elections were to be held today. Dr. Singh hopes to compensate for this dwindling public support by courting investors. This constituency, of course, is happy to be courted. Whether they deliver what the Prime Minister wants is the 272 seat question.

Olympics: the key to our success can rebuild Britain's economy

We need politicians who understand why we were so successful at the 2012 Games. Cameron and Osborne do not

• 
• • Will Hutton
  • The Observer, Sunday 12 August 2012

Chris Hoy's victory was the product of a finely tuned system of financial and technical support. Photograph: Tom Jenkins

Everyone has marvelled at the success of Team GB, but the best haul of medals in 104 years is no accident. It is the result of rejecting the world of public disengagement and laissez faire that delivered one paltry gold medal in Atlanta just 16 years ago. Instead, British sport embraced a new framework of sustained public investment and organised purpose, developing a new ecosystem to support individual sports with superb coaching at its heart. No stone was left unturned to achieve competitive excellence.

The lesson is simple. If we could do the same for economy and society, rejecting the principles that have made us economic also-rans and which the coalition has put at the centre of its economic policy, Britain could be at the top of the economic league table within 20 years.

The turnaround began in the run-up to Sydney in 2000 as the first substantial proceeds from the lottery began to flow into sport. There was investment in infrastructure – tracks, swimming pools, velodromes – but crucially also in the structures supporting individual sportsmen and women. There were funds for world-class coaches, such as Jim Saltonstall in sailing and Dave Brailsford in cycling, and for nutritionists and sports psychologists. Also for science and technology where appropriate, ensuring we had the best bikes and boats.

Crucially, the money was not distributed through one statist institution pursuing a centrally determined strategy, but through the varying intermediate bodies, from theRoyal Yachting Association to British Cycling. They knew their sport well, could direct the spending where it was most needed, but still had to show – through results – that they deserved the cash. Last but not least was a ruthless approach to picking potential winners and grooming them for success in a world of intensely global competition, all dramatised by the reality that Britain would host the Olympics.

Everything was underpinned not by a raucous jingoism but by a determined pride in what our country now is and to show that we can be the best, a patriotism that allows us to be open to the cream of the world but also to use it for our own purposes. The alchemy is, as we have seen, extraordinarily powerful.

Not only do we need to sustain these principles so they become structurally and culturally embedded for continuing Olympic success, but they should also be applied elsewhere. The problem is that they are born of an ideological hybrid that wrong-foots our political class. They are mostly rooted in liberal social democratic values that understand the importance of public investment, public organisation and institution-building. But they also involve an unashamed recognition that in the end individual application, resolve and will to win are indispensable.

David Cameron and London mayor Boris Johnson are happy to celebrate the element that is rooted in competition, elitism and individual effort. But they flounder the instant the conversation moves to the role of public investment and the necessity of understanding and sustaining our unique sport ecosystem, just as nearly every Labour politician flounders the other way round.

The number of British politicians who understand this hybridity – and will argue for it – is tiny. Michael Heseltine always has and Peter Mandelson finally got there in the dying days of the New Labour government, a government that should have been all about such hybridity but was racked by the desire to show its "business friendliness" and warmth to the City.

In today's government, only Vince Cable consistently argues for it and is thus nicknamed the "anti-business" secretary by many on the right whose understanding of what drives success in modern economies and societies is close to zero. The big point is that success depends on recognising that both elements count.

So what to do economically? The first part of the alchemy is for the state to trigger substantial public investment in everything that supports enterprise – communications, science, knowledge generation and transfer, housing and education. And to do so with purpose and consistency. It should be running at least £30bn a year higher than the Treasury currently spends, financed either by taxation or borrowing, depending on the particular economic conjuncture. Currently, it should be financed by borrowing at the lowest interest rates for 300 years. A plan B should begin immediately with such an ambition.

But that is only the start. The next step is to reproduce sector by sector the kind of ecosystem that sport has developed. There needs to be specialist knowledge, commitment, long-term finance and coaching for business and a new web of intermediate institutions that can do for companies in life sciences, robotics and new materials what the RYA, British Gymnastics and British Cycling have done for sportsmen and women. For example, the fledgling network of "catapults" designed to transfer technology into varying sectors must become centres of open innovation, coaching and support and scaled up quickly so they can reproduce the Olympic effect for business.

But for any of that to work, engaged owners have to be committed to their companies over time and banks need to behave more as business coaches – not sellers of credit and of useless financial products. They need to become organisations that attempt to co-grow the companies in an active partnership, not organisations that opt for money-laundering, Libor manipulation or mis-selling. This will demand a wholesale recasting of Britain's system of business ownership and finance, informed by the same pride and ambition for Britain as our athletes and Olympic crowds have shown.

There then has to be a commitment to management and performance – a world where achievement is genuinely rewarded and poor performance penalised. The principles are common sense. Wherever applied – from Team GB to the success of the German car industry or American IT industry – they work. Mr Osborne assures us of his complete focus on growth and jobs even as the UK economy remains locked in depression and an escalating balance of payments crisis. But such focus is meaningless unless informed by an understanding of what to do and a determination to do it.

Osborne and Cameron believe in the same ideas – public disengagement, free markets and laissez faire – that brought Olympic failure. Either they change or political leaders who do understand what to do must take their place. Britain could so easily be a world success. But first it has to find politicians who understand the necessity of hybridity. They are not Osborne and Cameron.