The state of unity

Raj Thackeray must be rolling on the floor laughing. Congress, which lambasted him until a few weeks ago for his divisive tactics, has gone ahead to announce the creation of Telengana. Worse yet, it had no clue of the simmering discontent within its own ranks, and the issue has become a comedy circus now. If anything, Raj stands vindicated. His actions may be condemnable, but his reasoning that one state cannot subsidize corruption and underdevelopment in other states merits consideration. The independent states movement is simply a corollary of this observation - that one part of the state cannot receive all the development and focus at the cost of others.

I was born and raised in Hyderabad, so I can definitely say that Telegana is the poorer of the three areas that form AP - the other two being coastal Andhra and Rayalaseema. The coastal Andhra is definitely richer in natural resources with fertile plains and rivers whereas Rayalaseema is traditionally wealthy and also has the temple town of Tirupati helping its economy. The Telengana area is part of the Deccan Plateau with mostly barren lands except for some cotton farming. By some freak chance, Hyderabad was made the capital of AP, else this area would have been written off totally. Of course, now, the demand for a separate state is purely a political manoeuver. And it has sparked demands for a bunch of other states. How long before we end up with 500 odd princely states we started with...

Austerity and Keynesian Economics

I am not the best articulator of economic concepts but this is too tempting to let go. The government has decided to cut costs. MPs and ministers are being asked to fly economy and use state guest houses.

This move is an economic disaster, especially when we are yet to fully recover from the recession. The GDP of a nation can be expressed as a sum of consumption, investment, government spending and net exports:

Z = C + I + G + NX

Roughly, GDP is the total value of goods and services produced by an economy. Now, for the economy to be in equilibrium, production must equal consumption. Therefore, GDP equals aggregate demand, which equals aggregate supply.

According to Keynes, the aggregate supply drives the GDP of an economy in the long run. That is, the resources available with a nation, both natural resources and people, will eventually determine what a country can produce, and therefore, what is available for consumption. In the short run, however, it is the aggregate demand that rules. When demand goes up, supply levels will adjust upwards to meet this increase.

Now, looking at the above equation, one way to increase GDP growth is to increase consumption, which means put more money in people's hands so they can spend. This is precisely the logic behind stimulus packages. But what's the guarantee that I will spend the money? As it is, the economy is gloomy, so I might rather put it in a bank deposit. To make that option unattractive, central banks cut interest rates, so you either spend or invest your money, both of which will boost the economy as can be seen in the above equation.

Government spending is much more effective in getting economies out of recession. Every rupee spent by the government has a multiplier effect, because it creates demand, which fuels more demand and so on. Tax cuts work in a similar manner. When people have more disposable income, well, they dispose it off in some way, which boosts consumption again.

So the present government's decision to embark on an austerity drive is an economic blunder. If ministers do not stay in hotels, the hospitality industry will suffer a slump. Hotels will have to make some cut backs that will result in people losing jobs and their vendors such as catering and laundry guys losing business. When these people have less money to spend, they will cut back on festival purchases such as apparel, which is the boom season for the retail industry. So now the retail industry will get into a slump and so on.

Of course, these effects would kick in only if the government stopped "spending". I doubt if our government was ever prompt in paying for its services, and has probably accumulated several years of unpaid dues so we shouldn't worry too much.

Anyway, with solid corruption, money will still be flowing freely in the black economy that will at some point trickle into the mainstream and boost demand. I can't remember right now, but I believe at least one well-known economist actually made the point that the underground economy plays the role of a stimulus package.

Rita Bahuguna's crime

It took me 30 min of focused Googling to ultimately figure what it was that caused so much uproar in UP. Well, I had an idea of what transpired based on what I saw on TV, but arresting the state congress chief for slander sounded a bit too much. I wanted to know the exact words uttered by Rita. For all the nauseating coverage of irrelevant events that our media provides, I had no luck finding the transcript of her speech or even the offensive words. I wonder if the media self-censored it or if they were afraid of the consequences of airing or citing the exact language! Mayawati, sure, is powerful.

It was the good ol' BBC that had the courage to mention what Rita said although even they did not quote her verbatim. Here's the link:

http://news.bbc.co.uk/2/hi/south_asia/8153161.stm