Its not the data, sir

Today, RBI kept the interest rates the same after a 3-day deliberation. 

Finshots is a email service/app that writes short journalistic pieces on the.. well, financial sector. 

In today's story, Finshots hypothesises that : 

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And an oft-cited criticism of the Reserve Bank of India is that it consistently fails to forecast inflation and growth rates accurately. According to the critics, this is a rather serious transgression on the part of the bank, mainly due to the fact that these numbers are then used to justify the monetary policy calibrations [changing interest rates etc]. How could the collective wisdom of the Monetary Policy Committee, the governor, the deputy governors, the modelling experts and other technical advisors all be so woefully inadequate to deal with what seems like a rather straightforward problem?

To answer that question we must first look at the data that’s used to predict these future outcomes. As Duvvuri Subbarao, the former Governor of the RBI points out — “The Reserve Bank operates within the universe of knowledge available in real-time, and that universe is largely shaped by data. If the data are reliable and available in good time, policy response can be accurate and confident. But the Reserve Bank is oftentimes wrong-footed because of the questionable quality of data.”

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Let me tell you a story. 

Naresh wanted to predict the rainfall this year. So, he took data from the last 20 years' rainfall - all 20 chaumasas with their comings and goings and everything in between. 

Then, he used a predictive index to say which day of the year will see how much rain. 

The statistical model predicted a deluge. People took precautions, businesses delayed new launches until after the deluge, and so on. 

But, that quote - Man proposes, God disposes, was not created in vain. The rains were normal, or below normal. People suffered that and criticised Naresh. 

A good friend came to meet him and asked him how he had configured his predictive model. Naresh said - the highest rainfall received on that date in any year was used to create the prediction of the expected rainfall in this year.  

Obviously, Naresh had all the data. He simply did not put the right analysis to that data. 

But why would anyone make such a huge mistake? Why not use something as simple and obvious as mode, or even mean rainfall? 

Because, Naresh had taken that model from a Cherrapunji based scientist. There, they prepare for excessive rains. So, they predict based on the highest they have ever got. Because the variance is not too high, it doesn't matter. They prepare for the worst and it works best for them. 

When we see that the model was created by a scientist in Cherrapunji, what appears to be absolute lack of reason, makes complete sense. 

End of story. 

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Why is that story relevant here? 

Because, the financial models we use to predict our numbers are created by economists who work in western economies. For over 200 years, everyone has been trying to fit our economy and its variables to a single universal format, guided by research in macro and behavioural economics. This research has been conducted in largely homogenous economies, with a defined set of cultural and social parameters. 

My hypothesis is, that if we want to understand the economy of India and how it interacts with macro economic policy variables, we have to understand how THIS economy functions. The government has often criticised the Indian trading community as being less than transparent. But is the government also not guilty of remaining ignorant about how the trading classes actually function, and then to create rules and laws that keep that in mind? 

The issue is not just with the data. The issue is that we have not invested in research to understand the model within which we operate. We report on numbers whose formulae are imported and have limited application in a complex economy like India. 

Examples: 

1. When the high denomination currency notes were banned overnight, no one expected the poorest of the poor to be so inconvenienced. BUT, they were. The preliminary, back of envelope calculation I did back then indicated the massive cash that flows through the bottom of pyramid. But because all this cash is completely undocumented, we cannot even include that data in our models, much less know what to do with it. 

2. Borrowing to spend on weddings and funerals is not listed anywhere as rational economic behaviour. No model of economics accounts for this. Yet, for at least 1000 years, Indians have borrowed routinely for weddings and funerals (if they are poor). What makes this even more perplexing is that this is the same society that gives 10% to charity and has among the highest family savings rates in the world. Why, then, do they borrow for weddings and funerals? (And now, for education) How does this indebtedness impact their disposable income and consumption? Their total income? Their nutrition? For how long does the impact last? 

3. How much does a country like India really need to spend on welfare medical facilities for all its people? What are the real medical needs of people who live every day with snake bites and dysentery?

The fault is not with RBI alone. Most economic reporting of India leaves out India (Sure, you can call it Bharat and snigger, but well, where's the money, honey?) 

It is written by people educated in Keynesian economics, read by people being educated in Keynesian economics, and criticised by people who base their criticism on fancy jargon and models of... you guessed it. 

To be fair, there cannot be a single economic model of India. India is, like all cultures, complex and complicated. Economic decisions have been based on rational decision making only in textbooks. Behavioural Economics is just beginning to get its due (or, is it?). 

But, can that really be an excuse for completely excluding the real Indian economic models from the study of economics? 

India's policy making, macro economic indicators reporting, and indeed, our education of economics, cannot be conducted without understanding the native economic models of India.

The illusion of choice

 Of course you can decide that your MS Word Normal should be Arial 12. But that doesn't mean a thing. MS has decided that Calibri 11 is the only normal, and that is what you will get.

You can still define your Normal and keep clicking on it. You have that option.

This is called "The illusion of choice".

Any other illusion of choice that comes to mind?

On dealing with breach

When a company goes through an internal breach of any kind - data, corruption, ethical lapse, etc., the thought, after cleaning up the mess, is to ensure that this never happens again. 

However, the way we go about doing this is so different. Indian companies tend to ensure that they hire no one who is likely to do this ever again. 

Western companies change their processes such that no one can do it ever again. 

One tightens the process but keeps the talent tap open. The other closes the talent tap but keeps internal processes open. 

They are both valid ways. In one, every employee becomes suspect and has to go through greater scrutiny and compliance. In the other, every employee is trusted, but it becomes harder to become an employee. The company's talent pool contracts. 

What would you like to do? Why? 

The size of the all cash economy at the bottom of the pyramid in India

 Background Information:

Only 1% of India's population pays income tax. The tax rate slab in India is 2.4 lacs for adults for the current financial year. Agriculture , which is a tax exempt sector, employs  about 57% of India's population. This means that of the remaining 43% of the population, 42% earn less than 2.4 lacs a year.

The Trigger:
On 8th November, 2016, something changed in India. By some estimates, 85% of our currency became invalid overnight.

The queues since then - mostly composed of the underprivileged, made all of us uncomfortable. Some of them had been paid to stand in that line. But a lot of others were there because they were a part of an all cash economy. 

As time passed and the queues did not get any shorter, it set me thinking about the real size of the cash economy at the bottom of the pyramid. How much cash is really there at the bottom of the pyramid, that is not entering the system at all? (And is, therefore, black money)? 

So, this morning, I did some back of envelope calculations, hoping to get some sense of the all cash economy that hides at the bottom of the pyramid 

The bottom of the pyramid has its own hierarchy(see note below). 

For my analysis, I decided to focus only on the primary income generators, as a reliable measure of  cash at the bottom of the pyramid. This is because B and C re-use the cash generated by A. They may add to the size of the economy, but I am interested in the size of the cash chest alone. The size of the economy will be about 2 or 3 times the size of the cash chest as the money gets recycled.

Determining the Set of Primary Income Generators
After this, I zeroed in on some occupations where I have some idea of the margins, daily income, ticket size et al. 

Methodology

I just followed very simple back of envelope calculation. So, average order/ ticket size, no. of orders per day, margins (because according to Indian tax law, business is allowed to deduct expenses before arriving at income) and no. of working days per annum. 
For monthly workers, I used average income per month, plus additional income (bonuses, overtime etc). 

At first, I couldn't believe the numbers that appeared on that screen. So I did some more changes - reduced the working days, reduced the no. of tickets per day and so on. Even with all the changes, at the most conservative, this is how it appears.

That number in INR Today is 562590 Million INR. i.e.,: 562590000000 or 562 Billion INR.

Notes:

1. This analysis is only for a few selected occupations. 
2. The number of 1000/2000/5000 vendors per city is obviously very low. 

3. The hierarchy at the bottom of the pyramid:
A. Primary Income generators
These are the people who generate income from the economy and bring it to the bottom of the pyramid. Think: Vegetable vendors, pan wallas, small grocery shop owners, dhobis, malis, parking stand boys, domestic staff,  other service providers. In the money cycle, think of this as the point at which wealth enters the bottom of the pyramid.
B. Secondary Income Recyclers
These are the people who then use that money to support the bottom of the pyramid economy. Think landlords, service providers to the poor, alcohol thekas et al.

C. Consumers
These are the people who have the spending power at the bottom of the pyramid. Think home decision makers, consumers et al. 

4. No. of cities in India as in 2011: 497. I have used the number of 450 for this analysis.

The continuity of Indian civilisation

 Here are the characteristics of a period in Indian history. Can you guess the period that is being described?

1. The civilisation was, at its core, a mercantile civilisation, where money was the prime objective of existence, and other things, like house in a good location, access to good civic facilities, the derivatives of that core objective.
2. There was a mature political and civic structure. This was a civilisation that was not given to petty internecine wars. They had the maturity to design and build political systems for scale.
3. Environment was not high on the political agenda. Nor were farmers given importance in the political establishment or the decision table.
4. The mature political structure ensured that small and large kingdoms lived in relative peace, with very little need for wars. Much of the state's budget went towards civic work and administration. Wars were rare and when they happened, decisive.
5. Education was a priority. This ensured the continuity of traditions and knowledge across many centuries - largely unchanged. But the knowledge imparted in this educational system had the best lessons of the past and encouraged readers to develop those ideas before sharing them with a larger world.
6. Cities, esp capital cities, were well planned.

The answer is: Every single Indian civilisation, dating back to the earliest known - the Saraswati Valley, has displayed these characteristics. India is not a successful democracy just bcs of the founding fathers of our constitution. India is a successful democracy because our political journey started with democracy - Janapadas and evolved into monarchy. 

Womens Day 2021

 

It was a pleasure and a privilege to be a part of this esteemed panel! 

Business Secrets of the Marwaris

 This will put in bullet points as we grasp from the various articles and books on the subject: 

Network, Network, Network 

When a Marwari child reaches earning age, he is put in tutelage with a relative or a friend. When they reach a new land, they are immediately taken in and supported by the local community there until they are able to support themselves. 

It may be nature, but a lot of it is nurture 

I have said this often and will repeat - the Western world is finding (again) the importance of giving children more than academics - of giving them real productive work where they can see the outcome of their actions. Indian communities have always made children a part of their work. If it is a trade, the child is taken on the rounds. If it is collections, the children go with the father. If it is a factory, the children grow up there, visiting at least once a week. If it is craftsmanship, children help the parent as soon as they can walk. Work is literally all around them in growing up. 

Family comes first 

I asked a Marwari friend - we Punjabis can never work with our families. We end up fighting. How do you do this? How do you work consistently with other family members? 

Her reply has stayed with me ever since - We have deep respect for our family members. No matter how much loss it means in business, we never let our elders feel bad. And we always keep family members happy. Since its the same business, people don't usually let ego come in the way. But if it does, we assuage the ego first, because relations are for the long term, business decisions are short term. 

Education 

Almost all Marwari children are educated well. This helps them, imho, understand emerging business trends and create networks that help them leverage these emerging trends. 

The most undeniable aspect of Marwari businesses is their longevity. That longevity is not possible without agility and proactive management of the business environment. 

Insistence on education may have a lot to do with it. 

Pioneering and risk taking 

The first people to buy sick jute mills were Marwaris. The first people to move to Calcutta and establish a trading base there once the port was set up were Marwaris. The first people to move out of Marwar and become financiers to the Mughal emperors were also Marwaris. 

If you look at Marwari businesses, quite a few of them would have started something new. Pioneering or risk taking is inherent to all businessmen. That is how businesses are built. But in this case, we combine the pioneering spirit with the ability to garner a community quickly, and we see a very good result. 

That thing called corporate culture 

In corporate grapevine, they are called the lala companies - companies that  are family owned and loyalty to the head is instinctive and personal. As family members join the business, some of the loyalty is also inherited by them - wives, sisters, children, cousins, everyone. 

The corporate culture is driven by loyalty and a sense of family. If an employee has a personal emergency, they would do something that no one can imagine in an MNC - they would request to meet the big boss directly, and the big boss would, after hearing of it, approve whatever it is that would help the employee. There is no question of involving HR, system adherence, etc. 

In fact, this is something I have observed, time and again, in Indian businesses - the family is an inherent part of the culture. The family is the most important unit - of the founder, and of every single employee.

Financial Control and instruments 

There is an acute sense of accounting for every penny. Financial control is typically much tighter. But, things like maker-checker or processes or accounting standards etc are not what lead to this tightness. It is the CEO's familiarity with the flow of money. 

The Marwari financial instruments were also much more evolved than their counterparts. The Hundis were the first negotiable instruments, long before the term was coined.  

Talent Pipeline

A direct result of the network and community angle was the ready availability of talent and a talent pipeline. The youth was assured of jobs and the business was assured of talent. Further, there was minimal risk of white collar crime because your entire social circle, your family, everyone worked with you. 

I think that while this aspect may have diminished in recent times, a trip to the industrial/ trading belt will show that people still maintain 25-30 years of tenure with the same organisation. The children may fly the nest, but there is still a security cover should they need it. 

Philanthropy 

Like most Indian communities, the Marwaris also believe in philanthropy. Much of that money is spent on generally accepted causes - temples, girl children, health, education of the underprivileged. There is a concept of a welfare state that comes from the very Indian idea of Sarbat ka Bhala / Vasudhaiv Kutumbkam. But this philanthropy ensured a certain basic minimum level of existence for most people in the region. I have some conjecture about how this led to the creation of a pro business environment, but better to write that after the research. 

Social capital and a brand

What is the secret of the fat Marwari weddings where the hidden wealth oozes out in all forms and fashions? Why do Marwaris spend so much on a specific festival or occasion? It is to build social capital.

If success in business is a direct consequence of one’s social capital, festivals and special ceremonies are the means to earn the capital. It is noted that the exchange happens on goodwill in the market of diamond and precious stone trading in Jaipur.

Bibliography

 Check How Marwari People Are Born For Business And The Secrets That Make Them So Good (edtimes.in)