EU – India FTA and Financial Liberalization

Even though India and the European Union (EU) are celebrating 60 years of bilateralism, it was only in 2007 during Prime Minister Manmohan Singh’s first tenure that a Strategic Partnership between the two parties was signed, which after six years of engagements broke down due to unresolved issues. This hiatus was finally broken in May 2021, when India and the EU decided to resume from where they had left off towards an ambitious, comprehensive and a win-win trade deal for both. They also reached an understanding to pursue market access issues, implement globalization and protect investments. The talks were formally resumed in June 2022 with the first round held in Delhi, the second round held in September 2022 in Brussels, and are to be followed by the third round in Delhi in November 2022. European Union as a region is India’s third largest trade partner after the US and China with trade volumes evaluating at $116.36 billion in 20210-22. In addition to protecting investments, both parties are keen to make a headway in accessibility in regards to digital commerce, agricultural products and geographical indicators (GI)(1). If the EU gets access to the vast and untapped Indian market, India in turn is hoping to enter a level-playing field on an equal footing with countries like Bangladesh and Vietnam that have received privileged status in the EU market.(2) The First Round covered 18 policy areas of FTA in addition to 7 sessions on investment protection and GIs. The Second Round focused on Indian responses to the EU’s proposals and India’s textual counterproposals.(3)  While understanding each party’s sensitivities on trade in goods and divergences on rules of origin was the highlight of Round 2, it is quite improbable to date the inking of the trade deal between the two with certainty due to EU’s 27-member countries’ complexities. 

There are up north of 6000 European companies present in India across various sectors, which are responsible for providing 1.7 million jobs, excluding 5 million that are indirectly provided. If tapping the markets is considered to be a rationale behind the trade talks, from EU’s point of view, the objectives are very many, viz. sound, transparent, open, non-discriminatory, and predictable regulatory and business environment for European companies trading with or investing in India. This is inclusive of protecting investments and intellectual property. The EU’s share in foreign investment stock in India reached €87.3 billion in 2020, up from €63.7 billion in 2017, making the EU a leading foreign investor in India. This is significant, but way below EU foreign investment stocks in China at €201.2 billion and Brazil at €263.4 billion. The reason for this lag is what the EU considers India’s restrictive trade regime and regulatory environment. For example, TBT (Technical Barriers to Trade)(4), which serve legitimate public policy objectives are often treated contentiously by Indian exporters, as any imposition of TBTs can lead to a significant relocation of resources from high-productivity to low-productivity firms. This coupled with limited administrative and technical capability potentially threatens the adoption of regulatory standards that have gained international currency. Then, you have the SPS (Sanitary and Phytosanitary Measures)(5), which is found to be ineffective in India’s case, primarily because SPS Measures provide a space for protectionist purposes under the guise of legitimate concerns. But, India is persevering to prove that its ease of doing business has improved, and in an age of deglobalization and economic decoupling, it wants to have a strategic partnership with the EU rather than merely focusing on an economic one, and an FTA in this regard would only help strengthen and forge newer ties and partnerships. 

Coming on the heels of India-UAE CEPA (Comprehensive Economic Partnership Agreement), which is broad in scope, but shallow at the same time, there is a sudden spurt in signing FTAs. It must be noted that in a number of India’s trade agreements, Indian trade deficits have increased after the signing of the FTAs as the demand for imported commodities increased with complete elimination of tariff and non-tariff barriers.(6)(7)  The “Early Harvest”(8) trade pact with Australia in April was interim and narrow in scope, but with the India-EU negotiations on, the scope of this FTA is supposed to be ambitious and broad with specific emphasis on trade and sustainable development. Importantly, the investment protection agreement was made distinct from FTA due to regulatory framework within the EU.(9)

India has long exercised caution against FTAs, either because of its over-indulging conclusions on the success/failure rates of FTA utilization, market penetration, or integration with regional and global networks, and crucially trade deficits. All of this is supposedly to change with its new found penchant for signing on to FTAs. 

Beginning in the 1990s, and on through the decade, economic liberalization helped India integrate into the global fold. There were divergences in academic scholarship between how such an integration would help India’s trade schemata in the short as well long run, when it comes to fully subscribing to the international market order. The skeptics(10) argued that any FTA India were to become part of in the wake of economic liberalization might not make sense in the short-term, but would definitely help the country in its strategic ends, if India were to become a hub for services’ exports. The not-so skeptics(11) argued that liberalization followed unilaterally should get its due acknowledgement in India’s integration with the World Market, especially in its Look East Policy. The Look East Policy has been upgraded to Act East Policy, and with it, the driver for a deep integration was liberalization(12), or more appropriately financial liberalization, until CoViD-19 hit and brakes were applied and course changed towards ‘protectionism’ by the Government’s ‘Atmanirbharta’. 

The process of financial liberalization directly influences the level of interest rates and indirectly, the structure of capital costs, marginal efficiency of investment and levels of aggregate savings, investments and employment. The three major objectives of financial liberalization are, 

– opens qualitative and quantitative financial flows

– liberalizes terms governing outflows of forex

– transforms financial structures

If we look at the financial landscape on either side of the Global Financial Crisis of 2008-09, India had done relatively better with its tight capital controls and small extent of its external linkages. This on the one hand had slowed down investment, while on the other locked in restrictions in most traditional industries. However, reforms were once again introduced during the current political dispensation of the BJP-led NDA regime when foreign investment permissions were relaxed. According to Arvind Panagariya(13), foreign invested enterprises may be wholly owned in some policy priority areas, including marketing food products, high-tech and capital-intensive activities in transportation, coffee, rubber, medical manufacturing, e-commerce, to name a few. Despite such reforms, the results on the ground are barely translatable, as India’s domestic financial development is still caught up in a lag, with the public sector banks accounting for a significant majority of the loans. In other words, India’s financial system remains in a hybrid mode with market forces permitted, but continuing state ownership and intervention geared towards priority sector requirements on the one hand, and in curbing the unleashing of market forces on the other constrict both of these. While the corporate bond market remains highly regulated and small in size, the equity markets are open and well regulated, it is the debt market with extensive capital controls(14) that govern the flows foreign funds. 

Financial liberalization involves developing equity markets. With banks entering this arena, any turbulence in equity markets could have ripple effects on the performance parameters of banks. Secondarily, FII (Foreign Institutional Investors) investments constitute a large share of equity capital of a financial entity. An FII pull-out, even if caused by developments outside the country can have rippling implications on the financial health. Thirdly, FII outflows can depreciate the currency, and in a special case (thankfully India hasn’t faced it yet) cause a currency crisis. 

Even if Financial Liberalization leads to growth, it can also force the state to adopt a deflationary position to appease financial interests, which are contrary to deficit-financing, as deficit financing can lead to a liquidity overhang(15) in the system further leading to inflationary pressures(16). This complex is a sign of interventionism on the part of the state and thus is contrary to the market dynamics. At the same time, curbing deficit contracts public expenditure, and this adversely impacts capital formation. This leads to declining growth and employment, and further contracts social sector expenditures. The moonshot of this declension is privatizing public assets. The cycle is vicious, as global finance seeks to delegitimize state and legitimize the market.

India’s FDI (Foreign Direct Investment) flows are heavily distorted by phantom capital flows, where special purpose entities and other conduits are used for tax optimization and to obscure the origin of capital, thus facilitating speculative forays in the market. It is essential to clean up these phantom flows. Mauritius, a tax haven followed by the EU and the US are the largest investors in India. UK is the 3rd largest non-tax haven investor with an inward FDI stock into India as large as the US and the EU. But, post-Brexit, the EU stands to lose almost half of its inward FDI stock to India. Looking at India’s outward investment, Mauritius and Singapore are the leading destinations whereas stocks in the EU fluctuate and remain relatively low. Another credo of financial liberalization that could be stamped is to exempt listed equities from long-term capital gains taxation regime, as this would facilitate investment in equities. Only short-term capital gains are taxable as of now. 

Modi’s Make in India to make manufacturing account for 25% of GDP decelerated due to a series of setbacks in the domestic credit market. By the end of the first term, it was clear that market-driven global integration had not delivered on the economic or strategic front leading to annulling a series of bilateral investment treaties. To add to the woes, the downward trend in customs duties since 1991 liberalization was reversed. Even India’s stepping out of RCEP that had simplified rules of origin and enough transition periods for Indian industry to adapt was deemed irrational. Atmanirbhar policy in the wake of CoViD-19 pandemic has been touted as a move away from market-driven liberalization to a more strategic approach with selective increases in industrial tariffs, liberalization of FDI in both goods and services, and PLIs (Performance-Linked Incentives) aimed at restoring key manufacturing processes. 

Post-1991, India signed a large number of Bilateral Investment Treaties (BITs), including 21 with the EU members, of which only with Latvia and Lithuania are still in force. Since 2015, India has annulled a high number of these BITs. The reason being a number of high-level investor state dispute settlement cases against India. In recent times, India has signed on FTAs, but have agreed in-prior principle to providing MFN status and national treatment to foreign investment, thus limiting the use of performance requirements and dispute settlement mechanisms. 

With this adumbrated look at India’s Financial Liberalization policies, let us briefly point out how would this impact the current and ongoing negotiations between India and the EU. EU Agreements are mostly two-dimensional – they have width and they have depth. In other words, they cover issues going beyond issues in liberalization of trade in goods and services and investments. Indian Agreements have shown an increasing inclination towards the dimension of width, but are a far cry from depth. In other words, EU Agreements are bounded by commitments, whereas Indian Agreements are at best, “best-endeavors”(17).

Advancing non-trade policy objectives is a core part of EU’s foreign policy. One of the cornerstones of EU’s Trade Agreements is Trade and Sustainable Development (the negotiating parameters) culminating into provisions related to environment and labor standards. An example of the EU-South Korea FTA(18) is apt here, for the agreement widens the scope to measures affecting trade-related aspects on environment and labor. If these standards are violated, the EU can legitimately ask the other party to comply with the standards, as had happened in case of South Korea which was asked to improve, rather than improvise on its standards in 2019. Such factors were then introduced in the text of the subsequently inked EU-Vietnam trade agreement. Contrast this with the example of India-Korea Trade Agreement, who in general agree on Sustainable Development, but the text of the deal misses any chapter on commitments.(19) 

Commitments needs to be complied with, and an ombudsman is essentially tasked with the responsibility. In case of FTAs that the EU signs on to, there are two such compliance mechanisms in place, viz. DAG (Domestic Advisory Group), and PoE (Panel of Experts). The former is an informal mechanism, while the latter is a formal one in nature. Domestic advisory groups should be advisory, consultative, institutionalized and competent to cover all provisions of FTAs. The EESC (European Economic and Social Committee) considers that the participation of civil society in all FTAs is an indispensable element in the strategic ambitions of the external policies of the EU. The DAG, which is more of an informal mechanism is represented from the two parties in a deal, while the Panel of Experts is constructed in accordance with the formal, third-party dispute settlement mechanism. In case of any dispute or non-compliance, the PoE is invoked and the decision of the same is binding and requiring the contracting parties to effectuate a change or changes to their domestic regulations. The case of EU-Korea mentioned above is related to precisely such an invocation of the PoE. The PoE admonished Korea to ratify three ILO (International Labor Organization) Conventions and also had to amend its trade union and labor relations.

How would these different takes pan out between the EU and India remains to be seen considering there are differences in multilateral and regulatory and domestic positions on these aspects. Multilaterally, two main conventions of the ILO, viz. C087 and C098 – Right to Convention and Right to Collective Bargaining are not ratified by India have not been ratified by India, and such a miss might become a point of contention to the inking of the treaty. Regulatory-wise, compliance is the responsibility of enterprises, and in India, where a large majority is informal sector, compliance costs could be onerous. If the trade deal is then said to go through, adherence to labor and environmental compliances could very well strike out a massive sector of the economy from getting integrated in the deal. 

If these are fiduciary challenges (in financial and trade terms), then there are challenges on an environmental front. Firstly, India’s environmental laws have gone through a series of notifications that critics believe are substantially diluted to foster India’s growth. Secondly, you have the EU’s Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage within the geographical territories of the EU and by moving carbon-intensive production where standards are lax. India looks unfavorably at this schema for its protectionist, discriminatory and contrarian evaluations to international laws and agreements. 

Unless these challenges are consensually agreed to be addressed, any trade deal, with how much ever liberal economic policies in place will have serious impediments to clear. Maybe, this is one of the reasons why critics of FTA between India and the EU call the deal, which is yet to materialize as a deal of unequals. As of now, for the EU, India remains a partial hedge against the risks emanating from the trade architectures along the pacific rim. It remains to be seen if additional layers are added on to this hedge. 

Lastly, with India now chairing the G20 for a year, there is likely to be a political temptation to conclude an early harvest agreement with the EU, but it would be compromising on the principles of a comprehensive agreement that may take longer than is expected. 

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(1) A GI is generally a produced, agricultural or natural product that is specific to a geographical origin. In trade parlance, GIs carry a guarantee of quality and originality.  

(2) India is specifically anticipating growth in industries like leather, textiles, processed foods etc. to create a parity in exports, which Bangladesh and Vietnam enjoy. 

(3) The EU tabled a chapter on trade and sustainable development, anti-fraud and mutual administrative assistance, which the Indian side was supposed to provide detailed explanations and clarifications on. Such an exchange then, would provide grounds for the negotiators to enter into actual negotiations in Round 3. 

(4) A progressive decline in tariffs has brought non-tariff measures (NTMs) under greater scrutiny as one of the major barriers to trade flows between countries. The increase in NTMs has  been primarily driven by a surge in regulatory measures like technical barriers to trade (TBT) and sanitary and phytosanitary measures. Theoretically, the imposition of a TBT can affect a firm in various ways: first, it can directly raise production costs. In particular, TBTs can be associated with either an increase in variable costs (eg. labelling requirements) or fixed costs (eg. new production processes) of production or both. Second, the existence of different standards in different markets could entail individual fixed compliance costs for separate markets, which could severely limit exporters’ production capacity and the number of markets. Overall, by increasing the variable or fixed costs of production, TBTs are likely to affect aggregate exports, which in the Indian case is very true to the markets maintaining these measures. Chakraborty, P., & Singh, R. (2020). Technical Barriers to Trade and the Performance of Indian Exporters. ERIA Discussion Paper Series, No. 393, 1–30. Retrieved December 1, 2022, from https://www.eria.org/uploads/media/discussion-papers/FY21/Technical-Barriers-to-Trade-and-the-Performance-of-Indian-Exporters.pdf.   

(5) The Agreement on the Application of Sanitary and Phytosanitary Measures (SPSA) was negotiated with a view to setting in place an array of multilateral rules that would, on the one hand, recognize the legitimate right of WTO Members to adopt sanitary and phytosanitary measures necessary to protect human, animal, or plant life or health, and on the other, enshrine certain checks and balances to cope with the possibility of thee measures emerging as non-tariff barriers (NBTs). Das, K. (2008). Coping with SPS challenges in India: WTO and beyond. Journal of International Economic Law, 11(4), 971–1019. https://doi.org/10.1093/jiel/jgn033 

(6) The case of import of Malaysian Palm Oil is appropriate here. 

(7) In order to understand the mathematical and econometric frameworks to assess the impacts of FTAs on the commodity value-chain, see Ghosh, N., Konar, A., & Pathak , S. (2015, October). India’s FTAs with East and SE Asia – Impact of India-Malaysia CECA on the Edible Oil Value Chain. Observer Research Organization Occasional Paper. Retrieved December 5, 2022, from https://www.orfonline.org/wp-content/uploads/2015/12/Oc-Paper_73.pdf 

(8) An early harvest agreement is aimed at liberalizing tariffs on the trade of certain goods between two countries or trading blocs before a comprehensive agreement. It is primarily a confidence building measure. 

(9) While an FTA can be approved by the European Parliament, investment promotion pacts are to be ratified by parliaments of member countries. 

(10) Pal, P. P., & Dasgupta, M. (2008). Does a Free Trade Agreement with ASEAN Make Sense? Economic and Political Weekly, 43(46), 8–41.

(11) Asher, M. G., & Sen, R. (2008). India-East Asian Integration: A Win-Win for Asia. Economic and Political Weekly, 40(36), 3–9. 

(12) Liberalisation is a loosely used terminology often tailor-made to suit contexts. But, in general, it refers to the relief of state restrictions with areas of social, political, and economic policies. Liberalisation in economic policy focuses on the reduction of government laws and restrictions in place to encourage greater participation by private entities. In India, liberalization began with the 1991 economic reforms, and were primarily aimed at – annulling the then-existing license raj; lowering of interest rates and tariffs; stripping the public sector’s monopoly from various segments of the economy; and sanctioning of foreign investment in different industries. Trade liberalization, on the other hand is the removal or reduction of restrictions or barriers on the free exchange of goods between nations, These barriers include tariffs, such as duties and surcharges, and non-tariff barriers, such as licensing rules and quotas. For a in-depth treatment on Trade Liberalisation, see Wacziarg, R. (Ed.). (2018). Trade liberalization. 2 vol. set. Edward Elgar. 

(13) Panagariya, A. (2016, May 18). Two years of reform: Substantial progress has been made towards restoring economic momentum. Much remains to be done. The Indian Express. New Delhi. Retrieved December 5, 2022, from indianexpress. com/article/opinion/columns/pm-narendra-modi-2-years-of-modi- govt-bjp-two-year-anniversary-pradhan-mantri-krishi-sinchai- yojana-2804219/. 

(14) In a related concept, India during the heydays of unfolding its liberalization policies acted prudentially in liberalizing its capital account. A capital account deficit is showing that more money is flowing out of the economy along with increase in its ownership of foreign assets and vice versa in case of surplus. The Balance of Payments contains the current account (which provides a summary of the trade in goods and services) in addition to the capital account which records all capital transactions. 

(15) Excess liquidity in the system, and has the potential to send short-term interest rates crashing down. 

(16) Chandrashekhar, C. P., & Pal, P. P. (2006). Financial Liberalization in India: An Assessment of its Nature and Outcomes. Economic and Political Weekly, 41(11), 1–25. 

(17) Best Endeavours are an onerous obligation requiring a party to take “all those steps in their power which are capable of producing the desired results” although it is by no means an absolute obligation and the concept of reasonableness still applies. One expression of this is that “best endeavours” requires “all that reasonable persons reasonably could do in the circumstances”. In contrast to “Best Endeavors”, you also have Rational Endeavors, which are the obligations that depend upon the circumstances of the party subject to it and they would not be required to sacrifice their own commercial interests.

(18) European Union , Official Journal of the European Union (2011). Retrieved December 5, 2022, from https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:22011A0514(01). 

(19) Ministry of Commerce, GoI, India – Korea CEPA (2009). Retrieved December 5, 2022, from https://commerce.gov.in/wp-content/uploads/2020/05/INDIA-KOREA-CEPA-2009.pdf. 

 

 

 

 

 

 

 

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China’s Belt and Road and India’s Infrastructural Ambitions – Where is the line to be drawn?

When in 2017, China organized the first-ever Forum on Belt and Road, almost 130 countries from all over the world, including the United States had sent in their representatives to witness and be part of the diplomatic showcase of China’s global ambitious project, which aims to create an interlocked trade, financial and cultural network stretching from East Asia to Europe and beyond. There was, however, one notable miss, India. India was always opposed to Chinese ambitions of erecting this vast infrastructural network and the primary reason was that it violated India’s state sovereignty. The showcase arm of the Chinese Belt and Road happens to be the China-Pakistan Economic Corridor, a $62 Billion pet project of Chinese President Xi Jinping and traversing the entire length and breadth of Pakistan with nodal points in Xinjiang province of China, and Pakistan’s port town of Gawdar. CPEC is marked by modern infrastructure of transportation networks, special economic zones, industrial clusters and energy hubs, and considered China’s main plank of Belt and Road Initiative aimed to underscore China’s economic might and dominance over the Asian-Pacific seas. That a segment of CPEC cuts through the disputed territory of Pakistan Occupied Kashmir has irked India no ends, which it considers a direct, uncalled-for and aggressive nature of China’s global ambitions at the cost of state sovereignty. Though, the CPEC is yet to be fully commissioned, some segments have started to function. This is turning out to be major bone of contention between the two Asian economic giants. But, relations have a gotten a bit murkier since 2017, and two major geopolitical events have confounded matters further. 

The first one is the Doklam Standoff between China and India. This tiny plateau nestled between China, India and Bhutan witnessed a three-month standoff between the two largest armies in the world over a road that the Chinese were building and which India apprehended would function more as a surveillance apparatus over the narrow path of land that connects the Indian mainland with the Northeastern states. Though the tension was eventually diffused, the state of affairs between China and India never really thawed as could have been anticipated. It was in 2017 that India and Pakistan became newly installed members of the Shanghai Cooperation Organization (SCO), having been elevated from observer states. China, anticipating an increasing amount of divisiveness within a regional economic and security organization by being accustomed to extreme comity and cooperative discussions was frustrated at India’s becoming a member state that Russia, another founder-member of SCO pushed for. Russia wanted to constrain China’s growing influence in the organization as it was concerned that post-Soviet SCO members were drifting too far into the Chinese geostrategic orbit. Moscow had long delayed implementing Chinese initiatives that would have enabled Beijing to reap greater benefits from regional trade. As China gained more clout in Central Asia, Moscow choice New Delhi’s inclusion to slow and oppose Beijing’s ambitions. It is under these circumstances that New Delhi would likely continue to criticize the CPEC in the context of the SCO because, as a full member, India now has the right to protest developments that do not serve the interests of all SCO members. The SCO also offers another public stage for India to constantly question the intent behind China’s exceptionally close ties to Pakistan.

The second is the recent escalation of hostilities between India and Pakistan, and how Pakistan felt betrayed over China’s so-called neutral stand by asking both countries to take recourse to meaning dialogue in resolving the contentious issue of Kashmir and Terror and cease all military adventures. It is to be noted that the second convention of the Belt and Road Forum is to take place in April this year, and China is all hopeful to get India’s positive support for its infrastructural might. India’s notable absence from the 2017 meet has hit Chinese plans, and the latter wants to reverse the course this time around. Even if India were to take part this year, or send in their dissent note via an official communique, it would reliably and reasonably highlight the contradiction between China’s stated anti-terrorism goals and the reality of its policy. Most notably, Beijing has consistently looked the other way as Pakistani Intelligence Services continue to support terrorist groups in Afghanistan and Pakistan. Moreover, because India is particularly close to the Afghan Government, it could seek to sponsor Afghanistan to move from observer status toward full SCO membership. This would give India even greater strength in the group and could bolster Russia’s position as well.  

Lingering border disputes and fierce geostrategic competition in South Asia between China and India is likely to temper any cooperation Beijing might hope to achieve with New Delhi in latter’s inclusion at the Forum. Mutual suspicions in the maritime domain persist as well, with the Indian government shoring its position in the strategically important Andaman and Nicobar island chain to counter the perceived Chinese “string of pearls” strategy – aimed at establishing access to naval ports throughout the Indian Ocean that could be militarily advantageous in a conflict. Such mutual suspicions will likely impact Forum’s deliberations and discussions in unpredictable ways. Although India may be an unwelcome addition and irritant, China’s economic and military strength makes it far more formidable on its own – a point that is only magnified as Russian influence simultaneously recedes, or rather more aptly fluctuates. Even when India rejected Beijing’s Belt and Road Initiative overture, China remains India’s top trading partner and a critical market for all Central and South Asian states, leaving them with few other appealing options. India’s entry into the Forum, however, could put Beijing in the awkward position of highlighting the value, while increasingly working around or outside of it. Outright failure of the Forum would be unacceptable for China because of its central role in establishing it in the first place. Regardless of the bickering between countries that may break out, Beijing can be expected to make yet another show of the importance, with all of the usual pomp and circumstance, at the upcoming summit in April, 2019.

What then is India’s infrastructural challenge to Belt and Road? India’s Prime Minister Narendra Modi instantiated the need for overhauling the infrastructure in a manner hitherto not conceived of by emphasizing that the Government would usher in a ‘Blue Revolution’ by developing India’s coastal regions and working for the welfare of fishing communities in a string of infrastructure projects. That such a declaration came in the pilgrim town of Somnath in Gujarat isn’t surprising, for the foundations of a smart city spread over an area of about 1400 acres was laid at Kandla, the port city. The figures he cited during his address were all the more staggering making one wonder about the source of resources. For instance, the smart city would provide employment to about 50000 people. The Blue Revolution would be initiated through the Government’s flagship Sagarmala Project attracting an investment to the tune of Rs. 8 lakh crore and creating industrial and tourism development along the coast line of the entire country. Not just content with such figures already, he also promised that 400 ports and fishing sites would be developed under the project. One would obviously wonder at how tall are these claims? Clearly Modi and his cohorts are no fan of Schumacher’s “Small is Beautiful” due to their obsession with “Bigger is Better”. What’s even more surprising is that these reckless followers of capitalism haven’t even understood what is meant by “Creative Destruction” both macro- or micro- economically. The process of Joseph Schumpeter’s creative destruction (restructuring) permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets. At the microeconomic level, restructuring is characterized by countless decisions to create and destroy production arrangements. These decisions are often complex, involving multiple parties as well as strategic and technological considerations. The efficiency of those decisions not only depends on managerial talent but also hinges on the existence of sound institutions that provide a proper transactional framework. Failure along this dimension can have severe macroeconomic consequences once it interacts with the process of creative destruction. Quite unfortunately, India is heading towards an economic mess, if such policies are to slammed onto people under circumstances when neither the macroeconomic not the microeconomic apparatuses in the country are in shape to withstand cyclonic shocks. Moreover, these promotional doctrines come at a humungous price of gross violations of human and constitutional rights of the people lending credibility once again to the warnings of Schumacher’s Small is Beautiful: A Study of Economics as if People Mattered…

So, is there any comparison between Belt and Road and Blue Economy? Well, pundits could draw far-fetched comparisons between these infrastructural advances, but, for the Chinese, Belt and Road is geographically much vaster as compared to Indian Blue Economy, which is more confined to domestic consumptions but do have elements of exim and trade aspects to it. Apart from that, when it comes to fulfilling these ambitions, China with its economic might have much better resources at commissioning the initiative, whereas India, with its faltering banking industry and waning investor confidence is finding its increasingly difficult to map out routes of funding and financing. On a more geopolitical note, and especially in the wake of current events between India and Pakistan, china would do well to factor in the larger perspectives of its relations with South Asia. It’s well known that China has been using Pakistan as a foil against India since the 1960s, and with its CPEC has upped its commitment to Pakistan that includes the assurances of Pakistani well-being. But can China remain oblivious to Pakistan’s scorpion-like behavior of devouring itself? On the other hand, a stable India is providing opportunities for Chinese companies to expand themselves. The reset in Sino-Indian ties following the Wuhan Summit of 2018 has created conditions which can be of great benefit to Beijing in an era when it is facing a fundamental challenge from the United States. Who knows, New Delhi may even consider supporting the Belt & Road Initiative in some indirect fashion as the Japanese are doing?  

Fascism’s Incognito – Conjuncted

“Being asked to define fascism is probably the scariest moment for any expert of fascism,” Montague said.

Brecht’s circular circuitry is here.

Allow me to make cross-sectional (both historically and geographically) references. I start with Mussolini, who talked of what use fascism could be put to by stating that capitalism throws itself into the protection of the state when it is in crisis, and he illustrated this point by referring to the Great Depression as a failure of laissez-faire capitalism and thus creating an opportunity for fascist state to provide an alternative to this failure. This in a way points to the fact that fascism springs to life economically in the event of capitalism’s deterioration. To highlight this point of fascism springing to life as a reaction to capitalism’s failure, let me take recourse to Samir Amin, who calls the fascist choice for managing a capitalist society in crisis as a categorial rejection of democracy, despite having reached that stage democratically. The masses are subjected to values of submission to a unity of socio-economic, political and/or religious ideological discourses. This is one reason why I call fascism not as a derivative category of capitalism in the sense of former being the historic phase of the latter, but rather as a coterminous tendency waiting in dormancy for capitalism to deteriorate, so that fascism could then detonate. But, are fascism and capitalism related in a multiple of ways is as good as how socialism is related with fascism, albeit only differently categorically.

It is imperative for me to add by way of what I perceive as financial capitalism and bureaucracy and where exactly art gets sandwiched in between the two, for more than anything else, I would firmly believe in Brecht as continuing the artistic practices of Marxian sociology and political-economy.

The financial capitalism combined with the impersonal bureaucracy has inverted the traditional schematic forcing us to live in a totalitarian system of financial governance divorced from democratic polity. It’s not even fascism in the older sense of the term, by being a collusion of state and corporate power, since the political is bankrupt and has become a mediatainment system of control and buffer against the fact of Plutocracies. The state will remain only as long as the police systems are needed to fend off people claiming rights to their rights. Politicians are dramaturgists and media personalities rather than workers in law.  If one were to just study the literature and paintings of the last 3-4 decades, it is fathomable where it is all going. Arts still continue to speak what we do not want to hear. Most of our academics are idiots clinging on to the ideological culture of the left that has put on its blinkers and has only one enemy, which is the right (whatever the hell that is). Instead of moving outside their straightjackets and embracing the world of the present, they still seem to be ensconced in 19th century utopianism with the only addition to their arsenal being the dramatic affects of mass media. Remember Thomas Pynchon of Gravity’s Rainbow fame (I prefer calling him the illegitimate cousin of James Joyce for his craftiness and smoothly sailing contrite plots: there goes off my first of paroxysms!!), who likened the system of techno-politics as an extension of our inhuman core, at best autonomous, intelligent and ever willing to exist outside the control of politics altogether. This befits the operational closure and echoing time and time again that technology isn’t an alien thing, but rather a manifestation of our inhuman core, a mutation of our shared fragments sieved together in ungodly ways. This is alien technologies in gratitude.

We have never been natural, and purportedly so by building defence systems against the natural both intrinsically and extrinsically. Take for example, Civilisation, the most artificial construct of all humans had busied themselves building and now busying themselves upholding. what is it? A Human Security System staving off entropy of existence through the self-perpetuation of a cultural complex of temporal immortalisation, if nothing less and vulnerable to editions by scores of pundits claiming to a larger schemata often overlooked by parochiality. Haven’t we become accustomed to hibernating in an artificial time now exposed by inhabiting the infosphere, creating dividualities by reckoning to data we intake, partake and outtake. Isn’t analysing the part/whole dividuality really scoring our worthiness? I know the answer is yes, but merely refusing to jump off the tongue. Democracies have made us indolent with extremities ever so flirting with electronic knowledge waiting to be turned to digital ash when confronted with the existential threat to our locus standi.

But, we always think of a secret cabal conspiring to dehumanise us. But we also forget the impersonality of the dataverse, the infosphere, the carnival we simply cannot avoid being a part of. Our mistaken beliefs lie in reductionism, and this is a serious detriment to causes created ex nihilo, for a fight is inevitably diluted if we pay insignificance to the global meshwork of complex systems of economics and control, for these far outstrip our ability to pin down to a critical apparatus. This apparatus needs to be different from ones based on criticism, for the latter is prone to sciolist tendencies. Maybe, one needs to admit allegiance to perils of our position and go along in a Socratic irony before turning in against the admittance at opportune times. Right deserves tackling through the Socratic irony, lest taking offences become platitudinous. Let us not forget that the modern state is nothing but a PR firm to keep the children asleep and unthinking and believing in the dramaturgy of the political as real. And this is where Brecht comes right back in, for he considered creation of bureaucracies as affronting not just fascist states, but even communist ones. The above aside, or digression is just a reality check on how much complex capitalism has become and with it, its derivatives of fascism as these are too intertwined within bureaucratic spaces. Even when Brecht was writing in his heydays, he took a deviation from his culinary-as-ever epic theatre to found a new form of what he called theatre as learning to play that resembled his political seminars modeled on the rejection of the concept of bureaucratic elitism in partisan politics where the theorists and functionaries issued directives and controlled activities on behalf of the masses to the point of submission of the latter to the former. This point is highlighted not just for fascist states, but equally well for socialist/communist regimes reiterating the fact that fascism is potent enough to develop in societies other than capitalistic ones.

Moving on to the point when mentions of democracy as bourgeois democracy is done in the same breath as regards equality only for those who are holders of capital are turning platitudinous. Well, structurally yes, this is what it seems like, but reality goes a bit deeper and thereafter fissures itself into looking at if capital indeed is what it is perceived as in general, or is there more to it than meets the eye. I quip this to confront two theorists of equality with one another: Piketty and Sally Goerner. Piketty misses a great opportunity to tie the “r > g” idea (after tax returns on capital r > growth rate of economy g) to the “limits to growth”. With a careful look at history, there are several quite important choice points along the path from the initial hope it won’t work out that way… to the inevitable distressing end he describes, and sees, and regrets. It’s what seduces us into so foolishly believing we can maintain “g > r”, despite the very clear and hard evidence of that faiIing all the time… that sometimes it doesn’t. The real “central contradiction of capitalism” then, is that it promises “g > r”, and then we inevitably find it is only temporary. Growth is actually nature’s universal start-up process, used to initially build every life, including the lives of every business, and the lives of every society. Nature begins building things with growth. She’s then also happy to destroy them with more of the same, those lives that began with healthy growth that make the fateful choice of continuing to devote their resources to driving their internal and external strains to the breaking point, trying to make g > r perpetual. It can’t be. So the secret to the puzzle seems to be: Once you’ve taken growth from “g > r” to spoiling its promise in its “r > g” you’ve missed the real opportunity it presented. Sally Goerner writes about how systems need to find new ways to grow through a process of rising intricacy that literally reorganizes the system into a higher level of complexity. Systems that fail to do that collapse. So smart growth is possible (a cell divides into multiple cells that then form an organ of higher complexity and greater intricacy through working cooperatively). Such smart growth is regenerative in that it manifests new potential. How different that feels than conventional scaling up of a business, often at the expense of intricacy (in order to achieve so called economies of scale). Leaps of complexity do satisfy growing demands for productivity, but only temporarily, as continually rising demands of productivity inevitably require ever bigger leaps of complexity. Reorganizing the system by adopting ever higher levels of intricacy eventually makes things ever more unmanageable, naturally becoming organizationally unstable, to collapse for that reason. So seeking the rise in productivity in exchange for a rising risk of disorderly collapse is like jumping out of the fry pan right into the fire! As a path to system longevity, then, it is tempting but risky, indeed appearing to be regenerative temporarily, until the same impossible challenge of keeping up with ever increasing demands for new productivity drives to abandon the next level of complexity too! The more intricacy (tight, small-scale weave) grows horizontally, the more unmanageable it becomes. That’s why all sorts of systems develop what we would call hierarchical structures. Here, however, hierarchal structures serve primarily as connective tissue that helps coordinate, facilitate and communicate across scales. One of the reasons human societies are falling apart is because many of our hierarchical structures no longer serve this connective tissue role, but rather fuel processes of draining and self-destruction by creating sinks where refuse could be regenerated. Capitalism, in its present financial form is precisely this sink, whereas capitalism wedded to fascism as an historical alliance doesn’t fit the purpose and thus proving once more that the collateral damage would be lent out to fascist states if that were to be the case, which would indeed materialize that way.

That democracy is bourgeois democracy is an idea associated with Swedish political theorist Goran Therborn, who as recent as the 2016 US elections proved his point by questioning the whole edifice of inclusive-exclusive aspects of democracy, when he said,

Even if capitalist markets do have an inclusive aspect, open to exchange with anyone…as long as it is profitable, capitalism as a whole is predominantly and inherently a system of social exclusion, dividing people by property and excluding the non-profitable. a system of this kind is, of course, incapable of allowing the capabilities of all humankind to be realized. and currently the the system looks well fortified, even though new critical currents are hitting against it.

Democracy did take on a positive meaning, and ironically enough, it was through rise of nation-states, consolidation of popular sovereignty championed by the west that it met its two most vociferous challenges in the form of communism and fascism, of which the latter was a reactionary response to the discontents of capitalist modernity. Its radically lay in racism and populism. A degree of deference toward the privileged and propertied, rather than radical opposition as in populism, went along with elite concessions affecting the welfare, social security, and improvement of the working masses. This was countered by, even in the programs of moderate and conservative parties by using state power to curtail the most malign effects of unfettered market dynamics. It was only in the works of Hayek that such interventions were beginning to represent the road to serfdom thus paving way to modern-day right-wing economies, of which state had absolutely no role to play as regards markets fundamentals and dynamics. The counter to bourgeois democracy was rooted in social democratic movements and is still is, one that is based on negotiation, compromise, give and take a a grudgingly given respect for the others (whether ideologically or individually). The point again is just to reiterate that fascism, in my opinion is not to be seen as a nakedest form of capitalism, but is generally seen to be floundering on the shoals of an economic slowdown or crisis of stagflation.

On ideal categories, I am not a Weberian at heart. I am a bit ambiguous or even ambivalent to the role of social science as a discipline that could draft a resolution to ideal types and interactions between those generating efficacies of real life. Though, it does form one aspect of it. My ontologies would lie in classificatory and constructive forms from more logical grounds that leave ample room for deviations and order-disorder dichotomies. Complexity is basically an offspring of entropy.

And here is where my student-days of philosophical pessimism surface, or were they ever dead, as the real way out is a dark path through the world we too long pretended did not exist.

The Plantation Labour Act, 1951. Random Musings.

The Plantation Labour Act, 1951 provides for the welfare of plantation labour and regulates the conditions of work in plantations. According to the Act, the term ‘plantation’ means “any plantation to which this Act, whether wholly or in part, applies and includes offices, hospitals, dispensaries, schools, and any other premises used for any purpose connected with such plantation, but does not include any factory on the premises to which the provisions of the Factories Act, 1948 apply.”

The Act applies to any land used as plantations which measures 5 hectares or more in which 15 or more persons are working. However, the State Governments are free to declare any plantation land less than 5 hectares or less than 15 persons to be covered by the Act.

The Act provides that no adult worker and adolescent or child shall be employed for more than 48 hours and 27 hours respectively a week, and every worker is entitled for a day of rest in every period of 7 days. In every plantation covered under the Act, medical facilities for the workers and their families are to be made readily available. Also, it provides for setting up of canteens, creches, recreational facilities, suitable accommodation and educational facilities for the benefit of plantation workers in and around the work places in the plantation estate. Its amendment in 1981 provided for compulsory registration of plantations. 

The Act is administered by the Ministry of Labour through its Industrial Relations Division. The Division is concerned with improving the institutional framework for dispute settlement and amending labour laws relating to industrial relations. It works in close co-ordination with the Central Industrial Relations Machinery (CIRM) in an effort to ensure that the country gets a stable, dignified and efficient workforce, free from exploitation and capable of generating higher levels of output. The CIRM, which is an attached office of the Ministry of Labour, is also known as the Chief Labour Commissioner (Central) [CLC(C)] Organisation. The CIRM is headed by the Chief Labour Commissioner (Central).

In the case of the tea plantations, the responsibility for welfare measures has been given to their management. The Government of India imposed this responsibility on them through the Plantation Labour Act of 1951 (PLA). The Government of Assam gave it a concrete shape in the Assam Plantation Labour Rules, 1956. This act provided for certain welfare measures for the workers and imposed restrictions on the working hours. They are to be 54 (per week) for adults and 44 (per week) for non-adults. The employers are also to attend to the health aspect, provide adequate drinking water, latrines and urinals separately for men and women for every 50 acres of land under cultivation, proper maintenance of the drinking water and sanitation system. The employer is also to provide a garden hospital for the estates with more than 500 workers or have a lien of 15 beds for every 1,000 workers in a neighbouring hospital within a distance of five kilometres. The gardens are also to have a group hospital in a sub area considered central for the people and provide transport to the patients. Along with the canteen facility a well furnished lighted and ventilated crèche for children below 2 is to be provided in gardens with more than 50 women workers. An open playground is to be provided for children above 2. The workers are to be provided with recreational facilities such as community radio and TV sets and indoor games. 

Specific to the PLA is the clause on educational facilities. If the number of children in the 6-12 age group exceeds 25 the employer should provide and maintain at least a primary school for imparting primary education to them. The school should have facilities such as a building in accordance with the guidelines and standard plans of the Education Department. If the garden does not maintain a school because a public school is situated within a mile from the garden then the employer is to pay a cess or tax for the children’s primary education. 

The tea plantation workers are still paid wages below the minimum wage of agricultural workers. An industry, which is highly capitalistic in character, owing to the colonial times when British private businesses with the extended involvement of British capital expanded the industry from the vantage point of international marketing and financial activities, and still continuing in formats no different in kind post-independence, bifurcates the wages partly in cash and partly in kind. Even if there has been a numerical increase in wages post-independence for the plantation workers, qualitatively, this hasn’t had any substantial improvement, thanks to minute upward fluctuations in real wages. What this has amounted to is a continuation of feudal relations of production and a highly structured organization of production in its pre-marketing phases, and thus expropriating super-profits on the basis of semi-feudal, extra-economic coercion and exploitation.

The literacy rate among the tea garden workers and their families is a poor 20 per cent. Around one-third of the workforce is denied housing facilities. Every year, hundreds of people in the plantations die from water-borne diseases like gastro-enteritis and cholera. Most of the plantations have no potable drinking water facilities and drainage systems.

The majority of the workers are suffering from anaemia and tuberculosis. Malaria is rampant. There are tea gardens where at least one in every family is suffering from tuberculosis. And the children and women are the worst affected. The infant mortality rate is very high, far above the state and national averages. 

The ethnicity of the tea workforce is probably one reason why nobody cares. a significant percentage of the tea plantation workers of Assam and West Bengal are tribals, fourth generation immigrants of indentured migrants from the Central and South-Central Indian tribal heartland. In Assam, they do not enjoy any special status, as their brethren elsewhere do. They are merely referred to as the tea labour and ex-tea labour community. The children cannot avail of any reservation facility in educational institutions, the youth do not enjoy any opportunity in the employment circuit. Most of the time, education begins and ends with lower primary schools housed within the gardens themselves. In other words, being coerced into plantation labour at the cost of continuing education is nothing uncommon. After getting sucked into the plantation, this young labour force, due to lack of skilled exposure and an almost complete absence of alternative employment opportunity only add credence to the epitome of modern-day bonded labour: forced and unfree in nature. With the institution of labour laws and the PLA in the tea plantation industry, it is the women who have been the prime target of deprivation and exploitation. They have been subjected to long working hours and heavy workload. Even the pregnant women are not spared from activities like deep hoeing. The majority of the temporary workers, today, are women. For them, social welfare benefits under PLA including maternity and medical benefits do not exist.

The tea plantation industry is amongst the largest organized industry in India, where the workers are unionized. In West Bengal, there are up north of 30 unions, whereas in Assam, the mantle of workers’ representation over the last five decades has been invested  with the Assam Cha Mazdoor Sangh (ACMS). ACMS happens to be the only registered union, even though some others have central trade unions affiliations.  Despite strong unionization, the issue of PLA implementation is weak with not a single plantation boasting of total implementation. One major implication of such a lack is reflected in the dominion of tea industry associations, which maneuver wage agreements. With hardly any promotional avenues opening up for a large majority of unskilled workers, these across ages and experiences receive same wages and are classified as daily wage workers. The last few decades of wage agreements show that the tea employers have not conceded any major demand of the trade unions. The tea associations have also not agreed to the CPI-linked variable Dearness Allowance. Nearly 40 per cent of the workers in the tea plantations of West Bengal and Assam are temporary and casual workers with growing numbers ruling them out of the ambit of PLA. That the tea industry is reaping all the benefits without investing a unit currency on a large section of its workforce is a direct consequent of the above fact. 

The agreements in West Bengal are tripartite in that the union, tea industry association and the government work out the agreement, whereas bipartite in Assam where the government is not a party. The long-term understanding with the Indian National Trade Union Congress (INTUC) affiliated ACMS has given the Assam employers a clear domination and stranglehold over the industry. Officially, there is no labour unrest, industrial relations remain generally peaceful and ACMS, understandably, ‘co-operates with the industry’. In West Bengal, however, any demand by the workers and the unions, termed unfair by the industry, is either flatly rejected, or is repeatedly discussed by the tea industry in a series of consultations, a delaying tactic mainly, until the unions are fed up and ask the government to intervene. Even then, there is a lot of resentment amongst the workers, but the very threat to their survival forces them to keep quiet and accept the verdict. For a tea plantation worker, whose forefathers were indentured immigrants, and were born and brought up inside the tea gardens, dismissal means not only the loss of livelihood but a threat to their general existence. It is therefore very evident that even with complete unionization, positive interventions on behalf of the workers are confined to the micro-scale and any extrapolation to the macro-scale doesn’t really help beat seclusion and isolation. But, what is really ironic is that these unions have remained workers’ only link to the outside world, albeit in a manner that hasn’t concretely contributed to their cause. 

The trade unions in the tea industry are operating under the same hierarchical and organizational setup master-minded and practiced by the planters right from the colonial days. Beyond a point, logic says that they will never be able to confront the tea industry to struggle for the betterment and uplift of the tea workers. The trade unions have thus miles to go, starting foremost with the politics of architecture: to revamp organizational change and hierarchies in favour of workers to be able to survive and discharge responsibilities towards the tea plantation workers.

Financial Entanglement and Complexity Theory. An Adumbration on Financial Crisis.

The complex system approach in finance could be described through the concept of entanglement. The concept of entanglement bears the same features as a definition of a complex system given by a group of physicists working in a field of finance (Stanley et al,). As they defined it – in a complex system all depends upon everything. Just as in the complex system the notion of entanglement is a statement acknowledging interdependence of all the counterparties in financial markets including financial and non-financial corporations, the government and the central bank. How to identify entanglement empirically? Stanley H.E. et al formulated the process of scientific study in finance as a search for patterns. Such a search, going on under the auspices of “econophysics”, could exemplify a thorough analysis of a complex and unstructured assemblage of actual data being finalized in the discovery and experimental validation of an appropriate pattern. On the other side of a spectrum, some patterns underlying the actual processes might be discovered due to synthesizing a vast amount of historical and anecdotal information by applying appropriate reasoning and logical deliberations. The Austrian School of Economic Thought which, in its extreme form, rejects application of any formalized systems, or modeling of any kind, could be viewed as an example. A logical question follows out this comparison: Does there exist any intermediate way of searching for regular patters in finance and economics?

Importantly, patterns could be discovered by developing rather simple models of money and debt interrelationships. Debt cycles were studied extensively by many schools of economic thought (Shiller, Robert J._ Akerlof, George A – Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism). The modern financial system worked by spreading risk, promoting economic efficiency and providing cheap capital. It had been formed during the years as bull markets in shares and bonds originated in the early 1990s. These markets were propelled by abundance of money, falling interest rates and new information technology. Financial markets, by combining debt and derivatives, could originate and distribute huge quantities of risky structurized products and sell them to different investors. Meanwhile, financial sector debt, only a tenth of the size of non-financial-sector debt in 1980, became half as big by the beginning of the credit crunch in 2007. As liquidity grew, banks could buy more assets, borrow more against them, and enjoy their value rose. By 2007 financial services were making 40% of America’s corporate profits while employing only 5% of its private sector workers. Thanks to cheap money, banks could have taken on more debt and, by designing complex structurized products, they were able to make their investment more profitable and risky. Securitization facilitating the emergence of the “shadow banking” system foments, simultaneously, bubbles on different segments of a global financial market.

Yet over the past decade this system, or a big part of it, began to lose touch with its ultimate purpose: to reallocate deficit resources in accordance with the social priorities. Instead of writing, managing and trading claims on future cashflows for the rest of the economy, finance became increasingly a game for fees and speculation. Due to disastrously lax regulation, investment banks did not lay aside enough capital in case something went wrong, and, as the crisis began in the middle of 2007, credit markets started to freeze up. Qualitatively, after the spectacular Lehman Brothers disaster in September 2008, laminar flows of financial activity came to an end. Banks began to suffer losses on their holdings of toxic securities and were reluctant to lend to one another that led to shortages of funding system. This only intensified in late 2007 when Nothern Rock, a British mortgage lender, experienced a bank run that started in the money markets. All of a sudden, liquidity became in a short supply, debt was unwound, and investors were forced to sell and write down the assets. For several years, up to now, the market counterparties no longer trust each other. As Walter Bagehot, an authority on bank runs, once wrote:

Every banker knows that if he has to prove that he is worth of credit, however good may be his arguments, in fact his credit is gone.

In an entangled financial system, his axiom should be stretched out to the whole market. And it means, precisely, financial meltdown or the crisis. The most fascinating feature of the post-crisis era on financial markets was the continuation of a ubiquitous liquidity expansion. To fight the market squeeze, all the major central banks have greatly expanded their balance sheets. The latter rose, roughly, from about 10 percent to 25-30 percent of GDP for the appropriate economies. For several years after the credit crunch 2007-09, central banks bought trillions of dollars of toxic and government debts thus increasing, without any precedent in modern history, money issuance. Paradoxically, this enormous credit expansion, though accelerating for several years, has been accompanied by a stagnating and depressed real economy. Yet, until now, central bankers are worried with downside risks and threats of price deflation, mainly. Otherwise, a hectic financial activity that is going on along unbounded credit expansion could be transformed by herding into autocatalytic process that, if being subject to accumulation of a new debt, might drive the entire system at a total collapse. From a financial point of view, this systemic collapse appears to be a natural result of unbounded credit expansion which is ‘supported’ with the zero real resources. Since the wealth of investors, as a whole, becomes nothing but the ‘fool’s gold’, financial process becomes a singular one, and the entire system collapses. In particular, three phases of investors’ behavior – hedge finance, speculation, and the Ponzi game, could be easily identified as a sequence of sub-cycles that unwound ultimately in the total collapse.

Financial Forward Rate “Strings” (Didactic 1)

Imagine that Julie wants to invest $1 for two years. She can devise two possible strategies. The first one is to put the money in a one-year bond at an interest rate r₁. At the end of the year, she must take her money and find another one-year bond, with interest rate r_1/2 which is the interest rate in one year on a loan maturing in two years. The final payoff of this strategy is simply (1 + r₁)(1 + r_1/2). The problem is that Julie cannot know for sure what will be the one-period interest rate r_1/2 of next year. Thus, she can only estimate a return by guessing the expectation of r_1/2.

Instead of making two separate investments of one year each, Julie could invest her money today in a bond that pays off in two years with interest rate r₂. The final payoff is then (1 + r₂)². This second strategy is riskless as she knows for sure her return. Now, this strategy can be reinterpreted along the line of the first strategy as follows. It consists in investing for one year at the rate r₁ and for the second year at a forward rate f₂. The forward rate is like the r_1/2 rate, with the essential difference that it is guaranteed : by buying the two-year bond, Julie can “lock in” an interest rate f₂ for the second year.

This simple example illustrates that the set of all possible bonds traded on the market is equivalent to the so-called forward rate curve. The forward rate f(t,x) is thus the interest rate that can be contracted at time t for instantaneously riskless borrowing 1 or lending at time t + x. It is thus a function or curve of the time-to-maturity x², where x plays the role of a “length” variable, that deforms with time t. Its knowledge is completely equivalent to the set of bond prices P(t,x) at time t that expire at time t + x. The shape of the forward rate curve f(t,x) incessantly fluctuates as a function of time t. These fluctuations are due to a combination of factors, including future expectation of the short-term interest rates, liquidity preferences, market segmentation and trading. It is obvious that the forward rate f (t, x+δx) for δx small can not be very different from f (t,x). It is thus tempting to see f(t,x) as a “string” characterized by a kind of tension which prevents too large local deformations that would not be financially acceptable. This superficial analogy is in the follow up of the repetitious intersections between finance and physics, starting with Bachelier who solved the diffusion equation of Brownian motion as a model of stock market price fluctuations five years before Einstein, continuing with the discovery of the relevance of Lévy laws for cotton price fluctuations by Mandelbrot that can be compared with the present interest of such power laws for the description of physical and natural phenomena. The present investigation delves into how to formalize mathematically this analogy between the forward rate curve and a string. We formulate the term structure of interest rates as the solution of a stochastic partial differential equation (SPDE), following the physical analogy of a continuous curve (string) whose shape moves stochastically through time.

The equation of motion of macroscopic physical strings is derived from conservation laws. The fundamental equations of motion of microscopic strings formulated to describe the fundamental particles derive from global symmetry principles and dualities between long-range and short-range descriptions. Are there similar principles that can guide the determination of the equations of motion of the more down-to-earth financial forward rate “strings”?

Suppose that in the middle ages, before Copernicus and Galileo, the Earth really was stationary at the centre of the universe, and only began moving later on. Imagine that during the nineteenth century, when everyone believed classical physics to be true, that it really was true, and quantum phenomena were non-existent. These are not philosophical musings, but an attempt to portray how physics might look if it actually behaved like the financial markets. Indeed, the financial world is such that any insight is almost immediately used to trade for a profit. As the insight spreads among traders, the “universe” changes accordingly. As G. Soros has pointed out, market players are “actors observing their own deeds”. As E. Derman, head of quantitative strategies at Goldman Sachs, puts it, in physics you are playing against God, who does not change his mind very often. In finance, you are playing against Gods creatures, whose feelings are ephemeral, at best unstable, and the news on which they are based keep streaming in. Value clearly derives from human beings, while mass, charge and electromagnetism apparently do not. This has led to suggestions that a fruitful framework to study finance and economy is to use evolutionary models inspired from biology and genetics.

This does not however guide us much for the determination of “fundamental” equa- tions, if any. Here, we propose to use the condition of absence of arbitrage opportunity and show that this leads to strong constraints on the structure of the governing equations. The basic idea is that, if there are arbitrage opportunities (free lunches), they cannot live long or must be quite subtle, otherwise traders would act on them and arbitrage them away. The no-arbitrage condition is an idealization of a self-consistent dynamical state of the market resulting from the incessant actions of the traders (ar- bitragers). It is not the out-of-fashion equilibrium approximation sometimes described but rather embodies a very subtle cooperative organization of the market.

We consider this condition as the fundamental backbone for the theory. The idea to impose this requirement is not new and is in fact the prerequisite of most models developed in the academic finance community. Modigliani and Miller [here and here] have indeed emphasized the critical role played by arbitrage in determining the value of securities. It is sometimes suggested that transaction costs and other market imperfections make irrelevant the no-arbitrage condition. Let us address briefly this question.

Transaction costs in option replication and other hedging activities have been extensively investigated since they (or other market “imperfections”) clearly disturb the risk-neutral argument and set option theory back a few decades. Transaction costs induce, for obvious reasons, dynamic incompleteness, thus preventing valuation as we know it since Black and Scholes. However, the most efficient dynamic hedgers (market makers) incur essentially no transaction costs when owning options. These specialized market makers compete with each other to provide liquidity in option instruments, and maintain inventories in them. They rationally limit their dynamic replication to their residual exposure, not their global exposure. In addition, the fact that they do not hold options until maturity greatly reduces their costs of dynamic hedging. They have an incentive in the acceleration of financial intermediation. Furthermore, as options are rarely replicated until maturity, the expected transaction costs of the short options depend mostly on the dynamics of the order flow in the option markets – not on the direct costs of transacting. For the efficient operators (and those operators only), markets are more dynamically complete than anticipated. This is not true for a second category of traders, those who merely purchase or sell financial instruments that are subjected to dynamic hedging. They, accordingly, neither are equipped for dynamic hedging, nor have the need for it, thanks to the existence of specialized and more efficient market makers. The examination of their transaction costs in the event of their decision to dynamically replicate their options is of no true theoretical contribution. A second important point is that the existence of transaction costs should not be invoked as an excuse for disregarding the no-arbitrage condition, but, rather should be constructively invoked to study its impacts on the models…..

Activists’ Position on New Development Bank, Especially in the Wake of 2nd Annual Meetings Held at New Delhi (31st March – 2nd April). Part 1.

This is an uncut version and might differ largely from the Declaration which the Civil society Organizations put up. It is also inspired by inputs from the Goa Declaration. So, here goes:

Peoples’ Forum on BRICS is a forum of peoples’ movements, activists, trade unions, national-level networks and CSOs. We intend to win our demands for social, economic and environmental justice. We heard testimonies confirming that the BRICS countries and corporations are reinforcing the dominant neoliberal, extractivist paradigm. Negative trends in the areas of global and local politics, and on issues of economics, environment, development, peace, conflict and aggressive nationalism, or social prejudice based on gender, race, caste, sexual orientation are not being reversed by the BRICS, but instead are often exacerbated. The BRICS speak of offering strong alternatives to the unfair North-dominated regimes of trade, finance, investment and property rights, climate governance, and other multilateral regimes. But on examination, we find these claims unconvincing.The victories we have won already on multiple fronts – such as halting numerous multinational corporations’ exploitation, gaining access to essential state services, occupying land and creating agricultural cooperatives,  and generating more humane values in our societies – give us momentum and optimism.

Our experience with other Multilateral Development Banks in the past have had bitter experiences with their involvement leaving a trail of destruction and irreparable damage involving devastation of the ecologies, forced eviction and displacement, inadequate policies of rehabilitation and resettlement, catalyzing loss of livelihoods and responsible for gross human rights violations. Despite having redress mechanisms, these MDBs have proven to carry forward their neoliberal agenda with scant respect for environment and human rights. Not only have their involvement resulted in the weakening of public institutions on one hand, their have consciously incorporated sharing the goods with private players and furthering their cause under the name of growth-led development, ending extreme poverty and sharing prosperity on the other. Moreover, with Right to Dissemination of Information forming one of the pillars of these MDBs, concerns of transparency and accountability are exacerbated with a dearth of information shared, inadequate public consultations and an absolute lack of Parliamentary Oversight over their involvement in projects and at policy-levels. There are plenty of examples galore with privatizing basic amenities like drinking water and providing electricity that have backfired, but nevertheless continued with. In other words, MDBs have stripped the people of the resources that commons.

The Forum views the emergence of New Development Bank in the context of:

1. Threat to Democracy with an upsurge of right-wing nationalism, not only in BRICS, but also beyond on the global scale.
2. As a result of this threat, state repression is on an upswing and aggravated under different norms, growth-led development being one among them.
3. Widespread ecological destruction, with catastrophic rates of species loss, pollution of land and air, freshwater and ocean degradation, and public health threats rising, to which no BRICS country is immune.
4. The precarious health of the economy and continuing financial meltdown, reflected in the chaos that several BRICS’ stock and currency markets have been facing, as well as in our countries’ vulnerability to crisis-contagion if major European banks soon fail in a manner similar to the US-catalyzed meltdown in 2008-09.
5. The longer-term crisis of capitalism is evident in the marked slowdown in international trade and in declining global profit rates, especially evident in the three BRICS countries (South Africa, Russia and Brazil) which have negative or negligible GDP growth.
6. Addition to commodity crashes, one cause of the economic crisis is the deregulatory, neoliberal philosophy adopted by BRICS governments, which puts corporate property rights above human and environmental rights; in the guise of development.
7. The new generation of Bilateral Trade and Investment Treaties will potentially have adverse impacts on lives and livelihoods of people across the BRICS and their hinterlands, and need complete rethinking.
8. The world’s workers are losing rights, farmers are suffering to the point of suicide, and labour casualisation is rampant in all our countries, with the result that BRICS workers are engaged in regular protest, including the strike by 180 million Indian workers which inspired the world on 2 September 2016.
9. The social front, the threat to our already-inadequate welfare policies is serious, especially in Brazil’s coup regime but also across the BRICS where inadequate social policies are driving people on the margins to destitution.
10. 10.Patriarchy and sexual violence, racism, communalism, caste discrimination, xenophobia and homophobia run rampant in all the BRICS, and because these forces serve our leaders’ interests, they are not addressing the structural causes, perpetuating divide-and-rule politics, and failing to dissuade ordinary people from contributing to oppression.

New Development Bank calls itself Green. However, the Bank is shrouded under a veil of secrecy. The website of the Bank lacks information about its activities to the extent that more than official records, one has to rely on secondary and tertiary sources of information. Not that such information isn’t forthcoming officially, it is the nature of unproven, untested environmental and social safeguards that is the point of contentious concerns for the communities who might adversely impacted by the projects financed by the Bank in their backyards. Unlike the World Bank and the Asian Development Bank, which somewhat robust safeguards to be followed and grievance redress mechanisms (not discounting sometimes questionable efficacies though), the NDB is yet to draft any such operational guidelines and redressal. Although speculative at large, such an absence could be well off the mark in meeting established benchmarks. Due to the lack of such mechanisms, communities may face threats of displacement, evictions, ecological destruction, loss of livelihoods, and severe curtailment of basic rights to life. These issues have recurred for decades due to projects funded by other multilateral development banks. Moreover, as a co-financier with other development institutions, the intensity of NDB’s seriousness on the objectives of promoting transparency, accountability and probity stands questioned. Furthermore, the NDB intends to be “fast, flexible and efficient”, without sacrificing quality. The Bank will use various financial instruments to ‘efficiently’ meet the demands of member states and clients. This is where things could get a little murkier, as NDB too has agendas of economic development dominating social and political developments, and the possibilities of statistical number jugglery to establish the supremacy of the ‘gross economic development’ sometimes trampling on human rights and environmental concerns. Consequently, the economic measures taken on many occasions forgo the human capital in a relentless pursuit of development agenda.

NDB could likely put issues concerning the marginalized on the back-burner in its accelerated economic means without justifying the ends. Whatever be the underlying philosophy of development finance, questions of sustainability from both social and ecological perspective should always be decided along with genuinely informed peoples’ participation. This is possible only when the information is transparently disseminated and there are measures for qualifying accountability rather than quantifying it. Furthermore, the NDB seems to have learnt no lessons from other MDBs with not only an absence of safeguards and dependency on country systems, but with all the more reliance on national development financial institutions which are liable to be relaxed in specific cases. The NDB has not engaged with the people directly and its engagement with the CSOs is a farce considering that there is massive absence of communities, marginalized groups, indigenous peoples who are likely to face the brunt of its investments. Free Prior and Informed Consent (FPIC) does not even exist in its dictionary. Adding to the woes is the accelerated pace of investing in projects without the policies being in place.

Everywhere that people’s movements have made alternative demands – such as democracy, peace, poverty eradication, sustainable development, equality, fair trade, climate justice – the elites have co-opted our language and distorted our visions beyond recognition. While we criticize the way world power is created and exercised, the BRICS leaders appear to simply want power sharing and a seat at the high table. For example, the BRICS New Development Bank is working hand-in-glove with the World Bank; the Contingent Reserve Arrangement empowers the International Monetary Fund; and the Asian Infrastructure Investment Bank serves mainly corporate interests – and all these financial institutions, despite their rhetoric of transformation, are opaque and non-transparent to people in BRICS countries, with no accountability mechanisms or space for meaningful participation by our movements. We have raised constructive critiques of BRICS in our plenaries and workshops. But beyond the analysis, we understand that only people’s power and activism, across borders, can make change. This Forum has found many routes forward for cross-cutting BRICS internationalism on various issues. We intend to win our demands for social, economic and environmental justice. The victories we have won already on multiple fronts – such as halting numerous multinational corporations’ exploitation, gaining access to essential state services, occupying land and creating agricultural cooperatives,  and generating more humane values in our societies – give us momentum and optimism.

Quantum Field Theory and Evolution of Forward Rates in Quantitative Finance. Note Quote.

Applications of physics to finance are well known, and the application of quantum mechanics to the theory of option pricing is well known. Hence it is natural to utilize the formalism of quantum field theory to study the evolution of forward rates. Quantum field theory models of the term structure originated with Baaquie. The intuition behind quantum field theory models of the term structure stems from allowing each forward rate maturity to both evolve randomly and be imperfectly correlated with every other maturity. This may also be accomplished by increasing the number of random factors in the original HJM towards infinity. However, the infinite number of factors in a field theory model are linked via a single function that governs the correlation between forward rate maturities. Thus, instead of estimating additional volatility functions in a multifactor HJM framework, one additional parameter is sufficient for a field theory model to instill imperfect correlation between every forward rate maturity. As the correlation between forward rate maturities approaches unity, field theory models reduce to the standard one1 factor HJM model. Therefore, the fundamental difference between finite factor HJM and field theory models is the minimal structure the latter requires to instill imperfect correlation between forward rates. The Heath-Jarrow-Morton framework refers to a class of models that are derived by directly modeling the dynamics of instantaneous forward-rates. The central insight of this framework is to recognize that there is an explicit relationship between the drift and volatility parameters of the forward-rate dynamics in a no-arbitrage world. The familiar short-rate models can be derived in the HJM framework but in general, however, HJM models are non-Markovian. As a result, it is not possible to use the PDE-based computational approach for pricing derivatives. Instead, discrete-time HJM models and Monte-Carlo methods are often used in practice. Monte Carlo methods (or Monte Carlo experiments) are a broad class of computational algorithms that rely on repeated random sampling to obtain numerical results. Their essential idea is using randomness to solve problems that might be deterministic in principle.

A Lagrangian is introduced to describe the field. The Lagrangian has the advantage over Brownian motion of being able to control fluctuations in the field, hence forward rates, with respect to maturity through the addition of a maturity dependent gradient as detailed in the definition below. The action of the field integrates the Lagrangian over time and when exponentiated and normalized serves as the probability distribution for forward rate curves. The propagator measures the correlation in the field and captures the effect the field at time t and maturity x has on maturity x′ at time t′. In the one factor HJM model, the propagator equals one which allows the quick recovery of one factor HJM results. Previous research has begun with the propagator or “correlation” function for the field instead of deriving this quantity from the Lagrangian. More importantly, the Lagrangian and its associated action generate a path integral that facilitates the solution of contingent claims and hedge parameters. However, previous term structure models have not defined the Lagrangian and are therefore unable to utilize the path integral in their applications. The Feynman path integral, path integral in short, is a fundamental quantity that provides a generating function for forward rate curves. Although crucial for pricing and hedging, the path integral has not appeared in previous term structure models with generalized continuous random processes.

Notation

Let t₀ denote the current time and T the set of forward rate maturities with t₀ ≤ T . The upper bound on the forward rate maturities is the constant T_FR which constrains the forward rate maturities T to lie within the interval [t₀, t₀ + T_FR].

To illustrate the field theory approach, the original finite factor HJM model is derived using field theory principles in appendix A. In the case of a one factor model, the derivation does not involve the propagator as the propagator is identically one when forward rates are perfectly correlated. However, the propagator is non trivial for field theory models as it governs the imperfect correlation between forward rate maturities. Let A(t,x) be a two dimensional field driving the evolution of forward rates f (t, x) through time. Following Baaquie, the Lagrangian of the field is defined as

Definition:

The Lagrangian of the field equals

L[A] = -1/2T_FR  {A²(t, x) + 1/μ²(∂A(t,x)∂x)²} —– (1)

Definition is not unique, other Lagrangians exist and would imply different propagators. However, the Lagrangian in the definition is sufficient to explain the contribution of field theory ∂A(t,x)∂x  that controls field fluctuations in the direction of the forward rate maturity. The constant μ measures the strength of the fluctuations in the maturity direction. The Lagrangian in the definition implies the field is continuous, Gaussian, and Markovian. Forward rates involving the field are expressed below where the drift and volatility functions satisfy the usual regularity conditions.

∂f(t,x)/∂t = α (t, x) + σ (t, x)A(t, x) —– (2)

The forward rate process in equation (2) incorporates existing term structure research on Brown- ian sheets, stochastic strings, etc that have been used in previous continuous term structure models. Note that equation (2) is easily generalized to the K factor case by introducing K independent and identical fields A_i(t, x). Forward rates could then be defined as

∂f(t, x)/∂t = α (t, x) + ∑_i=1^K σ_i(t, x)A_i(t, x) —– (3)

However, a multifactor HJM model can be reproduced without introducing multiple fields. In fact, under specific correlation functions, the field theory model reduces to a multifactor HJM model without any additional fields to proxy for additional Brownian motions.

Proposition:

Lagrangian of Multifactor HJM

The Lagrangian describing the random process of a K-factor HJM model is given by

L[A] = −1/2 A(t, x)G⁻¹(t, x, x′)A(t, x′) —– (4)

where

∂f(t, x)/∂t = α(t, x) + A(t, x)

and G⁻¹(t, x, x′)A(t, x′) denotes the inverse of the function.

G(t, x, x′) = ∑_i=1^K σ_i(t, x) σ_i(t, x’) —– (5)

The above proposition is an interesting academic exercise to illustrate the parallel between field theory and traditional multifactor HJM models. However, multifactor HJM models have the disadvantages associated with a finite dimensional basis. Therefore, this approach is not pursued in later empirical work. In addition, it is possible for forward rates to be perfectly correlated within a segment of the forward rate curve but imperfectly correlated with forward rates in other segments. For example, one could designate short, medium, and long maturities of the forward rate curve. This situation is not identical to the multifactor HJM model but justifies certain market practices that distinguish between short, medium, and long term durations when hedging. However, more complicated correlation functions would be required; compromising model parsimony and reintroducing the same conceptual problems of finite factor models. Furthermore, there is little economic intuition to justify why the correlation between forward rates should be discontinuous.

Data Governance, FinTech, #Blockchain and Audits (Upcoming Bangalore Talk)

This is skeletal and I am febrile, and absolutely nowhere near being punctilious. The idea is to note if this economic/financial revolution, (could it even be called that?) could politically be an overtone window? So, let this be otiose and information disseminating, for a paper is on its way forcing down greater attention to detail and vastly different from here. 

Data Governance and Audit Trail

Data Governance specifies the framework for decision rights and accountabilities encouraging desirable behavior in data usage

Main aim of Data Governance is to ensure that data asset are overseen in a cohesive and consistent enterprise-wide manner

Why is there a need for Data governance? 

Evolving regulatory mechanisms and requirements

Could integrity of data be trusted?

Centralized versus decentralized documentation as regards use, hermeneutics and meaning of data

Multiplicity of data silos with exponentially rising data

Architecture

Information Owner: approving power towards internal + external data transfers + business plans prioritizing data integrity and data governance

Data steward: create/maintain/define data access, data mapping and data aggregation rules

Application steward: maintain application inventory, validating testing of outbound data and assist master data management

Analytics steward: maintain a solutions inventory, reduce redundant solutions, define rules for use of standard definitions and report documentation guidelines, and define data release processes and guidelines

What could an audit be?

It starts as a comprehensive and effective program encompassing people, processes, policies, controls, and technology. Additionally, it involves educating key stakeholders about the benefits and risks associated with poor data quality, integrity and security.

What should be audit invested with?

Apart from IT knowledge and operational aspects of the organization, PR skills, dealing with data-related risks and managing a push-back or a cultural drift handling skills are sine qua non. As we continue to operate in one of the toughest and most uneven economic climates in modern times, the relevance of the role of auditors in the financial markets is more important than ever before. While the profession has long recognized the impact of data analysis on enhancing the quality and relevance of the audit, mainstream use of this technique has been hampered due to a lack of efficient technology solutions, problems with data capture and concerns about privacy. However, recent technology advancements in big data and analytics are providing an opportunity to rethink the way in which an audit is executed. The transformed audit will expand beyond sample-based testing to include analysis of entire populations of audit-relevant data (transaction activity and master data from key business processes), using intelligent analytics to deliver a higher quality of audit evidence and more relevant business insights. Big data and analytics are enabling auditors to better identify financial reporting, fraud and operational business risks and tailor their approach to deliver a more relevant audit. While we are making significant progress and are beginning to see the benefits of big data and analytics in the audit, this is only part of a journey. What we really want is to have intelligent audit appliances that reside within companies’ data centers and stream the results of our proprietary analytics to audit teams. But the technology to accomplish this vision is still in its infancy and, in the interim, what is transpiring is delivering audit analytics by processing large client data sets within a set and systemic environment, integrating analytics into audit approach and getting companies comfortable with the future of audit. The transition to this future won’t happen overnight. It’s a massive leap to go from traditional audit approaches to one that fully integrates big data and analytics in a seamless manner.

Three key areas the audit committee and finance leadership should be thinking about now when it comes to big data and analytics:

External audit: develop a better understanding of how analytics is being used in the audit today. Since data capture is a key barrier, determine the scope of data currently being captured, and the steps being taken by the company’s IT function and its auditor to streamline data capture.

Compliance and risk management: understand how internal audit and compliance functions are using big data and analytics today, and management’s future plans. These techniques can have a significant impact on identifying key risks and automating the monitoring processes.

Competency development: the success of any investments in big data and analytics will be determined by the human element. Focus should not be limited to developing technical competencies, but should extend to creating the analytical mindset within the finance, risk and compliance functions to consume the analytics produced effectively.

What is the India Stack?

A paperless and cashless delivery system; a paradigm that is intended to handle massive data inflows enabling entrepreneurs, citizens and government to interact with each other transparently; an open system to verify businesses, people and services.

This is an open API policy that was conceived in 2012 to build upon Aadhaar. The word open in the policy signifies that other application could access data. It is here that the affair starts getting a bit murky, as India Stack gives the data to the concerned individual and lets him/her decide who the data can be shared with.

So, is this a Fintech? Fintech is usually applies to the segment of technology startup scene that is disrupting sectors such as mobile payments, money transfers, loans, fundraising and even asset management. And what is the guarantee that Fintech would help prevent fraud that traditional banking couldn’t? No technology can completely eradicate fraud and human deceit, but I believe technology can make operations more transparent and systems more accountable. To illustrate this point, let’s look back at the mortgage crisis of 2008.

Traditional banks make loans the old fashioned way: they take money from people at certain rates (savings deposits) and lend it out the community at a higher rate. The margin constitutes the bank’s profit. As the bank’s assets grow, so do their loans, enabling them to grow organically.

Large investment banks bundle assets into securities that they can sell on open markets all over the world. Investors trust these securities because they are rated by third party agencies such as Moody’s and Standard & Poor’s. Buyers include pension funds, hedge funds, and many other retail investment instruments.

The ratings agencies are paid by investment banks to rate them. Unfortunately, they determine these ratings not so much by the merits of the securities themselves, but according to the stipulations of the banks. If a rating fails to meet the investment banks’ expectations, they can take their business to another rating agency. If a security does not perform as per the rating, the agency has no liability! How insane is that?

Most surprisingly, investment banks can hedge against the performance of these securities (perhaps because they know that the rating is total BS?) through a complex process that I will not get into here.

Investment banks and giant insurance firms such as AIG were the major dominoes that nearly caused the whole financial system to topple in 2008. Today we face an entirely different lending industry, thanks to FinTech. What is FinTech? FinTech refers to a financial services company (not a technology company) that uses superior technology to bring newer and better financial products to consumers. Many of today’s FinTech companies call themselves technology companies or big data companies, but I respectfully disagree. To an outsider, a company is defined by its balance sheet and a FinTech company’s balance sheet will tell you that it makes money from the fees, interest, and service charges on their assets—not by selling or licensing technology. FinTech is good news not only for the investors, borrowers and banks collectively, but also for the financial services industry as a whole because it ensures greater transparency and accountability while removing risk from the entire system. In the past four to five years a number of FinTech companies have gained notoriety for their impact on the industry. I firmly believe that this trend has just begun. FinTech companies are ushering in new digital business models such as auto-decisioning. These models are sweeping through thousands of usual and not-so-usual data sources for KYC and Credit Scoring.

But already a new market of innovative financial products has entered into mainstream finance. As their market share grows these FinTech companies will gradually “de-risk” the system by mitigating the impact of large, traditional, single points of failure. And how will the future look? A small business might take its next business loan from Lending Club, OnDeck, Kabbage, or DealStruck, instead of a traditional bank. Rather than raising funds from a venture capital firm or other traditional investor, small businesses can now look to Kickstarter or CircleUp. Sales transactions can be processed with fewer headaches by Square or Stripe. You can invest your money at Betterment or Wealthfront and not have to pay advisors who have questionable track records outperforming the market. You can even replace money with bitcoin using Coinbase, Circle, or another digital-currency option. These are the by-products of the FinTech revolution. We are surrounded by a growing ecosystem of highly efficient FinTech companies that deliver next-generation financial products in a simple, hassle-free manner. Admittedly, today’s emerging FinTech companies have not had to work through a credit cycle or contend with rising interest rates. But those FinTech companies that have technology in their DNA will learn to ‘pivot’ when the time comes and figure it all out. We have just seen the tip of this iceberg. Technically speaking, the FinTech companies aren’t bringing anything revolutionary to the table. Mostly it feels like ‘an efficiency gain’ play and a case of capitalizing on the regulatory arbitrage that non-banks enjoy. Some call themselves big data companies—but any major bank can look into its data center and make the same claim. Some say that they use 1,000 data points. Banks are doing that too, albeit manually and behind closed walls, just as they have done for centuries. FinTechs simplify financial processes, reduce administrative drag, and deliver better customer service. They bring new technology to an old and complacent industry. Is there anything on the horizon that can truly revolutionize how this industry works? Answering this question brings us back to 2008 as we try to understand what really happened. What if there was a system that did not rely on Moody’s and S&P to rate the bonds, corporations, and securities. What if technology could provide this information in an accurate and transparent manner. What if Bitcoin principles were adopted widely in this industry? What if the underlying database protocol, Blockchain, could be used to track all financial transactions all over the globe to tell you the ‘real’ rating of a security.

Blockchain can be defined as a peer-to-peer operated public digital ledger that records all transactions executed for a particular asset (…) “The Blockchain maintains this record across a network of computers, and anyone on the network can access the ledger. Blockchain is ‘decentralised’ meaning people on the network maintain the ledger, requiring no central or third party intermediary involvement.” “Users known as ‘miners’ use specialised software to look for these time stamped ‘blocks’, verify their accuracy using a special algorithm, and add the block to the chain. The chain maintains chronological order for all blocks added because of these time-stamps.” The digitalisation of financial service opens room for new opportunity such as to propose new kind of consumer’s experience as well as the use of new technologies and improve business data analysis. The ACPR, the French banking and insurance regulatory authority, has  classified the opportunities and risks linked to the Fintech such as the new services for uses, better resilience versus the difficulty to establish effective supervision, the risks of regulation dumping and regarding clients interest protection such as data misuse and security. The French Central Bank is currently studying blockchain in cooperation with two start-ups, the “Labo Blockchain” and “Blockchain France”. In that context, blockchain is a true financial service disruption, according to Piper Alderman “Blockchain can perform the intermediating function in a cheaper and more secure way, and disrupt the role of Banks.”

Hence, leading bank wants to seize that financial service opportunity. They are currently working on blockchain project with financial innovation firm, R3 CEV. The objective is that the project delivers a “more efficient and cost-effective international settlement network and possibly eliminate the need to rely on central bank”. R3 CEV has announced that 40 peer banks, including HSBC, Citigroup, and BNP Paribas, started an initiative to test new kind of transaction through blockchain. This consortium is the most important ever organized to test this new technology.

And what of security? According to the experts “the design of the blockchain means there is the possibility of malware being injected and permanently hosted with no methods currently available to wipe this data. This could affect ‘cyber hygiene’ as well as the sharing of child sexual abuse images where the blockchain could become a safe haven for hosting such data.” Further, according to the research, “it could also enable crime scenarios in the future such as the deployment of modular malware, a reshaping of the distribution of zero-day attacks, as well as the creation of illegal underground marketplaces dealing in private keys which would allow access to this data.” The issue of cyber-security for financial institutions is very strategic. Firstly, as these institutions rely on customer confidence they are particularly vulnerable to data loss and fraud. Secondly, banks represent a key sector for national security. Thirdly they are exposed to credit crisis given their role to finance economy. Lastly, data protection is a key challenge given financial security legal requirements.

As regard cyber security risks, on of the core legal challenge will be the accountability issue. As Blockchain is grounded on anonymity the question is who would be accountable for the actions pursued? Should it be the users, the Blockchain owner, or software engineer? Regulation will address the issue of blockchain governance. According to Hubert de Vauplane, “the more the Blockchain is open and public, less the Blockchain is governed”, “while in a private Blockchain, the governance is managed by the institution” as regard “access conditions, working, security and legal approval of transactions”. Where as in the public Blockchain, there is no other rules that Blockchain, or in other words “Code is Law” to quote US legal expert Lawrence Lessing. First issue: who is the block chain user? Two situations must be addressed depending if the Blockchain is private or public. Unlike public blockchain, the private blockchain – even though grounded in a public source code – is protected by intellectual property rights in favour of the organism that manages it, but still exposed to cyber security risks. Moreover, a new contractual documentation provided by financial institutions and disclosure duty could be necessary when consumers may simply not understand the information on how their data may be used through this new technology.

‘Disruption’ has turned into a Silicon Valley cliché, something not only welcomed, but often listed as a primary goal. But disruption in the private sector can have remarkably different effects than in the political system. While capital forces may allow for relatively rapid adaptation in the market, complex political institutions can be slower to react. Moreover, while disruption in an economic market can involve the loss of some jobs and the creation of others, disruption in politics can result in political instability, armed conflict, increased refugee flows and humanitarian crises. It nevertheless is the path undertaken….

Musings on Financialisation of Capital, Bureaucracy, Fascism and State PR

When one says Finance Capital is one expression of capital exerting its pressure socio-politically…I wouldn’t ever disagree on it. But, the way I am seeing this is missing the wood for the trees. Why? Because, socio-political affects are affects of the larger scheme of things we associate with finance. This is a trickle down effect (not in the strictly economic sense of the phrase). Finance Capital is becoming a controlling tool through increasing concentration and centralisation of capital in the hands of large corporations, cartels, trusts and banks. Not just that, these supranational entities are also diversifying into fields with intense financial intent thus bringing to effect financialisation of economy the world over. Once this is conceptualised, the socio-economic impacts follow. I am looking at a rigid top-down approach here.

On to Bureaucracy. Why do I say it is impersonal? This is an idea imported from Max Weber, probably the father of Bureaucracy Theory. Bureaucracy differed from other types of organisations by its nonlegal forms of authority. Weberian take was inclined on its being technical proficiency specialised expertise, certainty and continuity. The genesis of it lay in money-based economy, the forerunner to capitalism in its variegated disguises and attendant need to ensure rational, impersonal and legal transactions. So, that is the combination spoken about that has got inverted from its traditional schemata. Also, there is an accompaniment of historical roots in the statement.

Fascism: it is absolutely necessary to insist on this essential aspect of the definition of fascism, for one can scarcely understand the emergence of the fundamental concepts of fascism and of the Fascist philosophy and mythology if one does not recognize, at the same time, that it arose from an originally Marxist revolt against materialism. It was the French and Italian Sorelians, the theoreticians of revolutionary syndicalism, who made this new and original revision of Marxism, and precisely this was their contribution to the birth of the Fascist ideology. Zeev Sternhell has amazingly outlined the history of Fascism in his “The birth of Fascist Ideology: From Cultural Rebellion to Political Revolution“. Sternhell further says, ‘From the standpoint of the temporal structure of the project, fascism is a particularly radical form of conservative revolution.

Some of the traits that will be offered by a populist leader who affirms fascism is a rebirth of a strong National Identity, making a nation strong again, reviving culture, industry, education, and the middle-class values that have sustained it. It is always a populist authoritarian movement that seeks to preserve and restore a former glory to the nation as well as military, social, and religious values based on strong patriarchal roots that center on community of nation, race, and faith. It will treat any opposition as it sees fit to the point of utter abandonment of the norms and laws of the land, seeing in them hindrances that must be circumvented under dire emergencies, etc.. It will seek to cleanse the nation of foreign and domestic threats it perceives as outside the mainstream socio-cultural order it seeks to revive and promote. It will seek to revive an organic wholeness and totality, and expunge and expel those it perceives as outsiders: immigrants, refugees, or aliens in its midst. It will begin by attacking the insiders or establishment who it perceives as decadent, corrupt, and a parasite upon the body of the Nation as a whole. It will also incarcerate and expunge the poor and poverty stricken, enforcing codes of distrust and victimization. It seeks only to bolster up the vast majority of the middle-class workers of all diverse forms. From this point of view, BJP’s rule is perfectly congruent with fascism.

On the Adanis and Guptas, why is it not a collusion of corporate and state power of the past? It is, but with a vectoral shift in axis. The Fascist revolution sought to change the nature of the relationships between the individual and the collective without destroying the impetus of economic activity-the profit motive, or its foundation-private property, or its necessary framework-the market economy. This was one aspect of the novelty of fascism; the Fascist revolution was supported by an economy determined by the laws of-the free-market ideology. The shift in the axis lies precisely in the prerogative the financial capital has over decisions political. The shift in the axis has inverted the priorities of politics and capital. So, the Adanis and Guptas decide the politics rather than the other way round. This is a journey back to some of the basic tenets of political economy, which were seemingly eroded in the first phase of neoliberal era, thanks in large part to Thatcherism and Reaganomics.

Police before the state: This is a complicated relationship and is best understood if one were to dissolve the colloquial use of the word police. Allow me another recourse here to the French Political Philosopher, Ranciere, who puts it most aptly, “I do  to identify the police with what is termed the state apparatus. The notion of state apparatus is in fact bound up with the presupposition of an opposition between state and society in which the state is portrayed as a machine, a cold ‘monster’ imposing rigid order on the life of society. This representation already presupposes a certain ‘political philosophy’, that is, a certain confusion of politics and the police. The distribution of places and roles that defines a police regime stems as much from the assumed spontaneity of social relations as from the rigidity of state functions. The police is essentially the law, generally implicit, that defines a party’s share or lack of it. The police is thus first an order of bodies that defines the allocation of ways of doing, ways of being, and ways of saying, and sees those bodies are assigned by the name to a particular place and task; it is an order of the visible and the sayable that sees that a particular activity is visible and another is not, that this speech is understood as discourse and another as noise. Policing is not so much the ‘disciplining’ of bodies as a rule governing their appearing, a configuration of occupations and the properties of the spaces where these occupations are distributed.” Therefore, by this logic the latency of police’s requisition for running the state is guaranteed. And, do we see any other way, if policing is extended to the notions of ‘moral policing’? I bet not.

Politics as the last resort of scoundrels will defeat the entire purpose of this response, and evidently, there is a strain of polity running throughout this response. Moreover, communication theories across generations have believed in media as the message and politicians of the present-day ruling regime are dramaturgists precisely in their compositions. We have had numerous examples to prove the point in the last one month or so.

Why do I call the Left academicians and practitioners idiots? Substantial segments of the left are in danger of allowing their movement to degenerate into a trite, self-indulgent counter-culture, in which an angry anti-establishment posturing conceals a lack of a positive political programme, and obviously nothing to say about the economic programme. Have we forgotten about the frittered opportunity during the 2008 crash? Globalise Resistance is one of the most visibly popular left-wing campaigns, defined by what they’re against, not what they’re for. Many people on the left are far too ready to draw an artificial moral equivalence between true tyrannies overseas and the very real but usually much milder moral failings of their own leaders and institutions. This is perpetrated by academicians and practitioners, and I am speaking of a very personal set of experience here. And still nothing seems to have changed.

Techno-politics isn’t really a slippery terrain, and for a change is one way the left can bounce back with. Humanity is being processed as mindless organisms (i.e., through processes of de-education, cultural amnesia, de-programming, etc.)  in a system of normative practices on a global scale that seek to install an ethos of domestication in a grand safety system to secure its own inhuman ends. This inhuman core is constructing secure, comfortable, and hedonistic bubbles of imprisonment that will allow it to design and further its own programmatic operations. Most of all through the pacification of the human species, and a controlled or modulated form of work and leisure; attenuated by the dictates of a global hierarchy of corporate capitalist institutions, no longer bound to ideological systems of a democracy, communism, or religious practice: the nexus of encoded cultural references that bind us to ethno-nationalists agendas, all the while seeking to envelope us in intelligent hypermedia reality machines and systems that will allay our fears and graft us into their own secret agendas of power and dominion. This is a scary proposition talked about.

There is no doubt in me when I oppose Industrial Corridors, and why Shouldn’t I? But, by electronic corridors, I mean are trading systems becoming the nerve centres of financial capitalism, say for instance, High Frequency Trading, HFTs in short. These are algorithmically powered and somehow dehumanistic by being capable of the pillars of the Fourth Industrial Revolution. One could look at the recently held World Economic Forum, where this topic was largely thrashed about. Yes, there are political ripples created against it, but as a personal friend of mine who was single handedly responsible for launching the #occupymovement told me, “such ripples are minute for they lack steam to bring on the alternative voices into a robust solidarity against corporatism.” For obvious reasons, I cannot reveal the name of this person. BTW, she is a hardcore neocon, right now. Strange, but true.

Electronic knowledge turning into digital ash is a reference given to surveillance technologies, the answer to which lies in sousveillance, but then do we have have enough resources. Sadly, in our country, the answer is a resounding no. During the cold war, East Germany was the most infamous surveillance society, but the shift is palpable to more advanced democracies including the upcoming economies. China is a bizarre case still.

The other two intervening points are largely agreed to, and thus I won’t venture there. On me being a socialist, the original writeup said, sciolist, a concert that talks of superficial pretender of knowledge. The words appear same through spellings, but are vastly different. On whether I am a socialist in the Marxian sense, I’d be short here: NO.

Socratic irony is a particular device often used in rhetoric in which one person pretends to be ignorant about an issue to lure the other person into explaining it. In a debate or argument, for example, two people may hold differing points of view about a particular subject. One of the two participants may then pretend that he or she does not understand an important aspect of the subject, and ask the other person to explain it. As the other person explains it, the first participant then comments on weaknesses inherent in the other person’s argument and has used Socratic irony to make him or her reveal them. The left needs it, as the right is weak in rhetoric, maybe, or not. But it is required.

State as a PR firm is necessarily a naive understanding of state, but fits the present-day context. Though, I must admit if it was made to look like a naive understanding. Public relations and state have been two firmly entwined concepts since the beginning of recorded history. For evidence from ancient times, take a look at Aristotle and his schools of rhetoric that taught the art of persuasive communication. In more recent times, the work of the man commonly thought of as the father of modern day public relations, Edward Bernays, and his belief that public relations is an art applied to a science provide a clear connection between the two.

To pay the piper is to pay for the dire consequences. It only highlights the despair I referred to. This does end it on a bleak note.