Archive | July 2013

The Indian Ponzi scheme

I have been watching with great amusement politicians quoting ridiculous numbers about what it costs to have a meal in Delhi or Mumbai. According to Shri Raj Babbar it cost Rs 12 (story here) and according to Shri Rasheed Masood it costs Rs 5. (story here). And like an ordinary citizen wading through roads riddled with pot holes and struggling to survive in face of a run-away inflation you wonder what are these politicians smoking?  If you are a child in Bihar you have the option of eating mid-day meal laced with pesticides and risk your life (story here).

So you wonder what is behind all these stories. As I have said before Indian Politicians are not buffoons. They are very intelligent and supremely conscious of their utterances and its impact on their constituency i.e the people who vote them into power.

But if you are late to the party called “The Indian Ponzi scheme” the next question that you will ask me is how does all this make sense? What is the grand scheme behind all this? To answer all your questions let me explain what is the “The Indian Ponzi scheme” and how it works.  But before that a brief over-view about what is a Ponzi scheme:

“A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going”.

You can read more about what a Ponzi scheme is here.”

Now if you cleverly replace the word “investment” by “Political” and “investor” by “voters” then it will read as follows:

  “A Ponzi scheme is a fraudulent “Political” operation that pays returns to its “voters” from their own money or the money paid by subsequent “voters”, rather than from profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new “voters” by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new “voters” to keep the scheme going”.

Now when you read the above lines does it ring a bell? Okay you still don’t get it. I don’t blame you because our politicians have hidden this Ponzi scheme in plain sight. So let me show you how this Ponzi scheme works.

Part I of the story: Any Ponzi scheme is devised to benefit the group that runs the Ponzi scheme. Everybody else loses. This is a zero sum game. The Indian Ponzi scheme is devised by our politicians to benefit only their class. There are not willing to share the spoils of this Ponzi scheme with any other class or group. That is why you saw politicians across party lines ganging up when Anna Hazare challenged their hegemony (see video here)

Part II of the story: For the Ponzi scheme to run for a really long time the politicians need two classes of people. One set who will be forced to pay or invest their money into the Ponzi scheme. The second set that will receive money or benefits from the Ponzi scheme and vote the Politicians back to keep running the Ponzi scheme in perpetuity.

Part III of the story: The politicians have identified the two classes very well. The first class i.e the class that is forced to pay or invest their money in the Ponzi scheme is the urban middle class. The second class that receives money or benefit from the Ponzi scheme is what I call the politically recognized “entitlement class”. There are three sets that fall in this politically recognized “entitlement class”. One set is the SC/ST and other backward castes. The second set is minority voters. The third set is the landless rural and urban poor who live close to penury. Now if you look hard then you will find politicians (Lalu, Nitish, Maya etc) that already represent the first set (SC/ST and other backward castes). The constant competition is to represent the second set (minority) and the third set (rural and urban poor). Both Congress and local leaders like Mulayam compete to represent these two sets.  

Part IV of the story: To keep the Ponzi scheme going you need to keep the flow of money (investment) going into the Ponzi scheme. This flow of money comes from the urban middle class who is forced to pay higher taxes and rents to constantly feed the Ponzi scheme. The politicians keep extracting more and more taxes and more and more rent from this urban middle class. The need for constantly higher extraction leads to run-away inflation and spiraling cost of real estate in urban cities. Once the politicians have extracted the money from urban middle class to run the Ponzi scheme, they ignore them (more about that below). Hence roads filled with pot holes, poor infrastructure and law and order situation in urban cities. The plight of the urban middle class will probably not improve for the next 100 years. The urban cities will become worse than ghettoes that will lead to rise of the urban armed militia. There will be large tracts of urban cities where police will not enter and taxes will be collected by the local gang lord. Does that sound like Dharavi and Dongri (Mumbai) of today?

Part V of the story: To keep running this Ponzi scheme the politicians need to be voted back to power again and again. The politicians look at where is the largest number of votes. The urban middle class is less than 200 mn (see this NYT story). The “entitlement class” however is more than 900 mn. No wonder the Politicians focus on the “entitlement class”. Now as I said earlier the “entitlement class” has three sets. The first set (SC/ST and other backward castes) is well consolidated. There are leaders who have nurtured this vote bank for years. (Lalu, Nitish, Maya etc). The constant competition is for representing the second (minority) and the third set (rural and urban poor). This is the set that helped Congress win the elections in 2009.

Part VI of the story: Now as I said earlier to keep the Ponzi scheme going the politicians need to dole out more and more entitlements to the second (minority) and the third set (rural and urban poor). Congress is playing the game well. To appease the second set (minority) it is  beating up Modi in media about 2002 riots in Gujarat and making wild proclamations that IM is a reaction to the Gujarat riots (story here). The edgy statement by Digvijay Singh calling the Batla House encounter fake is part of the same strategy (story here). To appease the third set (rural and urban poor) it has already passed the Food Security Bill via an Ordinance. It is desperate to pass the Food Security Bill in the monsoon session which starts sometime in August. However to pre-empt all negative media stories around Food Security Bill they are creating controversy around the “cost of a meal”.

Why this controversy around cost of meal now?

You will ask me: But why this debate now? If you read the stories appearing in mass media about how much it costs to buy a meal in various cities in India you will see that all the journalists have come to uniform conclusion that you cannot eat a decent meal for either Rs 5 or Rs 12. That is exactly what the Congress wants the journalists to highlight. Because the core promise of Food Security Bill is as follows:

  • The poor households to have a monthly entitlement of 35 Kgs at a subsidized price of Rs. 1 per Kg for millets, Rs. 2 per Kg for wheat and Rs. 3 per Kg for rice. Read more about Food Security Bill here.

In short what Congress is promising is a full meal for the third set (rural and urban poor) at less than Rs 5 or Rs 12.

The Food Security Bill is Congress’s attempt to keep the “Indian Ponzi scheme” going on and on even beyond 2014.