Tuesday, March 20, 2007

Erosion of Ethics and Moral values in our society

Of late I have been seeing lot of news items in newspapers about thefts, vandalisms, and violence. Is it that people have started noticing and reporting these incidences more recently or is it that there is an increase of such cases recently. India has had a reasonably tough past with instances of violence strewn throughout history. Quite a lot has been between kingdoms, territories, regions and were more of a military nature. Then there has been religious violences, a remnant of the religious strife cultivated in India by the erstwhile tormentors - the Late British Empire. History does not in itself justify the present.

Though India have been growing at a healthy rate of around 9% per annum, around 50% of the population is still illiterate. Illiteracy alone does not result in degradation of value system. Illiteracy does not mean an inability to communicate - it only restricts the mediums of communications to personal and audio-visual. Illiteracy would mean an absence of formal education and thereby limit a persons analytical skills due to the lack of a proper knowledge foundation on which to build their skills upon. Even if illiterate a rational person should be able to think up and identify moral values and stick to them. India with its strong religious backgrounds has had a good value system but for a few stone-age traditions like sati, child marriage etc. So historic factors does not give us a valid reason for the present trend.

Formal education as is being imparted today does not give proper importance to building the moral and ethical aspects of human personality. The major stress is to create job-worthy individuals. It is important to have job-worthy individuals but it is equally important to have build strong value system in the individuals. Students who come out of the system are trained to work but are not trained to think. Most of the violent/criminal/anti-social incidences that have happened in our system could have been prevented if their perpetrators had a) a good value system b) a thinking mind and c) thought about their actions and their implications. Also most of the continuing social issues like poverty, hunger, unemployment can be tackled if more thinking individuals enter into the system to fight against these issues.

The erosion of the value system is for a big part due to the want of importance given in imparting it to the next generation. India has a very young population and it is growing at a very fast pace. If we don't put in enough effort the coming generations would not have any clue about the legacy we have inherited but are failing to pass it on.

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Thursday, March 15, 2007

How corrupt officials operate

I had a hands on feel on how corrupt officers operate. I did not take the bait but I saw how they fish. I had to go to the local Sales Tax Office to file my VAT returns. I had a few months pending returns. I had been under the impression that I had to file my returns only once every year like we do with our Income Taxes.

Initially I was doing my own accounts but when I engaged an accountant I got the information from him that I had to file monthly returns on Form 10. He had an associate who could help me with my returns. So I gave him all my previous months sales and purchase information and he prepared the returns for all the months till February. I did not have any pending VAT payments as I had been maintaining around stock for around Rs 150,000 which would correspond to a VAT credit of approximately Rs 6000 (all but few of the items I carry fall in Schedule III with 4% tax rates).

I prepared all the returns and went to this Sales Tax Officer. He asked me to sit. I sat down and gave him the returns. He told me with a wicked smile that there is a big problem and that I would have to pay a penalty. He then asked my why I filed the returns personally and why I did not engage a consultant. When told that I have a consultant he asked me to call him up to explain the situation. I tried my consultant and thankfully was not able to reach him. I then asked the officer 'how much would the fine be' and got a vague reply 'around 16000 rupees'. I told him that it is my first return and that I was not aware of the regulation. When asked if I could file an appeal in front of higher authorities he got irritated. He illustrated with an example, of a landlord who had every authority to make any tenant stay in his house or to evict any tenant from his house, that he had every power to cancel the fine. I acted as if I did not understand the deal. Another officer came in and he asked me to go out with him for him to explain how things operate there. I ignored that person. The sales tax officer then made some witty remarks about me not accustomed with the operations in a sales tax office. A sycophant tax consultant was sitting in the office at the same time and was trying to make funny remarks himself. I took it all in my stride and tried to reason with the officer.

I then boldly asked the officer to give it to me in writing that he is fining me for the offense so that I can file an appeal with a higher officer. This I think hit the wrong note and the officer immediately told me that he was going to cancel my registration and I could then go ahead and file any appeal with any higher officer or even in the court. I tried to reason with him that I am willing to pay the fine but he was not budging. All this long I never even gave any hint that I understood the whole script. The other officer who had earlier requested me to go outside to discuss came in and felt some sympathy for me and requested the Sales Tax Officer to reduce the fine. He started of with 2000 and then I grabbed the deal. The officer then advised me that it would be impossible for me to file the returns on my own and I should hire a consultant like the one sitting in his room to handle my returns. I told him that it would not be possible with the kind of rates they charge.

So my first experience in a sales tax office was tough but I came out unscathed though Rs.2000 lighter. I think I could have escaped the fine by parting with around Rs.200 as 'processing charges' for the officer and his aides. I am happy that atleast that Rs.2000 is going into 'My' government's coffers.

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Wednesday, March 14, 2007

Comparing Oranges with Apples

This is another of the economics dilemmas that I have been trying to find an answer to. This is related to my previous post but this is from an employers perspective. Suppose you have two very sincere, loyal and efficient persons working for you in two different positions. If one happens to be working in a high ROI job while the other in a low ROI job then how would you have an equitable distribution of the salaries.

One could argue that I should pay the employees based on the value contributed to the system. But what if they play very crucial roles in their respective departments? Should I pay the employee working in the low revenue department lesser than the other employee? Would the employee understand that I am paying for the net value brought into the system through his contribution? Would that mean that his commitment and sincerity does not count? But they do count.

The same issue would arise in case of sharing of profits. Should the division of profits be proportional to the salaries? Wouldn't that give lower incentives for people earning low salaries than those earning high salaries. On the contrary if you divide the profits equally then it wouldn't incentivize the high performers to keep performing.

I guess the solution is to go midway between equal distribution and ROI-based distribution and scaling the curve a little based on employee performance.

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Sunday, March 11, 2007

How much should you be paid

In this age of IT revolution, companies are competing with each other in trying to pay more for candidates. I have seen people being paid outrageous salaries given their skills sets and educational qualifications. Companies try to pay more to retain existing employees or to lure new employees. Personally I would not want to be paid more than what I am worth to the company; neither would I want to be paid less. It is reasonable to think that I provide some value to the company and that value can be translated into monetary value because money is supposed to be indicatory of the value transferred during any given transaction.

Some people get paid more than their worth while some others get paid less. It is rather easy to deduce why some people are paid less - it is probably because of the supply-demand relationship or simply because the company is trying to minimize costs. I am more interested in analyzing the reasons why companies pay more than an employees worth. The IT market is again a fledgling market. The supply of projects and the prospects of new projects far exceed the availability of companies and in turn the number of people who are available. This then means that companies would be making larger margins than they are expected to make in a mature market. So companies are getting paid for more than what they are delivering. A share of this premium on the value is simply transferred to the employees.

Consider such a company which has been over paying its large roster of employees to make most out of a young market. Now suppose the market matures and companies start getting paid according to the true value of the delivery then it is possible to think of a scenario where the company starts making less money than they are giving to the employees. At this point the employees would have to decide to get paid less than what they are making or quit their jobs or even get fired. So in the long term high salaries wont last theoretically. But the issue is we dont have any perfect mature markets. By the time one market matures another one will come up and start growing. So we may never see a equitable distribution of salaries.

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Friday, March 9, 2007

Of Profits and Growth

I run a company. So I could be called a capitalist. However I am also a consumer. So I play on both sides of the court. There is one core question that has started playing in my minds ever since I started my company. What is a fair margin that I should charge on my products and services?

There are some auxiliary questions here. Will the customer have any idea of the margin that I take and if not then what is the issue about the margin if the customer is happy with the final price? Even if the customer is aware of the margin and he is happy with the price that is being paid why bother? If I offer the lowest price in the market then what is the issue with the margins? The market I am talking about is not a mature market in its steady state stage but rather a growing market with transient trends. But then most markets are not mature markets and some of the arguments should hold true in such cases too.

By free market theory the market should ultimately fine tune the margins until all players start charging the same margins. But we don’t have a perfect market, we don’t have information symmetry, we don’t even have educated consumers - so there is a scope for exploitation in terms of margins. And capitalists, being opportunists, will keep overcharging consistently without any kind of formal or informal agreement between them. In spite of the absence of a price cartel or a centralized decision, capitalists will charge high margins to a limit where small players start controlling the margins by lowering the prices but not as much as to crash the market. Here the customer does not have too much of a control because the demand

Now the question is whether there is anything as a fair margin from the business owners perspective. If I run a business I should expect to get some return on investment on the money I put in. If there is no competition and there is infinite (or at least a huge) demand for my product I should theoretically be able to sell at any margin I like. But from a third party perspective I should charge a margin corresponding to the value I create to the end consumer. This should include a reasonable margin for growth of the company. So suppose you reach upon a fair margin. What does that make me - a fair capitalist. Consumers would want me rather than an exploiting capitalist to meet their needs. The society would expect me to cater to more and more people. This demand to serve more would put a requirement to grow more, and for high growth rates you need high margins. So how you work that out.

Now you figure out. I am still confused

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