Tricks of the Trade - Government Tendering Process

I have always been of the opinion that the tendering process in government sector is highly flawed. There were several reasons that I had attributed for this opinion. One was that the announcement of the tender seldom reached a large number of players in the market. Government tender announcements are made through newspapers and through direct intimation from the Government office. In offices where I had made some kind of sales or services the officers responsible used to send us request for tenders. I know for sure that there have been a lot more request for tenders than that I have noticed in newspapers or received via mail. In some offices request for tenders are just displayed on notice boards in the respective offices.

The request for tenders that come in newspapers are so badly categorized and tagged that you have to virtually read through the complete list to see if there is any that match your specific area of interest. Additionally they don't appear every day. I believe that there must be some regulation regarding the number of times the intimation has to come in newspapers. Even then it is practically very difficult to get information from the newspapers unless of course you already expect to see a request on a particular date. The requests that go via mail from the government offices go only to agencies they know (or in worser situations - to agencies whom the officials wish to let know). Unless the information is passed on to a large number of possible applicant agencies, market forces will not be able to work properly and the process will be biased against the government.

In either case the tendering process will be assumed to be fair if there are more than three, in normal cases, tender submissions for a given request. This is where the system has its second flaw. This flaw is the most glaring when the tender request is posted only at the office notice board. If there is a corrupt officer at the office with a vested interest in getting the deal through to a specific applicant agency, he/she could easily make sure that the specific agency gets to know about the tender while others possible applicants remain unaware. The said agency, if corrupt himself, can easily call up a couple of other similar corrupt agencies and manipulate the submitted tenders so that a person agreed upon by the three gets the tender with enough and more margin to spare. Through this manipulated process, open tendering process, which is expected to assure the best quality at the lowest price, gets completely derailed. The corrupt agencies would take turns in ripping-off the government in plain day light using a system that was designed to prevent exactly the same thing.

A third flaw in the system is the assumption that the government organization calling for the tenders has the necessary technical capability and expertise to analyze their requirements in the first place and to analyze the quality of the delivered items ultimately. This is definitely not the case of IT software and hardware. The government officials I had talked with had literally no clue as to what they wanted and what they already have. They also (at least from my experience) would not be able to judge thoroughly the quality of software and hardware they buy. This puts them in a position where they have to depend on an agency to form the tender document itself. Usually this would result in the tender request created by the agency itself. I have seen totally absurd requests for tenders - most probably suggested by some crooked agency.

From my short experience of an year till now, I can claim with some reasonable level of confidence, the validity of the above arguments. I however was shocked to hear a fourth and even more damaging way of manipulating the tendering process. I was talking with a marketing executing of a leading brand in the market a couple of days back. We were discussing about a request for tender that I had received. He casually told me that it should be easy to get a couple of 'adjustment' tenders from other hardware dealers to close the deal. When I told him that I don't work with other dealers to get 'adjustment' tenders as it was against my business philosophy, he told me that I don't have to. All I had to do was get three sets of letter-heads and office seals made of other companies in the market. I was stunned when I heard that. He then went on to say that almost all other dealers in Trivandrum does this. No wonder I don't get to hear about any government tenders.

My policy regarding government tenders remains the same. I am going to participate in all government tenders that I come to hear about even if I get rejected on experience counts. I could at least let the deciding body get a feel of the true market cost of items they are purchasing. I still have some faith in the goodness in human beings. Somebody in some deciding bodies would see the rate disparity in tenders and enquire about the irregularities. I would be satisfied that I played my small role in cleaning up a small area of the corrupt systems in our society.

Click here to read the rest of this article - "Tricks of the Trade - Government Tendering Process"

Creating a meaningful test that can differentiate between candidates

I was preparing a new set of question papers for the placement tests for Zyxware. This is probably the 4th or 5th time I am doing this. I haven't quite got the hang of the whole process yet. There are several key aspects involved in setting up a question paper for placement tests.

The questions should not be too tough or too easy. They should be a mix of everything from easy to difficult. If the questions are all too easy then the marks of the candidates would be segregated around a high value with little variance. Everybody will be able to answer most of the questions and there would not be too many mistakes and the variations in marks would be minimal. Similarly if the questions are all too tough the marks would be segregated around a low value with little variance again. Only with an optimal distribution of the toughness of questions will you be able to differentiate among the candidates. You wouldn't want too many candidates to clear the cut-off and you wouldn't want too few either.

Another issue to be considered is allocation of marks per question. Ideally each question should be given marks corresponding to the toughness of the question. However it is practically very difficult to do this. An alternative strategy is to divide the question set into sections where questions of similar complexity and type are grouped together. Now if each section is timed, then the time allowed per question can be varied to give tougher questions more time and the easier ones lesser time. This would ensure that even with identical marks you could make toughness/unit time a constant and have a meaningful test. However, if the timing of the section cannot be enforced - like when you have all the answers written on a single sheet - then the allocation of time does not make sense anymore.

Even after all these efforts if the set of candidates who turn up for the test has an expected average score much less than the fixed cut off then all the effort put in would be in vain. In fact one of the tests I had conducted I had to give extra time for the candidates during the interview to try out some of the problems they had skipped during the regular test.

Another issue that has been troubling me was whether I should publish the question sets or not. We follow an open documentation policy at zyxware. However it is tough to open out our question sets. Until we have a strong HR team that can generate new sets of questions it will be a big mis-utilization our resources if we have to keep creating new tests. So for the time being our tests are closed :).

Click here to read the rest of this article - "Creating a meaningful test that can differentiate between candidates"

It is tough to be fair and square in business

When I quit my job to start a business, people who knew me warned me that I wouldn't be able to do a business as it would be 'impossible to do business honestly'. Additionally I was warned that, even if I stick to my policy of doing honest business legally there would be more than enough people in the government establishment who would ensure that I wouldn't be able to get things done without bribing. Another prevalent conception among the people who advised me was that to do business one will at some point or other have to bend rules, side-step regulations and/or exploit(cheat) customers

However with my utmost faith in our legal system and in democracy I shoo shooed away the soothsayers and set out to start the business. I haven't had to interact with the government authorities except to apply for permissions, register for licenses, submit tax returns and to apply for renewals. Wherever it was possible and wherever there were corrupt officials involved they tried to get me to bribe them. But having not done any thing illegal I stuck adamantly to my stand and the officials involved couldn't get me to budge. The stand has been validated up till now.

People bribe officers when,

1. They have not done something they should have done
2. They have done something they should not have done
3. They wish to do something they should not be doing
4. They wish to not do something they should be doing

Officers demand bribes when,

1. The person involved has done or plans to do any of the above
2. The person involved is not aware of his rights and the officer's responsibilities
3. The person involved does not know the rules and regulations

From the above conditions we can see that it is pretty straightforward to avoid situations where you have to bribe or where the officer demands bribe. You have to

1. Be aware of the rules and regulations involved
2. Be aware of your rights and the officers responsibilities
3. Do and plan to do only those things that are perfectly legal

I have not found it very difficult to follow the simple guidelines given above and have been successfully following it till now. For example it is very easy to decide to not evade tax - tax is not my money, it is the governments fees for allowing me to run my business. Since it is not my money I don't even have the slightest qualms about giving tax, on the contrary it makes me proud to contribute towards nation building. Businesses normally try to evade tax because that alone could double or triple their normal profits. Since it is illegal I don't even look at it as a possibility.

The distinction between legal and illegal is very clear as we have laws laid out very clearly in all areas of running a business. If you decide to not do anything illegal your options would become very much simplified and it would be a straightforward issue to run your business accordingly. Now there is one aspect of business that my advisors never warned me about - the grey areas between fair and unfair. You wouldn't come across such situations if you are not running a business and this was probably the reason they missed it. I will discuss a few example to illustrate the point.

Consider the scenario where a customer comes to you with false impressions about the price and/or quality of a product. Do you as a businessman tell the customer that the prices are lower than what he thinks or that the quality of the product is lower than what he thinks? If you do that you risk lowering your profits and if you don't you could end up having a happy customer as well as good profits.

You have tied up with a company to arrange loans for the customers and the company advertizes a 0% financing scheme where there is hidden 3.5% flat service charge on the complete loan amount including the initial down-payment. Do you tell the customer that the service charge is just another name for interest and that the actual interest rate would be around 20% or just tell that it is 0% and is very cheap? If you do he might decide against buying it or could walk out and fall prey to another dealing putting the deal across to him with another perspective.

A device that came in for service gets damaged because of some accidental mistake on your part and you have a customer who would believe that the device was faulty when it was brought in. Do you tell the customer that the device got damaged because of your mistake and that you would replace it for free or do you just tell him that he will have to buy a new device? If you do then you would loose the cost of the device plus the service charges but if you don't you would not only get your service charges but also an additional sale.

These are examples of some situations where you have to make a fair decision and there is no assistance from any set of black and white rules to help you make your decision. Additionally nobody is going to point fingers at you if you make an unfair decision. And under such scenarios is the true test of fairness of a businessman. It is very easy to be fair, clean and legal under public scrutiny but would you do the same under such conditions. Almost all such cases where a fair decision is taken involves a seeming financial loss for the businessman. It is possible to take such decisions but it is tough.

I have been trying my best to be fair and square in all my dealings. This is my experiments with my business. I think it is possible to do business fair and square. It is a helluva lot tougher than the shorter and crooked path. You have to forgo financial gains that are taken for granted by other businesses and sometimes you would have to make decisions that might not make business sense at all. But it is possible. I cannot convincingly claim it now, because I haven't been in business long enough to consider it a successful experiment, but, hopefully I should, in due course of time.

Click here to read the rest of this article - "It is tough to be fair and square in business"

Get out of the box

I have been telling a friend of mine to start blogging. He used to write very well in school and then he used to send these mails that were really well written and entertaining to read. He recently got around to starting a blog but has not been regularly updating it. I distinctly remember a few others from my high school who used to write well and none of these people blog.

This is the era of Web 2.0 - of people-generated content. There are loads of people who blog and some of them have even successfully taken blogging up as a viable career option. I feel that whoever believes that he/she is good at writing or could become good at writing should try a hand at writing blogs. Other than writing - another soft skill people could try out is photography. There is not too much of investment to be made and there is not too much of effort involved nor would it require too much of changes to existing schedules.

The point I am making is not about blogging or photography - it is about peoples' innate capabilities and talents. People study very hard (those who do) and once that is done they try hard to get a job. After that it is all about marrying, having kids and then settling down. Life is not just about getting a job, marrying, having kids, falling into a routine and settling down (as in particulate suspensions settling down). It could be a lot more. It could be those fanciful ideas you expressed when your english teacher asked you about your career aspirations when you were in kindergarten. It could be your dreams of doing something which the orthodox systems prevented you from doing - like going on a world tour, volunteering for charity for a couple of years, trying out a wild business idea and what not. It could be about following your passion. Identifying things you would like to do and then doing it.

You could possibly excel and enjoy using any of those skills that you possess and that does not directly play any role in your job. It is probably just a matter of trying out those skills and building them up (and even giving it a try as a true career option if you are confident enough). However our system and our society wants all of you to take safe bets and choose career options that will enable you to have a regular job with regular assured income. I am not saying that people should wildly follow their fancies. They should not douse the flames within them - that is all. Make safe choices, get good jobs - but always keep your options open.

The ultimate challenge is to turn back and walk against the crowd instead of following it. It is a great feeling. Believe me. Those of you who are bold enough should try it out before it is too late in your lives. Even if you don't succeed you would at least be able to say with satisfaction that you tried. Those who succeeded in doing that were the people who took the world to where it is now. If people had just followed routines we would still be digging grubs and roots with our hands. Be forewarned - not everybody is going to succeed - and that could include me too.

Click here to read the rest of this article - "Get out of the box"

Reservation - A helping hand for the under-privileged

Recently I saw a post in a forum, in which I am a member of, questioning the need for reservation policies and even the original need for reservation. I was not very much surprised about the discussion for I too used to think in similar lines when I was much younger.

When I was growing up my family had to go through troubled times when my father's chances of promotions were almost jeopardized because of some reservation policies. He was a rank holder in the PSC list and had every academic right to get to the top of his organization. He did get to the top ultimately though. I grew up among people, some of whom with reservation and some without. Financially there was not too much differences between the reserved and the non-reserved. In Kerala, or atleast in the schools where I studied, there was seemingly no factual evidence for proving the requirement for reservation. So the logical conclusion was that reservation is biased against quality and hence it would reduce the system quality in the long run.

But we cannot just look at the educated, empowered, urban population of India and claim that there is no requirement for reservation. Around 1/3 of the country still earns less than 50 rupees per day on an average. See the World Research Institute survey on people living on $1 a day. The highly educated and empowered section of the population would be less than 10% of the total population.

Until we have equitable distribution of education, health and employment opportunities - reservation IS THE ONLY WAY to have an all-round development of the society. Reservation is not a punishing rod for the privileged but rather it is a helping hand for the under-privileged. The only point that has to be noted is that the current policy of reservation based on caste or tribe is not delivering what the creators of the system intended it to deliver. This system is being promoted by politicians with vested interests for electoral gains. However the honorable supreme court has been trying to point the legislature in the right direction in excluding the creamy layer from the reserved categories.

The set of all people in the set of reserved categories would be a very good approximation for the set of the under-privileged people of India. The educated and empowered comprise only a very small percentage of the Indian population. Of this, the set of people who complain about reservation again comprises a much smaller percentage and their whines are based on their experiences with people of reserved categories who really should not have had any reservation based on economic criteria or possibly because of a lack of necessary skill sets required for their corresponding job positions. But this biased judgment would be based on a highly non-random sample from a very small set of the population.

Yes there is an argument against reservation in that it would reduce the total quality of the system. On an average a random person from the reserved categories should have similar capabilities as an average person from non-reserved categories. That is how statistics work. There is no reason to believe that the distribution of capabilities is not a normal distribution. However because of their different upbringing and educational opportunities they would have differences in the way they express their capabilities.

I am not claiming that reservation does not reduce the total quality of the system. It might, in the short term. This would be a small price we would be paying for the greater good of the people and an overall development of India. Additionally if we move the reservation policy based on an economic criteria we will be able to phase out the complete policy in about 50 years.

So the verdict is - Yes we need reservation, but probably on the basis of financial backgrounds.

Click here to read the rest of this article - "Reservation - A helping hand for the under-privileged"

The true cost of things

When you buy a sheet of paper for 25 paise - what does this 25 paise go towards? When you hire a gardener and pay him Rs 100 for a day - what does this 100 Rupees go towards? When you buy electricity at Rs 8 a unit - what does this 8 Rupees go towards? When you buy a pot for Rs 10 - what does the Rs 10 go towards?

Simple questions that we normally don't pay any attention to. Profound when you think about these in detail. Coming back to economics, each of the above examples is a market transaction where a seller sells a product or service to a buyer. The buyer pays a price that will cover the seller's cost plus his profit. The transaction goes through only with the mutual consent of all parties involved. The seller could represent a chain of sellers with intermediate transactions between each of them and all of their costs and profits taken care of.

The seller incurs several types of cost for the product. These could include cost of raw materials, cost of labour involved, transportation cost, marketing cost, inventory cost and capital cost. Each of these costs could further be broken down. For example marketing cost would just be labour, materials,capital and energy involved in marketing, cost of raw materials would be cost of production and procurement of raw materials, cost of energy, cost of capital and the cost of labour involved in doing that. Ultimately all of the costs could just be factored into cost of labour involved in different processes, cost of the raw materials, cost of energy used, cost of capital involved.

Cost of labour and cost of capital are pretty straightforward as only two specific parties are involved in the transaction, set of labourers and set of capitalists. In the case of the cost of raw materials, it is not so. Raw materials are procured from nature and the cost involves only the cost of procuring and processing it. The cost incurred by Nature is discounted in the process. The cost incurred by nature would include the cost in the production of the raw materials and the cost incurred because of the removal of the resource. These costs are not easily calculated as our economists are yet to figure out a way to convert the value of the cost to a gold-equivalent. There is however an even worser aspect. If the raw material is not replaceable then there is a cost of the resulting instability in the system.

A similar explanation can be given for the cost of energy. Cost of fuels (like petrol, diesel, natural gas, coal etc) and the cost of the energy generation mechanisms (like dams, wind mills) only include the cost of creation of the mechanism to get the fuel or tap into the system. The actual cost of production of the fuel by nature, the cost incurred because of the discharge of the byproducts and the cost incurred because of the instability created are completely discounted. Burning of fuels release a lot of greenhouse gases into the atmosphere. This could result in an increase in the global temperatures and in turn lead to collapse of different types of ecosystems further leading to a decreased capability by the system to absorb the greenhouse gases.

A crucial aspect of drawing resources from the nature is that, some resources, like forests, are renewable while others are not. For those resources that are renewable, there is a maximum limit at which they can be renewed. Any rate of consumption above the maximum limit is going to draw in on the renewal capacity and the resources are going to be depleted exponentially. Once that happens there is a cost of irreversibility incurred by the system.

The above three aspects of the cost of the product can be unified and considered as an environmental cost. A lot of products in the market are as cheap as they are because the environmental cost involved is totally discounted. Now if that too is included in the cost of the product then a market based solution is created that can counter-act against the environmental issues created by over consumption, exploitation of nature etc. As the severity of the environmental issues caused by a product increases the cost of the product should also go up there by limiting the consumption of the product and thus reducing the total impact of the system.

But how do we pay mother nature. Simple... Institute an environmental tax and charge it against different products in the market at different rates. The rates should be proportional to the environmental cost incurred by the system during the production of the product. Use the environmental tax income for reversal and cancellation of the effect of the products on the environment.

The above thesis looks at the problem from a purely economical perspective with out any humane considerations. There will be limitations in the above strategy but at least this would offer a possible solution to the endless environmental problems created by a system that totally ignores the true cost of things. Even if such a system does not come into place rational people should change their patterns of consumption based on the true cost of things. A clay pot at Rs 100 could possibly be truly cheaper than a plastic pot at Rs 10.

Click here to read the rest of this article - "The true cost of things"

The 2% Fixed Overhead

Credit cards have revolutionized the way people shop. The widespread use of credit cards was one of the big differences with life in India that I had noticed when I moved to US for my studies. I had marveled at the ease of use of credit cards and the total replacement of cash that credit cards facilitated. I even used to champion for the credit card movement.

Though I liked the credit system I never, not even once, availed of any extra credit period but for the normal billing cycle of 29 days. I never had to pay anything extra for the credit facility provided by VISA(and/or DISCOVERCARD, and/or MASTERCARD as the case might have been). The cost of using the card and the cost of the credit (average 29/2 = 14.5 days per transaction) was paid as part of the cost of the products I bought. Being in software industry I was well aware of the transaction charges charged by the credit/debit card providers to the sellers of the goods or service.
Every credit card transaction would result in around 2% service charge with some minimum charge for the transaction. Debit card transactions are cheaper as the seller is only charged a per transaction fee(around 25 cents) + network charges. In the case of a credit card transaction the 2% service charge looks very nominal but if you consider that fact that you are given a credit of only 14.5 days you are effectively paying interest at close to 50% per year.

So for a person with enough bank balance it might seem better to use the debit card option as the charges are lower. Now here lies the funniest part. Irrespective of the type of transaction - cash, credit, check - you are billed at the same rate. So if you pay with cash the seller ends up making an extra 2% profit on the transaction. The buyer pays the 2% charge no matter what. The tables are tilted in favour of using the credit card.

What happens as a result is that all the products in the market are going to cost the end user 2% more than what it is supposed to cost. For a developed country like the US this might be fine. Additionally the revenues generated by the 2% overhead remains within the country and helps the overall economy. However for a developing country like India this 2% could be a big hindrance to development. A 2% overhead on all retail transactions would work out to be a huge amount and to add insult to injury, most of the charges get pumped out of the country to the card provider.

Initially establishments in India were charging the credit card service charges to the end user. The current trend is that it is being absorbed into the cost of the product. Could have been interesting if a big banking chain based out of India - like State Bank of India or ICICI comes up with a credit card of their own. I wonder why Reserve Bank of India did not bring forward a suggestion or regulation to make this happen.

Click here to read the rest of this article - "The 2% Fixed Overhead"

What is the incentive to do good?

Most, if not all, children are taught to do good by their parents and by the society as a whole. It would however be debatable as to how many actually try to do so when grown up. The reasons tendered (for doing good) would range from gratification and peace of mind to heavenly rewards. But what is the real physical, psychological and meta-physical reward for doing good?

The harsh reality is that, on an individual basis there is no real incentive to do good. Doing good normally costs the person doing it. But for maybe a sense of gratification or a peace-of-mind, both of which are trained responses which could have been trained otherwise. On the contrary, not doing good or instead doing bad could result in personal gains. Lot of people have identified this vile truth and try to reap such rewards.

Let us take a look at historical perspective. Man is a social animal. This means he needs the help of other men. Not that he needs help in the absolute sense but he would be able to do a lot better with help than without it. So this resulted in men living together as a society. Now in a society you have interaction between the members. Each of these interactions could be biased towards 'good' or towards 'evil'. In either case, on an average the good someone receives would equal the good he gives or the evil he receives would equal the evil he gives. However the total quality of life in the society as a whole would be much better if the interactions are biased towards 'good'. Thus ethics evolved and society as a whole tried to define good and bad and the kind of acceptable behaviour in the system.

The social fabric is held together by the value system. People who subscribe to the value system do good maintaining the quality of life in the system. However among the majority of do-good-ers a small minority of do-bad-ers can thrive. They will have a higher credit column in the 'good-bad' account book. They draw 'good' from the system and give 'bad' back to the system. The society tries to counter balance this by setting disincentives for doing 'bad'. So those of the do-bad-ers who get caught pays the price for doing 'bad'. However there still would remain a percentage of social parasites who are neither do-bad-ers or do-good-ers. They sap the goodness from society but does not give anything in return.

There is no real way of addressing the do-no-good-and-do-no-bad people in the society. The only possible way to address this in part is through social programming by instilling in people while they are still young a feeling of satisfaction and happiness associated with doing good. So the incentive would be personal and internal. Rational people should be able to identify the historical reason and the motivation for doing good should be the goal of making their lives better by making the total quality of life in the system better.

Click here to read the rest of this article - "What is the incentive to do good?"

Is it evil to be rich

During the early stages of Google it was the darling of the IT masses. However as the company grew it slowly started drawing criticism from different circles. Google has remained the same with the same corporate policies and the same objectives, the primary objective being - to make money and more of it - as with any other company. So what shifted the attitude. The perceptible difference is that Google is richer by several orders of magnitude from what it was during its pre-IPO years.

Everything that google does these days is being observed carefully to identify if there is any evil in it. People don't usually understand something very fundamental - companies exist to make money and that is what they are supposed to be good at. Making money is a game where you dont always have a win-win situation. Sometimes you do but mostly not. The winner in all cases should be the company. So when the company takes certain steps to ensure that it wins more games and that it wins handsomely people starts complaining.

As long as a company does not indulge in illegal or unethical business practices there is no reason to complain that the company is not doing anything good for the system or the people. In the first place that is not the company's job. It is the government's job and it is the citizen's job. Moreover when you are talking about a private company you are not talking about a single entity amassing wealth. It is the whole set of shareholders amassing the wealth. Yes the total set of investors of all the companies would comprise a small subset of the total population, but they do a very essential process in the economy - creating wealth.

When google was incurring losses/earning very little income by giving away services for people for free, it was the apple of everybody's eyes. But now that it has grown into an IT behemoth earning in billions, it has slowly started becoming an eye-sore for some. I guess one simple explanation would be - jealousy.

Click here to read the rest of this article - "Is it evil to be rich"

Do we really have the right to use our own resources

"We have no authority to use more than what is required at minimum cost be it energy, materials, or money", Laurie Baker

The renowned architect and humanist Laurie Baker passed away recently. His life story has been covered in most of the news magazines that come out in India. This was one sentence that struck me most. The whole low-cost philosophy of the man can be summarized in the above sentence.

The statement applies not only to architecture and building but to almost all walks of life. These days the term affordability is being redefined every day. With salary levels going higher and higher, more things are becoming affordable for the average educated and decently employed person. The question however is, should somebody go for something just because he/she can afford to? The answer Laurie Baker gives is a definite NO.

The world has only a fixed absolute amount of resources. Be it energy, natural resources, natural products, we have only a finite total amount. Additionally some of the resources that are replenished by nature - example trees - are generated at some finite rate which limits the rate of our usage of such resources. All resources have a cost in procuring and delivering to the end user. However the costs normally does not include the cost incurred by the Natural System in generating the resource. A simple example is paper. The cost given by the end user for the paper reflects only the cost in cutting down the tree, transporting it, creating the paper and transporting it. The cost incurred by nature in growing the tree is discounted. The further cost incurred by nature when the tree is cut down is also discounted.

The world economy is governed by market forces. Unfortunately mother nature has no say in the market economy and her debit columns remain blank. People draw from it but don't pay the cost. It is for this reason that the great man said that people should restrain themselves from over-consumption just because they can afford to do so. It should be remembered that the affordability is most probably a result of the skewed cost structure. So the safest rule of thumb when a decision has to be made regarding a purchase is - can you do without it, if not then what is the minimum quantity that you would want to meet your needs.

This philosophy can be seen in the creations of Laurie Baker and in his simple lifestyle. He was a Gandhian to the core and lived up to his high ideals.

Click here to read the rest of this article - "Do we really have the right to use our own resources"

What is a fair transaction?

I had a very interesting discussion with a friend of mine today. I had recently purchased a used computer from a customer of mine. The objective was to resell it to somebody who needed a refurbished PC. During inspection we found that there is a reasonably good chance for the PC to fail as there were some ready-to-go-bust capacitors on the motherboard. The discussion was whether I should reveal this information to a potential buyer. My contention was that I should because I would rather be 'just' than 'rich'. We discussed about how most companies in our market tries to sell goods to us with false information or with concealed facts. The question is - What is a fair transaction?

From an economics point of view a transaction is a transfer of value from a seller to a buyer at a rate agreed upon by both. The value could be a service, a good, an opportunity, etc and henceforth we will refer to this as the object of the transaction. A person buying milk from a store, paper boy delivering paper to a customers house, a teacher teaching a class etc... are examples for transactions. All the transactions succeed an unwritten contract between the buyer and the seller in that the buyer is going to get the given value and the seller is going to get the given price.

The dictionary reference of fair is "Free from favouritism or self-interest or bias or deception; or conforming with established standards or rules". If either of the parties involved does not get what he was supposed to get, then the transaction can be considered unfair to that party. In an unfair, greedy and selfish world there is always the possibility of a person gaining unfair advantage in a transaction. Thes would mean that one of them - either the buyer or the seller gets cheated in the transaction. So what are the necessary and sufficient conditions for a fair transaction? Is a fair transactions even possible?

When a person decides to buy or sell value, he/she already has a presumed value about the object of the transaction. This presumed value is based on the information that he/she has about the object. Now if the other person involved has either more or less information than the first then there is information asymmetry. In such a situation there is a possibility for the person with the larger set of information to charge more or give less, when seller and when buyer respectively, and the other person to agree to give more or get less, when seller and when buyer respectively. So even if not intentional the transaction becomes unfair to one of the parties. If there is an intention from one of the parties then the unfairness could be amplified. One simple examples of such a situation is where people agree to buy goods at higher than normal rates because of lack of information about market prices. Another case is where people are paid less than what they deserve when they don't know about the market rates.

It is not required that both parties need to know everything about the object of the transaction. Both should have the same sets of information. Equal information alone does not ensure a fair transaction. The buyer and the seller should have similar analytical capabilities to process the given information to come to the same conclusion about the value of the transaction. Here again both should have comparable analytical powers to come to the same conclusion. It really shouldn't matter if one of them is analytically stronger than the other in other areas.

Even if both parties have the same sets of information and if both concludes the same about the value the transaction could still be biased if there is an external factor affecting the transaction. A very simple example is when a third part or a regulatory body sets rates for the transaction. In such a situation the bias will depend on the external factor and could go either way - towards the buyer or the seller. Another simple example is when a person is forced to sell his land for a lower price because he is in urgent need of money.

Thus the three necessary and sufficient conditions for a fair transaction are
a) Equal information about the transaction for both parties
b) Similar processing capability to come to the same conclusion about the value
c) Absence of external factors biasing the transaction
Theoretically it would be impossible to have a fair transaction just like it is impossible to have a perfect market. However we have ignored the ethics and value systems while explaining the logic. A person could sell an object to another person who does not about the value of the object and still sell it at the value he has perceived about it if he is a fair person. The point is that even if the theory fails we still could have fair transactions if we have a good value system in our society. So let us hope for a future where our society has a good value system.

Click here to read the rest of this article - "What is a fair transaction?"

Personal Luxury at Public Inconvenience

It is sad to look around and see utter disregard for public inconvenience by the common man. Be it the person spitting on the road or the taxi driver parking in a bus bay or the pedestrian walking along the road and not the footpath, you see it everywhere. People always complain about the public authorities not taking enough care about public convenience. I don't see any anomaly in the acts of public authorities and just see it as a reflection of the general state of mind of the common man.

What is disturbing is the fact that people don't really understand that it is such minor transgressions from several people that accumulate and create general public inconveniences. Roads littered with garbage, drainages filled with plastic, roads congested because of badly parked cars etc are good examples for this phenomenon. However most people, even those engaged in committing these civic crimes, complain about the cumulative effect of such actions.

The matter of the fact is that people don't think about the consequences of their seemingly harmless actions. After all what can happen if you spit on the road, you have been doing it since you were a child isn't it?. Or what could happen if you park your car near a busy intersection - it is only for a few minutes right? Or what could happen if you throw your plastic bag into the drainage - it will just go with the sewage right? After all aren't these small luxuries that the system owes you? Isn't it your right to do these things? People don't even realize that they are committing a crime when they make one of these offenses.

The generic solution to these problems is to teach people to think. But, since that is possibly impossible, it is more practical to teach them, while they are still young, certain civic responsibilities and value systems essential to maintain a smooth civil society. It might be a little inconvenient to keep that toffee wrapper in your pocket till the next trash can or even back home, but it would be more more inconvenient for a lot more people if you don't; and other people like you, don't.

Click here to read the rest of this article - "Personal Luxury at Public Inconvenience"

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.

Click here to read the rest of this article - "Erosion of Ethics and Moral values in our society"

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.

Click here to read the rest of this article - "How corrupt officials operate"

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.

Click here to read the rest of this article - "Comparing Oranges with Apples"