My dear Sir Arvind Kejriwal,

Hope you are doing well.

My name is Alok Kejriwal, and I am a humble digital entrepreneur based out of Mumbai.

Sir, I have been struggling for the past 13 years to make a mark for myself in my industry and while I have certainly not achieved the size and scale of success and fame that you have, I do enjoy my own small universe of friends and supporters.

This mail is not to obviously compare my popularity vs yours' (silly comparison) BUT to ASK you a question about your philosophy of creating such amazing and effective agitation against CORRUPTION. 

My Question - Instead of fighting tooth and nail (and losing yesterday's battle) against corruption, have you Dear Sir considered fighting and agitating for INCREASED GDP??

Sir, allow me to explain...

In my Company, let's assume I do a business turnover of Rs 100.00

Also let's assume that my profit margin is 10%

Therefore, I SPEND Rs 90.00 in generating my business turnover.

Obviously this expenditure of Rs 90 is towards salaries, cost of buying services, electricity, rent etc paid to OTHER Indian companies and individuals.

Since you are a very smart man, you will quickly understand that IF a man starts a business of Rs 100 in India, then this is what happens when the people who receive my Rs 90.00 further retain 10% margin and SPEND the rest in making THEIR business run:

Turnover Profit Expenditure
100.0 10.00% 90.0
90.0 10.00% 81.0
81.0 10.00% 72.9
72.9 10.00% 65.6
65.6 10.00% 59.0
59.0 10.00% 53.1
53.1 10.00% 47.8
47.8 10.00% 43.0
43.0 10.00% 38.7
38.7 10.00% 34.9
34.9 10.00% 31.4
31.4 10.00% 28.2
28.2 10.00% 25.4
25.4 10.00% 22.9
22.9 10.00% 20.6
20.6 10.00% 18.5
18.5 10.00% 16.7
16.7 10.00% 15.0
15.0 10.00% 13.5
13.5 10.00% 12.2
12.2 10.00% 10.9
10.9 10.00% 9.8
9.8 10.00% 8.9
8.9 10.00% 8.0
8.0 10.00% 7.2
7.2 10.00% 6.5
6.5 10.00% 5.8
5.8 10.00% 5.2
5.2 10.00% 4.7
4.7 10.00% 4.2
4.2 10.00% 3.8
3.8 10.00% 3.4
3.4 10.00% 3.1
3.1 10.00% 2.8
 TOTAL
875.00

 

Sir, if you notice, the TRICKLE DOWN EFFECT of starting a business with Rs 100.00 turnover results in Rs 875.00 turnover generated by other people down the value chain as they run their business/service. 

NOW, coming to a topic closer to you:

LET'S ASSUME THAT THE PERCENTAGE of BRIBE IN EACH BUSINESS TRANSACTION IS 10% 

So, of the first Rs 90 I spend, I will have spent Rs 9 in bribes.

AND 

In the Rs 875.00 turnover achieved above, the other players in the VALUE chain will also have spent 10% of 875.00  or Rs 87.50 AS BRIBES.

In short, Rs 100.00 turnover GENERATES Rs 875 more turnover, with Rs 87.50 being spent as bribes.

MY QUESTION TO YOU IS - what is MORE IMPORTANT?

Encouraging me to START A BUSINESS of Rs 100.00 that GENERATES further business of Rs 875.00 OR  SAVING Rs 9.00 ????

Bear with me for one more minute:

Let's ask ourselves, what stops people from starting businesses (that grows GDP) in India in the first place??

It's the lack of EDUCATION.

So, let's take the case of my Driver.

His son is studying in an English medium school and is quite a bright guy.

I hope that one day he will NOT become another driver BUT someone, like say, an Auto Parts Dealer with a SHOP that sells parts and runs a BUSINESS. 

NOW COMES THE QUESTION:

If he HAS TO PAY A SMALL BRIBE TO START HIS SHOP - ISN'T THAT OK - CONSIDERING THAT HE WILL CREATE 8.75 TIMES MORE BUSINESS FOR THE COUNTRY EACH YEAR???

BRIBES ARE PAID ONCE. BUSINESSES RUN FOR EVER!

If my driver asks me for a LOAN to help start his son's business - should I NOT GIVE IT - KNOWING that Rs 9.00 WILL GO IN BRIBES, BUT EACH year he will generate a 8.75 MULTIPLE effect for the country??

Sir, I am businessman, and just using elementary math, note THAT RS 875.00 is BIGGER than Rs 87.50!!

My plea with you is:

Agitate to get more people to START businesses.

TO INCREASE THE GDP OF INDIA

TO CREATE ENTERPRISES 

TO CREATE AN ARMY OF ENTREPRENEURS

TO NOT JAIL BHARO

BUT

BANK BHARO WITH ENTREPRENEURS!!!

I have tears in my eyes as I write this Sir.

Simply because the biggest and most powerful agitators ever born in this great country... which would be you and Shri Annaji... seem to have MISSED THE REALLY, REALLY, BIG PICTURE.

A troubled,

Alok Kejriwal

alok@rodinhood.com

*****

Ps - special thanks to Asha for her speed editing of this one!

*****

This comment exchange between me and a fellow rodinhooder (part of comments) may also help understand my article:

Comment by Darshan Mujumdar

Hi Alok,

First of all, very creative attempt to solve the problem at hand than keep beating around the bush. I, however, see a fundamental flaw in your argument. The number Rs. 875 is a notional number, as you are summing the "revenues" while you move down the value chain of your product/service. In effect your model is proving that if our country's earning is Rs. 100 (the revenue generated in your example), then Rs. 87.5 goes in bribe. Note that at each level in the value chain, the REAL earnings are only 10% of the service/product that you sell, so effectively your model depicts that at each level of the value chain, as the money trickles down, 90% goes in the form of bribe, while 10% of the profit or 1% of the revenue remains with the actual producer of the service or goods.

Regards,
Darshan

My reply:

Darshan,

You really need some basic tutoring in economics.

Let me contribute:

- Lets assume I run a Paav Bhaji stall in Mumbai.

I SELL Rs 100 worth of paav bahji to customers PER DAY

FIRST - who pays me? Nearby employees of office buildings etc - who have EARNED SALARY and spend small moneys to eat every day. So that is where I get Rs. 100 from. ( not important in this discussion).

Now, from the Rs 100 I earn, I SPEND RS 90 per day.

Where does the Rs 90 get spent per day?

Assume:

- Vegetables & Food vendors - Rs 70

- Helper - Plates, disposables etc - Rs 11

- HAFTA - BRIBE TO POLICE WALA - Rs 9  (10%)

- TOTAL  = Rs 90

- Profit retained  = Rs 10 

GROSS TOTAL = Rs 100 = Original sales.

Now, lets look at ONE OF THE ELEMENTS of my Rs 90 spent - the Rs 70 spent on the vegetable and food vendor.

The Rs 70 I SPEND is EARNED by Wholesale vegetable guys who have small shops that BUY from the Village market suppliers etc. So get this right - My Rs 70 spend is Rs 70 Sales for this guy.

This person in turns spend Rs 63 (90% of his cost) daily on:

Lets assume - Rs 50 - paid to village agent who gets him vegetables, Rs 7 to a Hamaal (coolie) who carries the goods for him and Rs 6 (10%) BRIBES - to the police wala who lets the vegetable seller conduct his business.

As per the economic model I have maintained, the Vegetable vendor keeps 10% of his sale or Rs 7 as profit for himself.

Now, lets do totals for JUST ALOK and Vegetable Vendor

Alok's sales - Rs 100, Bribe paid - Rs 9

Vegetable sales wala - Sales - Rs 70 - bribe paid - Rs 7

(The same could be calculate for plate supplier, hamaal etc)

TOTAL SALES just between 2 people = Rs 100+ Rs 70 = Rs 170

BRIBES PAID - Rs 9 + Rs 6 = Rs 15 ( less than 10% here)

Therefore, as the Original 100 trickles down, it creates momentum value since what I spend is someone's earning etc etc

IF I REFUSE TO SPEND RS 9 on the first Bribe - I DONT SELL Rs 100 of Paav Bhaji, the Vegetable Vendor doesn't get Rs 70 etc etc etc....

DOES THIS MAKE SENSE???

Now comes the FUN!!

The 2 police walas who take bribes - Rs 9 and Rs 6 = Rs 15 ACTUALLY FURTHER SPEND MONEY ON EATING PAAV BHAJI FROM MY NEIGHBOR, thereby again increasing the cash circulation!!! (source of money which I did not care to cover because if I ever said that bribes are good for the economy, then I would be killed).

FINALLY

I would like you to look up a famous man called Keynes and what he said about 'digging holes in the ground'.... that will really strike a point.

Your friendly, neighborhood economist:

Rodinhood

******

Update - 30-8-2012

I just cant help smiling to myself. 

In the post above, just below the maths, this is what I had written:

"Sir, if you notice, the TRICKLE DOWN EFFECT of starting a business with Rs 100.00 turnover results in Rs 875.00 turnover generated by other people down the value chain as they run their business/service. "

YES!!!

Just read this in the Times of India Today:

:-))))

******

Some blessings from a Senior Economist!

*****

 

Prof. Pinaki was not quoted by me 'randomly' - he was quoted by me to prove that corruption INDEED DECREASES AUTOMATICALLY when GDP increases - something that i been screaming in my post.

Check the PPT and Prof. Pinaki's graph as under:

 

 
And, here is Prof. Pinaki's graph taken from - http://www.multiplier-effect.org/?p=1481
 
*****
"What do you think of the AAP party?

I think they are stumbling. Corruption is not a problem. It is a symptom of a problem. Today people have no trouble buying airline tickets, car, train tickets, a phone. You know why? The markets opened up; which is the point I want to make to the AAP — open up the markets fully. Indian liberalisation is of the elite, by the elite and for the elite. They have liberalised air travel, automobile, financial sector, capital freedom but  they did not liberalise (for the ) poor—farm sector, labour sector. They think they are helping the poor. They're not. They're preventing jobs from being created. All the power in a train is actually the locomotive, entrepreneurs are like locomotives. They start the train. For people at the lower end to have jobs, people with entrepreneurial skills should start companies."
********

You can read the compilation of my articles on

AAP, Arvind Kejriwal & Anna Hazare in AAP the BIG Fail

********

Tags: Alok Kejriwal, Anna Hazare, Arvind Kejriwal, Business, GDP, Kejriwal vs. Kejriwal

Views: 17685

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Replies to This Discussion

Alok, every man has a purpose in life. So does every Kejriwal. Let him fight his own battle and you fight yours. Trust me, I am seeing more and more Rodinhoods being born everyday! Thanks for this great community.

thanks sir

nice sir

hmm i am not a economist but i dont get the 100:800 logic..but a point well made! i am scratching my head

tell me if u want help (explanations) - see one explanation in detail below in comments about paav bhaji stall

Your GDP calculations are wrong

GDP can be calculated from 3 methods-

1) Production Approach- also called value added method, here all the value addition at each stage is added, not whole amount of each stage

2) Income Approach- this is the addition of household income's, corporate profits, interest income etc.

3) Expendiure approach- this is an addition of consumption + investments + govt. spending + exports - imports

consumption is only final household consumption not all the expenditures in the production chain

investment is basically purchase of new assets and does not include financial products.

By any method expenditure of all the stages in production can't be added and passed on as GDP.

Somewhere in the replies I read of Multiplier effect, which is basically income/marginal propensity to save

MPC is basically savings rate.

Multiplier effect is calculated on Income and not on Consumption or Expenditure.

say someone earns Rs.10 then he will spend some and save some amount from this, say he saves 20%

then Multiplier effect of this (his total addition to GDP) will be 10/.20= rs. 50

No doubt, multiplier effect and trickle down factor will increase the the GDP (but not to such proportions as mentioned by alok), but the original guy who gave the definition of GDP also said that GDP should not form the measure of nations welfare. GDP per capita is also not a true measure of standard of living.

Human Development Index is considered the best way to measure standard of living.

also their is another index which measures corruption, The CORRUPTION PERCEPTION INDEX(CPI) by Transparency International.

Top 20 Countries as per HDI-

Norway, Australia, Netherlands, US, New Zealand, Canada, Ireland< Liechetenstein, Germany, Sweden, Switzerland, Japan, Hongkong, Iceland, South Korea, Denmark, Israel, Belgium, Austria and France.

Top 20 least corrupt Countries as per CPI-

NEW ZEALAND, DENMARK, FINLAND SWEDEN SINGAPORE NORWAY NETHERLANDS AUSTRALIA SWITZERLAND CANADA LUXEMBOURG HONGKONG ICELAND GERMANY JAPAN AUSTRIA BARBADOS UK BELGIUM IRELAND 

and if we compare the 2 index- HDI  and CPI , 15 countries in the HDI list also appear in CPI index.

other 5 also hover around 20 to 30 in the ranking.

India ranks 134 in HDI and 95 in CPI (although it has third highest GDP(ppp) in the world

China ranks 101 in HDI and 75 in CPI and it has 2nd largest GDP(ppp) in the world.

CONCLUSION- if corruption is low real standard of living and quality of life is high

despite higher GDP India and China lack in human development as they also have high rate of corruption.

@alok you started by acknowledging that Arvind is the most powerful agitators born....and there were tears in your eyes, but then in replies you are simply mocking and belittling and deprecating the same Arvind.

@Asha Chaudhry: It appears to me that you are the editor of this blog and also this particular article, but only one comment from you and in that also you are profusely thanking someone who corrected Alok as a serial rather than just entrepreneur. I don't know whetther this is plain sycophancy at work or maybe you are too busy to give your opinion or you are just a glorified proof reader. Editors are known for their opinions. 

or maybe I am totally wrong.

 

I was actually going to spend a nice hour typing out a my working of the example I gave, but you saved me from the effort!

In your reply you state:

"Multiplier effect is calculated on Income and not on Consumption or Expenditure.

say someone earns Rs.10 then he will spend some and save some amount from this, say he saves 20%

then Multiplier effect of this (his total addition to GDP) will be 10/.20= rs. 50

No doubt, multiplier effect and trickle down factor will increase the the GDP (but not to such proportions as mentioned by alok)"

:-)))

In my example, I state:

I own a Pav Bhaji stall with an income of Rs 100 and a profit of Rs 10

Going JUST by YOUR MATHS

I save Rs 10 on Rs 100 = 10%

Now, using your MCP formula - 100/.10 = 1000!!!

SO 1000 IS what you also state "No doubt, multiplier effect and trickle down factor will increase the the GDP (but not to such proportions as mentioned by alok)" 

errrr - by your own math, the multiplier trickle down effect is = 1000

I just said 875 :-)))))

Yeah, you are right. The extent I said was wrong. ITS MORE as explained by you!!

(Ps - I guess you got caught in the trap I laid of drilling down the MCP via a single constant example. Instead you thought I was multiplying each trickle down by the factor....?! The trap was on purpose)

By virtue of a real example, let me explain what happens:

When there are 1 lac paav bhaji stalls in India due to increasing urban life and activity (office goers, students, people who need a quick meal), then:

A massive demand shows up for:

- Tomatoes, Potatoes, Ghee, Butter, Paav, Kerosene, Plates, spoons etc etc

- Lets take just Plates. Because of the massive increase in demand, many factories in Vashi, Daman, Dui (near by industrial areas of Mumbai) start making plates.

Therefore the GDP of the country does go up!!

These factories employ labor that do not eat the Mumbai Paav Bhaji - but because the Paav Bhaji created a trickle down effect, the labor in Daman benefited.

Now, the children of the labo go and buy Kurkure from the near by stall of their homes because their father is earning money working in a plate factory.

So, Paav Bhaji helped in selling Kurkure - although they compete with each other!

GDP expands massively as you rightly pointed out at an exponential rate linked to consumption! 

INDIA MUST BE ALLOWED TO CONSUME - BRIBES OR NO BRIBES

why are you so obsessed by your point of view. first you miss the larger picture or maybe you are reluctant to admit that maybe you are wrong. please explain me

if your profit is rs.10 on rs. 100 than your income is rs.10 and multiplier effect of this sales of rs. 100 will work on your income of rs.10. and you will save 10% from this income.

so the multiplier effect will be 10/.10=rs100

and this multiplier effect will work whenever someone earns and consumes something. consumption is very good.

but please tell me if you agree or don't agree with the fact that GDP does not reflect the  actual quality of life of a nation and wherever corruption is low, quality of life is higher.

hahahahah! This is one of the most silly mathematical discussions I have ever encountered!!

See you own ORIGINAL text (reproduced for the last time) - 

"Multiplier effect is calculated on Income and not on Consumption or Expenditure.

say someone earns Rs.10 then he will spend some and save some amount from this, say he saves 20%

then Multiplier effect of this (his total addition to GDP) will be 10/.20= rs. 50

No doubt, multiplier effect and trickle down factor will increase the the GDP (but not to such proportions as mentioned by alok)"

****

I note that you are a Chartered Accountant

Revenue = EARNINGS!!

When a factory generates revenue, it PAYS out its vendors = spends

When a man EARNS salary (revenue), he pays his bills.

When a Pav Bhaji owner earns Rs 100, he saves some and spends the other.

Hence your formula is RIGHT when u stated it first.

Now, when I trapped you, you are changing the formula!

But, the beauty of maths is that you cannot fool it.

So, think - How can SAVINGS HAPPEN ON SAVINGS?!!

:-)))))))))))))

if so, then your formula should be Rs 2 (savings) /.2 = 10!!

How can I earn or create Rs 10 from Rs 2 that I have SAVED?

Is my safe deposit box magical??

Boss, when you SPEND money, thats when it create a multiplier.

Its like when you give a speech, thousands of people hear!

And the biggest joke is, you are dividing the numerator by the numerator!

Boss - don't make me laugh :-)

Revenue is not earnings. Earnings is Net benefit, on which tax is paid. Read this http://en.wikipedia.org/wiki/Earnings
Revenue is turnover or sales, read this http://en.wikipedia.org/wiki/Revenue

Let me explain again. When you sell a vada pao for 100 your revenue is 100 and you will earn (income) rs 10 on it. Now you will take this rs 10 home and a portion of it will be saved and other will be consumed.
Now multiplier effect will occour when you will spend to consume and it will be income or earnings/mps
And that will be 10/.1=100

Expenditure method to calculate GDP-again you are showing lack of basic conceptual knowledge. Read carefully consumption is defined as final household consumption, consumption by intermediaries to provide goods/service to final consumer is excluded. Investment also does not include expenditure but only includes purchase of assets.


Again you are skirting around the issue and trying to prove my calculations wrong... Lets assume all my concepts and calculations and maths are wrong and I am a dumbass b.com. Now what do you have to say about "human development index and corruption" argument I made in my first reply.

The fool doth think he is wise, but the wise man knows himself to be a fool.
-william shakespear


Theses are few lines from your post China-the den of theives... (http://therodinhoods.com/xn/detail/6328457:Topic:19557)
Both the cases above presented ethical dilemmas to me. They forced me to walk the tight rope of being ‘righteous’ vs. ‘practical’, ‘academic’ vs. ‘practical’ and most importantly a ‘rigid businessman’ vs. a ‘practical one’.  Was I supposed to ask the ladies who came for the interviews indirect questions leading to figuring out if they were indeed pregnant? Pretend that we needed men secretaries’ because they might be required to work the night shift?  In my meetings with the local Chinese firms, was I supposed to carry gifts bought in China and pretend they were from India and just hand them over as a token of friendship? ***** …

Ravi, now as per you even wikipedia is wrong!

What you are forgetting is the Rs 90 that is spent by you on others.

IT BECOMES THE OTHER PERSONS INCOME!!

Lets take a simple example.

A taxi driver in Mumbai drives 10 hours a day.

On an average he does about 10 trips, each of Rs 150

Thats Rs 1500/- of income = earnings.

He saves Rs 300 for home and living. That means power companies, etc etc gain from that and earn income!

The cab driver gives the balance RS 1200 to the owner of the cab, for gas, for hafta etc

Of the Rs 1200, lets say 500 is kept by the cab owner for home expenses, and Rs 700 spent on fuel

Now, 700 is earned by petrol companies who then have their own employees etc

So, the Rs 1200 is income for the Cab Owner  is AN EXPENSE for the Cab driver!

As per your formula, the Rs 1200 spent by the cab driver has vanished!! Its impact is lost?? You are only focussed on the Rs 300 saved!

WHAT HAPPENED TO THE 1200? WHAT IMPACT DID IT HAVE ON THE ECONOMY?

THIS IS THE TRICKLE DOWN - CASCADING effect of expenditure!

Read this HEADLINE again:

http://en.wikipedia.org/wiki/Gross_domestic_product

Expenditure approach

" All expenditure incurred by individuals during 1 year . "

In economics, most things produced are produced for sale, and sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. Note that if you knit yourself a sweater, it is production but does not get counted as GDP because it is never sold. Sweater-knitting is a small part of the economy, but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-market provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market provision of services, then this trend toward increased market provision of services may mask a dramatic decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is particularly a problem for economies which have shifted from production economies to service economies.

[edit]Components of GDP by expenditure


GDP (Y) is a sum of Consumption (C)Investment (I)Government Spending (G) and Net Exports (X – M).

Y = C + I + G + (X − M)

Here is a description of each GDP component:

  • C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing.

Ravi, I followed your advise!

I calculated my table again, this time ADDING THE savings (earnings) whatever you wanna call it:

Check out what happens when all the earnings get added up!!

It TOTALS 100!

That's because as I have been saying, one persons expense is another ones income!

So, when I add your formula to the savings:

99.1/0.1 = Rs 991!!!! 

Hmmmmm- NOT to different from my Rs 887!!!!

Turnover Profit Expenditure Savings
100.00 10% 90.00 10.00
90.00 10% 81.00 9.00
81.00 10% 72.90 8.10
72.90 10% 65.61 7.29
65.61 10% 59.05 6.56
59.05 10% 53.14 5.90
53.14 10% 47.83 5.31
47.83 10% 43.05 4.78
43.05 10% 38.74 4.30
38.74 10% 34.87 3.87
34.87 10% 31.38 3.49
31.38 10% 28.24 3.14
28.24 10% 25.42 2.82
25.42 10% 22.88 2.54
22.88 10% 20.59 2.29
20.59 10% 18.53 2.06
18.53 10% 16.68 1.85
16.68 10% 15.01 1.67
15.01 10% 13.51 1.50
13.51 10% 12.16 1.35
12.16 10% 10.94 1.22
10.94 10% 9.85 1.09
9.85 10% 8.86 0.98
8.86 10% 7.98 0.89
7.98 10% 7.18 0.80
7.18 10% 6.46 0.72
6.46 10% 5.81 0.65
5.81 10% 5.23 0.58
5.23 10% 4.71 0.52
4.71 10% 4.24 0.47
4.24 10% 3.82 0.42
3.82 10% 3.43 0.38
3.43 10% 3.09 0.34
3.09 10% 2.78 0.31
2.78 10% 2.50 0.28
2.50 10% 2.25 0.25
2.25 10% 2.03 0.23
2.03 10% 1.82 0.20
1.82 10% 1.64 0.18
1.64 10% 1.48 0.16
1.48 10% 1.33 0.15
1.33 10% 1.20 0.13
1.20 10% 1.08 0.12
1.08 10% 0.97 0.11
0.97 10% 0.87 0.10
TOTAL 99.1

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