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Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts

Monday, August 20, 2012

Capitalism vs Socialism vs Communism

During one of the debates recently, I learnt that, commonly people are confused with the terms Capitalism, Socialism, Communism and Democracy. Thus, I thought of putting things here explaining (trying to explain) the difference between these in layman's term.
Capitalism, Socialism, Communism - these are commonly known as economic models and entirely independent of political models like Democracy, Anarchy...

Capitalism - An economic system based on the "Survival of the fittest".
Example: I own the cow. You buy the milk. The government gets its taxes. Or, more generally, everyone owns a private property but the government can tax us.

SocialismAn economic system based on the "You get your share no matter what your contribution is".
Example: The government owns the cow. You buy the milk. You pay the government. Or, more generally, government owns the resource production (farms, factories,...) but the people can own private property.
Want to read my view on socialism, click here

CommunismAn economic system based on the "you put in your fair share you get your fair share".
Example: The government owns the cow. The government owns the milk. You are allowed to drink the milk, but only as much as you really need. The government owns everything, but everyone shares the resources.



Sunday, July 22, 2012

Financial crisis - the ticking timebomb...


This post is an advanced version of one of my earlier post, How the Bubble burst.

What is the credit crisis?
It's a financial fiasco including:
  • Sub-prime mortgages
  • Collateralized debt obligations (CDO)
  • Frozen credit markets
  • Credit default swaps (CDS)
The credit crisis brings two groups together, Home owners and Investors. There is common place for either of these groups to suffice their respective needs - a bunch of financial institutions commonly known as Banks.
It is these banks which actually initiate the process of creating this time bomb.

How does it actually work?
1. Let's say, a family A wants to buy a house and needs some money. 
There is another group called Z who is financially well off and has stash of money which it would like to invest.

2. Now, A goes to this bank B in need of money and the bank B lends them in return of an agreement to pay EMI (equated monthly income). A is happy because he knows the house that he bought at x amount is appreciating in terms of value and doesn't mind paying the EMI. B lends mortgage to many such home owners.

3. People from group Z would like to invest their money and want to become richer so they go to bank B for deposit, but, bank B pays a very low interest rate. So, not all investors from group Z are happy. In fact, very few park their money at low interest rate in the bank B.
This is observed by another investment bank 'IB' (probably of higher magnitude) and approaches small bank B. IB buys out these mortgages from B at a very good price and B is happy as it sold off its risk at better price! 

4. IB collects many of these mortgages and bundles them in one box. This box receives EMI monthly from all these mortgages. Now, IB does financial analysis and splits this box into three parts viz, Safe, Ok and Risky. This is called, 'Collateralize debt obligations' (CDO). A CDO works like cascade with Safe block at the top, when the money flows in, it first fills in the Safe block, then in the Ok, and finally in the Risky block. This means, in case if there is some family which defaults to pay their EMI then, first it will impact the lower most i.e Risky block.
To compensate this, the bottom block has the highest rate of return and the top most block has the lowest but still better rate of return as compared to bank B.
To make the top most block more safer IB will take a small fee usually called, 'Credit Default Swap' (CDS). Usually the CDS fee is charged by the insurance firms to protect the investor. Credit rating agencies will give the rating AAA on it. Credit rating firms have nothing to lose and they get money to rate the risky CDOs as AAA.
(Credit rating AAA is considered as the safest investment area)
Thus, Group Z investors are interested in these top block of safe CDOs which pays of better than normal bank B deposits.
IB sells of the rest of the CDO blocks to other high risk taking institutions like hedge funds, etc... thus, IB sold it risks and makes millions and is obviously happy!

Everyone is happy, in fact the Z group investors are so happy with the return on their investment that they demand for more of such safe CDOs. So, IB calls up bank B and asks for more mortgages. But bank B has no new mortgage as there are no more home buyers.
Now, as we know that prices of house are ever increasing so bank B thinks, if the home owner defaults then his house can be sold as collateral. Thus, bank B starts adding risk to the mortgage like, no down payments, no income checks etc... This is called 'Sub-Prime Mortgage'.

This is where the time bomb actually starts!

The above process, from 2 to 4 repeats. unsurprisingly, few the home owners start defaulting. Which stops EMI from the home owners. So what! Bank IB sells of their houses as house prices are high and covers up the default. But slowly and gradually as more and more home owners start defaulting, a situation arises where there is more supply then demand. Obviously, the housing prices will not increase in fact they plum.
Now the family A which is still paying the EMI thinks, "why we are paying so high value of EMI for house which is not worth that much?", and even they put up the house for sell and don't want to pay EMI. 
This increases the default rates and further diminishes the value. So now the question is, IB had taken a lot of credit from other countries to make the CDO boxes which is now worthless and IB cannot afford to pay back the money it borrowed. This situation is not only with IB but also, the family A, bank B and group Z. This is known as 'Frozen Credit Market' and eventually they go bankrupt. 

...BOOOOOOOOOM!!!!!!!


Monday, June 18, 2012

Money is not Wealth


Most of us wake up in the morning and go to a place called 'work' in order to earn money.  And most of us surely spend money every day.  In essence, money is a medium of exchange that helps us get the things we want and need.  In other words, you provide your labor in exchange for this medium called money, which you can then exchange for others goods or services you want. However, it’s important to note that money has no intrinsic value (unless it’s commodity money).  Is money, then, really the thing we want?
The father of modern economics, Adam Smith, once wrote: "All money is a matter of belief."

Wealth is not the same thing as money. Wealth is as old as human history. Far older, in fact; ants have wealth. Money is a comparatively recent invention.

Wealth is the fundamental thing. Wealth is stuff we want: food, clothes, houses, cars, gadgets, travel to interesting places, and so on. You can have wealth without having money. If you had a magic machine that could on command make you a car or cook you dinner or do your laundry, or do anything else you wanted, you wouldn't need money. Whereas if you were in the middle of Antarctica, where there is nothing to buy, it wouldn't matter how much money you had.

Wealth is what you want(both tangible and intangible), not money. But if wealth is the important thing, why does everyone talk about making money? It is a kind of shorthand: money is a way of moving wealth, and in practice they are usually interchangeable. But they are not the same thing, and unless you plan to get rich by counterfeiting, talking about making money can make it harder to understand how to make money.

Money is a side effect of specialization. In a specialized society, most of the things you need, you can't make for yourself. If you want a potato or a pencil or a place to live, you have to get it from someone else.

How do you get the person who grows the potatoes to give you some? By giving him something he wants in return. But you can't get very far by trading things directly with the people who need them. If you make violins, and none of the local farmers wants one, how will you eat?

The solution societies find, as they get more specialized, is to make the trade into a two-step process. Instead of trading violins directly for potatoes, you trade violins for, say, silver, which you can then trade again for anything else you need. The intermediate stuff-- the medium of exchange-- can be anything that's rare and portable. Historically metals have been the most common, but recently we've been using a medium of exchange, called the Rupee/Dollar/Euro..., that doesn't physically exist. It works as a medium of exchange, however, because its rarity is guaranteed by the respective Government.

The advantage of a medium of exchange is that it makes trade work. The disadvantage is that it tends to obscure what trade really means. People think that what a business does is make money. But money is just the intermediate stage-- just a shorthand-- for whatever people want. What most businesses really do is make wealth. They do something people want.

Tuesday, June 12, 2012

Excellent Quotes by Warren Buffet

On Earning: "Never depend on a single income. Make investment to create a second source"

On Spending: "If you buy things you don't need, soon you will have to sell things you need."

On Savings: "Do not save what is left after spending, but spend what is left after saving."

On Taking Risk: "Never test the depth of river with both the feet."

On Investment: "Do not put all eggs in one basket."

On Expectation: "Honesty is very expensive gift. Do not expect it from cheap people."

Wednesday, March 7, 2012

How the Bubble burst?

Just found this little anecdote which explains How a Bubble is formed and how/when it bursts. A simple explanation of the sub-prime crisis.

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.
Thus,
- the net asset of the country now = 3 dollars.

3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.
- A has a loan to C of 1 dollar, so his net asset is 1 dollar.
- B sold his land and got 2 dollars, so his net asset is 2 dollars.
- C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
- Thus, the net asset of the country now = 4 dollars.

4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
- B loaned 2 dollars to A. So his net asset is 2 dollars.
- C now has the 2 coins. His net asset is also 2 dollars.
- Thus the net asset of the country now = 5 dollars. A bubble is building up!

5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.
- As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
- B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
- C loaned 2 dollars to B, so his net asset is 2 dollars.
- Thus the net asset of the country now = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation!

6) Everybody has made money and everybody felt happy and prosperous.

7) One day an evil wind blew, and an evil thought came to C’s mind. “Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more.”

8) A also thought the same way.

9) Nobody wanted to buy land anymore.
- So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
- B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
- C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his heart is palpitating.
- Thus the net asset of the country = 3 dollars again.

10) So, who has stolen the 3 dollars from the country? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B’s net asset is still 2 dollars, his heart is palpitating.

11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.
- A owns the 2 coins; his net asset is 2 dollars.
- B is bankrupt; his net asset is 0 dollar. (He lost everything)
- C got no choice but end up with a land worth only 1 dollar
- The net asset of the country is again = 3 dollars.

The story ends now, but —
There has been a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -
(1) When a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island’s own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land’s value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land goes up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depends largely on psychology (or speculation).

If you are still reading this then probably your would be further interested in reading what and how the real burst happened. Here is the advanced version of it.

Monday, January 23, 2012

Why does socialism fails!

My great Economics professor at SIBM, prof. Azhar Khan once said, behavioral economics plays an important role in nations economy! He always said, "Economics and Politics are inter-linked".
He always argued that, "government should not give any subsidy to any service or commodity".
Being in Denmark for almost 8 months now, I've noticed that, a retail store seller and an IT specialist in a reputed bank earns almost the same salary!
So, people who work hard were upset and people who work little were happy.
If this continues, and by general human tendency, people who worked little, work even less and the ones who worked hard decided they wanted a free ride too so they worked little. Thus, at the end of the day no one worked as required and eventually it lead to system failure. So, the one who works harder should be rewarded!
When the reward is great, the effort to succeed is great but when government takes all the reward away, no one will try or want to succeed.

Sunday, January 8, 2012

Dharavi - An informal economy in Bombay!



Bombay (as I still prefer calling it), At the edge of India's greatest slum, where decrepit shanty is cleaved like a wedding cake, four layers high and sliced down the middle. The missing half has been demolished. What remains appears ready for demolition, too, with temporary walls and a rickety corrugated roof. Yet inside, carpenters are assembling furniture on the ground floor. One floor up, men are busily cutting and stitching blue jeans. Upstairs from them, workers are crouched over sewing machines, making blouses. And at the top, still more workers are fashioning men's suits and wedding apparel. One crumbling shanty. Four businesses...
In the labyrinthine slum known as Dharavi I've read that, there are 60,000 structures, many of them shanties, and as many as one million people living and working on a triangle of land barely two-thirds the size of Central Park in Manhattan. Dharavi is one of the world's most infamous slums, a cliche of Indian misery. It is also a churning hive of workshops with an annual economic output estimated to be $600 million to more than $1 billion (I know it is unbelievable!). 

"Parallel economy", people are involved in several businesses in Dharavi. "In most developed countries, there is only one economy. But in India, there are two."
India is a rising economic power, even as huge portions of its economy operate in the shadows. Its "formal" economy consists of businesses that pay taxes, adhere to labor regulations and burnish the country's global image. India's "informal" economy is everything else: the hundreds of millions of shopkeepers, farmers, construction workers, taxi drivers, street vendors, rag pickers, tailors, repairmen, middlemen, black marketeers and more. This divide exists in other developing countries, but it is a chasm in India: experts estimate that the informal sector is responsible for the overwhelming majority of India's annual economic growth and as much as 90 percent of all employment. The informal economy exists largely outside government oversight and, in the case of slums like Dharavi, without government help or encouragement.
For years, India's government has tried with mixed success to increase industrial output by developing special economic zones to lure major manufacturers. Dharavi, by contrast, could be called a self-created special economic zone (SEZ) for the poor. It is a visual eyesore, a symbol of raw inequality that epitomizes the failure of policy makers to accommodate the millions of rural migrants searching for opportunity in Indian cities. It also underscores the determination of those migrants to come anyway.
"Economic opportunity in India still lies, to a large extent, in urban areas," said Eswar Prasad, a leading economist. "The problem is that government hasn't provided easy channels to be employed in the formal sector. So the informal sector is where the activity lies."
It is ingrained in the Indian imagination, depicted in books or Bollywood movies, as well as in the Oscar-winning hit "Slumdog Millionaire." Dharavi has been examined in a Harvard Business School case study and dissected by urban planners from Europe to Japan. Yet merely trying to define Dharavi is contested.
Maybe to anyone who has not seen Dharavi, Dharavi is a slum, a huge slum, but "I have also looked at Dharavi as a city within a city, an informal city".
It is an informal city as layered as sheared building - and as fragile. Plans to raze and redevelop Dharavi into a "normal" neighborhood have stirred a debate about what would be gained but also about what might be lost by trying to control and regulate Dharavi. Every layer of Dharavi, when exposed, reveals something far more complicated, and organic, than the concept of a slum as merely a warehouse for the poor.


One slum. Four layers. Four realities.
On the ground floor is misery.
One floor up is work.
Another floor up is politics.
And at the top is hope.
"Dharavi," said Hariram Tanwar, 64, a local businessman, "is a mini-India."
Misery
The streets smell of sewage and sweets. There are not enough toilets. There is not enough water. There is not enough space. Laborers sleep in sheds known as pongal houses, six men, maybe eight, packed into a single, tiny room - multiplied by many tiny rooms. Hygiene is terrible. Diarrhea and malaria are common. Tuberculosis floats in the air, spread by coughing or spitting. Dharavi, like the epic slums of KarachiPakistan, or Rio de Janeiro, is often categorized as a problem still unsolved, an emblem of inequity pressing against Bombay, India's richest and most glamorous city. A walk through Dharavi is a journey through a dank maze of ever-narrowing passages until the shanties press together so tightly that daylight barely reaches the footpaths below, as if the slum were a great urban rain forest, covered by a canopy of smoke and sheet metal.
Traffic bleats. Flies and mosquitoes settle on roadside carts of fruit and atop the hides of wandering goats. Ten families share a single water tap, with water flowing through the pipes for less than three hours every day, enough time for everyone to fill a cistern or two. Toilets are communal, with a charge of 3 cents to defecate. Sewage flows through narrow, open channels, slow-moving streams of green water and garbage.
At the slum's periphery, Sion Hospital treats 3,000 patients every day, many from Dharavi, often children who are malnourished or have asthma or diarrhea. Premature tooth decay is so widespread in children that doctors call them dental cripples.
"People who come to Dharavi or other slum areas - their priority is not health," their priority is earning.
And that is what is perhaps most surprising about the misery of Dharavi: people come voluntarily. They have for decades. Dharavi once was known for gangs and violence, but today Dharavi is about work. Tempers sometimes flare, fights break out, but the police say the crime rate is actually quite low, even lower than in wealthier, less densely populated areas of the city. An outsider can walk through the slum and never feel threatened. Misery is everywhere, as in miserable conditions, as in hardship. "But people here do not speak of being miserable. People speak about trying to get ahead".
Work
The order was for 2,700 briefcases, custom-made gifts for a large bank to distribute during the Hindu holiday of Diwali. The bank contacted a supplier, which contacted a leather-goods store, which sent the order to a manufacturer. Had the order been placed in China, it probably would have landed in one of the huge coastal factories that employ thousands of rural migrants and have made China a manufacturing powerhouse.
In India, the order landed in the Dharavi workshop of Mohammed Asif. Mr Asif's work force consists of 22 men, who sit cross-legged beside mounds of soft, black leather, an informal assembly line, except that the factory floor is a cramped room doubling as a dormitory: the workers sleep above, in a loft. The briefcases were due in two weeks.
"They work from 8 in the morning until 11 at night because the more they do, the more they will earn to send back to their families. They come here to earn."
Unlike China, India does not have colossal manufacturing districts because India has chosen not to follow the East Asian development model of building a modern economy by starting with low-skill manufacturing. If China's authoritarian leaders have deliberately steered the country's surplus rural work force into urban factories, Indian leaders have done little to promote job opportunities in cities for rural migrants. In fact, right-wing political parties in Bombay have led sometimes-violent campaigns against migrants.
Yet India's rural migrants, desperate to escape poverty, flock to the cities anyway. Dharavi is an industrial gnat compared with China's manufacturing heartland - and the working conditions in the slum are almost certainly worse than those in major Chinese factories - but Dharavi does seem to share China's can-do spirit. Almost everything imaginable is made in Dharavi, much of it for sale in India, yet much of it exported around the world.
Today, Dharavi is as much a case study in industrial evolution as a slum. Before the 1980s, Dharavi had tanneries that dumped their effluent into the surrounding marshlands. Laborers came from southern India, especially the state of Tamil Nadu, many of them Muslims or lower-caste Hindus, fleeing drought, starvation or caste discrimination. Once Tamil Nadu's economy strengthened, migrants began arriving from poverty-stricken states in central India. Later, the tanneries were closed down for environmental reasons, moving south to the city of Chennai, or to other slums elsewhere. Yet Dharavi had a skilled labor force, as well as cheap costs for workshops and workers, and informal networks between suppliers, middlemen and workshops. So Dharavi's leather trade moved up the value chain, as small workshops used raw leather processed elsewhere to make handbags for some of the priciest stores in India.
During this same period, Dharavi's migration waves became a torrent, as people streamed out of Bihar and Uttar Pradesh, the teeming, backward northern states now at the locus of rural Indian poverty.
In 1990s,"It used to be that 100 to 300 to 400 people came to Dharavi every day. Just to earn bread and butter." Leatherwork is now a major industry in Dharavi, but only one. Small garment factories have proliferated throughout the slum, making children's clothes or women's dresses for the Indian market or export abroad. According to a 2007 study sponsored by the United States Agency for International Development, Dharavi has at least 500 large garment workshops (defined as having 50 or more sewing machines) and about 3,000 smaller ones. Then there are the 5,000 leather shops. Then there are the food processors that make snacks for the rest of India.
And then still more: printmakers, embroiderers and, most of all, the vast recycling operations that sort, clean and reprocess much of India's discarded plastic. "We are cleaning the dirt of the country," said Fareed Siddiqui, the general secretary of the Dharavi Businessmen's Welfare Association.
Mr Asif, the leather shop owner, is a typical member of Dharavi's entrepreneur class.
Now 35, he arrived at the slum in 1988, leaving his village in Bihar after hearing about Dharavi from another family. He jumped on a train to Bombay. He was 12.
"Someone from my village used to live here," he said. "We were poor and had nothing."
Mr Asif began as an apprentice in a leather shop, learning how to use the heavy cutting scissors, then the sewing machines that stitch the seams on leather goods, until he finally opened his own shop. As a poor migrant, Mr Asif could never have arranged the loans and workspace if Dharavi were part of the organized economy; he rents his workshop from the owner of the leather-goods store, who got the order from the supplier for the briefcases for the bank.
Today, nearly all of Mr. Asif's workers are also from Bihar, one of the myriad personal networks that help direct migrants out of the villages. A worker earns roughly 6,000 rupees a month, or about $120, as a laborer in Mr Asif's workshop. He sends about half home every month to support his wife and two children. He is illiterate, but he is now paying for his children to attend a modest private school in their village. He visits them twice a year. And all this for better education and future of his family!
Politics
"Now the place is gold," said Mr Mobin, the businessman.
He is sits on the top floor of his building, surrounded by men's suits in the apparel shop. His family began in the leather business in the 1970s and has since moved into plastic recycling, garments and real estate. Slum property might not seem like a good investment, but Dharavi is now one of the most valuable pieces of real estate in Bombay. Which is a problem, as Mr Mobin sees it.
"People from all over the city, and the politicians, are making hue and cry that Dharavi must be developed," he said. "But they are not developing it for the people of Dharavi. They will provide office buildings and shopping for the richer class."
As Bombay came to symbolize India's expanding economy - and the country's expanding inequality - Dharavi began attracting wider attention. Bombay grew as Dharavi grew. If the slum once sat on the periphery, it now is a scar in the middle of what is a peninsular, land-starved city - an eyesore and embarrassment, if also a harbinger of a broader problem.
Today, more than eight million people live in Bombay's slums, according to some estimates, a huge figure that accounts for more than half the city's population. Many people live in slums because they cannot afford to live anywhere else, and government efforts to build affordable housing have been woefully inadequate. But many newer slums are also microversions of Dharavi's informal economy. Some newer migrants even come to Dharavi to learn new skills, as if Dharavi were a slum franchising operation.
"Dharavi is becoming their steppingstone," said Vineet Joglekar, a civic leader here. "They learn jobs, and then they go to some other slum and set up there."
Dharavi still exists on the margins. Few businesses pay taxes. Few residents have formal title to their land. Political parties court the slum for votes and have slowly delivered things taken for granted elsewhere: some toilets, water spigots.
But the main political response to Dharavi's unorthodox success has been to try to raze it. India's political class discovered Dharavi in the 1980s, when any migrant who jabbed four posts into an empty patch of dirt could claim a homestead. Land was scarce, and some people began dumping stones or refuse to fill the marshes at the edge of the Arabian Sea. Rajiv Gandhi, then India's prime minister, saw the teeming slum and earmarked one billion rupees, or about $20 million, for a program to build affordable, hygienic housing for Dharavi's poor. Local officials siphoned off some of the money for other municipal projects while also building some tenements that today are badly decayed. The proliferation of shanties continued.
Three decades later, the basic impulse set in motion by Mr Gandhi - that Dharavi should be redeveloped and somehow standardized - still prevails. But the incentives have changed. Dharavi's land is now worth hundreds of millions of dollars. Private developers do not see a slum but a piece of property convenient to the airport, surrounded by train stations and adjacent to a sleek office park.
A sweeping plan approved in 2006 would provide free apartments and commercial space to many Dharavi residents while allowing private investors to develop additional space for sale at market rates. Many Dharavi civic and business leaders endorsed the plan, even as critics denounced the proposal as a giveaway to rich developers.
For now, the project remains largely stalled, embroiled in bureaucratic infighting, even as a different, existential debate is under way about the potential risks of redeveloping Dharavi and shredding the informal networks that bind it together.
"They are talking about redeveloping Dharavi, but if they do, the whole chain may break down. These businesses can work because Dharavi attracts labor. People can work here and sleep in the workshop. If there is redevelopment, they will not get that room so cheap. They may not come back here.
Matias Echanove, an architect and urban planner, has long argued that Dharavi should not be dismissed as merely a slum, since it operates as a contained residential and commercial city. He said razing Dharavi, or even completely redeveloping it, would only push residents into other slums.
"They are going to create actual, real slums," he said. "Nobody is saying Dharavi is a paradise. But we need to understand the dynamics, so that when there is an intervention by the government, it doesn't destroy what is there."
Hope
Sylva Vanita Baskar was born in Dharavi. She is now 39, already a widow. Her husband lost his vigor and then his life to tuberculosis. She borrowed money to pay for his care, and now she rents her spare room to four laborers for an extra $40 a month. She lives in a room with her four children. Two sons sleep in a makeshift bed. She and her two youngest children sleep on straw mats on the stone floor.
"They do everything together," she said, explaining how her children endure such tight quarters. "They fight together. They study together."
The computer sits on a small table beside the bed, protected, purchased for $354 from savings, even though the family has no Internet connection. The oldest son stores his work on a pen drive and prints it somewhere else. Ms. Baskar, a seamstress, spends five months' worth of her income, almost $400, to send three of her children to private schools. Her daughter wants to be a flight attendant. Her youngest son, a mechanical engineer.
"My daughter is getting a better education, and she will get a better job," Ms Baskar said. "The children's lives should be better. Whatever hardships we face are fine."
Education is hope in Dharavi. On a recent afternoon outside St. Anthony's, a parochial school in the slum, Hindu mothers in saris waited for their children beside Muslim mothers in burqas. The parents were not concerned about the crucifix on the wall; they wanted their children to learn English, the language considered to be a ticket out of the slums in India. 
Once, many parents in Dharavi sent their children to work, not to school, and child labor remains a problem in some workshops. Dharavi's children have always endured a stigma. When parents tried to send their sons and daughters outside the slum for schooling, the Dharavi students often received a bitter greeting.
Mr Hashim responded by opening his own school, tailored for Muslim children, offering a state-approved secular education. He initially offered the curriculum in Urdu but not a single parent enrolled a child. He switched to English, and now his classrooms are overflowing with Muslim students.
Discrimination is still common toward Dharavi (on higher level its almost everywhere). Residents complain that they are routinely rejected for credit cards if they list a Dharavi address. Private banks are reluctant to make loans to businessmen in Dharavi or to open branches. Part of this stigma is as much about social structure as about living in the slum itself.
"They all belong to the untouchables caste," the longtime social activist, "or are Muslims."
But money talks in Bombay, and Dharavi now has money, even millionaires, mixed in with its misery and poverty. Mohammad Mustaqueem, 57, arrived as a 13-year-old boy. He slept outside, in one of the narrow alleyways, and remembers being showered with garbage as people tossed it out in the morning. Today, Mr Mustaqueem has 300 employees in 12 different garment workshops in Dharavi, with an annual turnover of about $2.5 million a year. He owns property in Dharavi worth $20 million.
Dharavi's fingerprints continue to be found across Bombay's economy and beyond, even if few people realize it. Mr Asif, the leather shop owner, made leather folders used to deliver dinner checks at the city's most famous hotel, the Taj Mahal Palace. The tasty snacks found in Bombay's finest confectionaries? Made in Dharavi. The exquisite leather handbags sold in expensive shops? Often made in Dharavi. "There are hundreds of Dharavis flourishing in the city," boasted Mr. Mobin, the businessman. "Every slum has its businesses. Every kind of business is there in the slums."
But surely, Mr Mobin is asked, there are things not made in Dharavi. Surely not airplanes, for example.
"But we recycle waste for the airlines," he answered proudly. "Cups and food containers."