Managing India’s capital account

Dr YV Reddy has given a nice speech on the subject at Hyderabad on Jan 3, 2007.

He discusses the economic thinking behind the subject and offer Indian perspective. He says a pragmatic approach has to be taken and one cannot rely on the developed country model.

The effectiveness of capital account management should be viewed from several angles. Let me mention a few. First – impact on exchange rate expectations. Second – the counterfactual, namely what could have happened without capital controls at a particular juncture? Third – the short term impact versus the long term effectiveness. Fourth – the overall regime of current account management in the country concerned, to thwart capital account transactions in the guise of current account. The regimes governing repatriation and surrender are also relevant here. Fifth – the administrative framework and overall effectiveness of administration in the country, in a given legal and institutional framework. Finally, by all accounts, in terms of both growth and stability, China and India, who do manage capital account rather actively, have performed exceedingly well in all the recent years.

Read the entire speech for more details. And yes, the empirical research he mentions I have covered it earlier here.  So, now you know I have been advising you to read the right things.

Roads vs Cars, Airports vs airplanes etc etc

Reading the comments over Ratan Tata’s much awaited People’s car has made me wonder over the infrastructure issues in India. (Read in favour views here and here. And against view here) For the uninitiated the car is going to cost just Rs one lakh (about $ 2,500 in today’s currency) and will be the cheapest car in the world. Hence we are seeing a lot of commentary over the subject. The car would be unveiled in Autoexpo 2008, an automobile exhibition in New Delhi on Jan 10, 2008.

India is facing really tough problems like these:

• We have numerous cars, but not enough roads
• We have enough airlines and airplanes now, but not enough airports
• We have train tracks but trains don’t run on the same – like the harbour line from Vashi to Belapur. It could help decongest the trains quite a bit.

Infrastructure takes time to develop and because of little urgency shown earlier we have a huge deficit at hands. On the other hand, the things which help human beings utilise infrastructure like cars, motorcycles, airplanes etc have expanded big time leading to big management problems for authorities.

I am all for the People’s car but it is going to be a big-big concern for already jammed roads. And the jams are not just in large cities but more and worese in small towns. Reason?  Easy financing schemes (that is what the adverisers call it and we now know we should be careful) have made it easier for people to afford cars, motorcycles. As roads haven’t changed, we have jams all over.

Infact, the problem has become so bad at some places that one has to be a town expert (knowing all roads, sub-roads) in order to reach his work or home. The traffic has become so huge that a minor disturbance in a main highway leads to chaos like the National Highway 2 got disrupted at Agra and as a result the traffic from Kanpur to Delhi was disrupted. The jam ran upto almost 2-5 kms.

So, what do you do? Do you stop Tata from making cars? Do you stop ICICI from giving auto finance? Clearly both are not the right choices. People’s car would make car available to many, ICICI auto finance provides debt and using the equity one can buy the motor cycle/car/truck.

But then the issues with infrastructure are also a reality and one cannot just ignore it. The roads etc would take time to build and in many cases the traffic actually is more than the capacity of the new road. Hence we would have the policy dilemma for some time to come.

Assorted Links

1. Ajay Shah points to his list of 2007 articles. He also updates his earlier post on the critical appointments held for this year.

 

2. WSJ Economics Blog points how vote buying works in Africa. It points to a paper that says Fed should publish revised inflation forecasts.

 

3.Mankiw points to an article that says of the many thousands of mutual funds only 31 managed to beat the index each year from 1999 to 2006. He also points to this article which says number of economists favor John Edwards as next president

4. Time forRodrik humour J