Should we close down the Planning Commission…a counter view

July 21, 2014

It is difficult to support the cause of Planning Commission in these times. But it is important to have people on both sides of the debate.

Prof. Prabhat Patnaik of JNU in his typical style argues why  the Planning  Commission must continue. Infact it needs to be redefined to fight the neo-liberal capitalism we are facing.

The National Democratic Alliance government is reported to be considering an end to the Planning Commission. Whether or not this actually happens, we are likely to see a further enfeeblement of the Planning Commission, a process that has been going on for quite some time.

Why should there have been such a process of enfeeblement at all? Some would answer this question by asserting that a Planning Commission simply cannot have any role in a neo-liberal regime. The country has moved away from the “Nehru-Mahalanobis strategy”1 which visualised substantial public investment, and hence the need for a “plan” to effect such investment. With the public sector displaced from its leading role, any particular “public” engagement in development projects that may still be required in a neo-liberal regime (through public-private partnerships for instance) can be planned and executed by the concerned departments. There is no longer any role for an overarching body like the Planning Commission.

But this is not a compelling argument. There can still be a role for a Planning Commission even under the new dispensation, but a role different from the one it had earlier. This new role can be to provide a counterpoint to neo-liberalism. Paraphrasing Bertolt Brecht’s famous line: “In the dark times will there also be singing? Yes, there will also be singing about the dark times”, one can say: “Can there also be planning in the neo-liberal times? Yes, there can also be planning for coping with the neo-liberal times”.

In other words, even a government that lacks the will to take the country out of the vortex of globalisation, and hence willy-nilly has to pursue a basically neo-liberal policy trajectory can still have a national planning body that provides a counterpoint to neo-liberalism. Such a Planning Commission can be concerned with working out ways of preserving what remains of the public sector, with preventing the decimation of peasants and traditional petty producers that neo-liberalism brings in its wake, and with providing amelioration, by formulating welfare schemes, against the immiserisation of the people through inflation and unemployment.

He says Planning Commission stopped being the agency for development and just pushed the neo-liberal agenda as done by other agencies. He also takes on India’s elite econ policymakers:

Such a full-fledged neo-liberal state is characterised not just by a set of policies that fall under the rubric of neo-liberalism. It has a set of specific institutional features as well. These include: the “autonomy” of the central bank; the elevation of the Ministry of Finance to the status of a super ministry dominating all others; the manning of the central bank and of the finance ministry by ex-employees of the International Monetary Fund (IMF) and the World Bank, or of certain other global financial institutions (who usually go back to their parent bodies at the end of their tenures with the government); the organisation of training programmes for the bureaucracy, especially of the home-grown segment of the financial bureaucracy, by these multinational institutions or by universities in the metropolis acting on their behalf; and a general increase in the power of the bureaucracy over the elected political representatives of the people on the grounds that the latter are corrupt and cannot be trusted with key economic decision-making (which is often enough true, except that the “corruption” itself is usually a consequence of the privatisation spree unleashed by the neo-liberal regime, and tacitly acquiesced in by the very members of the global financial community manning the government, who then use it to discredit the “politicians”).

The transition from a postcolonial Nehruvian state to a neo-liberal state is not easy to effect within a political framework characterised by universal adult franchise. But the problem of negotiating such a transition is typically sought to be resolved through at least two means. One is the insulation of economic decision-making from the domain of politics, so that no matter who comes to power the same policies continue to be pursued in the realm of the economy.

This insulation is achieved partly by putting in institutional arrangements of the sort I mentioned above, which shift decision-making from elected political representatives of the people to employees and ex-employees of the World Bank, IMF, and other global financial institutions. And it is achieved partly by the need to ensure that capital does not fly away from the economy in question: if the nation state confronting globalised capital pursues economic policies – such as expansionary fiscal policies – which are different from those demanded by such capital, then it runs the risk of exposing the economy to debilitating capital flight, which can erode in no time the political support base of the ruling government; this serves to prevent any bourgeois political formation from nurturing ambitions of having an economic agenda of its own which is at variance with what is demanded by globalised capital. The possibility of a relatively autonomous nation state negotiating with globalised capital via a Planning Commission under these circumstances (when the economy is not delinked from globalisation through restrictions on cross-border movements of goods and capital) is then snuffed out.

Given the policy failures of IMF in multiple countries, one is not sure why we care so much for its trained economists. If we question Planning Commission, shouldn’t we question IMF’s role as well? But then anything goes as long as certain mainstream agendas are promoted.


It is not surprising that the process of enfeeblement of the Planning Commission, which is apparently reaching a denouement now, began long ago, when the Planning Commission, instead of being assigned the role of providing a counterpoint to neo-liberalism, was simply made into an instrument for promoting neo-liberalism.

Over the decade of the 1990s we find a bizarre phenomenon: while the tax-gross state domestic product (GSDPN) ratio of the states was higher than that of the centre on average, and even held up well, the states were caught in a debt trap at the end of the decade, which was then used by successive Finance Commissions, at the behest of the centre, to force “neo-liberal reforms” upon them. (This was a blatantly unconstitutional course for Finance Commissions to follow, against which Amaresh Bagchi, a member of the Eleventh Finance Commission, had given a dissenting note.)

An extremely important reason why the states got into a debt-trap was the high interest rates charged by the centre on the loans it made to them, rates whose weighted average for individual states exceeded in many cases the nominal growth rate of that state’s GSDP (which was a recipe for a debt-trap). And the rates charged on central plan assistance to states, instead of breaking this high-interest-rate regime, contributed to it. The Planning Commission in short was used as an instrument for making the states fall in line behind neo-liberal policies.

When the United Progressive Alliance (UPA)-I came to power, corresponding to the duality of thinking within the ruling circle, there was a peculiar duality that developed in the realm of institutions: while the Planning Commission continued to be used for promoting the neo-liberal agenda (through its insistence, for instance, on public-private partnerships), an altogether different body was created in the form of the National Advisory Council to formulate welfare programmes. True, the Planning Commission during this period, when Left support was needed to prop up the government, did have a diversity within it, which prevented its complete collapse into neo-liberalism, and gave rise to some striking initiatives like the Rashtriya Krishi Vikas Yojana; but with UPA-II little space remained for such initiatives and the process of enfeeblement gathered momentum.

Does the argument which I have been putting forward, namely, that a process of enfeeblement of the Planning Commission is embedded within the unfolding political economy of a neo-liberal regime, imply that it is an inevitable phenomenon? This question is both pertinent and topical at this moment. There is currently a debate among progressive economists in the United States (US) on whether increasing income and wealth inequality among people is a matter of pursuing particular policies or whether it expresses an immanent tendency of capitalism.

I think there is a need for a broader debate on the role of certain institutions. We have seen the whole world turn around in the last 5-6 years. One cannot say that planning kind of institutions alone have failed. The market savvy ones have failed and miserably too. We forget that by doing away with Planning Commission kind of places on the basis of them being too centralised, we make the finance ministry even more centralised. We need some distribution of powers. And who knows just like UPA created NAC for the role of Planning Commission, current govt might created another planning commission kind of agency.

Much of policy work too goes around in circles..

A unique informal banking system for rickshaw drivers in Delhi

July 18, 2014

An interesting post by group of researchers based at Delhi.

They figure an arrangement amidst rikshaw drivers in Delhi to tansfer money to homes:

Seasonal, rural migrants that drive rickshaws in cities have little or no access to formal financial institutions. Based on a survey of over 100 rickshaw drivers in Delhi, this article highlights a unique mechanism used by the drivers for remitting earnings to their families back in villages, obtaining short-term loans, and managing their savings.

What is the system?

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What is behind Latin America’s declining income inequality?

July 18, 2014

Well, in case the topic surprises don’t you worry. It is expected to surprise most. I mean how can income inequality decline of all places in Latam when it is rising everywhere?

But then the catch is despite the decline, it still has the highest inequality across the world. This paper by IMF econs  looks at reasons for this decline:

Income inequality in Latin America has declined during the last decade, in contrast to the experience in many other emerging and developed regions. However, Latin America remains the most unequal region in the world. This study documents the declining trend in income inequality in Latin America and proposes various reasons behind this important development. Using a panel econometric analysis for a large group of emerging and developing countries, we find that the Kuznets curve holds. Notwithstanding the limitations in the dataset and of cross-country regression analysis more generally, our results suggest that almost two-thirds of the recent decline in income inequality in Latin America is explained by policies and strong GDP growth, with policies alone explaining more than half of this total decline. Higher education spending is the most important driver, followed by stronger foreign direct investment and higher tax revenues. Results suggest that policies and to some extent positive growth dynamics could play an important role in lowering inequality further.

Nice paper. Looks at income inequality in most (if not all) Latam economies. And yes one sees it declining in most!

Relationship between trust and the size of the welfare state…

July 18, 2014

An interesting piece by Yann Algan, Pierre Cahuc, Marc Sangnier, all three based at France’s economic schools. French econs are really getting popular these days.

They say the relationship between trust amidst citizens and size of welfare state  isn’t as linear as imagined. The higher the trust and higher the size of welfare is not really true. What we see is twin peaks. Both states with high and low trust can have higher welfare spending:

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How will ECB’s voting right system differ from Federal Reserve?

July 18, 2014

In its last MPC meeting, ECB made three changes in its structure:

  • The MPC will now have rotating members from various member central banks.
  • ECB will also publish its minutes from the meeting
  • The number of meetings reduced from 12 to 8.

So how will this rotating system work? ECB has put up a FAQ to explain.

Why was this needed? As per EU treaties the moment EMU membership crosses 18, it will need to follow rotatory procedure. Currently it has 18 members and with Lithuania expected to join next year, it will be 19. Hence the change. Interestingly, the member will rotate each month..

What about comparisons with FOMC?

How does the voting right system compare with that of, for example, the US Federal Reserve?

The system used by the Federal Open Market Committee (FOMC) of the US Federal Reserve is very similar to the one to be used by the ECB. The FOMC has 12 voting members, 7 of whom are members of the Board of Governors and hold permanent voting rights, rather like the ECB’s Executive Board members on the Governing Council. The President of the New York Fed has a permanent voting right, the Presidents of the Federal Reserve Banks of Chicago and Cleveland vote every other year and the Presidents of the other nine Federal Reserve Districts vote every third year. Unlike the Fed’s yearly rotation, the voting rights for the members of the ECB’s Governing Council rotate every month.

ECB I think has still not fixed the number of members who will be sitting on the ECB. It will be 6+ a number. How the large member countries like Germany, France etc are rotated will also have to be seen.

Bernanke vs Friedman…Did Bernanke get Friedman’s theory wrong?

July 17, 2014

Prof. Jeffrey Rogers Hummel of San Jose State University writes this superb paper on the topic (HT: Marginal Revolution).

In the process, he dubs Fed as as the U.S. Economy’s Central Planner. Well all central banks are central planners. There is nothing more ironical than a central banker talking about free markets. Which regulator really interferes in its domain as much as central banks do? And these days they do not even need to interfere. Mere talk and face signs are enough.

Anyways, in this paper Prof Hummel suggests Bernanke got Friedman’s lessons wrong. Friedman simply suggested to flush the economy with liquidity in case of a crisis hitting agggregate demand. However, Bernanke intervened and supported some financial firms in early part of the crisis.  And surprise surprise, Prof Hummel says Greenspan did a better job in resolving crisis as Fed chair. The once maestro just flushed markets with liquidity unlike Bernanke who targeted support.

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Confusion over Centre State financing in the Budget 2014-15..some clarifications

July 17, 2014

The budget documents always lead to confusions of some sorts.

This time, there has been some confusion over how centre financing has changed in recent budget. Some people have suggested that amounts to be transferred to states have risen significantly. Others are not sure. In reality the amounts have not changed, the pockets have.

Actually the confusion started in interim budget 2014-15. The outgoing UPA govt adopted the suggestions of Chaturvedi committee report to rationalize the plethora of CSS schemes. Apart from streamlining the CSS from 147 to 59 in number, the report also asked govt to revamp its mechanism to transfer funds from centre to states.

I have written this note to clarify certain issues –  Confusion over Centre State financing in the recent budget . Somehow, it was not coming out proper as a blogpost. Hence the note.

Comments/suggestions are welcome as always..

The role civil society can play in India’s democracy today..

July 16, 2014

An interesting paper by Prof Trilochan Shastri of IIMB.

He looks at some recent trends in India’s elections and how money determines the election outcomes (those having higher assets tend to win) . We need more awareness campaigns to elect the right people. Here civil society needs to play a major role:

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Irrational exuberance one more time?

July 16, 2014

Prof. Shiller in his recent piece sees signs of irrtaional exuberance across asset markets yet again. He calls the article “Booming till it hurts”.

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Thomas Piketty and Ireland crisis…..

July 15, 2014

Patrick Honohan of Ireland central bank responds to a presentation by Piketty on his famed book in Ireland.

In the process he tries to connect the recent Irish crisis to Piketty’s theory:

Although much of the commentary around Piketty’s book has centred on his forward-looking analysis of the prospects for the size distribution of worldwide wealth in the decades ahead, other parts have greater immediate resonance for us here in Ireland. I am thinking specifically about the way in which many of the long data series in Capital show a pronounced decline in the mid-20th Century. Related to two world wars and the Great Depression which separated them, as well, perhaps, as to the rise of the “Welfare State”, these collapses occurred both in terms of the aggregate wealth-to-income ratio and to the concentration of wealth at the top end of the distribution.

If Capital convinces of anything, it surely establishes that looking at major historical transitions through the lens of data on wealth is very instructive. We also have had disruptive events in Ireland in the past decade somewhat comparable to the mid-century capital and wealth collapses in Europe documented by Piketty. As well as tipping the economy into a deep recession, triggering a surge in unemployment and emigration and crippling the public finances, our crisis has been associated with large losses in household capital and increases in indebtedness causing distress. These latter aspects have been the focus of a lot of work at the Central Bank in the past few years as we have used the limited powers at our disposal and sought to provide advice to Government to map the best available route to recovery.

Pikettymania continues to bit one and all..

What is good (financial/banking) regulation?

July 15, 2014

The speech title just says What is “good regulation”? but is on financial/banking regulation. Hence used brackets.

The talk is by Andreas Dombret of Bundesbank. He was a banker once upon a time. So understands both the sides – the regulator and regulated:

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Rise of the digital bank…

July 15, 2014

An interesting article  by Tunde Olanrewaju of Mckinsey.  The author argues that despite Europeans increasingly moving to digital world, banks have not really moved on.

So the author chalks out a strategy for European banks to bite the digital world:

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High Speed Rail in India…Issues and challenges

July 14, 2014

Anjali Goyal, adviser at Planning Commission has written this timely paper on the topic (thanks to EPW for keeping things going here).

She lays out a whole framework to understand HSR policy in India. Apparently govt. has been working on the idea for a while and Kerala was the first to introduce the project. The paper was also written just before the rly budget:

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Cricket’s corridor of uncertainty and monetary policymaking…case of interesting similarities..

July 14, 2014

A fascinating speech by Andy Haldance of BoE.

He connects cricket with monetary policymaking. The predicament facing today’s policymakers is similar to the batsman in cricket who face balls in corridor of uncertainty:

It is wonderful to be back in Scarborough. I say back because many of my earliest and fondest childhood memories were of summer holidays spent here. Being a cricket fan, the Scarborough Festival – the cricketing jamboree held at the end of August each year since 1876 – has always held a place in my imagination. Alas I have never been, but am hoping one day to break my duck.

I want to discuss the economy and the role of monetary policy in supporting it. And with apologies to the non-cricketers in the audience, to do so I will borrow a cricketing metaphor – the “corridor of uncertainty”. The corridor of uncertainty is every bowler’s dream and every batter’s nightmare. It refers to a ball which pitches in such a position – the corridor – that the batter does not know whether to be playing off the back foot or the front foot.

This, I will argue, is similar to the dilemma facing monetary policymakers on the Bank’s Monetary Policy Committee (MPC) today. Should monetary policy hold back until key sources of uncertainty about the economy have been resolved? Or instead push forward to prevent leaving it too late?

He reviews the econ situation across globe and UK. For both an econ and cricket follower one can easily connect the two.

He says depending on how the batter/policymaker reacts, one dubs him/her a dove or hawk:

Faced with these uncertainties, what would be a prudent course for monetary policy in the period ahead? The first thing to say is that there is consensus across the MPC on three key elements of our monetary strategy: that any rate rise need not be immediate, that when rate rises come they are intended to be gradual and that interest rates in the medium-term are likely to be somewhat lower than their historical average.

This message appears to have largely been understood by financial markets. Despite the upwards revision to growth, financial markets’ best guess of how rapidly the first percentage point of tightening will take place is essentially unchanged over the past year – around 20 basis points per quarter. So too is their best guess of where interest rates may settle in the medium run – around 2-3%. Views may in time differ across the MPC on the preferred lift-off date for interest rates, as you would expect at a difficult-to-predict turning point in the cycle. These will reflect individual members’ different reading of the runes, not their individual preferences. That is a real benefit of the MPC’s committee-based structure, with individual member accountability.

It is not difficult to see why this choice over timing is a difficult one. The policymaker in this situation faces the self-same dilemma as the batsmen facing a ball pitching in the corridor of uncertainty. In that situation, the coaching manual no longer offers a clear guide. Two strategies are equally justifiable.

The first is to stay on the back foot and play late. This has the advantage of giving the batsmen more time to get a read on the trajectory of the ball as it swings and darts around. It avoids the risk of lurching forward and then needing hurriedly to reverse course if the first movement is misjudged. This is the way, Joe Root, the Yorkshire and England batsmen, plays his cricket. If he were on the MPC, he’d be called a dove.

But this strategy is not riskless. Playing late relies on having an uncannily good eye and strong nerve. It runs the risk of having to react fast and furiously to avoid missing the ball entirely. An earlier front foot movement would avoid that risk, allowing a more gradual movement forward. This is the way Ian Bell, the Warwickshire and England batsman, plays his cricket. If he were on the MPC, he’d be called a hawk.

What about owls? Night watchmen?

Which is better? Hawk or Dove?

So which is the better strategy? Benjamin Disraeli told us there are lies, damned lies and statistics. Here my analogy between cricket and the economy breaks down. Economic statistics, as we know, do sometimes lie. Cricket statistics, typically, do not. They tell us that Joe Root averages 43 in test matches to Ian Bell’s 45. In other words, it is a close run thing with the odds at present slightly favouring the front foot. But a good run of scores from either player could easily tilt the balance. That, in a nutshell, is where the MPC finds itself today

A superb analogy.

Though, Haldane misses the other side of the cricket pitch – the bowlers. In this case the bowlers are financial markets/players. They keep putting the batters into difficulty with their persistent attack on the batters. In the swinging UK conditions, they pose even more difficulty to the batters.

And then all this happens cyclically. During tough times, the central bankers become the batters and are made to face tough batting conditions. And when the times turn good, the markets become the batters and thrash the bowlers all around…


How history can contribute to better economic education..

July 14, 2014

Coen Teulings of Cambridge joins the discussion on improving economics education. And takes the position most have been taking– teach more history.

He goes a bit further and says there is a need for a broad brush of history:

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Do super rich think they no longer need govt?

July 11, 2014

Seeing how conveniently India’s uber class has shifted its preference for the new govt., one will obviously reject the question.  Infact, they need more and more support from the govt. to keep expectations high so that their wealth/paper wealth can keep multiplying. It is pretty paradoxical.

Dani Rodrik in this piece raises the same argument from a global perspective:

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If the Budget 2014-15 figures are near similar to Interim Budget 2014-15, why so much hype?

July 11, 2014

As the website was not opening properly yesterday, I did not really check the numbers. The morning papers and other articles of full of praise for the budget and the reformist govt. Yes, some are disappointed that the budget was not as bold and did not announce big bang reforms, but most are still sanguine.

Yes, there have been announcements of many kinds but  one has to see how they get implemented. So, the best thing is to see the budget numbers. And here is where things have been done cleverly by most analysts.

Interestingly, most analysis compares 2013-14 (Revised estimates; RE) with 2014-15 of recent budget. It missed the interim numbers as budget format one just has 4 columns: 2012-13 Actual, 2013-14 BE, 2013-14 RE  and 2014-15 BE

So as one compares the recent numbers with 2013-14, one sees growth across categories indicating change/reform etc. But if you put the interim budget numbers, there is hardly any difference.

So here you go with the interim numbers:

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Why building even more IITs/IIMs is just such a bad idea..

July 10, 2014

Though the proposal was in air, better to write on it when it actually ends up being announced/implemented.

In his budget speech, FM Arun Jaitley (nice to have a completely different name as it was just PC for many years) said:

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Karanataka government’s road tax mess…

July 10, 2014

Usually, the scene in most Indian cities is like this. Say you drive down from one state to another state for tourism/visit etc. It is quite common that some police person will stop you seeing your car number plate from another state. The person will charge you for some offense which you have not committed. You plead and then are left after paying some money.

In Bangalore, things have reached crazy level. Next time anyone is driving from another state, your entire car could be confiscated if you are caught by the traffic police! One has to prove that you are just visiting the city by showing toll receipts, petrol bills etc showing you have just entered the state. Couple of incidents have already happened where touring people have had to prove their case against all odds.

So the deal is this.

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Changing default setting in India’s economic policy …a leaf from beh eco..

July 10, 2014

The big B day is over. Enormous noise and brouhaha going on. The blog will see whether it will write something on the budget laters.

Meanwhile, was trying to scan the economic survey -2013-14 presented yesterday. Chapter 2 which has become kinda famous for being different, this time it speaks on issues and priorities. It has the usual set of words which will please the market sentiment.

Came across these interesting lines in the middle:

Default setting for government intervention in the economy needs to change from ‘prohibited unless permitted’ to ‘permitted
unless prohibited.

Nice to see the words picked from behavioral eco literature. So far, the default for most eco activity in India is “Well, it must be banned till it is allowed”..this was fine in command and control economy. This default needs to change in the market economy to” Well, it is allowed till not banned”.

Simple play of words but changes the entire approach. That is what nudges strategy is all about…:-)


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