Paul Krugman’s Love Affair with France..

April 27, 2015

An article disputing Krugman’s assertion that austerity loving UK grew slowly that stimulus loving France.

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Noise around India’s shift to full capital account convertibility..

April 27, 2015

As ME was away, capital account convertibility issue again cropped up in discussions on Indian economy.  It is amazing how we make such noise around something whose benefits and risks have been overstated for such a long time.

Before we discuss the issue further, what exactly is a capital account and what is an open capital account? The expression comes from Balance of Payments of a country which represents the account of a country with other countries/institutions. So, we have a current account which records exports and imports of a country. Then there is a capital account which is a mirror image of current account. So, if there is a deficit in current account, one needs surplus in capital account to balance the payments (& vice-versa). Capital account shows all the inflows/outflows from other countries. Includes popular items like FDI, FII, External borrowings etc. etc.

So, if you open the current account it means that one can import and export freely from all countries with some basic regulations in process. In case of opening capital account it means you allow import and export of capital as well. So, one can buy Indian shares freely as Indians can buy shares of other countries freely. Likewise Indian companies can borrow freely from banks based abroad and foreign companies can borrow from Indian banks.

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Perhaps the media is getting a reality check over hype it created over Indian government..

April 27, 2015

As the one year review of the Indian government draws close, some previews are already doing rounds.

In this article, Mihir Shah says the media has perhaps been too kind to the new government. Talk about some one creating massive illusion and itself falling in it.

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Game of Thrones Economics: Why Doesn’t Westeros Have A Central Bank?

April 27, 2015

I have no idea about Game of thrones or Westeros.But this article on why there is co central bank in the game is interesting.

The Austrians would be happy seeing no such thing and attribute the success of the game for its absence. Whereas other schools might add that to spice the game, a central bank is a must…

Traditional stock broking firms react negatively to discount brokerages..

April 24, 2015

Interesting article. Financial broking/trading industry thrives on other companies competing with each other and coming out with new products/services. After all that is what leads to increase in earnings, potential growth etc. The whole idea is let markets function and pick winners and losers based on capabilities/capacities and so on.

But what about when it comes to competition in financial broking industry itself? Of course oppose it:

BSE Brokers’ Forum and Association of National Exchanges Members of India (ANMI), the two leading association of stock brokers, are divided over the idea of setting a floor brokerage rate.  BSE Brokers’ Forum has written to the market regulator, Securities and Exchange Board of India (Sebi), proposing a minimum brokerage rate as it believes discount-broking is distorting the market. ANMI says the charges should be market determined. At present, broking houses are free to charge any below an upper ceiling of 2.5 per cent.

“A cross-section of brokers is worried about the discount-broking model as it impacts them adversely. Several of them had written to take up the issue. Brokerage charged by firms is the smallest component of all levies and taxes, that also shouldn’t be taken away,” said Alok Churiwala, vice-chairman, BSE Brokers’ Forum.

“Prescribing a minimum brokerage rate may be counter-productive. Besides, brokerage rates have already come down a lot, so fixing a lower limit would be difficult. If there is a lower limit, it should come from broker consensus and not through regulation,” said Gopal Agarwal, president, ANMI.

Discount broking is a business model whereby brokers offer to charge only a flat fee (often less than the price of a packet of biscuits), irrespective of size of trade. The two most popular brokerages offering discount services are Zerodha and RKSV Securities.

Brokers are feeling the heat as more and more net-savvy investors prefer the low-brokerage model adopted by Zerodha and RKSV. The discount brokerage strategy often involves a web-based platform for users to trade on, without any research or advisory services. Clients are charged a flat fee for each trade irrespective of its value. Any additional service provided is paid separately by clients.

Why write to SEBI feeling heat from discount brokerages? Let markets and clients figure out whether discount brokerages are of any value or not. Traditional brokerages have picked pounds (not pennies) from clients for many years now. Has been a classic case of where are the customer’s yachts? High time customers get some value from discount brokerages as well.

Applying IO principles one can see the impact of competition right away. Brokerage houses charge above the marginal cost and earn a premium for their services. Discount firms might be just pricing at marginal cost or just slightly lower than MC just to capture the market and then increase it later to MC levels.

One could also model it as a game between incumbent and new entrant. Under such games what matters is the threat incumbent send to the new entrant. If the threat is credible and incumbent will fight the competition then new entrant stays away. If the threat is not credible then new entrant enters and tries to capture some market. In this case, traditional brokerage industry instead of competing is using their lobbying power and push regulator from dissuading the discount firms. It will be interesting to see how SEBI responds. Knowing SEBI it might just ask these firms to compete and let markets figure..

Waste Management lessons from an ITC project in Saharanpur..

April 24, 2015

The authors call it best out of waste.

Given rapid urbanisation and the increasing amounts of solid waste generated in India cities, there is a pressing need for effective waste management processes. In this article, Sourabh Bhattacharjee and Ujjwal Sinha, who have been associated with a successful waste management project in Saharanpur, provide an outline of the project and highlight lessons for other Indian cities. 

There are nearly 125,000 households in Saharanpur in the state of Uttar Pradesh and approximately 65 tonnes of waste is generated daily. In order to dispose of household waste in a safe and cost-effective manner, ITC Ltd. launched the Mission Sunhera Kal in October 2006, under its social development initiative. The project has developed a model that reduces the burden of land filling, and helps in recycling/ reusing of biodegradable and recyclable waste. It is implemented in collaboration with an NGO (non-governmental organisation) called Muskan Jyoti Samiti (MSK).

The programme covers nearly 17,000 households in Saharanpur. The model is one of door-to-door collection of waste4, six days a week. Each waste collector covers 225-250 households daily, between 7.30 am and 1.30 pm. They move around in a rickshaw trolley, carrying two plastic bags – one for recyclable waste and the other for biodegradable and non-recyclable waste5. Thus, primary segregation of the waste is done at the household level. Households are made aware of the importance and process of primary segregation through campaigns such as road shows, pamphlets etc., as well as day-to-day reminders by waste collectors.

To separate the non-recyclable and biodegradable waste, secondary segregation is done at the waste management site. The biodegradable waste is then processed to make organic compost, the recyclable waste is sold to private vendors, and non-recyclable waste is transported to landfills. Therefore, nearly 85% of the total waste is recycled or reused and only 15% (non-recyclable) goes to landfills….


Lessons for others:

‘Mission Sunhera Kal’ shows that cleanliness can be achieved in a cost-effective manner with a well-designed system for house-to-house collection of solid waste, which provides employment opportunities without putting undue financial burden on the local government body. The model is environment-friendly and economically self-sustainable, and easily replicable in cities across India.

  • The PPPP9 model, involving the community, local government bodies, and other stakeholders, is a key factor in the success of the programme in Saharanpur. MCs can either implement solid waste management on their own, or outsource the process to other organisations while limiting its role to monitoring and facilitation. Community awareness regarding the importance of effective solid waste management, environmental and health hazards etc. is central to the process, so that households are willing to participate by undertaking primary segregation, and pay user chargers for waste being picked up directly from them.
  • The model should be revenue-driven to make it economically sustainable in the long run. Money can be raised by either levying user charges on households, or through taxes. Sale of recyclable waste and manures are other key sources of revenue.
  • MCs generally pick up waste from community bins. However, the Saharanpur model promotes picking up of waste directly from the source (households) for greater cleanliness and hygiene in the community. This would require more human resources in the form of waste collectors, in addition to the street sweepers.

Trying to make Saharanpur livable using simple ideas..

Markets have shrugged off poor monsoons in last decade..hence no problem?

April 24, 2015

In Indian economy, stock markets are a test for anything and everything. Whether any policy/event is good or bad is justified by stock markets. Rest does not matter.

Once again, there are predictions that monsoons are likely to be bad this year too. Ideally, given the pathetic state of agriculture and farmers, one would expect markets to react negatively. But this is not how it has fared in the past. Infact, it has ignored the bad monsoons in last decade. But history cold be tested this time:

Markets gave double-digit returns in 3 of the past decade’s worst monsoon years but the resilience will be tested this time.  The stock markets have not always followed the same trend as the monsoons in the past decade. Returns have ranged from 13 to 81 per cent during times of rain shortfall in these years.

However, this seems unlikely to continue in 2015. The stress of two years of rain shortage, the attendant negative sentiment and some earnings pressure bodes ill for returns this year, say experts.  “There have not been two years of bad rainfall in a row. If the monsoons are bad this year as well, there could be a major problem even in the irrigated areas, as groundwater levels would have been depleted. The markets are likely to be impacted,” said G Chokkalingam, founder & managing director, Equinomics Research & Advisory.

“In 2009, Indian equity markets were in recovery mode after a major selloff in 2007-08, so the rise was off a small base. Similarly, the markets had begun to rise in 2003-04, after a long consolidation since October 2001. Now, we are sitting on a large base, with markets having risen to all-time highs. So, even a small negative trigger can play spoilsport, though, traditionally, the impact of deficient rainfall has not been very large,” said Deepak Jasani, head of retail research at HDFC Securities.

2009 was one of the best years in terms of market returns, despite a poor monsoon. The S&P BSE Sensex gave a return of 81 per cent. Two of the other worst monsoon years also saw double-digit returns, according to an analysis of data from the stock exchanges and monsoon data from a report by Edelweiss Securities.

The next worst year in rainfall was in 2014, at only 88 per cent of the long period average (LPA). The market returns were 29.9 per cent. The year 2004 saw rain at 91 per cent of the LPA and the market return was 13.1 per cent.

Only if markets had reacted negatively previously things could have been better in terms of our agri policy. That is how the country has been governed for many years now..


How are new institutions created? How are old ones reformed?

April 24, 2015

William Galston and Elizabeth McElvein of Brookings have written a fascinating paper on the topic.

They summarise the paper here:

First, William Galston and Elizabeth McElvein initially examine the nature of institutions and why reforming them is so difficult. They then analyze how institutional innovation can happen, honing in on “acute” vs. “incubated” innovations. Acute innovations, they write, tend to occur quickly; they are dominated by individuals who are close to the locus of decision-making; the generation of alternatives takes place within the decision-making process, not prior to it; and the level of partisan conflict is relatively low. Incubated innovations take place slowly, frequently over many years. Because of this long march from private research to public visibility, these innovations tend to get caught up in partisan politics.


There is no single road to success for acute government innovations, Galston and McElvein conclude. Some reforms respond to acute problems at moments of crisis, while others seize windows of opportunity to address persistent problems. Some reflect the pressure of public opinion, while others are driven by consortia of insider experts and elected officials. And while every reform requires leadership, the locus of that leadership varies widely, from social movements and the private sector to the executive branch and Congress. Despite these variations, one fact remains immutable: the default setting of every form of government—and especially a constitutional republic with divided powers—is the status quo. Overcoming resistance and simple inertia is hard, all the more so because what is exists is real and familiar while the proposed change is imagined and novel, unfamiliar and therefore threatening. Although the details vary, it always takes energy and sustained commitment to move the status quo.

There is much variation for incubated institutional change, they find. Some new institutions—such as the CBO and the EPA— function well because their founding leaders define their mission and mode of operations in ways that make sense internally while building trust externally. Some succeed because their relatively narrow original mission persists unchanged for decades, as was the case with the FDIC. Other successful innovations begin with broader, vaguer missions but are flexible enough to shift with changes of leadership and circumstances. In its early decades, for example, the NSC reflected the differing operating styles of successive presidents as well as varying levels of presidential trust in the departments of State and Defense and in the intelligence agencies.

As these case studies show, Galston and McElvein argue, governing by crisis is expensive. Our inability to preempt failures of intelligence and financial oversight imposed costs measured in trillions of dollars for which we and future generations will pay. Looking forward, if we cannot figure out how to finance the maintenance and modernization of our infrastructure, efficiency and productivity will slow, and bridge and dam collapses will become increasingly regular.

Superb reading on how institutions are actually built/shaped…

When Peepli Live actually becomes alive..

April 23, 2015

The producers of the Hindi movie Peepli Live would have least imagined that their movie will actually become a reality someday.

It is tragic that it has indeed become a reality. In the movie the farmer Natha did not die but managed to escape all the tamasha. IN reality the script changed with the farmer Gajendra Singh Rajput actually  dying. The news channels are abuzz with each party blaming the other for the suicide by the farmer. I am not getting into all the allegations made by each party.

It is also comic as in how closely Peepli Live actually went around to forecast the kind of conversation our politicians are likely to have in such events. This clearly beats all projections our dalal street makes round the year.

What levels have we come to? On one hand our Prime Minister goes tom toming about India’s emergence as a global economic superpower. On the other we continue to have tragedies like these.

Rethinking macroeconomic policy…

April 23, 2015

Oliver Blanchard sums up the views on macro policy at recently held IMF/WB meetings.

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How China’s Asian Infrastructure Investment Bank is going to recast global development finance politics..

April 23, 2015

Nice summary of what AIIB will do to politics around world development finance.

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Forget smart, make cities livable…

April 23, 2015

Blogging has been absent for many days as ME was on a summer break. Blogging going to be more regular from now on.

Anjuli Bhargava of BS has a piece on Smart cities saying make our cities livable first. This is what ME has been arguing ever since the idea was first espoused:

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Moving Towards Free-Market Money..

April 15, 2015

A good discussion at Cato Institute.

One of the discussants mentioned about making Fed chief completely irrelevant:

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If everything Is getting better, why are people so pessimistic?

April 15, 2015

Steven Pinker Professor of Psychology at Harvard University discusses this much needed question. One one hand, Economists argue in many a research how things have become better for the world. Most of these economists are based in west who do not see economic progress beyond material wealth and luxuries. On other hand, disciplines like ecology and psychology are not so sure. They see a cost people are paying for all this economic growth.

Prof Pinker says  no matter the era, people always fell it was better in the past:

Evidence from academic institutions and international organizations shows dramatic improvements in human well-being. These improvements are especially striking in the developing world. Unfortunately, there is often a wide gap between reality and perception, including that of many policymakers, scholars, and intelligent lay persons. To make matters worse, the media emphasizes bad news, while ignoring the many positive long-term trends. At a Cato Policy Forum in November, Steven Pinker, the Johnstone Family Professor of Psychology at Harvard University and author of such books as How the Mind Works and The Blank Slate, discussed the psychological, cognitive, and institutional factors behind the persistence of pessimism in an age of growing abundance.

Why are people so pessimistic about the present? My own interest in this topic began when I became aware of historical data on violence and compared them with the conventional wisdom of respondents in an internet survey. I found that people consistently estimate that the present is more lethal than the past. Modernity has brought us terrible violence, the thinking goes, while the native peoples of the past lived in a state of harmony, one we have departed from to our peril. But the actual data show that our ancestors were far more violent than we are and that violence has been in decline for long stretches of time. In some comparisons, the past was 40 times more violent than the present. Today, we are probably living in the most peaceful time in our species’ existence.

This insight led me to write The Better Angels of Our Nature: Why Violence Has Declined. But it was not the end of my encounters with pessimism. After writing a book on war, genocide, rape, torture, and sadism, I thought I would take on some truly controversial issues — namely, split infinitives, dangling participles, prepositions at the end of sentences, and other issues of style and usage in writing. There, too, I found widespread pessimism. When I told people that I was writing a book on why writing is so bad and how we might improve it, the universal reaction was that writing is getting worse and that the language is degenerating.

There are a number of popular explanations for this alleged fact: “Google is making us stoopid” (as a famous Atlantic cover story put it). Twitter is forcing us to write and think in 140 characters. The digital age has produced “the dumbest generation.” When people offer these explanations to me, I ask them to stop and think. If this is really true, it implies that it must have been better before the digital age. And of course those of you who are old enough remember the 1980s will recall that it was an age when teenagers spoke in articulate paragraphs, bureaucrats wrote in plain English, and every academic article was a masterpiece in the art of the essay. (Or was it the 1970s?)

The fact is that if you go back to the history of commentary on the state of language, you find that people were pessimistic in every era. In 1961: “Recent graduates, including those with university degrees, seem to have no mastery of the language at all.”

He gets into psychology of pessimism:

these findings point toward an interesting question for a psychologist such as myself. Why are people always convinced that the world is going downhill? What is the psychology of pessimism? I’m going to suggest that it’s a combination of several elements of human psychology interacting with the nature of news. Let’s start with the psychology.

There are a number of emotional biases toward pessimism that have been well documented by psychologists and have been summarized by the slogan “Bad is stronger than good.” This is the title of a review article by the psychologist Roy Baumeister in which he reviewed a wide variety of evidence that people are more sensitive to bad things than to good things. If you lose $10, that makes you feel a lot worse than the amount by which you feel better if you gain $10. That is, losses are felt more keenly than gains — as Jimmy Connors once put it, “I hate to lose more than I like to win.” Bad events leave longer traces in mood and memory than good ones. Criticism hurts more than praise encourages. Bad information is processed more attentively than good information. This is the tip of an iceberg of laboratory phenomena showing the bad outweighs the good.

But why is bad stronger than good? I suspect that there is a profound reason, ultimately related to the second law of thermodynamics, namely that entropy, or disorder, never decreases. By definition, there are more ways in which the state of the world can be disordered than ordered — or, in the more vernacular version, “Shit happens.”

Superb stuff.. read on..

We think there is progress. Econs using their bully pulpits tell us the same. But most people think otherwise…

Why Indian mutual fund industry neglects North East India?

April 15, 2015

Chandan Kishore Kant of BS has a story.

The story is similar to limited banking in NE:

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Should monetary policy take into account risks to financial stability?

April 15, 2015

Blogger Bernanke does not think so. He says financial regulation is the best way to manage financial stability, even if it is limited in scope.

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Regulate the Carry Trade..

April 15, 2015

Harold James advocates the regulation of carry trade.

He says large volumes carry trade are distorting world economies:

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Azim Premji varsity goes philosophical in its new economics syllabus..

April 15, 2015

Azim Premji university  is getting more philosophical and historical in its economic teaching. It has a tie up with Soros INET and is now going to teach from latter’s economics undergraduate book – The Economy.

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Dear PM Narendra Modi, here’s why I will not be giving up my LPG subsidy

April 14, 2015

Superb stuff from Sandipan Sharma. Exposes the enormous double standrads of the current govt.:

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Who would mortgage their children?…Developed countries of all people?

April 14, 2015

Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority has this interesting speech on the topic.

He begins quoting from 1942 movie:

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