Archive for May, 2007

The latest GDP numbers

May 31, 2007

The latest GDP numbers for India have been released by CSO.

In 2006-07 the economy grew by 9.4% higher than 9.0% seen in 2005-06. The quarter-wise growth rates have been 9.6%, 10.2%, 8.7% and 9.1%.

If we look at sector-wise break-up, sectors in which growth has been higher than seen in 2005-06 are Manufacturing, Transport & Communication.  

I would try and put up a detailed picture later.


Assorted Links

May 31, 2007

1. Suman Bery says he is living in interesting times.

2. A good editorial from Business Standard on Power reforms. The summary is government needs to get some facts right on Power. Sample this:

While the government claims to have over 49,000 Mw of capacity “under various stages of construction”, Bharat Heavy Electricals Ltd, the main supplier of boilers and turbine-generator sets, which are the key components of a power plant, has orders for just 23,000 Mw…..

But what I loved was this:

And from where is the money to come for the proposed investment? The working group on power for the 11th Plan has estimated an investment requirement of $250 billion (about Rs 10,00,000 crore) for the power sector, including transmission, generation and distribution. This would require huge doses of private sector investment—domestic and overseas. Private investors do not go by glossy presentations. They need to know that they can turn off the switch on a non-paying consumer and find alternate buyers for the power they generate. They need to see open access in operation, rather than as a directive principle. Giving bulk consumers the option of changing their power supplier would ensure discipline on both sides—on the consumer and the supplier.

3. Another one from Economic Times on Indian railways. Sample this:

The objective of this article is to emphasise the need to put the financing decisions ahead of other decisions and the need to think out of the box in soliciting finances from the market. Private financing requires a totally different approach to project conception and formulation.

I have been blogging about this for sometime now. We need a detailed discussion on financing options for infrastructure.

4. Our Prime Minister has a supporter in Mr. T.T. Ram Mohan. He says salary system in India is to be looked upon. I like most of the articles from him as they give an alternative picture to most of the arguments/debates/facts on Indian Economy and Polity.

Agriculture sector is a problem area

May 30, 2007

I had posted about the slowdown in Agriculture sector here and here.

This morning newspapers are reporting about the speech given by Prime Minister on Indian Agriculture sector at National Development Council (opening & closing remarks). The summary is to allow states to draw up their own plans for agriculture and The Centre would commit Rs 25,000 crores over the next 4 years for various initiatives taken to provide impetus to this sector.

Various newspaper summaries: Economic Times, Business Standard, Indian Express, Financial Express. An interesting article from Ashok Gulati on how to reform Indian Agriculture sector.

I also came across that World Development Report for 2008 (An annual publication from World Bank) focuses on Agriculture for Development. The website says:

A reconsideration of agriculture’s role in development has been long overdue. Developing country agriculture is caught up in the far-reaching changes brought by globalization, the advent of highly sophisticated and integrated supply chains, innovation in information technology and biosciences, and broad institutional changes—especially in the role of the state and in modes of governance and organization.

One can take a cue on why government is so active in agriculture sector from this statement:

Although agriculture is a private sector activity, it is uniquely dependent on good governance, wise public investments, and carefully focused public policy. An important question examined in this report is how to determine when public policy should concentrate on capturing the new growth opportunities available to agriculture and when it should concentrate on capturing opportunities in other sectors of the economy to help people exit agriculture.

Looking forward to the report.

Assorted Links

May 30, 2007

1. Ajay Shah points to two superb articles in Wall Street Journal. The first one is by Eswar Prasad on capital flows and its impact on India; the topic which is of recent interest to me and I have blogged and summarised here. Eswar Prasad is also one of the co-authors for the paper on financial globalization I critiqued here

Prasad says that India needs capital account liberalisation for reasons other than the ones attributed in text-books. Then he picks a cue from the research paper talking about collateral benefits that financial globalization could bring to Indian economy.

Dani Rodrik criticises the article by Eswar Prasad saying one thing most of these studies is that capital inflows leads to appreciation of the currency which leads to negative effects on the economic growth. So, either India lets its currency float or sterilize the inflows.

2. IPO fees in Europe catches up with US for the first time.

3. Indian Mutual Fund industry continues to confuse me. I am yet to figure out how UTI Mutual Fund is the most profitable Mutual Fund (I posted about it here). And now I see this– Franklin Templeton launches high-growth fund. And then the news says it talks about investing in companies like Infosys, Bharti etc which are high growth companies. Well, but then what is new? Does it mean other funds are not growth funds? What is the new thing it has to offer? This is one aspect of MF industry in India which needs some kind of self-regulation. The industry players continue to throw me-too funds and there is no check on the same.

4. Just came across this interesting advertisement in Economic Times. There is an education program  from the IIT-IIM stable called Post Graduate Program for Executives for Visionary Leadership in Manufacturing. What does it mean?

More reports on Indian economy

May 29, 2007

I had posted about reports on Indian economy earlier as well ( here (from RBI) and here (From EAC) 

Eleventh Plan document is not yet out, but we have a number of reports from the Planning Commission which would form the base for the 11th plan. As the website says:

“In the context of the formulation of Eleventh Five Year Plan (2007-2012), the following sectorwise WORKING GROUPS/STEERING COMMITTEES/TASK FORCE have been set up by Planning Commission, to make recommendations on various policy matters.”

Most of the reports which have been completed can be seen here.

I was just reading the report on Savings which provides the base of the entire plan. The report is pretty neatly done and explains in detail how much savings need to be generated and the sources to finance the growth. It also includes scenario analysis and portrays different levels of growth and the different level of savings needed to finance the growth.

The report is a good read for someone who needs to understand how savings are computed in India and the trends so far. It has projections but does not discuss in detail. I am waiting for sub-committee reports on the same for some details.

The report also covers SME sector and the approach is still the same- give them more credit. I don’t know when would we have some policy paper discussng the role and development of equity markets for SME.

Incidentally, Planning Commission has an excellent report on role equity capital can play in developing SME sector and innovation in the economy. Somehow, it has few takers or atleast I am not aware of any useful discussion in the public domain on the subject.

Assorted Links

May 29, 2007

1. A good article from Economic Times on policy with respect to Indian Roads.

2. I was surprised to know that UTI Mutual Fund is the most profitable of the lot. Considering the fact that most of its equity funds are not top performersexcept for UTI Infrastructure Fund (I take equity funds as majority of the incomes come from equity funds ; read the above mentioned article), whether you take pure returns ( 5-year period) or you see it on the basis of alpha only fund you see performing is UTI Infra fund. This means the funds are not performing and still profits continue to go up. So what explains the higher profits?  I need to look at the balance sheets of the various fund houses.

3. A.K. Bhattacharya’s take on Export Promotion Councils.

4. A nice round-up on the Jan-Mar quarter performance of the Indian industry. In a summary, the sales have slowed but due to improving operating margins all seems to be well. The party pooper could be higher interest rates.

5. Jaimini Bhagwat is absolutely right on the state of education in science and technology. It is hightime Indian policymakers do something aabout improving the quality of overall education and dovert their attention from IIM/IITs etc. For people wanting a detailed analysis on the nature of science in India, see the Indian Science Report.

For an excellent discussion on why science and technology is important, read this interview from a damn-good thinker and economist Paul Romer.

6. Some good collection of papers by George Akerlof. Looks like a must read. Thanks to New Economist for the pointer.

The much-talked about PM speech

May 28, 2007

The media is full of comments on the speech Prime Minister gave to a CII meeting. You can read the speech here.

The comments: Business Standard, Economic Times, Indian Express

More on Capital Flows and growth

May 28, 2007

I had posted earlier on this topic here and here. The last one was a summary of an excellent survey (which is a summary of the empirical work done so far) which showed capital flows do not help in growth as theory suggests. It also showed that equity flows are better than debt flows.

I came across this another State of the art paper by Eswar Prasad, Raghuram Rajan and Arvind Subramanian titled Foreign Capital and Economic Growth. It has looked at some very interesting arguments:

“Developing countries that have relied more on foreign finance have not grown faster in the long run, and have typically grown more slowly. By contrast, we find that among industrial countries, those that rely more on foreign finance do appear to grow faster.”


First, the positive correlation between current account balances and growth is stronger among less financially developed countries

. In these countries, the range of profitable investment opportunities, as well as private consumption, for those that experience growth episodes, may be constrained by financial sector impediments, so investment can be financed largely through domestically generated savings.

Second,a developing country may actively choose not to absorb too much foreign capital in order to avoid exchange rate overvaluation. In turn, this ensures that the country’s manufacturing/tradable goods sector is competitive, thus allowing it to play its customary important role in fostering growth.

The paper is different as it mentions the role of financial system in absorbing capital flows which has been missing in previous papers (as finance has never been really thought as important in most previous work on economics). This paper attempts at correcting that biased viewpoint.

Further the paper adds:

The apparent perversity of overall foreign financing is even more dramatic when one examines the allocation of capital across developing countries……within this group capital should flow in greater amounts to countries that have grown the fastest, that is, countries that are likely to have the best investment opportunities. Does it?

Their research shows that it doesn’t infact capital flows mostly to medium and low growth developing countries!! Another puzzle is that when we look at FDI it does flow to top performing developing countries.

It is an excellent analysis once again from the team. However, the paper is a bit confusing as somehow the flow is not as clear-cut as it is in most Rajan papers. Perhaps it is missing Zingales (Rajan’s co-author in most papers) factor.

Summary of all papers I have read so far including this one: There is no relationship between openness of an economy to economic growth.  

Assorted Links

May 28, 2007

1. Both Goldman Sachs and Nasdaqplan to float seperate exchange for private equity/venture capital deals.

“Last year, according to Nasdaq, $162 billion of capital was raised through unregistered private placements compared with $154 billion through IPOs, which are registered with the Securities and Exchange Commission…..Under SEC rules, companies can sell securities without registering them as long as issues are limited to qualified institutional buyers and investors with at least $100 million of assets and there are no more than 499 stockholders.”

2. Read about the Norway Pension Fund.

” Norway has amassed a fortune of more than $300 billion over the last decade, thanks to its profits from oil exports. Yet few countries are more ambivalent about their vast wealth than this modest, socially conscious society of less than five million people.

So rather than managing their monstrous nest egg simply for the best returns, the reluctant billionaires of Norway are using the money to advance an ambitious ethical code they established in 2004 for their oil reserve, known as the Government Pension Fund.

Norway’s investment choices have become a focus of attention in the last nine months over the exclusion of Wal-Mart, the American retailer whose big-box stores do not exist in this pristine country.”

3. It is not just that World Bank, IMF are in crisis we have Asian Development Bank joining the race as well.

4. Check out this mapwhich gives a snapshot of how your country fares in terms of business conditions. It is great collaboration between World Bank and Google Earth.

5. Heterodox economists?

Thanks to Finance Professor for 1, Marginal Revolution for 2 & 5.

Using Behaviour Finance to understand savings in India

May 25, 2007

I have been trying to get this database provided by Finance Ministry of India for quite sometime but the link was not working. Now it has been fixed and I am hooked. Basically, it has been derived out of a survey done amongst the individuals employed in the unorganised sector asking numerous questions on their saving and investment behaviour.

The methodology and the questionnaire have been provided as well. The database is huge (almost 34 MB) so people with bandwidth constraint may have a problem. But those that can, should download it for some pretty interesting analysis.

It shows that people prefer fixed income securities for their savings, have little awareness about Mutual Funds, shares and so on. Well, what got me the most interested was this question (abridged verion):

Suppose you have Rs 1000 with you which you want to invest. Here are the three choices given to you:

  1. After one year your Rs. 1000 could become Rs. 2000 or could also become Rs. 500
  2. After one year your Rs. 1000 could become Rs. 1200 or could also become Rs. 800
  3. After one year your Rs. 1000 would become Rs. 1050 and you do not loose anything

What do you think the choice would be? Before that let us rank these choices:

  1. Assuming 50:50 probability of the event happening, the expected value after year 1 is ( 0.5 * 2000 + 0.5 * 500 = Rs 1250)
  2. 0.5 * 1200 + 0.5 * 800 = Rs Rs 1000
  3. Rs 1050

Hence going by classical finance theory the choices in order are 1,3 and 2. But the survey revealed something different choices:                                                            


Choice 1 Choice 2 Choice 3
Urban   10.76% 14.40% 74.85%
Rural   9.85%  12.98%  77.17%
All India  10.31% 13.70%  75.99%

These results would definitely make a behavior finance follower smile and classical finance follower frown. Choice 3 wins hands on, despite Choice 1 offering higher expected value. Both at rural and urban the favorite was choice 3. People simply hate any losses on their money.

Well, the result is nothing new and has been explained by nobel laureate Kahnemann and his colleague Tversky (who missed out on the nobel as he had passed away before the nobel). The theory was  called Prospect theory and was developed as back as 1979. The basic idea is simple: given a position of profits humans become risk averse and when there is a position of losses humans turn risk-seeking.

Well, I wanted to point this out as there have been many research papers explaining this behaviour in US and other markets, but I haven’t come across something like this for Indian markets. Overall, the database has some very interesting points which I would try and cover later.

Assorted Links

May 25, 2007

1. You have to read this speech from India’s finance minister Chidambaram. It is given at a CII conference on Mumbai as a whatever International Centre. He simply pours his heart out. Sample this:

“The last time I spoke about Mumbai, and I said, with a very careful choice of words, that I would like Mumbai, the city of Mumbai to have a large degree of autonomy in governing itself because that is how large cities govern themselves. The next morning I read that someone was threatening to cut off my tongue. The point is not what powers Mumbai has, but what kind of governance structure Mumbai will have, in order to effectively provide the services, which Mr Entwistle mentioned. “

2. Law firms mostly have a partnership structure, here we have the first law firm which has listed itself on the exchange.  It is a great development for capital markets, after private equity firms (Blackstone) we have a law firm accessing capital markets. It is an Australian firm and is called Slater & Gordon.

3. A wow article from Austan Goolsbee(Univ of ChicagoProfessor) on why Mr Warren Buffert’s strategy of picking his successor by giving 3-4 top candidates USD 5 billion and picking the best performer after 2 years of fund management. Sample this:

“For all of Mr. Buffett’s reputation as the ultimate nonmutual fund, he may have just fallen into one of the biggest mutual fund traps of all — forgetting how incentives affect fund managers’ behavior.”

Further he adds:

“In a fund doing well but not stellar in the first three quarters of the year, the manager has a clear incentive to take big risks. If the risks pan out, the payoff in the last quarter can raise the fund’s return enough to get it into a top 10 list, say, and attract a huge number of new investors. If the risk doesn’t pay off, the return will be lower but the fees won’t be too much lower than they were before. The study showed that managers responded rather directly to these incentives. The managers heading toward the top of the ranking increased their risk-taking significantly in the last quarter of the year whereas those in the middle played it extra safe. “

4. The significance of Shanghai Stock exchange touching 4444. Read on

Thanks to Ajay Shah for 1, Finance Professor for 2 and Greg Mankiw for 3.

Another good report on Indian economy

May 24, 2007

I had posted sometime back about some very useful reports on Indian Economy from RBI. I had also summarised the report on real economy here.

However, I found another very interesting analysis from Economic Advisory Council to the Prime Minister headed by Dr. Rangarajan.This is perhaps more analytical as it actually looks at reasons behind growth rather than a plain summary of facts as RBI does. It is natural as RBI leaves the analysis to people like us where as EAC is actually doing the analysis for the Prime Minister as the Terms of Reference for EAC suggest:

  1. Analyzing any issue, economic or otherwise, referred to it by the Prime Minister and advising him thereon;
  2. Addressing issues of macroeconomic importance and presenting views thereon to the Prime Minister. This could be either be suo-moto or on a reference from the Prime Minister or anyone else;
  3. Submitting periodic reports to the Prime Minister on macroeconomic developments and issues with implications for economic policy;
  4. Attending to any other task as may be desired by the Prime Minister from time to time.

Well, now to the analysis bit of the report. It is basically an old report and most of the analysis is for 2006-07. However, it has some interesting points:

  • Has our growth (from 2003 onwards) been consumption driven? (page 18) The report comprehensively argues that yes, it has been so far. The idea is that growth in personal credit given by banks has increased by nearly 50% CAGR between 2003-06 and the growth for industry is just about 24%. And the share of personal credit in outstanding credit has increased from 15% in 2002-03 to 25% in 2005-06. Whereas for industry it has reduced from 41% to 39%. So a large part of credit has gone for personal use and hence we can say that growth has been consumption driven. The growth in credit happened as we had low inflation, low rates etc and as both rise, consumption would slow and so would the  growth.

Here, the report makes a good point that Indian policymakers need to shift the growth momentum from consumption to investment, exports etc. It also makes a comparison with China and rightly says Indian and China are mirror images to each other. Where in China the growth is more export and investment driven and has to make it more consumption driven, in India we have a completely opposite case. Very interesting indeed!

And how do we make growth more investment driven? By easing supply-side measures. One it has to provide better infrastructure and two it would have to lower its deficit so that interest rate for raising capital for infrastructure projects goes down. So the government has to do a tight-rope walk of balancing the deficit on one hand and spending on infrastructure on the other hand.To be honest, the argument that deficit needs to be lowered so that cost of capital comes down is a point I had not really thought.

  • The Problem with Agriculture Sector (Page 24): This is also explained very well in this report. As per the report, except oilseeds, in all the foodgrains both our production and yields have slowed down. In 2005-06, all the foodgrains show lower levels than highs achieved in previous years. The yields, which showed improvement in 1970s and 1980s, have slowed down.  

The problem is acute in wheat and pulses and in most of the years the actual production has been lower than targeted.If I add my previous analysis on economic conditions in India, which also talked about poor growth in agriculture, the problem looks quite serious.A good report and it is pretty concise as well (just 46 pages of easy reading). Happy reading.

Revisiting Globalisation and Inflation

May 24, 2007

I had posted earlier on the subject as well where I put forward a lot of empirical work arguing that globalization should be a factor for lower inflation but so far the evidence has not been conclusiveenough.

I just came across two pieces on the subject which say globalisation has infact lowered inflation.   One is a speech by Randall Krozner (Fed Governor) and another is a paper by BIS team including Claudio E. V. Borio and Andrew Filardo. Here is the abstract:

There has been mounting evidence that the inflation process has been changing. Inflation is now much lower and much more stable around the globe. And its sensitivity to measures of economic slack and increases in input costs appears to have declined. Probably the most widely supported explanation for this phenomenon is that monetary policy has been much more effective. …. In a large cross-section of countries, we find some rather striking prima facie evidence that this has indeed been the case. In particular, proxies for global economic slack add considerable explanatory power to traditional benchmark inflation rate equations, even allowing for the influence of traditional indicators of external influences on domestic inflation, such as import and oil prices. Moreover, the role of such global factors has been growing over time, especially since the 1990s. And in a number of cases, global factors appear to have supplanted the role of domestic measures of economic slack.

I have just finished reading the speech and am yet to read the paper. The speech is quite good a la Krozner.

Update: There is another fiery speech from Jeff Lacker (Richmond Fed President) on why Central Banks are responsible for inflation and inflation expectations.

How do we finance infrastructure?

May 24, 2007

After many estimations, here is another article by Economic Times which projects a total funds flow of USD 456 billion in the 11th plan. The article bases its projections on a recent assessment by Prime Minister’s Committee on Infrastructure (CoI) report.

In 10th plan the expenditure was about USD 170 bn. So it means nearly 4 times the expenditure is projected in 11th plan. The sector-wise allocation is as follows:

Sector                             10th plan (%)   11th plan (%)
Power                                               36.1         28.1
Roads                                               16.2         19.7
Railways                                          10.4        14.5
Telecom                                           11.5         12.4
Irrigation                                          14.6          9.8
Water Supply & Sanitation                   8.0          5.7
Ports                                                 0.4          4.7
Airports                                            0.5          2.2
Gas                                                     1.1          2.1
Storage                                              1.2          0.9
Total                                      100        100

I have read many of these reports which project how much finance India needs to improve its infrastructure in India. However, I have yet to come across a good report which tells how this finance is going to be raised? Where is it going to come from? Thin air?

It is infact an aspect of most of the reports we have in India. Somehow, the importance of financial system is ignored in quite a few reports made by Indian policymakers.

For instance, I was reading this report on Inclusive Growth by Planning Commission which does not talk about finance at all. (I do not understand the focus on inclusive growth as most of economic policies have been oriented towards the poor/rural/down-trodden etc section of population. I would write on this later.) How do we achieve inclusive growth without making finance available to those whom you want to include in the growth story.

Now, to the main story infrastructure financing. I have done some simple research and see the numbers just do not add up. I do not mean it cannot be achieved but perhaps the debate has to move more to means rather than ends. Ajay Shah points out that we need to increase financial innovation to make securitisation work.

The same has to be applied in other areas as well. Policymakers should realise that finance is critical in whatever we do and needs to be given its due.

Not all is that bad though. We have another committtee looking at financing infrastructure which as per the Terms of reference should have submitted the final report by 31st March, 2007.  Finance Minister does mention it in his budget speech this year as well (search for the word Deepak in the file) but after almost 2 months we still don’t have it in public domain.

Assorted Links

May 24, 2007
  1. Finance Ministry seems to have put up its case to allow Public Sector Units with surplus cash to invest in Mutual Funds. The surplus amount the article tells me is Rs 2,50,000 crore. Well to give you an idea of how huge the figure is consider this: Foreign Institutional Investors invested USD 9.3 billion in 2005-06 which when multiplied by 45 ( to convert into rupees) is about 41,850 cr and this amount is almost 6 times.
  2.  The Great Indian PMS (Portfolio Management Services) trick. A very apt title indeed.
  3. Are Hedge Funds worth it? The article says no. Here is a summary:

Last year was actually a pretty tough year for the industry. Because hedge funds tend to make a lot of countercyclical bets — thus the name — they can often turn a profit even when the stock market falls. When it’s rising broadly, though, many struggle to keep up. Last year, the Standard & Poor’s 500-stock index jumped 14 percent, while the average hedge fund returned less than 13 percent, after investment fees, according to Hedge Fund Research in Chicago.

Thanks to Marginal Revolution for 3.

How to Catch up with Australia in Cricket

May 23, 2007

This is my second post on cricket. The first one discussed how one sided one day internationals had become. The previous post covered an analysis which gave a general picture and not a country-wise analysis. However, I believe Aussies would have featured in most of the one-sided wins (obviously on the winning side).

Here, is a  very interesting discussion on ‘How to catch up with Aussies‘ between Sanjay Manjrekar, Tony Greig and Ian Chappell.

Ian Chappell asserts that it is not as if Aussies have raised their game to a new level, rather it is the other countries that have lowered their standards.

You can’t tell me that Glenn McGrath is a better bowler now than he was in 1999 and in ’99 Australia still had Shane Warne. I have trouble believing that Australia have gone to another level, I think it’s the other teams that have gone to another level and sadly it’s down; and that I think is a major problem with world cricket.”

Tony Greig agrees to the statement but adds that Aussies are fitter now and are more athletic in the field. He says a few players have been replaced and the current ones are fitter. Ian Chappell raises some really strong points over the Aussie brand of cricket.

One of the reasons why Australia is better than the rest of the world is because of the system that produces their cricketers….. When people start telling me that it’s the academies and the coaches that make Australia better these days, I tell them that that’s a load of rubbish.The reason why Australia is a good side now, is the same reason why it was good side in 1948 – it’s because of the system that is producing the cricketers.  The system starts with the younger cricketers, then goes through the clubs and then to the first-class level. It’s a good system but not as good as it was when I started for the simple reason that when I came into club cricket, I ended up quite often, playing against Test match cricketers quite occasionally. And when we played first-class cricket – and we played eight Shield matches those days – we would come up against the Test match players definitely five times and probably six times out of the eight games

Further he gives a very good instance of how Aussies keep coming back: The reason why it’s a good system is because you get tested – whether as a batsman or as a bowler – many times on the way through…….. when West Indies were piling it on in the first few overs of the finals and Australia still managed to come back, how Australia keep managing to come back whereas the other teams fail to do so and that is because of the system. Bracken was the guy who got Chris Gayle on that occasion. Now Bracken has probably been mauled a few times on the way through, as a young cricketer, as a club cricketer and as a first-class cricketer and he’s found a way to come back from that and that stood him in good stead when he got to international cricket. So, atleast he knows that he’s got a way to come back. It may not always work but he knows that atleast he’s got something to fall back on.

He adds a point about other Cricket Systems:

The English system used to be perhaps as good as Australia’s. The Indian system – with the amount of players that they have got – should be able to match Australia in the same way but they don’t seem able to do it. The other countries – well, I’m not so sure about them.

Another aspect they agree to is that most of the countries have more or less acknowledged the fact that Aussies are going to be extremely hard to beat (which is true and quite sad).

Another interesting thing discussed was as West Indies went down-hill after being champs could the same happen for Australia? Tony Greig says no, it will not happen.

One important point to note (and not discussed) is that WI lost a lot of talent to other sports (majorly basketball) which were more rewarding. Whereas Cricket is not really as popular in Australia (Rugby, Aussie Rules are more popular) hence the threat of loosing out talent to other sports is not really there.

So improve the domestic cricket system goes the advice, which is a cliche by now.  As Ian Chappell suggests, I am sure it is not that tough to improve the system, then why doesn’t it improve? All you need is to bring competition in all forms of domestic cricket – make sure international players play domestic cricket, make school cricket competitive etc etc….

I was wondering if I could apply the various growth and development theories to this whole episode. More on this later as I need some thinking to do. It could make for a very interesting paper.

The Indian Government Performance Report

May 23, 2007

After a report on Mumbai as an International (whatever) Centre, here is another one from the Indian government. This time it is a performance report of the current government (called United Progressive Alliance).

It is called ‘The Report to the People’ and is available here. It has a foreword from the Prime Minister saying:

“The Report to the People, published every year by our Government, has set a new benchmark for accountability in governance. This comprehensive report listing all the policies adopted, projects launched and programmes implemented is a unique demonstration of our commitment to being accountable. In a democracy, people have a right to know what their Government is doing in fulfillment of its mandate. It is my sincere hope that the contents of this report are widely disseminated and are discussed by our people.

This year’s Report to the People, putting together initiatives taken since May 2004 when our Government took charge, shows that the policy agenda set out by the constituents, allies and supporting parties of the United Progressive Alliance in the National Common Minimum Programme has been substantially implemented. It is my sincere hope and firm belief that by the end of our tenure in Government we would have delivered more than we had promised.”

I have gone briefly through the report and found it really boring as it is all in words. The report could have been more readable by adding tables, graphs etc conveying what was actually promised and what has been achieved so far sector-wise and year-wise. It helps a lot in in analysis.

For me to make a comparison as to how the government has fared in 2006-07, I would have to read the previous report and this makes the whole task pretty arduous one.

Nevertheless, it gives some idea about various government projects and poverty schemes (do they help at all??) and the status.

Some newspapers have given a nice summary of the various achievements and disappointments- Business Standard, Financial Express (by Rajiv Kumar)

My take on the performance is what most people would agree on- India is going through a golden run and the time is ripe to usher in some big and tough reforms and this government has a formidable team which has been disappointing in almost all the aspects.

Assorted Links

May 23, 2007
  1. The Indian Markets are in correction mode, says Akash Prakash in Business Standard.
  2. Record breaking Initial Public Offers this June 
  3. There is an interesting edit in Business Standard which advocates Equity financing for infrastructure. The summary is:

Like private equity helped in developing telecom sector (Warburg Pincus picked Bharti Telecom, The Commonwealth Development Corporation, then a fund backed by the UK government, invested in BPL), the same could be repeated for other infrastructure sectors as well.I don’t really quite agree with the approach though. For private equity to come successfully in other infrastructure sectors, what is needed is that investor should be able to get some return on capital which they did in the case of telecom, as the article rightly points out.What it misses is the classic distinction between various kinds of goods. The goods are classified on 2 basic principles:

  • Excludable vs Non-Excludable: A good/service is excludable if you can price it and as a result only who can pay will get the good.  Unlike a non-excludable good where pricing is difficult for instance how do u make someone pay for street lighting.
  • Rivalry vs Non-Rivalry: A good service has rivalry characteristic if consuming a unit of the good means nobody else can consume it.

And on this basis we have 4 kinds of goods.

The challenge is to move goods to the excludable category i.e. they can be priced. Once that can happen it interests people to produce/finance the good.

As pricing was possible with telecom, it got private equity. How does one price roads, ports etc. The answer is using tolls for roads, some pricing arrangement for port-users but then this takes time. Unlike telecom, the other infrastructure projects take a lot of time to become fully operational. Hence you need some kind of incentive for the investor to invest in these projects and that is where long-term debt come in. It gives him some revenue inflow at-least.

RBI curbs growth in ECB

May 22, 2007

1. RBI lowers the interest rate a company can pay for Borrowing Abroad (popularly called External Commercial Borrowing):

Average Maturity Period

All-in-Cost ceilings over
6 Months LIBOR*



Three years and up to five years

200 basis points

150 basis points

More than five years

350 basis points

250 basis points

The idea is to restrict the inflow of ECB as lower interest rates would mean only those corporates would be able to raise loans which have stronger fundamentals. As per RBI’s latest Macroeconomic survey on April 2007, the net ECB figure for Apr-Dec 07 period is USD 9.3 billion, more than double that of USD 4.4 billion seen in Apr- Dec 06.

The question that comes to mind is why restrict ECB inflow? Some points:

  1. As ECB is nothing but debt flow, it carries risks as I mentioned in my previous post.
  2. RBI would be worried as it means increasing dollarisation of liabilities of Indian corporates’ Balance sheets. With assets in rupees and liabilities in dollars, it could lead to asset-liability mismatch if some projects go awry. This was also one of the main reason responsible for South-East Asian Crisis in 1997.

These are tough times for any regulator. The free market theorists would trash RBI move on the basis that a company would face the consequences if things don’t work out.

RBI, I would believe is not really worried about corporates as much as it would be worried about network effects of such an event on the economy. It has been seen that increasingly financial markets tumble taking a cue from some event which may not really explain why the fall at all happened. This is the biggest challenge facing the regulators and policymakers.

Assorted Links

May 22, 2007
  1. Prithvi Haldea is bang on with this article on Corporatisation of Mutual Fund Industry in India.
  2. A nice articleby Mukul Asher on New Pension System in India

Thanks to Ajay Shah for 2

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