Archive for May 24th, 2007

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.

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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.


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