Archive for August 24th, 2007

Report on agricultural loans in India

August 24, 2007

RBI has placed a new report for public comments. This one is on further simplifying the procedures and processes for agricultural loans, especially for small and marginal farmers.

The press release states:

It  may be recalled that the Reserve Bank of India had constituted a working Group under the Chairmanship of Shri C.P. Swarnkar, Chairman and Managing Director, Syndicate Bank to suggest measures to further simplify the procedures and processes, thereby reducing the cost and time for obtaining agricultural loan, especially by small and marginal farmers. The Report of the Working Group was submitted in April 2007 and Reserve Bank has already implemented the following recommendations of the Group in the Annual Policy for 2007-08 :

  • The banks were advised to immediately dispense with the requirement of ‘no due’ certificate for small loans up to Rs.50,000 to small and marginal farmers, share-croppers and the like and, instead, obtain self-declaration from the borrower.
  • Further, banks were advised to accept certificates provided by local administration/panchayati raj institutions regarding the cultivation of crops in case of loans to landless labourers, share-croppers and oral lessees. This would help overcome the problem faced by the banks in lending to landless labourers, share-croppers and oral lessees due to the absence of documents verifying their identity and status.
  • Recognising role of financial/credit counselling towards enhancing the quantity and quality of agricultural credit, each State Level Bankers Committee convenor has been asked to set up a credit-counselling centre in one district as a pilot and extend it to all other districts in due course.

On a quick glance over the report, the findings are largely what one would expect. The farmers have to spend a lot of effort in getting a loan  application done and numerous hassles are involved.

The suggestions are many. However, this para explains all the thinking:

The Group is of the view that while a lot of effort has already been made to simplify the procedures and processes of agricultural lending, the real benefit of simplification will accrue to the farmers if there is a substantial change in the lending methods and attitudinal change at ground level.

So enough preaching has been done. Time to practice.

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Inflation Targeting and Impossible Trinity

August 24, 2007

I had written some days ago on impossible trinity. It covered a speech from BIS Deputy GM who explains the mechanics and presented evidence on the same. He says most Asian Pacific nations have been targeting exchange rates.  The currencies have hardly appreciated over the years despite capital inflows being a problem with most. Further, couple of countries have inflation targets as well but still seem to be targeting exchange rates as well.

Now, this was just about Asian- Pacific countries. How about others? Impossible Trinity says one you allow for free capital flows, a country can go for either exchange rates stability or price stability but not both.

Now, some countries have adopted exchange rate stability (by following some exchange rate regime) and some have adopted price stability (by following inflation targeting (IT)). So which is better so far?

This paper from Andrew Rose does answer the question in his own way. The title is also quite stimulating – “A Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods, Reversed”. Infact,if you look at it the title reveals the findings right away. Inflation targeting is doing quite well so far. The abstract:

A stable international monetary system has emerged since the early 1990s. A large number of industrial and a growing number of developing countries now have domestic inflation targets administered by independent and transparent central banks. These countries place few restrictions on capital mobility and allow their exchange rates to float. The domestic focus of monetary policy in these countries does not have any obvious international cost. Inflation targeters have lower exchange rate volatility and less frequent “sudden stops” of capital flows than similar countries that do not target inflation. Inflation targeting countries also do not have current accounts or international reserves that look different from other countries. This system was not planned and does not rely on international coordination. There is no role for a center country, the IMF, or gold. It is durable; in contrast to other monetary regimes, no country has been forced to abandon an inflation-targeting regime. Succinctly, it is the diametric opposite of the post-war system; Bretton Woods, reversed.

Now why Bretton Woods (BW) reversed. BW advocated fixed exchange rates (backed by USD) and following an IT means floating exchange rates. As latter is quite successful, it is BW reversed.

This is a short paper (31 pages) compared to his peers and has a lot of food for thought. The paper focuses on IT and exchange rate stability is just an add-on. It is largely empirical but explains  the process and findings in English.

The evidence that took me most by surprise was that countries that have IT have lower exchange rate volatility than others.

This paper is different as earlier papers looked at whether countries that have adopted IT have actually managed to lower inflation or not? So, they compared countries that have adopted IT vs those that have not. Some found positive evidence, some found the evidence questionable. So as a result, IT despite being pretty popular has its criticisers as well.

This paper looks at the evidence from the foundations of Impossible Trinity i.e. exchange rate and capital flows. And yes, the evidence is IT so far looks a good strategy.

A nice paper. Very neatly written. If you can absorb the statistics a bit, it is an excellent read.

Assorted Links

August 24, 2007

1. WSJ Blog points Fed exempted Citi from the limit on how much its bank unit, Citibank N.A., can lend to its affiliated broker-dealer, Citigroup Global Markets.

2. Rodrik offers food for thought. This time on property rights and WTO.

3. PSD Blog points out to this excting development- Allianz would use Google Earth to monitor risk.

4. Saumitra Chaudury of ICRA explains the sub-prime crisis using mythology. BS points out to how sub-prime has started affecting corporate bond from Indian industry that are traded in foreign markets.

5. TCA points to a new paper on logistics. He is taking quite an effort to point to some titbit research done in Indian schools.

6. Ajit Balakrishnan points to interesting development in online education.


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