Archive for November 8th, 2007

How do we analyse a Financial System?

November 8, 2007

The website of Reserve Bank of New Zealand is one of the best as far as Central Banks.

Now coming to the topic. The speeches of Alan Bollard (their governor) are full of insights and very simple. I just read through this speech he gave in Jan 2007. It is a superb speech and a lesson for anyone who is looking at analysing a financial system. The layout and presentation are high quality stuff.

Read it for finer details.


Understanding Savings & Invesments in India

November 8, 2007

Understanding the flow of savings and investment in an economy is vital. It has never really been clear to me the way they are calculated within Indian Statistical System. CSO has explained the methodology but it not very clear.

Saumitra Chaudhury (of ICRA and EAC member) explains in his note the mechanics of the same. (It is an old paper in 2005 but is very relevant) 

The note begins by looking at the possibility that savings may be overestimated in India. In 2003-04, when savings as a % of GDP was 28.1% and investment is 23% of GDP this view gained importance. In order answer the question he explains the way savings and investment are estimated in India.

Read the paper for details.

The findings are also pretty interesting. He turns the hypothesis on the heading. He says savings have risen but it very much within the trend. Infact it is investments which are underestimated!

He adds,  savings are not a constraint in India anymore.

….if savings are close to 28 per cent of GDP, then financial resources cease to be a constraint to growth. Which marks the departure of the final member of the trinity of constraints that have ever since Independence been viewed as the principal constraints to economic growth in this country; the other two—food and foreign exchange—having had made their respective exits some years earlier.

So what are the constraints then?

The only reason investment may not materialise where there is a felt need, is the absence of a meaningful revenue model, which for the most part derives from the weakness in the regulatory framework and administrative inefficiencies.

Further expenditure inefficiencies are endemic to the government sector and the only good thing about it is that the productivity gains that are potentially attendant on improve- ments in expenditure efficiency are so vast that even modest efforts in this direction are bound to yield enormous dividends to the economy.

The danger lies in trying to continue the public sector programme unreformed and unreconstructed, drawing from the larger pool of financial resources that exist in the economy. Hopefully the downside dangers will not materialise.

The last point is a well made point. It is now emerging as a consensus in most policy research that public sector is there to stay. The best idea is to initiate reforms in the public sector and not try and do away with it.

Assorted Links

November 8, 2007

1. WSJ Blog summarises the 5 speeches given by FOMC members yesterday.

2. Mankiw points to Bush’s speech when awarding President’s medal to Becker.

3. Rodrik pulls up Martin Wolf for using Market Cap as a % of GDP as an indicator of wealth.

4. PSD Blog points to a new report that suggests that there is little respite for poorest of poor

5. ESAP Blog points out to the 2nd inconvenient truth about Indian economy. This one is a big surprise. It says India has had 6% fiscal deficit since 1980s (which should have restricted growth) but it has still grown over 5% since 1980’s.

much of India’s deficit during the 1990s was due to reform-induced losses in revenues–from liberalization of trade taxes and reduction in financial repression.  The high deficit was not due to higher spending……So the very factors that contributed to high fiscal deficits made the Indian economy more competitive domestically and abroad, setting the stage for a strong growth performance.

I am not very sure of this truth as I (and many others, for instance see this report from EAC) have always felt the contrary. India has been criticised hugely for its high fiscal deficits and that is why we have FRBM Act which seeks to control the deficits. Moreover, the blog points to just one paper justifying the truth which I believe is not enough. They should have pointed out to many more papers.

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