Archive for August 25th, 2009

Looking at rear view mirror is as important Sirs!!

August 25, 2009

I was reading this Mint interview of BSE ‘s new Chief Madhu Kannan. It is a pretty interesting interview telling you about stock exchanges as a business. On one of the Qs he says:

Why is BSE a laggard?
You have got to go back and look at what are the key drivers to making an exchange a successful entity. Innovation is a key point. And very closely linked to it is—you have got to be talking to your customers. You have got to understand what is going on, what your customers want, to be able to be responsive.
The exchange business is a very interesting business. It has got the elements of a technology company; it has got the elements of a regulatory entity; and you also have got to get very close to the customers.
I don’t want to run this car by looking at the rear-view (mirror). You’ve to look forward. I think, maybe, a better question is what are the issues I am focusing on as part of our strategy.
I read this rear view mirror analogy too often by CEOs (However CFOs say this). It is important to be forward looking and drive the car looking ahead. However, looking at the rear view mirror is as important as you never know what hits you from behind. History always repeats and has to be understood properly. Be it economic history or business history, it is very important.
It would be better if CEOs instead say- I would want to drive the car looking ahead but have my eyes on rear view mirror as well.

Inflation Targeting Research source

August 25, 2009

As one goes thought the huge Jackson Hole Conference 2009 material, you are bind to come across tons of additional references and stuff. There is a tip for all those in a hurry and not enough time for reading papers (which applies to most). Atlesast I found it useful-  Just read the comments by econs on the various papers. It gives you a broad idea on what the paper is about and some criticism as well!

So I was reading this comment/speechby Mark Carney of Bank of Canada. He comments on paper from Carl Walsh. The speech is quite interesting as it discusses the trade-offs a central bank faces while trying to balance price and financial stability (More on this later).

The speech points to this very useful sourceby Bank of Canada on inflation targeting. It points to useful papers, speeches, conferences on ITF and issues. You can subscribe to the new developments here.

Importance of teams in reforms

August 25, 2009

I was reading this short note from Growth Commission on importane of leadership team in reforms. The note says:

What do Botswana, Cape Verde, Malaysia, Mauritius, and Taiwan (China) have in common? They belong to an exclusive group of economies that grew out of poverty in less than 30 years. They also initially relied on a small, dedicated team of experts to get the job done. These teams brought to bear world-class skills along with direct access to the top level of government and a large development budget. That combination of skills, access, and resources gave them the clout to steer an ambitious reform agenda through vested interests and layers of government.

The 6 functions of these teams were:

  • Designing development strategies
  • Leading the dialogue with the private sector
  • Grooming political leaders
  • Leading critical policy negotiations
  • Mobilizing and allocating resources
  • Compelling the administration to act





Fairly interesting stuff. The reform teams are pretty critical in emerging economies and now even in developed economies. Romer, Summers et al have a huge task at hand to revamp and reform US economy and financial systems.

Anyways what I think is missing in this note or deserves special mention is the indifference of these reform teams to interest groups. In any reform strategy, there are all kinds of people looking to seeks rents from a certain policy. This includes the policymakers themselves. Most of the time policies are made to suit their families and kins. It will be very interesting to read any stuff by Growth Commission on this aspect. How did these teams do away with these special rent seeking interests? As the rent seekers are usually very powerful people and could be major stumbling blocks to any reform, keeping them away is the key. As Jaimini Bhagwati points, it is one of the key challenges for India as well.

Primer on India’s Goods and Services Tax

August 25, 2009

If there is one area of economics which I would want to improve, it is taxes. I just don’t understand them at all. I just understand (that taxes are critical in every macroeco/fin eco equation/identity) the basics and the famous dictum – Nothing is certain but death and taxes. But with all those regulations and rules, it just gets too much for me. I understand VAT but that is just it. I don’t know the details at all which is very important as VAT is justa  theoretical concept. The practical aspect lies in details.

So, when the Goods and Services Tax was initiated by Indian Fin Min in 2006 Budget speech, I just gave it a big miss. He said:

It is my sense that there is a large consensus that the country should move towards a national level Goods and Services Tax (GST) that should be shared between the Centre and the States. I propose that we set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax. That is the foundation of a GST. People must get used to the idea of a GST. Hence, we must progressively converge the service tax rate and the CENVAT rate.

Now as talks abiout GST picked up, I was like what is this? Thankfully Google helped.

I found this excellent primer by Sudhir Halakhandi, a Chartered Accountant. Basically it is a VAT system which would cover entire spectrum of goods and services. So no separate Services Tax, Excise Duty, Tax on Interstate sales and current VAT. Halakandi points that as states tax goods and centre services, states will find it tough to forgo their powers. His small note also gives a detailed analysis of how the input-output system will work. So now I atleast know the basics.

Dr Vijay Kelkar has also given an excellent speech (his speeches) detailing design issues and the need for business associations to help develop this important reform. The benefits are quite large:

Much can and has been said on the merits of the GST. It will bring about a phase change on the tax firmament by redistributing the burden of taxation equitably between manufacturing and services. It will lower the tax rate by broadening the tax base and minimizing exemptions. It will reduce distortions by completely switching to the destination principle. It will foster a common market across the country and reduce compliance costs. It can provide a fiscal base for local bodies to enable them to fulfill their obligations. It will facilitate investment decisions being made on purely economic concerns, independent of tax considerations. It will promote exports. A recent study on the impact of GST on foreign trade indicates that the rate of growth of exports will be significantly higher than that for imports. CST will also promote employment. Perhaps, most importantly, it will spur growth. As I have mentioned elsewhere, it has been estimated at the GST implementation increased Canadian GDP by 1.4 percent. In India, we can expect a similar kind of positive impact. This means gains of about 15 billion dollars annually. Discounting these lows at a modest 3 percent per annum, the present value of the GST works out to about half a trillion dollars. This is indeed a staggering sum and suggests the need for energetic action to usher the GST regime at an early date. I will attempt to address important questions relating to effective implementation of the GST regime.

Good stuff.

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