Archive for February, 2011

Linking agri productivity of India, Peru and France

February 28, 2011

Dani Rodrik has a superb post on the same.

He along with co-researchers discovers  U-shaped pattern of agri productivity:

(more…)

Effective Revenue deficit – a new measure/jargon in Indian public finances

February 28, 2011

Understanding the Union Budget in entirety remains a major challenge despite many attempts in the past . With so many numbers and concepts and linkages of various tables and items, it is a mind-boggling exercise .

I will try and post more on the  budget as I again fine comb the budget documents  for FY 2011-12.

This year the government has decided to introduce a new measure for estimating true revenue deficit  – Effective revenue deficit.

In his speech, the FM said people say  revenue deficit remains sticky.

(more…)

State of India’s social development indicators…

February 28, 2011

A follow up to the previous post on microfoundations of India’s macroeconomic growth.

The economic survey has another interesting chapter – Human Development, Equity and Environment. In this a nice overview of India”s social development indicators is provided.

(more…)

FinMin’s Economic Survey is fine with teaser home loan products

February 28, 2011

Indian Ministry  of Finance (MoF) tabled Economic Survey in 2010-11 on Friday (25-Feb-11). The survey is an annual update by MoF on Indian economy just ahead of its budget.

Much of the document is just a repeat on various updates on Indian economy we get from various sources – RBI, PM’s Economic Advisory Council, IMF and various private sector sources. Still, it is a nice decent read.

However, Just like we saw in previous survey, this year’s survey has two interesting chapters. First is titled – Micro-Foundations of Macroeconomic Developement and second is Human Development, Equity and Environment. The first chapter talks about some microeconomic aspects which could help improve macro performance. Second chapter shows details our socio-economic profile which is really worrisome. I will just cover both the chapters in brief.

Micro-Foundations of Macroeconomic Developement is a strange report. It gives some interesting insights on some issues but disappoints on others.

Some interesting insights first:

(more…)

Central bank profiteering in Zimbabwe

February 25, 2011

Stephen Matteo Miller and Thandinkosi Ndhlela of Monash University have this interesting paper on Zimbabwe Central Bank.

(more…)

Are parliamentary systems better in managing financial crisis?

February 25, 2011

FCIC has closed operations after submitting its controversial report. While closing shop, it has released a huge library of closed- door interviews, videos and documents.

JR Varma in his superblog points to transcript of the testimony held with Bernanke. Bernanke says US was the only country/democracy where a firm failed (Lehman). In rest of the democracies firms were saved. Why? He thinks it is US Presidential system which does not allow the US government to act quickly. Hence, Fed was the only option:

(more…)

How RBI makes a difference in your daily life

February 24, 2011

A nice speech by RBI Governor Subbarao.

The speech gives an excellent summary of RBI’s objectives and functions. So, in case you want to understand RBI in quick time, this speech should help. It could also help make a PPT on the same.

It is a pity that newswires focused on this para and in particular statement on inflation (which is emphasized below). This just created random volatility in markets:

(more…)

Is the modern central bank in need of reform?

February 24, 2011

Gulzar points to a discussion hosted by Economist on the topic.

Needless to say the economists are divided on role of central banks. Some say it should focus on price stability alone and others say it has to be expanded…

From Growth Commission to Growth Dialogue

February 24, 2011

Commission on Growth and Development made waves in 2008 with its superb array of economists and policymakers as members. Its report also  created waves with some different findings. It emphasised there is no one size fits all strategy and importance of leadership:

According to the Commission, fast sustained growth is not a miracle; it is attainable for developing countries with the “right mix of ingredients.” Countries need leaders who are committed to achieving growth and who can take advantage of opportunities from the global economy. They also need to know about the levels of incentives and public investments that are necessary for private investment to take off and ensure the long-term diversification of the economy and its integration in the global economy.

As role of the commission is over, it has moved on to become Growth Dialogue:

(more…)

Did Doubling Reserve Requirements Cause the Recession of 1937-1938?

February 24, 2011

In an amazing paper, Charles Calomiris, Joseph Mason, and David Wheelock kind of refute the lessons from economic history.

In a widely accepted theory, Friedman said there was double dip recession in 1936-37 as Fed raised reserve requirements on banks. This led to lower supply of credit pushing a fragile economy back into a severe recession. Needless to say, same lessons were even repeated and appreciated in this crisis as well. Central Banks have been resisting pressures to tighten their rates etc for a year now citing the very example of Great depression.

Calomiris et al say this was not really the case. Fed raising reserve ratio implies supply of reserves. They look at the demand for reserves by banks and show reserves rose because of structural needs of banks. It had little to do with rising reserve ratio. In other words, reserves would have been higher anyways:

(more…)

Egypt revolution and rise of internet democracy

February 24, 2011

2011 has been another very interesting year.

Just when you thought global economy is expected to gear from this year, we have many interesting developments in countries having dictatorships. Starting with Egypt, we have Tunisia, Libya and many more countries in middle east and north africa (MENA region). Apart from many geopolitcal concerns, it has led to serious risks over prices of oil and inflation going forward.

Economists have jumped into the debate in interesting ways.

(more…)

Why prices of Brent and WTI oil differ?

February 23, 2011

It is like understanding why similar security prices differ across exchanges..

James Hamilton explains the recent widening spread between Brent and WTI crude oil prices.

(more…)

RBI’s capital account management framework

February 23, 2011

RBI Deputy governor Shyamala Gopinath sums up the topic nicely in this speech. It has been gradual, based on feeling teh stones while crossing the river approach. As it has worked in the past, it is expected to be like this going forward as well.

She begins the speech tracking changes in thinking on capital account management as controls are more welcome now than in the past. Havings said that research shows cacontrols on inflows are more useful than outflows.

What is India’s approach? It has relied on using capital account to promote stability.

The policy approach in India to the issue of capital flows has evolved from the broader objective of maintaining financial and macroeconomic stability and not merely addressing the singular variable of exchange rate. The salient elements of this framework have been:

  1. an explicitly stated active capital account management framework,  based on the policy stance of encouraging non-debt creating and long-term capital inflows and discouraging debt flows;
  2. having the policy space to use multiple instruments – quantitative limits, price based measures as well as administrative measures, particularly for foreign currency borrowing by corporates;
  3. short term debt permitted only for trade transaction;
  4. avoiding the ‘original sin’ of excessive foreign currency borrowings by domestic entities, particularly the sovereign;
  5. prudential regulations to prevent excessive dollarization of balance sheets of financial sector intermediaries, particularly banks;
  6. cautious approach to liability dollarisation by domestic entities and  
  7. significant liberalization of permissible avenues for outward investments for domestic entities.

She then looks at the recent trends and shows how flows have increased in recent years. Within inflows, which kind of flows have been more? She points to an IMF study which shows exchange rate appreciation differs by types of flow. Portfolio investments, which are more volatile, have the highest appreciation effect, followed by FDI and bank loans. Since these flows are potentially related to an increase in productive capacity, the real appreciation associated with FDI and bank loans is barely one-seventh of the real appreciation due to portfolio investments. Private transfers (mainly remittances) are the flows that have the least appreciation effect. This may suggest that remittances are not procyclical.

In India’s case, FII equity flows have been dominant which in past led to RBI intervening to prevent appreciation. This year the intervention has been very limited.

Then Governor looks at issues of opening up equity ann debt markets to foreign flows. We need to invite more FDI flows and limit debt flows. The speech is summed as:

In an open economy like ours, there is need for greater recognition of currency and interest rate risks and the risk management in banks and corporate firms need to gear up their risk management practices further in this area. It is our experience that a large number of corporates still do not have well-designed risk management policies and practices to take care of volatile exchange rate movements and give scant regard to tail risks. There is also need for greater disclosure and adherence to accounting standards for financial instruments.

There is also need to more comprehensively qualitatively assess our external liabilities to also encompass liabilities of subsidiaries and branches of Indian financial institutions overseas, not in nominal terms but through a risk-based approach on the probability of recourse to parent bank liquidity support.

Operations of foreign financial entities in domestic markets also have implications on capital account due to cross border fund flow and derivative positions. During the crisis period, funds were held abroad temporarily to support parent bank liquidity. In India. there are prudential regulations on banks’ recourse to overseas funding markets, including for foreign banks. More local funding of local assets reduces systemic risk and helps to curb excessive risk taking and credit growth.

Nice primer on India’s capital account approach.

BoE MPC divided further

February 23, 2011

We do get some hints on division in RBI’s TAC, but nothing compared to divisions in BoE’s MPC. In the recent meeting in Feb 2011, there were 4 dissents compared to 3 in Jan-11 meeting:

(more…)

Why Isn’t Wall Street in Jail?

February 23, 2011

This is the title of an article by Matt Taibbi. Taibbi is a polemical journalist reporting on politics, media, finance, and sports for Rolling Stone and Men’s Journal.

So it is not from some reputed economist as such but Taibbi has a point. He  extends further the argument made by Simon Johnson of the revolving door facility between wall street and financial regulators (in Taibbi’s case SEC and Johnson’s case Treasury). Hence, despite the huge size of financial crimes nothing much happens.

His article begins with an interview with one of a former Senate investigator. Latter says that to check crisis like these send the culprits to jail.  This leads Taibbi to explore the issue further.

(more…)

RBI releases Minutes of its Monetary Policy Meeting

February 23, 2011

RBI calls it One More Step towards Transparency but it could be called a leap actually.

RBI has decided to release minutes of its monetary policy meetings.  It just released minutes of its meeting held on Jan 19, 2010 for arriving at the policy outcome for the formal meeting on Jan 25, 2010. So with a lag of almost a month we get the minutes of the monetary policy meeting.

RBI actually calls it Technical Advisory Committee (TAC) which has both internal and external members. It meets quarterly ahead of the monetary policy. With midterm reviews now, may be it would be meeting eight times in a year now.

(more…)

Market for trading IIT JEE toppers!

February 22, 2011

Gulzar points to this interesting newsitem. People always have some innovative ideas for making money.

This person figures out the huge demand for toppers at IIT’s entrace test by the various IIT training institutes. He would figure out the toppers from few places and then sell their names to the coaching institutes. The coaching institutes would then have a choice to pitch their coursework to these students or even pay them, so that their names and pictures could be released with the institute’s name at the time of results!

 The whole thing was then exposed by ToI. Well, what can one say to this??

This huge caraze for IIT and lack of promising careers in other professions leads to all kinds of perverse incentives as Gulzar calls it. Just look at the stakeholders and huge stakes in what is just an entrance exam.

Economic lessons from game of monopoly

February 22, 2011

Monopoly, the famous board game (I learnt it too came up after the depression) has gone through a major change. The old game will continue but there is a new variant .

In the new variant, there would be no dice or bank. Instead, there is an infrared tower which will issue instructions and keep track of money. It will. make sure players stick to their rules. This is done to fight competition from  online games:

(more…)

Tata Jagriti Yatra….what an initiative

February 22, 2011

India continues to live in paradoxical times as always. On one side you get public which is frustrated with state of affairs and wondering where to start. On the other side you have some initiatives which try to bring the best given the tough times.  

Indiadevelopment blog alerted about this superb initiative called Tata Jagriti Yatra. It kind of rhymes with Tata Tea’s Jaago re campaign on corruption but is on different lines.

It is more about awakening youth on the spirit of entrepreneurship in India- both social and economic. It is a 18 day train ride which takes you to different parts of the country sharing thoughts with entrepreneurs. The final objective is to help the youth become job creators and not job seekers.

(more…)

Brief profile of Gita Gopinath

February 22, 2011

There is a nice profile of Gita Gopinath, the first Indian woman with tenure in Harvard’s Department of Economics. 

She points how her son has learnt the tricks of the game at age of 7:

(more…)