Archive for February, 2017

Lessons from Central Bank of Barbados fiasco: Central Bank chief is a goalkeeper?

February 28, 2017

Finally after much deliberations and total chaos, Dr DeLisle Worrell the governor of Central Bank of Barbados got fired. One of the Deputy Gvernors has been named as the new Governor.

Dr Worrell got fired just a day after the Court intervened that he could keep his position:

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Future of cash: Cash is tried and tested and has a future (the Swiss view)..

February 28, 2017

Given the war on cash, a few “developed countries” like Germany and Swiss are not letting bills disappear that easily. They perhaps understand the issue of how cash prevents privacy much better than others. I shall not be surprised if there are deeper historical reasons behind them.

In this speech, Fritz Zurbrügg, Vice Chairman of the Governing Board of the Swiss National Bank defends cash.

The last few months and years have witnessed a growing debate on the future of cash. Its critics say that cash should be abolished, or that cashless alternatives will in any case gradually render it obsolete. However, to paraphrase Mark Twain: Reports of the death of cash have been greatly exaggerated.

This is reflected in the continuing robust demand for cash on the part of the general public. In many countries, the value of cash in circulation relative to GDP has increased over the last few years; a development that can be attributed to occasional periods of heightened uncertainty about the stability of banks in the wake of the financial crisis. Another factor is the low level of interest rates on transaction accounts, and hence the low opportunity cost of holding cash.

Moreover, surveys and anecdotal evidence suggest that cash is still widely and readily used for payments. This might seem surprising at first glance, given the numerous alternatives to cash, but there are a number of reasons. For instance, people like to use cash for personal reasons, because it allows more effective budget control or because it does not require technical know-how. People’s tastes can change, yet cash has properties that cashless methods do not have to the same extent. It is more reliable, because it does not depend on the use of a technical infrastructure. It also offers comprehensive protection as regards financial privacy. Only the availability of cash guarantees that the data owner really has control over the decision on how much financial information to share, and with whom.

In addition to these demand-side considerations, the SNB itself, as the supplier of banknotes, has no plans to do away with cash. The SNB is mandated by law to ensure the supply and distribution of cash as well as to facilitate and secure the smooth functioning of cashless payment systems. These tasks have equal status. By fulfilling both tasks, the SNB lays the groundwork for the public to choose its preferred method of payment for each individual transaction.

Yet this freedom of choice between payment methods exists only if the public has confidence in both cashless payments and cash. Prerequisites for public confidence in cash are, first, a monetary policy which is geared towards stability and ensures that banknotes and coins retain their value over the long term. Second, banknotes need to be of the highest quality and have the best possible protection against counterfeiting. Switzerland’s new banknote series is a case in point. It meets high standards of safety, design and technology. After all, banknotes are also a symbol for the quality and stability of our currency, as well as one of Switzerland’s ‘calling cards’.

It has to be seen for how long can these few dissenters against war on cash can continue…

What Explains the Popular Support for Demonetisation?

February 28, 2017

Despite quite a few (hopefully unbaised) economists/experts (if they matter today) saying that demonetisation is a bad policy, the public support for the same has been amazing. After all politicians unlike experts have a scorecard in form of elections and initial results suggest no damage to the ruling party.

Prof Rita Khera of IIT Delhi tries to unravel this puzzle:

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The power and secrets of gold, central banking and what not: A case from Deutsche Bundesbank…

February 27, 2017

This is an interesting post by Norbert Häring which questions/exposes the secret world of central banking across the world. Just like the politicians who show they oppose each other, central banks too express their displeasure at monetary policy of other central banks. But in the evening just like warring politicians the central bankers too chill out with each other. It is a secretive murky world given how together they control the fortunes of so many.

Häring writes how recent Bundesbank announcement of shipping their own gold from NY Fed is being spinned nicely. The German bank portrays it like a victory but in reality it also calms the nerves of their American counterpart:

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Historically some of the truly radical innovations in finance have come from criminal enterprises…

February 27, 2017

Prof JR Varma has a blog post which debates Uberisation of finance. They key idea here is whether innovations in finance can/should be ahead of regulation. Moreover, should regulation kill or allow innovation?

He quotes from a paper by Pollman and Barry in regulatory arbitrage. The business is done under the assumption that law shall be changed in their favor overtime. In finance we are seeing a surge in technology which also relies on regulatory arbitrage. So, how do we think this will pan out?

Prof Varma points firstly current finance players are fairly tech savvy and know the game. Second and more interestingly is this thing that historically most finance innovations come from criminal enterprise itself!

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A paper tiger called Banks Board Bureau..

February 27, 2017

This is a scathing piece by Tamal Bandopadhyay on Banks Board Bureau (BBB). For someone who has been reading banking history, it is not surprising to see government first creating hype by creating bodies like BBB which will “clean Indian banking forever” to be reduced to another of the several bodies. One problem in recent years how much hype media creates over anything connected to banking without either seeing basics or waiting for sometime to get details.

Over to Tamal for busting another such hype over BBB:

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Demonetize huge amount onetime vs Demonetise smaller amounts frequently..

February 27, 2017

JP Koning’s blog keeps coming out with posts related to India’s demonetisation. Most people say demonetisation is over and not worth the time now. Well for  scholarship on monetary economics, India’s demonetisation deserves to be as widely researched a subject as any for many years. It just has so many facets to it.

In his recent post, Koning says instead of massive demonetisation drive onetime one could have smaller drives periodically. Interestingly in Philipines, Central Bank keeps withdrawing currency fairly regularly as well. Its central bank act says:

SECTION 56. Replacement of Currency Unfit for Circulation. — The Bangko Sentral shall withdraw from circulation and shall demonetize all notes and coins which for any reason whatsoever are unfit for circulation and shall replace them by adequate notes and coins: Provided, however, That the Bangko Sentral shall not replace notes and coins the identification of which is impossible, coins which show signs of filing, clipping or perforation, and notes which have lost more than two-fifths (2/5) of their surface or all of the signatures inscribed thereon. Notes and coins in such mutilated conditions shall be withdrawn from circulation and demonetized without compensation to the bearer.

SECTION 57. Retirement of Old Notes and Coins. — The Bangko Sentral may call in for replacement notes of any series or denomination which are more than five (5) years old and coins which are more than (10) years old.

Notes and coins called in for replacement in accordance with this provision shall remain legal tender for a period of one (1) year from the date of call. After this period, they shall cease to be legal tender but during the following year, or for such longer period as the Monetary Board may determine, they may be exchanged at par and without charge in the Bangko Sentral and by agents duly authorized by the Bangko Sentral for this purpose. After the expiration of this latter period, the notes and coins which have not been exchanged shall cease to be a liability of the Bangko Sentral and shall be demonetized. The Bangko Sentral shall also demonetize all notes and coins which have been called in and replaced.

But this is more about retiring old notes to keep counterfeiting etc at bay.

Koning says one way to achieve this regularly is by declaring notes having a particular serial number as losing legal tender status:

This continues a series of posts (1, 2, 3) I’ve been writing that tries to improve on Indian PM Narendra Modi’s clumsy demonetization, or what I prefer to call a policy of surprise note swaps.

The main goal of Modi’s demonetization (i.e. note swapping) is to attack holdings of so-called “black money,” or unaccounted cash. The problem here is that to have a genuine long-run effect on the behavior of illicit cash users, a policy of demonetization needs to be more than a one-off game. It needs to be a repeatable one. A credible threat of a repeat swap a few months down the road ensures that stocks of licit money don’t get rebuilt after the most recent swap. If that threat isn’t credible, then people will simply go back to old patterns of cash usage.

…..

Weeding out rupee banknotes according to serial number rather than denomination would have allowed for a more refined policy along the lines advocated by Henry. Here’s how it would work. The government begins by declaring that all ₹1000 notes ending with the number 9 are henceforth illegal. Each person is granted a degree of protection from the note ban. Anyone owning an offending note can bring it to a bank to be swapped for a legitimate ₹1000 note (one that doesn’t end in 9). However, the government sets a limit on the number of demonetized notes that can be exchanged directly for legitimate notes, say no more than three. Anything above that can only be exchanged in person at a bank teller for deposits, which requires that they have an account (i.e. their anonymity will be lifted). Once an individual has deposited five notes in their account, all subsequent deposits of demonetized notes would require a good explanation for the notes’ provenance. Should the requisite paper trail be missing, the depositor gives up the entire amount.

The process begins anew a few months hence, the specific timing and banknote target being randomly chosen. So maybe thirteen months after the first swap, the government demonetizes all ₹500 notes ending in 6. Randomness prevents people from anticipating the move and hiding their illicit wealth in a different high denomination note. 

Too understand how this affects black money owners, consider someone who owns a large quantity of illicit ₹1000 banknotes, say ₹70 million (US$1 million, or 70,000 banknotes). This person faces the threat of losing 10% to the note swap. After all, when the 9s are called, odds are that he or she will have around 7,000 of them, of which only eight can be returned without requiring a paper trail. The owner can simply accept a continuing string of 10% losses each year as a cost of doing business.

Alternatively, they might protect themselves by converting their hoard into a competing store of value, say gold, bitcoin or low denomination rupee notes like ₹100s (which are not subject to the policy of ongoing swaps). If they flee high denomination notes, illicit cash users in a worse position than before the adoption of the policy of note swapping. Gold and small denomination notes have far higher storage and handling costs than ₹1000 banknote. And unlike gold and bitcoin, a banknote is both supremely liquid and stable.  

As for licit users of high denomination notes, the fact that the 10% clawback would not apply to them means they needn’t change their behavior. Nor would the poor, who are unlikely to be able to provide a paper trail, have to worry about the policy. Demonetizations would only occur in high denominations, in India’s case ₹500 and 1000s. The poor are less likely to own these in quantities above the three note limit.

Incidentally, readers may recognize a policy of repeat demonetizations as akin to a Gesell stamp tax, named after Silvio Gesell, who in 1916 proposed the idea of taxing currency holdings in order to increase the velocity of circulation. Greg Mankiw famously updated Gesell’s idea during the 2008 credit crisis to remove the zero lower bound. He did so by using serial numbers as the device for imposing a negative return rather than stamps. This post updates Mankiw’s idea, except rather than applying the tax to all cash it strikes only at illicit cash holdings, and does so in the name of an entirely different policy goal—attacking the underground economy, not removal of the zero lower bound.

A series of small serial number-based swaps seems like a better policy than Modi’s ham-handed demonetization of all ₹1000 and ₹500s. It would certainly do a better job of promoting a long-term decline in undocumented cash holdings and would do so by imposing a much smaller blast radius on the Indian public. There would be no currency shortages, huge lineups at banks, empty ATMs, or trades going unconsummated due to lack of paper money.

Not sure about this at all. Such measures always read like nice experiments but one has to see the overall context. India has massive amount of illiteracy and keeping people off guard regularly will create regular havocs. It is also important to note that Rs 500 and Rs 1000 notes are hardly high value given how inflation has eroded purchasing power over the years. Rs 500 atleast is used fairly common amidst even lower income people. So, it is not right to assume that poor will not be effected by repeated smaller demonetisation. Whether one time or regular, they are the ones who shall be hit given current denominations. Only if denominations are higher, can we even think of this measure.

Another problem shall be speculation against which number shall be demonetised next. Given how things work, markets are fairly good at guessing all this and we could see people refusing to accept notes even before the new demonetisation order. We have seen how Re 10 coin is not accepted despite being legal tender.

Any measures to manipulate currency usually backfire. People are way too smart than Governments think..

A digital archive for Rashtrapati Bhavan….

February 27, 2017

Superb initiative underway  as reported by The Hindu. The Archive will be housed at – http://www.sahapedia.org – which is quite a knowledge seeking place already.

The architectural history and the heritage of Rashtrapati Bhavan, the 340-room official residence of the President of India, has been documented in a series of books, which will soon be available in an online series.

Concise web-based modules are set to bring to life the architectural and cultural grandeur of the iconic building, designed and constructed by legendary British architect Edwin Lutyens.

A multi-volume documentation project of the Rashtrapati Bhavan was commissioned three years ago by the President’s Secretariat in collaboration with the Indira Gandhi National Centre for the Arts (IGNCA).

Sahapedia, an open online resource on the arts, cultures and heritage of India, which began the project in 2014, compiled 11 volumes of well-researched books written by top experts in various fields.

“Along with the books, we have produced a series of web modules and will be shortly uploading all of them on our website. These will be valuable for both researchers and laypersons to gain a better understanding of the history and heritage of the building,” Yashaswini Chandra, Project Manager, Sahapedia said.

Having archives is such a crucial aspect of building and updating history of any institution. Very nice to see these volumes being stored digitially for a wider access..

 

 

How three students caused a global crisis in teaching of economics..

February 27, 2017

A superb review of what looks like a must read book titled Econocracy by three students Joe Earle, Cahal Moran and Zach Ward-Perkins.

n the autumn of 2011, as the world’s financial system lurched from crash to crisis, the authors of this book began, as undergraduates, to study economics. While their lectures took place at the University of Manchester the eurozone was in flames. The students’ first term would last longer than the Greek government. Banks across the west were still on life support. And David Cameron was imposing on Britons year on year of swingeing spending cuts.

Yet the bushfires those teenagers saw raging each night on the news got barely a mention in the seminars they sat through, they say: the biggest economic catastrophe of our times “wasn’t mentioned in our lectures and what we were learning didn’t seem to have any relevance to understanding it”, they write in The Econocracy. “We were memorising and regurgitating abstract economic models for multiple-choice exams.”

Part of this book describes what happened next: how the economic crisis turned into a crisis of economics. It deserves a good account, since the activities of these Manchester students rank among the most startling protest movements of the decade.

After a year of being force-fed irrelevancies, say the students, they formed the Post-Crash Economics Society, with a sympathetic lecturer giving them evening classes on the events and perspectives they weren’t being taught. They lobbied teachers for new modules, and when that didn’t work, they mobilised hundreds of undergraduates to express their disappointment in the influential National Student Survey. The economics department ended up with the lowest score of any at the university: the professors had been told by their pupils that they could do better.

The protests spread to other economics faculties – in Glasgow, Istanbul, Kolkata. Working at speed, students around the world published a joint letter to their professors calling for nothing less than a reformation of their discipline.

Economics has been challenged by would-be reformers before, but never on this scale. What made the difference was the crash of 2008. Students could now argue that their lecturers hadn’t called the biggest economic event of their lifetimes – so their commandments weren’t worth the stone they were carved on. They could also point to the way in which the economic model in the real world was broken and ask why the models they were using had barely changed.

Hmm.

We have moved from one extreme to another:

The Econocracy makes three big arguments. First, economics has shoved its way into all aspects of our public life. Flick through any newspaper and you’ll find it is not enough for mental illness to cause suffering, or for people to enjoy paintings: both must have a specific cost or benefit to GDP. It is as if Gradgrind had set up a boutique consultancy, offering mandatory but spurious quantification for any passing cause.

Second, the economics being pushed is narrow and of recent invention. It sees the economy “as a distinct system that follows a particular, often mechanical logic” and believes this “can be managed using a scientific criteria”. It would not be recognised by Keynes or Marx or Adam Smith

(Third)… By making their discipline all-pervasive, and pretending it is the physics of social science, economists have turned much of our democracy into a no-go zone for the public. This is the authors’ ultimate charge: “We live in a nation divided between a minority who feel they own the language of economics and a majority who don’t.”

This status quo works well for the powerful and wealthy and it will be fiercely defended. As Ed Miliband and Jeremy Corbyn have found, suggest policies that challenge the narrow orthodoxy and you will be branded an economic illiterate – even if they add up. Academics who follow different schools of economic thought are often exiled from the big faculties and journals,

Interesting stuff..

Looking Back at 100 years of research in Indian economics (by Indian economists)..

February 27, 2017

India may have made progress economically, but it has clearly declined in economic research and thinking. We hardly have original economic ideas with most thinking coming from elsewhere. There was a time when there was original economic research published in Indian economic journals and by Indian university economists. Now all these three are missing. Few people who continue to be passionate about so called Indian economic thought are hardly given their due.

J Krishnamurthy pays a tribute to Indian Journal of Economics which completed its 100 years in 2016. It is a pity that most students would have hardly heard about this journal.

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25 years of economics reforms but banking woes come a full cirlce: Making India less dependent on banks..

February 24, 2017

Prof JR Varma has a piece saying 25 years of economic reforms has led to remarkable turnaround in equity markets. But banking sector remains the same with woes coming a full circle.

He says we should take measures to make Indian economy less reliant on banks. In an interesting comparison, he compares banks to a CDO:

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Brahmin adopted by SCs can get quota job..

February 24, 2017

India’s battle for backwardness gets murkier.

In a new case, Punjab and Haryana High Court said:

Can a person avail the benefits of reservation under Scheduled Caste (SC) if he was born a Brahmin but was adopted and brought up by SC parents? In an order that will have wide-ranging ramifications, the Punjab and Haryana high court has held that such a person cannot be denied a government job under the reserved category.

The court has also clarified that the adoption would be considered valid even if the regular format has not been followed and customary law has been employed.

Haunting melodies from life of Bollywood musical genius Khayyam

February 24, 2017

Khayyam saab turned 90 last week and Ajay Mankotia pays a nice tribute to his work. As kids one was always stung by his work but didn’t pay attention to the name behind the songs. It was only over time that one realised that all those wonderful songs (and many more) came from his stable alone. No words or praise can do justice to the sheer quality of his work.

Hope many more birthdays to come..

The battle for backwardness in India…

February 23, 2017

Prof Rohini Somanathan has a piece in Ideas4India:

We must also realise that no set of concessions granted by the central and state governments can lead us out of the current conflicts over reservations. This is because placing two castes in the same category does not give them equal status, but rather shifts scarce goods across them. No matter where a caste is placed in the scheme of things, there is always a better place to be. This is best illustrated by the Gujjar demands for reservations in Rajasthan in 2006. The Gujjars were already part of the OBCs but wished to be re-classified as an ST. The reasons were obvious. There were many literate OBCs who were competing with them for jobs and university seats but relatively few of the tribes had enough education to be rivals. The probability of entering elite institutions was therefore much higher as an ST. The Meenas of Rajasthan were the most influential within the STs and the new Gujjar demands led to violent clashes between these two groups. The Gujjars then pushed for compartmentalising the OBC quota to guarantee them a 5% share of reservations, but the Jats, who were OBCs in Rajasthan found this unacceptable. Finally, the category of Special Backward Classes was created, consisting of the Gujjars and four other groups and they were given a 5% quota. This, however, took the fraction of total reserved seats to above one-half and the courts stepped in to strike down the notification. Last September, in a similar move, the Nishads of Bihar petitioned to move from the OBCs to the SCs.
With hundreds of castes already labelled as backward, the most educated within them gain from reservations. This has widened inequalities within scheduled groups. In Bihar, for example, Dhobis and Musahars are both SCs, but 14% of Dhobis complete 10 years of schooling, while only 1% of Musahars do so. It is inconceivable that they will converge in social standing if SC quotas are our only means to equalise opportunities. In 2007, the Nitish Kumar government created a new group, Mahadalits, to help communities like the Musahars, but it was only a matter of time before the Dhobis and Chamars also wanted in.
Caste reservations first emerged to promote equal treatment in a society where untouchability was widely practised. They have now degenerated into a scramble for privilege and a catalyst for communal conflict. Many state elections are being held in 2017, including Punjab, Gujarat and Uttar Pradesh. Punjab has already announced OBC status for the Rajput Sikhs. It remains to be seen whether politics in the other states will also be dominated by lobbies for reservations or whether our leaders can focus on expanding the social and physical infrastructure that we so badly need. Only 15% of children in rural India have easy access to a high school, only 4% of villages have a primary health centre, and income transfers to the poor and the old are negligible for most families. The Indian State now has the capacity and the data needed for modern methods of redistribution – through public goods, social insurance, and progressive taxes. It is time to use these to move forward.
India’s political economy of development remains as interesting as ever..

Vera Smith’s five reasons for central banks : Are They Any Good?

February 23, 2017

I doubt how many of today’s monetary scholars have read Vera Smith’s dissertation- The Rationale for a Central Bank? What must have been a must read some years ago is hardly part of any course these days. The thesis was written under Hayek’s supervision and looked at reasons behind formation of various central banks.  We take central banking for granted without looking at various ways in which they come in different countries.

Karl-Friedrich Israel has a piece in Mises Institute which looks at five reasons given by Smith for having a central bank. Smith gave these reasons during GOld Standard days. After many years, do the reasons remain valid?

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The 10 rupee coin chaos in Karnataka and the fake Rs 2000 note from Children Bank of India..

February 22, 2017

The RBI chef recently said it is important to be thick skinned in such jobs. He also added that “everyone has agreed that not just the RBI, but the wider banking system has done a “Herculean job” over the last few months. Well it is fine to be thick skinned and congratulate oneself, but it is also important to respond to what is going on. However, thick skinned does not mean one becomes insensitive and stops responding completely.

Ever since the central bank agreed to unleash the demonetisation, the Re 10 coin has been one of the unintended victims. There are repeated rumors that this Rs 10 coin is not legal tender. It even got a rare response from the Central Bank on Nov 20 2016 that there is no such case and Re 10 remains legal. But no repeated assurances after that.

So once again the rumors built in Karnataka and no one is accepting the 10 rupee coin. The media reported this on 10 Feb but there is no official notice from the central bank. So people are not accepting the Rs 10 coin in Bangalore (not sure about other regions in the state) and it has been nearly 10 days:

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Bond traders betting on Euro break up..

February 22, 2017

Joe of Bloomberg points to this interesting article. The article shows how investors anticipating some exits from Euro are buying short term German bonds. Though, the risks are not as large as seen in 2010 period.

However, the sources of concerns are different. He adds that this time the risks are from political troubles and Draghi’s 3 magic words “whatever it takes” will not help:

Once again, traders are placing bets on a breakup of the euro area. Investors are piling into short-dated German government bonds, which would presumably be the safest of safe havens if calamity were to strike.

But is the euro really at risk of a breakup? You’d think, perhaps, that if the currency survived 2010-2012 then it can survive pretty much anything. And obviously at this point (at least going by peripheral spreads) investors aren’t anywhere near as concerned as they were back then.

But one thing to consider is that the problems faced back then by Europe were essentially about monetary architecture. Governments lacked a fiscal union and a central-bank backstop, exposing them to the whims of bond vigilantes. Mario Draghi solved the problem in 2012 with his “whatever it takes” speech.

This time, the stresses building in Europe are perceived as more political. Anti-euro factions are on the rise while mainstream center-right and center-left parties are seeing their support melt away. As risk transfers from the monetary realm to a political one, these problems won’t go away with three simple words from a central banker.

Hmm..

RIP: Prof Kenneth Arrow..

February 22, 2017

Another giant passes away. Prof Kenneth Arrow was a giant of the giants. His work continues to inspire (or mentally harass!) students till date.

Here is a nice obituary.

Crony Capitalism: Shifting fortunes of Indonesia and Malaysia

February 22, 2017

Interesting piece on how tides have turned for the two countries.

Earlier Indonesia was a hotbed of cronyism but now it is Malaysia:

With populists emulating autocrats from Azerbaijan to Zimbabwe, free markets are being forced to confront crony capitalism.

One response is visible in the reversal of fortunes of Malaysia and Indonesia. The two nations still wrestle with the politics of ethnicity and religion at odds with the capitalism of market competition. In Indonesia, Basuki Tjahaja Purnama, a Chinese Christian who is the governor of Jakarta, is running for office while defending himself against charges of blasphemy against Islam in a country of predominantly Muslim voters. Malaysia’s embrace of an ideology of Malay supremacy and the low interest rates that invite a debt bubble are impediments to a dynamic economy.

But the historic advantage that Malaysia, with just 30 million people, has enjoyed over its Southeast Asian neighbor of 250 million is disappearing amid a barrage of corruption allegations challenging Prime Minister Najib Razak.

Najib, who was elected in 2009, says hundreds of millions of dollars in his personal bank accounts came from a gift from an unidentified Saudi donor, denying a U.S. Justice Department complaint filed in federal court last July that accuses Najib of stealing from a Malaysian government investment fund, 1Malaysia Development Berhad, or 1MDB. 

The markets have noticed this:

The divergent growth rates are reflected in the stock market, where the 539 companies in the Jakarta Stock Exchange Composite Index gained 287 percent during the past 10 years, according to Bloomberg data. That’s more than three times the 95 percent return during the same period for the 30 companies that make up the FTSE Bursa Malaysia Kuala Lumpur Index, and amounts to Indonesia outperforming Malaysia by 7.6 percent each year. The gap has grown more pronounced since 2014, as the Indonesia market has outperformed Malaysia’s by 9.3 percent annually.

In the bond market, Indonesian government securities provided a total return (income plus appreciation) of 100 percent since 2010. That’s 6.5 percent per year more than Malaysian government debt, which returned 30 percent over the same six years, according to Bloomberg data. Since 2014, Indonesia’s advantage has widened to 7 percent.

The inferior performance of Malaysia’s debt is reflected in the country’s deteriorating fiscal outlook during the past two decades. Since 1997, when both countries saw their surpluses transformed into deficits, Indonesia kept its budget close to balanced with an average annual deficit of 1.32 percent of its GDP, according to data compiled by Bloomberg.

Nothing is granted..

Evolution of currency denominations in India – From Rupee 1 to Rupees 10000

February 21, 2017

I came across this wonderful book – The Indian Financial System (1985) by RK Sheshadri, former Deputy Gvernor of RBI (1973-76). It is perhaps one of the most useful books to understand how Indian monetary and fiscal system has evolved over a period. It has amazing amount of information and facts which helps one know many aspects of Indian macroeconomic system and not just financial system.

From the book and other data available with RBI, I tried to draw a timeline of the various currency denominations in India. I have also updated it as his analysis ends in 1985.

This is how the timeline looks:

  • 1861       Paper Currency Act allowed denominations of Rs 10, Rs 20, Rs 50, Rs 100, Rs 500 and Rs 1000.
  • 1871       Allowed Rs 5 and Rs 10,000 which were issued in 1872.
  • 1910       Rs 20 discontinued as not much in demand. Reintroduced in 1972.
  • 1917       Re 1 introduced due to shortage of silver; discontinued in 1926.
  • 1918       Rs 2.5 issued for the same reason; discontinued in 1926.
  • 1935       Issue of Rs 50 discontinued due to lack of demand, reintroduced on 17-May- 1975.
  • 1940       Re 1 reintroduced.
  • 1943       Rs 2 introduced.
  • 1946       Demonetisation of Rs 500 and upwards.
  • 1954       Reintroduction of Rs 1000 and 10000 along with a new Rs 5000 denomination.
  • 1978       Demonetisation of Rs 1000 and upwards.
  • 1987       Reintroduction of Rs 500.
  • 2000       Reintroduction of Rs 1000.
  • 2016       Demonetisation of old series of Rs 500 and Rs 1000. Reintroduction of new Rs 500 and a new denomination Rs 2000.

Interesting to note that we had Rs 2.5 albeit for a short time as well.

Of all the denominations, Re 1 is the most interesting. It was first planned to introduce the note in 1893 but did not happen. It was finally issued in 1917 due to shortge of silver. As silver prices declined in 1920, these notes withdrawn in 1926. The notes were again printed in 1933 (in England) as silver prices rose dur to Silver Purchase Act 1934. However, the crisis receded and notes were not issued.

Though they were issued on 1940 due to again – shortage of silver. The issuance was done under the Currency Ordinance (1940). AS the ordinance was made during World War II, India and Burma Emergency Provisions Act 1940 amended the the 9th schedule of Government of India Act (1935). This allowed continuance of all the ordinances issued during World War II. Thus, it continues to provide the authority to Government to issue Re 1 note.

So much so, the Government stopped printing Re 1 notes a while ago, the ordinance remained much to surprise for lawmakers:

Remember the Re1 note, or the last time you saw it?

It may well have gone out of print, but an ordinance promulgated to facilitate its birth in 1940 is still in force, despite the fact that the Constitution grants no more than six months of life to an ordinance.

Notably, the currency ordinance issued by the colonial British government to print the Re1 note is going to survive, as it did two bids earlier when a finance ministry panel in 1997 and then the law commission in 1998 recommended its repeal on the ground that the note is no longer printed.

The parliamentary standing committee on finance stumbled upon the currency ordinance, 1940, recently while examining the coinage bill, 2009, aimed at replacing four existing laws on metal coins and tokens.

Flummoxed by its queer longevity, the committee headed by former finance minister Yashwant Sinha asked the ministry if the ordinance promulgated in 1940 was ever enacted as a law.

“No. The currency ordinance, 1940, was promulgated after passing of the India and Burma (Emergency provisions) Act, 1940, which provided that ordinances made during the period of the Emergency beginning June 27, 1940, (imposed to meet the exigencies of World War II) would not lapse within six months,” the ministry told the lawmakers’ panel.

“This made the currency ordinance, 1940 of permanent nature,” it said, adding that after Independence, the Indian government adopted it thorough a presidential order in 1950 to adopt various British laws.

An ordinance is a special piece of legislation made by the executive to meet an emergency when Parliament is not in session. But Article 123 of the Constitution stipulates that the ordinance will lapse unless it is ratified and made into a full-fledged law by Parliament within six months of its promulgation.

Asked by the panel as to why the ministry was not repealing it when it has stopped printing Re1 note, the ministry replied: “The 1940 ordinance may not be repealed as yet as one rupee notes continue to be in circulation though not being printed any more.”

The coinage bill, 2009, seeks to amalgamate four laws — Metal Tokens Act, 1889, Coinage Act, 1906, Bronze Coin (Legal Tender) Act, 1918, and the Small Coins (Offences) Act, 1971, into one comprehensive act.

So Coinage Act 2011 Section 28 says:

28. Continuance of existing coins

Notwithstanding the repeal of the enactments and the Ordinance specified in sub-section (1) of section 27,–

(a) all coins issued under the said enactments; and

(b) Government of India one rupee note issued under the Currency Ordinance, 1940 (Ord. IV of 1940), which are legal tender immediately before the commencement of the Coinage Act, 2011 shall be deemed to be the coin and continue to be legal tender in payment or on account under the corresponding provisions of this Act.

All this is so so fascinating.

History, law, currency, wars…there is a bit of everything in this. It is a pity we have not paid any attention to currency denominations in studying monetary economics. With the war on cash, much of this will be lost as well.


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