Archive for February 7th, 2017

When those who ridicule power of State in research, advocate the power when becoming policymakers…

February 7, 2017

The current currency withdrawal currency crisis tells economics students one thing – be very sure before taking up a policy position. Most of the time, you would have to discard/undo whatever your beliefs/opinions you have shaped in research.

These remarks is one such example of this volte face. One is fairly sure if any other government had done it, the opinion would have been just the opposite. To defend themselves, some argue that it was worse in previous government.

It is shocking to see such new lows in Indian policy. There was a time when none of these government organisations were deemed as independent. Even then one found some advisers stuck to their beliefs and expressed themselves and even resigned. Now with most of these agencies deemed as independent, the case of independent voices are just shrinking..

How demonetisation halved the profits of a multinational company that used no cash..

February 7, 2017

Scroll has an article from from a CEO of a multinational company in India who prefers to remain anonymous (perhaps fearing trolling).

He is in the logistics business.

I am the Chief Executive Officer of a multi-national corporation, and I am still reeling under the demonetisation policy announced on November 8, 2016. I will neither disclose my name nor my company’s, lest there is a blowback. But the figures and facts that I will cite are all from our books or mentioned in our in-house discussions. It will give the reader a sense of the disruptive consequences of demonetisation.

The business I head is engaged in transporting containers packed with finished goods or raw material for export and import. Readers must have seen these containers, in colours of blue, violet, grey and white, loaded on trailer trucks groaning down the highway.

Containers arrive at seaports, and my company loads them onto trains to transport them to dry ports. Here, after custom formalities are completed, containers are unpacked and goods are dispatched on trucks to importers. At times, we undertake this last-mile delivery as well. Obviously, we also take containers from exporters and move them by rail wagons to seaports, from where these are shipped out.

The trains we use are our own, each of which has 45 wagons. We handle 10,000 containers a month, or 2,500 a week, to and fro from the hinterland to seaports. We pay a haulage charge to Indian Railways for using its facilities to run the wagons on its rail-tracks. This charge constitutes a substantial chunk of our operations cost.

Our rates, therefore, comprise operations costs plus our margin. Our profit before tax hovered around 2.5% of our revenue, obviously, before demonetisation took the fizz out of the business.

The CEO says their profits halved despite they following cashless transactions for a while. Why? Cash has been king in India and hits you bottoms up.


Most economically undervalued country of 2017? Pakistan!

February 7, 2017

Prof Tyler Cowen picks Pakistan as the most underrated economy in the world. This is easily one of the bravest predictions of the year.


The impact of demonetisation on the dairy sector..

February 7, 2017

One just came across this press release from Ministry of Agriculture. It talks about the status of dairy farmers post demonetisation.

Consequent upon the Central Governments decisions of demonetization, certain unintended impacts have been observed especially in the sectors thriving upon sheer cash transactions. In this regard, non-availability of funds to the co-operative banks for making payments to Milk producers/farmers by dairy co-operative against the milk supplied by them came to the notice of the Government.

Responding promptly to the prevailing situation of reported payment problems, the Union Minister of Agriculture and Farmers Welfare, Shri Radha Mohan Singh has regularly reviewed and directed to take appropriate action to alleviate the problems. Meetings with Mother Dairy, Gujarat Cooperative Milk Marketing Fed (GCMMF) /Amul, Delhi Milk Scheme and other State Co-operative Dairy Federations are taken at regular intervals.

In order to take stock of the prevailing situation, the Secretary Animal Husbandry, Dairying and Fisheries, Shri Devendra Chaudhry has accordingly convened a series of meetings and initiated actions for streamlining the payment system to Milk producers and even sale of milk to consumers through cashless transactions primarily.

GCMMF/Amul has been specifically directed to ensure 100% milk producers accounts to be opened by 30th December, 2016. Similarly, other co-operatives have been directed to ensure the opening of 100% accounts of milk producers/farmers by 30th January, 2017.

Specific instructions have been issued to all the agencies such as National Dairy Development Board, Mother Dairy, Delhi Milk Scheme and all state Dairy co-operative federations for ensuring direct payment to milk producer’s bank account at the earliest. Low penetration of nationalized banks and co-operative bank accounts in rural areas need adequate financial support with appropriate safe guards. This department vides D.O. letters dated 06.12.2016 have taken up the matter with the Department of Economic Affairs and Reserve Bank of India to provide necessary funding support to the cooperative banks in rural areas with appropriate safeguard to protect the interest of milk producers and for timely payment of the milk supplied by them.


Using the window of opportunity opened by the demonetization decision, it is high time to accelerate the opening of bank accounts of all those unbanked milk producers to make it cashless and digital sooner than later. Eventually, transparency saving habits, financial enclosure etc. would be benefiting milk producer in multiple ways.

One was told that demonetisation would lead to unearthing black money like never before. This is the principal purpose of demonetisation as well.

With no such signs, it has moved very conveniently to digital payments. A few years ago, it announced that nearly all the households have a bank account via the Jan Dhan account but each time we are told so many people have been brought under banking via some other scheme. To use demonetisation to usher digital payments is just amazing.

Then it gives us some useful data:

It is to be noted that there are 1.70 lakh Dairy Co-operative Societies (DCS) at village level having 1.6 crore milk producers affiliated with 218 milk unions. About 850 lakh litres per day Milk is procured totally, of which co-operative sector procures about  425 lakh litres per day and about 425 lakh litres per day is procured by private sector. The value of the milk procured by Village level DCS is to the tune of rupees 120 crore per day. For weekly and 10 days payment cycle the substantive amount is to be disbursed to lakhs of milk producers spread over varied geographical areas.

Then it just randomly picks data of a week before demonetisation and 70 days after demonetisation to show both banking inclusion and digital payments have risen:

Participating agencies i.e

NDDB Dairy Services and 23 State Milk Federations

No of Farmers (Nos in Lakh) Details of payment done (amount Rs in Crore)
Total with bank account without  bank account % farmers having bank A/c Total through Bank accounts through Cash

% cashless Transaction

Pre- Demonetization (1- 8th Nov 2016)

31.64 15.59 16.05 49.27 % ₹ 215.23 ₹ 51.28 ₹ 153.77

23.82 %

Post-Demonetization (9th Nov 2016 to 18 Jan 2017)

88.99 56.43 32.56 63.42 % ₹ 1,146.60 ₹ 828.39 ₹ 318.21

72.25 %

The above table shows that:-

  1. The percentage of farmers with bank accounts has increased from 49.27% to 63.42%.
  2. The cashless transaction to farmers after demonetization has increased from 23.82% to 72.25%.
  3. Due to close follow up, now only 27.75% farmers are being paid through cash, balance through bank accounts. Further that, the sale of milk has gone up by 2.81% in December 2016 as compared to December 2015 and the overall sale of milk from April- Dec 2016 has gone up to  328.91 lakh litres per day as compared to 321.43 lakh litres per day in April- Dec 2015.

It is evident from the above facts that situation regarding making cashless payment to the farmers has considerably improved over last two months and there is no negative impact of demonetization.

Hmmm. Couple of points:

  • Firstly, in order to show demonetisation has succeeded we should be told how much black money was received from dairy sector.
  • Secondly, digital payments will obviously rise if cash is not available. What needs to be seen whether the same flow continues as cash comes back to the system.
  • Thirdly, it is the third point on sales which is more important. The impact of demonetisation should be seen from sales figures of milk. The government reports it has risen but is inconclusive really. We need monthly data for a couple of years to see the trend, seasonality and so on. Statistics always hides more than it reveals.
  • Moreover, milk is a necessity in India for most households and people will buy it in whatever way possible. Most milk sales are on credit purposes anyways with people settling their transactions at the end of the month and so on. There is a large possibility that people would have extended the credit period as well.

These pre-demon and post-demon studies are going to absorb us for quite sometime to come in future..



Switzerland: The nation that hates to be late…

February 7, 2017

A piece written in July 2016 but is really interesting.

How Swiss have such fascination for “being on time”:


Central Bank appointments and election cycle – Case of New Zealand

February 7, 2017

New Zealand’s election is scheduled to be held on 23 Sep 2017.

However, the central bank’s term is getting over on 26 Sep 2017 as well. This is of immediate interest to those studying political economy of central banking. After all, central banks are always blamed to be favoring either incumbent or opposition government. And to have the tenure of head of central bank clash with election dates is a pot boiler.

The best way to do handle the situation is to either give the current incumbent another term or extend the term of the chief by a few months till the political cycle is over.

What becomes interesting in NZ case is that the current chief Graeme Wheeler is not interested in any extension whatsoever. Thus, the government has announced the current Deputy Grant Spencer as the Acting Governor for 6 months.

Here is press release from Government and this one from Central Bank

Finance Minister Steven Joyce will appoint current Deputy Reserve Bank Governor Grant Spencer as the Acting Governor of the Bank for six months, following the expiry of current Governor Graeme Wheeler’s term on September 26 this year.

“Mr Wheeler’s term as Governor expires on September 26, three days after the general election, and he has decided not to seek reappointment,” Mr Joyce says. “Following advice from the Cabinet Office and consultation with Cabinet, I have decided that the most appropriate course of action would be to appoint an acting Governor for a six month period to cover the post-election caretaker period. This will give the next Government time to make a decision on the appointment of a permanent Governor for the next five year term.

“I have decided to appoint Mr Spencer as acting Governor from 27 September 2017 to 26 March 2018, on the advice of the Reserve Bank Board of Directors. The Government is pleased to have someone of his calibre to move into the role. He is a highly experienced member of the Bank’s Leadership team who will provide stability and continuity through this caretaker period prior to the appointment of the new Governor.”

Mr Joyce and Mr Spencer have agreed that there will be no change to the Policy Targets Agreement for the period Mr Spencer will be acting Governor.

Mr Spencer has advised the Government that he won’t be applying for the permanent role, and intends to retire following his period as acting Governor.

The Bank has had one previous acting Governor. Former Deputy Governor Rod Carr was appointed in an acting capacity for the pre-election and caretaker period around the 2002 General election, following the resignation of Governor Brash.

Mr Joyce thanked Governor Wheeler for his service to the Bank.

“The Governor has performed his role calmly and expertly during a highly unusual period for the world economy. I thank him for his service up until now and for the remainder of his term as Governor,” Mr Joyce says.

Croaking Cassandra, a blog on NZ economy wonders about the proposal:

But there are other unanswered questions.  For example, is this a solution envisaged by the Act?     The only previous appointment of an Acting Governor was when Don Brash resigned to go into politics, and Rod Carr was appointed as acting Governor while the selection process for a permanent successor took place.  There is a clear need for acting Governor provisions in such cases –  Governor can resign, die, or otherwise become incapacitated (and can even be removed for cause by the Minster).

But here is the relevant statutory provision (section 48)

If the office of Governor becomes vacant, the Minister shall, on the recommendation of the Board, appoint—

(a) a director of the Bank; or
(b) an officer of the Bank; or
(c) any other person—

to act as Governor for a period not exceeding 6 months or for the remainder of the Governor’s term, whichever is less.

As I have read that section, it envisages an acting Governor to complete a Governor’s term. not to provide a temporary Governor when it is inconvenient to appoint a permanent one.

That interpretation seems consistent with two other aspects of the Act.  First, Governors must be appointed for an initial term of five years (although subsequent extensions can be for shorter terms).  Parliament made that choice deliberately, presumably to help emphasise that the Governor was to operate at arms-length from the government.  If, by contrast, an acting Governor could keep on being appointed for terms of six months at a time, it would allow the intent of the Act, operational autonomy, to be eroded if the government determined on such an approach, without coming back to Parliament to amend the law.

And second, the PTA provisions of the Act clearly tie in to the fixed term appointment of a Governor –  and in that context an acting Governor filling in for an unexpected vacancy (as Rod Carr was in 2002) simply carries on with the PTA the substantive Governor had had in place.  There is no provision in the Act for a PTA with an acting Governor –  and the existing PTA is personal to Wheeler, and expires with his term in September this year.

The key lesson is need to rethink through the central bank act:

More generally, it highlights again the desirability of a more throughgoing review of the governance provisions of the Reserve Bank Act.  That should not be a particularly partisan issue –  more like an opportunity for some sensible reflections and revisions in light of 27 years experience with the current framework, changes in the role of the Bank, changes in the governance of other core government agencies, and changes in the understanding of how mechanically (or not) monetary policy can be run (and monitored).


We in India are also waking up to the need to thoroughly understand the central bank act. There are just so many ways Governments can interpret the loopholes in the Act to serve their interests…



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