Archive for June 19th, 2017

Politics and Economics of Mathura’s temples…(similarities with Central Bank Governance??)

June 19, 2017

Fascinating piece on politics/governance and economics of Mathura’s temples.

Apparently, the government wants to regulate these temples to ensure tourists are not looted . In a way similar to Goa’s taxi case, but here we cannot really have competition. Thus, the government wants the pandits to be regulated under a Board to manage affairs. Obviously, the pandits/priests are not amused:

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What is wrong with our system of global trade and finance: Dani Rodrik version

June 19, 2017

Interesting interview of Dani Rodrik who had warned about this hyper globalisation mania and its repercussions long back.

On free trade agreements he says:

If the trade agreements were about free trade, they would be one sentence long. They are thousands of pages, because they consist of a new set of regulations. And the question then becomes what are these regulations for, whose interests are they advancing.

No country has a completely free trade policy. There is always some management of trade. We don’t let goods come in that don’t satisfy our health and safety standards, that go beyond our regulatory standards, so we always have these controls. It’s never about free trade vs. protection. It’s always about where we should and shouldn’t regulate.

And the same is true about capital markets, and financial globalization. I think we have too easily internalized the norm that financial capital should be free to move without any restriction. There is no justification in economic theory for the idea that free capital mobility is optimal. These are things we know we need to approach pragmatically. There are real decisions that need to be made.

🙂 This is not new for those familiar with Prof. Rodrik’s works. Just that this free trade bit is as straight as it gets.

On Trump:

Like most everything with Trump, I think there is a significant element of truth in the causes that he picks up. He is addressing some real grievances. But then the manner in which he addresses them is completely bonkers. So in the case of Germany, I do think Germany is the world’s greatest mercantilist power right now. It used to be China. China’s surplus has gone down in recent years, but Germany’s trade surplus is almost 9 percent of GDP. And they are essentially exporting deflation and unemployment to the rest of the world.

I think the damage, though, is done to the rest of Europe and not the United States. In addition, it is not a trade problem. It is a macro-economic problem. The solution is to get German consumers to spend more and save less and the German state to spend more and to increase German wages. It is not the trade policies of the US or any other country that is going to be able to address this issue. It is similar to the way Trump has picked up grievances about how trade agreements have operated in the United States. These agreements have created loses, and grievances that have not been addressed, and I think there is a lot of truth to those kind of things, but I don’t think he has any realistic way of dealing with those things.

Hmm..

The entire interview is worth a read. Lots of interesting stuff to think and ponder upon. He says how Europe opened up much earlier to trade and built the insurance mechanisms to safeguard those who were to be hit by trade. Thus, populism in Europe is not much about protection against imports but about immigration. In US trade was followed without any social welfare leading to cries against trade..

All this requires deep understanding of politics and society something which current economics totally fails you to teach..

What do we mean by legal tender? Currency? Are they the same?

June 19, 2017

How many monetary economics students bother with these terms?

JP Koning’s another terrific post takes you through absolute basics of money. First legal tender:

David Birch recently grumbled about people’s sloppy use of the term legal tender, and I agree with him. As Birch points out, what many of us don’t realize is that shopkeepers have every right to refuse to accept legal tender such as coins and notes. This is because legal tender laws only apply to debts, not to day-to-day transactions. If someone has borrowed some money from you, for instance, then legal tender laws dictate a certain set of media that you cannot refuse to accept to settle that debt. These laws have been designed to protect your debtor from a situation in which you demand payment in a rare medium of exchange, say dinosaur bones, effectively driving them into bankruptcy.

Conversely, they also protect you the lender from being paid in an inconvenient settlement medium. In Canada, for instance, a five cent coin is legal tender, but only up to $5. If your debtor wants to pay off a $10,000 debt using a truckload of nickels, you can invoke legal tender laws and tell them to screw off—give me something more convenient.

Not sure what the laws are in India. I would strongly recommend reading Birch’s post for more clarity.

On currency:

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‘Batsmen win you games, bowlers win you tournaments’

June 19, 2017

Pakistan victory over India is all over the physical and internet media. Open any paper/website today and you cant help but get carried away in discussions.

One just hopes the victory springs Pakistan cricket to action in shorter format of the game. Their test performances are not all the bad by the way but post retirement of Misbah and Younis they will be tested once again. There is not a better sign than Pakistan bowlers testing batsmen across the world with their guile and pace.

So this interview by Azhar Mahmood, former Pakistan player and now the bowling coach is an interesting one. In this age of batters where all rules are being designed to glorify them even more, one just forgets the role of bowlers.

In this interview, Mahmood makes the statement that ‘Batsmen win you games, bowlers win you tournaments’. He talks one through what it takes to create a bowling unit, right length to bowl, conditions and so on:

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Political economy of introducing competition in taxi services in Goa

June 19, 2017

There is something about Goa which makes tourists just pay through their nose without any protest. Perhaps Goa means total freedom and tourists just don;t want to haggle over pity things as cab fares. However, for others there is little doubt that tourism mobility in the city is highly expensive which is ironical as the city thrives so much on tourist mobility.

Not anymore. People are protesting about the taxi fares in Goa and want competition to break the taxi union. It wants introduction of app based ola and uber services in Goa. One would imagine GOa to be one of the first to introduce such services. But thanks to lobbying by taxi unions, they have kept competing forcs away.

This article by Pamela D’Mello informs about the political economy of taxi services in Goa:

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Is the impact of demonetisation on agriculture finally showing and does this mean a rethink on inflation targeting?

June 19, 2017

I should have blogged about this piece last week as it came.

Harish Damodaran says the experts got it wrong on the initial impact of demonetisation which was to expect a decline in crop output. The impact seems to have come in the second round as agri prices have declined like never before:

When demonetisation happened, many, including this writer, thought the decision, taken at the start of rabi plantings in November, would significantly impact farm production. We were proved wrong. Good monsoon rains, after successive drought years, besides the timely onset of winter conducive to germination, turned out to be strong motivations for farmers to sow, even if this entailed begging or borrowing. They successfully weathered the DeMo storm by simply replacing cash with deferred payments, for labour, purchase of seed, fertiliser and pesticides. Informal credit networks and “social capital” ensured that, at the end of the day, we had a bumper crop.

Where demonetisation did have an impact, however, was in the prices received during harvest: Potatoes in Farrukhabad, Uttar Pradesh, fetched below Rs 350 per quintal this February, compared to Rs 600 or more last year. Moreover, while prices in 2016 had crossed Rs 1,100/quintal by mid-May, they are stuck even now at Rs 350-400. The same goes for rabi onions in Lasalgaon, Maharashtra, that traded at an average of Rs 450 per quintal in May, as against Rs 750-800 and Rs 1,200 in the same month of the preceding two years. Farmers, likewise, sold tomatoes at Kolar, Karnataka, in early May for Rs 300-400 per quintal, down from Rs 1,500-1,600 a year ago.

When was the last time we saw all three — potatoes, onions and tomatoes — wholesaling at less than Rs 5/kg, and even retail prices within Rs 20/kg? And this, in peak summer!

How did this happen? Eventually the decline in cash impacted the chain. 

Well, much of the produce trading in India is cash-based and financed through a chain of mandi intermediaries, processors, input dealers and retailers. While difficult to establish, anecdotal reports suggest that this traditional agro-commercial capital was dealt a body blow by demonetisation. The collateral damage from it has been a haemorrhaging of liquidity from the markets. With the trade, which used to previously buy and stock up whenever prices fell, no longer active — it neither has the cash, nor the confidence now — the produce markets are suddenly without an important source of liquidity. True, this speculative capital was also a source of inflation, wherein, say, a 10 per cent production shortfall led to prices zooming 200 per cent. But today, it’s the opposite: A 10 per cent output increase engenders a 200 per cent price collapse.

One does not know how long it would take for formal finance, banks, commodity trading houses or organised retail, to fill the void left by traditional agro-commercial capital whose transactions were largely in cash. Till that happens and liquidity truly returns, the ultimate sufferer is the farmer, evidence of which is visible in mandi prices and restive hinterlands.

Interestingly, he adds inflation targeting has a role as well. Given high weight of food items in CPI inflation, its success depends on dampening of the agri prices:

But even assuming demonetisation’s effects to be transitory, there is another elephant in the room in the form of “inflation targeting”. The finance ministry and the RBI, in February, 2015, signed a monetary policy framework agreement, obliging the latter to achieve an annual consumer price index (CPI) inflation target of 4 per cent, subject to a plus/minus 2 per cent band. While such inflation targeting may have been adopted by some 29 other countries, the Indian case is unique because of the sheer weight of food and non-alcoholic beverages in its CPI. At 45.86 per cent, this is way above the corresponding combined share of these items in the official CPIs of the United Kingdom (10.3 per cent), Canada (16.41 per cent) or New Zealand (18.84 per cent).

Given the high weightage of agricultural products in its CPI, the success of inflation targeting in India is predicated on what happens to food prices. And since inflation at the retail and not just the wholesale level is what’s being targeted, it inherently incentivises policy actions that depress farm prices (“fire sales” may, after all, not be all that bad a thing for the five wise men and one woman constituting the RBI’s monetary policy committee). That could also explain why our policymakers today are naturally predisposed towards imposing controls on stockholding, domestic movement and export of farm goods, alongside allowing duty-free imports, at the slightest hint of a price increase — while doing nothing when produce realisations hit rock bottom.

Inflation eventually isn’t just a matter of the prices of goods and services going up or down. It is also about whose prices are rising and whose are falling — in other words, winners and losers. In the current deflationary environment, the farmers are the clear losers.

Hmmm… Never really thought from this perspective.

One can’t even blame MPC alone here. We have ignored agricultural economics for a while. Much of agriculture analysis is plain noise. There is hardly any understanding of the sector which drives much of Indian economy and politics. The role of MPC just glamorises the already over the top macro models. An MPC should have clearly tried to be more diverse bringing insights from local economies and sectors. 

The article lists a few agri markets/mandis:

…Garlic and methi (fenugreek) seed prices at Mandsaur — the district in Madhya Pradesh’s Malwa region that’s become synonymous with the ongoing farmer unrest — averaged Rs 3,400 and Rs 3,100-3,200 per quintal in April, whereas these ruled at over Rs 4,100 and Rs 4,700-4,800 respectively during the same time last year. Farmers in Nashik, which has also witnessed large-scale street action, along with the rest of Western Maharashtra, had to dump Sonaka grapes at about Rs 12 per kg in March, having sold the same green seedless variety for Rs 45 or so last year.

Even more illustrative is the story of soyabean, a kharif crop that, at harvest time in November, quoted at Rs 2,800-2,900 in Indore — that price has barely moved since then, even as sowing for the new season has commenced. A similar fate has befallen arhar/tur (pigeon-pea), which realised Rs 4,300-4,500 in January-February at Gulbarga, Karnataka.

How many of us even know of these mandis? 


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