Archive for the ‘Discussion’ Category

Niti Aayog to give 7-year strategy and a 15-year long-term vision?!

April 24, 2017

It is often said if you want to do away with an institution, just dismantle it completely. If you think of replacing it with another one, there are chances that the second one will just eventually become a clone of the first one. The longer the first one has served the more this is likely to be true as well.

We are seeing this in the case of Niti Aayog. It has replaced Planning Commission with Niti Aaog (meaning Policy Commission) but gradually it is just becoming the same type which it wanted to replace. It has similar set of advisers who see no wrong with whatever the government does. So much so, it even releases reports which don’t stand upto facts.

Apparently the 12th plan got over on 31 March 2017.

Niti Aayog held a recent meeting in which we see new buzzwords like strategy, vision and so on. And 5 year is to be replaced by 7 year , 15 year and so on. The body is also sticking to 8% growth rate assumption which was hyped by Planning Commission earlier. This 8% assumption has been behind most of India’s problems today as expectations have fallen short leading to all kinds of mismatches.

What is even more perplexing is how the Commission did not discuss the most important issue haunting India – lack of water. We can keep making all kinds of claims about economy growing thrice of its current size to keep pleasing the media and international bodies like credit rating agencies. But on basic aspects we are no where close to even our neighbors.

Water should be our number one priority across government and policy.

Does RBI’s Monetary Policy Committee have powers to vote on reverse repo rate hike..

April 24, 2017

An intriguing piece by Aparna Iyer of Mint (HT: Niarajan).

She says MPC minutes of RBI’s April 2017 policy  reveals an interesting paradox. The policy made headlines as central bank raised Reverse Repo rate. However, Minutes show none of the members voted on the reverse repo decision.

Why? Well as per the Government, MPC can vote only on repo rate!:


Why does Indian central bank need things like Prompt Corrective Action despite having inspection powers under Banking Regulation Act?

April 21, 2017

Despite many years of rising NPA and bank problems, we just keep moving from one regulation to other. The latest regulation is Prompt Corrective Action which  apparently is not really new. It was started in 2002 and has been modified recently in 2017. As expected, media is buzz with whether this PCA 2.0 will correct banking problems.

What is not understood or questioned how these things have gone so wrong?

RBI is perhaps one of those few central banks which has extensive powers to regulate and monitor our banks. The central bank got these powers under Banking Regulation Act (1949). Section 35 of the Act gives wide inspection powers to the central bank. RBI in its first history volume celebrates passage of this Act which gave central bank powers to put our banks in order. Apart from capital and reserves requirements, the History notes:


College dropouts who rule the world are rare exceptions – not the rule…

April 21, 2017

An important reminder from Jonathan Wai (Research Scientist, Duke University) and Heiner Rindermann (Professor of Educational and Developmental Psychology, Chemnitz University of Technology).


How David Ricardo wrote about problem of distribution and inequality 200 years ago…

April 21, 2017

It is 200 years anniversary of David Ricardo’s idea of comparative advantage.  His book “On The Principles of Political Economy and Taxation” was released in 2017.

Oleg Komlik of Economic Sociology blog has a different take on the 200 anniversary of the book. One should not be surprised as economists usually hype very limited ideas from such classics. The best example is Adam Smith’s Wealth of Nations which has so many ideas but the profession just writes about invisible hand which Smith mentions just once in the book!

Coming to Ricardo. Hewrote about problems of distribution right at the beginning of the book. Economics is mainly about two problems: production and distribution. For the longest time, the profession focused just on first problem. After years of ignorance, this distribution problem is haunting much of the economics profession today.

But like of Ricardo wrote about it way back:


Inter-ethnic marriages in Italy – stable or unstable?

April 20, 2017

Laura Bottazzi, Sarah Grace See and Paolo Manasse research the issue:

Inter-ethnicity is defined as choosing a partner from a different country.  The note starts with this interesting TV drama:


It wasn’t just hate. Fascism offered robust social welfare as well?

April 20, 2017

Sheri Berman, Professor of political science at Barnard College in New York has a piece on possibilities of fascism rising in US:

An analogy is haunting the United States – the analogy of fascism. It is virtually impossible (outside certain parts of the Right-wing itself) to try to understand the resurgent Right without hearing it described as – or compared with – 20th-century interwar fascism. Like fascism, the resurgent Right is irrational, close-minded, violent and racist. So goes the analogy, and there’s truth to it. But fascism did not become powerful simply by appealing to citizens’ darkest instincts. Fascism also, crucially, spoke to the social and psychological needs of citizens to be protected from the ravages of capitalism at a time when other political actors were offering little help.

The origins of fascism lay in a promise to protect people. In the late 19th and early 20th centuries, a rush of globalisation destroyed communities, professions and cultural norms while generating a wave of immigration. Right-wing nationalist movements promising to protect people from the pernicious influence of foreigners and markets arose, and frightened, disoriented and displaced people responded. These early fascist movements disrupted political life in some countries, but they percolated along at a relatively low simmer until the Second World War.

The key to all such movements who moves first to renegotiate the social contract:

The fascist solution ultimately was, of course, worse than the problem. In response to the horror of fascism, in part, New Deal Democrats in the United States, and social democratic parties in Europe, also moved to re-negotiate the social contract. They promised citizens that they would control capitalism and provide social welfare policies and undertake other measures to strengthen national solidarity – but without the loss of freedom and democracy that fascism entailed.

The lesson for the present is clear: you can’t beat something with nothing. If other political actors don’t come up with more compelling solutions to the problems of capitalism, the popular appeal of the resurgent Right-wing will continue. And then the analogy with fascism and democratic collapse of the interwar years might prove even more relevant than it is now.

History’s so many interpretations…

For a nation born out of tax resistance, why Americans tend to grumble but not revolt against taxes?

April 20, 2017

I had posted earlier how cleverly governments have convinced people that any incomes taxed is white and rest black. However, history of nations shows how revolt against some or the other taxes was one of the crucial ingredients to development of the very nation.

So two more things here. First is to read stuff by Charles Adams who is a tax historian and has written a lot about the subject. Second is this post by Jeff Deist who writes about American tax day:

Today is Tax Day in America. When April 15th happens to fall on a weekend, the IRS generously permits us to extend the filing ritual until the following Monday. But since Monday was a holiday in the District of Columbia known (without irony) as Emancipation Day, we all enjoyed an extra bonus day to comply. And for the most part, comply we do: the voluntary compliance rate, defined by the IRS as taxes timely paid as a percentage of taxes owed in aggregate, is nearly 82%. Compare this with Italy, for example, where tax evasion is a national pastime. For a nation born out of tax resistance, we Americans tend to grumble but not revolt.

We also tend to view taxes only in terms of personal pain: the financial costs of paying, the compliance costs of dealing with the paperwork, and the psychic costs of worrying about it all. It is precisely this pain, experienced only by individuals, that upends the left-wing rationale for imposing taxes on business entities, estates, and all manner of transactions. Only people pay taxes. When someone talks about raising taxes on “greedy corporations,” they’re really calling for higher consumer prices for those corporations’ goods and services.

But the larger impact of taxation is found in the countless and profound ways it changes human activity. Charles Adams, the great tax historian, devoted his career to examining the enormous sociological and cultural impacts resulting from how states raise revenue. Adams called taxes a “prime mover of history,” from ancient Egypt through the Middle Ages, from Enlightenment Europe to Colonial America and all the way up to our present world of offshore tax havens. Taxes, Adams maintained, are far from the price we pay for civilization. Instead they are mean, petty, and arbitrary, causing existential struggles for the poorest people in societies across history. Taxes not only fund wars and enrich unworthy rulers, but also create crippling distortions in every economy the world has ever known.

The impact of taxes on ordinary people in modern America, including the lengths to which some will go to avoid them, is well-represented in our national psyche. We’ve all heard anecdotal horror stories, usually involving someone’s finances being destroyed by a sudden IRS seizure. Americans also view the IRS as wanton and political in its enforcement actions, which makes sense. Even experts can’t agree how much a hypothetical family owes in any given year.

The distortive impact of taxes on US and multinational businesses is also extraordinary, albeit not as much discussed. While monetary policy causes malinvestment through artificially low interest rates, high tax rates and burdensome complexity similarly cause firms to radically alter their business decisions. And just as interest rates affect the length of production, tax rates (and rules) dramatically affect decisions about the capital structure of companies.

Trying to find ways to avoid taxes is hardly anything unique to India as our media and politicians suggests. It is present across countries though degrees may differ. Places where State shows more efficiency in delivering public services, people could be less averse towards paying taxes. It would be just opposite for less efficient States. Though, people might just say efficient State is just an oxymoron…

Water extremes in Chennai: from floods to drought

April 20, 2017

A really sad state of affairs in Chennai on water. The city faced a serious flood two years back and is now facing a drought.

The heat is already making Chennai residents wilt. “It is only April, imagine how bad May and June are going to be,” says K Perumal, manager at a restaurant in south Chennai. At home he is already facing water shortages. “We buy cans for drinking and cooking, but for bathing and washing clothes we get supply only once in three days. We have two schoolgoing children. What on earth do we do for water?”

That’s a question haunting the one crore denizens of the city, which daily requires about 1,200 million litres of water. Of the four reservoirs — Poondi, Chembarambakkam, Cholavaram and Red Hills — supplying the city, the Cholavaram is completely dry and the rest have only around 10 per cent or less of their storage capacity.

After the deluge in December 2015, groundwater levels in Chennai rose by two metres to touch 10.5 metres, according to the Chennai Metrowater Board. Poor rains (62 per cent deficit) the following year pushed people across the State to tap groundwater for their daily needs. The levels fell one to three metres in and around Chennai this year. Private tankers are in demand as government supply has failed in many parts of the city. These tankers illegally draw excessive groundwater, and this is threatening to worsen an already distressing situation.

The decades-old court battles with neighbouring States for water supply from shared rivers offer no hope of succour this time around — Karnataka, too, is facing drought, as is Kerala. In January, the then chief minister O Panneerselvam requested his Andhra Pradesh counterpart, Chandrababu Naidu, to release more water from the Telugu Ganga project. Naidu agreed and 2.5 tmcft (thousand million cubic feet) of water arrived from the neighbouring State. Now that too has trickled away.

Chennai is not alone here. This situation of drought is common across so many cities in India. Even floods are becoming so common across cities. Cities like Bangalore drown in just few hours of rain.

Niti Aayog overstating digital payments growth?

April 19, 2017

Satyanarayan Iyer of ToI has an article showing how Niti Aayog is overstating rise in digital payments in India since demonetisation.

In its publication Niti Aayog says payments have risen by 23 times!

Volume of all digital transactions increased by about 23 times with 63,80,000 digital transactions for a value ofRs. 2425 crore in March 2017 compared to 2,80,000 digital transactions worth Rs.101 crore  till November 2016.

Iyer points to RBI data saying the data shows all digital transactions have gone by 1.43 times.

However, an analysis of the RBI data on digital transaction volume and value in March 2017 (latest available data) as against that of October 2016 shows that the overall volume had gone up just 1.43 times (see table). TOI spoke to Anna Roy, adviser (DAMD), Niti Aayog, who was in charge of preparing the statement, about “the 23 times’ gain”. She said the numbers were provided to them by the National Payments Corporation of India (NPCI). When told that the numbers were too high and the data showed that actual gains were much lower, she replied, “I agree with you”.

Going by the RBI data, the 23 times’ increase is only for Unified Payments Interface (UPI) volume and value gain and not for “all digital transactions” as stated. For perspective, UPI volume in March 2017 was just 0.69% of overall digital volumes and 0.015% of overall digital transactions value.

“The numbers have been reconciled and double-checked by our IT department,” said Amitabh Kant, CEO, Niti Aayog, on Saturday. On Monday, one of his team members said they will look into the data and it could have been a “typographical error,” but said the intention was to point out that consumer-facing digital numbers have grown.

While the numbers have grown in the days since demonetisation, the overall growth is much lower than stated even for only consumer-facing transactions like card usage at PoS terminals and digital wallet usage, among others.

The data is fairly easy to check and indeed shows the error. One does not know where to look when such elementary mistakes are made by leading economics policy body of the country.

It is really sad when policy institutions release reports just to please the current government. These numbers have been released and using the several channels have been told to the people as well. The impression has been created and a TOI article can barely change the perception. Even a corrected report will not really be released with similar fanfare .

Instead of sounding caution which is one of the main jobs, it is amazing to see the main Policy body to just blindly move to digitisation. Its disconnect with Indian reality is alarming. One has been reading highly arrogant statements made by its heads which does not provide any comfort either.

These were the very mistakes the earlier version of Niti Aayog also made with respect to the previous government.We were told the new version would be different and would play just an advisory role and not get into politics. But sadly this has not been the case.


Celebrating or regretting 200th anniversary of Ricardo’s idea of comparative advantage?

April 19, 2017

It was on 19 April 1817, Ricardo proposed the idea of comparative advantage.

Prof Douglas Irwin pays a tribute:


Will Reserve Bank of New Zealand have dual objective like Fed? Inflation and employment?

April 18, 2017

How tides keep turning. Reserve Bank of NZ was the first bank to start inflation targeting formally in 1989. Since then, inflation targeting has become a huge buzzword across central banking circles with more and more central banks taking up targeting inflation.

Now the pioneer of inflation targeting could be made to reconsider and change its single mandate. If the Labour government comes to power in NZ, there are high chances that the RBNZ Act will be changed and employment will be added to the single objective.

The superb blog on NZ economy – Croaking Cassandra blog reports:

I’ve already written a bit about Labour proposals on monetary policy (here and here) and, for now at least, I don’t want to write anything more about the proposed changes to the decision-making process or the plan to require the Monetary Policy Committee to publish its minutes.  If there are all sorts of issues around the details of how, I haven’t seen anyone objecting to the notion of moving from a single decisionmaker model to a a legislated committee, or objecting to proposals to enhance the transparency of the Bank’s monetary policy.    The Bank was once a leader in some aspects of monetary policy transparency, but is now much more of a laggard.

Where there has been more sceptical comment is around Labour’s proposal to add full employment to the statutory monetary policy objective.    At present, section 8 of the Reserve Bank Act reads as follows:

The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices.

Responding to this aspect of Labour’s announcement hasn’t been made easier by the lack of any specificity: we don’t know (and they may not either) how Labour plans to phrase this statutory amendment.    There are some possible formulations that could really be quite damaging.  But there are others that would probably make little real difference to monetary policy decisionmaking quarter-to-quarter.  Probably each of us would prefer to know in advance what, specifically, Labour plans.  But this is politics, and I’m guessing that there is a range of interests Labour feels the need to manage.  In that climate, specificity might not serve their pre-election ends.  One could get rather precious on this point, but it is worth remembering that there are plenty of other things that may matter at least as much that we currently know little about.  Under current legislation, who becomes the Governor of the Reserve Bank matters quite a lot to shorter-term economic outcomes, and we have no idea who that will be.   The details of the PTA can matter too, and under the governments of both stripes the process leading up to the signing of new PTAs has been highly secretive (often even after the event).  For the moment, we probably just have to be content with the “direction of travel” Labour has outlined.

In some quarters, Labour’s plans for adding a full employment objective have been described as “cosmetic”, as if to describe them thus is to dismiss them.    That is probably a mistake.  When I went hunting, I found that cosmetics have been around for perhaps 5000 years (rather longer than central banks).   People keep spending scarce resources on them for, apparently, good reasons.     Why?  They can, as it were, accentuate the positive or eliminate the negative –  highlighting features the wearer wants to draw attention to, or covering up the unsightly or unwanted marks of ageing.    They (apparently) accomplish things for the wearer.


Further, in all NZ elections central bank objective has been a focal point:

What is the relevance of all this to monetary policy?  Well, there has been a long-running discontent with monetary policy in New Zealand, especially (but not exclusively) on the left.  In the 28 years since the Act was passed there has not yet been an election in which some reasonably significant party was not campaigning to change either the Act or the PTA.  We haven’t seen anything like it in other advanced countries.   Personally, I think much of the discontent has been wrongheaded or misplaced –  the real medium-term economic performance problems of New Zealand have little or nothing to do with the Reserve Bank –  and many of the solutions haven’t been much better (in the 1990s, eg, Labour was campaigning to change the target to a range of -1 to 3 per cent and NZ First wanted to target the inflation rates of our trading partners, whatever they were).     But that doesn’t change the fact that there has been discontent –  and more than is really desirable.

But what about the trade-off?

I’m quite clear that there is no long-run trade-off adverse trade-off between achieving and maintaining a moderate inflation rate (the sorts of inflation rates we’ve targeted since 1990) and unemployment.  And since something akin to general price stability generally helps the economy function better (clearer signals, fewer tax distortions etc) there is at least the possibility that maintaining stable price might help keep unemployment a little lower than otherwise.  Milton Friedman argued for that possibility.

But I don’t think that is really the issue here.

Because it is not as if there are no other possible connections between monetary policy and unemployment.   Pretty much every analyst and policymaker recognises that there can be short-term trade-offs between inflation and unemployment (or excesss capacity more generally –  but here I’m focusing on unemployment).   Those trade-offs aren’t always stable, even in the short-term, or predictable, but they are there.    Thus, getting inflation down in the 1980s and early 1990s involved a sharp, but temporary, increase in the unemployment rate.  That was all but inescapable.  And when the unemployment rate was extremely low in the years just prior to 2008, that went hand in hand with core inflation rising quite a bit.  Monetary policy decisions will typically have unemployment consequences.    Unelected technocrats are messing, pretty seriously, with the lives of ordinary people.   It is all in a good cause (and I mean that totally seriously with not a hint of irony intended) but the costs, and disruptions, are real –  and typically don’t fall on the policymaker (or his/her advisers).

And it isn’t as if monetary policymakers are typically oblivious to the pain.   There was plenty of gallows humour around the Reserve Bank in the disinflation years, a reflection of that unease.  And yet often the official rhetoric is all about inflation –  as if, in some sense, what look like relatively small fluctuations around a relatively low rate of inflation, matter more than lives disrupted by the scourge of unemployment.

So perhaps that is why cosmetics can matter, and serve useful ends even in areas like monetary policy.

Hmm..age old debates once again come to the surface when we were told they have been addressed. Inflation targeting was seen as the only thing that worked given NZ’s experiences. Now with pioneer considering changes, will it lead to change in thinking in other countries too?

There is little doubt that central banks though may just be targeting inflation but their actions have wide ramifications on the entire economy. This is particularly tricky in case of growth/employment issues which have to be answered by politicians. Thus, central banking is far more politicised than we imagine.

Interesting times. Who knows we could be going back to old central bank debates if we see so called cosmetic changes in RBNZ…

Why financial entities become customer unfriendly as they grow in size…

April 18, 2017

Nice piece by Ms. Uma Shashikant. It discusses how there is trade off between local service and scale economics. As organisations grow in scale, they compromise on local services. This is perhaps more acutely faced in financial industry more than other industries.

Working around bars at highway ban, Kerala style…

April 18, 2017

As the saying goes, you can keep alcohol away from a Keralaite but cannot keep Keralaite away from alcohol (many communities in India will fight to owe this tagline).

Given the recent Supreme court ban of keeping bars atleast 500 mteres away from highways, this bar in Kerala comes with an innovative way to jump the ban (HT MR blog).  Moreover, the ban seems to be inspired from an old Malyalam movie where similar ban was imposed due to religious sentiments..

Superb stuff. Despite umpteen instances showing such bans rarely work, the high officials keep at it..

Income tax implies that Government owns you

April 18, 2017

One of the biggest hoodwinks of governments worldwide has been to convince people that any income on which you pay taxes is white and what you manage to hide is black. It is just amazing how convincingly governments have managed to do this and how easily we have bought into this idea. Even so called liberals buy into this idea. The history of this conviction has to be tracked and written as it makes for a great story.

This piece from Jeff Tucker is a reminder that income tax is the root cause of all evil.


After a long pause, Market Stabilisation Scheme is back…

April 17, 2017

I think the last time, government mopped up liquidity via MSS was Sep 2, 2008. That week, RBI notified issuance of  91 day T-Bills worth Rs 5000 cr out of which Rs 2000 cr was for MSS. There was also another issuance same day of 182 day Tbills as well worth Rs 2500 cr of which Rs 2000 cr was under MSS. The government also used to issue bonds for MSS but not sure when was the last time they were used.

After Sep 2 2008,  came Sep 16 2008 and all things reversed. Of course Sep 16 2008 was when Lehman happened changing things from a surplus liquidity to a deficit liquidity position. It also led to a serious rise in fiscal deficit with government using the bonds issued under MSS as part of its borrowings to meet fiscal deficit. Until then MSS bonds were parked seperately with RBI (under liabilities of RBI Balance sheet) and could not be used by government. They were just used for liquidity purposes but soon began to be used for deficit purposes as well.

Since then each year there is a MSS limit prescribed in the budget but is not used.

Now, with things again under surplus liquidity RBI/Government have announced usage of MSS scheme. There is a weekly calendar with one issuance per week of Rs 25000 cr which is huge given previously around Rs 3000-5000 crore were used as MSS. The government will issue T-bills and not bonds (which suck liquidity for a longer period).

The results for the first auction (17 Apr 2017) have already come up. The markets have sold the 329 day Tbill for Rs 94.56 at a yield of 6.38%. Just a few days ago on 12 Apr 2017, the markets bought 364 day Tbills from government at 94.16 at a yield of 6.21%.

Interesting times are back again.. Appreciating rupee, MSS bonds being used to absorb liquidity and so on…

The puzzle of Indian urbanisation: Why rural-urban migration decelerated at 25% levels when global average is 50%?

April 17, 2017

Pronab Sen of IGC India Central looks at this urbanisation puzzle in India:

The global experience has been that as countries develop, rural-to-urban migration accelerates, and decelerates only when the urbanisation level is very high – usually well over 50%. In contrast, migration in India began decelerating when urbanisation was below 25%. In the article, Pronab Sen deconstructs this puzzle.

The main reason? India’s political system. Any rapid migration movement makes it difficult for the political masters to understand their bases. Thus, they try and slow it down:

The reason may lie in the imperatives of gaining and retaining political power. In a country where political success is driven by managing the 3 Cs of Indian society – caste, community, and class – no incumbent political leader would like to see any uncontrolled change in the social configuration of the constituency, and therefore of the winning coalition. Migration causes this both in the originating villages and destination towns. Initially these effects may be relatively small, but can snowball over time since much of migration is driven by social networks.
The political system seems to have succeeded: 80% of Indian urban growth is organic in that it arises from three predominant sources: (a) natural population growth; (b) absorption of neighbouring villages; and (c) designating existing villages as “census towns”. None of these involve spatial movement of people and hence, do not alter the social composition of constituencies. Migration accounts for the remaining 20%, most of which is for marriage. This too may not upset the political calculus.
India is just so so interesting. Contrasts everywhere..

How to deflect attention from core issues in Indian policy? Add digital/internet to policy…

April 14, 2017

The best way to deflect attention from any major issue in India is to say the 7 letter golden word: Digital. Be it anything from water provision to bus transport, the government has figured the magical word- digital/internet.

This is one such article which says Bangalore’s BMTC buses will be equipped with wifi.


Too Late to Compensate Free Trade’s Losers

April 14, 2017

The usually superb Dani Rodrik has a piece:

Today’s consensus concerning the need to compensate globalization’s losers presumes that the winners are motivated by enlightened self-interest – that they believe buy-in from the losers is essential to maintain economic openness. Trump’s presidency has revealed an alternative perspective: globalization, at least as currently construed, tilts the balance of political power toward those with the skills and assets to benefit from openness, undermining whatever organized influence the losers might have had in the first place. Inchoate discontent about globalization, Trump has shown, can easily be channeled to serve an altogether different agenda, more in line with elites’ interests.

The politics of compensation is always subject to a problem that economists call “time inconsistency.” Before a new policy – say, a trade agreement – is adopted, beneficiaries have an incentive to promise compensation. Once the policy is in place, they have little interest in following through, either because reversal is costly all around or because the underlying balance of power shifts toward them.

The time for compensation has come and gone. Even if compensation was a viable approach two decades ago, it no longer serves as a practical response to globalization’s adverse effects. To bring the losers along, we will need to consider changing the rules of globalization itself.

Robots and jobs: Evidence from the US

April 14, 2017

Daron Acemoglu and Pascual Restrepo research on emerging hot topic: