Archive for the ‘Indian Economy/Financial Markets’ 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!:


The ancient seaports of India which once thirived…

April 24, 2017

S.Muthiah has a fascinating article which once again shows how India was one of the trading powers till it got lost.

The author points to old names of Indian ports which are a pale shadow of their past:


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:


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.


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..

Lessons from 2017 Clark economics prize: Encourage more studies on Indian railways and economic history..

April 17, 2017

Niranjan Rajadhyaksha of Mint has this piece on the 2017 Clark prize given to Donald Daveson of Stanford.

One of Daveson papers is othe controversial topic: Development history of Indian railways. Those for railways say it connected India mainlands to hinterlands enabling development. Those against say railways was another source of colonial exploitation (perhaps the most successful one) where rich resources from hinterlands were brought first to ports and then shipped to London.

Daveson looks at historical data and falls in the first camp:


How failure of stock brokers/banks in 1860s led to formation of Bombay Stock Exchange..(and history repeated with NSE 120 years later)

April 12, 2017

This blog had earlier posted on why and when Bombay overtook Calcutta as the leading financial centre of India. Most likely Bombay displaced Calcutta around late 1940s post Partition. However, Bombay was always chipping Calcutta’s share even at the beginning of 20th century. SO it was expected that Bombay will eventually takeover Calcutta in financial activity.

One reason why eventually Bombay was to takeover was Bombay had stock markets much before Calcutta. BSE started in 1875 and Calcutta Stock Exchange started 33 years later in 1908.

The question is how and why did BSE start? BSE website has some history but not much detailed.

I had earlier blogged about a coffeebook on SEBI history.  In the book, there is a very brief account of BSE history. It is just outright fascinating how multiple factors are behind formation of financial institutions and same is the case with BSE as well. And behind most institutions is the common thread of some or the other financial crisis.


Did India get the idea for its recent demonetization by watching old episodes of M*A*S*H?

April 11, 2017

Another fascinating post by Jim Koning. He  has written some amazing stuff on India’s demonetisation drawn from monetary history.

In this post he points how US Army had also tried to demonetise notes  in the Vietnam war. The epic serial M*A*S*H was also based on the war. Though, chances are highly remote that the war serial had anything to with India’s demonetisation. But the Vietnam war surely has parallels:


Wholesale & Long-Term Finance Banks: An old wine in a new bottle?

April 11, 2017

Indian central bank recently released a discussion paper on whether India should establish some new financial entities termed as Wholesale & Long-Term Finance Banks.


Case of Konoklota Mahila Urban Cooperative Bank: A women based bank in Assam

April 10, 2017

There is little doubt that our financial media is highly biased towards its coverage of just large city based banks. Most of these banks are largely transactional in nature which just attract lot of attention due to their scale of operations and jazz surrounding them. The media hardly covers small relationship banks which are playing an equally important role serving small people in remote locations.

So getting to know about Konoklota Mahila Urban Cooperative Bank via this story is really nice. The bank is an all women bank (employees and customers) based in Jorhat (Assam). It was started in 1998 by Lakhimi Barua. In a way it was a precursor to Mahila Union Bank launched by the UPA Government which was more out of populism than designing it to really serve women customers.


Why did Bombay takeover Calcutta as the leading financial centre? Some probable reasons…(Part -II)

April 6, 2017

This post written in jiffy has become one of the most popular posts of this blog. The post looked at a timeline when Bombay probably replaced Calcutta as the leading financial centre. The post drew data from Clearing house data which shows how by late 1940s more cheques were cleared in Bombay over Delhi. This data was supported by RBI history which showed how overtime RBI moved from a twin office of Calcutta and Bombay to just Bombay. This transiton also happened towards late 1940s.

However, the question still remains why did Bombay eventually take over? I came across a wonderful book written in 1943 – A study of Indian Money Market by Bimal C Ghose (1943). The book particularly studies Calcutta Money Market but compares Bombay and Calcutta financial centres.

Before why Bombay, let us look at some more data which shows how Calcutta was more prominent compared to Bombay. All data is drawn from the Ghose book.


How many banks migrated from West Pakistan to India?

April 6, 2017

Yesterday, I had blogged about Pakistan bound banks during Partition. In the post, I pointed to two broad types of banks.

  • One which was Pakistan bound (East and West)
  • Two those who migrated from India to Pakistan and vice-versa.

We had shown most banks were in the first category. Only Habib Bank had migrated from Bombay, India to Karachi, Pakistan.

What about the banks which migrated from West Pakistan to India? (We keep our discussion to West Pakistan here as not much happened in East Pakistan.)

Again, RBI Statistical tables (1947) provide several answers and raise questions.

There were a total of 17 banks which migrated from West Pakistan to India. Around 14 were from Lahore, 2 from Rawalpindi and one from Sialkot.


Where is the currency going? Why are ATMs dry?

April 5, 2017

The cash crunch is back. There are again news of bank branches/ATMs showing no cash option. Though, as cash moved into deposits during the demon, banking system liquidity is high. It is all so ironical.

Coming back to cah crunch, Sucheta Dalal wonders what is going on?


From being world leader in economic surveys, India is now facing a serious data problem…

April 5, 2017

I was just reading this piece by Abhijit Banerjee on decline of higher quality education in India. Though it is on general education, much of is related to economics education in India.

Whereas in the 1950s and 60s good teaching jobs were scarce, and many talented people had to settle for ill-paying part-time jobs in obscure private colleges, finding competent teachers is a major problem these days, and very few places even aspire to attract world-class talent. Even prestigious institutions like the Delhi School of Economics have many unfilled slots.
It is tempting to blame the explosion of institutions. There are of course many more colleges, universities and institutes, which is why places like Presidency University (the erstwhile Presidency College) are now struggling. In 1959 they used to have the pick of the talent; now they have to compete for them against upstarts that are often able to pay much more (more about that later) and offer better working conditions.
But if you think about it, this cannot explain why the entire system is short of talent. After all, the fact that we have so many more institutions also means that we are producing vastly more graduates and each such person is a potential academic, a possible Nobel Prize winner in the making. The same factors that increased the demand for higher education should, in principle, also increase the supply of outstanding researcher-teachers? Why haven’t they?

In another article (HT: Niranjan), Prof Banerjee along with three more economists deplores the decline in statistics systems in India:


What happened to Pakistan based Banks (West and East) during the Partition in 1947?

April 5, 2017

This question has fascinated me for a while.

During India’s partition, there were mainly two parallel forces at work. One was that of partition of India into two countries. Second was integration of British Indian Union with Princely States. These political fores partition impacted economic and financial developments as well. This blog is more interested in financial history/developments as there is hardly any emphasis on the same.

In terms of integration with princely states, the issue was of State Associate Banks. This blog looked at fascinating history of these State Banks which were 54 in number! How government and RBI integrated these banks which had varied structure is quite something.Out of 54 banks, just five remained. These banks were lately in news for their merger with SBI. With them goes the fascinating history as well. In case of Hyderabad, the integration also involved a monetary union of sorts as the State had its own currency (will blog about the exchange ratio soon).

Let us now look at the partition side of the story. Here, the case was of division of banks’ assets and liabilities.

There were two types of banks here:


RBI Board clears proposal to introduce Rs. 200 notes: Another decision in secrecy?

April 4, 2017

There was a lot of criticism over the introduction of Rs 200o denomination. It was issued immediately after demonetising so called high notes of RS 500 and Rs 1000. Moreover, the velocity of Rs 2000 denomination is much lower and created further chaos. People said if at all, the RBI/ Government should have introduced smaller denomination notes like say Rs 200. This blog’s research also shows that this will be a totally new denomination just like Rs 2000. This has to be first approved by RBI Board and then the Government.

Perhaps taking a cue, RBI Board has cleared printing of Rs 200 note. Gopika Gopakumar of Mint reports:

The board of the Reserve Bank of India (RBI) has cleared a proposal to introduce banknotes of Rs200 denomination, two people aware of the development said.

The decision was taken at the RBI board meeting in March, these people said. They didn’t want to be identified as they aren’t authorized to speak to the media.

The process of printing the new Rs200 notes is likely to begin after June, once the government officially approves this new denomination, said one of the two people cited earlier.

However, there is one catch.

If this is true, then again we have a decision on new currency note taken in secrecy. A lot depends on the veracity of the news.

This time it is even a bigger secret as there was no Board meeting in March as per the website (select 2017 and then March in right menu). As per RBI Act, Section 13:


There were 54 Princely State banks in 1950s! (The thinking to merge these banks started in 1951..)

March 30, 2017

As the 5 remaining State Associate banks are going to merge with parent SBI, the blog has been interested in knowing more about these banks. The blog has put up some posts as well: one, two, three.

However, this amazing chapter drawn from Second Volume of RBI History (1951-67) pretty much sums up how these banks became part of SBI. The thinking on this process started almost as early as 1951 (more on this later in the post).

Moreover, it is fascinating to know that RBI counted 54 such State banks in 1952:


When Marginal Revolution Blog visits Lasalgaon Onion Market

March 30, 2017

One very important module in all economics training should be visiting and understanding local markets. It is appalling how as economics students we don’t know how markets/shops work in our neighbourhood and markets in our city of training. It is as if markets only exist in textbooks. They are just all around us but we hardly care. It might be just a great idea if we students understood these markets and look to make them better.

So it was interesting to read this post on MR blog by Alex Tabarrok who visited Lasalgaon’s onion market. It was also nice to read that he was invited by an avid blog reader!