Archive for the ‘Indian Economy/Financial Markets’ Category

Indian innovation: The pressure cooker fix that saved TKK Prestige from imminent bankruptcy

May 23, 2018

This is an excerpt from a book on history of TTK Prestige group:



Financing reindustrialization: bring back development banks

May 11, 2018

Prof Deepak Nayyar argues to bring back Development banks or Development Financial Institutions (DFIs):

Until the early 2000s, development finance institutions (DFIs) had done much of the lending to corporate entities for investment in the manufacturing or services sectors. These began winding down in 2000 and were closed down in 2005. For a while, companies used retained profits or cash reserves, before turning to external commercial borrowing, the domestic bond market, or equity markets as sources of finance. It was not long before borrowing from commercial banks emerged as an important alternative source of corporate financing. Apart from behest, corrupt or inept lending, some systemic problems arose. Commercial banks simply did not have the capability to assess credit risk on long-term investment lending because they have always been engaged in advancing short-term working capital. Moreover, commercial banks were caught in a maturity mismatch, because they borrowed short from depositors but had to lend long to investors.

In countries that are latecomers to industrialization, this role has always been performed by development banks, which meet the investment financing needs of new firms in underdeveloped manufacturing sectors that are not met by capital markets or commercial banks because, in their calculus, the risk is too great. Starting around 1950, this model was adopted not only by several underdeveloped countries in Asia and Latin America seeking to industrialize, but also by Germany and Japan, which were seeking to reconstruct their economies. India was a pioneer in establishing DFIs, its equivalent of development banks elsewhere, to kick-start industrialization.


In retrospect, it is clear that these DFIs made a significant contribution to the provision of industrial finance in India. As a proportion of gross fixed capital formation in the manufacturing sector, their total disbursements rose from one-tenth in 1970-71 to half in 2000-01. The public sector relied on resources allocated by the government to finance its investment. Hence, this lending was almost entirely to the private sector. Total disbursements, as a proportion of gross fixed capital formation in the private sector, rose from one-fourth in 1970-71 to three-fourths in 2000-01. In the absence of these institutions, such levels of private investment in the industrial sector would have been difficult to finance from alternative sources. The counterfactual is important. It shows that their contribution was essential. Some of it served a strategic purpose in kick-starting manufacturing sector activities and supporting innovative lending to an emerging services sector.

There were limitations too. Sometimes, the process of due diligence for extending loans was limited or incomplete. On occasions, even the debt servicing capacity of the borrower was not reviewed or monitored after the loan had been provided. Similarly, where the lending or investment institutions acquired equity in manufacturing firms, which entitled them to place their nominees on boards of directors, their role was often that of silent partners, essentially preserving the status quo rather than protecting the interests of the institutions they represented.

In addition, there were errors of omission. Infrastructure was excluded from their portfolios. By the time this was corrected, it was too little, too late. There was almost no coordination between their lending and industrial policy objectives or priorities, so there was no preferred access for pharmaceuticals, clothing, two-wheelers, auto components or information technology.

There were errors of commission as well. DFIs provided preferential access to some entrepreneurs, firms or business houses, so that the allocation of resources was shaped by the borrowers rather than the lenders. The DFIs and the government were both responsible for the behest lending that often led to bad loans. The most serious error of commission by the government was the deliberate winding down and premature closure of DFIs. ICICI and IDBI were turned into commercial banks. SFCs and SIDCs stopped such lending. Investment institutions never had this formal mandate, and, except for LIC, withdrew from such lending.

I had raised the same points when the idea of so named Wholesale banks was floated recently. First you close DFIs and then you bring back the old wine in a new bottle.

The time has come to establish a National Development Bank (NDB) in India. Such a new institution would start with a clean slate, without any baggage from the past. It must incorporate lessons from our past experience with DFIs to eliminate errors of omission and commission. It is just as important to introduce institutional control mechanisms that were missing from the conception and design of the erstwhile DFIs. Thus, it is essential to have an institutionalized system of checks and balances that can prevent collusion between governments and firms, or between development banks and firms, to capture rents by imposing discipline on the self-seeking behaviour of any one stakeholder, or even two stakeholders who wish to collude, by other stakeholders. The design and blueprint will need careful thought.

At this juncture, an NDB is both necessary and desirable. It would help reindustrialize India. It would also de-stress commercial banks.

Well, well..

Examining Gross Domestic Product Data Revisions in India

May 2, 2018

RBi researchers should write more of such pieces.

In the recent Mint Memo (No. 12), a team of researchers examine GDP data revisions. They says broadly, the advanced estimates underestimate GDP:


SBI breaks a decades-old tradition and will hold annual board meet in Mumbai

May 2, 2018

SBI started as Presidency Bank of Bengal in Calcutta in 1806. Later Presidency Bank opened shops in Bombay and Madras as well in 1840 and 1843 respectively. Then the three were merged to become Imperial Bank in 1921 which was nationalised and renamed as SBI in 1955.

In my research on How Bombay replaced Calcutta as a major financial centre, I show how by 1940s Bombay had taken over Calcutta. However, SBI continued to have its head office in Calcutta and was only shifted to Bombay in 1970. Despite this head office relocation, the SBI Board met annually in Calcutta to maintain traditions.

Now, it seems SBI has decided to do away with this tradition. The Annual board meeting will be held in Mumbai as written in this interesting piece by Shobha Roy and Abhishek Law.

In a break from years of tradition, the State Bank of India (SBI) has decided to relocate its annual board meeting from Kolkata. This year, it will take place in Mumbai, its corporate headquarters.

SBI’s roots in Kolkata date back to the 19th century, when the Bank of Bengal was established. In 1921, the Bank of Bengal and two other Presidency banks — Bank of Bombay and Bank of Madras — were “reorganised” into Imperial Bank, which was reconstituted as the ‘State Bank of India’ in 1955.

The relationship between SBI and Kolkata took a hit in the 1970s, when the corporate headquarters was shifted to Mumbai, then Bombay. However, till the 1990s, some departmental headquarters were still based out of Kolkata. For the last quarter of a century, the annual board meet remained its sole link to the city, but even that now stands snapped.

The move comes at a time when the Mamata Banerjee-led West Bengal government has been projecting the State as “Best Bengal” or “Sonar Bangla”.

Banking industry sources link the development with the perceived decline in the State’s economic importance. “There is no legal binding on SBI to hold the board meet in Kolkata. But erstwhile chairpersons had been upholding this tradition. Business was never the consideration,” an ex-SBI official said, requesting anonymity.

SBI did not respond to mails sent by BusinessLine. Nor did it confirm whether this year’s meeting location is a one-off or will henceforth be the norm. According to senior SBI officials, the top management has cited “logistics issues”.

Apart from the Chairman and three MDs, 14 Deputy MDs, nearly 44 CGMs, other senior board members and support staff come down for the meeting annually. An entourage of 200-odd people, which includes several analysts, flies down.

The authors cite that even IPL schedule could have impacted this decision. But IPL is annual affair too and happens at this time. So hardly a reason and moreover Calcutta has enough hotels to accommodate.

Even in the Calcutta vs. Bombay piece, I show how the shift of RBI Head-office from Calcutta to Bombay played a  crucial role in cementing Bombay’ numero uno position. So shifting of headoffices especially of big and important organisations matters quite a bit in economic geography.

In the SBI case, it is perhaps more ornamental as much of action was anyways happening in Mumbai. But even then for history buffs like me, this is significant in its own ways.


Indian Antecedents to Modern Economic Thought

April 30, 2018

This paper by Prof Satish Deodhar of IIM Ahemdabad was doing the internet rounds.

The history of economic thought begins with salutations to Greek writings of Aristotle and Plato. While the fourth century BCE Greek writings may have been the fount of modern economic thought that emerged in Europe starting 18th century CE, there has been a general unawareness of the economic thinking that emanated from the Indian subcontinent. Preclassical thoughts that had appeared in Vedas dating a millennium prior to the Greek writings had culminated in their comprehensive coverage in the treatise Arthashastra by Kautilya in the fourth century BCE.

In this context, the paper outlines various ancient Indian texts and the economic thoughts expressed therein, delves on the reasons why they have gone unnoticed, brings to the fore the economic policies laid down by Kautilya, shows how these policies exemplify pragmatic application of the modern economic principles, and brings out in bold relief, the contribution of this Pre-Classical literature in the history of economic thought.

This all has been known atleast amidst a few people. However, much of Indian economic thought is reduced to a few quotes here and there. Most of economics academia based in India, has been reluctant to teach these ideas in classrooms and encourage research on the same. This is a huge challenge which has to be overcome.

Urban Transport Planning in Bengaluru: A Polycentric Governance System

April 26, 2018

Any ideas to figure and ease Bangalore/Bengaluru’s transport system are hugely welcome.

In this paper, Vivek Vaidyanathan and Sujaya Rathi look at governance systems for transport:

Transport planning in Bengaluru is characterised by institutional fragmentation, increasing private modes of transport, and questionable investment decisions in the transport sector. What are the possibilities of implementing a polycentric governance system in such a city? Answering this question requires exploring the characteristics of polycentric governance systems as part of the larger discourse in institutional economics and reflecting upon how far Bengaluru satisfies such characteristics and where changes may be required.



How the South Indian idli became so widely available despite odds…

April 25, 2018

Superb photo essay by Vikram Doctor in ET.

He points how innovations in idli making helped especially in making batter readily available helped idlis ride over chapatis:


Dinner tables, caste networks, entrepreneurship

April 25, 2018

Thus blog had pointed to how dinner tables are so important for entrepreneurship.

Niranjan Rajadhyakhsha reviews the role of dinner tables in his new piece:

A few months ago, Mumbai Mirror reported how several of the biggest real estate developers in the city traced their roots to Bhinmal, a small town in Rajasthan. Almost all the new public buildings in this town have been funded by those who struck gold in the Mumbai real estate market. One of the locals perceptively told Chaitanya Marpakwar: “See, if one person moves to a new place and makes money there, others follow. But it is important to note that all these builders had business acumen and foresight. They made the right investments at the right time. Later, they helped people from their native place to set up a business in Mumbai. It was like a chain.”

I remembered this newspaper story when I came across a new paper by two economists on what they have evocatively described as dinner table capitalism. Hans K. Hvide and Paul Oyer went through reams of data on entrepreneurs in Finland to show that many of them went into industries in which their fathers worked. And those who set up new enterprises in areas where their fathers worked did better than their entrepreneurial peers who ventured into other lines of business. Four years after the new enterprises were set up, the ones in the former group were more likely to survive and have more employees.

Not just real estate, even much of diamond business is driven by Jains from Palanpur. There are several such stories of caste networks and entrepreneurship. And yes how they come from a common location..

Patanjali bidding for Ruchi Soya foods?

April 24, 2018

Baba Ramdev run Patanjali group always has some surprises. How the group has captured both the imagination and markets is quite a story.

This story in Business Line says that the Patanjali group is bidding for Ruchi Soya foods:


Prof A.K. Bagchi: Bank frauds are not unknown in India

April 20, 2018

Nice interview of Prof A.K. Bagchi. His amazing work on SBI’s history should be widely read and taught but sadly people are not even aware of the history volumes.

Have Nirav Modi and Vijay Mallya done something entirely new?


In photos: The slow transformation of a place into the capital city of Amaravati

April 19, 2018

S. Ananth in this photo essay shows how the capital city of Amaravati is shaping up:


RBI’s woes spreading from banking regulation to cash management..

April 17, 2018

It is quite surprising how cash crunches are becoming common since Demonetisation in Nov-2016. We also have issues of some denomination of currencies are not accepted like Rs 10 and small amount coins.

It is for nothing that scholars who studied money and its history advised never to interfere with money. For instance, Milton Friedman quoted John Stuart Mill:


Cash crunch in parts of India?

April 17, 2018

There are reports coming from different corners about cash crunch and empty ATMs.

Madhya Pradesh chief minister Shivraj Singh Chouhan on Monday alleged a conspiracy aimed at creating cash crunch in the market by hoarding Rs 2000 currency notes and warned that the government will act sternly against the perpetrators.

“When demonitisation took place, markets were flooded with currency notes worth Rs 15 lakh crore. Today, Rs 16.5 lakh crore currency notes have been printed and circulated. But where are the Rs 2000 currency notes vanishing? Who is hoarding them? Who is creating currency crunch?” Chouhan asked a large gathering of farmers at Shajapur district headquarters. 


Chasing The Machine: India’s first computers and the Cold War

April 16, 2018

Fascinating account of  history of computers in India by Prof Nikhil Menon of Notre Dame University.

Prof Menon starts with this story of Morton Nadler who escaped from Prague to Calcutta for setting up a computer at Indian Statistical Institute at the behest of PC Mahalonobis. The entire tale is woven with ongoing Cold War and geo-political affairs. It was several events and conspiracies which led to computers coming to India.

What caught my eye was how computers were needed to “mine big data” to usher planning:

An encounter with Prasanta Chandra Mahalanobis—founder of the Indian Statistical Institute, and the driving force behind India’s Second Five Year Plan (1956-61)—presented Nadler with an escape route. Mahalanobis made Nadler an offer to work for the institute in Calcutta as a computer scientist. Czechoslovakia could not object to Nadler leaving for India (given India’s friendly relations with the Soviet Union), and in American eyes spending time in a democracy that was formally non-aligned in the Cold War helped rub off the stain of communism. Nadler signed a two-year contract to join the ISI “to work on electronic computers.” At the time, the institute was home to the only two electronic computers in India.

The first time he saw an electronic computer at Harvard in 1947, Mahalanobis was mesmerised. Stunned by its ability and convinced of its indispensability to economic planning, he believed that computers would solve one of centralised planning’s largest problems: big data. They could help with complex calculations and develop mathematical models of the economy. Mahalanobis believed that they could be vital for assessing trends for the extensive National Sample Survey that he was integral in launching. Unlike most countries that used computers in the mid twentieth century, in India their earliest use was for development—not in the military. The computer’s potential for planning was how Mahalanobis and the Indian government justified their pursuit and enormous expenses.

How this big data talk is seen differently today. But in reality the objectives are the same.

Highly recommended….


Is India a currency manipulator?

April 16, 2018

The US Treasury in its semi-annual currency report to the Congress has added India on the watchlist of currency manipulators:

Treasury has established a Monitoring List of major trading partners that merit close attention to their currency practices and macroeconomic policies. An economy meeting two of the three criteria in the 2015 Act is placed on the Monitoring List. Once on the Monitoring List, an economy will remain there for at least two consecutive Reports to help ensure that any improvement in performance versus the criteria is durable and is not due to temporary factors. As a further measure, this Administration will add and retain on the Monitoring List any major trading partner that accounts for a large and disproportionate share of the overall U.S. trade deficit even if that economy has not met two of the three criteria from the 2015 Act. In this Report, the Monitoring List comprises China, Japan, Korea, Germany, Switzerland, and India, the latter being added to the Monitoring List in this Report.

Why India has been added?

India increased its purchases of foreign exchange over the first three quarters of 2017. Despite a sharp drop-off in purchases in the fourth quarter, net annual purchases of foreign exchange reached $56 billion in 2017, equivalent to 2.2 percent of GDP. The pick-up in purchases came amidst relatively strong foreign inflows, both of foreign direct investment and portfolio investment. Notwithstanding the increase in intervention, the rupee appreciated by more than 6 percent against the dollar and by more than 3 percent on a real effective basis in 2017. India has a significant bilateral goods trade surplus with the United States, totaling $23 billion in 2017, but India’s current account is in deficit at 1.5 percent of GDP and the exchange rate is not deemed to be undervalued by the IMF. Given that Indian foreign exchange reserves are ample by common metrics, and that India maintains some controls on both inbound and outbound flows of private capital, further reserve accumulation does not appear necessary.


In the earlier report, Treasury had said it is watching India:

Over the first half of 2017, there has been a notable increase in the scale and persistence of India’s net foreign exchange purchases, which have risen to around $42 billion (1.8 percent of GDP) over the four quarters through June 2017. India has a significant bilateral goods trade surplus with the United States, totaling $23 billion over the four quarters through June 2017. Treasury will be closely monitoring India’s foreign exchange and macroeconomic policies.

Mint edit says India is not a currency manipulator:

How are countries accused of currency manipulation by the US Treasury actually identified? There are three parameters that are used, sometimes unthinkingly. First, a country has to run a significant trade surplus of over $20 billion with the US. Second, it is judged not by the amount of currency intervention but whether such an operation is a one-sided attempt to keep the exchange rate down, measured in terms of additional foreign exchange reserves as a percentage of gross domestic product (GDP). Third, a country should have a large current account surplus with the rest of the world. How does India fare on these three fronts?

India does have a $23 billion trade surplus with the US, though that is dwarfed by the $375 billion trade surplus that China runs with the US. Mexico, Japan and Germany have far bigger bilateral trade surpluses. The net foreign exchange purchases by the RBI in 2017 amounted to 2.2% of GDP, which is close to what Thailand, Taiwan and Switzerland have done. And India is the only one of the countries on the US Treasury list that has a current account deficit with the rest of the world. Countries such as Thailand or Mexico were considered far more likely than India to be identified as potential currency manipulators.

Do Indian policymakers have to worry? They should not in normal times. The mechanical way in which the US Treasury interprets its three main parameters for identifying currency manipulation is almost scandalous. Also remember that the US has not yet formally accused China — with its notorious mercantilism — as a currency manipulator. US President Donald Trump had promised during his election campaign to treat China like a currency manipulator. If a country such as China with a massive bilateral trade surplus with the US, a large current account surplus with the rest of the world, and historically unprecedented management of its exchange rate is still only on the watch list, then the chances of India being actually termed a currency manipulator are slim.

The problem is that these are not normal times. Trump is merrily charging into a trade war that has much of the world on tenterhooks. He believes American workers are getting pushed into a corner because of trade partners who get preferential treatment in free trade agreements, or who strategically use trade barriers, or who keep their exchange rates artificially low to promote exports to the US. The new list released by the US Treasury needs to be seen against this background.

Indian policymakers have to be sensitive, without actually overreacting, to the risk that Trump may move from rattling the sabres to actually using them. India has traditionally tried to balance between preventing excess currency appreciation on the one hand and protecting domestic financial stability on the other. Much now depends on how the Indian government and the Indian central bank respond to the implicit US threat — but the two most obvious consequences could be an appreciating rupee as well as excess liquidity that messes with the interest rate policy of the RBI.

Ira Dugal discusses on BQ:

While there is no doubt, that India is now comfortable on forex reserves, the Treasury Department’s own data shows that its reserve accretion in 2017 and level of reserves is comparable to the other trading partners of the U.S.

The report also looks at adequacy of reserves slightly differently from the RBI by measuring it mostly against short-term debt. However, in a 2015 paper, RBI staffers had pointed out that India may need to consider factors other than the traditional metrics of forex reserve adequacy. One such factor is potential volatility of foreign portfolio inflows, since such flows are a significant source of financing India’s current account deficit.

Finally, while supporting the employment generating export sector is not the RBI’s mandate, it would be justified in keeping an eye out on that aspect too. As a flexible inflation targeting central bank, growth is still broadly part of the RBI’s mandate. To the extent that the currency impacts exports, which in turn impacts growth and employment, the Indian central bank would be justified in ensuring that the value of the currency is not wildly out of line with fundamentals just because of a surge in capital flows.

The geo-politics of currency markets…

Should RBI issue e-rupee? A global outlook..

April 11, 2018

My new piece in Mint newspaper.

The piece is written in backdrop of RBI setting up a team to study whether it should issue a digital currency. I sum up lessons from several other central banks and central bankers which have studied and spoken on the topic.


Building an Indian bank: Punjab National Bank’s Swadeshi roots

April 9, 2018

Poulomi Banerjee of HT has a nice piece on PNB’s historical roots. I had earlier pointed to another Outlook article which pointed to the Punjabi pride behind the bank.

This one also starts on similar lines but is more on the early promoters and their battles:


RBI to review desirability and feasibility to introduce a central bank digital currency

April 5, 2018

One should not just criticise the Indian central bank but even appreciate where it is due.

In the recent policy, RBI announced that it is studying  central bank digital currency (CBDC):

Rapid changes in the landscape of the payments industry along with factors such as emergence of private digital tokens and the rising costs of managing fiat paper/metallic money have led central banks around the world to explore the option of introducing fiat digital currencies. While many central banks are still engaged in the debate, an inter-departmental group has been constituted by the Reserve Bank to study and provide guidance on the desirability and feasibility to introduce a central bank digital currency. The Report will be submitted by end-June 2018.

One is looking forward to the group’s report (hope they make it public).

Given the massive craze for everything digital and cashless in India, it has been surprising all this while that RBI has been silent on things like CBDC.

RBI is more interested in setting another data centre than inform people on the banking crisis…

April 5, 2018

It is quite amazing how Indian central bank has gotten away without explaining anything in recent years. The central bank pushed demonetisation on people and showed least sympathy for people’s troubles during the period. Its so called Monetary Policy Committee (MPC) meetings which were supposed to usher transparency were as opaque as it could get. Most MPC statements released then were like “we are based in Ivory towers and do not care”.

Now, its recent monetary policy does not even mention ongoing crisis in banking. The RBI chief recently shrugged off responsibility saying it does not have power to regulate public sector banks. But we have seen similar troubles at the leading private sector bank as well.

Least you imagine that central bank officials will say something on the matter in the monetary policy on 5th April 2018. But there was nothing in the MPC statement released today.  All it says is this winding statement which hints there is no problem whatsoever in Indian economy:


Mahindra and Mahindra to assist in making Sri Lanka’s first indigenous car

April 4, 2018

This is interesting bit of news from the island country. Its citizens will see its first indigenous car in 2019.

From India’s perspective, this is important as Mahindra is a partner in the joint venture. In a way it is doing what Suzuki did to Maruti more than three decades ago:

 Towards the end of 2019, automobile loving Sri Lankans will see something they have been longing to see – a locally manufactured “Sri Lankan” car vying for road space with international brands. Sri Lanka’s Ideal Motors has teamed up with India’s automobile behemoth the US$ 19 billion Mahindra and Mahindra (M and M), to make a range of vehicles ,starting with a small car, at a plant in Kalutara district south of Colombo.

This will be the second Sri Lankan attempt to make a car in the country, the first being the late business magnate Upali Wjewardene’s UMC Mazda and Upali Fiat in the 1970s.  But there is a vital difference between Upali’s cars and what Ideal Motors wants to do. While the earlier plants were assembly units putting together imported parts brought down in a completely knocked down condition, the Ideal Motors’ car will be an indigenous one up to at least 35% eventually.

The LKR 3 billion (US$ 19.2 million) Joint Venture, in which Ideal Motors will have a 65% stake and M and M the rest of the 35%, will also involve technology transfer and training to personnel. “The Vendors Park will have units from the Mahindra and Mahindra stable of auto parts manufacturers in India as well as locally owned units. The local units will work under the supervision of M and M experts to ensure international standards,” Welgam

“The idea is to give a boost to industrialization in Sri Lanka and train its entrepreneurs and employees to work at the higher reaches of automobile technology,” the Chairman of Ideal Motors said.

The cars and other vehicles made in the Sri Lankan plant will be exported, as Sri Lanka is too small a market to absorb the entire production. And one of the first markets to be serviced will be the Indian one next door, Welgama said.

Describing the venture in cricketing terms, Aravinda de Silva, the cricketer turned Vice Chairman of Ideal Motors, said that if the JV succeeds, it will be a game changer in Sri Lankan economic history, akin to the Sri Lankan cricket team’s lifting the World Cup in 1996.

Nice bit of history being created..



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