Archive for the ‘Indian Economy/Financial Markets’ Category

SEBI capping Mutual Fund expenses

September 19, 2018

One wonders why financial services industry needs to be pushed by regulatory bodies to act in investor’s interests.

In the Board meeting y’day, SEBI knocked off a few percentage points from the expenses charged by Mutual Funds:



What led Gandhi to develop ideas on trusteeship? Ahmedabad’s Nagarseths and Pedhis…

September 19, 2018

Superb paper by Jaitirth Rao and Shishir Jha.

They look at the sources behind Gandhi’s idea of trusteeship. Given the total chaos in corporate governance and lack of ethics, one could revisit Gandhi’s idea of trusteeship:

Mahatma Gandhi’s views on trusteeship deserve special attention as part of the discipline of political economy. He repeatedly opposed the idea of expropriating wealth or property from the rich, yet, for him, wealth did not “belong” to the rich owner. The owner was merely the “trustee,” one who was duty-bound to take care of the wealth and use it not just for his personal welfare but for the welfare of many. Similarly, the firm too was in his opinion held “in trust” by the person in control in a tripartite partnership along with its employees and customers. The different nuances of Gandhian trusteeship are examined by tracing the influences on Gandhi that led him to his conclusions.

The literature points to three such sources:

  • Trusteeship is seen as an integral part of English Common Law. Being a lawyer trained in England, he knew about the Trusts
  • Quaker ideas
  •   Hindu Scriptures particularly Isavasya Upsanishad whose opening line says: It is a call to ­enjoy the worldly gifts given to a person while simultaneously refraining from coveting another’s wealth.

The authors point to a fourth source: Ahmedabad’s Nagarseths and Pedhis:

English law, Quaker ideas, and Hindu scriptures are three credible sources from which Gandhi must have and indeed did derive inspiration as he began developing his ideas on trusteeship. Exploring each of these sources would involve separate exercises. But, was there and is there something still missing? And, as we were grappling with this question, we came across this quote from Gandhi:

If the wealthy and the educated wish, they can change the face of Ahmedabad. The biggest Jain firm is in Ahmedabad. It is said that the firm of Anandji Kalyanji is wealthier than any other firm in the world which can be described as a religious body. (Gandhi 1999a)

This unexpected sentence sent us off in various directions and, during the ensuing journey, we managed to explore a uniquely Indian, nay Gujarati, wellspring, from where Gandhi seems to have drawn considerable inspiration. We explored the world of Gujarati pedhis and nagar­sheths and found empirical validation in the work of Dwijendra Tripathi and M J Mehta (1978). We found a theoretical position where we could locate Gandhi’s intellectual forebears in an authentically Indian setting as we explored the article titled, “The Work of Theory: Thinking across Traditions” by Prathama Banerjee, Aditya Nigam and Rakesh Pandey (2016).


The paper goes onto connect these dots…

Do the Rich Get Richer in the Stock Market? Evidence from India

September 18, 2018

John Y. Campbell, Tarun Ramadorai and Benjamin Ranish in this paper:

We use data on Indian stock portfolios to show that return heterogeneity is the primary
contributor to increasing inequality of wealth held in risky assets by Indian individual investors.

Return heterogeneity increases equity wealth inequality through two main channels, both of
which are related to the prevalence of undiversified accounts that own relatively few stocks.

First, some undiversified portfolios randomly do well, while others randomly do poorly. Second,
larger accounts diversify more effectively and thereby earn higher average log returns even
though their average simple returns are no higher than those of smaller accounts.

Our paper partially supports Pikettyís (2014) concern that the rich get richer by earning
high investment returnsó subject to the distinction, central in Finance theory, between simple
and log returns. Our results also highlight the importance for developing countries of
investment vehicles, such as mutual funds and exchange traded funds, that are already
common in developed countries and that give small investors an affordable way to diversify


RIP: Deena Khatkhate

September 18, 2018

It is quite something about 2018 as notable figures in their respective fields leave us one after the other.

Last weekend, Deena Khatkhate also passed away.

Niranjan of Cafe Economics tweeted about Mr Khatkhate:

 Sep 17

Deena Khatkhate, Anand Chandavarkar, M. Narasimham and V.V. Bhatt were the formidable quartet that built up economics research at the RBI in the 1950s and 1960s. Three of them subsequently moved to the IMF. Narasimham stayed on — and became RBI governor

 Sep 17

Khatkhate was also an elegant writer on economic issues. His EPW column of dispatches from the banks of the Potomac were consistently brilliant. And his collected essays –Ruminations of a Gadfly — is one of my favourites, especially the pen portraits of great Indian economists.

There is another tribute by Prakash Loungiani of IMF on his blog. Prakash cites three main areas of Mr Khatkhate’s work:

“Life is lived forwards but understood backwards,” wrote the philosopher Kierkegaard. This collection of a life-time’s work of the Indian economist Deena Khatkhate can be understood as an act of rebellion against much of his intellectual inheritance: socialism and central planning, Keynesian macroeconomics, and an adversarial view of North-South relationships. Instead, these essays put forward a spirited (but not uncritical) defense of capitalism and markets, espouse a macroeconomics as much Friedmanite as Keynesian, and urge a constructive approach to relationships between developing and advanced nations.

The last of these themes is illustrated in arguably the best article in the collection, which is on the brain drain—the emigration of skilled workers from developing to advanced countries. In this article, published in F&D in 1971, Khatkhate challenged the prevalent view of the brain drain as an evil, a form of aid from the poor to the rich. He showed that because most emigration occurred from developing countries with a clear excess supply of skilled workers, it was actually a social safety valve for the poor countries. And because it encouraged the “cross fertilization of ideas” between skilled workers from the poor nations and the richer nations, the brain drain could be “a desirable investment.”


Prior to joining the IMF, Khatkhate worked for over a decade—from 1955 to 1968—at the Reserve Bank of India, the country’s central bank. Not surprisingly, therefore, a second major theme of the essays is the role of macroeconomic and financial policies in promoting economic growth. In the 1950s, the Keynesian view advocated running fiscal deficits to promote growth in developing countries. The rationale was that since there were underemployed resources in these economies, heavy government spending could lead to employment of those resources without triggering inflation. However, Khatkhate writes that the negative evidence on the actual impact of government spending convinced him that “all that happened as a result of heavy resort to fiscal deficit was inflation, decline in income, saving and investment.” Khatkhate’s views on monetary policy also differed from the 1960s Keynesian view, emphasizing as they did the need for rules to guide the central bank rather than give it too much discretion.

A third theme is the rhetoric vs. the reality of socialism and central planning. Khatkhate blamed socialism for trying to deliver both growth and equity and delivering neither. The real problem in developing countries, he said, was not so much the skewed income distribution but “improving the standard of the whole mass of people, which is possible only with rapid economic growth.” These views were far from the mainstream when Khatkhate wrote them in 1978. He is not, however, an unvarying defender of capitalism and free markets. On the free mobility of capital, for instance, his views are close to that of his compatriot Jagdish Bhagwati in favoring a cautious approach, given the evidence that hasty liberalization can contribute to financial crises.

Just as in case of Prof Dwijendra Tripathi, so little is known about Dr. Khatkhate as well.

Infact, barring M. Narasimham whose name comes up in the two financial sector reforms committees he chaired in 1990s, we hardly know anything much about the other three economists mentioned by Niranjan. The works of these economists is barely taught anywhere in economics departments in Indian universities.

I had the good fortune to review some of VV Bhatt’s work during my PhD thesis work, but is hardly enough.


Arvind Subramanian pays a tribute

Will IL&FS be India’s mini Lehman?

September 13, 2018

The ever alert and hard hitting Andy Mukherjee in his new piece looks at the woes of IL&FS which is the new trouble for India’s financial markets.

India is marking the 10th anniversary of the 2008 global financial crisis with its own mini-Lehman moment.

True to script, ratings companies have belatedly realized that the IL&FS Group — Infrastructure Leasing & Financial Services Ltd. and its associates — is woefully short of liquidity, with about $500 million in repayments coming due in the second half of its fiscal year through March and only about $27 million available. The group, which missed a payment in the commercial-paper market last month, is now late in servicing an inter-corporate deposit.

Shocks are starting to reverberate amid an avalanche of ratings downgrades. That’s only to be expected: On the hook for the group’s $12.5 billion debt are banks and mutual funds. (IL&FS itself is a motley collection of shadow lenders that don’t take deposits.)

Meanwhile, the group’s assets include financial claims on everything from roads and tunnels to water treatment plants and power stations. This is the stuff that IL&FS has been financing for 30 years; none of it can be liquidated to make lenders and debt-fund investors whole.  

But then, infrastructure — when taxpayers don’t fund it — is always about rolling over liquid, short-term debt to create solid long-term assets. Trouble starts when power plants get stranded for lack of fuel or purchase contracts, and roads clear environmental hurdles only to crash into low tolls, poor usage and payment disputes with the highway authority. The economics collapses backward. 

He compares the IL&FS chief who resigned this year to Richard Fuld as well!

All the talk that India is different from the west as we did not allow sub-prime markets and other financial innovations, is being questioned now. The human greed and this ability to create finance from nowhere will eventually deflate all of us. We have exclusions and inequality of all kinds but in finance this goes to a different level. How sovereigns and firms are able to raise trillions of dollars of debt on one hand and completely waste it. And on other hand we talk about lack of financial access and basic livelihood for so many others. There is something fundamentally wrong with how we humans have devised and designed these mechanisms….

What the Starbucks App can teach central bankers

September 12, 2018

Nice piece by Mandar Kagade. He gets to basics of economics which says do not regulate prices of any products. The idea behind regulation is to safeguard consumers but usually the opposite happens.

Mandar brings this insight into regulating payment markets. He nicely stitches the story using Starbucks app which he calls a killer app. The app in an interactive fashion helps you earn points while sitting at the cafe which you can then use to buy the coffee.

He then relates the Starbucks experience to central bankers and card schemes…


Tribute to Prof Dwijendra Tripathi: Taking forward the legacy of a pioneer of Indian business history

September 12, 2018

Here is my tribute to Prof Tripathi in Mint. It is co-written with Prof Tana Trivedi, who teaches business history at Ahmedabad University.



10 Years Since Lehman Collapse: What India Didn’t Learn From The Global Financial Crisis

September 11, 2018

Jahangir Aziz,Chief Emerging Markets Economist at JPMorgan, goes back to 2008 when he was part of a government panel to figure the impact of global financial crisis on Indian economy. He says initially there was this feeling that the crisis would just pass with minimal impact. As the initial reactions from financial markets was much worse, it led to lot of policy interventions and we overdid things. Both fiscal and monetary stimulus continued for longer than required leading to high inflation, high fiscal deficits and current account deficits leading to the 2013 crisis. The banking troubles continue even today.

Given this broad experience, he draws three main lessons from the 2008 crisis:


Examining Electoral Data: An Enquiry into People’s Preferences of Communist Parties in West Bengal and Kerala

September 11, 2018

Interesting paper by Profs Arun Kumar Kaushik and Yugank Goyal of O P Jindal Global University, Sonipat, Haryana.

In this paper, we try to show why the approach of painting the two states with the same “communist” brush needs re-examination and propose two ideas: first, that the obsession of communist regimes as the most preferred political mandate of the people needs revision, and second, that we recognise that the two states have markedly different political preferences and processes and therefore must be studied with as much mutual consideration as there is for any two other states in the country.

To substantiate these two ideas, we closely examine constituency- and party-level data collected from every assembly election that has taken place in the two states since 1967. This allows us to observe the preference of the people in isolation of whatever their ideology may have been. In other words, since studying voting preferences of people is a neat way of insulating the mandate from speculative predictions and policy analysis, our ex post analysis has lessons for ex ante imagination of what the political preferences of the people are rather than how the government of the states is constructed. We do not engage with political processes or elements of political decision-making in the two states (even though we recognise the
importance); instead, we encourage scholars to re-examine their labels of communism in the state. Our results should merit the attention of those who are interested in how the electorate decides its rulers.

The motivation for the research is to recognise the importance of understanding people’s political preferences, reflected in election mandates. Election results and the micro-constituents of the election data contain a rich source of knowledge about political imagination that shapes the state. There is a considerable value in examining what people want(ed) so as to construct a more robust understanding of political participation, preference, and the value system embedded in the social fabric of the region. In fact, one of the contributions of the paper is that it knocks out the surprise factor on the defeat of the Communist Party of India (Marxist)—CPI(M)—in 2011 (and later in 2016); if one observes the electoral indices, these results will not look so drastic.


R.I.P. Prof Dwijendra Tripathi: The doyen of Indian business history

September 6, 2018

It has been quite sad in last few months with several stalwarts of respective fields leaving us.

Prof Dwijendra Tripathi, former Professor of Business History at IIM Ahmedabad passed away last evening, on Teacher’s day.

He was the doyen and torch bearer of Indian business history. Indian business history and his name were like synonyms of each other.  His book on Indian business history is a must read for all those who have not read his works. His EPW papers are here.  Here is Vrunda Pathare’s (Chief Archivist of Godrej) tribute to Prof Tripathi

No words can summarise his contribution to the subject and an era has gone. We have hardly created any passion or interest in the subject despite Prof Tripathi’s best efforts. Once Prof Tripathi retired from IIMA, business history stopped being taught at IIMA. It was after a gap of few decades that it again started thanks to Prof Chinmay Tumbe’s efforts. But a lot of time and resources have been lost in the period.

India’s business history is as extensive and rich as its economic history but we barely pay attention to either of the two subjects. Economic history still gets some remote attention but there is absolutely nothing  of this sort in business history. The several business and management schools could make their region’s business history their forte and tell students about the several linkages. This is something which would surely please Prof Tripathi and is the best way to keep his legacy going.

Rest in Peace Sir.

Mumbai Based Heritage Management Team Traces Family’s Business History

September 5, 2018

Superb bit of research and great to see Mid-day covering this story.

The story is about this firm- Past Perfect– which a Heritage Management agency that provides archival services to institutions, organisations and private families who are proud of their legacy and value it as a source of inspiration for future generations.

The team figured history of Bajaj family:


State Government Market Borrowings in India – Issues and Prospects

September 3, 2018

Nice speech by Mr BP Kanungo of RBI.

He reviews the market borrowings in India by State Governments.


The sudden reversal of fortunes on views over RBI’s independence…

September 3, 2018

The current RBI Governor must be surprised to read the constant change of opinions over his tenure.


The Reserve Bank of India needs to engage with history

August 31, 2018

My debut piece in Moneycontrol. I argue that where other central banks look so much at their history, RBI is largely ahistorical in whatever it does.



Amravati 2018 bonds listed on BSE…

August 27, 2018

Indore Municipality recently raised bonds on NSE.

There has been talk of Government of Andhra Pradesh raising money for building its proposed capital of Amravati via bonds. The bonds were issued on 14 August and got listed on BSE today:

Andhra Pradesh CM Nara Chandrababu Naidu on Monday rang the opening bell to mark the listing ceremony of ‘Amaravati Bond 2018’ at Bombay Stock Exchange (BSE). The bond was issued by Andhra Pradesh Capital Region Development Authority (APCRDA) for the construction of the state capital, Amaravati. 

The platform was launched on July 1, 2016, to facilitate online bidding for private placement of debt securities. Since then, 120 issuers have garnered Rs 4.86 lakh crore through the exchange mechanism, reports PTI.

“On August 14, 2018, APCRDA successfully raised Rs 2,000 crore by issuing bonds on private placement basis using BSE BOND platform,” the exchange said in a statement.

“Amaravati Bond 2018 has created history by over-subscription raising Rs 2,000 crore and is the testimony of investors’ confidence in Andhra Pradesh and Amaravati. This will help in developing Amaravati as smart, sustainable and happy city and as a global destination of people, jobs and investments,” Andhra Pradesh CM Chandrababu Naidu said.

Interesting developments in history of bond finance in India. It also tells us that old-age competitive rivalry between BSE and NSE could move from equity to debt space as well. NSE has been the clear winner in equity space and it will be interesting whether BSE can create some competition in the debt space…


This piece raises concerns on the bonds – 10.32%-  being on the higher side

The long road to building an Indian banking union: Learning history backwards from European Banking Union

August 27, 2018

My new piece in Mint.

One usually does historical research by going into past and try figure evolution and make sense of the world today. There is another way where we look at evolution in current terms in some economy and try & figure whether and how we could apply these ideas to some economy in the past.

The case of ongoing developments in European Banking Union belongs to the second category. As the members of Europe try and build a banking union, it gives us this rare opportunity to look at banking union in other countries as well.

This piece in Mint looks briefly at how banking union gradually developed in India as well. The comparisons are fascinating and striking…


RBI’s monetary policy has been circumscribed by CPI inflation targeting…

August 24, 2018

Worldwide central banks are getting criticised for their narrow inflation targeting mandates. Latest is this piece which has asked BoE to include growth in its target. NZ has already widened its mandate by including employment.

The how can India which has just recently moved to inflation targeting be left behind?

EPW’s recent editpiece argues to revisit the mandate. They say RBI recent rate hike is a Pavlovian response (:-)):

The Reserve Bank of India (RBI) has indulged in one more Pavlovian response to the self-propagated inflationary expectations by increasing the policy (repo) rate for the second time in succession—first from 6% to 6.25% and further to 6.50%—along with similar quarter percentage point increases in the reverse repo rate, the marginal standing facility rate, and the bank rate. The objective is to push up the cost of liquid funds supplied by the RBI to the banks and consequently make bank loans more expensive for the borrowers; potentially to contain retail inflation within the mandated range.

It is indeed disconcerting that in the management of the national economy the two potent instruments of public policies—fiscal and monetary—have been pigeonholed into a narrow groove of the liberal economic framework, barring them from serving the wider objectives of higher growth, more employment opportunities, and diminishing social inequalities. The path of fiscal consolidation has led to inadequate allocation of public funds for social sectors, where India’s progress stands behind many peer countries. The incidence of such a phenomenon has further widened inequalities in the system.

In the case of the monetary policy, the RBI’s sole responsi­bility has been narrowed to a legislative mandate of inflation targeting within a range of 4%, +/–2% in the medium term, subject to a single interest rate policy vis-à-vis the liquidity adjustment for banks. Almost all retired RBI governors have objected to such circumscription of monetary policy, broadly on the grounds that exclusive attention to inflation is defocusing the central bank of its larger developmental objectives. Much of the inflationary processes in India are driven by supply-side issues over which the RBI has little control. Thus, the monetary policy transmission mechanism remains a weak spot. Various independent studies have questioned the RBI’s claim that movements in CPI inflation rates have been achieved by its repo rate changes.

Also, there are multiple measures of inflation—consumer price index (CPI), wholesale price index, and the gross domestic product (GDP) deflators—with each having different relevance for different players, namely, consumers and producers. A classic example is the successful dairy movement in Gujarat, which had proved that price increases in a developing economy serve as incentives for producers to increase production. Considering the relative price behaviour of various commodities and services, the 4% CPI target may be unduly low. Within inflation, there are subsets such as headline and core inflation. But, as the RBI governor admitted at the latest press conference, “The legislated target is on CPI headline and our policy is oriented to keep that at 4%.”

It is high time for both the RBI and the government to make a choice between legislative mandates of inflation rate targeting and a holistic approach for development management. The RBI should aim at promoting financial savings in the economy, which is a crying need; ensure a positive real rate of return to depositors on their bank deposits, which still remains a major and easy instrument of making savings for the vast masses; and customise fiscal incentives for small savers who, despite predominating the saving community, are usually bypassed by fiscal interventions. While it is not the intention to revert to the erstwhile rigorous interest rate control regime, one single prescription, namely bank deposits with a one-year maturity should get a minimum of +2% real rate of return on the previous year’s CPI inflation rate. The other prevalent savings rates, including the savings deposit rate, the postal rates, etc, will get adjusted over time. The additional cost of funds so imposed on the banks will be taken care of in the marginal cost of funds based lending rate (MCLR) which has been prescribed for banks to follow.

On the matters relating to the deployment of bank credit for development purposes, one gets a distinct impression that the authorities are overwhelmed by the twin balance sheet problems of corporates and banks due to non-performing assets (NPAs). On the other hand, there is an overwhelming dominance of the informal sectors in the Indian economic structure which are neglected by the banking system. Since the Indian banking system has not tapped the millions of unincorporated enterprises operating in different sectors of the economy, India’s private bank credit to GDP ratio is as low as 52% in comparison to the 110% or more in many comparable economies. Substantial thinking should go into the organisational and instrumental needs of banks for tapping these potentially large numbers for productive credit dispensation. Also, the industrialisation process has suffered due to the closure of large development finance institutions, and the new proposal made by the RBI almost a year and a half ago has not taken off. But, no attempt has been made to find out why. A plausible ideological weakness of this proposal is its exclusive emphasis on the private sector–led non-banking finance companies. These can never mobilise the required resources for rendering long-term finance for industry unless there is public sector support.

Considering, thus, the vast sets of developmental issues awaiting the attention of the RBI and the government at this stage of development, it is time that a high-powered commission is appointed to undertake detailed probing of the issues involved and come out with appropriate recommendations.

These arguements are barely new. Infact as it was felt that RBI has been unable to do so many functions leading to ignorance of inflation. leading to regime of inflation targeting. The whole idea that RBI should play a role in development of the country is as old as the institution itself.

But then we are living in such times that old arguments keep coming back given the dissatisfaction with the overall state of economy. Just that they have come a bit too soon in case of RBI…


The last glassmakers of Kapadwanj (Gujarat)

August 23, 2018

I had written about a lone bell maker left in a Greece town which boasted of few hundreds at one point of time.

We have a similar story of a glassmaker in town of Kapadwanj in Gujarat:


How women in rural India turned courage into capital: Story of Mann Deshi Mahila Sahkari Bank

August 22, 2018

Inspiring TED talk by Chetna Gala Sinha who started the Mann Deshi Mahila Sahkari Bank. She came in KBC as well which was quite inspiring too.

What led to the formation of the bank? The other banks were unwilling to open bank accounts for rural women:


Brief history of Indian Rupee when it was linked with Sterling Pound

August 21, 2018

Puja Mehra has a nice piece on the tricky (and difficult to understand) history of Indian Rupee when it was linked with Sterling Pound before and after independence.

The rupee’s depreciation to more than 70 to a dollar just ahead of Independence Day led to historical comparisons of the value of the rupee. These can be misleading, as political freedom did not automatically result in India’s monetary independence in 1947. The rupee’s association with Britain was prolonged by factors beyond India’s control.

On a sterling standard 1931 onwards, the rupee, linked to a depreciating currency, depreciated along with the sterling.


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