Archive for the ‘Indian Economy/Financial Markets’ Category

Examining the trade-off between price and financial stability in India

January 21, 2019

Ila Patnaik, Shalini Mittal and Radhika Pandey of NIPFP in this recent paper find trade off between price and fin stability:

In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global financial crisis,
there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical
approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and
financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial
stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging
economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with
monetary policy instrument.



India’s Corporate Bond Market: Issues in Market Microstructure

January 17, 2019

Nice piece by Shromona Ganguly of  RBI in the January Monthly Bulletin.

Development of corporate bond market in India remains crucial for meeting the financing requirement of industry and infrastructure sector. Despite various initiatives undertaken in the past, there is little change in the overall market microstructure of the corporate bond market in India. At this backdrop, this article explores the available statistics on corporate bond market in India during recent times (2010-18) to analyse the various demand and supply side factors, which impede the growth of corporate bond market in India. It is found that the gradual increase in proportion of market-based sources in total debt financing by non-financial companies is confined only to the larger-sized firms. Though finance and infrastructure companies dominate the corporate bond market, mutual funds are playing an important role in diversifying the issuance base of the market. Empirical analysis suggests significantly higher risk-premia associated with lower-rated bonds in the private placement market.

Vijaya Bank Merger: Protests over losing history and community identity

January 15, 2019

The Government recently cleared the merger of three public sector banks: Vijaya Bank and Dena Bank with Bank of Baroda. As per the share exchange ratio, the Bank of Baroda will issue 110 shares of Rs 2 each for every 1000 shares of Dena Bank and 402 shares of Rs 2 each for every 1000 shares of Vijaya Bank.

The merger announcement has led to discussions over viability of the merger. Bank of Baroda and Dena Bank have been under RBI’s Prompt Corrective Action framework on account of high NPAs and losses. Thus, people have questioned why two loss making banks have been merged with profitable Vijaya Bank?

Given the financials aside, the choice of Vijaya Bank has hurt emotions in a certain corner of Southern India.  The concerned corner is city of Mangalore on the western coast of Karnataka (see this as well)


Will SEBI celebrate its 40th birthday? Reflecting on its silent transformations

January 11, 2019

This post is coauthored with my colleague Prof Parag Patel of Ahmedabad University.


Many a times, transformations begin with small words and little attention. Such is the case of Securities Exchange Board of India (SEBI) which started in 1988 amidst high political and financial turbulence, but gradually took control and shaped Indian capital markets like never before.

As SEBI turned 30 in 2018, we should reflect on its amazing journey, both by drawing lessons from its history and suggesting a way going forward. Post-1991, we have made tremendous progress in financial markets but role of SEBI has been largely unnoticed and underappreciated.

First some history. On 28th February, 1987, Rajiv Gandhi who was doubling as both Prime Minister and Finance Minister in his budget speech proposed establishing a regulator for securities markets:

“The capital markets in India have shown tremendous growth in the last few years. Approvals for capital issues have exceeded Rs.5,000 crores in 1986-87. They were only about Rs.500 crores in 1980-81. For a healthy growth of capital markets, investors’ rights must be fully protected. Trading malpractices must be prevented. Government have decided to set up a separate Board for the regulation and orderly functioning of Stock Exchanges and the securities industry.”

What must have read as another budget promise, was going to turn out to be a change agent. The Finance Minister would himself have not realized that this was about to change the landscape of Indian financial markets forever.

A year later, on 29 Feb 1988, then FM ND Tiwari in subsequent Budget speech added that “Necessary legislation in this regard is under preparation and the Board is expected to become operational soon.” Eventually, SEBI was formed in 1988 as a non-statutory body for regulating the capital markets.  It took four years for SEBI to get statutory status which was accorded by then FM Manmohan Singh in his landmark Budget speech on 24 July 1991.

SEBI started with a three-fold mandate. First was protection of interest of investors which was shaken during the 1992 scam. Second was development of securities markets which is interesting as India was home to several regional stock exchanges including the oldest in Bombay in 1875. However, the opportunities to invest were limited to a few people and funds available to a few companies. Both ownership and investment had to be made accessible to a larger pool. Third, was obviously regulation of securities markets. The Indian markets so far were governed by Controller of Capital Issues which was seen as inadequate and cumbersome and done away with as specified in the 1991 Budget above.

The timing of starting SEBI could not have been worse as the country was going through high political uncertainty and was about to witness an economic crisis coupled with a major scam in equity markets. However, one could take this more positively as crisis provides a steep learning curve. Fortunately, both the Government and SEBI took the second option. What we saw in the next two and a half decades is nothing short of extraordinary. The IPO pool has been widened to a large set of companies, small investors have much more opportunities to invest in capital markets especially via the mutual fund route, foreign investor participation has increased manifold and so on. SEBI also had a unique structure wherein it was given judicial powers as well. SEBI Act also went through multifold changes since inception.

Realising the strong control of Bombay Stock Exchange on Indian equity markets, the Government and SEBI first decided to break this monopoly. They nurtured National Stock Exchange (NSE) in 1993 which was demutualized and used state of the art technology right at inception. The regulator is often criticized for favoring NSE over other exchanges but the times demanded a stern action else all would be lost. NSE over the years has not just used best global best practices but has itself become a global benchmark in many parameters.

This was followed by action across all aspects of capital markets from trading to settlements to investments to corporate governance and so on. The trading and settlement cycle has been brought down from t+5 to t+2, all the trading has moved to screen based providing both transparency and investor comfort, ensuring retail participation in IPOs etc. One of the biggest changes have been the way mutual funds have been marketed to small investors allowing them to participate and diversify their savings. Equally important has been the way we moved from a paper based share system to an electronic demat system. The role of NSDL was also central to this transition.

One of the best moments in history of Indian capital markets was seen during the 2008 crisis. The crisis saw a few regulators in developed countries ban short-selling of stocks. SEBI which had just turned 20 showed remarkable and confidence and did not execute any such bans despite pressure from markets. This strategy of developing markets yet allowing markets to find their own trajectory is perhaps the best way to sum the tenure of the regulator.

The agenda is not to keep listing SEBI’s achievements. Instead, we need to learn how institutions develop and shape behaviors overtime. Late Douglass North, Nobel laureate in economics, defined institutions as humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights).

SEBI has clearly contributed in shaping both formal rules and informal constraints in Indian securities markets. Yet, it remains the unsung hero of India’s reform story since 1991. How else does one explain that there has been barely any coverage of the institution touching this milestone of 30 years? This is a kind of history which should not just be reflected upon (time & again) but also told across the world. It is not very often that a developing country builds a world class institution for the world to emulate. SEBI is clearly in that league.

We also need to reflect on SEBI’s future going ahead as perhaps it will not celebrate its 40th year. The FSLRC and India Finance Code has recommended merging SEBI with all three other financial regulators (SEBI, FMC, IRDA and PFRDA) into a new unified agency. The idea is that a unified regulator will cover the gaps which exist in current financial product space where insurance funds can be sold as investment products and vice –versa.

We do not know the current status of FSLRC but its suggestions have been implemented in piece-meal form. RBI has adopted inflation targeting regime and devolved the powers of setting interest rates from RBI Governor to a Monetary Policy Committee. SEBI and FMC (Forward Markets Commission) have already been merged. We have to wait and watch whether the higher authorities do go ahead and merge all the four regulators into one single agency or not. Given SEBI’s success, we could even merge the remaining two with SEBI but this will require fighting turf wars and political capital.

Till then, let us step back and congratulate SEBI for its achievements and shaping Indian equity markets. We could obviously also make a case of SEBI’s misses and argue for its glass being half empty. Even then, the achievements in glass half full needs to be complemented and appreciated..

Agricultural Loan Waiver: A Case Study of Tamil Nadu’s Scheme

January 10, 2019

Deepa S. Raj and Edwin Prabu of RBI have this interesting and timely paper:

This paper examines the impact and implications of Tamil Nadu’s agricultural loan waiver scheme of 2016, based on data collected through a field survey of seven districts of the state as well as farm loan transactions data obtained from select primary agricultural co-operative credit societies. The state government’s loan waiver scheme was applicable only to agricultural loans availed by small and marginal farmers, while other farmers with land holdings of above 5 acres were not eligible for the waiver benefit.

Empirical findings using Regression Discontinuity Design (RDD) suggest that in the immediate post-waiver period near the cut-off acreage of 5 acres, the probability of obtaining credit was higher for non-beneficiary farmers than for beneficiary farmers. However, the differentiation in post-waiver access to credit to the beneficiary farmer and the non-beneficiary farmer comes down as the supply of funds for agricultural loans normalises.

The paper also has a summary of the previous debt waiver schemes and their impact….

As Panjim turns 175..

December 24, 2018

Fascinating piece in Scroll on completion of 175 years of Goa’s Capital – Panjim.

Panjim occupied a key position in the Portuguese empire – it was the urbs prima, the primary city, in the Estado da Índia Portuguesa (Portuguese state of India) from 1843. Its rich history has made it a melting pot of cultures and identities, and bequeathed it a unique socio-cultural fabric with “wonderful dualities”.

It is to celebrate this complex heritage on the occasion of the city’s 175th anniversary that the Serendipity Arts Festival is hosting an art exhibition titled Panjim 175. The exhibition, curated by Menezes and Swati Salgaocar, is being held at the old Public Works Department complex near the old and new Patto bridges in Sao Tome.

The theme of confluence runs through many of the works. The iconic mermaid that “represents Panjim in many ways” figures prominently in the works of Nishant Saldanha and Shilpa Mayenkar Naik. A poster by Saldanha, in vivid colours, shows the mermaid surrounded by Goa’s tropical flowers. Naik’s work is an azulejo (a painted, tin-glazed, ceramic tile), in which the mermaid is seen in front of one of Panjim’s most iconic buildings – the old Goa Medical College.


Menezes describes the old Public Works Department complex as a “keystone crossroads”, connecting the new as well as old parts of the city. This over-100-year-old structure on the banks of the Mandovi opens up to the Latin quarter of Panjim – Fontainhas – and has an old-world charm. But it is now possibly going to be pulled down in a bid to make Panjim a “smart city”, a move Menezes describes as a “cultural crime”.

“The early map of Panjim looks like Manhattan, as it is built on the grid, [it had] place for sidewalks for people to walk,” said Menezes. “They [the city planners] were aware of the European drainage system – they had a very advanced, state-of-the-art thinking. It is particularly a galling, upsetting movement that in the 21st century all this is destroyed in the name of the ‘smart city’.”

Not just Smart cities. Anything with the name smart as a prefix – smart phone, smart shopping, smart banking etc – is anything but smart…

Remembering former PM Chaudhary Charan Singh in times of farm loan waivers (wonderful archives on his life and works..)

December 24, 2018

Interesting piece by Praveen Dhanda (HT Cheri). It was 116th birthday of former PM Chaudhary Charan Singh on 23 Dec recently.

Though 23 December is observed as ‘Kisan Diwas’ to commemorate the birth anniversary of Chaudhary Charan Singh, the fifth Prime Minister of India, also sometimes called the ‘champion of India’s peasants’, both the day and the leader remain obscure in the public discourse at large.

However, as Indian politics veers towards addressing rural distress and farmers’ anger, it is increasingly important to rescue Singh from obscurity.

Charan Singh’s politics and ideas were informed by a deeper appreciation of the problems of agriculturists. For instance, the manifestos written by him did not promise easy solutions such as loan waivers, but rather chalked out a complex and sophisticated blueprint for the Indian economy keeping the interests of agriculturists and other small producers at the core. Despite his political swings, Singh’s policy proposals were almost always informed by his deeper thinking on developmental questions.

We clearly know little about this era and our farmer Prime Minister.

I also came across these amazing digital archives on the person (HT Amit Bhasole) whose grandson Harsh Singh Lohit has painfully put up his works and speeches.

Ornithology and RBI MPC members: Moving from hawks/doves/owls to swans/canary/turkey…

December 21, 2018

Manas Chakravarty keeps coming up with amazing pieces. He wrote an interesting piece on economic consequences of Arvind Subramaniam’s grandchild.

Now he has written this piece on applying ornithology to RBI’s MPC members. These ornithology pieces are mostly centered around Governors and interesting to see them being applied to MPC members. I recently blogged about Rajiv Mailk piece hoping the new Governor is not a lame duck.

Manas moves onto the 6 MPC members and as a result many more birds:

Let’s start with Urjit Patel, the former governor, who left the RBI like a bat out of hell. A bat, though, is not a bird. This meeting was his swan song, which I suppose makes him a swan, though a rather unlikely one. Some have said a goose would be more appropriate because his goose was cooked, but the flaw in that reasoning is he wasn’t cooked but his goose was, although there’s some difference of opinion on that. The government, of course, has no doubt whatsoever that he was an albatross around its neck.

Ravindra Dholakia has been classified as a dove ever since we started giving them bird names and there’s no reason to change it now. I would merely like to emphasise he isn’t a turtle dove, since he doesn’t bill and coo, at least not in monetary policy meetings. The latest meeting however does open up the possibility of him being a wet hen since he ranted that ‘retaining the stance of calibrated tightening seems totally inconsistent and unjustified.’ He seems as mad as a wet hen against the decision to keep interest rates high.

There can be absolutely no doubt that Chetan Ghate is an owl. Only someone as wise as an owl could say ‘two interlaced variables pose the potential of un-anchoring inflationary expectations, and thereby making it difficult to ensure price stability on an enduring basis’ without batting an eyelid at the monetary policy meeting.

Some say Pami Dua is neither fish nor fowl, more of a dark horse really. But she might be a turkey, on the rather slender basis that she talks turkey. Thankfully, she survived the Thanksgiving cull.

What about Michael Patra? He’s traditionally been known as a hawk, although his enemies who want lower interest rates say he’s a loon, no doubt inspired by the ‘crazy as a loon’ idiom. But we don’t have loons in India. His statement at the monetary policy meet that it was ‘apposite to persevere with the stance of calibrated tightening to head off inflation pressures from potentially corroding the foundations of the growth path that is evolving over the medium-term’ may or may not make him as graceful as a swan, but there’s no doubt he’s in fine feather. A swan? Nah, not really, those are borrowed plumes, you can’t hide the hawk in him.

We come then to Viral Acharya. In the last monetary policy meeting, his eagle eye spotted a ‘divergence in the direction of price movements in data in key food items provided by the Department of Consumer Affairs (DCA) and realised food inflation for October.’ Such divergence, he said, is rarely observed. That firmly makes him an eagle.

Others say his famous speech on the independence of the RBI that so rattled the government was the canary in the coal mine. That makes him a canary, but it’s not known whether he sings like one at monetary policy meetings. Others believe that, given what the government thinks of him, he is most likely a sitting duck. On the other hand, the whole controversy may well be water off a duck’s back. Either way, he’ll be a duck.

Everyone is agog to know what Shaktikanta Das, the new RBI governor and chairman of the MPC, will be. But there is little doubt he’ll be cock of the walk, besides being happy as a lark.

Lastly, just in case anybody thought otherwise, this is of course a cock-and-bull story.



RBI MPC Minutes: MPC would run the risk of being considered neither current nor relevant!

December 20, 2018

Dr Ravindra Dholakia, MPC member does not mince words. His latest statement in the minutes of the MPC held in Dec-2018 is worth highlighting (HT: Avinash Tripathi for the pointer):

Drastic and sudden changes in external economic environment have taken place after the last meeting of MPC in October 2018. Should these changes evoke a response through an appropriate policy action? – yes, if they are not purely temporary and have reasonably long term impact on the economy. RBI’s own downward revision of the forecast of inflation 12 months ahead to a substantial extent in response to those developments, is a clear indication of their long-term impact on the economy. Thus, a policy response is called for. If there is no policy action in response to such a major favourable shock, MPC would run the risk of being considered neither current nor relevant!

With inflation forecast coming down by around 120 basis points and quarterly growth forecasts marginally revised downward opening up output gap going forward, there is hardly any justification in retaining calibrated tightening stance. In my opinion, this would be the right time to cut the rate and bring the unduly high real interest rates in the country back to around 2 per cent. It was, however, unfortunate that in October 2018, MPC had changed its stance to calibrated tightening with 5:1 majority despite my unsuccessful persuasion to maintain neutral stance. As a result, any rate cut is off the table for now and any such action would not be advisable at this point. The best we can do under the circumstance is to hold the rate, but change the stance to neutral to take care of all possible uncertainties. We should not deny any possibility of either a rate cut or a rate hike in the near future depending on data coming in.

43. More specific reasons for my vote on the rate and the stance are:


Measuring financial capability of the street vendors

December 17, 2018

Amidst all the chaos, team RBI continues to function. Just pointed to an interesting short paper on state-wise impact of demonetisation on deposits and cash usage.

Came across this interesting paper released last weekend by D.V. Ramana and Silu Muduli of RBI:

Financial capability of an individual is the ability to use and manage financial products for current and future financial needs with adequate financial knowledge. This paper examines financial capability on four dimensions- financial management to meet current needs, future financial planning, financial products management, and financial knowledge using a sample of street vendors in Bhubaneswar, India.

A financial capability index for each individual in the sample has been calculated in a manner that satisfies monotonicity, anonymity, normalisation, uniformity, shortfall sensitivity and hiatus sensitivity to level axioms. We find that education, age, business experience, and daily turnover significantly affect the financial capability of an individual. Moreover, street vendors in regions with higher number of bank branches are found to have significantly higher financial capability.

These results are fairly intuitive as well..

History of British Dak Bungalows (and RIP Tulsi Ramsey)

December 17, 2018

Quite a coincidence.

As I was reading this history of Dak Bungalows by Aditi Shah of Live History India, came across this news of passing away of movie director Tulsi Ramsey. Both Tulsi and Shyam (Ramsey) made horror movies with Dak Bungalows as one of the cornerstones (along with Havelis, Darwazas etc) in their movies. There is even a movie by the name Dak Bangla (Bungalow) by the Ramseys. And not just Ramseys. other directors used it too. The mention of the two words was meant to tell the audience something is going to happen in the movie..

GOing back to Aditi’s piece, she writes on how these Dak Banglas became such a critical part of British infrastructure and our psyche. They were built to help deliver post (or dak in urdu) in stages. Gradually, they came to be occupied by British officers to travel and stay in remote parts of India..

Superb stuff from LHI ahain…


100th anniversary of Mysore Sandal Soap..

December 17, 2018

Live History India has another fascinating piece which has a bit of everything.

It is a classic case of creating opportunities during crisis. During WW-I ,Mysore’s sandalwood exports dried. This prompted the Maharaja to make sandalwood oil indigenously within Mysore. A foreigner gifting Sandalwood soap in 1918 to the Maharaja gave the idea for making the soap.

Keep them coming LHI..


RBI Governors And The IAS: A Long History

December 17, 2018

My debut piece with Bloomberg Quint. I look at this long history of IAS officers at helm of RBI. Of the 25 Governors in RBI’s history, 12 have been IAS officers including the recent appointee.

Some more trivia not there in the article:

  • IAS have occupied 60% of total days of RBI Governorship since 1935.
  • The average tenure of IAS officer is 4.5 years almost double that of other professions which stands at 2.6 years.
  • Within other professions, number of economists who have been Governors is 7. Their average tenure is 3.3 years. If we exclude Mr BN Adarkar who was the first economist at the helm but had a tenure of just 42 days, the average tenure improves to 3.9 years.
  • Post-1990 we have had 8 Governors, split equally between 4 economists and 4 IAS. The average tenure of IAS and Economist is also split at 4 years.



Post-Demonetisation patterns of deposits: a State-wise analysis

December 14, 2018

Nice bit of research by Tarun Kumar Saxena and Thoppil Bhargavan Sreejith of RBI.  It features in RBI’s monthly bulletin of Dec 2018.

The paper says deposits rose during demonetisation in most states and now people prefer savings deposits compared to term deposits. In terms of cash usage, only two states – Sikkim and Telangana – show a decline in its usage:

Shifts in ownership and tenor of deposits provide valuable insights into payment habits, saving propensities and liquidity preferences. This article has the vantage position of studying these patterns under the impact of a shock – in this case, demonetisation – and its backwash. This event appears to have produced a permanent shift in deposit behaviour with households’ preference shifting to savings deposits and away from term deposits. This suggests a premium on liquidity induced by the shock, partly incentivised by lower rates of returns on term deposits and alternative avenues of saving which combine the benefits of liquidity and returns. While the withdrawal of SBNs caused a shift in payment habits away from cash, this has proven to be short-lived and mean reversion became evident in 2017-18 itself. Only two states show a break from the central tendency, with a decline in cash dependency.

The results presented in this article draw from a census. They point to the fact that deposit and payment habits are inflexible across most states/ UTs in India and tend to return to steady state, even after large shocks. This has implications for banks’ deposit mobilisation strategies and business models.

Lots of tables and colorful graphs. One is noting RBI’s research bulletins is beginning to feature interesting research pieces. Keep up the tempo!

We should have institutionalised RBI autonomy (with accountability) and not its frictions with government

December 13, 2018

My new piece in moneycontrol..

Urjit Patel’s resignation: its implications, controversial tenure, return of IAS to RBI and much more

December 12, 2018

Lots of columns being written.

Will try keep adding to the list…

RBI Governor Urjit Patel resigns..

December 10, 2018

Well, well, well.

This has come from nowhere:

On account of personal reasons, I have decided to step down from my current position effective immediately. It has been my privilege and honour to serve in the Reserve Bank of India in various capacities over the years. The support and hard work of RBI staff, officers and management has been the proximate driver of the Bank’s considerable accomplishments in recent years. I take this opportunity to express gratitude to my colleagues and Directors of the RBI Central Board, and wish them all the best for the future.

Urjit R. Patel

10th December 2018

Really terrible and sad the way events have been folding in the last few days…

The history of South India is relatively unknown: Rajmohan Gandhi

December 10, 2018

A new book on South India by Rajmohan Gandhi.

In this article, he says (and rightly so) that we know very little about Southern India history:

Billed as “a masterpiece in every sense of the word”, Rajmohan Gandhi’s upcoming book “Modern South India” is promoted by its publisher as an authoritative and magnificent work of history about that will be read and reflected upon for years to come.

“The sounds and flavours of the land south of the Vindhyas — temple bells, coffee and jasmine, coconut and tamarind, delicious dosais and appams — are familiar to many, but its history is relatively unknown,” Gandhi writes in the 500-page book that traces the history of from the 17th century to current times.

But why this historical amnesia?

“For one thing, the South is a large area, where, dauntingly, a great deal happened during the 400 years covered in my study. Secondly, while the story of each powerful culture within the South has been studied in depth, few in either the South or the North have attempted an integrated view of the South as a whole. Thirdly, India’s political power has resided in the North, influencing the focus of academia, not merely the media,” the grandson of Mahatma Gandhi, who has taught political science and history at two IITs, and the University of Illinois, where he currently serves a research professor, told IANS in an email interview.

But is not the only major region suffering from neglect, Gandhi maintained, and asked: “Do we have many histories of western or 

He pointed out that the Maratha history is rich, so is the history of Bengal, and likewise the histories of Assam, Odisha and Gujarat, but there is a case for broader histories of western and 

“Yet the expression ‘South Indian’ conjures up images hardly matched by phrases like ‘East Indian’ or ‘West Indian’, which Indians never use. In places in the US, an ‘East Indian’ is an Indian from India, different from a native American, while ‘West Indian’ suggests the West Indies,” he said.

In the book, Gandhi tells the story of four powerful cultures — Kannada, Malayalam, Tamil and Telugu — as well as the cultures Kodava, Konkani, Marathi, Oriya, Tulu and indigenous that have influenced them. Asked if there was a common thread that binds them all together, he pointed to three elements.

One geographical and the other linguistic, have given the its unity and distinctiveness. Because of the and the Bay of Bengal, European countries like Portugal, Holland, England and impacted the South in ways not experienced by northern and  Secondly, the South’s major languages have Dravidian rather than Sanskritic roots, even though their vocabularies have been enriched by borrowings from Sanskrit and elsewhere. Thirdly, the Dravidian/Aryan question resonates, not necessarily divisively, in many southern minds,” he shared.

Not just general history. But even Southern economic, banking and business history is relatively unknown and unexplored/

More  here:

Should be an immediate pick and read…

Insights from behavioral economics for India’s policy issues

December 7, 2018

Prof Ashima Goyal of IGIDR in this paper looks at behavioral constraints in policy and behavioral strategies for reform:

A long day of intense and enthusiastic debate among a Panchayat of wise elders has generated valuable insights. One of the learning points repeatedly touched on through the day is the importance of coordination across regulators, government departments and policies. Moreover, Bibek Debroy in his talk extended it to the citizen—how can the citizen help the government achieve its tasks.

Criticisms made, however, point to the question of why policy has not been able to deliver— why is it India has under-performed in so many dimensions? From the macroeconomic perspective, higher growth and some reduction in poverty has been associated with a lot of volatility. Growth has not yet crossed the threshold above which it becomes self-sustaining. Participants of this symposium were long associated with policy. There is an old saying that India has good economists but poor policy. Post liberalization, however, there is more optimism—it is agreed India has excellent potential but the question is when is it going to be realized?

It may be helpful to try a fresh approach. This year the Nobel Prize was given for behavioral economics. It is useful to examine behavioral constraints in policy making, and in achieving the required coordination. First we will apply psychological concepts to understand policy inadequacies, and then go on to see how general reforms or better coordination can be achieved using psychological trigger strategies.


Behavioral constraints:

  • Over-reaction post 2008 crisis leading to high stimulus.
  • Once bitten twice shy: The overreaction led to over cautiousness
  • Wanting to do everything best before growth leads to losses in output.
  • Copying from others like inflation targeting (ouch!) without looking at India specific issues.
  • Interpreting rules too rigidly: Flexible Inflation targeting has become strict inflation targeting. Some discretion is important.
  • Narrow vision where policymakers miss the connections in the economy
  • Excess weight to foreign reputation and external risks
  • Economists in Delhi are more pessimistic than those in Mumbai. (what about other cities?)
  • Do not see any change by focusing on lower growth rates..
  • Optimism and assuming 9% growth is ours..

Likewise there is a list of behavioral strategies for reform.

One may disagree with the arguments posed, but it is nevertheless an interesting and lighter way to assess Indian policy…

Luxembourg set to make all public transport free (and Indian cities barely encourage public transport)…

December 7, 2018

Interesting decision by Luxembourg polity.

From 2019 onwards, the public transport in the country will be completely free. The new government believes this will make people take more of public transport.


%d bloggers like this: