Azim Premji university is getting more philosophical and historical in its economic teaching. It has a tie up with Soros INET and is now going to teach from latter’s economics undergraduate book – The Economy.
What to say?
Such a terrible day for folks who have grown up to the great commentary by Benaud. I for did not get the privilege to see him tweak leg spinners but it did not matter. He was so good behind the mike that one thought he was just a commentator.
Blogging has been absent for few days and likely to remain weak for sometime. ME is on a longish break and blogging shall not be as regular.
Anyways, Dhiraj Nayyar has a piece in Bloomberg on what is the the single most important achievment of India’s new govt – stock market boom. He calls it giving electricity to India’s stock markets.
If Prime Minister Narendra Modi has delivered one thing in his first ten months in office, it’s been electricity to India’s stock markets. India’s benchmark Bombay Stock Exchange (BSE) Sensex recorded a31 percent jump in 2014. Only the insane runup in Shanghai’s bourse — up 90 percent in the past 12 months — has overshadowed the Indian rally.
Unfortunately, very few actual Indians stand to benefit from the boom. The proportion of retail investors in India’s equities markets is strikingly low. Less than 1.5 percent of the population invests in securities, compared with almost 10 percent in China and 18 percent in the U.S. Just 2 percent of India’s household savings are exposed to equity; in the U.S., the long-term average is 45 percent.
This is ultimately bad news for India’s economy. The country desperately needs to channel more household savings into equities — which are a vital source of corporate finance — and away from unproductive investments in gold and real estate. India also needs more local funds if it’s to sustain the strength in its equities market while avoiding macroeconomic imbalances. At the moment, around 70 percent of the market isdominated by foreign institutional investors.
Consider this statistic. Between September 2008 and October 2014, those foreign investors made net purchases of $45 billion. In the same period, domestic institutional investors (mostly funded by retail investors) made net sales of $16 billion. This imbalance creates serious side effects. The billions of dollars flowing in produce upward pressure on the rupee and a decline in India’s competitiveness. When they flow out, usually at short notice, markets collapse and the exchange rate grows volatile. That scenario is almost certain to play out in coming months when the U.S. Fed tightens monetary policy.
Well, all this has been known for a while now.
This blog itself has regularly written on how stock markets have become the single most important agenda for any govt and particularly this govt. How so few Indians are connected to stock markets but still it gets priority as media and views are shaped by people who have such large stakes in the stock market. In the 1.5% of population, majority is all the big powerful guys. It is all about media shaping views as likes of Chomsky have shown over the years.
Infact this is how all we look at economic policymakers. The music should just go on. Those who enable the show get all kinds of accolades and praises. Those who don’t or are ublucky are just ignored no matter how much their contribution is..
A nice BS edit. Didn’t realise BJP has completed 35 years in 2015. The article dwells on how the Party has evolved in the last 35 years or so.
I think the biggest shift has been how the party has moved from being a swadesi party to a party accepting global economic thinking. It will be interesting whether it will remain the case or it will go back to the swadesi thinking. The current party has too much of a stamp of current PM who being close to big business has shaped his policies based on latter’s thinking. So whether the core thinking has changed as well or not will have to be seen in future. This shift in thinking even if temporarily is something of huge interest to political economy historians.
Rest of the political ideology etc remains more or less the same.
Ajit Balakrishnan hits the nail on its head. Much of decline in economic ideas are not mainly because of some failed theory or something. It is because we make a huge hue and cry over some reform/new policy coming and changing the game. Most ideas are just repackaged old ideas.
It is amusing to say the least how media continues to cook stories over rifts between Indian finance ministry and central bank. One day there is a rift and just the next day the rifts are bridged.
First and foremost, central bank independence is a very strong and wrong term. At best, one can talk about central bank autonomy like any other public sector organisation. The broad objectives are set by the government and central bank tries to work towards them. In terms of autonomy, the idea is that the govt does not interfere in day to day activity of the central bank and lets it function. When we say independence, the idea is the central bank is completely independent to do what it wishes to do which is just wrong. How can an organisation be completely independent when it is funded completely by the govt.? Moreover, all the senior appointments are made by the govt just to provide credibility and in India’s case most are required to work at finance ministry before the central bank (and rejoin FinMin after the central bank stint to get to IMF/World Bank etc). So where is the case for independence as we mean by the term really?
Second, the word became fashionable after western economists who have tried to minimise the role of government and fiscal policy in whatever possible way. So we have lots of papers on the fancy word forgetting the basic structure of the central bank which has govt written all over it. The ignorance of central bank history has also played a major role. There is a feeling that this bank has suddenly sprung up and govt is trying to intervene in it. They forget that all central banks have been created by govt to give them control over currency and finance issues. It is nothing but a govt body. Monetary policy is much like subset of govt./fiscal policy in many ways. Those who forgot these lessons have learnt it the hard way in the recent crisis. So all this talk just creates media noise and nothing else. It is like a Principal-Agent relationship where there can be some disagreements between the two which is natural and healthy.
It is ironic (as Austrian school proponents suggest), that those who talk about independence wanting to limit govt.’s role in economy, should actually argue for a limited central bank (if at all). By taking Austrian economics out of books, we hardly discuss this aspect. We have highly overdone the control central banks have over macro variables even inflation. At best, central banks can regulated the banking system as they have a monopoly over currency/money matters.
Anyways, this continuous media focus reminds me of a joke. It is like this. There is a man who is once asked by another ” Sir are you a Chinese”? The man who is an Indian responds amusingly as no. The question becomes a continuous one as the second man keeps asking the same question over and over again. The first man keep replying no with rising irritation. The questioning does not stop and the first man commits suicide in frustration. The second man follows him in heaven and asks again. The first man says “Yes I am Chinese. Now what”? The second man quips ” Well, you don’t look like one”..
In similar vein, media keeps cooking stories over differences between the two. Is there a rift? Both the govt and central bank say no. As the question becomes repetitive, the exasperated officials say yeah there is..now what? To this the media says does not look like and game goes on..
Autonomy is fine and every management need it but independence is a highly overdone term. It makes us think of central banks as some holy cow which they are not. They are actually a central planner which continue to determine prices (interest rates) of sector they regulate. No other regulator does it anymore. But thanks to the dominance of monetary policy thinking , no one even questions why should a central bank be setting interest rates for an economy? Why can’t banks change interest rates as per their financials?
This is just a brilliant book by TJS George. It is a bio of MS. Subbulaxmi but is much more than just a personal sketch.
It has an amazing introduction & discussion and Carnatic music and social life in TN. The way music was shaped in TN and became such an important part of their lives is quite a story. The various caste and community equations and how MS overcame all this, is really a fascinating read. Then there is politics as well.
Debashis Basu reflects on the decision to create a new bank – MUDRA bank. He wonders the obsession to create new financial instis in each new govt:
For some strange reason, every new government wants to launch a new bank, or a major financial institution and multiple financial products. Previous governments have been responsible for superfluous organisations like IDFC with headquarters in Chennai, the Bharatiya Mahila Bank in 2013, the Rajiv Gandhi Equity Scheme, etc.
The Narendra Modi government, following the same path, may well outdo previous governments, because Mr Modi, like Indira Gandhi, believes the government alone can “fix” the many problems India has. In just 10 months, the government has launched Jan Dhan Yojana with a lot of fanfare and a financial product called the Sukanya Samriddhi Scheme in January this year. On April 8, probably with as much fanfare and full-page ads in newspapers, the government will announce the launch of the Micro Units Development and Refinance Agency (Mudra) Bank.
Is there a need for Mudra Bank? Well, arguments can always be cooked up to support a direct government intervention to solve any one of our many chronic problems. One such problem is inequitable availability of finance. Too much of capital goes to large companies and too little to small businessmen. This is unfortunate because study after study has proved that not only are smaller borrowers more honest in repaying debt, but collectively they have a huge economic impact.
Mudra Bank will be another such attempt:
Mudra Bank will be a Rs 20,000-crore institution, which would “primarily be responsible for refinancing all micro-finance institutions which are in the business of lending to micro and small business entities”. It will be supported by an additional Rs 3,000 crore from the Budget to create a credit guarantee corpus to guaranteeing loans being provided to the micro enterprises. It would partner with state-/regional-level coordinators to provide finance to the “last-mile financier” of small and micro business enterprises. Not to forget that it will “primarily be responsible for laying down policy guidelines for micro/small enterprise financing business; registration, regulation and accreditation/rating of MFI entities; laying down responsible financing practices to ward off indebtedness and ensure proper client protection principles and methods of recovery”.
It would also be “responsible for the development of a standardised set of covenants governing last-mile lending to micro/small enterprises; promoting right technology solutions for the last mile; formulating and running a credit guarantee scheme and creating a good architecture of last-mile credit delivery to micro businesses under the scheme of Pradhan Mantri Mudra Yojana.”
Phew! So Mudra Bank will be a lender, consultant, regulator, think tank and an agent of social change, all rolled in one. Unfortunately, if this is what Mudra Bank is supposed to be, it will suffer from a congenital defect at birth: too many conflicting objectives – something that beset Unit Trust of India earlier and still affects government-controlled banks and insurance companies. This is how all public sector units used to be conceived. Clearly, the babus who have drawn up the Mudra Bank seem to belong to the 1970s, too, not just the idea.
There have been so many in the past:
But wait a minute. What can Mudra Bank do that can’t be done now with some tweaking of the existing system? I dug around a bit and discovered, to my horror, that successive governments have focused on microlending for decades. As a result, the Modi government has already inherited a massive bureaucracy and welfare system meant for small businessmen. This includes:
- Small Industries Development Bank of India
- National Small Industries Corporation
- National Bank for Agriculture and Rural Development
- Credit Guarantee Scheme
- Priority sector lending by all banks
- Regional rural banks
- Bharatiya Mahila Bank
- National Scheduled Castes Finance and Development Corporation
- National Scheduled Tribes Finance and Development Corporation
- National Backward Classes Finance and Development Corporation
- 18 State Financial Corporations
- 25 State Industrial Development Corporations
- Microfinance programmes
- Assistance to Entrepreneurship Development Institutes
- National Innovation Foundation
- A Rs 10,000-crore fund announced in the 2014 Budget for promoting entreprneurship.
Mudra Bank will be backed by a Rs 3,000-crore credit guarantee scheme. But a credit guarantee scheme is already functioning for the past decade. Till August 31, 2014, cumulatively 1,599,128 proposals from micro and small enterprises have been approved for guarantee cover for aggregate credit of Rs 79,647.15 crore.
There are at least three ministries now involved in helping small business in some way or the other: finance; micro, small and medium enterprises; and a new ministry of skill development and entrepreneurship; apart from ministries like tribal affairs and social justice running their own sectarian schemes for tribals and scheduled castes, respectively. I may have missed a few more organisations and the many departmental schemes that try to put money extorted from taxpayers, into the pockets of chosen people.
This array of government companies, schemes and initiatives overseen by a vast bureaucracy, based on some warped but failed notion of government-delivered equity, was not enough for Mr Modi. He had to set up a new bank, another new bureaucracy, borrowing ideas of the 1970s, even as there is no accountability for taxpayers’ money already wasted on numerous initiatives to “support” small businesses of various kinds. And this from a regime that had promised minimum government. What a shame!
We have anyways made too much out of the change. All that is happening is packaging old wine in new bottle. Both central bank and government’s obsession with creating new banking organisations shows neglect/ignorance of India’s financial history. We moved form a highly differentiated banking structure to a consolidated one only to move back to differentiated one..
Just new names are being added to the old (shall we say rejected) ideas..
EPW has a new column which will occasionally look at such interesting pieces. It is written by Toothcomber which is the pseudonym of an officially retired economist musically disinclined to rationality. :-)
‘Toothcomber’ is intellectually descended from ‘Beachcomber,’ which was pen name of the English columnist J B Morton who presided over the Daily Express’ ‘By the Way’ column from 1924 to 1975. The present column has been stimulated partly by the kindly thought that an economics magazine deserves a regular dose of solid economics in it, and partly by the realisation that even if one were to deliberately set about doing a J B Morton on Economics, it might prove hard to come up with anything that could quite parallel some of the stuff that professionals in the field have been systematically dishing out—as mimicked in various minuscule pieces which Morton wrote on the subject, with titles such as ‘The Money Market,’ ‘Financial Note’, etc. ‘Economics: The View from Above’ is an irregular offering whose presiding spirit will be the philosopher Harry Frankfurt’s book On Bullshit. If any part of anything written here is found to make any sense to any reader who is not an advanced economic theorist, the author promises to go back to the drawing board and think deeply. He now has the time, as he has retired, or has at least been put out to pasture.
The first piece is on why onion prices are rising and second connecting economics to music:
This Note is intended to be of help to the millions of ordinary unlearned people who are wondering, in a battered sort of way, about the reasons for the sustained rise in the price of onions which we are now witnessing. A first step towards uncovering causation resides in considering the specifics of a closed, compact, convex, continuum economy in an epsilon environment characterised by almost-perfect autarky. A fuller picture is yielded by opening up the economy to world trade at border-prices, in which exchange at the margin is mediated by myopic discount rates. A good part of the burden of explanation would have to be borne by the operation of incomplete Arrow–Debreu contingent markets in an economy subjected to monetary sterilisation in the presence of debt-capitalisation; a steep and unprecedented increase in the repo rate; a failure to ensure anything more than partial convertibility on the capital account; insider trading on outward bills of lading; and quasi-transitive rationality on the part of agents experiencing animal spirits inspired by methylated spirits..
Hopefully you get the hang..
India’s eminent agri economist Ashok Gulati’s raises concerns over not just this year but future agri growth as well (dated interview):
ET Now: What are the initial signs? Is it too soon to try and cast apprehensions about how the monsoon and crop patterns will turn out for the current calendar year?
He wonders why India based economics/economists do not get adequate dues. We always need appreciation from the west. Infact, without the west blessings, one does not get anywhere in Indian economic space. It is even more amazing to see such a post from a person who believes in anything but global best practices. This blog itself has raised this issue in multiple posts: