Tuesday, 26 January 2016

Ditching the Washington Consensus?

Pulapre Balakrishnan and Ila Patnaik take opposing views on how to revive the economy. He advises revving up public investment, she says-follow easy monetary and tight fiscal policy.

Who is (more) right?

Both focus on the need to increase private investment. This is backed by the mid year economic review that shows that its contribution to GDP growth has been muted in FY 2015 and 2016 compared to the period from 2004-11.

Theoretically either method could work. If we assume the flexible accelerator model of investment, producers are looking to reach a certain 'desired capital stock'. Higher the expected GDP of the economy, higher would be the desired capital stock, because of higher likelihood of output produced being sold. Producers will typically adjust slowly to this desired level of capital. How much they add to the capital stock in a given period (that is, investment), depends on the cost of making the investment. This could be rate of interest or regulatory factors (for example, a temporary investment subsidy or tax holiday).
More public investment => producers expect higher demand for their output in the future = increase investment.
Easy monetary policy => lower rate of interest => ability to finance the investment more easily.

Other findings of the mid year economic review:

    • Real consumer credit has picked up while industrial credit has slowed. Note that this slowdown is in spite of the RBI's loosening of money supply.

    • The Review conjectures that stressed balance sheets have caused corporates to go slow on investment. Interest cover-i.e. the ratio of earnings to interest payments have been on the decline. Profit after tax between FY15 and FY14 also dipped slightly.
Both above facts make it difficult to understand how a (further) lower interest rate in isolation will help increase investment. This is because-
1. If the RBI already reducing rates has not helped increase investment, while consumer credit has picked up, this is possibly due to a lack of credit demand from the corporate sector.
2. If the balance sheets already stressed, reducing interest rates henceforth does not help the past issues.

[The government is planning to ask the RBI to change NPA classifying norms such that projects that have more than 2 years of delay (currently classified as NPA) not be classified as NPA if the delay is not due to the fault of the promoter. Similarly, they are asking that banks be allowed to provide additional funds to promoters to meet cost overrun on projects, even if the overrun is greater than 10% of the initial cost (10% being the current limit for such additional support, at present).]

Hence, stepping up public investment so that it boosts profit expectations more likely to help in activating 'animal spirits'.


  • It is possible that increasing investment only props up the desired capital, and not the yearly investment which is more sorely needed.
  • In that case, temporary investment incentives may be given, announcing clearly that these incentives will not be available, say three years hence. Businesses likely to want to take advantage of these incentives then.
  • More public investment does mean higher rate of interest, thus dulling the ability of the private sector to invest. So Patnaik right about the undesirability of 'tight' monetary and easy fiscal policy. 
  • The Mid year Review seems to suggest that the RBI should not stick to its avowals of reaching the set CPI inflation target and possibly follow easy monetary policy. But then why go to the trouble to announce inflation targeting as the goal of monetary policy and sign an RBI-government agreement  'guaranteeing the same', if you backtrack at the first hint of trouble? But then this is the classic discretion versus rule based monetary policy dilemma.
  • More public investment likely to worsen the fiscal deficit and the debt to GDP ratio. Already the 10 year G sec yield exceeds the nominal GDP growth. Balakrishna says rejigging the public finance- away from unproductive subsidies to productive investment and raising more funds through disinvestment may help reconcile the two objectives of growth revival and fiscal consolidation. 
  • I bet you are now smirking at how welfare subsidies are a waste while subsidies for investment are seen as incentives [hence not a waste].  
  • Arun Maira takes the easy way out by plumping for institutional change and nice alliterations.
  • I am now beginning to wonder whether the call for reducing non-merit or unproductive subsidies is also an easy way out...given that you can pretty much expect that the government will never follow through on that. [The reduction in the LPG subsidy has been an exception, but then that too will not affect a large part of the voter base].

Monday, 25 January 2016

Five Ways in which India changed the World

Every time someone needs to extol India’s virtues-be it the PM at his galas for the diaspora in different countries, the FM, while pleading for FDI at different fora abroad, or sundry political and business leaders or foreign diplomats while making domestic speeches-they have to rely on some stock phrases. Largest democracy in the world, diverse, emerging economic behemoth, global bright spot, young, are some. For the more imaginative, Lord Ganesha is held up as proof of India’s prowess in cosmetic surgery and the Pushpak Vimana as our contribution to aeronautics.  On the eve of our 66th Republic Day, I am guessing we will have to hear more of the same. So I have helpfully compiled a list of five of India’s contributions to the world which I haven’t seen being used in public discourse before.

[I would add in a disclaimer about tongues being in cheeks, or taking stuff with pinches of salt, but that goes without saying in a country where scientific conferences point to Lord Shiva as an environmentalist.]

We invented the concept of ‘soft power’. (Or it could have been Egypt.)
Much before McDonalds’ and KFC, Ashoka pointed out that it was better to win people and territory over through ideas than through the coercion of war. [There might have a Egyptian king called Akhnaton before him who said that too, but Ashoka could not have known that]. Of course, our soft power was in Buddhism and peace. The Americans exported obesity and reality TV.

We made the USA.
Bengal, that Communist fiefdom for more than 30 years, played a crucial part in the making of the flagbearer of all things capitalist, the United States of America.
Between 1756 and 1763 the French and the British were fighting the Seven Years’ War for control over more colonies across the world. Some part of this was being played out in India as well as the two battled it out mostly in South India. The British won, largely due to the resources they were able to command from Bengal after 1757, when they used supreme levels of skulduggery to beat Siraj-ud-daulah.
Winning in India, no doubt contributed to the overall win over the French. It also led the British to demand that the American colonists pay them ‘rent’ for the land they were using in America, since it was after all the British government that won it for them. Subsequently, the Stamp Act and the Townshend Act led the colonists to get weary of cheapo Britain fight the American War of Independence in 1776 and establish the United States of America. And who should they thank for it? The nice, self-effacing Bengalis.

The French revolution, you ask? All us.
Incidentally, the Colonists in their War of Independence were being supported by the French, who in a close approximation of cutting off your nose to spite your face, managed to bankrupt themselves in the process. This in turn caused the French revolution. [Aside:  I think Bengal should let Odisha claim the roshogolla. Since they you know, helped create the modern world, as we know it today.]

The industrial revolution was our idea.
We have all heard of how British merchants coerced India to sell (cotton) cheap and buy (final goods) dear, leading to ‘primary accumulation’ of capital that allowed the industrial revolution to take place. But we may have had a more important to play-essentially, by creating a market for cotton textiles in the first place. The British capitalists piled on, realising that there was a ready market they could serve, if they could only displace the market leaders.  This was hardly going to be difficult given their political control over India-imagine Steve Jobs as the majority shareholder in Nokia. But they went about it the civilised way first-by raising tariffs on Indian goods. By 1813, they were able to pressurise their government to end the monopoly of the East India Company in India, and subsequently flood the Indian markets with cheaper machine made goods. Interestingly, they also tried to increase the uptake of British goods in India by bringing in English education and Christian missionaries.

Maybe the firang love for FabIndia is their way to atone for the past.

Desi kids, your childhood dynamic with your friends/ siblings is the model of international diplomacy/ belligerence
North Korea is claiming that it has tested its first hydrogen bomb. In retaliation South Korea is broadcasting criticism against the North Korean government through loudspeakers on the border. North Korea is returning that in kind. It’s basically like when you were five and cheated in kho-kho and then somebody called you a cheater-cock and you got back by saying “no ji, jo bolta hai wahi hota hai”. 
Have you heard of China's frenzied island re-claiming activity in South China Sea? You, with your spitting-lightly-over-the-chocolate-before-the-blasted-sibling-can-make-a-claim behaviour, inspired it.

Sunday, 24 January 2016

Of News and Other Stuff-9

If there are two things I am extremely suspicious of (apart from displays of extreme religiosity--in my limited experience, the car with a 'Jai Bajrang Bali' bumper sticker is mostly likely to be driven by a lech), they are international agencies and conferences.  So I will admit that I have an inbuilt bias against the World Economic Forum which is a combination of both. Their mission statement confirms my worst fears:
The World Economic Forum, committed to improving the state of the world, is the International Organization for Public-Private Cooperation.The Forum engages the foremost political, business and other leaders of society to shape global, regional and industry agendas.It was established in 1971 as a not-for-profit foundation and is headquartered in Geneva, Switzerland. It is independent, impartial and not tied to any special interests. The Forum strives in all its efforts to demonstrate entrepreneurship in the global public interest while upholding the highest standards of governance. Moral and intellectual integrity is at the heart of everything it does.Our activities are shaped by a unique institutional culture founded on the stakeholder theory, which asserts that an organization is accountable to all parts of society. The institution carefully blends and balances the best of many kinds of organizations, from both the public and private sectors, international organizations and academic institutions.We believe that progress happens by bringing together people from all walks of life who have the drive and the influence to make positive change.
 [The bold italics above are mine, and basically represent the stock BS phrases I have learnt to be very wary about.]
There also some other FAQs, their website answers:

  1. Why does our work matter? Short answer: It doesn't. Long answer here.
  2. What makes us unique? Short answer: a seemingly unashamed backing of crony capitalism. Long answer here.
  3. How do we do our work? Short answer: We sit around and chat. A lot. Long answer.
  4. What are our focus areas? Short answer: Do you still care? Long answer here.

Wednesday, 13 January 2016

Krugman's 2007 essay on Milton Friedman shows us what we are missing in India- economists who can communicate ideas about economics to non-economists in a manner that is not dead boring to the latter. Amartya Sen writes beautifully and simply but rarely, and when he does, he is basically angsting about the lack of government expenditure in health care and education (not that, that's not worth angsting about, I hasten to add). Jean Dreze primarily writes about the Food Security Act or poverty talking more in terms of policy than economics. And then there are these bunch of people (Surjit Bhalla, NIPFP professors, chief economists for random banks or their underpaid, uncredited subordinates) who write on issues that can only be lumped under economics (inflation and investment and manufacturing growth and other things regular people don't give a shit about) but they never talk about economic theory, always focusing on the dal-chawal issues, to  harangue the RBI or the government about policy rates or Make in India or the fiscal deficit.  Subir Gokarn is a sometimes-exception. Having read a collection of old columns by Kaushik Basu however, I vote for him to start writing for newspapers again. 

Friday, 8 January 2016

Of News and Other Stuff (Links mostly)

Apparently Piketty and I agree on how much economists know about anything...almost nothing.

Also you call yourself a science? Compared to this stuff, economics is pure hokum.

And it's scary given how much economics influences policy. Like after months of study, and deliberation, the whole idea of the RBI targeting the CPI is turning out to be not that great. And that's in spite of their success in achieving the target. Essentially, while the CPI inflation turned out to near target levels, such that the returns on savings for consumers is attractive, the negative WPI has meant that the borrowing cost of investment [nominal rate of interest minus (minus WPI inflation)] is too high. Lower borrowing means lower investment which means lower real growth. So the projected tax revenues, calculated on an assumed growth rate cannot be met. More so, because the projection is based on the nominal growth rate, which a priori is expected to be higher than the real growth rate. This turns out to be wrong however, when inflation rates (that is the WPI or the GDP deflator-which in turn reflects the WPI more closely than the CPI) are low or negative.

Ila Patnaik argues  that the conversation about inflation targeting is misplaced. Whether it is the WPI or the CPI, the government should concentrate on keeping inflation low (which will more likely be missed if the fiscal deficit is high). Hence she roots for a mix of easy monetary and tight fiscal policy, where the fiscal policy, instead of the monetary policy directly attacks inflation. The reverse-where the there is a easy fiscal and tight monetary policy is not the best option because higher government spending could crowd out private investment if it raises rates of interest-in this case a tight monetary policy will aggravate things further. In India, such a policy is defended on the grounds that monetary policy transmits only weakly while government spending increases aggregate demand immediately. Patnaik argues that government expenditure is often allocated, but the spending takes place only with a lag. Moreover private companies already have stressed loans they have to repay, so it is unwise to burden them more with a tight monetary policy.