politicaleconomix

Demonetization and the great Indian policy arbitrariness !!!

2016-11-13T03:48:00.001-08:00

India wants to be an economic powerhouse and eagerly anticipates domestic and international participation to enable this leap, and yet Indian executive as well as the Judiciary believe they can arbitrarily break the rules set for the participants as and when they deem justified.

Stability of rules is one of the most desirable attributes of an economy, sometimes more important than the tax holidays, and yet the Indian decision makers haven't been able to understand the seriousness of it. And each time the trust is broken, it becomes increasingly challenging to win it back.

Demonetization or de-regularization of large denomination Indian currency is the most recent, jarring policy change, where the rule of "honoring the amount mentioned on the currency" has been flouted without prior warning. This has led to an unwarranted inconvenience for the masses. It is also likely to hurt trade and therefore the economy severely in the days to come if the manufacturing and distribution wheels come to a halt in the absence of sufficient liquidity.

Long queues outside banks and ATMs in India as 80% of existing currency is pulled out from circulation overnight

I have been termed a cynical, who cannot appreciate the huge trade-off of unearthing the black money, however, as an economist with some exposure to policy analysis I find the current decision failing in terms of deliberately ignoring the critical element of stakeholder management, in this case the stakeholder being the public.

For those, who may suspect me to be anti the current regime, they may take heart in the fact that my fundamental issue is with the increasing "arbitrariness" in policy making. So while I detest the BJP's demonetization implementation, I also detest the AAP's odd-even formula and UPA's retrospective taxation.

Let's look at some of the cases of policy arbitrariness and emotional judicial interference in policy interpretation:

1. Retrospective taxation - a number of international companies in India, including Vodafone, were served notices during the UPA regime for paying taxes retrospectively for laws which didn't assess that tax at the time of doing the business. Each company formulates its business plans based on the existing tax structures and changing these arbitrarily at a later date is only likely to spook the investor and so it did.

2. Odd-even formula - the AAP party that runs the government in Delhi announced a formula to reduce the alarming pollution levels in the city. Termed the odd-even rule, it allowed operation of vehicles with only the odd registration on odd dates and only the even registered vehicles on even days. While the intention was great, insufficient provision of alternative modes of transport, issues of women security, and insufficient cause and effect analysis didn't allow the policy to gain permanence. To me it was a roughshod way of imposing a policy on citizens while not delivering the bare basic means of security and transport that is expected of a government. For a detailed view on this, read my previous blog.

3. Nestle and the food safety rules: India's food regulator FSSAI banned Nestle's popular brand of Maggi noodles in India citing safety concerns but without giving satisfactory explanation. Having lost millions of dollars, the product was cleared and no safety concerns were found. The Swiss Ambassador made it amply clear that it sends a wrong message to investors.
"I think the ban was not justified clearly. It could not be substantiated very clearly. That is something that is disturbing potential investors or investors who want to do something, Swiss enterprises, reliable enterprises, producing all over the world and who want to invest in India are raising questions about the regulatory framework and the consistency and implementation and control by one of these authorities.”

Pepsi CEO, Indra Nooyi also conveyed the message to Prime Minister Modi during his visit to the USA, "there was no need to reinvent food standards when global norms in the form of Codex were available."

4. Cars emitting Oxygen - Chief Justice Thakur asked an emotionally charged question to multinational car makers "Do your cars emit oxyegn?" and subsequently the diesel cars of 2000 cc and above were arbitrarily banned. This was totally unacceptable because the car makers made their investments into diesel engines and diesel cars based on the existing rules. If you feel the need to change the rules due to changing situation, you must follow the due process and notification and not ban vehicles on a smoggy day. Toyota as a consequence was clearly unhappy and started revisiting its investment plans.

And the list can be endless.

Policies need to be designed carefully and once designed need to be honored in letter and in spirit. The government may roughshod the domestic stakeholders with its policies as in the current demonetization case, however, when dealing with international investors it can turn out to be extremely damaging. Devas, for example, dragged India to international arbitration where the government has been recently charged with a huge penalty of US$1 billion.

To conclude, I believe, arbitrary and sudden policy moves in times of peace, make the investor or the citizen an easy scapegoat for the past or current deficiencies or populist needs of the state and may not yield the best outcomes in the long run.

Sleep with your neighbor on odd days!! AC usage needs to be cut due to ozone depletion over Delhi.

2016-01-04T23:49:00.000-08:00

I unfortunately get labeled in the set of people that are cynical, pessimistic and who don’t care about the environment and the problem of pollution facing citizens. Whatever is the case I must make my point about why I am not a big fan of the odd-even policy in Delhi.

However, before people pounce on me, here is the 10-point disclaimer:

I have been using the Orahi car pool app for about a year now. And trust me configuring rides is not very simple due to time and destination mismatches. Unlike Mr. Kejriwal not everyone has a set of colleagues living nearby and travelling to the same destination. I am amazed at the repeated announcements on radio of this over simplified car-pooling. I wish that like for Mr. Kejriwal there were colonies for private companies e.g. TCS colony, Deloitte Colony etc. that would make car-pooling a piece of cake.
Continuously following up with Shuttl for the past 6 months to suggest a relevant bus shuttle route for me in Gurgaon.
Used local rail to commute to office in Hyderabad. Always used airport shuttle bus (not cab) to and from Hyderabad airport (such buses don’t exist in Delhi, god knows why?).
Used local DTC buses during my school days.
When I visited Singapore, I didn’t hire a cab. Didn’t need to. The buses, metro, footpath, cycle paths are awesome and prioritized.
Never bought a diesel vehicle.
Used Myles to test drive the Mahindra electric vehicle (e2o) in NCR for one complete day. It’s awesome and doesn’t lack power.
Stopped using Delhi Metro when I could hardly get down (with just one luggage) at the New Delhi Railway Station even during so called off-peak hours.
No public transport goes to my wife’s office and she doesn’t operate in a SEZ setting where car-pooling could even be considered. She has to frequently commute at late hours.
I did contract sinusitis during my stay in NCR because of bad air.

I hope the above points do objectively communicate my willingness and pro-activeness to adopt public transport, that I am not in a comfort zone of driving around only in a car, and that I am also a victim of the bad air in NCR and would love a solution to the problem.

However, to me odd-even policy is extremely knee-jerk, looks more like gimmickry not backed by robust analysis, smells of autocracy, dumps what is state responsibility on citizens arbitrarily and is set in a control environment involving exemptions and school closures.

While I strongly believe that over analysis is sometimes the problem, it is not a great idea to first announce the plans and then give a thought to its modalities. I am not sure how great is the "agile" approach of "fail fast fail often" when applied to policy making.

Here are my ten questions for the Delhi government (not only the current government):

Why has it failed to provide last mile connectivity? Delhi’s metro feeder buses have never materialized after so many years of metro.
Why the roads / streets in Delhi are considered so unsafe, especially for women? Hyderabad / Ahmedabad are not so unsafe.
Why do autos not run by meter? Or go to places where you want them to go to? Mumbai doesn’t have this problem.
What has been done about the other heavyweight polluters like construction projects, diesel vehicles, burning of conventional fuels etc.? (By the way i am not in favor of knee-jerk, one fine day bans on diesel vehicles too without any warning to users / investors.)
What’s your promise to the citizens in return for asking compliance to the odd-even rule? What are your timelines for other initiatives?
Once the exemptions are removed, how do such people travel to offices that have no public transport connectivity?
Has someone analyzed the kind of adverse behaviors odd-even policy may generate and the actual impact it may have? Do you understand that a badly designed policy can be more problematic than the status quo?

As per a NYT article, "Estimates of how much vehicles contribute to total levels of P.M. 2.5, particulate matter that is considered the most dangerous because it penetrates deep into the lungs, range from 20 to 40 percent in Delhi. Less than one-fifth of that comes from cars, according to a 2012 study."

Why was their no stakeholder management before announcement of the plan? What promise did you share with the citizens?
For the long term – When will the traffic from satellite towns like Gurgaon / Noida / Faridabad / Ghaziabad etc. stop using Delhi roads?
When will you have “meaningful” footpaths not the current foot islands?

If odd-even is how the problems of environment are going to be tackled then soon there may be a dictat as to how one must use ACs on odd-even days based on your house number. Sleep with your neighbor on days you can’t run your AC. It will certainly help reduce Ozone depletion and also check electricity consumption.

And soon we may have ads showing Mr. Kejriwal in his pyjamas at his dear friend’s house demonstrating how it is feasible.

Indian Rupee Depreciation - A crisis that was waiting to happen

2013-09-03T11:31:00.000-07:00

The context

The Indian Rupee (INR) has depreciated by c.30% against the dollar (USD) over the past six months and it’s not clear if it has already bottomed out. What is really worrisome for global policymakers and businesses alike is that a large portion of the emerging market seems to be affected by this currency crisis. Morgan Stanley has labelled the currencies of India, Brazil, Indonesia, Turkey and South Africa as ‘The Fragile Five.’

At a juncture in global growth story where emerging markets including BRICS were to play a significant role, this development has certainly spooked the markets.

The trigger behind the implosion

Macroeconomic imbalances build up over a long term and are visible most of the time, but myopic politico-economic issues generally lead to these being condoned. Due to the practical difficulty of being able to diagnose the exact tipping point – when the imbalance would explode and what the trigger would be – most decision makers like to think and wish that it would not be now.

The current, ongoing depreciation of the Indian Rupee (and other emerging market currencies) is one such explosion that was waiting to happen and just needed a trigger.

India suffers from high twin deficits (internal – fiscal deficit, external – current account deficit) and high inflation. This precarious position got exposed on account of a number of recent developments emanating mainly in the US. These include an improved US economy, the decision of the Fed to gradually end Quantitative Easing (QE), and possible war in Syria. All these developments have driven global money towards the Greenback making it much stronger and the other currencies much weaker. The figure above shows our currency’s vulnerability. Each time external factors lead to an exodus of FII (Foreign Institutional Investors) the fragile currency generally goes for a dip.

Where does this lead the economy to?

After the first round of currency depreciation this fiscal (May-June), the economy was perceived to have stabilised at the new exchange rate.

Despite the ongoing political paralysis, and impending elections the economy was forecasted to do better than the previous year’s 5% GDP growth. The heady days of greater than 8% GDP growth were nowhere near but at 5.5-5.7% in 2013 and 6-6.5% in 2014 the economy was looking relatively better.

In this scenario, where does the current round of currency depreciation that began in August 2013 lead the economy to?

India is not an export oriented economy so as to benefit from such depreciation. Instead it will be faced with imported inflation and high borrowing costs both of which will hurt the domestic purchasing power. This in turn will slowdown consumer spending as well as investment. While fiscal spend may go up owing to the trend observed before elections, the rating agencies would ensure that would not be easy. Monetary policy, which remained tight under Governor Subbarao in order to check inflation, will have to most likely remain so under the new Governor Rajan to provide some pull to the capital markets.

As far as the fall of the INR is concerned, a regime change, or a revised policy stance will not bring back its value immediately. Other attempts such as controlling import of luxury items or purchase of dollars by Oil Companies from RBI to skip the spot market are temporary and can last for only so long.

There is no quick fix to the current situation, and only long term efforts aimed at reducing supply bottlenecks that bring down inflation in a high-demand economy, exploring ways to reduce exposure to oil price fluctuations that hurt our current account position, a more rational deployment of public funds to check our fiscal deficits and resolving the policy paralysis are the only meaningful ways to reduce instability.

Under such circumstances it would not be surprising to expect a further downgrade of the growth forecast. In fact, BNP Paribas has already trimmed the growth to 3.7% for this fiscal. The only upside to this forecast can be a good harvest on account of sufficient monsoon this year.

What is exceptional corporate performance and what matters for that?

2013-06-28T04:48:00.000-07:00

A new book - 'The Three Rules: How Exceptional Companies Think' - has come up with 3 simple rules for corporations to follow in order to have a sustainable superior performance. These rules are ‘Better before Cheaper, Revenue before Cost, and deployment of all means to follow the first 2 rules’.

As the US economy improves leaving the recession behind, a rule such as ‘revenue before cost’ is likely to only help. The test for the book will, however, arrive a few years down the line when the business cycles may bring upon the next recession.

The book is meant for corporations and the rules sound simple. In fact these are so simple that the authors actually had to qualify the simplicity of the rules.

“Better before cheaper and revenue before cost are not “dumbed down” simplifications of our findings, nor mnemonics connected to more elaborate formulations. These rules are the principles we inferred from our research, and so their simplicity does not come at the expense of completeness.” (p.216)

However, while the rules are simple, reading the book is an academic exercise in itself that requires a notepad, a pen, and a lot of time. That investment nonetheless should be worthwhile because this book is not just another one in the ‘business performance’ genre. What fundamentally separates this book is –

a. Choice of ROA as a parameter for performance as against parameters like stock performance

b. Scientific selection of top companies as against author nominations

c. Thorough understanding of each industry and company and triangulation of facts to separate facts from beliefs. This process was based on not just news reports and annual reports but hard facts and numbers from sources not so easily available.

For a book that has 1/3^rd devoted to notes and methodology there is little scope to doubt the robustness of its results. Also, the thickness of the appendices is not just a tacit stonewall deployed by many to avoid a volley of questions it is actually a transparent and open invitation to serious readers to detect and point out the gaps.

Given the confidence in the 3 rules proposed, one begins to think more closely of real life business scenarios and this is where I have a few questions for the authors.

1. 3 simple rules that are difficult to follow? – While we can buy in to the hypothesis and the evidence that ‘Revenue should come before cost’ taking a call with regard to this rule may be difficult. So, for example, should a company lay off its employees and cut costs under changed circumstances or should it reason that re-skilling the employees while focusing on new sources of revenue is a better approach? I guess what the book is trying to suggest in these cases is to focus more of the managerial attention on value generation and less on cost cutting. Is that right?

2. Rules for companies or for products/services? ‘Better before cheaper’ appears to be a rule applicable more to the product development than to the growth of a company. So, if a company caters to customers from different income groups all its products are not likely to come out true on the ‘better before cheaper’ front.

Putting it differently, in some markets a cheaper product may be the only definition of ‘better.’ In such markets a company that epitomises ‘better before cheaper’ may need to adapt.

3. Limits to applicability?

a. With the exception of the Retail industry, we don’t see the example of any service company, especially of the kind reliant on bidding for contracts? How would a service company bidding for contracts from US government, given the current focus on Low Price Technically Acceptable (LPTA) policy, win the contracts if it doesn’t focus on cost? We could reason that the company should move out of such an industry but is that the only answer? Given that services sector is no less than 50% of total global GDP it becomes important to address this sector.

b. Do the three rules contradict the process of disruptive innovation where the new entrants making a foothold provide relatively low cost and low quality alternatives to gain a foothold?

Is there an Indian ‘BNDES’ bank and should there be one?

2013-06-25T04:14:00.005-07:00

The Brazil Development Bank (BNDES) plays an important role in the country’s infrastructure development process especially when the country’s budgeting process leaves little room for discretionary spending.

The word ‘development’[i], however, has a very broad bearing in the case of BNDES since it lends not just for infrastructure development but also to private companies that it perceives to have a strong business model. In fact 60% of the bank’s loan portfolio comprises large companies.[ii]

China similarly has the China Development Bank (CDB) which in fact is much bigger in scale[iii] and size than the BNDES[iv] (see figure below). That left me wondering if there is a comparable bank in India with similar objectives and one that could help the country realise its $1 trillion infrastructure target by 2017.

A close examination, however, suggests that there is no such bank of comparable stature dedicated exclusively to development needs. Sectoral development banks like NABARD try to do the job; however, such banks are present in China and Brazil too in addition to the gigantic development centric banks.

Country	Main Development Bank/s[v]
Brazil	Banco Nacional de Desenvolvimento Economico e Social - BNDES
Russia	State Corporation Bank for Development and Foreign Economic Affairs – Vnesheconombank
India	Trade - EXIM Bank Industrial - IFCI, SIDBI, IDBI Agriculture – NABARD Housing – NHB Infrastructure – IDFC, IL&FS, IIFCL
China	China Development Bank Corporation
South Africa	Development Bank of Southern Africa

The State Bank of India and other nationalised Indian banks do contribute to development lending; however, the scale of such lending cannot compete with CDB or BNDES with the total assets of SBI almost equal to the BNDES.[vi]

That brings us to the question that do we need such a mammoth development bank? From an infrastructure perspective, a report by PwC in 2007[vii] shows that commercial banks (mainly public sector) and the other development banks together finance more than 90% of the total infrastructure financing.

Figure 1- India Infrastructure Finance (PwC/World Bank, 2007)

However, going forward, the capacity of the commercial banks to fund long term infrastructure debt has saturated and there is a need for alternative finance. Infrastructure bonds with tax incentives are now being floated in to the market but their contribution to total debt requirement is limited.

[i]“Brazil: A bank too big to be beautiful,” FT, September 2012, http://www.ft.com/intl/cms/s/0/983f1bca-0234-11e2-b41f-00144feabdc0.html#axzz2X7C1DtQS

[ii] “Nest egg or serpent’s egg,” The Economist, August 2010, http://www.economist.com/node/16748990

[iii] “(Almost) all you need to know about China Development Bank,” FT, May 2013, http://blogs.ft.com/beyond-brics/2013/05/29/qa-almost-all-you-need-to-know-about-china-development-bank/#axzz2XDln6iEB

[iv] “Brazil’s BNDES and Caixa hit by downgrades,” FT, March 2013, http://www.ft.com/intl/cms/s/0/0a07be4c-924f-11e2-851f-00144feabdc0.html#axzz2X7C1DtQS

[v] EXIM Bank of India, March 2012, http://www.eximbankindia.com/press300312.asp

[vi] “My conflicted heart – the struggle for the soul of India’s largest bank,” The Economist, April 2012, http://www.economist.com/node/21553039

[vii] “Infrastructure Financing in India,” PwC, 2007, http://toolkit.pppinindia.com/pdf/infrastructure-financing-india.pdf

Discovering Dholera !

2013-04-11T02:58:00.001-07:00

I had been hearing of this particularly Gujarati name Dholera for the past some time but it caught my attention specifically after the Budget speech by the Indian Finance Minister P Chidambaram in March 2013.

Given the adventurer I am I set out for the place within two weeks to see what it is about and whether the place can be an investment destination for me?

The Ahmedabad Rajdhani that now stops at Gurgaon, dropped me at Ahmedabad station in the morning where I got my first information feeds about Dholera. The auto and taxi guys that are generally the gatekeepers of information about a city and its surroundings were broadly clueless about Dholera. Few that knew about it, knew of it only as a village on way to Bhavnagar.

So, in a way I become the pioneer in exploring Dholera (of course apart from the policy guys and the biggie investors). And in fact when I reached there I couldn’t recognise I was in Dholera for I couldn’t see anything apart from a roadside eatery, few signboards, few huts, and a lot of land of the type where water comes in at high tides.

There were no gigantic machines, or glamorous buildings as seen in brochures and You Tube videos. And the natives in fact looked at me as if I had lost my way. In fact if you have to understand what Dholera is you will have to look at a cluster of villages/towns around it such as – Pipli, Vatanam, Bagodra, Bholad, Dhanduka etc.

Dholera SIR (Special Investment Region) which is supposed to be the new industrial hub in that region is so far just a plan on a piece of paper and so are the other components that are supposed to make the SIR a mammoth hub of economic activity.

The road to Dholera port (see picture above) didn’t even take me half way to the port and there are no signs of the approaching Delhi-Mumbai-Industrial-Corridor (DMIC) or the Dedicated Freight Corridor (DFC) yet. The long distance metro line that is also so regularly flaunted by government as well as the upcoming residential builders is still a dream. As regards the airport, I can say I have seen the grass and the trees that would possibly be uprooted to make way for the project.

But hey, isn’t that how all the big projects or upcoming new cities are supposed to be in the initial stages.

The only difference possibly is that unlike a Noida or a Gurgaon that had visible settlement in the near distance in the form of Delhi, there is no such habitation here. It is also not a Bhiwadi – neither in terms of distance from a big city nor does it have any existing industrial or economic activity apart from agriculture that could eventually drive people in. The commute from Ahmedabad to Dholera, however, will take 1.5-2 hours which is almost similar to the commute from central Delhi to Bhiwadi.

Based on my ground assessment then, here are the few pros and cons for a retail investor.

Pros:

· The project has commitment from the Gujarat government and Narendra Modi. As mentioned above, it is also on centre’s radar. That Narendra Modi has another 4 years in power is a plus.

· Japan is a big investor on the DMIC project around which Dholera is coming up

· It will be one of its kind of project in India and perhaps the world where a city of this size (903 Square kilometres) will be brought up from nothing. For benchmarks, It will be twice the size of Ahmedabad and thrice the size of Lucknow.

· As per the plan it will be an integrated, modern city that would have been planned from scratch, something akin to Chandigarh but more futuristic

· Cheap land available –2000 to 3000 per square yard (residential)

· Inspired by some of the best new city projects globally – Songdo (Korea), Punggol (Singapore), Iskandar (Malaysia), Tianjin City (China)

· Concept developed and submitted by renowned urban consultant Halcrow (UK), AECOM to programme manage the development
· Being a SIR, contigous land acquisition not a must (unlike in a SEZ) and this fast tracks the process. Low population density and non-fertile land reduces scope for resistance.

Cons:

· No builder of national scale, or a builder that we frequently hear of in north India, is providing any projects over there. The only exception probably would be Mahindra Life Spaces but there is no information as to when this project would be launched. Existing builders claim that they have the NOC, NA (approval for Non-Agriculture use) approvals but I am still to figure out how credible these are.

· Distance from Ahmedabad – the distance angle makes one think whether they should look at Dholera which is on extreme or should one consider a mid-way place between Ahmedabad and Dholera such as Bagodra.

· Mainly a manufacturing hub unlike the service story of Gurgaon or the Mahindra SEZ near Jaipur. How suitable is such place from a residential perspective may need to be thought of although it is not something too uncommon in India

· The presence of a number of high-tide areas

· Absence of drinking water – as per plans water will come initially from the Narmada Canal and later from the upcoming Kalpasar dam

If you have any comments, I would be happy to take them as there is a lot more to be learned about this upcoming city.

There are 13 SIRs planned in Gujarat. The status of these in January 2013 was as follows:

...................................................................................................................
Updates:
July 4, 2913 - DSIRDA looking for new buyers of land forfeited from HCC, Nano Works, and Universal Success Enterprise (USE). The price will also be higher. (Business Standard)
May 29, 2013 - Interarch to invest 150cr in Dholera (Hindu BusinessLine)
May 26, 2013 - Mahindra awaits land from govt for World City at Dholera (Business Standard)
May 8, 2013 - Central Government approves assistance of 17,500 crore for 7 cities including Dholera (BS)
March 12, 2013 - AECOM wins contract to "programme manage" the development of Dholera

On-going or Up-coming projects in the region

1. Four laning of Bagodara – Bhavnagar Road under VGF Scheme of GOI (SH- 1 & SH- 36) Km. 61/400 and Bhavnagar at Km. 189/100

2. Widening & Strengthening of Sarkhej–Dholka-Vataman-Pipli-Dholera-Bhavnagar Road – Km 16/8 to 133/2 (Short Route) - SMS Infrastructure Ltd. Nagpur

3. Widening & Strengthening of Sarkhej–Dholka-Vataman-Pipli-Dholera-Bhavnagar Road – Km 133/2 to 168/2 (Short Route) - Ketan Construction Ltd. Ahmedabad
4. Township Planning 3 & 4 (out of 6) is with Sai Consulting Engineers Pvt Ltd
5. Tender for Consulting for EIA/EMP for power station floated in April 2013

LIBOR cheated! - casts shadow over the sanctity of numbers published by big houses

2013-04-10T00:27:00.004-07:00

Well the speculations seem to be over and it is now almost true that London Inter Bank Offer Rate (LIBOR) got cheated and with it the entire world that relies so much on this indicator. Top officials (CEO, COO, and a Chairman) at Barclays resigned this week as an admission of guilt while the Bank agreed to pay a penalty of $453 million[i] to US and UK regulators.

At a time when the distrust is high with regard to everything related to finance and banking reforms are underway in most developed nations this development is likely to further increase the resentment of the layman and the non-finance industry about the ailments in the banking industry.

Here we give you a lowdown on the importance of LIBOR, how it gets determined, and how it got manipulated.

Why LIBOR is important:

It wouldn’t be incorrect to say that each one of us could have been individually impacted by what the LIBOR could be on any given day. LIBOR indicates the rates in terms of ten currencies[ii] and fifteen maturities at which banks can borrow unsecured money in the market so as to further lend to businesses, government, or households. So the mortgage rates or the education loan rates you are charged do get determined by what the LIBOR is. In macro terms LIBOR serves as “.....the benchmark for $360 trillion of global securities.”[iii]

How LIBOR is determined:

British Bank Association (BBA) publishes the LIBOR each day. The LIBOR, however, is not based on some sophisticated, scientific calculations but on the rates submissions by a panel of leading banks for each of the ten currencies for which the currency is published.

The panel of banks that submits its borrowing rates for GBP for example includes - Abbey National plc, Bank of Tokyo-Mitsubishi UFJ Ltd, Barclays Bank plc, BNP Paribas, Citibank NA, Credit Agricole CIB, Deutsche Bank AG, HSBC, JP Morgan Chase, Lloyds Banking Group, Mizuho Corporate Bank, Rabobank, Royal Bank of Canada, The Royal Bank of Scotland Group, Société Générale, and UBS AG.

What went wrong?

A number of banks allegedly colluded to rig the LIBOR. Barclays has already been found guilty while a number of others are being investigated.

The accused banks deliberately reported lower borrowing costs during the financial crisis to avoid suggesting to the markets that they were struggling and facing tight credit markets. This practice was also found to be commonly used for the benefits of the banks’ traders.

[i] http://online.wsj.com/article/SB10001424052702304299704577503974000425002.html

[ii] http://www.bbalibor.com/bbalibor-explained/the-basics

[iii] http://www.businessweek.com/news/2012-07-03/diamond-s-exit-shows-libor-only-what-each-bank-says-it-is

Good and bad inequality

2012-11-04T03:52:00.001-08:00

In India it’s not uncommon to have heated debates on whether India is ‘shining’ or it’s creating another India which many of us are ‘afraid to see.’ Being an economist I have been a part of such debates more frequently. Fortunately or unfortunately, but because of my understanding of economic systems as part of my education, I have been on the side that is less emotional but more realistic. My stance is also generally in contrast to what one would associate with the ostensibly-socialist attitude of a JNU pass out.

As has been the case a less emotional side doesn’t appeal much to the larger audience. People like to be swayed by the imagery of people dying, children working, etc. and in the process they tend to suggest or follow or practice or patronise such policies that actually act in ways contrary to what their objective is.

One of the best cases of such emotion driven misconceived ideology is ban on child labour. People would hate a person like me who suggests that you shouldn’t ban child labour. They would rarely take the pains to understand that I am suggesting so not because I am a sadist who hates children or an opportunist who has hired several of them at home, but because banning child labour actually reduces the well being of those very children. (For details on this argument see Kaushik Basu’s paper – The Economics of Child Labor)

On similar lines one of the common complains of many in the middle and upper income classes is that the gap between the rich and the poor is growing.

This is a fact and I wouldn't dispute it. What I, however, try to dispute is the presumption that this growing gap or inequality is making people worse off. My observation of the economic development of India over the past two decades suggests that more and more people are reaping the benefits of a growing India.

In my attempt to reconcile these two varying opinions I felt it might be a good idea to instead classify inequality as ‘good inequality’ and ‘bad inequality.’ This is akin to the concept of inflation being classified in to ‘good inflation’ and ‘bad inflation’ so as to put to rest the blanket notion that all inflation is bad inflation.

‘Good inequality’ then according to me, is the inequality which is the by-product of a nation’s economic growth. Such inequality is representative of the presence of opportunity for people seeking growth, for trade and entrepreneurship to flourish, for growth in employment opportunities, for technological progress and so on and so forth. Today’s India has the potential to give birth to more and more millionaires and billionaires. And these individuals weren’t all born with silver spoons. At a smaller level or a bigger level, it wouldn’t be incorrect to say that most Indians today have a dream to fulfil – for some it’s about buying a new house, for others it’s about educating children or taking their parents for a world trip.

In terms of concrete examples, recently sweets were distributed in my office and the occasion was construction of our CEO’s driver’s house. Rising aspirations are also manifest in housemaids hired for household chores sending their kids (or at least their sons) to private schools even if these are expensive.

At a much personal level I am happy to see the progression in my family. My grandfather started with selling clothes in streets on a bicycle while I started with a job with Deloitte, thanks to the economic growth in Andhra Pradesh, India (AP) brought about by former Chief Minister Chandrababu Naidu. Inequality has certainly grown in AP but is this inequality bad? In fact the growth brought about by Naidu seems to have played an important role in bringing down naxalism in the state.

The growth in India has also led to increased demand for labour and as a consequence this segment of the population feels much empowered today. The labour today can choose between different employers and can bargain for what s/he thinks are the right wages. The salesmen at my father’s shop have staged 3 walkouts to demand wage hikes over the past two years. Earlier the frequency of such an event was hardly once in a few years.

Good inequality I feel, is also where the increasing numbers of rich leads to increasing philanthropy (see Bain’s “India Philanthropy Report 2012”) and where the rural consumption starts to evolve beyond agrarian products.

I have also felt that the issues of inequality, for the sake of discussion, troubles the middle and upper classes more than the people in the lower rung who are keen on tapping all possible opportunity to grow. I felt so particularly while listening to a programme by the Manav Rachna radio (FM - 107.8) while driving to my office. The radio jockey was interviewing migrants to Gurgaon and trying to understand how they fare. These people were mainly fruit vendors or labourers that had been working in Gurgaon for about 5 years. I was taken by surprise to know that most of them were utterly grateful to Gurgaon for being a land of opportunities. A city that changed their fortunes and a city that has given them an opportunity to lead a better life back home. The grievances, when prodded, were few and far between and included distaste for the rustic language of Gurgaon.

Well, one might think that I am broadly an optimist who sees more of good in every situation. This could be somewhat true but I am quite cynical about a number of things in the Indian story. One amongst those is all instances of ‘bad inequality.’

‘Bad inequality’ according to me is something that doesn’t allow a less well off person to benefit from these opportunities. It is symbolic of such growth that happens at the cost of the poor. These are more of governance issues that snatch away level playing field from the less privileged.

So while a new highway or a new expressway is good for growth of India it shouldn’t ignore the interest of the poor. A person without a bike or car should also be able to navigate the roads with equal ease. A pedestrian shouldn’t be disadvantaged because s/he lacks the means.

Similarly, while the Indian mobile revolution is good and is quite an example for many countries malpractices by some telecom companies hurt the poor more. A daily wager is badly hit if the prepaid recharge is wrongfully deducted for unsolicited ringtones. A doctor fleecing thousand of rupees from an illiterate farmer by scaring him of a non-existing disease is also unfair. These are instances of issues where strict enforcement of rules and delivery of justice by the government would immensely help.

Another instance could be hoarding of tickets in Indian Railways. The option to book tickets four months in advance puts a poor fellow at disadvantage because he can’t block his money for so long.

Reduction of loan disbursement to poor retail borrowers on account of lending to institutional borrowers, something that was highlighted by the Finance Minister P. Chidambaram recently, can be one more instance of such ‘bad inequality.’

It is important to understand this delineation between good and bad inequality. Trying to call economic growth bad names is gross simplification of facts and an unintended attack on one of the most promising paths to making more and more Indians better off. Today's reality of 'poor governance along with growth' is certainly better than yesteryear's 'poor governance without economic growth'.

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For those interested in a more detailed study, please refer to 'Growth and Poverty - The great debate', CUTS International, which is a follow up to Jagdish Bhagwati's lecture in the Indian Parliament in 2010

China is a big, safe, secure, open, secular, and vibrant country – if one looks at the tourist inflow!

2012-07-05T07:37:00.000-07:00

A religious group in the northern state of J&K in India has recently suggested banning tourists wearing mini-skirts in the state. Well, the tourist department knows that this wouldn’t go down well with the tourists and the tourism industry which is making attempts to attract eyeballs in a militancy infested state may suffer.

This J&K instance though is one amongst zillions of reasons that hold tourists away from India. Others include lack of hygiene, lack of cooperation from the public and the bureaucracy, very little security, and lack of infrastructure.

Tourism, however, is a very important indicator of the level of comfort that the globe enjoys with a particular country and this level of comfort is a pre-requisite for ushering in business at a larger scale. Our inability at being able to pull sufficient crowds to the country also explains why there is less FDI in India, and why to some extent we are growing at somewhat lesser rates of growth than we could possibly attain.

China on the other hand has mastered the art of being palatable to the globe and it then matters relatively less that the country is not a democracy and the media is not that free. The inflow in China especially took off after its WTO accession. Tourist arrivals in China are now matching the levels in the USA and this is no mean feat (see figure below).

Whether for business or for leisure each tourist asks a basic question ‘what’s in there for me?’ and China we all know has lots to offer to the world. To businessmen it is the world’s ‘workshop,’ to students it has some good universities to offer (at least by Indian standards) and to the core tourist it has its heritage and infrastructure to offer. I am myself so keen to visit China to experience the Shanghai Maglev, to see the hutongs in Beijing, the Great Wall, the terracotta warriors and so on and so forth. An Indian (who has visited or somewhat studied China) is generally in awe at how so much has been accomplished in China.

India has shown some effort in boosting tourism especially with national campaigns like ‘Incredible India!’ and state campaigns from Kerala, Madhya Pradesh, and Gujarat among the prominent ones. However, we have a long way to go and campaigns alone wouldn’t help. The day we would reach China’s levels of tourism, I am sure we would have arrived economy-wise as well.

Ignore ratings, but not the confidence levels!

2012-06-22T03:05:00.002-07:00

Everybody is busy bashing rating agencies and I am no exception. Only yesterday I was telling my colleagues why a time will come when these agencies would go out of business. Recently it was emphasised in the G20 meet also that reliance on rating agencies should be reduced. (see The Hindu article)

The best rebuttal of these agencies came from the markets which reflected the irrelevance of these ratings in the yield rates. The US bond yields went down after a downgrade and so was the case in UK recently. (see Bloomberg article)

Indian ministers would certainly be happy with this antagonism towards the rating trio – they are an apt scapegoat to blame and to divert the nation from what is ailing the Indian economy. However, would the Indian economy be doing any better if the agencies didn’t exist? I am not sure.

Each economic unit (household, companies, labour, etc.) is a de facto rating agency in an economy. If a household is gloomy because of high inflation it would impact growth by lowering demand. If a company is skeptical of growth in the days to come it will pass on the scepticism to its suppliers, its employees and so on. So if the economic units are feeling low about the economy, only positive policy actions or positive external shocks can help the economy and ratings aren’t that relevant.

So ignore the rating downgrades if you wish but do not ignore issues like increasing fiscal deficit on the back of irresponsible policies, poor governance, policy paralysis, and infrastructure constraints to name a few that hurt the confidence of the consumer as well as the investor in the Indian economy. You can ridicule 3 rating agencies but ridiculing each economic unit’s sentiment should be done at one’s own peril.

Fiscal and rural buffers of India missing this time?

2012-06-05T04:35:00.002-07:00

In 2008 when the world was facing recession India appeared relatively calm. Its exports were certainly hit and the industry did face some degree of liquidity crunch however, a few fundamentals and policy events kept the economy kicking.

Pay Commission announced hikes and big lump sum packets of retrospective salaries were doled out, agriculture and therefore the rural economy was doing well, the central government was prepared for a fiscal stimuli and the RBI brought the bank rates down. The B and the R of the BIMARU states provided positive sentiment with their growth stories and the new middle class and the new set of salaried individuals entering the economy kept the engines warm.

This time around when the world seems to be stuck in a low level growth equilibrium India appears more pessimistic. It all started with the inflation that tempered the economy followed by RBI’s monetary tightening. Thereafter it was the loss of faith in the Indian Government in the wake of scandals and the loss of faith in the Indian currency as the Eurozone plummeted.

India is currently caught in a phase of macroeconomic instability where the twin deficits are high and the inflation is above the targets. This macro instability has derailed India from its high growth trajectory for now and it would need some positive policy actions in the next quarter or so. Few days back T K Arun of The Economic Times talked about irrational lack of exuberance in the Indian Economy and he almost derided experts who look at the stuff like twin deficits.

“The trouble is, respectable people see respectable things like the fiscal deficit, the current account deficit, inflation and the exchange rate, and feel discouraged.

They see other respectable folk - foreign investors and their lobbyists, some of them state dignitaries - shake their heads in knowing disapproval and feel doubly disheartened. If only these respectable people would look into the grime and murk that is India's politics.”

The current situation I am sure would certainly make T K Arun think again, However, what I am hopeful about and where I am on the same page as him is that once the government starts to show some constructive path, the economy can certainly come back to a high growth rate of about 8%. Also I think India is not likely to go below a 6% growth rate in its current form. The reason I hold such confidence in the Indian economy is facts like this:

- Competition between states is increasing and the states are at different stages of development. Bihar is still doing well and it needs, and is likely to attract significant investment even if the average mood in Indian economy is sombre.
- The Industry is showing signs of flexibility and is quick to shift to states that show better governance. Maruti for example is moving its plants to Gujarat from Haryana.
- The latent demand with the non-salaried class is quite high and is now beginning to surface. People are actually spending more – be it on child’s education, be it on electronics, be it on property or be it on alternative medicine like Ramdev’s.
- Indian households are still less leveraged compared to what is the norm in the developed world. In USA or Australia households are in debt up to 100% or more of their income while in India the ratio is about 30-40%. Such households as in India do not defer or change their durable or property buying decisions in response to minor ups and downs in interest rates or in the economy.
- Marriage and religion would continue to support the Indian economy even now.
- As mentioned in my previous blog rural demand is likely to be robust.

So while the fiscal buffer is certainly missing this time I would like to bet on the other buffers to help keep the economy in a 6% kind of state even in the absence of positive policy moves.

Indian rural demand enters coma?

2012-06-05T04:30:00.003-07:00

That the consumer demand in the developed world is in a state of coma after the Global Financial Crisis is a well known fact. It is also well understood that this economic coma is bound to persist for a long period, possibly a decade.

However, what came as a surprise to me was the possibility of the Indian rural market entering such a coma recently. The Economic Times carried such news in the second week of February – Rural India Loses Steam. Thereafter I began to hear stories from people getting affected from the slump. One textile trader complained of the missing rural demand even while the Indian wedding season was in its full swing. In other instance a sugarcane farmer complained of receiving low prices. A bicycle retailer in Bihar contemplated changing trade even when the cycle doling scheme of Nitish Kumar is on. So what is wrong?

Before we think of the reasons we must take all of this with a pinch of salt. I have found it to be a common habit of business people to over blow their worries even when the changes have been marginal. Sometimes this is done to make others feel good about their sorry state of affairs. At another level this tendency has caught up with salaried professionals too who have become attuned to hyper returns year after year. So for example a 10% hike in salary might be considered no hike at all, when all it might mean is that it is not the usual 20% with the same firm or the usual 30% when job hopping.

So let’s come back to the allegation that rural demand has fallen and the proposed reasons to which this slump is attributed.

- The MGNREGS has spoilt the rural economy
- The hiked Minimum Support Prices (MSP) do not reach the famers – This could be the case but this has been true for ages.
- Price crash and crop failures – This indeed appears to be the case. Prices of crops like Potato, Cotton, and paddy indeed crashed in different regions.
- Lack of liquidity and high loan rates
- Election fatigue in north

A careful look at these suggests that these do not lead to a coherent story. These reasons are either not backed by facts or in other cases the fact has been in existence earlier too and is not a novelty.

The most baffling statement seems to be about a slowdown in sales of ACs since November. I thought this was common sense.

“Manish Sharma, Panasonic India director marketing and sales, says in tier-II and tier-III markets, sales have fallen 10-15% since November with the worst affected being direct cool refrigerators, small-screen LCD television and window air-conditioners.”

Broadly then my gut feel is that there is no new structural development that would reduce rural demand. Although unsubstantiated, the demand may be down for a while but that cannot be the new normal in India.

My confidence in the rural economy especially gets summed up well in what Pradeep Kashyap has to say:

“The rural economy is an authentic economy while the urban economy is a bubble economy and a speculative economy to a large extent. In rural India, nobody speculates on housing, no one really invests in financial markets, and again there is no IT sector in rural India. So that’s why our rural economy continued to grow in 2008-09 and we did much better than even China back then as ours is a domestic consumption-driven economy and theirs is much more export driven. The rural economy now accounts for 50% of India’s economy. So half of our economy remains stable and that’s a huge advantage.”

What doesn't interest the state or the market!

2012-03-29T01:13:00.000-07:00

West Champaran is a remote district of Bihar – one of the poorest states of India. The region borders Nepal and is the same place where Mahatma Gandhi started his non-violent campaign against the British Empire. Until 2007, Sixty years since India got Independence several villages in this region remained unelectrified. Though availability of electricity in Bihar is in general sporadic, the State Electricity Board considered it non-feasible to provide electricity to these villages around the Gandak river basin due to geographical difficulties.

In August 2007, however, things changed. A group of friends managed to find a solution to a problem that the state considered outside its competence. A five year long research process culminated in the formation of Husk Power Systems (HPS) that could provide off-grid electricity that used rice husk, a resource that was abundant in that area. The provision of electricity to villages deemed unfit for grid based delivery was a feat in itself but what was more commendable was the vision of a model that was affordable, self sustainable and scalable.

The villagers could buy power from the micro power plants at the same cost or less than their monthly spend on kerosene oil which they used to burn oil-lamps. A solar system is also capable of off-grid electricity provision but in India it is still an expensive option which a select few can afford. The plants generated revenue from the sale of power units as well as sale of CFL bulbs, and utilisation of the rice char for manufacturing incense sticks. This revenue was sufficient to make each plant profitable and this attracted franchisee interest. The profitability of these plants holds special significance in the Indian context given that most State Electricity Boards (SEBs) are loss making. The operation and maintenance of the power plants was relatively simple and the replication was therefore quick. By 2010, 50 plants had been established and HPS targets 2000 plants by 2014.

The case of HPS is no exception, as India develops economically a number of social enterprises are emerging to somewhat reduce the massive deficits in public service delivery. To read more about such enterprises one may look at "Frugal Innovation: Learning from social entrepreneurs in India."

“Jaypee” immune to bicycles and elephants?

2012-03-27T01:14:00.000-07:00

Many people investing in the real estate in Noida must have been dissuaded by brokers and laymen alike to not to buy a Jaypee property because of its close connections with the Mayawati fraternity. It is/was believed that the group has benefitted disproportionately from Mayawati’s regime and will likely go in for a tailspin once the Yadav’s take over.

As a company that is listed on the stock exchange and one that does not take any money in cash from its buyers (unlike the norm of 40-50% in black) the facts suggested a level of transparency. However, the behind-the-scene realities were/are as good as anybody’s guess.

With the elections now over and SP firmly in place the stock markets seem to be indicating that the fears related to the vulnerability of Jaypee to regimes were unfounded.

Twenty days after the victory of the SP, the Jaypee stocks have risen broadly. There were some fluctuations in the first two days of the election results but those seem to have been clearly rested now.

What is not yet settled though is the explanation for this neat outcome for Jaypee? People are wondering if it is actually a company with great fundamentals or if it has the skill of manoeuvring across political parties.

I thought India was better than Vietnam!

2012-03-16T03:08:00.000-07:00

When I first started to look at the economy of Vietnam I thought it is a pretty small economy that is overly reliant on exports and investment and has struggled to maintain its macroeconomic stability off late.

I was also pessimistic about the economy on account of the heavy state involvement in production as well as banking. More than 80% of banking is state controlled and the state owned enterprises (SOEs) contribute to about 35% of the economy. There is heavy channelling of bank lending to state enterprises and that leads to inefficiencies.

Such a scenario in Vietnam made me think that our India is doing quite well. We are a democracy and private markets here are not interfered with. Well all this remains the truth but when compared to Vietnam, I now realise, we are certainly not doing better.

The reforms for the two countries started around the same time (1986 for Vietnam and 1990 for India) and Vietnam has managed to achieve a comparable per capita income already. Like India, Vietnam didn’t contract during the Global Financial Crisis and the growth rates for both countries are quite similar.

What came as a surprise to me is that government owned banks still control 75% of Indian banking system and 3% of their loans are bad. Most of these bad loans are attributable to loans to government owned entities or projects like the Indian Airlines.

And that is not the only negative comparator; India also visited a similar macroeconomic instability recently as Vietnam with high inflation, high twin deficits, and low forex reserves.

Well, India certainly has a much bigger economy than Vietnam as of now but that is due to the enormity of its size. In terms of the economic fundamentals credit must certainly go to Vietnam for catching up so fast despite years of strife on account of the infamous Vietnam War.

Tight budgets, deleveraging households lead to a new equation of output (Y= I + X-M) for biggies

2012-02-08T00:28:00.000-08:00

In economic theory, one of the ways output is defined is by the expenditure method. According to this approach the GDP of an economy is the sum of expenditures by the households, by the governments, by the corporations, and the net exports of a country. Symbolically the equation is Y= C+G+I+(X-M).

However, this equation seems to be getting pruned in the aftermath of the Global Financial Crisis (GFC). Most of the developed world is suffering from a sobering phase where the households that were so far consuming as if there was no tomorrow are drastically cutting back their spending and instead focusing on deleveraging. In UK, harsh economic conditions actually led to a decline in real disposable income in March 2011. Such a phenomenon has occurred after about 30 years.

Similarly heavy public debt burdens in most of the developed world have led to severe austerity cuts that comprise of budget freezes and job cuts. UK is already undergoing a four year spending review which would see decline in real expenditures, and USA has frozen discretionary spending. Greece recently witnessed loss of some 15,000 public sector jobs and this number of course is just a harbinger of what is likely to come.

So the developed world has basically ruled out any growth in the contribution of (C) and (G) to (Y) in the output equation. Instead they are banking on (I) and (X-M) to offset the loss of growth in two of the erstwhile leading engines of growth.

The growth plan broadly reads as follows: make private sector invest more by reducing the crowding out by the government sector, and leverage and redirect this investment so as to be able to serve external markets and external demand in emerging economies by way of exports. Given the rising cash surpluses with developed world corporations and the rising middle class in emerging economies the plan seems perfect on the face of it.

However, this plan runs on big assumptions about the feasibility of such a large structural change in the developed world economies as well as the appetite of the emerging economies for such exports and investments. Only time will tell if this experiment around a pruned output equation would do the job.

“Chinternational” – How China has become the gateway to international trade for Indian Industry!

2012-01-27T02:22:00.000-08:00

Emerging economies of the BRIC (Brazil-Russia-India-China), especially the BIC have become a must for the trade orientation of almost all economies in the globe today. Simultaneously trade between the BIC nations has picked up tremendously in their attempt to foster south-south relationships. Within this intra-region trade, however, the I-C trade seems to be catching fire more profusely than the B-I trade. The former stands at about $60 billion today while the latter is at $8 billion or so.

Coming from a time when the Indian Industry was so afraid of Chinese products being dumped here, the pace at which the things have changed often surprises me. Today every businessman seems to have either been to China or plans to go there some time. China comes up in day-to-day conversation as if it was just another market in one of our Indian states.

The other day I went to the bicycle market on Esplande Road in Chandni Chowk (Delhi), and was sitting in a small shop when one surrounding shop owner stopped by. The two proprietors were casually talking of how INR weakness was affecting trade with China. Well, cycle trade is still a small scale industry (SSI) in India and expecting this trade to have become international in such a manner came as a surprise to me. Unconfirmed reports suggest that biggies like Hero Cycles also source some of their products from Chinese markets. The industry has embraced cheap products from the country as a way of being competitive and stopped looking at Chinese as hostile gobblers of our market.

Similarly, in the textile industry, Pallavi Aiyar (author of Smoke and Mirrors) suggests that Shaoxing City is more like a little India where approximately 10,000 Indians could be working or living. Apart from this data my interaction with a resident of Jhansi (U.P.) onboard a train to Delhi suggests that traders from the city frequently visit China for textile business.

Electronics is another industry where Chinese imports to India are quite common, and Palika Bazar (Delhi) prices fluctuate with the prices of product in China and the INR/USD exchange rate. My friend from Rajouri Garden (Delhi) also mentions how china is important in the furniture trade. In fact I feel it might be hard to find an industry in India that is not trading with China currently (and I would encourage the readers to suggest some such industries.). When I enrolled myself for a mandarin course at IGNOU (which I never managed to finish,) I found so many businessmen from varying industries registered for the classes.

What is interesting is that for many Indian businessmen international trade first started with China. This is a country that is capable of not just producing high-tech goods which countries like America also produce but because of its emerging economy populace capable of producing low-end mass products as well. Products like cycle spares or torches or solar plates or polyester rolls that are needed in the daily life of a common Indian.

While it certainly feels euphoric to see an industry like bicycle go International with this China trade what is somewhat worrisome is that this flow is highly lopsided with India running a trade deficit with China of about $20 billion in the year 2010-11. When I look at the exporting side, I can only remember of a friend that exports print machinery, and an advertisement by Paharpur Industries about the world’s factory (China) buying cooling systems from them. Well, I am certain that our services industry that is known for its competitiveness globally would be one of the biggest exporters to China as well but in the absence of focus on manufacturing it would be wishful to expect this trade to balance any time soon.

Defining public debt no less difficult than getting rid of debt....

2012-01-10T23:17:00.000-08:00

Different institutions/nations use different measures to denote the sovereign debt of a nation. This generally leads to confusion when countries need to be compared. It is therefore important to be aware of all the classifications and the suitability of each for different purposes. So, what is the most relevant public debt measure for nations?

Possible classifications:

- Total debt vs. Public debt /Government debt /National debt

o Total debt refers to debt of the government sector as well as the private sector owed to local or foreign bodies.
"But Krugman's point, which is correct, is that many make the mistake of assuming that government debt is equivalent to external debt and they overestimate the burden that it imposes on a country." (AntonioFatas and Ilian Mihov on the Global Economy)

- General government debt vs. Federal debt

o General government debt refers to debt owed by all levels of government – Federal, state and local – collectively.

- Gross debt vs. Net debt

o Net debt refers to gross debt minus all financial assets.

Who uses what?

o IMF World Economic Outlook (WEO) database as well as IMF Fiscal Monitor provides data for General Government Gross Debt level only.

o Australia Budget reports data only in ‘General Government Net Debt’ terms.

o UK uses the Public Sector Net Debt measure which is basically the general government net debt figure.

o The debt measure used by European Union is General Government Gross Debt (GGGD). This differs from the UK fiscal measure, PSND, in two important respects. The first is the sectoral boundary; being defined as General Government it excludes the net debt position of public corporations, which are included in the public sector. The second is that is measures gross liabilities and does not net off liquid assets.

o India: Unlike the USA where the centre and state debt data is difficult to find at a place RBI’s Macroeconomic and Monetary Developments Quarterly clearly lays out state, centre, and combined/consolidated public debts. The Status Report of the MoF, DEA, released in November 2010 lays out a debt reduction roadmap up to 2014-15 which again segregates clearly the central, state, and consolidated/general government debt.

o The broadly quoted measure for USA debt is Gross Federal Debt which is the sum of debt held by government accounts plus debt held by public. State and local government debt data is not easy to find. Congressional Budget Office (CBO) in its reports refers more to ‘debt held by public’ component of Federal Debt.

o “The difference between gross debt and net debt is very large for some countries. For example, for 2011 the OECD projects that Japan’s gross debt will be 204.6% but its net debt will be 121.5%, a significant difference, and close to the projected 106.7% net debt of Italy. Indeed, some analysts believe that net debt is a more appropriate measure of the debt situation of a particular country. However, since not all governments include the same type of financial assets in their calculations, the definition of net debt varies from country to country and makes country-to-country comparisons difficult. Therefore, gross debt as a percentage of GDP is the most commonly used government debt ratio and is the way that the OECD measures debt.” (Global Finance magazine)

“In principle, net debt is a more appropriate measure of government indebtedness. There are, however, some concerns with the concept of net debt. In addition to some measurement question (which assets to include, at which value), the government needs to refinance all its gross debt and not only the net part, so in terms of flows, it is the gross debt that matters. Also, while it makes sense to exclude government debt held by the government, some of this debt is part of a fund that covers future pension liabilities that are unaccounted for in the budget. And here is where the assessment of government solvency gets more difficult: what you really want to do is not just to look at government debt but also at future revenues and liabilities.” (Antonio Fatas And Ilian Mihov, INSEAD professors)

Natural disasters as indicators of global interdependence and competitiveness

2011-11-02T05:24:00.000-07:00

Globalisation as a phenomenon is no longer new. One wouldn’t be surprised if a neighbourhood shopkeeper in a developing economy uses the term in his/her day to day conversation. However, it is a phenomenon of mammoth proportions where the actual ground transactions defining this phenomenon are almost infinite in nature. This then makes it almost impossible for even the experts to be aware of all possible linkages and often the reaction is – oh! I didn’t know this was dependent on this.

I recently had such an experience. I was planning to go to Thailand to enjoy what is widely considered its competitive advantage – tourism. The plans, however, had to be aborted because of the flood situation which is still going worse. I understand that the airlines would be affected, hotels would be affected, and sellers of souvenirs would be affected and so on but I could not fathom that the sales of Honda cars in India would be affected because the Greater Noida plant in Uttar Pradesh sources some components from there.

For that matter I didn’t even know that Thailand has established itself as a reliable vendor of auto components and manufacturer of CBUs for global giants like Honda, Ford, Toyota, Isuzu, etc. Textiles competitiveness was known to me but for Thailand be an automotive base even when it doesn’t have any indigenous manufacturer was surprising for me. In fact further research showed to me that Thailand is a much bigger exporter of passenger cars than India. For that matter Thailand is the biggest exporter of passenger cars and race cars by value amongst all developing economies (see figure below).

Beyond the supply-chain disruptions induced by Thai floods, the Australian floods and cyclone (December 2010- January 2011) highlighted the critical role played by the country in the commodities industry, the Japanese earthquake and Tsunami made people aware of the deficits in the auto industry, the drought and fires that destroyed crops in Russia in 2010 had people worried about wheat prices, and now the drought in southern USA is worrying the markets about cotton prices.

While it would remain a big debate whether increasing globalisation is responsible for increasing natural disasters (if they are statistically increasing) the natural disasters today certainly serve as a barometer for the interconnectedness of the global economy.

The news of setting up of a particular supply chain across geographies by a corporation generally remains confined to the business media and annual reports, however, the news of a disruption in supply networks gets much more broadly covered. Also such news gets covered not just in the nation where the tragedy has struck but also in each such nation where the loss of production is having any impact.

While risk preparedness ensures that to a larger extent such events do not hurt much, (Disarming the value killers – Deloitte) such tragedies would continue to provide a not so comfortable route to understanding the global supply linkages.

When PIGS worship dogs, and dogs act maturely

2011-10-05T00:49:00.000-07:00

These are interesting times that we are living in. The awe of the ‘west’ is largely over and the developing countries are moving towards economical and somewhat cultural convergence with the developed world.

As this convergence unfolds there would be so many situations that would be so nostalgic for the citizens of the south bloc. Many would be reminded of the past when they were treated as inferiors and often ridiculed.

It is true that it would still be a couple more decades until when such treatment would be vastly over but things seem to be moving in the right direction.

One notional instance that came to my mind as the Eurozone crisis unfolds is the coining of the term ‘PIGS’ to denote the debt-ridden countries of Portugal, Ireland, Greece, and Spain. Well it is true that this term is an acronym but at another level it is also symbolic of the structural malaise in these nations.

This then is far turn around from the times when Indians were considered on par with dogs. During the British colonisation there apparently were notices outside places mentioning ‘Dogs and Indians not allowed’ and Mahatma Gandhi was thrown out of his first class compartment in a train owing to this belief held by the Britishers.

Today nobody dares call Indians dogs. Instead everybody is wooing India and the Indian market and this includes the PIGS. Over the past few years most of the indebted developed nations have embarked on an ‘export oriented growth’ path as domestic demand vanished. Heads of state of most of these nations have come to India with huge business delegations to get a pie of our domestic demand.

India, however, is maturing in its attitude along with its economic maturity. It is not retaliatory or revengeful but is opting for all such options that are broadly good for its masses. This is best captured in the decline of the ‘left’ in India. The left quit the central government formed by UPA-I when it opposed the nuclear bill in 2008. The Communist Party, however, apparently misjudged its strength and suffered a serious blow in the 2009 parliamentary elections. 2011 turned out to be worse. The left was wiped out in the state elections in the last two remaining left bastions—Kerala and West Bengal. In Bengal, the left had been in control since 1977 and the defeat this year marks the end of an era.

At another level, and to be candid, India itself is manifest with so many forms of discriminations between its people – the lower and the upper classes, the minorities and the Hindus, the rural and the urban, the women and the men – and so on and so forth. Aravind Adiga’s acclaimed ‘The White Tiger’ provides a glimpse of such an India. However, as any observer of India would agree, significant strides have been taken with respect to reducing all such biases.

These are glorious days for India and all (an increased number of, if not all) its citizens. Days of opportunity when we can redeem our esteem and also show an India grounded in a higher value system.

American economy – chronicle of a death foretold?

2011-09-21T22:25:00.000-07:00

Gabriel Garcia Marquez’s novel ‘chronicle of a death foretold’ is a fascinating story of how a man who sees his death and still keeps moving towards it. Today when I read about the status of the American economy I see an uncanny resemblance to the story.

The Fed, the Government, and most of the decision makers individually know of the direction they are headed to but still appear to be unaware of the direction they are headed to collectively. Most of them have heard and analysed the Japanese lost decade(s) and how it managed to not come out of the liquidity trap, however, they appear to either foresee that they are also headed there or they are all individually hapless.

The Democrats can’t convince the Republicans to go for a fiscal push that is big enough and soon enough, and the Republicans can’t convince and ensure the Fed from not creating more and more liquidity in the system through a series of Quantitative Easings (QEs).

Few years have already passed by in the recession and the immediate aftermath of a slow recovery. In the current scenario nobody is expecting a robust recovery anytime soon. In totality, in retrospect it might well be a complete decade of ‘laidback’ recovery if I might call it. And the structural losses of productivity, and unemployment, and competitiveness will likely never be recouped.

Japan didn’t manage to come out of crisis at that time because it didn’t have a precedent to go with. The decision makers couldn’t decide but they were totally unaware of the possible damage. America knows of it and is still treading the same path. It is true that both situations are not 100% comparable but they are not that disjunct as well. Marquez could maybe claim sometime later that the protagonist in his novel was meant to denote the American economy in the days to come.

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I recently came across and article by Krugman in NYT that confirms to my feelings above:
"Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth."

Messy America or a messy world

2011-09-20T21:20:00.000-07:00

We Indians are used to getting depressed after picking up the morning newspaper. News of non-functional government, road rage, political gimmicks, and injustice is generally all over. And many of us, and of course many in this world look to America as an ideal place to be in. Not for nothing is the phrase ‘the American Dream’ so popular.

However, when I read the NYT today it made me feel bad. The denial of clemency to Troy Davis and the mention of police forcing witnesses to testify incorrectly, bad news on Afghanistan front and a reminder that this would be a never healing wound, the governor of California Jerry Brown finding it difficult to deal with Republicans and the images of the debt default crisis and so on and so forth. This is news but this is symbolic of the fundamental fractures that have appeared in the American system and it is tough to believe if these could be cured especially when the inspiring Obama is appearing hapless.

It is true that sometimes we feel good that as we are growing economically and therefore politically in the global arena the so called bosses of this world are seeing a decline. Only recently was I emailing the YouTube videos of American ‘tent cities’ to my colleagues in my office. However, at another level America for all its bossism is also a set of superb values. Well many Indians feel that we have stronger values than say Americans but my reading is values in India are more of hypocrisy.

Europe again is in crisis which is not just economy related but reflective of deeper malaise in the system. So that makes me wonder if we are all in a period of institutional decline or is this a transitional phase of say a couple of decades when the high would converge to the low and then the low would reach to a higher pedestal. In other words would Indian or Chinese values and institutions graduate and mature enough to ever reach the status of an ‘American Dream’ in its true sense.

Or has something changed drastically in the set of human values that would never allow us to recreate such a nation. As Fareed Zakaria mentions we are a bit more pessimistic today because of the flood of easy information, and I am cognisant of that. There are no world wars, no cold war of the previous magnitude, increasing longevity and so on, and terrorism kills lesser number of people than events in say earlier times. There is also a flood of philanthropy lead by the likes of Gates and Buffetts.

What do you think then? Is it a messy America or a messy World?

Quick, advanced, quarterly.............. how does one comprehend so many estimates?

2011-08-30T02:04:00.001-07:00

I am an economist but I have been struggling with the number of estimates that are generated these days. Say we talk about a developed economy which unlike the Indian economy publishes very granular economic data. There would be thousands of variables related to GDP, Inflation, Industry, Credit etc. that are published. While this is certainly a good and useful thing to do what troubles me most is the series of estimates that get generated.

In terms of regularity of reports you have weekly, monthly, quarterly, half-yearly and annual reports. Then in terms of the preciseness of reporting you have the quick estimates, then you have the advance estimates, and then you have a set of revised estimates. Top all this by the number of agencies that report these estimates – the central bank, the treasury, the statistical agency, the chambers of commerce, the commercial and investment banks, the budgetary bodies, the independent/ autonomous bodies that evaluate economic and public finance figures, the supranational bodies like the IMF, OECD, and World Bank and last but not the least the think-tanks. How many estimates does this all make? And this does not include forecasts. It also does not include the revisions in series, and revisions in base numbers that happens every few years. It also does not include the estimates of so many other economies in this coupled world that can have an impact on the economy under discussion.

The problem is by the time one analyses one set of estimates, a new set of estimates arises. Each economist can cite his set of estimates and prove another economist incorrect and defend his/her own turf. Well I have heard of the rationale for publishing the estimates at as short an interval as possible – you are warned of any lurking dangers at the right time. However, I think this is taking it a bit too far. We are facing a surfeit.

Rational behaviour - some evidence

2011-08-03T06:11:00.000-07:00

US Auto employees agree to work at below par wages
"In the auto industry, for example, the major companies are in the process of increasing the number of employees at their plants who work for $14 an hour, as opposed to the average $28 an hour previously earned by workers at these enterprises. They are doing so with the active support of the trade unions." (view story)

Two-tier wage system in US auto industry
"Nothing distinguishes them from other workers at the Jefferson North plant, except their paychecks. The newest workers earn about $14 an hour; longtime employees earn double that.
With the economy slumping and job creation once again a pressing issue in the White House and Congress, the advent of a two-tier wage system in Detroit is spiking employment for one of the country’s most important manufacturing industries." (View Story)

India reacts less to inflation as income rises
"More broadly, though, I sense that for all the sound and fury, the political tolerance for a period of high inflation has risen. I suspect this is to do with the fact that earlier episodes of high inflation in India occurred in an economy where income per head rose very sluggishly indeed. Now, with real rates of economic growth near 9%, and slower population growth than before, real incomes are rising fast enough that people are willing to put up with high inflation for some time." (The Economist)

When California reminded me of Bihar

2011-07-22T00:22:00.000-07:00

Thefts are quite common in India and one of its states Bihar is particularly notorious for it. And we are not talking of thefts in houses alone but the theft of public property. During my recent visit to my home town in Bihar I found that the grills used around the public playground have started to disappear. People are cutting these iron pieces to sell them in the market as prices of iron soar. Iron bars of that quality sell for about Rs. 60-70 per kg. at todays' prices.

A popular social enterprise called Husk Power Systems (HPS) is facing similar problems in the West champaran area of Bihar. Its transmission wires frequently get stolen. A youtube video captures this well.

However, I was happy (in a sadistic way) to see a recent article in NY Times that covered thefts in the state of California. Almost everything in the open is getting stolen be it tomatoes, copper wires, bee-hives, or batteries. Here is an excerpt from the article "Farm thieves target grapes, and even bees"

"While other states have their own agricultural intrigue — cattle rustlers in Texas, tomato takers in Florida — few areas can claim a wider variety of farm felons than California, where ambushes on everything from almonds to beehives have been reported in recent years. Then there is the hardware: diesel fuel, tools and truck batteries regularly disappear in the Central Valley, the state’s agricultural powerhouse, where high unemployment, foreclosures and methamphetamine abuse have made criminals more desperate, officials say."