Will NOTA work for India?

“Hi, Mom! What’s for dinner?” That was Teenager, back from his badminton practice at about 8:00 p.m.

“Well,” I said enthusiastically, “there’s roti, beans, dal and carrot raita in curd!” That was me, happy and secure in my belief that I’m feeding all the right stuff to my family.

“What? Beans? Uuuuuuuuuugggggggggggghhhh. NOONE eats beans, Ma, except us. And we eat it every third day! Beans, potato, beans, brinjal, beans, capsicum, beans…?”

I looked at him speculatively. Teenager has taken this one thing from me, for sure. He can exaggerate. The boy can have a golden career as an economist, I started thinking. “The GDP growth rate of India is 7%, nnnno, its actually 7.3%, nnnnnnnnaaahhh, it’s more like 7.8%!” Yeah, he can really do a fine career out of this wonderful trait. Put him in the RBI, and your CPI will go crashing down to 4% or wherever it is that Urjit wants it to be. Put him in NITI Aayog, and you will get your growth numbers right. Put him in the Commerce Ministry, and India’s trade to world trade ratio will cross the dreaded 3% psychological benchmark in a matter of minutes! Heehee, the boy has potential, I tell you. He simply HAS to become an economist.

“I am NOT going to eat this! Give me something interesting, Mom, I’m hungry! And I’m bored” That broke my reverie and jerked me back to reality. And the reality is that teenagers have absolutely no clue or interest in any career profiles. They have only two massive sensations. One, hunger and two, boredom. Sigh.

“Beans are great for health! And …”

“Mom, why can’t you make Chhole-bhature or pasta for dinner?”

“Because the former is oily and the latter is maida. Only calories. No nutrients. Beta, dinner has to be healthy! And this week, we’ve not really had beans for about…”

“20 hours,” piped in the Hubs, with a sly smile. “This time she has really broken all records and cooked beans within the usual 24 hour deadline!”

“Oh, shut up, both of you! And boys, you can’t declare a strike at 8:00 p.m. Food is ready, I am beat and I am not going to cook anything else. It’s too late for that.”

“This is so not fair!” Teenager, indignant with rage and upset at the gastronomical disappointment. “If it’s not possible to change the menu at the last minute, then ask me earlier, Mom. Next time, ask me when you go shopping for veggies. ONLY the vegetables I approve should be bought next week. Else you’ll keep on dishing out what you feel is right…”

That’s interesting! Thought Econ Mom, surfacing suddenly in Mrs. Phadke’s kitchen. Hmmm, isn’t that exactly what the State Election Commissioner had been saying, just a couple of days ago, in our meeting at Mumbai?

“We need to take a look beyond our usual role.” The Commissioner, as always, had come well prepared with his ideas on what needs to be done. “The role of the State Election Commission of Maharashtra (SECM) is to conduct local body elections in a free, fair and transparent manner. And we do that, to the best of our capacities and abilities. But the real question is, even if the election is conducted fairly, are people really getting a fair choice to choose from?”

For the uninitiated reader, let me just put in a little bit of gyan. When the candidates file their nomination forms for an election, that is when the voters come to know what is the mix of people from which they select a people’s representative for themselves. With great foresight and I must say, with a lot of gumption, the state of Maharashtra offers a “NOTA” i.e. “None Of The Above” option for its voters, so that the voters do not have to always choose the least of all evils. They are getting a choice to say that they want none of the candidates at all. And this, is supposed to be an absolute triumph for democracy.

However, deeper thought tells you that while NOTA is great for freedom of expression, the fact that hordes of people have this expression is itself worrisome. Thus, what is happening is that candidates filing nomination do not match the expectations of the electorate. The authorities know this, but they can’t do much about it. So, they decide to give the NOTA option to the electorate so that their voice can be heard loud and clear on the day of the election. “We do NOT like these candidates.” The problem is, that it is kinda late to do anything about this, just pretty much like it was too late for me to cook a different recipe for Teenager at 8 p.m.

“The true solution is to give them a voice before the elections.” That was what the Commissioner was saying in the meeting. Is it really necessary to do that? Even while this thought hit my mind, I got the answer. “Our job is to do everything in our scope to strengthen democracy. If the electorate is not happy with the candidature, we can’t just sit around offering NOTA. NOTA might bring the issue to light, but it certainly does not resolve it.” NOTA is the dressing on the wound. The team was brainstorming on why there is the wound in the first place.

And out of that emerged one solution. Accordingly, we’re currently doing a snap poll on voter perceptions, or what the voters want. What kind of a candidate do they really want? Do they want people who are clean, or is the priority on efficiency? How many voters feel that candidates ought to be well-educated in order to be a good representative? What proportion of voters feel that women make better representatives than men? How many people are of the opinion that good candidates stay away due to criminalization of politics?

Data analysis will soon reveal voters’ preferences. This is to be done prior to the filing of nomination forms, so that the political party heads too will get a pulse of what the common man wants. This will hopefully feed into a more scientifically designed ticket distribution process, with at least a few deserving candidates getting the tickets. Rather like buying only those veggies that Teenager approves of. This will truly give voice to the electorate and make the process more participative, which is exactly where we want to go, right?

Right, but, will this work? Even if the data analysis brings out these trends, are political parties going to toe the line? Are they going to go by statistics, or by the simple chemistry of dynasty and money? We all know the answer, don’t we? Then am I doing something futile? Why should we create this data-base on voter perceptions when we know that the true users of this data, the political parties, can, but won’t use it?

I sat in my chair, post dinner, brooding over the futility issue, when Teenager started a discussion with Daddy dearest on poetry. They were both arguing about what a line in some poem meant. I was far away from the discussion, disturbed and restless. Suddenly, Teenager propped his English text in front of my eyes. “Mom? Have you ever read these lines?” he asked.

And Econ Mom found her answer. In a dog-eared literature text-book. The answer to why a scientifically designed statistical survey has to bring out voter issues, political parties be damned. “Tis better to have loved and lost”, said Alfred Lord Tennyson, “than never to have loved at all.” Bravo.

The Metaphorical Faux Pas of the Central Banker

What happens when you cross metaphors with economic ideologies? Controversies, as the RBI Governor discovered after calling the Indian economy a one-eyed king in the land of the blind. Many an eye popped with disapproval, many an eyebrow was raised delicately, many a pert nose wrinkled in metaphorical distaste and all hell broke proverbially loose.

The poor, poor man must have wondered what he’d said that was so very wrong. He was just trying to say that a 7.5% growth rate was not a bright spot by itself; it still was short of hitting the potential growth rate in India. So compared to a lacklustre world, we may seem to be quite the economic miracle, but well, a miracle that could get more miraculous. A one-eyed king in the land of the blind. Uh-oh!

Miffed, the Commerce Minister sniffed at the choice of words. Jayant Sinha too got into the fray with gusto claiming that to confuse the shining star with the shining one-eye was so not done. The FM, who after the Budget debate on Times Now, has discovered the lethal power of silencing loud critics with statistics, merely chose to say in a clipped, dignified fashion that 7.5% growth rate is enough to get celebrating. It’s rather unfair, to get so righteous about metaphors after having used them profusely through sher-o-shaayari to take interesting potshots at the opposition during budget speeches. Remember this, folks? “Kuch to phool khilaye humne, aur kuch phool khilane hai. Mushkil yeh hai bag me ab tak, kaante kai purane hai.” Ha!

Just as the NDA was busy meta-reacting to the poor Governor, Mani Shankar Aiyar, much to the delight of the UPA, chose to give his opinion on the issue. He cleverly and deviously converted the metaphor into an allegory to claim that the PM is in fact the one-eyed king of India, causing a kind of an allergetic or allegoristic reaction all across the NDA. The UPA must have, by now, gleefully decided that henceforth, every RBI monetary policy review will be followed by a press release personally crafted by Mani Shankar Aiyar. The RBI, which on normal days issues good monetary guidance, and on special occasions, well, issues good monetary guidance for variety, is really not used to such excitement and adrenalin. Recoiling in complete horror, it is said to be currently debating whether the Indian economy won’t be better off with only one review in every 8 years, rather than 8 reviews in every 1 year.

In the meanwhile, there was a complete kahaani mein twist as P. Chidambaram, whilst reacting to the nation’s demands about Ishrat Jahaan, chose to declare full and final support to the RBI Governor. Does the excitement never end? The Commerce Minister dished back her criticism, no holds barred. State of the economy, Indian and global, notwithstanding, this has now become a full fledged fight between the Commerce Minister and P. Chidambaram, whereas the RBI Governor, I’m sure, has decided to quit giving speeches for a while and just stick to good old monetary guidance.

Metaphorically speaking, the entire controversy is also perhaps indicative of the differences in the delivery mechanisms of the fiscal and monetary policies. The fiscal policy is passed as an Act of the Parliament; its tone does not lend itself to interpretation, its clauses have to be spelled out in black and white. The monetary policy in the Indian context, has always treaded that fine line between growth and inflation; in that sense, it has been more interpretative, more guidance oriented. It’s kind of a déjà vu, that as inflation targeting pushes monetary policy into a more concrete format, the RBI Governor faces ire for having been metaphorical in stating the stance of the Indian economy vis-a-vis the globe.

It was Alan Greenspan, a Central Banker from another time and another zone who had famously remarked, “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.” The RBI Governor may not have been in concurrence of the expansionary monetary policy that Greenspan unleashed on the US prior to the crisis, but even he will not be able to find a fault line in this particular statement by Greenspan.

Budget Humour

There are so many wisecracks about budgets. World over, budgets have managed to create madness, hysteria, protests, and satire. It is basic to the human mind that no other mind is possibly capable of carefully handling and allocating that joyous commodity, money. Add this sense of insecurity to the Orwellian point of view that all politicians are equal (in their incapability) but some politicians are more equal than the others, and you quintessentially have, what our Parliamentarians fondly call ‘The Budget Session’.

Budgets are largely an exercise in philosophy; you deliver the numbers only to realise that they are never deliverable and never have been, to begin with. “Deficits satyam, Budget mithya” could well be the Indian take on the issue. Americans, those descendants of immigrants and revolutionaries, have scant regard for things as deep as the Shankara philosophy. Their philosophy about budgets goes about as deep as, errr, a bean bag. It was the inimitable Will Rogers, who in his loud style commented, “The budget is a mythical bean bag. Congress votes mythical beans into it, and then tries to reach in and pull real beans out.”

American budgets have inspired perhaps the biggest quips and laughs. George W Bush, never quite revered across the globe for his intelligence, much to the delight of his critics, is believed to have said, “Of course it’s a budget. It’s got a lot of numbers in it.” Can’t get more dubiously Dubya than that, eh?

Greeks, the other race that pride themselves on their philosophical underpinnings, have a different way of looking at budgets and debt burdens. When in trouble, they have a strange Greek way of using wonderful quotes by their forefathers in a most inappropriate fashion. “Speaking the truth and repaying your debts is not a correct definition of justice,” once said Plato. And now says Tsipras, to the great horror of Merkel and Co. It was humour in its blackest form that the Greeks recently passed an ‘austerity’ budget.

Even the late Sophocles, that great master of tragedy who is believed to create despair even in Heaven, started laughing uncontrollably when he heard about that one. Merkel showed her technical German wit when she primly commented, “Austerity makes it sound evil. I prefer to call it balancing the budget.” Even the British raised their eyebrows in appreciation.

Because, perhaps the greatest kind of budget humour can only come from the stiff upper lip of Europe, Great Britain. Unwittingly and unknowingly, George Osborne, the finance minister of UK, created complete confusion in Britain when he dared to claim last year in the British parliament, “This will be a budget for working people.” The Brits paused for a minute over their seventy-third cup of tea to exclaim, “I say, what does he mean, working people? We thought they were called Germans!”

Back home at North Block, the entire team is getting serious about how to get funny. The FM has been braving suggestions on taglines that could scroll on the bottom of the TV screen whilst he would read the budget provisos. Senior advisors have suggested sher-o-shayari, but Ghalib makes you feel depressed, and Iqbal, Congressed. The younger interns are all for filmi taglines.

Imagine, the FM would declare the fiscal deficit target for FY17 to be 4.2 per cent, markets would tank, only to be assured by the tagline scroll, “Bade bade deshon mein aisi choti choti baatein hoti rehti hain.” Or whilst talking of subsidies, “Hum AAP ke hain kaun.” The FM is hoping for an ‘Airlift’

Thought for food: Coco(a) Bonds and Dosa Economics!

Economics just became a whole lot more edible this week. It all started rather unexpectedly, with a student asking the RBI governor why dosas have become more expensive despite the disinflation phenomenon in India. Pat came the answer.

It’s not the dosa, stupid. It’s the tawa! It’s the tawa that has retained its price and reluctance to change the tawa technology has cost us, dear. Pun intended. And it doesn’t quite end there, does it? The hand that rocks the cradle, rules the earth. And the hand that rules the ladle, rules the worth.

Simple! Labour prices have skyrocketed, so much so that they nullify the reductions we get from ingredients. Ahem, not that we are getting too many reductions from those ingredients there. Important to note that the dosa is primarily made from urad dal, after all.

The statement from the Guv created quite a furore. The RBI has issued a new guideline saying that all future governors should necessarily be good cooks and have to know all ingredients going into major food dishes. The Bhumata Ranragini Brigade is now actively considering marching into the inner sanctum of the RBI saying they always knew that women would make better governors.

The RBI has launched a new Big Dosa Index to counter the very popular Big Mac Index as the Indian contribution to quick-fix inflation gauges. The CSO, ruffled at being sidelined, cleverly pointed out that since dosas are only sold on retail, the BDI can only be seen to be a quick gauge of CPI movements and is hence, an incomplete index. The RBI reacted sharply by also announcing the creation of a Tawa-Index to understand wholesale price movements.

Startup India has announced a new VC funding line to whoever gets new technology for creating dosas. It’s expected that support to this line of credit will be declared in the upcoming Budget through the Tawa Hatao, Dosa Bachao Yojana.

Commercial banks now know what it takes to reduce their NPAs. Risk rating on the over-the-counter food service business units has gone down drastically since they are seen to be the only guys who can continue to charge high and make high profits, no matter what the inflation numbers. The new base rate or PLR will be termed the DLR, the Dosa Lending Rate.

On a more international front, Deutche Bank made headlines with its coco(a) bonds ratings taking a beating from S&P. “Their standard is very poor,” said an RBI spokesperson. “We always knew that this cocoa business is very risky. Had they listened properly to the Hon Governor, they would have issued Dosa bonds. That is the only way ahead.” The Chinese are also thinking of replacing Dim Sum Bonds, which have in letter and spirit become Dim Sum since the devaluation, with Dosa bonds.

In the meanwhile, the FM was fairly terrorised when he was asked to host the halwa ceremony. Despite the fact that no student interaction was allowed at all, he made sure that he knew the halwa recipe by heart before meeting the media. For good measure, he also learnt the prices of rawa, sugar and ghee, all by heart.

Rumour is that after getting to know the phenomenal prices of ghee and dry fruits, he wants to create a halwa cess to fund such colossal expense programmes. It is estimated that this single move will move the fiscal deficit from 3.9 per cent to the magic number 3.6 per cent. The RBI governor is happy. Dosas sure work!

A brief history of the Greek crisis: A ppt format

Hi All,

I have been talking about the issues involved in the Greek public debt crisis at various fora and this is a baseline ppt I had prepared for my talks. A lot of the material on this presentation is collated from different sites and articles that I’ve been reading whilst preparing; the ppt is of value primarily to students or researchers looking for a quick reference on the crisis. The presentation covers main issues upto 15th July 2015.

There is a lot of action that happens around this ppt when I support it with the talk, so in that sense, a new reader may find some gaps in it. If you want to know more about a particular issue, just write in and I’ll try to send you some material around it. Here it is..

A brief History of Greece Crisis

These are the main themes covered in the presentation:

1. History on the formation of the European common market

2. Maastricht treaty entry level criteria and movement towards convergence

3. Problems associated with the Maastricht: Connection to Greece

4. Euro launch in 1999

5. Why Greece wanted to enter the Euro: Benefits from having a common currency

6. Change in the growth profile of Greece post-entry

7. How the yield spreads, fiscal deficits, CAD and other indicators for Greece moved pre and post entry

8. Tipping point for the crisis in 2009

9. Reaction of core group in the EU

10. Bailout by the Troika

11. Greek elections and effects of Tsipras coming into power

12. Suspension of bailout and near-collapse of Greek banks

13. The crazy referendum held on July 5th

14. Why Tsipras HAD to accept bailout

15. The new bailout terms by IMF, EU and ECB

Hope you enjoy this study material!

Hard targets

The Finance Minister is a worried man. It’s Budget time after all. The top season for unreasonable demands has just begun at the ministry.

On hearing that the FM met with the “captains” of the Indian industry, Mr Bedi alleged that this kind of a “cricket huddle” should not be allowed in the budgeting process. After all, the Finance Ministry is the Deep Deficit Cutting Association aka DDCA. With personal blessings from AAP, he has asked that the FM step down from this DDCA as well.

But the muffler has more to demand from the business suit. “Why is the FM suddenly backtracking on the fiscal consolidation path for the year 2016-17? We are against this. We are basically against everything that the government does. Book the Jantar Mantar for a Dharna! Be fiscally prudent, keep deficits in check. And be physically prudent, wear a muffler in Delhi.”

“Hmph! Prudent or not, he is definitely impudent,” is what the FM was thinking. But then not for nothing is our FM known for keeping his temper in the most trying of circumstances. The good man sent an entire team from Delhi School of Economics to the AAP office to teach them the basic Keynesian model. “When the private investments won’t pick up, the Government spending has to spur the system. Hence, we may have to go soft on fiscal targets next year, so that growth can be on track.” AAP reacted by sending leftists from JNU to the Finance Ministry, causing a nervous breakdown amongst the younger, innocent economists at the Ministry.

In a wild attempt to get some economic sense going, the FM gave personal assurances to AAP that fiscal targets will only be softened for those financial years ending in odd numbers. Thus, we will stick to the FY16 target of 3.9 per cent like a leech, but we go soft in FY17. AAP has finally okayed the proposal.

The NCP in the meanwhile, believes that it has a master solution for the entire macroeconomic framework. It has asked that tax exemptions be given for not only buying the second home, but also the third, fourth and fifth properties. The moment you give these exemptions, people will start buying properties. Voila! Construction will begin anew and all problems concerning low private investment levels will disappear. Not only that, but as this huge inventory of unsold houses reduces, the banking system will also become robust. This is good fiscal and monetary policy, all rolled into one. Dr Rajan, who shuddered after receiving such out-of-the-bank ideas, has said curtly that there is no need for the NCP to get worried about banks.

The UPA scion, fresh from the Europe sojourn, insists that the Indian states are like the European Union. “I know what needs to be done in the Budget! We need to have a common market and a common currency!” On being informed that we already do (just pass the GST!), the UPA has declared that all brand new ideas pertaining to Europeanising Indian markets will only be discussed on the Arnab Goswami show. Rumour is that Mr Goswami has gone into hiding and will only be seen post-Budget.

The PM has suggested from a remote location in Antarctica, that the FM incorporate a “Lambi Udaan, Sasti Udaan” Yojana to give a boost to the airline industry. Subsidies could be declared for frequent fliers.

The poor FM is left wondering how to handle flights of fancy.


A new Parliament building, please!

Shah Jahan constructed the Taj Mahal at Agra. Sumitra Mahajan wants a new Sansad Mahal at New Delhi. If the former was an ode to love, justification for the latter is as techno-legal as it gets, ranging from the stiffly legal references of Article 81 to creating technological capacities. Such Parliamentary fervour after such amazing sessions! Really, they quite deceive us, our Sansad members.

Why a new building?

Top reason is Arvind Subramaniam. It’s he who has created this Shah Jahan-minus-the-love aka Keynesian furore in our to-hell-with-growth Parliamentarians. The man claims that the growth forecast stands revised downwards from 8.1% to 7.3%. So let’s make it in India and get the growth rate moving. After visiting nearly all countries that make anything at all, we’ve realized that no one wants to really make much to begin with (it’s a global slowdown, stupid!) and if at all they do, they certainly won’t make it in India.

So let the Government spend some more. On what, is the golden question. Spend too much, and those firangi buggers at Moody’s will give us a downgrade. Spend too little, and Arvind threatens to release a new document with 7.0% growth. Do nothing and the Opposition will disrupt the Budget session. It’s quite a tricky little question.

Hmmm. So here’s the answer. Spend on a project that gets the multipliers working, so that Arvind is happy. Spend on a project that has the capacity to raise its own revenue source, and Moody’s will be happy. Spend on a project that will be used by the Opposition as well, and keep them at bay.

Hurrah! It’s the Parliament! Getting that going will create huge demand for steel and cement and construction material. Welcome, employment. This will push private investments as well, creating the impetus for growth. That takes care of the CEA. Next, impose a Sansad Bachao, Sansad Banao cess. What we really need is Sansad Padhao, but that’s another matter altogether. Surely Moody’s cannot get upset about such a deficit neutral project. What’s more, voters absolutely cannot resist Hindi-named taxes. Hehehe!

As far as the Opposition is concerned, this project takes the cake. They’ll not only support it, but positively beam and urge the Government to spend more. The only condition is that we use Italian marble in the construction. Why, they may even behave themselves in the Budget session and finally pass the GST. Yeah, that the Government may have to re-name it the Great Sansad Tax is another matter altogether.

Apart from the terrific economic benefits of the move, there are also those other, rather important issues that justify the new building. Ms. Mahajan claims that the current building is under “stress”. Being a mute witness to such high-on-adrenalin chair-upturning and yelling sessions does that to the strongest of stones.

Making the new premises technologically capable will make the Parliament a paperless organization. That is truly a masterstroke and will end all possibilities of the Opposition flinging paper balls to disrupt the session. Wish they would make it pepper-free as well. Let’s put nation building on hold. First, the Parliament building, please.

Econ Mom as the Finance Commission, Hubby as the Planning Commission

The topic of pocket money has suddenly become fairly hot in the Phadke household. I am frankly, not too sold out about it. Whenever Lil One needs funds (normally Rs. 10 to buy Lays), I give it to him and that pretty much is that. Since I am the single window for fund disbursal, I have an automatic tab on the frequency with which he eats Lays/ chocolates/ ice-creams. And hold on. I am NOT a control freak. I am just…mom.

However, some parent in Lil One’s classroom has started giving pocket money and the trend has caught on. And (and this is REALLY important), Greg, the wimpy kid (groan!), apparently gets “mom bucks” too. Sigh! Don’t know why I am so proud of being mom to a reading kid. I sometimes pine for those non-reading, non-argumentative types.

So, apparently, all kids in the class are currently divided into those with the funds and those without. Lil One has been increasingly vocal about “always” being part of the have-nots and the deep image beating he’s taking at school.

“But you always get the money when you want it!” I tried to reason.

“Yes, but since my friends get pocket money, they don’t have to ask their mom every time they buy wafers. I have to. Also, many of them save their money and then they are going to put those savings into a bank account.”

Hmm. I raised my eyebrows at Hubby, who gave a tiny thumbs up from the other end of the room. “Ok, but it’s only Rs.10 a week. And it’ll be given weekly. No advance (Lil One didn’t really understand this bit but it sounded superbly official and he nodded, impressed with my financial intuition). And you have to do a small chore for me every week to earn your money.” Lil One was digesting this new information as well as the new official avatar of mommy, when Hubby piped in with a wink, “And if she is really being stingy, I’ll try to chip in. Ok? Umm…additional Rs.10 from my end occasionally if you are good! Of course, with mommy’s permission.”

“Yaay!”yelled Lil One and rushed downstairs to inform all about finally having joined the elite “haves” club.

Though I really smiled at that typical last sweet offer by Hubby, Econ Mom was uncomfortable. “Occasionally, if you are good” is BAD news. Period.

Being fond of economics as well as politics, Econ Mom is kind of passionate about the fiscal federalism structure in India as governed by officially the Finance Commission, and over a period of time, also by the Planning Commission.

The Finance Commission was set up by an act of the Constitution; the makers of our Constitution were acutely aware that States would need more funds for their development whereas their control over revenue sources, such as taxes, was typically restricted. Hence, the Finance Commission was to be set up by the President, every 5 years, to decide how much of the pool of the Central taxes could be shared with the states. The Finance Commissions have always worked out a formula based devolution of taxes; this year the Fourteenth Finance Commission (FFC) increased the States’ share in the Central tax pool from 32% to 42%. (You can read more about this in an earlier blog of mine dedicated to the FFC.)

However, the (erstwhile) Planning Commission was just an arm of the Government and not really a constitutional authority. It was set up as an independent think tank to drive planning goals for the development of the country. Nowhere do its guidelines mention disbursal of funds to drive the plans as a part of its objectives.

However, as the history of our Center-State relations goes, the Planning Commission also became an authority to sanction “Plan Support” to State Governments in accordance with the Plan objectives or schemes mentioned in their Economic Surveys. Now, the disbursals by the Planning Commission are not really in accordance with any formula; rather, they were need-based and hence, often found to be driven politically rather than economically.

If one examines the trends in the disbursals of the Finance Commissions, one finds that they are often progressive in nature; poorer states get a bigger share of the Central pool of taxes. However, the same cannot be said of the disbursals by the Planning Commission; in fact casual observation of the data suggests to me that more funds are normally given in Plan Support to those State Governments which are aligned to the National Government.

Dissolving the Planning Commission and setting up of the NITI took the country by political storm with plenty of observers interpreting the event to be a mistrust of Nehruvian institutions by the NDA. And whilst that may be true (I don’t really have a comment on that), the fact is that unless the Commission stood completely dissolved, it would have been very difficult to get it back to the format it was originally designed for. A think tank. Not an additional fund-tank.

It was a good move and frankly, the only move to solve the issue. Fund disbursal has to be rule-driven. Only then is it possible to drive sound economic outcomes in a transparent manner.

Lil One came rushing home. “Mom, I’m so, so, so thrilled about you giving me pocket money. Thank you!”

“You’re welcome, honey. But..”

“Don’t tell me you are cancelling it. You said yes! And you were convinced!”

“Of course I am going to give you your pocket money. It’s just that I’m not okay with Dad giving you that additional bit.”

“Oh! That’s fine with me, Mom. I don’t really need that additional bit.”

And so that’s that. Hubby is now NITI, whereas I continue with being the Finance Commission.

Delhi traffic: At odds and evens

Dunno if Delhi’s pollution will be controlled. But Delhi’s GDP is definitely set to go up as the Government will only allow even-and-odd numbered cars on alternate days. The multiplier effect will now explode, thereby creating jobs, employment, growth, and more number of cars for the Aam Admi, and a seriously good chance of getting re-elected for the Aam Admi Party. Ms. Sheila Dixit is ruing how she missed this bus, errrr, this passenger car.

Just look at the numbers. There are 260 lakh passenger cars registered in Delhi as of March 2015. In 2014-15, Delhiites added 1.8 lakh cars to their already enviable and unviable kitty. At least 15000 of these must have been bought by those on whom P. Chidambaram wistfully dreamt of levying the super rich tax. At least 3000 of these will now make a beeline to the nearest Audi/ BMW/ Mercedes-Benz showroom, trying to buy a car which hosts that super number so that one can manage to reach the workplace even at odd times. Another 2000 may settle for an odd City or even a Jetta. Car makers are rubbing their hands in glee at the prospect.

Those not having the budgets or the parking spaces to buy a new car need not despair. A new range of services are being offered by roadside repair shops, which will now sell instant plate-change offerings. Due to heavy demand, the price of getting another number plate done has increased from Rs.1000 to Rs.5000. The casts and moulds industry is experiencing heavy demand to fabricate such insta-change car accessories.

Patanjali is thinking of seriously getting into the segment. The idea is that the one should be able to change the Patanjali number-plate in the 2 minutes in which the Patanjali noodles get cooked. Later, wash the hands with Patanjali soap and you are as good as new.

The demand for new cars and accessories will thus act as the ultimate growth driver, pushing Delhi’s growth rate to an unbelievable 20%. And that’s not all. For every new car manufactured, 7 more people get employed. All those poor crooks who used to surreptitiously paint cars and number plates after robberies will now get to legitimize their skilful profiles. Such a surge in employment was not seen in Delhi even during the good old days of the Commonwealth Games.

In all the merriment that ensued in the corridors after such cheerful thoughts, there came a more sobering, practical problem. How in the world will the Delhi Police, who stand steadfast in their duty at the traffic signal, read the number plates of those cars that zip through happily at 95 kmph? Visibility tests startlingly revealed that one can only read the numbers if the car passes at a more sedate pace of 25 kmph. Hence, in addition to the earlier even and odd guideline, the Delhi Government is now in the process of issuing a speed limit guideline as well. The number of cars will be halved and the time taken to office will be doubled.

Schools are thrilled to bits with the new pedagogy with which to make Maths more interesting. They have appealed to the Delhi Government to also have days when only composite or prime numbers will be allowed. One school has raised an RTI against the RTO demanding an explanation as to why number plates cannot be issued in all rational numbers on the number line and why only positive integers have been allowed so far. A case for fractions is also being fought. A divisive number game on irrational traffic integration. It’s the limit!

Cop out at COP 21!

Scene again opens in the Opposition Neta’s office, where Netaji is reading the newspaper and is confused with all the reports on Paris.

Netaji: Tell me Guptaji, what is this COP 21? Even in the High Command office, they were all discussing this cop. What is the COP 21? It sounds like a new movie with Salman Khan in a cop avatar strong enough to beat 21 gundas.

Clever Guptaji (startled): Sir! COP 21 is not a movie, Sir! It is an acronym for the 21st Conference of Parties. It is an annual forum where countries come together to debate and discuss climate change issues. It was held at Paris, Sir. Developed countries were worried as to how India would play her climate change card, especially with our PM keen on attending. But our team has made quite an impact and held their own in discussion with bureaucrats and technocrats and ministers from 193 countries.

Netaji (disapproving): What! I am not impressed. I don’t like all these new-fangled approaches to politics, Guptaji. Discussing such deep, internal problems with Obama and hobnobbing with that Putin. Now tell me, why should we discuss our climate with other countries? No, no. We should have never attended this event.

Clever Guptaji (startled): But Sir, this is an issue that we cannot resolve single-handedly. All countries will have to come together to take a position on climate change. We really have damaged the atmosphere badly.

Netaji (chewing nonchalantly on his paan): I think everyone is now over-doing it, Guptaji. It is not the first time we are facing such a climate of mistrust and suspicion in India. Why, when we were in power, there was not a single day anyone trusted us on anything. This AAP created such trouble for us, I tell you. But did we tell the globe to assemble in Paris? Never. And just look at this Government. And the newspapers are saying we also made some commitment on power?

Clever Guptaji (stuttering): Oh Sir, you are totally misunderstanding the issue.

Netaji (loudly): QUIET! Just tell me what this power commitment is all about.

Clever Guptaji: Well Sir, our stance is that India will change the way power is used, but developed countries have to lead the way in this commitment.

Netaji (irritated): Hmph! Quite in the ivory tower we are, aren’t we, Guptaji? Change the way India uses power indeed! What a joke! Nothing can move in this country if we change the way power is used. We politicians have ensured that completely! If the Government wants more growth and development, they will need more and more power. Just to Make in India, they will need more power. Do you think any investment can be driven without power? And if they want to pass the GST, they’ll definitely need more power. Hee hee hee. Especially post-Bihar. And in the Rajya Sabha.

Clever Guptaji (now completely horrified): We are talking about power, as in coal, Sir. Coal is bad for the atmosphere.

Netaji (indignantly): First they said coalition was bad, now they are saying coal is bad. First they wanted power, now they don’t want to use power. In India they want more action on GST. And outside, they want more action on GHG. What a misleading Government, Guptaji!

Clever Guptaji (exasperated): They should have sent you to Paris, Sir. Then, India could have really displayed a real COP out on commitments!

Pay Commission 007: Bond’s Spectre pales before India’s Spectre!

It’s back! In a richer, more generous, more fiery, more flashy avatar. With more goodies for everyone. No, not James Bond. Pay Commission 007. And it has left the Indian Administrative Services shaken as well as stirred.

Decadal corrections have come in, and how! “What took you so long, 007?” Even as the average salaries of central government employees go up by 23 per cent, this Desi 007 has created a storm by bringing the tricky question of pay parity between IAS and other services to the fore. IAS officers enjoy higher pay than their counterparts in other services by way of earning additional increments at 3 per cent of their basic pay.

The weeks prior to the release of the recommendations of Pay Commission 007 saw hectic activity and a flurry of letters from IAS officers to Secretary, department of personnel and training. It’s very difficult to understand what most IAS officers write in their letters. For the most part it does seem to be in English, but for mere mortals (read non-IAS) to understand what the brightest and the best are saying is to expect a child to fathom The Wasteland by TS Eliot.

Had we had the honour of hosting Sir Humphrey, the Permanent Secretary to Hon’ble Jim Hacker (of Yes, Minister! fame) in the IAS, he would have recorded his “profound opposition to the newly instituted practice which imposes severe and intolerable restrictions upon the ingress and egress of senior members of the hierarchy and which will, in all probability, should the current deplorable innovation be perpetuated, precipitate a constriction of the channels of communication, and culminate in a condition of organisational atrophy and administrative paralysis, which will render effectively impossible the coherent and co-ordinated discharge of the function of government within India”. Whew! That is Sarkari 007 to cut the Sanskaari Bond to size. To put it in English, “We are simply the best and hence deserve more”. It’s simply the “writing on the wall”, Bond would have claimed.

Bond heads to Mexico City with a lead from M and has his brush with Spectre, the organisation driven by IT intelligence systems, and exists simply everywhere. The Indian Pay Commission 007 is also headed by our own M, Justice AK Mathur, and now is up against the Indian Administrative Spectre, the organisation driven by Bureaucracy intelligence (?) systems and exists simply everywhere, or as an afterthought, at least in the highest levels of government.

Fathom this. Of the total 91 Secretary posts in the current system, there are 73 IAS officers and a sprinkling of other services just to keep the situation under control and maintain an atmosphere of bonhomie with the police, forests, scientists, etc. However, at the Joint Secretary level, they don’t even pretend to be interested in “What will the other Services think” . Joint Secretaries are IAS officers. Period. Having secured the joints, the IAS cadre then “adds on” muscle power. Additional Secretaries obviously have to be IAS officers; what with all these Secretaries and Joint Secretaries and Additional Secretaries, you have quite an adhesive Bond of the Indian AdministrativeSpectre.If Bond’s Spectre is autocratic, the Indian Spectre is bureaucratic. If Spectre works with sinister one-liners, the IAS works with meaningless realms of paper in different coloured ink filed meticulously since 1947. Pay Commission 007 is up against a formidable force. In the Indian version of Spectre, M has raised the Q. The real Q is, is there an A?

Divine Humor: When Deity goes wrong!

Silicon Valley is thrilled to bits and bytes. The Draft Encryption Policy by the Department of Electronics and Information Technology (DEITY) has been nothing less than a godsend for GOD, the Gathering of Developers. Even as the Indian PM goes into the valley to charm the IT honchos, the Deity has already got their attention fully.

Store all electronic communication, unencrypted, no matter how private, for 90 days? How exciting! Mark Zuckerberg was moved to tears on spying this huge opportunity. What! Save the FB status updates for 90 days! The Indian government is really making me feel special. Given that there are some 5 million status updates done in a day on FB in India, 90 days storage means a database of 450 million status updates! That is not a cloud computing opportunity, folks, its a crowd computing one. This itself would create billions of dollars in wealth and add another 2000 people to the FB employee base.

He is now thinking of launching the FB Utsav, along Star Utsav lines. FB will only show the new updates while the older data will automatically go into the FB Utsav memory. FB Utsav will also have an automatic tie-up to the regular FB; when you open your regular FB account, the Utsav account will tell you “You had received 326 likes 3 months ago” making you feel instantly wanted and desired and maybe also a bit wistful.

This’ll enhance the emotional connect between FB and the user. There’ll be more scope for emoticon development as well, as newer shades of wistfulness and jealousy get identified by the user. Pixar is looking animatedly happy about this and Disney stocks have been rising ever since the Deity announced their grand storage plans last weekend.

FB Utsav will also host a real- time webcam option to capture the emotions on the user’s face when she sees her slim image from 3 months ago. This, together with the speed with which the user surfs away from the page, will give rise to a new fitness-panic index, say psychologists. Higher the speed, more is the speed with which dieticians and gyms will advertise on your FB account. This should give a total business boost of $5 billion, say Ad Gurus and fitness professionals.

FB Utsav will further carry an add-on option of telling you “This guy has not liked you in 3 months now, the bugger” and will immediately flash “Remove inactive friends” button at you. Optionally, the Utsav platform will automatically “unfriend” people who are not that fond of you, helping you to manage your life better.

Once the FB Utsav steadies as a product in India, its global counterpart FB Nostalgia would be launched. Howard Schultz, the CEO of Starbucks, has already started bidding to get FB Nostalgia launched exclusively at Starbucks Cafes, since nothing helps nostalgia along like the aroma of coffee. CCD has urged the PM to make nostalgia in India and to secure exclusive rights for Utsav and Nostalgia only for the Indian chain.

Tim Cook has decided to come out with a special iPhone for India. Only, it’ll be called “we-phone 90”; 256 GB local storage, at ₹90,000.

IMF has heralded the move by the Deity to be a supreme move by India to make sure that the global recessionary winds do not persist. Even though the draft Encryption Policy has been withdrawn, there is now pressure that it be re-instated with immediate effect in global interests. New ideas, apps and platforms are in line. All that is needed is the policy. Make it in India.

US Fed Funds Rate will rise in 2016

It’s status quo. She has not changed the rates.

With a growth rate of around 3.5% and better and brighter jobs data, the general expectation in early August was that the Federal Funds rate would be hiked in this policy meeting. However, as China devalued the yuan, global markets went into a major turbulence episode. Further, reduction in the Chinese interest rates caused uncontrolled outflows from all asset classes in EMs and showed markets moving to the dollar, like they always do in troubled times.

A hike in US interest rates, at such a time, could cause further disruptions in an already volatile environment; it is with this view in mind that the Fed has not changed the interest rates in this policy review.

However, this keeps us in a tentative state of mind and markets till December, which is when the next guidance is scheduled.

What I attempt in this blog is to try and see where the rates are headed in a medium term outlook, as we move into 2016.

The Taylor Rule and the Fed Funds Rate

The Taylor’s Rule is a rule that prescribes the nominal interest rate charged by the Fed be dependent on output gap, divergence of actual inflation from the target and on the equilibrium interest rate in the following fashion.

it = πt + 0.5 (πt – πt*) + 0.5 (GDPt –GDPt*) + rt*;

where it is the is the nominal Fed funds rate, πt and πt* are the actual and targeted inflation rates, GDP* is potential output and rt*is the equilibrium real interest rate.

Is the rule really used by the Fed to set interest rates? As Ben Bernanke said recently, Fed fund rates should be set systematically, not automatically. Using the Taylor’s rule to determine Fed funds rate is too simplistic, given that economic conditions keep changing all the time. Thus, the Fed does not actually set its rates by the Taylor’s rule; however, studies do show correlations between the rate as determined by the rule and the actual Fed fund rates.

If the Achilles heel of the rule is its simplicity, that perhaps is also its biggest strength. The rule connects movements in economic fundamentals to interest rates, giving us an analytical tool to create a baseline understanding of how rates will move in the future.

Higher is the inflation as compared to the target inflation (about 2% for the past 4-5 years in the US) and more is the GDP as compared to the potential GDP (that level of GDP at which all labor and capital resources are fully employed), more is the nominal funds rate that the Fed ought to set in order to cool down economic activity. The Fed Funds rate also depends on rt*, the equilibrium real interest rates in the economy. Equilibrium real interest rates are those at which the output and inflation are absolutely at target and monetary policy is said to be neutral. In a recession and low asset prices, the equilibrium real rate required to get the system to a higher growth level would have to be very low. Easier said than computed.

The following table shows the output gap (OECD data) and core inflation (Bureau of Labor Statistics) for the US from 2009 to 2015. Core inflation was chosen rather than CPI due to the high volatility that oil and food prices have shown in the time period. Under the very simple assumption that the Fed fund rate corresponds closely to the Taylor rate computation, we realize that the equilibrium real interest rates in the US for the said period have been extremely low, in fact negative at times, as many analysts have suggested.

Year Core inflation (Fed data) Output gap (OECD data) Fed Funds Rate Equilibrium real rate
2009 1.7 -4.535 0.25 0.97
2010 1.0 -3.786 0.25 1.64
2011 1.7 -3.913 0.25 0.66
2012 2.1 -3.428 0.25 -0.19
2013 1.8 -3.016 0.25 0.06
2014 1.7 -2.476 0.25 -0.06
2015 1.7 -2.363 0.25 -0.12
2016 (forecast) 1.8 -1.631 0.750.88




Taylor’s Rule to forecast interest rates

It may be fruitful to attempt understanding the movement of Fed Funds rate in the next one year using this analysis.

There are plenty of signs of strengthening in the US. As per OECD forecasts, the output gap will reduce in 2016, indicating better utilization of resources. Unemployment rate is already at around 5.2%, which is lesser than 5.5%, the natural rate of unemployment for the US, at which we assume that labor is almost fully employed. Since January, personal consumption expenditure index has been growing at an average of 2.2%. Real interest rates are bound to rise in the immediate future.

Even if we assume the same low negative real interest rates for 2016, the Taylor rule calculation tells us that the Fed Funds rate will jump up by 50 bps in the immediate future (Graph shown below). More realistically, if we assume the real interest rates to be 0% or 0.5% in 2016, the corresponding funds rate would jump to 0.88% and 1.38% respectively.


Ceteris Paribus, the way the fundamentals are evolving right now, a rate hike over the next one year seems imminent. This is not only because the fundamentals are strengthening; it is also because keeping interest rates unnaturally low beyond the required time-frame can have heavy costs in terms of asset bubble formations. To presume that the Fed will delay internal adjustment to allow a smoother glide path to EMs is just too naive for words.

Even if the hike has been postponed as of now, directionally the markets will have to get poised for a higher Fed funds rate between 1 to 1.5% in the next one year.

PM Modi’s Big Boss House!

September 8, 2015. There was a flurry of activity at 7, Race Course Road. After all, PM Modi had decided to host the Big Boss show in his own house. The who’s who of industry, banks, industry associations, ministries, mutual funds and the RBI would be called in as inmates. The event was bound to be full of masala and histrionics.

Inmate selection had been a nightmare. Cyrus Mistry had been extremely ruffled by the huge outlays that Big Boss had promised on roads and infrastructure in the last budget. “After all the pain we took to create a toy car which can navigate all the potholes! This guy is going to kill my small car business!” Even after 10 phone calls from the PMO, the man refused to attend. It was only after FM Arun Jaitley cleverly pointed out that there is a difference in outlay on roads and laying out the road that Mistry came to the House.

Sunil Mittal pooh-poohed the whole idea of having a physical meeting in digital India and offered 5G connections to ModiG. “What an absurd idea!” remarked Kumar Mangalam Birla, deciding to nominate the Airtel candidate for eviction immediately.

“Hehehe. Do what you will, guys, but end of the day, there’ll be only one winner. RIL.” That was Mukesh Ambani, the one inmate who had immediately accepted the Big Boss’ invite. He had already won several Big Boss seasons. Mallya did not have dates in his calendar and was not invited.

Culinary conundrum

There was a big issue over who would cook. Chief Economic Advisor Arvind Subramanian, having established himself firmly in the culinary department with the introduction of JAM (Jan Dhan, Aadhar and Mobile scheme) in the Economic Survey, was called in to cook up some steam in the stale economy. Pancake would be cooked by Panagariya, the other Arvind. Minister Goyal, the “power” factor, was jealous of Minister Dharmendra Pradhan, whose job of supplying oil at low prices was being undertaken by the Saudi Prince himself.

The Governor of the People’s Bank of China Zhou Xiaochuan was invited as the firang guest. However, he cleverly declined seeing that the mutual fund inmates had donned “khali” looks at the mere mention of yuan devaluation. It is a nice game of thrones, thought Big Boss, with the policy team at loggerheads with implementation. “Take risks!” he boomed and the game began.

The games begin

RIL wanted all taxes to go; no I-T, no MAT, and certainly no GST. It also demanded no SIA and no ecological assessment when it acquired land. FM Jaitley, startled at such extreme demands, remarked that Mukesh needs to be the next FM. Mutual funds wanted bears out of the house. The bears said volatility needs to be evicted. The industry pointed fingers at banks for keeping rates so high. SBI chief Ms Bhattacharya bristled visibly and asked why the inmates had taken loans they couldn’t repay.

“But why don’t you reduce interest rates?” There was a sudden silence as Big Boss spoke. Ms Chanda Kochhar delicately looked at her empty glass. “No liquidity, Big Boss.” RBI Governor Raghuram Rajan, who was brought in to keep “interest” on the show high, started uncomfortably. No matter how slowly the government moves on critical infrastructure, he knew that eventually his interest rate policy would be blamed for the slow pace of investments. “The weak transmission,” he began but was shouted down by the other inmates. The show had begun.

Big Boss smiled. He could see his TRPs going up.

Econ Mom talks Mann ki Baat on Land Ordinance

Lil One has always been good at chess. But this week, his game has suddenly become quite indestructible. I was getting frustrated as he was anticipating almost every move of mine and was giving me a tough match, often winning the board. “Losing to one’s kid is a wonderful feeling!”, my elderly neighbour informed me after she saw this most embarrassing spectacle of Lil One finally rupturing my rook defence and yell in delight, Orc style. I tried to look positively delighted to find this little speck of a boy beating me; my neighbour glowed in approval and left to inform the entire building of my successful motherhood milestone.

AAAAAAARRRGH! I am SO upset! Ok, I can see Saintly Sacrificing Mommies Inc. including women like Karan-Arjun’s mommy glowering at me in disapproval. But frankly, I am so frustrated! Ok, so here’s the world’s most well kept secret. Losing to one’s own kid in chess is quite an awesome feeling, once you overcome that strong urge to go and yell real loudly in frustration.

“You are reluctant to sacrifice, Mom, that’s your problem”, piped Lil One, getting into groove on his pet subject “3001 Favorite Mommy Errors.” “You have to be able to give up a minor piece in order to capture my rook. The power of exchange sacrifices is BIG. Let go a small thing today for BIG gains tomorrow. It always works. That’s what all chess masters say.”

Hmm. A sacrifice? He’s talking about a trade-off! Perhaps we are witnessing the same kind of a trade-off in the politico-economic-parliamentary space today. PM Modi declared in the “Mann-Ki-Baat” show a couple of days ago that the Land Ordinance would not be re-promulgated. Is this a small exchange sacrifice to get the rook, the GST Bill, going? It does look like it.

Frankly, I was never comfortable with that Land Ordinance. You can see some of my arguments regarding land acquisition in India in my earlier blogs here. The archaic Land Acquisition Act 1894 was replaced by the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (RFCT- LARR) in 2013. This Act was passed after a lot of discussion in the Parliament. LARR required consent of 80% of the land owners, if the acquisition was being done by a private party and 70% , if it was done by PPP. It also mandated Social Impact Assessment (SIA) before the land acquisition is done. The BJP, which was then on the Opposition bench, had been vociferous about certain clauses pertaining to Social Impact Assessment. Those clauses were duly inserted and then the Act was passed.

Now once the NDA came to power, it made an attempt to make the Act more “industry-friendly.” How does one do that? Well, there were two main changes that the NDA wanted to make in order to hasten the process of acquiring the land. First, it sought to dilute the SIA compliance for projects such as industrial corridors, rural infrastructure, affordable housing and “infrastructure and social infrastructure” projects. This last category includes sectors ranging from urban public transport to hospitals. Second, it provided an exemption to the consent clause for the Section 10A projects, as listed above.

This, it was felt, would reduce the time required in terms of acquiring land, thereby helping the industry to reduce project costs. To quote a CII estimate, the time required for consent and rehab and resettlement could increase the project costs of a 1000 MW power plant from Rs.150 crores to Rs.450 crores.

What I was uncomfortable with was the fact that the NDA chose to take the Ordinance route in order to get this on track. We are talking about land, the most politicized of all assets, the asset mostly closely associated with land grab and conflicts and farmers’ welfare programs, and there simply CANNOT be a case for promulgating an ordinance. This is one issue on which one wants full transparency. These amendments to the Act should have been passed after full discussion in the Parliament.

The Ordinance was passed and was renewed three times. There was a hope that the issues would get duly discussed in the Parliament in the monsoon session and the amendments would be passed; but what we’ve seen is a monsoon washout. There were two key discussions to be held in the monsoon session; the GST Bill and the Land Ordinance, both of which couldn’t be tabled.

In the meanwhile, the industry lobby is getting restive about policy reforms promised by Modi Sarkar. The external environment has become unstable and volatile, monsoons in India have been 12% deficient causing the agriculture growth rate to fall to only 1.6% in FY16, the IIP is showing sluggishness in industry and interest rate continues to be high despite low inflation. Tabling and passing the GST Bill will be a shot in the arm for industries wanting to see some action on the indirect tax front.

Surprising many, the PM declared on his radio show that the Land Ordinance would be allowed to lapse on 31st August 2015. He mentioned that the Ordinance was about getting a better deal for farmers, whose land was acquired, but it had backfired and had created an environment of mistrust within the farmers. He was hence allowing it to lapse. Interestingly, the tone in which he spoke was not accusing or bitter but reconciliatory and warm. Full points on delivery!

Well, what happens to industrial growth then, one may well wonder. We are back to square one. Project time will now escalate and so will project costs. How do you take care of that, PM? What we’re witnessing is a trade-off. Let’s get the GST rolling smoothly. Now that the land issue is null and void, it’ll be easier to get the Opposition back to the Parliament. The Opposition cannot really take too much of a stance against GST; it was their idea in the first place and is undeniably required for taking growth ahead. Once the GST Bill is passed, we can get back to the more sticky issue of land acquisition (I hope this time through a discussion route.)

He’s let the land ordinance go so that he can take the more required and infinitely more flashy GST reform ahead. If the NDA can get the GST Bill passed, no industry lobby will be able to claim that they have not done enough for growth. Sacrifice the knight for the rook.

After dinner, I challenged Lil One to one more game of chess. As we were lining up our pieces, he suddenly said, “Can you feel it in your heart when you’re going to win, Mom? I can. Dil se.” I had a sudden urge to tell him it’s not Dil ki baat. It’s Mann ki Baat.

The Bahubali of a Devaluation!

Dear Reader,

The Chinese Yuan was devalued so suddenly, it was almost filmy in its implementation. Here’s my filmy take on a “Bahubali of a Devaluation” that appeared in the Hindu Business Line today under my column “Tweakonomics.” You can also read the column directly at http://www.thehindubusinessline.com/opinion/yuan-a-lens-eye-view/article7583325.ece



It’s official. So impressed is the film fraternity with the filmi way in which the Chinese Yuan was suddenly devalued, that film makers all over the world now want to re-create famous movies in China.

Cast of the sci-fi movie “Honey, I shrunk the kids” was found in China last week, trying to create “Honey, I devalued the Yuan.” Instead of a mad scientist, the movie will show a mad economist, trying to gain entry into the IMF inner circle. The mad economist makes a desperate appeal to the IMF to let the Yuan be one of the 4 currencies that can be part of the Special Drawing Rights. But the IMF refuses to consider it and then the mad economist goes back to China and creates a machine that can shrink the Yuan to miniscule sizes.

In the meanwhile, disavowed IMF agent Raghuram Rajan comes to India on Mission Impossible. His mission, if he is to accept it, is to prevent the Chinese devaluation from affecting Indian markets. He is given a team of the best to assist him in this mission. An FM who can make statements to calm the markets and Sundar Pichai as IT support. The services of Amma or Didi can also be availed to create the charm of the femme fatale, but he correctly refuses. As he fights with the havoc created by the Rogue Nation, he uses the FOREX to control the Rupee from going into free fall. Indian FOREX reserves fall a bit, but he says in style “Desperate times, desperate measures.”

Karan Johar has also reached China to re-make “Kabhi Renminbi Kabhi Yuan”. In Johar’s film, Shah Rukh Khan, who is Bachchan’s son and lives in a palace that looks suspiciously like the NY Federal Reserve, is called Dollar. In the meanwhile, there’s Renminbi, played by Kajol, who lives in abject poverty off the Great Wall of China. Dollar and Remnimbi exchange rate their vows and enter parity. The marriage enters troubled waters. Reason? Kajol has become fat and has slowed down. Bas! Aur nahiiii! Renminbi decides to devalue and break parity. Kajol, wearing a 10-feet long black pallu depresses currency, derivative and stock markets through the globe. But she emerges looking leaner and meaner and with re-newed fundamentals, re-enters a new, more flexible relationship vis-a-vis Dollar. Shava shava!

Karan Johar also wanted to re-make “Currency of the Year” in China; but the Chinese Government expressed serious reservations about allowing Alia Bhat to play a central role in any movie made on Yuan dynamics.

Finally, much to the consternation of the Chinese, the entire star cast of Bahubali reached Shanghai, the new Mahishmati. Chinese economists were rounded up for a compulsory viewing of the first part. The poor economists could only watch in stunned silence as the towering matriarch with the curled lip gave crazy orders holding two babies in one hand, while Orcs from another movie suddenly entered the scene to pass lewd comments. Her spite and command reminded many of the good old Mao days. After the ordeal was over, wiping tears of disbelief and relief, the Chinese Premier asked the only question, which has been ticking in the mind of crores of Indians. “WHY, oh WHY did Katappa cut-uppa Bahubali? Tell me the answer and I’ll do anything you want. I’ll stop the Yuan from devaluing further.” Bahubali Junior removed his helmet. It was PM Modi. “Place a call to Dr. Rajan and tell him it’s all over. Mission Accomplished. There’s no need for competitive depreciations and FOREX reductions. All it needed was a Hindi movie.”


Will the US raise interest rates in September?


Based on the volatility we’ve been witnessing in the global markets, it seems unlikely that the Fed will hike interest rates in the September review.

One of the external factors that the RBI has been watching closely for taking a call on its own interest rate stance is the behaviour of the US interest rate. Since Jan 2015, increasing number of Fed members, policy analysts and traders have opined that an interest rate hike in the US is a question of when, rather than of.

The markets were largely expecting that the Fed would raise its interest rates in the September review. The RBI, which did not slash rates in last month’s policy review, also seemed to be waiting for some kind of a cue coming in from the Fed, before it could give a reduction on rates.

Pre-volatility, why were the markets expecting the Fed to hike rates?

The basic argument was that the jobs data from the Labor Bureau has been very good in the run-up to August. Unemployment rate in the US seems to be around 5.5% (see chart below). Now, the Federal Reserve believes that the “Natural Rate of Unemployment” for the US stands between 5% and 6%. This is the unemployment rate faced by the US when the labor resource is almost fully employed. Thus, any further reduction in the unemployment to say, 5%, would eventually spark off wage inflation and feed into an overall price hike.


Has the inflation in the US been very high?

Actually, no. But since monetary policy is as much about managing inflationary expectations as it is about curbing the actual inflation, the Fed was taking a view that the current jobs data seemed to show a trend of future potential inflation. It would be necessary to curb this potential overheating by hiking interest rates.


How has the dollar been moving vis-a-vis other currencies in the past one year?

Now this is one trend which is really interesting. If we observe the US Dollar Index (which is 6 currencies weighted against the dollar), we find that the dollar has pretty much strengthened against a basket of currencies since September 2014. The aggregate strengthening of the dollar over the past one year works out to a hefty 14%. So for a year now, the dollar has been getting stronger, which has been hurting the exports movement from the US.


So what has changed now?

Many things.

  • Since the Emerging Market economies have all witnessed considerable depreciations in this week, the dollar will emerge even stronger once the dust starts settling down. This by itself, should help the economic system to move from overheat to a more calm economy.
  • Add to this the fact that cheaper exports and cheaper oil should take the inflation southwards. Since the Chinese growth rate is expected to be soft in the coming fiscal, the biggest buyer of commodities will be showing low demands. This will cause commodities to remain low for a while, helping inflation to be controlled for all economies including the US.
  • Finally add to this the fact that the Chinese Central Bank PBOC has reduced its interest rates in an attempt to excite the real sector fundamentals into growth. Even with the US interest rates untouched, it really creates a differential between the US interest rates and the Chinese interest rates, which effectively helps in controlling overheat and dampening inflation in the US.
  • One last point before I wind up. Interest rates are changed in order to give critical direction to the economy. By that I mean, that interest rates are used as an instrument to change values in the real sector of the economy. However, that they have an impact on financial markets is also a given. When markets are already jittery and on tenterhooks, it would be pointless to rattle them some more by hiking the rates at this point.

There seems to be no case left for a September hike anymore.

Making the “Most” out of Indian “Post” Office Payment Banks

Today morning, the RBI gave in-principle approvals for payment bank licenses to 11 out of 41 applicants. While there are some big names there such as Reliance Industries, Aditya Birla Nuvo, Vodafone and Airtel, the most humble name in the list was the one with maximum connect to the objective of financial inclusion. Indian Postal Service.

Big numbers in small accounts

I went back to browse through the Annual Reports of the Department of Posts and found some interesting snippets on how the post supports the economic structure in India. As on 31st March 2013, there were 1,54,856 Post offices, of which 89.87% were in the rural areas of India. That is 1,39,164 branches in rural India, folks! The Post Office also operates several small savings schemes floated by the Government of India. The Post Office Savings Bank (POSB) handles 12.53 crore small savers’ accounts with an outstanding balance of nearly Rs.378 billion. And if we add the total balances outstanding under different savings accounts, recurring deposits, fixed deposits, PPFs, MNREGA accounts, etc., we are looking at a total outstanding balance of Rs. 6031.7 billion! Most of these deposits have been collected from the poor, unbanked areas, hence offering inclusivity to the chunk of our populace which finds it difficult to approach a bank, for whatever reason.

It would be interesting to compare this number to the rural branches of a big nationalized bank, say, SBI, I thought. And voila! Here’s what I find.

In 2013, SBI boasted  having 16,000 total branches, of which 9851 (around 66%) were in the rural areas. No bank comes even close in the actual number of villages/ rural areas that are covered by the Post Office. Interestingly, I found it exceedingly difficult to get data on savings deposits mobilized by the SBI in the rural areas. One rather oblique number that I found claimed that the rural deposits are roughly around 38% of the total deposits. This amounts to Rs.3600 billion. Thus, one comparison point that comes across is that the Postal Offices, which are not really banks, mobilize a tenth of the deposits mobilized by the SBI, whereas the number of branches of the Postal Services is 10 times that of SBI.

Is that small comparison telling us a deeper story? Perhaps, yes. Perhaps it is hinting at the tremendous potential of the post offices to offer financial inclusion to that section of the population that shies from commercial banking, for whatever reason.

The physical reach of the humble Post Office is definitely enviable; the next question is whether the Post Office has in it the wherewithal to function as a payment bank. It is fruitful to stop for a minute and reflect what a payment bank really does. It basically collects small deposits (to the tune of Rs. 1 lakh), invests in Government paper, disburses payments done through Government of India schemes, cannot really offer a loan, but would definitely offer the facility of a debit card or an ATM card. If you discount the last feature there, what you have is a full fledged description of the Indian Postal Services.

Postal Services and interaction with the Government

Since 2008, the Post Office was chosen by the Government to be an official agency to disburse MNREGA wages; in the year 2013, 57.4 million beneficiaries of the scheme were disbursed payments worth Rs.120 billion through the Post. The Department of Posts enjoys a seamless kind of an interface when it comes to networking with the Government of India. The pilot programme of the Direct Benefits Transfer (DBT) in Andhra Pradesh for disbursement of MNREGA wages and other benefits is being handled by the Post. Disbursal of pensions for several Government schemes is facilitated by the Post. The Aadhaar letters were booked and delivered under the Speed Post facility offered by the Department.

Very very interestingly, the Post Department helps the Ministry of Statistics and Programme Implementation (MoSPI) gather data in 1181 villages which feeds into preparing the CPI data for rural India! Thinking about it, it makes sense, doesn’t it? Who else, than the dak ghar, with a reach to the smallest of houses in the remotest of villages, to offer a sneak peek into how the prices of the basket of goods and services consumed by the rural folk are changing!

Since 2012, a computerization scheme of the postal network has started. The objective of this computerization program is not only to connect the postal network across the country to help track parcels and postal delivery instruments, but to also allow a platform for the Post Offices to get financially integrated into the overall payments system. Once this financial integration is completed, we may well be looking at one of the biggest potentials in Indian financial history to truly offer inclusivity to India.

Stories from elsewhere in the world

A quick look at some other postal case studies from other countries offers some lessons. The World Bank has published financial inclusion data after interviewing 65,000 participants from across 60 developing and developed countries. And there are some very interesting findings.

  1. The data suggests that those people in the 60 countries who tend to have an account with a post office are likely to be older, poorer, less educated and not employed.
  2. Most poor people who tend to hold a postal account also tend to hold an account in a commercial bank! Only 3% of the respondents were those who exclusively owned only a post account.
  3. The success of post banks as a vehicle of financial inclusion depends on the business model followed. There are countries where the post office acts like an unlicensed savings bank (POSB, the kind of model we have in India currently), others where the post office has a tie-up with some established commercial bank, and yet others, where the post offices get a formal license to operate as a Financial Institution or a payment bank (this is the model we are now getting into).
  4. Whenever there are partnership models between commercial banks and post offices, it has been observed that postal deposits do not actually increase; but this model does lead to an overall increase in the total number of accounts held by the poor.
  5. More importantly, whenever the post office acts as a “cash merchant” for transactional financial services, such as electronic government and remittance payments, the number of accounts held by the poor is likely to increase significantly.

What does this mean for India?

To begin with, post office payment banks have a chance to make it real big in terms of the financial inclusion vision of the Government of India. If they could aggressively market the strength they have in terms of being the preferred institution through which the Government benefits are disbursed, it’ll give them the numbers to become a viable force in the initial few years. Over a period of time, these banks may have to explore the possibility of tying up with another Financial Institution to sustain the momentum of the earlier years.

Nursery Rhymes, SDRs and Devaluation of the Yuan


As I came in from my walk yesterday, I saw some little girls playing their usual, chirrupy games…

Ring-a Ring-a Roses

Pocket full of posies

Atishoo! Atishoo!

They all fall DOWWWWWNNNNNN!!!

There was a great amount of scuffling and giggling to make sure that one sits down before the others. A competitive, let-me-fall-before-you-do game. The person to fall last gets a penalty, of course. I sat down on a bench to watch them play, and Econ Mom took over. Obviously.

The day’s news were playing on my mind. It’s almost similar, I found myself thinking. The ring-a-roses on the currency markets today. The yuan sneezes…Atishoo! And they all fall down in a competitive depreciation. The Rupee and the Yen and the Ringitt. The question is: WHY did the Yuan sneeze? Here are some quick Q&As.

#1. I hear that the Yuan devaluation has to do with Special Drawing Rights? What are SDRs?

Simply put, the SDR is an international reserve asset created by the IMF, which can be used to supplement or augment the member countries’ official reserves. Now this reserve asset comprises of 4 currencies; the dollar, the euro, the pound and the yen. 2015 is the year in which the IMF will review whether new currencies should be included in the pool of currencies that comprise the SDR.

There are 2 basic features that a currency has to posses to make it to the highly dignified SDR category. It has to have a significant role in world trade and it has to be “freely usable”.

That the Chinese have a significant role in world trade is undisputed. Their current contribution to 11% of the world’s exports means that they gain automatic entry into the IMF review this year, though of course, their chief stumbling block would be that the Yuan is not perceived to be “freely usable.”

The Articles of Agreement of the IMF define a “freely usable” currency as that which is widely used to make payments for international transactions and is widely traded in the principal exchange markets. Thus, a freely usable currency is technically NOT a freely floating currency. In fact, it has very little to do with the underlying exchange rate regime. You could have a situation where in a currency was fixed but was freely usable in markets across the globe.

So the next question is: Is the Yuan freely usable? Increasingly so. More and more FOREX reserves are being held in Yuan terms, more and more export payments are being made in Yuan terms. The Economist has shown that even though Yuan payments/ holdings may not be high in absolute terms, its been showing a growth rate that allows it to come very close to the “freely usable” terminology. At least, “The Economist” thinks so.

The People’s Bank of China (PBC) is now in a mood to make sure that the IMF thinks so too. One of the chief reasons why the Yuan was devalued is because the PBC is anxious to prove to the world that the Yuan increasingly is market determined, rather than determined in a fixed parity by the Bank.

#2 Hold on. I thought the Yuan was always undervalued. If the market is to determine it, it should have risen, right?

Wrong. There are 2 factors here. First, that the yuan has been typically held undervalued is a correct perception. However, in the last one year, with the US showing robust fundamentals, the dollar has undoubtedly strengthened. The robust fundamentals and increasing sentiment has also increased the possibility of a rate hike and FIIs hence have been making a beeline towards the dollar, strengthening it further. Since the Yuan, at whatever undervalued level, was held fixed vis-a-vis the dollar, it has implied that the Yuan has de-facto strengthened against most currencies in the globe. So even if the yuan was undervalued, the extent of its undervaluation has lessened. This is one of the reasons that sparked off the devaluation.

Second, the Chinese fundamentals have definitely deteriorated in the last one year, when the US strength has increased. Here is my earlier blog on what plagues their banking structure and why excess capacities got built in China. A deterioration in the fundamentals calls for a devaluation from the present value, whether that value is correct or otherwise to begin with becomes immaterial.

# 3. Does the Yuan devaluation help China? If every Emerging Market goes into competitive depreciation, there’ll be no relative change at the end of the game.

The argument given above is largely a financial argument. As currencies across the globe get hit, relatively we may find in the medium term that the Yuan is not really cheaper compared to the other emerging currencies and hence, Chinese exports may not really get the boost that they want vis-a-vis other emerging markets. But that the yuan stands cheaper vis-a-vis the dollar, is undeniable.

Second, the current movement in the yuan is not so much about devaluation as it is about sending a signal of more flexibility. While the IMF has now said that the same 4 currencies will comprise the SDR till September 2016, there is increasing reason to believe that the Yuan would find a place in the SDRs after 2016. This would make the Yuan more acceptable, more traded and would create a different positioning for China in the global markets.


As every News Channel was analyzing yesterday, the currency market movements are because of the SDR issue. Never in my life do I remember the humble, modest SDRs occupying such a special place in a common man’s life and discussions. To have news analysts yelling about Sensex and currencies was okay, but to have them yelling on composition of SDR, the IMF’s virtual currency, the role of which IMF itself says has been “insignificant”, was surprising beyond measure.

As I got up from the bench with a sigh to head back home, I heard the girls start on their game…

Who stole the cookies from the cookies pot? Who me? Yes, you. Couldn’t be. Then who? Mr. Yuan stole the cookies from the cookies pot.