Teaching economics in today's world

FT has an article on how the teaching of economics to today's students can be made useful and relevant. What is taught apparently does not help students to relate to stuff such as the Eurozone crisis. Students want to know about climate change, financial instability and economic disparities- the author says we have the tools to address these in economics.

That's fine. What I would like to know is how these topics can be incorporated in basic courses in Micro or Macro-economics. I look forward to seeing the curriculum the author says her Centre proposes to make available on open access. I have a suggestion: just take the core course outline of any leading institution and tell us what new topics you would like to incorporate - and how you want these taught at the basic level. 

Let me add that I'm also tired of people telling us how B-school curricula need to change to cope with the new world. We are constantly being told that the courses are not relevant,  they don't provide soft skills, they don't deal with the organisation of tomorrow. Alright, so please take the curriculum of IIMA or any other leading B-school and tell us the following: which courses to delete, which courses to add, and how existing courses need to be modified. Please do this session by session and mentioning topics and text books/ references. Now, that would be a serious contribution.

Any takers?

Two fascinating interviews

FT carries two fascinating interviews. One is with Henry Blodget, the analyst who was disgraced during the dotcom burst of the early 2000s. Blodget now runs a successful business news and analysis website. The other is with scientist Paul Davies about the three fundamental questions in science.

Banks will benefit from more capital, not less

Banks in the western world have been crying themselves hoarse over the increase in bank capital mandated under Basel 3. They say higher capital will mean costlier lending, it will cause banks to cut back on asset growth or even shrink assets. One way or another, they say, it will end up hurting the economy.

Worse, higher capital risks causing an erosion in investor interest in banks. Who would want to invest in the face of falling return on equity?

Well, the reality is that banks in the US have moved to meet the higher Basel 3 requirements well ahead of the deadline of 2019. And with what result?Their share prices are soaring. Swedish regulators have mandated a tier I capital ratio of 12%, way above the 7% mandated by the regulators. And Sweden's banks are producing a return on equity of 15% compared to 10-12% produced by their better known European counterparts.

How do you end up increasing return on equity with greater capital? Well, you get the benefit of cheaper borrowings. As for share prices, the markets end up giving a higher price to earnings (or book) multiple because they see banks with higher capital as being safer. Here's the bottom line: don't try to keep bank capital down to the regulatory minimum or even lower based on your own risk modelling. Hold capital more than what regulators require. After the financial crisis, the advantage lies squarely with banks with more capital, not less.

Read this excerpt from an article in FT:

Here is the problem: banks have spent a lot of time, energy and money warning of the potential ill-effects of ramping up regulation. But since the crisis, international regulators have kept demanding more capital, including a surcharge for the biggest banks. Lenders have doubled their capital levels as a result, hitting the new Basel III targets six years early in some cases and, yet, where are the ill effects? The best of them continue to set new profit records.

J P Morgan hiring in Asia under scrutiny

I read with some astonishment a news item about the US authorities looking into JP Morgan's hiring practices in India, South Korea and Singapore. This follows similar investigations into hiring in China by the anti-bribery unit of the SEC and other federal authorities.

As I understood the report, the allegation seems to be that JP Morgan hires sons and daughters of influential people - and using less rigorous standards than are applicable to other applicants- so that it can win business.

The average person is bound to ask: so what is new? How many companies will the US authorities likewise investigate? And how exactly do you establish a nexus between such hiring and improper winning of business? As the report indicates, JP  Morgan also hires consultants. So do a number of other companies.

I cannot say about  JP Morgan but very often consultants hired by companies are retired government bureaucrats, regulators, ambassadors and others. This practice is rampant in the US itself. And the idea in hiring such people is not just to understand processes in government but to influence outcomes by using the contacts of influential people. The US is notorious for its "revolving door" syndrome- government officials moving into Wall Street and then back into government.

In India, one method used is to give business contracts to children of those in power. The easiest thing to do for politicians' children is to get into the real estate business.The private sector provides the finance; the children provide the clearances through their contacts. It's a terrific arrangement. Nothing unofficial or even illegal about it.

Getting close to influential people- whether by hiring them as consultants or their kith and kin as employees- is an integral part of crony capitalism. How far do the US authorities propose to go in tackling it?

How do developing countries catch up?

'Convergence' is a term that students of economics are familiar with. For several reasons, developing countries are poised to catch up with higher income countries over time, although this could be a long time. How to expedite this is an important policy issue. The conventional wisdom is that you allow markets to function freely and do the trick- produce high growth. Remove the dead hand of the state and- hey presto!- growth materialises. Most "reformers" would ascribe the high growth in India since the 1990s to precisely such a thing having happened.

Alas for them, the reality is rather different. Economist Deepak Nayyar has an article in the Hindu in which he points out that rapid growth flowed from meaningful state intervention rather than state retreat. (He has a book coming out on this theme):

Thus, industrialisation was not so much about getting-prices-right as it was about getting-state-intervention-right. Indeed, it is plausible to suggest that, for a time it might even have been about getting-prices-wrong. It may be argued that state intervention in the form of industrial policy should recognise and exploit potential comparative advantage, but it is just as plausible to argue that instead of climbing the ladder step by step it could be rewarding to jump some steps in defiance of what comparative advantage might be at the time. In either case, state intervention is critical.

Apart from an extensive role for governments, the use of borrowed technologies, an intense process of learning, the creation of managerial capabilities in individuals and technological capabilities in firms, and the nurturing of entrepreneurs and firms in different types of enterprises were important factors underlying the catch-up in industrialisation. The creation of initial conditions was followed by a period of learning to industrialise so that outcomes in industrialisation surfaced with a time lag. This accounts for the acceleration in growth of manufacturing output that became visible in the early 1970s.

Clearly, it was not the magic of markets that produced the sudden spurt in industrialisation. It came from the foundations that were laid in the preceding quarter century. In this context, it is important to note that much the same can be said about the now industrialised countries, where industrial protection and state intervention were just as important at earlier stages of their development when they were latecomers to industrialisation.

So, the acceleration since the 1990s didn't come out of thin air, it wasn't conjured up by markets or private sector firms. The foundations had been laid in terms of an industrial base, technological capability, investment in higher education, a growing middle class, etc. Liberalisation helped get the best out of this investment in capability that had been state-driven. It might have happened a little earlier; the License Raj excesses were clearly unwarranted. But this is different from saying that the private sector produced a magical transformation, starting in the 90s.

Economist on Sachin Tendulkar

The Banyan column in the Economist seeks to unravel the Sachin mystique. It's not just about Sachin being a great cricketer- the column suggests that Gavaskar was, perhaps, a better player and contributed more in a weaker Indian team.

It's about what Sachin represents, the transformation of India from a poor country into a relatively better off country. In the process, many have become richer, including Sachin himself. Now, a new set of players are knocking at the doors of good fortune in cricket. Unlike Sachin, however, they are brash and ostentatious. Sachin, with his low-key persona, good manners and devotion to family represents what India would like to see in the successful.

Well, nothing new here, I guess that's what Indians have always wanted to see in the successful. They would like politicians to sport khadi, they don't much like industrialists who own jets and yachts, and bureaucrats still go around in half-sleeved shirts and sandals. Even in Bollywood, the sober and soft-spoken Amitabh Bachchan is more revered than the flashier types. As the article points out, however, this applies to only to the older India (those above 35); with the younger crowd, ostentation may be going down well.

The column's point about Sachin overstaying in the team is a stronger one. All of us know how difficult it was for the board and the selection committee to ask him to leave. Sachin, the column points out, illustrated the bane of Indian society: the "impunity enjoyed by all India's rich and powerful". In not wanting to leave, again, Sachin, alas, represented something that is all too common in Indian politics, the corporate world, the bureaucracy and the cinema.

Perhaps, it is for politicians to give the lead: I read somewhere that Jairam Ramesh has suggested a retirement age for politicians. There should also be a generally accepted upper limit for people who assume high office, say, the prime ministership. It happens in the UK and the US. It should happen here as well. Once it happens in politics, hopefully the message will go out to other sections of society: for god's sake and ours, quit and find something else to do in life.

My latest book is out

My latest book, Before and After the Global Crisis, is out.  It's a collection of my writings in recent years, broken down into five themes: Indian Economy, Indian Banking, World Economy, Management and Governance, Indian Polity. I reproduce the blurb:

The Indian economy has been through something of a roller-coaster ride since 2004. There was a period of boom in 2004. Then came the global crisis, a sharp deceleration in India’s growth rate and a waning of confidence about India’s economic prospects both at home and abroad. 

This collection of articles, written for The Economic Times and the Economic and Political Weekly, provides an intelligent – and often off-beat- analysis of events in the Indian economy as well as the world economy over the period 2004-2012.     

As the financial sector has been at the heart of the crisis, the Indian banking sector as well as international banking come in for close scrutiny.  The book also takes in its stride developments in the Indian polity, and a range of issues relating to management and governance.  

Written in the readable and hard-hitting style for which the author is well-known, the book is at once a chronicle and a critique of a turbulent period for the Indian economy as well as the global economy.

As I thumbed the pages after receiving my copy, I asked myself whether the writings would stand the test of time. That's obviously for the reader to judge. But I have no difficulty in confessing that I seem to have been somewhat over-optimistic about India's growth prospects. I did not foresee the sort of sharp deceleration in growth we have had in the past three years. Some of it is, of course, the result of non-economic factors that could not have been foreseen: the Supreme Court ban on mining, the delays in environmental and other clearances that have held up projects, including the expansion of coal supply, and, not least, the CAG reports and the anti-corruption crusade which have paralysed both parliament and the bureaucracy.

A deceleration from 9% during the boom years to 6.5-7% would have been understandable. But not the drop to 5%. Still less could one have thought that the drop in the growth rate would have stretch out for so long. It doesn't seem likely that growth will move up to 7% before 2015-16, and, that too, is contingent on global factors. Before we get there, we will need to weather the storm that will be unleashed by the tapering of QE in the US. Looking back on the growth optimism, which I shared, one is reminded that economists need more than a touch of humility in pronouncing on the future.

US education model should be a warning, not an example

Oxford's vice-chancellor complains that the ceiling of £ 9000 on fee charged by universities it not fair; it makes no allowance for differences in quality. After all, in the US quality universities can charge what they like. An article in FT warns that the US model may not be the right one for other economies.

To me, the interesting point the article makes is that, in exchange for the enormous fees they charge, universities have become generous with grades- or what is called "grade inflation:

Students are getting increasingly lavish accolades for their money. In the early 1980s, fewer than 30 per cent of all grades were As; now the figure is more than 40 per cent. By other measures things have worsened. In one survey, only a quarter of college graduates were deemed able to understand written material to achieve everyday goals.

Few who have taught in America outside the Ivy league will be surprised. Students receive highish marks for semi-literate work, displaying a glimmer of rhetorical power only when they plead for still greater leniency.

At the Ivy League and other reputed universities, education may be of high quality. But, precisely because it is so, universities have come to charge exorbitant fees- tuition costs five times on the average more than what it did 30 years ago. In general, costs bear no link with either cost or the value of education. The impact on students who cannot afford costly loans can well be imagined.

The US model should be a warning to others who wish to develop human capital. It's reassuring that, in India, institutions such as the IITs have desisted from raising fees, even when experts sitting on  committees have wanted them to. Privatisation of education is bad enough because it means the state has forsaken its role in providing education; leaving fees totally unregulated will sound the death knell for access to education for people at large.

Nobel for Economics

FT has two interesting articles on this year's Nobel for Economics, one by John  Kay and the other by Tim Harford (of Undercover Economist fame). They make a point that many others have made, that two of Nobel Laureates, Eugene Fama and Robert Shiller, got the award for holding rather contradictory views. Fama propounded the theory that markets are efficient, that is, securities prices reflect all available information. Shiller contended that markets are prone to bubbles and that volatility in stock prices exceeds what can be ascribed to new information.

Who is right? Well, in a way, I suppose both are. Markets tend towards efficiency; the fact that they deviate from efficiency often or even for long periods does not refute Fama's basic postulate. As Harford points out, one big outcome has to been to discredit stock analysts and stock pickers in general. It's far better in terms of returns and far more cost effective simply to invest in a basket that mimics the market.

The popular view is that the sub-prime crisis arose from the belief in market efficiency and that this belief underlies the crisis. Harford makes an interesting point: true believers in market efficiency would have wondered how safe (AAA securities) could yield such high returns and would have stayed away from these.

I guess the point about the crisis is that the banks ventured into activities that are more the preserve the capital markets; poor regulation allowed them to do so. Capital markets may not be efficient at all times but that does not diminish their role. Banks too have their traditional role but they must be careful not to stray away from it and involve themselves heavily in capital markets.

The Nobel:how the news is given out and what makes it great

Nobel Laureate Peter Higgs chose to disappear on a holiday without his mobile to evade the media frenzy that follows the announcement. He must have been pretty sure he would win- and, of course, he was heavily tipped to.

How the news is given and how it is received is a story in itself- and it's well told here. Often, people are disbelieving: how could they be sure it's not a hoax? Sometimes, there is a stunned silence. At other times, people just want to be by themselves to digest the enormity of it all. Those tipped to win will be more than a little tense on the given day - if it's a Tuesday, it's Chemistry, Wednesdays are for the Physics prize-and Economics the following Monday. These prizes are announced by the permanent secretary to the Royal Academy of Sciences of Sweden. Peace, medicine, literature- these are left to others.

FT has a good article on why the Nobel remains the most sought after and respected, despite attempts by other endowments to outdo the Nobel in terms of money.

America Inc rules again

American firms have muscled their way back into nine of the top ten slots amongst global firms in terms of market cap. In 2009, only the US had only three firms in the list. Post-crisis, it seemed the US was headed for a decline. For the nth time, the US is to prove the naysayers wrong. The US economy is recovering better than Europe and it's emerging markets that are slipping up of late.

The Economist gives the reasons why America's renewed ascendance in the business world:

A perky stockmarket is partly responsible. The euro crisis has killed off any hope that more firms from the euro zone might scale the rankings: the currency block has just four firms in the top 50 (see article).
Two deeper factors are also at play, though. First, America’s mix of resilience and renewal. Three of its nine biggest firms have their roots in a 16-year period in the late 19th century—Exxon, General Electric and Johnson & Johnson. Their durability reflects their powerful corporate cultures. But the country still does creative destruction, too. IBM and Intel have slid down the rankings to be replaced by Apple and Google. Chevron, an energy firm, has gone from a laggard to a world-beater. Success has been anything but parochial. Six of the nine biggest firms sell more abroad than at home.

Second, the old rule that buying shares in state firms is investment suicide has reasserted itself. The world’s ten biggest state firms in 2009 have lost $2.2 trillion of value, or 60%, from their peaks. Lower commodity prices are only partly to blame. Investors now award most state firms stingier valuations than their private peers. Gazprom is worth three times its profits, versus Exxon’s multiple of 11. And although emerging economies have slowed, nimble private firms are doing fine. In 2007 investors gorged on shares in PetroChina when it listed in Shanghai, briefly making it the only firm ever to be worth over $1 trillion. Now China’s hottest corporate property is Alibaba, a private internet firm plotting a huge flotation.

The Economist may be exulting too soon over the falling fortunes of state firms. Nobody gave these firms the ghost of a chance of being highly valued, say, 10 years ago. But they did become a force to reckon with. With improvements in governance, restructuring and better market orientation, they could well reinvent themselves. The Economist had its ideological basis but it's too early to write off state-owned firms everywhere. 

Why McKinsey will stay at the top

Economist columnist Schumpeter takes a look at McKinsey's future while reviewing two books, one on the firm and another on consulting in general.

The big challenge to the to consulting firms comes from lower-priced competitors, some of whom use consultants who once worked for the big three. I doubt that lower prices will take away the bulk of the top three consultants' business- the companies who hire them are hardly the price-sensitive variety.

As Schumpeter correctly points out, McKinsey's strengths are talent, investment in knowledge creation and a network of alumni who are happy to use its services. In most companies, the people running them are so busy with operational matters that they just don't have the time or the mental space to strategise or even analyse information systematically. The bright minds at consulting firms do just that. Whether this adds value or not is not clear. But it serves a purpose akin that of the psychiatrist counselling patients:

Though lesser firms may be facing disruption, McKinsey dispenses a special sort of consultorial fairy-dust that is hard to replicate, and as much in demand as ever. The global ruling class is seized with a toxic combination of status-obsession and status-insecurity. Decision-makers also fear being swept away by one of Mr Christensen’s disruptive forces. They seek constant reassurance and reaffirmation from prestigious institutions. McKinsey knows better than almost anyone how to exploit this peculiar mindset. That will guarantee the Firm a solid future, even if no one can prove that its advice actually does any good.

Raghuram Rajan's maiden monetary policy

Rajan's maiden monetary policy produced a blizzard of instant commentaries. I thought I would wait and see how things pan out in the markets. The wait was worth it. I am not inclined to buy the contention that the policy is primarily about fighting inflation. I think it is more about maintaining currency stability.

Why do I say so? Well, the policy caused short-term rates to fall by a cut in the MSF rate. However, the hike in the repo rate will cause long-term rates to rise. The net effect should be an increase in banks' cost of funds and hence in lending rates. It cannot be otherwise if the policy is anti-inflationary. You can't have an anti-inflationary stance that causes lending rates to fall!

Rajan's maiden policy is undoubtedly anti-inflationary. But I would think that Subbarao's tightening in July was even more so. There was a rise of nearly 300 bps in short-term rates- and it was only a matter of time before long-term rates followed suit. That would have really slammed the brakes on growth. So Rajan has loosened policy somewhat, albeit at the short end.

If the focus had been primarily on inflation, then such a loosening would not have been warranted. The hike in the repo rate, which is meant to offset the cut in the MSF rate, is intended to maintain a decent differential between yields in India and those in the US ahead of tapering. It is a sort of preparation for the inevitable tapering of QE that lies ahead. Evidently, the RBI takes a rather grim view of what tapering would mean for India.

More in article in the Hindu, RBI focus still on currency stability.

Raghuram Rajan's diagnosis

Somebody sent me the link to an article on the Indian economic situation that Raghuram Rajan wrote just before he became RBI governor. It does not seem to have received the attention it deserves.

Rajan does not contend that the present situation is the result of serious economic mismanagement or that it can be rectified only through sweeping reforms, as many critics of the government do. Instead, his thesis - allow me to say that it is one that I have myself been peddling for quite some time- seems to be that the current situation is the result of a combination of adverse factors of a transient variety. They can be addressed through modest initiatives, it is not as if we need to unveil the entire panoply of 'second generation' reforms. I will let Rajan speak for himself:

In part, India’s slowdown paradoxically reflects the substantial fiscal and monetary stimulus that its policymakers, like those in all major emerging markets, injected into its economy in the aftermath of the 2008 financial crisis. The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared. So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption.

Moreover, India’s institutions for allocating natural resources, granting clearances, and acquiring land were overwhelmed during the period of strong growth. India’s investigative agencies, judiciary, and press began examining allegations of large-scale corruption. As bureaucratic decision-making became more risk-averse, many large projects ground to a halt.

Only now, as the government creates new institutions to accelerate decision-making and implement transparent processes, are these projects being cleared to proceed. Once restarted, it will take time for these projects to be completed, at which point output will increase significantly.

Finally, export growth slowed, not primarily because Indian goods suddenly became uncompetitive, but because growth in the country’s traditional export markets decelerated.

 And how do we fix these?

The immediate tasks are more mundane, but they are also more feasible: clearing projects, reducing poorly targeted subsidies, and finding more ways to narrow the current-account deficit and ease its financing. Over the last year, the government has been pursuing this agenda, which is already showing some early results. For example, the external deficit is narrowing sharply on the back of higher exports and lower imports.

Every small step helps, and the combination of small steps adds up to large strides. But, while the government certainly should have acted faster and earlier, the public mood is turning to depression amid a cacophony of criticism and self-doubt that has obscured the forward movement.

There is no suggestion in the above of serious economic mismanagement on the part of UPA II. True, the fiscal deficit increased to an uncomfortable level post the crisis. But that is at least partly because the sharp slowdown in growth in recent years- caused, to  a large extent, by the sputtering of the Eurozone and the rest of the world- just could not have been anticipated. 

IAS/ IPS officers can now get medical treatment abroad!

I haven't seen any news item about the above, and I got to know about it when I read a great piece by Rama Baru in the Hindu:

The Government of India’s Department of Personnel and Training (DoPT) has decided to reimburse approved expenditure on treatment abroad, for a defined range of medical conditions, for officers of the Indian Administrative Service (IAS) and Indian Police Service (IPS). In doing so, it is extending to them a benefit available to Members of Parliament and officers of the Indian Foreign Service (IFS) when posted abroad. In addition, the travel and treatment costs for the officer and an attendant will be borne by the government. The order confers benefits over and above the entitlements under the Central Government Health Scheme (CGHS).

The existing rules, according to Baru, are as follows: 

Existing rules permit civil servants to secure reimbursement for medical treatment abroad or at a private hospital in India based on what it would cost to secure the same treatment in a private ward at the All India Institute of Medical Sciences (AIIMS), New Delhi.

If the government wishes to reimburse treatment of IAS/IPS officers at actual rates at a private hospital in India (and not at the AIIMS rate), it would be understandable. Allowing officers to go abroad for treatment is a different matter. The move, alas, will only reinforce popular perceptions of the collusion between politicians and babus in appropriating the spoils of government. The conclusion that most people will draw is that now that the politicians have done the babus a big favour, they can count on the babus to help them out where required.

I do not know whether MPs have raised this issue in parliament; if they have not, that would not be a surprise. Netas already enjoy the privilege that the babus will now get.

PS: After writing the above post, I checked the news online. It appears that medical treatment abroad will be permitted only for certain complicated ailments, which are mentioned in the order. Presumably, these are ailments for which comparable treatments are not available in India. This point is not properly reflected in the article I have cited. I have had to tone done my criticism somewhat and have modified my original post accordingly. I am hesitant to take my criticism back entirely. Which ailment requires treatment abroad is a matter of judgement and  such judgement, in our scheme of things, may end up being exercised independently of the merits of a given case.

Modi for PM: why did Advani want to wait until November?

Advani (and, until the last minute, Sushma Swaraj) is said to have asked the BJP top brass to defer Modi's anointment as PM candidate until November. Many people see this as mere pique on the part of the old warhorse or even a mere stalling tactic: put off the decision first, then get it spiked. Veteran columnist Rajinder Puri has a more plausible explanation:

What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes.......

....In November all the BJP units going to the polls are expected to comfortably win with or without Mr. Modi’s support. Except the Delhi assembly election in which the BJP sits in opposition. Delhi therefore will test in November how far Mr. Modi’s perceived charisma can deliver results. That is why perhaps Mr. Advani and Mrs. Swaraj want to delay Mr. Modi’s candidature as next PM till after the November poll. If BJP cannot win Delhi there could be serious rethinking and the party would need a prime ministerial candidate acceptable to potential allies who would be badly needed. 

Puri also suggests that, in the event that neither the BJP nor the Congress is able to form a government, there could be an effort to install Mr Pranab Mukherjee as PM. 

In November all the BJP units going to the polls are expected to comfortably win with or without Mr. Modi’s support. Except the Delhi assembly election in which the BJP sits in opposition. Delhi therefore will test in November how far Mr. Modi’s perceived charisma can deliver results. That is why perhaps Mr. Advani and Mrs. Swaraj want to delay Mr. Modi’s candidature as next PM till after the November poll. If BJP cannot win Delhi there could be serious rethinking and the party would need a prime ministerial candidate acceptable to potential allies who would be badly needed. - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf

What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes. - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf

What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf

What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf

What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf

What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf

What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf

A spy novel- in more senses than one

Does the name Valerie Plame mean anything to you? Well, during the second Iraq war, she shot into unwanted fame as a CIA spy who was keeping tabs on Iran. And the people responsible for her getting unmasked were none other than those in the inner circle around President George Bush. They were upset that her husband, a diplomat, was not toeing the official line about Saddam Hussein having weapons of mass destruction- and sought revenge in the pettiest of ways by exposing his wife, who had spent many years living dangerously for the CIA. Plame's life became hell thereafter, with friends deserting the family and the couple getting death threats and what not.

At that time, Bush is said to have quipped rather callously that Plame was "fair game", meaning it was okay for his buddies to go after her. Plame wrote a book about the affair which was then made into a movie. The movie was a hit not least because the heroine in real life was everything you expect a lady spy to be - blonde, beautiful and very bright. Although Plame did tell interviewers that women, who were spies, did not necessarily conform to the James Bond version. As she put it then, the CIA had not invested a huge amount in her training so that she could go "horizontal".

Now Plame has come out with a spy novel, Blowback. Gillian  Tett reviews it in FT. Tett's conclusion is sobering:

The next time I read a newspaper story about western efforts to prevent Iran from obtaining a nuclear bomb (or Syria from spreading chemical weapons), I will ponder the twists of that Plame-cum-Pierson tale. If nothing else, it is a timely reminder that behind all the stories about Iran and Syria there is a second tale too: hordes of hidden young intelligence officers toiling away to make sense of events, in tough and (often) thankless jobs. And, for the most part, battling in complete silence.

QE reversal: does India face a financial emergency?

This is the question more than one reader of this blog has posed to me in recent weeks. I hope the appreciation of the rupee and the rise in the Sensex in recent days has assuaged their concerns somewhat. My own view has been that, yes, it is a challenging time but hardly cause for panic. The fall of the rupee below Rs 65 was a case of overshooting, so it is no surprise to find it oscillating between Rs 60 and Rs 65.

I guess the key question is: what happens when the Fed reverses QE? It is expected to make its intentions clearer on September 18. There is a view that this will unleash a tidal wave of withdrawal of funds that will devastate emerging markets, as in the East Asian crisis of 1997; India is in for a beating.

I had a look at the data on FII flows, and I am not persuaded. Since end May, when the Fed first gave indications of tapering the QE, only $3 bn has left the equity market (until September 6); most of the flight has been on account of investment in debt, $9 bn. Cumulative FII investment in equity is $137bn at the moment; that in debt only $28 bn. Even if more of the investment in debt leaves, that is not an issue. We face a serious problem only if there is an exodus of equity. The considerations underlying debt flows are quite different from those underlying equity flows. Debt will flee the moment interest rates in the US and the advanced world perk up; equity flows will flee only if growth opportunities change dramatically.

In the East Asian crisis, the exodus happened mainly account of foreign bank loans (which is similar in characteristics to FII investment in debt) and domestic residents taking their savings abroad, thanks to full capital account convertibility. (That is why the reduction in annual remittances of Indians from $200,000 to $75,000 is a sensible move). FII flows were not a crucial factor in the  East Asian exodus.

There are other differences as well between East Asia in 1997 and the current situation. I highlight these and make the point that emerging markets remain vulnerable in the long-term to advanced economy monetary policies unless they impose some restrictions on volatile capital flows- all this in my article in the Hindu, Easing troubles in the long run.

Raghuram Rajan's arrival

The  media went to town about Rajan's "rocking" arrival speech. Although Rajan had been careful to downplay expectations by warning that he did not have a 'magic wand' for India's problems, the media came close to suggesting that he was on his way to waving away India's economic woes. Some of the stuff I heard on TV sounded absurd: a century on debut; no, a century in the first session of play; and if this was his performance in the first session, what might one expect in the slog overs? Even by the abysmal standards of private channels these days, this was the pits.

Ok, so what did we have on the first day? Monetary policy, whether interest rates would be lowered or kept where they are, was deferred to the policy statement, which itself was deferred by a few days. RBI to offer low-cost hedging for banks that bring in NRI deposits in foreign currency. But this means the RBI is indeed focusing on currency stability and not just price stability. At the very least, commentators might have noted that Rajan was not strictly adhering to the ideology of focusing on price stability alone. 

Most of the announcements were about financial sector reform, mainly banking. New bank licenses to screened by a committee headed by Bimal Jalan (Jalan, if I am not mistaken, has had reservations about corporates getting into banking); a committee on financial inclusion under Nachiket Mor; SLR to be brought down once government finances improve, which is easier said than done.

Bank branch licenses to be made freely available except in the case of banks where RBI has concerns. Much was made of this but, as many bankers pointed out subsequently, getting branch licenses is not a problem today. Getting banks to apply has the effect of imposing a certain discipline on banks- they get to thinking through the commercial and other aspects more carefully- and it is also a means for the RBI to convey messages to banks (on say, customer service). So dispensing entirely with branch licensing might sound like "big bang reform" but may not be that.

What else? An inflation-linked bond. How will these be sold? Through banks? If so, what will be their motivation to push these at the cost of their own deposits. And, if it is sold through other agencies and works perfectly, what happens to deposit growth, the sheet anchor of our banking system? Gold bonds might be a better idea, so that idle gold is monetised and the need for gold imports is reduced but Rajan was silent on this. As for going after promoters with high NPAs, that's too much to expect in India's brand of crony capitalism.

It was left to FT to strike a cautionary note in its Lex column. How to stabilise the rupee is the main issue and this might require work outside the RBI; the G-20 declaration to create a fund for the purpose is a sign that all central banks feel helpless in the wake of the impending reversal of QE, not just the RBI.  Good to have a classy governor at the RBI but any euphoria is misplaced.

Subbarao rocks (or plans to)

Subbarao plans to learn Salsa after retirement. Other things on his wish-list include: making up with his mother-in-law (who is upset about soaring prices), watching matinee shows and studying math an linguistics. One thing he will not miss: having to say something profound every time he opens his mouth (he says he was asked about the world economy when he was at a wedding at 4 00 am!) For more cracks, see this post.