GST fest in MINT

Vijay Kelkar, Poddar and Baskar continue with their long think-pieces on GST. They had written one last month on the formation of the GST Council. One would presume that most of what they write in this op.-ed. is backed up by some data analysis and scenarios-based analysis. For example, suppose one compensates for higher inflation rates with DBT as they recommend, would it not be a double whammy on inflation? A legislation that boosts prices one-time combined with a fiscal transfer?

Just as young economists and analysts ignore political economy, senior journalists focus more and more on political economy aspects. Wisdom for others lies in judicious combination of the two. Rajrishi Singhal focuses on the political economy aspects. For example, IRS vs. IAS.

He also talks about the possibility of ‘Federalism’ being upended if BJP ruled States win some upcoming State elections. That fear, even if it did not exist before, might be planted in some minds after this piece. The FM and his bureaucrats must go out of their ways to offer reassurances on that.

That made me think whether this exercise of implementing a completely a new architecture for indirect taxes in the country should not also have roped in behavioural science experts, coaching the MoF Officials, GST council heads, etc., in the art of persuasion, salesmanship and winning consensus, etc.

This is a drastic change involving processes that require multi-disciplinary talent.

So many angles must be kept in mind and unintended consequences must be tackled as they arise.

Remya Nair’s piece actually suggests that even as Dr. Kelkar and his co-authors wrote something, the GST council has gone ahead and decided on something else – multiple rates. The idea of cess to compensate States seems a bit whacky, at face value. The objections seem legitimate. Why not a higher GST rate on ‘sin goods’?

The people involved have my sympathies and even admiration. It is humongous exercise requiring so many skills. I wonder if human beings actually have that. The one they should have is the recognition that they do not have ’em all and seek advice, counsel and help, without shame. Will they do it?

Further, will the people concerned have the physical energy to concentrate for long hours? Will that be addressed during meetings?

Home prices and inflation in India

Karthik Shashidhar has a piece in MINT today on how inflation is generated in India. It is a good piece that shows the expected (intended) and the unintended consequences.

(1) This paragraph could have been better worded to make it clear that he was talking about rents and not home prices because the latter does not figure in the CPI.

“Both these come together to raise the market clearing price for rental homes, which then results in a higher housing index and consequently a higher CPI. In other words, given the weightage of housing, and that it is measured using rentals only, a higher policy rate can actually result in higher CPI.”

(2) The theoretical basis for this paragraph is somewhat incomplete, if not incorrect:

The idea behind monetary policy influencing prices is that higher interest rates result in higher spending on interest-sensitive factors which reduces demand for other items, which, in turn, results in a drop in inflation. In other words, spending on interest rate-sensitive expenses can crowd out spending on other stuff, which can mitigate the price rise.

He is focusing on inelasticity of interest payments since it is a contractual obligation. That too is a factor but that is not the main (theoretical) purpose of higher rates.

Interest rate is the price of money. Everything else being equal, higher the prices, the lower the demand for money. Liquidity demand will drop and spending will be lower and money will be left in banks as savings. That is, savings rise consequently.

Further, if cost of capital raises, at the margin, some projects will not clear the hurdle rate and investment demand for funds too will decline.

(3) On a different note, Urjit Patel has written a paper last year that shows that, in a world of SLR and government claim on banking resources, lower interest rates can actually decrease credit availability and hence, not meet credit demand.

That is another unintended consequence along with what Karthik writes about higher interest rates leading to reduced housing demand and hence upward pressure on rentals.

Agriculture reforms

I read this long piece published in MINT yesterday with great interest. Makes for good reading. These were my immediate thoughts:

We notice some small evidence of a welcome change and we are pleased about it. That is fair. But, as the article points out, towards the end, we touch the tip of the ice-berg.

The problem is big and the comments made by an unnamed ‘Agriculture Expert’ about the failure to reform the APMC too are telling.

In other words, the big question of whether it would scale, would the reformers have the energy and commitment to see it through fully and whether it would sustain remain very much open.

Our politicians should, in fact, make one or two such initiatives their signature initiatives and see them through to the fullest, including institutionalising it.

They fail to realise the signalling potential that such an approach would have, on other matters too. The spillover effect would be substantial. Some of them would begin to happen on their own, when bureaucrats, Minsters and other CMs notice that one person carried it through to the fullest.

Now, all those who have vested their interest in the status quo do cosmetic changes and bide their time for the politician to be distracted.

Nonetheless, as a work of journalism, it is very well done. High marks to Abhiram Ghadyalpatil.

Big risks

Look at some of these stories:

Something called ‘bird dogging’ – disrupting your opponent’s political rally by creating trouble.

Email received by Ms. Tulsi Gabbard for having dared to support Bernie Sanders in the Democratic Primaries.

Names of media organisations and the amounts they donated to the Clinton Foundation

John Podesta’s mail (wish) on the identity of the San Bernardino shooter is very troubling.

If Mrs. Clinton won, she would owe so much to so many that it would be reasonable to expect that they would extract their pound of flesh for their support all these years. People who receive support for just causes won’t owe anything back. Their cause would be their shield. Indeed, it is a privilege extended to others to support a just cause. Not so in other cases. These stories are but a sample. They indicate the risk of a massive inability on her part, if she won, to govern in the name of and for the United States of America and its people.

These revelations and campaign tactics (plus other tactics that I have not named) have diminished American democracy considerably in the eyes of the world and have vastly eroded its prestige and reputation. Most have not applied their mind to it. Duterte thumbing his nose at the United States is just a curtain-raiser. It will have very big ramifications internationally and will tilt global power balance against America, adversely. That is a big global risk, post-election.

Second, in the big picture, quite apart from the well-known risks like terrorists, rogue-nations and their supporters, the so-called liberals constitute one of the biggest risks to the world with their staggering certitude, their stupendous hypocrisy and the extraordinary immoral license they assign themselves to pursue any means to achieve their ends.

Here are some examples:

Ezra Klein’s tweet is so cringe-worthy.

This tweet has arrogance written all over it.

Here is one exception I could find: Chris Balding. At least, he understands the hypocrisy of selective outrage.

Trump deserves all the outrage for threatening to jail Clinton, however, where were you during the IRS scandal which continues? [Link]

Obama admin explicitly went after its political opponents and absolutely nothing has happened. This behavior in either party is reprehensible [Link]

If you aren’t standing up to condemn all forms of using power of the executive to target political opponents, you are a rank hypocrite. [Link]

In any case, Chris Balding is a digression. The point is about the risks to the US and the world in the circumstances and the manner in which Ms. Clinton is likely to win. I had already written about it in Swarajya.

The diminution of America, an election victory tagged with a big IOU to many, elite arrogance, hubris and hypocrisy constitute big risks to the world.


Made for each other?

Few days ago, Bloomberg had a fascinating story of how the Libyan Investment Authority had lost more than a billion US dollars on wrong investment advice from Goldman. It is a riveting read. Some paragraphs that are important, in my view, of course:

The talk at the LIA, Kabbaj learned, was that Qaddafi wanted to emulate the leaders of Qatar, who’d invested in the shares of troubled banks. One target was Citigroup, which Abu Dhabi’s sovereign wealth fund had put $7.5 billion into less than two months before. On Jan. 15, Kabbaj texted the head of the LIA’s equities team to note that Citi shares were down, creating a buying opportunity: “It is time to do the trade!!!”

The Libyans made two trades later that month, totaling $200 million. But this wasn’t a simple purchase of shares—it was a complex derivatives deal, or as Goldman Sachs described it later, “a cash-settled forward purchase agreement for Citigroup shares with downside protection in the form of a put option at the same price as the forward.” More simply, if Citi shares rose, as the LIA was betting, the fund stood to gain many times its initial investment. If the shares fell by a certain amount, the fund could lose everything. The structure was potentially more lucrative than a conventional purchase of equity and also significantly riskier—while resulting in far higher profits for Goldman.

Whether the LIA understood it wasn’t actually investing in Citi is disputed. Whatever the case, the fund proceeded a few weeks later with another large deal, a similar wager on the French utility EDF Group that cost it almost €120 million (then $175 million) in premiums…..

…. Like the Citi and EDF deals, they were “synthetic”—the LIA wasn’t actually buying shares in the companies concerned, in this case Banco Santander, Allianz, Eni, and UniCredit. Kabbaj later called it “one of the biggest orders that GS has ever been given on single names.” [Link]

Bloomberg has updated the story to reflect the development that a US court has dismissed the claims brought by the Libyan Investment Authority against Goldman Sachs.

Silly season of referendums

First, we had David Cameron’s referendum on Brexit. Regardless of the inevitability of such a backlash (read Hans Werner-Sinn’s sensible piece here), it was perhaps a stupid thing to do – less than a year after winning a more comfortable mandate to govern. Perhaps, it was as much hubris as it was their blissful ignorance of the ground reality that led to the referendum being called.

Then, we had the Colombian government putting its peace deal with rebels to a referendum vote. They rejected it.

Now, in the coming months, we have the Italian referendum. Contrary to popular perceptions, the referendum is not about Italy’s continued membership of the single currency. It is about reforms to the way their Senate functions. But yet, it has somehow morphed into a referendum on the Eurozone itself!

Whether they are stupid or if it is by design, it is quite surprising to see politicians contrive to conjure up such impossible situations for themselves. May be, secretly, some of them do want to see the existing order change? IF so, they are darn smarter than we give them credit for.

Groping around

FT View writers are gloating that the markets have punished the ‘stupid’ Theresa May for her hard talk on Brexit. They have latched on to the infinite wisdom of financial markets to support their case.

They conclude their piece on this note:

investors are marking down the UK’s economic prospects by selling its currency. [Link]

Is that so? How do we know? We do not know. It is our ex-post guesswork of the market action. Short-term movements could be noise. Brexit would, ironically, prove to be a problem at one level, for the UK, only if its example is followed by continental European nations. Then, all countries can and will engage in competitive devaluation -something that Europe wished to put an end to. Particularly, Germans.

But, on the other hand, if they hang together, then it might be to the advantage of the British, because it is somewhat inconceivable that the Eurozone would undertake structural reforms. There is neither political will nor credibility nor the mandate to pursue tough reforms that would, for a while, cause economic pain only with a promise of some future redemption. The populace is not ready for that. This is the age of instant gratification.

So, if they hang together with scelerotic economies that stagnate and if the currency (Euro) remains uncompetitive, UK has an opportunity to get back some manufacturing mojo, if it works hard at it. No guarantees but together with robotics and a weak currency, it might work.

Therefore, it is a bit too premature to ‘gloat’or to warn – in diplomatic and civil language – that the markets are indeed marking down UK economic prospects and that they would be right.

Markets – to the extent something like that still remains in the Western world with central banks’ policy interventions in bond markets (and potentially in stock markets) and with sovereign wealth funds active in all asset classes – get things wrong more often than they get right.

Well, that is an entirely different story as to why they frequently get asset prices wrong. We must ask some of FT’s favourite central bankers.

At the least, FT View writers should read the paper, ‘Stock Returns over the FOMC cycle’.  The authors of the paper have been civil. But what they have uncovered is nothing short of a scandal. No less than that of deleted emails.

Since it is the season of commentary on ‘groping’ and since the FT has been second to none in writing about it, it is delightful to see their vain grope here for some elusive logic and objectivity.