I had mentioned this speech by the Sri Lankan Prime Minister made in November in my weekend links of 27th February 2016. I should have highlighted one point, in particular:

The Mattala Airport and the Hambantota Port, which have become white elephant ventures, will be transformed into profit making initiatives with changes and modifications.

If I am not mistaken, Hambantota Port was developed by the Chinese. Perhaps, Jokowi should just place a call to Colombo before it is too late. They changed their mind to award a high-speed rail project to the Chinese.

Evaluating the budget

Normally, I look for the following, given my macro orientation

(a) Assumption on nominal GDP growth. Is it realistic and even conservative?

(b) Assumptions on growth in various revenue items – corporate tax, personal income tax, excise and customs

(c) Assumption on Public Sector Asset Sale Amount

(d) Assumption on dividends from PSU

(e) Growth in Overall Expenditure and growth in Overall Revenue – how far they are in or out of line with last decadal trends

(f) Then, expenditure on specific subsidy items – food, fertiliser and oil. Of course, these could be losing their importance. It is a good thing.

(g) The outcomes statement on last year’s budget promises. (In this budget, I would be looking for some update on MUDRA performance vs. expectation).

(h) Primary and Revenue Balance achievement and the projections for both

In this specific budget, I would be looking for

(a) The delivery on the promise of removing ad-hoc exemptions and lowering corporate taxes.

(b) The roadmap for implementation of Parthasarathy Shome and (if possible) Justice Easwar committee recommendations on tax law simplification or actual steps, where feasible.

(c) Long-term farm sector answers – irrigation, productivity and risk management solutions rather than one-off giveaways. Export liberalisation for agri. products would be welcome too.

(d) Long-term reforms – capital gains exemption time-frame extended to 3 years.

(e) Securities Transaction Tax to be hiked

(f) Any other reform to re-invigorate retail participation in stock markets (have no specific idea in mind)

(g) Any fine-tuning to the gold monetisation scheme

(h) An update on the Fiscal Federalism of the last year and continuation.

(i) Bank recapitalisation measures coupled with governance reforms. The latter is strictly not part of the budget but an imaginative, meaningful, purposeful, measurable (i.e., monitorable) package would be very welcome.

(j) Any initiative to shore up India’s economic data quality, reliability and timeliness

What I would not like to see

(a) Too many new schemes

(b) Too many new revenue-spending initiatives

(c) One-off populist schemes for farmers (certainly not a loan waiver)

(d) Any tax amnesty scheme

(e) Fiscal slippage without rigorous explanation and monitoring. Ideally tied only to bank recap.

(f) Mindless incentives for financial products (derivatives, futures, options) trading

Bonuses I would be pleased about

(i) A more purposefully written Medium-Term Fiscal Policy Statement, Macro-economic framework statement and Fiscal Policy Strategy Statement. Right now, there is considerable overlap in all three and the government’s commitment to them is perfunctory. If the Government makes them purposeful, streamlined and take them seriously, that would signal a different government with a different approach to governance.

(ii) Transparency in the budgeting process

(iii) A better and internationally accepted framework for Budget Accounting.

(iv) Any other that I don’t see now but can recognise when I see it 🙂

Intellectual battle vs. policy battle

In his review of the book Keynes Hayek: The Clash that Defined Modern Economics (W.W. Norton & Company. 355 pages. $28.95), David R. Henderson wrote the following:

I shouldn’t leave this review without noting one major mistake Wapshott makes in discussing the recent financial crisis. Wapshott writes, “The mayhem suggested that the decades-long experiment in allowing barely restrained markets to generate growth and prosperity had failed.” In fact, markets, in Britain and in the United States, have been heavily restrained for almost a century. It’s true that free-market economists until recently were winning the intellectual battle. But they haven’t come close to winning the policy battle. Indeed, many of us think that if we had, the financial crisis would have been much less severe. [Link]

Intellectual battle is relatively easier to win than policy battle which is an outcome of the interplay of many different forces of which the intellectual force probably has one of the smallest weights!

The comments on the readability of Keynes’ ‘General Theory…’ are very interesting.

I must add that David Henderson wrote this blog post in December 2011.

Despite their intellectual battles, this is what Hayek had to say on Keynes on the latter’s death:

“the one really great man I ever knew, and for whom I had unbounded admiration. The world will be a very much poorer place without him.” [Link]

The quote is from a letter that Hayek wrote Keynes’s widow shortly after his death in 1946.

Weekend links – 27.2.2016

Pramit Bhattacharya weaves together many different research papers and findings on economics education.

Somalia leads the world in heralding a cashless society.

The value of goods that crossed international borders last year fell 13.8 per cent in dollar terms — the first contraction since 2009.  I think 2016 decline will be worse than 2015.


India is an outlier with its low tax/GDP ratio. Some interesting charts from Praveen Chakravarty and Vivek Dehijia.

India is also an outlier with its highly fragmented farms and factories. Explanations as to why it is the case? Jerry Rao has one here. Rigorous academic investigations needed.

According to Jayant Sinha (MoS, MoF), four pillars of the budget will be poverty eradication, farmers’ prosperity, job creation and a better quality of life for all Indian citizens. These are permanent planks of government policy. Does not give much clues as to what the budget, in particular, can do and should do.

The government’s budget promotion marketing strategy. H…mmm

Andy Mukherjee on the bad idea of a bad bank for India

T. N. Ninan strikes the right note of caution for Modi. Wailing against conspiracies is usually not a good sign. He has faced them all through his political career.

LIC includes the third gender in its forms now.


EU businesses warn of potential trade strains from China’s overcapacity. In eight industries, they say that capacity utilisation has declined in China, since the crisis.

China speaks out against EU steel tariffs imposed last month.

A very chilling article (from February 19), in a way, on the Chinese President’s attempt to seek full control of the media.

Saudi Arabia

Jack Kemp has a good piece (dated Feb. 18) on Saudi Arabia vs. US shale producers. Saudi credit rating lowered two notches on Feb. 17.


A conventional explanation of what ails Brazil.

Uber driver suspected to be involved in Michigan shooting that killed six people. Shooting in Kansas leaves 4 people dead. Real intolerance in the US.

A woman’s plastic surgery (cosmetic) in Brazil turned her into a kleptomaniac, briefly. The story seems to have ended well.

Delightful news: Digitally weary users switch back to real smart phones – stupidly called ‘dumb’ phones.

An interesting speech by Sri Lankan Prime Minister on Nov. 5 on reinvigorating Sri Lanka through market economics (ht: Café Economics)

Money Changers helping ISIL – unwittingly or otherwise.

Geo-politics watch

The Centre for Strategic and International Studies says that China building high-frequency radar installation in South China Sea is a bigger threat to the balance of power in the region.

US wants to deploy anti-ship missiles soon (what exactly does it do?) in South China Sea.

China says that the United States has no place in South China Sea deployment or disputes.

US wants many countries such as Australia conduct ‘Freedom of Navigation’ operations like it did, in the South China Sea.

Australia will boost its annual defence spending by 80% within a decade. Australia is particularly concerned by the unprecedented pace and scale of China’s land reclamation activities,” says a white paper, which warns that territorial disputes in the East and South China Seas have “created uncertainty and tension” across the region.

FT reported on Feb. 15 that Russia and Turkey could be edging closer to direct confrontation in the (Syria’s) country’s increasingly internationalised war.

Russia says that cross-border shelling by Turkish artillery in Syria is unacceptable.

A quick short summary of the situation that Turkey finds itself in. This is from February 19.

Turkey wants the US to declare YPG (a Syrian-Kurdish militia) a terrorist organisation.  US is not ready since YPG is helping US fight IS in Syria. Turkey are US are NATO members who are sworn to protect each other from external threats.

Turkey is not so hot on the ceasefire brokered by the United States and Russia

Europe (including the UK, for now)

Brexit. A horrible word. But, from now on, we have to track it too. Referendum is on June 23. Forty-eight percent of Brits want UK to stay in the EU. I think it would go that way.

Standard Chartered Bank declared its first loss since 1989 and is looking to claw back bonuses from those found guilty of compliance and risk management breaches.

North America

Defaults in sub-prime auto loans on the rise, to levels not seen since 2010. This is in the US

Justin Trudeau is ready to break all his three promises on the fiscal front. Modi should ring him up before Feb. 29 and take talking points.

Productivity and Gordon

Just watched a nicely-filmed 8-minute segment in PBS on Robert Gordon’s new book, ‘The rise and fall of American growth’, filmed for effect, mostly by way of a debate-like conversation between Prof. Robert Gordon and Erik Brynjolfsson of MIT. The interviewer is dressed in a nice old-fashioned suit and hat. All good stuff.

In that 8-minute long interview, at around the 6th minute, Erik Brynjolfsson says that pessimism about economic stagnation was at its highest in the 1930s but America had the best twenty years of economic growth after that.

It is total conflation (or, ignorance or both) of the causes that contributed to growth in the 1940s (second half, may be including first half due to production of weapons!) and in the 1950s. A lot was destroyed and hence a lot had to be rebuilt. Period. As simple as that. Nothing more; nothing less. Why confuse that?

If one were to be charitable to Erik Brynjolfsson, one could say that there were multiple causes other than productivity and technology gains and collectively, they perhaps mattered a lot more than these two factors.

If anything, such a comment is proof, if it were needed, that technology has no answer for human cognitive limitations – deliberate or unintended.

Quick take on the US data

University of Michigan consumer confidence index fell sharply in January. Manufacturing in the Fifth District (Federal Reserve Bank of Richmond) entered contraction territory. Housing Starts fell. Finally, US Services Sector PMI shows signs of cracking. But, Dow-Jones index rallied from -200 points to + 53 points by the close on Wednesday, 24 February 2016. May be, it rallied because of these news. More bad news means less Fed tightening or even reversal of policy into zero or negative rates and helicopter drops.

Pride and blushes

Madan Sabnavis of CARE Ratings has an article in ‘Financial Express’ that exhorts investors and entrepreneurs to stop complaining:

The time has come for investors and entrepreneurs to stop complaining and take advantage of all the good work that has been done by the government. We need to show that we react to positive impulses from the government before asking for more. It would also be interesting in case foreign agencies list out what they expect in terms of reforms, with some anecdotal proof of such reforms bringing about big changes in their investment, or opinion of countries which have gone for the same. Otherwise, it appears that analysts are just complaining for the sake of it. There is evidently need for introspection whenever anyone asks for more.

At a philosophical level, it is hard to argue with this. We all need to do what we can before asking others to do more for us.

This is the same point that I had advocated in my MINT column on Tuesday, for the Commerce Ministry: Show what the Special Economic Zones (SEZ) had done for the country’s exports before asking for concessions to be retained or expanded.

This is the same advice I have been giving (evidently in vain) to Martin Sandbu who keeps batting for more monetary stimulus in the Western world. This is the most recent advice.

However, Madan Sabnavis had listed several of the government’s initiatives. Even the government might be embarrassed because some of them are too recent. It is too soon to call them a success or a failure. Second, such a list fails to take into account what the government could have done differently. For example, in the extreme, all the government measures could have been inferior to other alternatives that existed. Of course, it is a theoretical argument. The point is that listing the decisions without even a cursory evaluation does not make for an effective case.

Of course, the list contains some substantive measures the government has taken:

  • FDI has opened up to defence and railway equipment, and limits for insurance have been enhanced.
  • the new crop insurance scheme of the government
  • Skill India, which addresses lacunae for generating such skill-sets that are currently missing and provides an opportunity for the demographic dividend of the country
  • Pradhan Mantri Jan-Dhan Yojana, payments banks, small banks are major reforms in financial inclusion

T. N. Ninan in his latest ‘Weekend Ruminations’ dishes out liberal praise and criticism to the government. He chides some Ministers for faking numbers while he lauds the real achievements but he lists several positives:

There can be no doubt that, in 21 months, it has been able to register improvement on several economic fronts. But the tendency to make exaggerated claims diverts attention from what is real, and affects credibility.

A reality check shows that the pace of road construction in 2013-14 (the year before Mr Gadkari took charge) was more than 11 km per day, not 2 km. This year may achieve 16 km per day, so Mr Gadkari’s efforts at renewed momentum in highway construction are bearing fruit.

Mr Goyal has managed improvements on other fronts – coal production, for instance. Also his focus on tackling the discoms’ financial problems and removing transmission bottlenecks are what the doctor ordered, since the issue now is not the old one of supply shortage, but demand shortfall.

As for making in India, leading makers of fighter aircraft like Boeing and Saab have said they are willing to re-locate assembly lines to India, so some breakthroughs may well be coming.

Groups like Tata and Mahindra, and companies like Bharat Forge and Larsen & Toubro, are being encouraged to get into localising defence production – encouragement that was missing from the last government. [Emphasis mine]

New railway locomotive factories are being built, and the solar drive is making headway.

That is an impressive list that supplements some of the substantial decisions that I had plucked from Madan Sabnavis’ article.

In fact, both the lists might have missed out even more important ones such as the Swachh Bharat Mission. That it had inspired a lady from Nagaland, Ms. Temsutula Imsong to undertake a cleaning of the bathing ghats in Varanasi and beyond is a very lasting and impressive testimonial to the Swachh Bharat Mission. To sample her work, check out one of her recent tweets. It is a bit of a pity, then, for the government to go for a cess in the name of ‘Swachh Bharat’. That is old-style governance and economic policy.

Clearly, the government’s initiatives on self-attestation and self-certification are important too. Some one needs to make a start to making India a society of trusting individuals and ‘economic agents’. Otherwise, much of our daily activity will be dedicated not to value creation but to character verification.

The Prime Minister’s personal initiative on the surrender of LPG Cylinders by higher income classes was a good case of leadership. If the results are not commensurate, it is more a reflection of the attitude of the Indian society than that of the government. Hence, the government should not be squeamish about sharing the true achievement on this front.

On the introduction of Aadhaar, it is not widely appreciated that the Unique Identification Card may not have seen the light of the day, had the UPA returned to office. Under UPA II, the Home Ministry was batting for its own National Population Register and its own ID card.

When the government changed, Nandan Nilekani, the former Chairman of UIDAI, met the Prime Minister and got his consent for the adoption of Aadhaar. The rest, as they say, is history.

The government’s timely release of food inventory and the restraint it showed in fixing the Minimum Support Price for agricultural commodities played no small part in the taming of the inflation rate in the last two years. Of course, much remains to be done to bring the rise in cost of living to moderate levels structurally. But, that is a whole different story.

On administrative reforms, this government can look back with satisfaction at few things it has done.

This is what the Prime Minister said in the 6th Delhi Economic Conclave in November 2015:

“I have also instructed that the performance appraisal system for Income-Tax officers be changed. The appraisal should reflect whether or not the officer’s orders and assessments have been upheld on appeal. This will deter corruption and also motivate officers to pass correct orders,” PM Modi said at the 6th Delhi Economic Conclave here. [Link]

That could be a potential game-changer although one would not get that impression from the latest notice sent by the Income-Tax department to Vodafone on a case pending before arbitration.

Then, there was the article in DailyO in June 2015, followed up by another one in ‘India Today’ (yes, the same magazine that is edited by Rajdeep Sardesai) on how the Modi-government had dismantled the transfer posting industry. Not only that, it had managed to create a mechanism for the best officers to be placed in the jobs for which they had shown the best aptitude. Sample these:

Take the case of Sanjay Chadda, an officer in the Indian Railways. His expertise in economics came to the notice of the Modi government when he was a member of the committee headed by Bibek Debroy on railway reform. Next, he was posted as a joint secretary in the commerce ministry.

It is to the great credit of the Modi government and the PMO in particular, that in a short span, it has helped appoint 26 people as general managers and five members of the Railway Board, including the chairman in the most transparent manner which has no parallel in Indian Railways in the past 35 years.

This is from the article in ‘India Today’ in November 2015:

One of the unintended consequences of this new policy has been the end of the primacy of the IAS officers in all posts in Delhi. For the first time in recent years, officers from across central government services are being inducted to posts that were earlier “exclusively reserved” for IAS officers. The 89 non-IAS officers out of the 269 joint secretary-level posts at the Centre are believed to be the highest ever. Indian Revenue Service officer Aniruddha Kumar was appointed joint secretary, power; Indian Forest Service officer Amitabh Gautam was named joint secretary, agriculture; Darshana Momaya Dabral, officer of Indian Posts & Telecommunication Accounts and Finance Service, is now joint secretary and finance adviser, Ministry of Human Resource Development. [Link]

In fact, as I was writing this article, I came across a tweet by MP Jay Panda that the pursuit of administrative reforms by stealth by the present NDA government was continuing. He had retweeted Aman Sharma of Economic Times:

Non-IAS march continues in Joint Secy posts — seven new appointments sees 4 non-IAS postings, 3 IAS!

Then, there was a little-known development. In September last year, the Indian government relaxed its cabotage policy. I did not know about such a word before. Apparently, it means reserving coastal trade for national flag vessels. On 3rd July, the Ministry of Shipping sought comments and in September, ‘Times of India’ reported that the policy was relaxed

“to allow special foreign flagged vessels such as roll-on, roll-off (Ro-Ro), pure car carriers, truck carriers and LNG vessels to facilitate transportation of cargo along the country’s coastline.”

Two days ago, Business Standard reported that

Hyundai Motor India Ltd recently shipped 800 cars made at its Chennai plant to its markets in western India using a roll on-roll off vessel. The cargo was loaded at Chennai Port and it reached Pipavav Port in Gujarat last week. [Link]

This holds enormous potential and also provides impetus to improving inland waterways. So, they call can and do add up.

What are the glaring failures?

(1) This government could not cash in on the bonanza from the huge decline in oil price because it had to use the windfall to meet an impossible fiscal consolidation target that it had meekly accepted. When it took office, it started from a fiscal deficit of over 6% of GDP and not 4.1%. Hence, the oil price windfall (even a portion of it) could not be passed on but had to be used to shore up public finances. In other words, it failed to take the country into confidence on the fiscal deficit it inherited from the previous government.

(2) More broadly, failure to issue a white paper on the economic legacy inherited from the UPA government. For example, most of the dramatic rise in bank frauds related to advances over Rupees One Crore happened in UPA II. Most of today’s Non-Performing Assets (NPA) are of the UPA II vintage. UPA damaged the Indian banking system in two ways. Loans were made to cronies and normal loans became non-performing because it ran the economy to the ground.

(3) Its ‘Indra Dhanush’ project for improving bank governance is unfinished project. Actual and substantive changes in bank management have been too few to be touted as achievements.

(4) Failure to make much headway in the resolution of Non-Performing Assets with the Public Sector Banks.

(5) Failure to put an end to retrospective taxation

(6) Failure to understand the importance of few high-optic issues such as the tax dispute with Vodafone and privatisation of airports, to name two.

(7) Failure to communicate its real achievements – as in administrative reforms, in national skilling mission, in showcasing the work of ordinary folks like Temsutula Imsong.

(8) Failure to acknowledge, thank positive endorsements and to take credit for the same (Proof: T.N. Ninan’s Op.-Ed. and see concluding paragraph).

(9) Prime Minister’s voluble silence in the public space in India, except during election campaigns, resulting in the rise and strengthening of the perception that the government has lost control of its policy agenda.

(10) As the Ministry of Shipping has done, Ministry of HRD could also examine allowing foreign universities to set up joint ventures in the country, with majority ownership and repatriation of profits. It is worth a try.

What is the score-card, on balance?

The final word is better left to Raghuram Rajan, Governor of the Reserve Bank of India:

Macroeconomic stability will be the platform on which we will build the growth that will sustain our country for many years to come, no matter what the world does. Indeed, I am reminded today of the period 1997-2002 when India labored and reformed with only moderate growth, only to see a decade of high growth after that. [Link]

This blog post has been carried by ‘Swarajya’ magazine here.

Pro-business vs. Pro-Market

In his critical op-ed. on Donald Trump, Luigi Zingales presents useful distinctions between a pro-market and a pro-business businessman.

Among self-identified Republicans in a 2010 Booth-Kellogg survey, 43 percent agreed that “big business distorts the functioning of markets to its own advantage,” and only 22 percent disagreed. But the Republican establishment has happily become big business’s mouthpiece. This fracture became evident during the congressional debate on the Troubled Asset Relief Program: Many Republicans in the House voted against it, even though it came from George W. Bush, a Republican……

….. We cannot blame voters for being confused about pro-business versus pro-market politicians. The Republican establishment deserves most of the responsibility. Being pro-market means being in favor of competition and against excessive concentration, as Theodore Roosevelt was. Business executives are pro-market when they want to enter a new sector.

But when they become established in a sector, they favor entry restrictions, excessive licensing, distortive regulation and corporate subsidies. Those policies are pro-business (in the sense that they favor existing businesses), but they are harmful and distort a competitive market economy. [Link]

Feigned or real?

Martin Sandbu of ‘Free Lunch’ has a one-track mind when it comes to the power of monetary policy – quantitative easing, negative interest rates and helicopter drops of money – to fix everything. He thinks central banks are feigning impotence. Firstly, that is wrong. They are not. They think that they omni-potent thanks, in no small measure, to the encouragement they receive from the likes of Martin Sandbu.

Second, their impotence is therefore not feigned. The reality is that they are impotent. They are indifferent to evidence of their impotence as are journalists like Martin Sandbu.

This is a comment I posted on one of his more recent articles:

I suppose even elementary accountability is too much of ask either central bankers (who contemplate zany policy proposals) or their cheerleaders like Martin Sandbu.

Three questions for central banks and for journalists like Martin Sandbu:

What do you have to show for all that you did in the last six years?

Have you done a cost-benefit analysis of what you now propose to do, taking into account empirical evidence (see the first question), the operation of the law of unintended consequences and the impossibility of constructing counterfactual scenarios in real-time economics?

Can you present your analysis and are you prepared to debate its assumptions and errors of omissions and commission?

Fiendishly clever

Brexit. A horrible word. But, from now on, we have to track it too. Referendum is on June 23. Forty-eight percent of Brits want UK to stay in the EU. I think it would go that way. But, the referendum and the concessions that the EU might be forced to make to keep Britain within the EU might actually weaken the Euro and embolden other countries with their own demands. Britain wants to have its cake (stay in the EU) and eat it too (more autonomy and exemption from EU-wide policies).

Alternatively, it could all be a fiendishly clever British way to debase the currency. When others are busy slashing rates below zero, one cannot put it past the Brits to come up with a creative solution to debasing the currency since they may be wary of the consequences of negative rates.