Policy credibility

Niranjan Rajadhyaksha has a good column on India’s enhanced policy credibility. I am agnostic about rate cuts now. I am neither for nor against it. Perhaps, there is scope for 25 bp.rate cut.

As for credibility being regained from the last days of UPA, the answer is that they deserve credit for tackling the diesel subsidy. It is also an interesting case study as to how other political parties did not disrupt it as they do now. They did through a 50-paise increase every month. It was not interrupted for too long.

Wonder if the Congress built a better consensus around it than NDA II did with its haughtiness or was it an accident?

On this point, “… Indian fiscal policy continued to drift, at least till the return of P. Chidambaram to the finance ministry in July 2012.”

As for the credibility of fiscal policy, no UPA did not rebuild it despite PC becoming FM and Kelkar recommendations. The UPA government engaged in creative accounting and postponement.

The mid-year economic appraisal of the economy published in Dec. 2014 was clear that the fiscal deficit inherited by NDA II was over 6% and it was dead right.

Weekend reading links – 26.12.2016



India takes the US to WTO on the hike in fees for H1B visas. It may be up to the next US President to resolve it, if he wishes to, that is. Missed out the news that the UK too would be hiking its visa fees. But, it is of a different nature.

India may have a new monetary policy committee by September. The question is who will be the RBI Governor then? Rajan’s current term ends in September.

FT has a detailed article on the race among Silicon Valley giants to sign up India.

India looks to build five rail links to Nepal. So far, so good.

India in the final stage of conversation with Dubai for storing their crude oil in India.

James Crabtree of FT and his Indian-born son Alexander Francis Viswanathan Crabtree.

Niranjan Rajadhyaksha says Indian economic policy has regained credibility and that it opens up space for interest rate cuts.

Deals last week between Rosneft and Indian state-run firms beefed up India’s share in two assets that are linked to the East Siberia-Pacific Ocean pipeline.


Isn’t it a bit late in the day to warn of excessive corporate debt in China?

In the same breath, People’s Bank of China (PBoC) allows farmer to mortgage their land as collateral for bank loans. Chris Balding wrote that it was deleveraging with Chinese characteristics!

No idea of cost of capital for Chinese companies and whether it matters at all to them. Anbang Insurance bids USD13.0bn for Starwood Hotels & Resorts just a day after it had agreed to buy Strategic Hotels and Resorts for USD6.5bn. Thankfully, Starwood Hotels agreed to a more sweetened merger with Marriott Hotels.

China Post acquires Royal Bank of Scotland’s Exchange Traded Fund (ETF) business.

The Chinese Communist Party’s richest man is the biggest owner of US movie theatres. Prof. Victor Shih adds that xi family members are likely shadow shareholders of that company.

State Grid Corporation of China says money is no constraint for overseas expansion. Don’t we know that?

However, interesting to note that this link (in Mandarin) suggests that Anbang would not have gotten approval to buy, due to capital outflow considerations.

A good Reuters story on the severe liquidity crunch for Chinese companies.

China rescues fishing vessel even as Indonesia arrests eight Chinese fishermen. The Indonesian official in charge of maritime security says that China has created a ‘new ball game’. Earlier Argentina had sunk a Chinese boat.

China detains 20 people after letter calls on Xi to resign.

FT has a more detailed story and one more story on dissent in China’s ‘Two Meetings’.

A very thoughtful blog post on the two trajectories of China from here on.

Financial Markets

Same ol’, same ol’: Analysts remained bullish right until Valeant shares crashed

Look at the right place to see the credit boom in the United States. We never learn. This is from March 14th.


On the bomb attacks and killings in Brussels Airport and Metro Station, commentaries that would rarely be seen in mainstream media that continue to deny and obfuscate. What exactly is the point in lighting up buildings with Belgian flags and praising Belgian resilience? What do they mean, exactly?

Najib, Malaysian Prime Minister, told his Party members that he does not think that he is a crook.

Malaysia closed schools for heat wave conditions as temperatures reached 39 degrees – first time this has happened.

At the heart of South Africa’s political crisis is an Indian family that relocated to the country in the Nineties.

Upside to a housing bubble in Hong Kong. It has restored the joint family system: Seventy-six per cent of Hongkongers aged 18-35 are still living with their parents

A blog post says that Japan PM’s influence across ASEAN is growing.

Der Spiegel, German magazine, withdraws its correspondent from Turkey as Turkey denies him residency permit.

27 years later, the Nobel Organisation condemns the fatwa against Salman Rushdie.

Banking and Finance

Credit Suisse posts second straight quarterly loss and says that senior leaders did not know that traders had built up risky positions.

China and hard landing

​On Thursday, I had the opportunity to attend a seminar by Prof. Danny Quah of LSE. His credentials are impressive. Check him out here.

The talk was tantalisingly titled, ‘China: why a crash is imminent… and why it is not going to happen anytime soon’.

It was held at LKY School of Public Policy in Singapore.

He called the case for a hard landing for the Chinese economy the prosecution case. In the ‘spirit of objectivity’, he proceeded to present that case first. Then, he presented his case which is that the prosecution case is massively overblown.

If his arguments are the ones against China hard landing, then the world msut be worried. He made no case.

His points were that:

(1) A stock market is no barometer of the China economy.

(IF so, why did the government go to ridiculous extent to prevent the stock market from declining).

(2) Service sector doing far better and rebalancing happening. Evidence: Services sector PMI. He needs to have a dialogue with Chris Balding.

(3) Rural  ==> Urban migration would take care of the housing inventory.

He had nothing to say on the continuous profit decline, the massive rise in debt/GDP ratio since 2008 (it still keeps rising). Now, I came across this chart too:

​​​Source: https://twitter.com/EMgist/status/711816061235015681​

​I also took issues with the stale quote from Prof. Samuelson on how the stock market predicted nine out of the last five recessions. Professor Quah cited that to make the case that the Chinese stock market crash did not mean anything for the Chinese economy.

He had said it in 1962 and, hence, his sample period must have included or consisted largely of the post-war​ recovery period when stock market declines were not followed by an economic recession. That is somewhat unsurprising.

But, more than five decades later, the stock markets do not predict anything or have nothing to do with the real economy at all. Period.

The case for an economic hard landing in China does not stem from its stock market crash of 2015. That was but one of the several symptoms. It is not the important one.

Further, in addition to all the economic and financial market signals and noise, clearly, beneath the surface political rumblings can be felt and perceived by many. See here and here.

Matthew Johnson has a very thoughtful blog post that I would strongly recommend reading.

Given all these, a facile case for China economy soft landing does no justice to the topic nor to the learned Professor’s scholarship.

UK Budget

It is not possible for us to follow the budget documents of other countries. Interest in the UK budget was triggered by their sugar tax. Then, the controversy over the withdrawal of pension over disability erupted. I am amused and tickled by the pickle that George Osborne finds himself in. I was stumped by the extraordinary energy he devoted to building up a special relationship with China. Not that I was amused by that opportunistic alliance-building. Many in the UK were stumped themselves. I had blogged on it here.

Arun Jaitley could either commiserate with George Osborne or somehow feel relieved that he is not the only one facing heat for budget measures.

Equally newsworthy was the Office of Budget Responsibility analysis on potential growth rate for the UK economy, productivity growth, etc. OBR has downgraded both. It takes some comfort from the fact that the US had downgraded productivity trend growth even more than UK had done.

For all those who keep egging central bankers to do what they are doing – with callous disregard for costs and non-accountability for supposed benefits – should pay attention to page no. 20 of the document, ‘Economic and Fiscal Outlook’ dated 16th March 2016 presented by Robert Chote (Press Conference Slides), the Chairman of OBR. Just as OBR had done, the Congressional Budget Office (CBO) in the US had downgraded trend productivity and potential output too considerably from the estimate made in 2016. Yes, this is the record for six years of QE and ultra-low to zero % interest rates.

OBR is a good site and it is good that it exists. It provides an independent assessment of the soundness of budget numbers and yet it is embedded within the government system.

India should think of a similar set-up. Perhaps, the Office of the Chief Economic Advisor to the Government of India could play that role too?




Administered rates come down in India

After the announcement of a new hydrocarbon drilling and exploration policy which fixed many of the past ills, the government has taken another bold step and a right one, under the circumstances, by reducing interest rates on small savings schemes. Interest rates will also be adjusted on a quarterly basis rather than annually. They will be benchmarked to government borrowing costs in the bond market. All these are very sensible steps. Those of us who have been looking for ‘reforms’ should update their scorecards.

Here is an article on the government’s decision. Not a bad one. The article has a good table on the old and new rates.

The author is right about the money illusion. Problem: people’s inflation expectations in India have hardly come down, despite the measured inflation rate coming down. Hence, are they really suffering from money illusion? Or, are they measuring their cost of living increases wrongly? Those are separate and interesting research topics in themselves.

One is better off visiting the Press Information Bureau website (www.pib.nic.in), clicking on ‘Releases’ at the top-left corner and choose 18th March 2016, click on the ‘Ministry of Finance’ and click on this release to get the factual information. See the attachment below at the bottom of the post.

Some of the media headlines (1st page of ‘Google Search’ outcome) are polemical, misleading and deliberately inflammatory. Some samples:

Firstpost: ‘Political, public outrage as NDA government cuts PPF, NSS, saving scheme rates’ [Link]. Provocative, needlessly.

DNA begins its story with the first line, ‘in a move that will hit the common man’. Very bad. [Link]

Both THE HINDU and ‘Indian Express‘ reported the news factually without imposing their bias and colouring.

For a quick, immediate impact assessment, read Jaggi’s piece in ‘Swarajya’. They should have avoided ‘savers face the axe’. It provokes anger when the purpose of the piece is, perhaps, the opposite.

What follows is a long, text-bookish explanation of the issues surrounding the issue of interest rates, their roles in saving and borrowing, the generation of perverse incentives to borrow, etc. Long one – pl. ignore, if you know these stuff already:

(1) This was written in response to a friend’s statement that India should be encouraging savings and not spending and extravagance implying that lower interest rates do the opposite.

(2) To add to that, it is generally healthy for an economy that private consumption (spending) should not be a cause of economic growth but a consequence of economic growth.

​​​(3) I had underlined the word, ‘generally’ to draw your attention to the fact​ that there would be exceptions. Nothing is or should be sacrosanct in economics. There are very, very few (if any) absolute, inviolable, immutable truths in economics. Of course, you would not realise if you follow public discussions between economists or columns by economists (Paul Krugman comes to mind) in the US or in India. Some of it is political and some of it is ignorance and some of it is combination of two.

(4) The American emphasis on consumption spending is not a time-enduring phenomenon either. It is of recent vintage. Probably, last thirty years. That is why we feel that is the American way of life. We should not forget that that country has a history of 240 years. It has not always been like this. Even they are beginning to wonder and worry if what they had been doing in the last thirty years has been counterproductive and wrong. But, these debates, changes and course-corrections happen more slowly than we think or we would like them to be.

(5) Again, in general, today’s economically developed countries, much saving and investment had happened during their growth and development years. So, they feel that there is scope to drive the economy forward through spending. Unfortunately, America also developed a taste for a lot of borrowing and financial market speculation. It was a lazy approach to economic growth. But, America could get away with it, given its advantage with the global currency US dollar, with its geopolitical dominance, intellectual dominance, etc. But, those are separate threads and each one is worthy of discussion separately.

(6) However, one of the threads that is important is the one on intellectual dominance. Most developing country scholars went to the US (UK influence waned quickly) for higher studies and hence, it is natural that they are influenced by the discourse there on economic models, what works and what does not work, etc., without adjusting them for context, for the path that countries had taken, their current position in the development cycle, etc.

(7) That is why lower interest rates are often chanted as a mantra and the only formula for boosting investment, employment and economic growth. Most people think immediately of large and tall chimneys, plants and machines when they visualise the word, ‘investment’. However, the moment we do that, we should also remember that there are many other factors that influence such investment decisions and not just interest rates.

(8) Indeed, even in the context of economically advanced countries – like the US or the UK or a region like Europe – the efficacy of low and lower interest rates is very much in doubt. This blog has written extensively on it.

(9) Do not get me wrong. Lower interest rates are useful and they had worked. Lowering interest rates when appropriate and raising them when needed, do have the intended effects. But, what I have warned about in the above bullets is the tendency to elevate them to the level of a religion or a deterministic science. Context and other considerations matter.

(10) Economic theory tells us that low interest rates should result in higher borrowing, everything else being equal. The problem is that economists forget that or deliberately ignore that condition. In real life, other things are not equal. They are constantly evolving and changing. In physical sciences, in laboratories, the experimenter/scientist can control all factors and vary just one and see the difference. In real life, one cannot do that. That is why is very, very hazardous, misleading and difficult to make predictions based on economic theory. At least, one should be very humble about the reliability and accuracy of those predictions, given the moving parts in real life. Yet, many economists sound as though the science is deterministic and not, at best, probabilistic. On many occasions, they are nothing better than guesses, let alone being educated guesses.

(11) It is this failure to take account, the ‘other things being equal’ condition that have sent many advanced countries down the path of zero interest rates and even negative interest rates now! Can you imagine receiving interest to borrow from a bank and paying interest to deposit money in a bank?! But, voices are rising against this tendency to keep pushing interest rates lower and lower into unprecedented low levels. Again, it is not necessary to go into details here. India’s Raghuram Rajan is one of them. Intellectually, they are not yet winning the battle yet.

(12) But, nothing changes human behaviour (including that of politicians and policymakers) more than an actual crisis. Think of how we adjust our lifestyle only after a visit to the doctor that revealed a nasty surprise and how we delay or deny the problem until it is often too late. Economists, politicians and policymakers are not much different. So, things will change but, unfortunately, only after some bad crisis. It appears that 2008 did not turn out to be enough of a warning.

(13) So, this elaborate backgrounder is to agree on the scepticism of lower and lower interest rates, etc., in general. Now, let us come to the Indian context and this particular decision.

(14) Any entity – PF authorities in this case – cannot give guaranteed return because the investments they make do not often give them guaranteed return. They fluctuate. Therefore, the return they offer should also fluctuate.

(15) Interest rates that banks offer on deposits cannot be too low or too different from interest rates available in other instruments like the Small Savings interest rates. If they are, the public will divert their savings to those instruments. Banks cannot raise funds and lend them. Now, let us not get into a debate on whether bank loans are being made properly, etc. The current banking crisis in India might colour our debate. But, that has to be a separate topic.

(16) The government cannot undermine or undercut its own banking system by offering different interest rates on some of its administered schemes.

(17) Technically, it is correct that RBI sets the rate at which it lends to banks and accepts deposits from them. It does so six times a year now. The rate it charges and offers banks forms the basis for other interest rates. However, these administered schemes still exist and the government of the day, sets them! That in itself is an anomaly.

(18) The logical ‘bigger picture’ question that arises then is concerning the relationship between interest rates and inflation. The official inflation rate is 5.2%. But, even in RBI quarterly surveys of households in sixteen cities (that include housewives, working men and women), it comes out clearly that people perceive their inflation rate to be 9% or 10% and continue to expect that their cost of living will keep rising at double-digit rate. In that context, it is right to ask the question if the interest rate should be lower than the rate of inflation. Savers lose their purchasing power. That is a valid question.

(19) There are no easy answers. Governments and central banks like RBI will work only with official inflation rates. On that basis, the ‘new’ interest rate of 8.1% is still above the inflation rate. Also, survey answers given by households are not necessarily based on properly and accurately measured rate of increase in their cost of living.

(20) India does need higher savings to finance its investments. If not, we depend on foreigners for aid, loans or have to give them ownership. That comes with its own baggage of pressures, fickleness and other issues such as inferior technology. Again, pursuing that thread will lead to other issues such as the quality of our higher education, our investment in and commitment to R&D, etc., etc.

(21) We need to invest in public health, education and also infrastructure. East Asian countries, when they were growing, had savings rates above India’s. Moreover, their savings rates kept rising. Ours has not. Based on official data, our official savings rate (proper title is ‘Gross Domestic Savings Rate’) was 21% of the nation’s GDP in 1978-79. It declined after that. But, it took another 11 years to cross that again. In the 1990s and up to 2006-07, it kept rising steadily. Since then, it has declined. Now, it is estimated to be around 30%. That is not good.

(22) For the decline in the savings rate in the most immediate period (2007 to 2015), we can partly (or, largely) blame the UPA government. But, there are deeper problems. They need to be discussed separately.

(23) So, yes, one can judge that the government was right to lower the administered interest rate on Small Savings Schemes or that it was wrong to do so. It depends on which criteria we apply. Criteria suggested in (14) to (17) mean that the government did right. But, bigger discussions on savings and inflation would suggest a different answer.

(25) So, for policymakers, as it is the case in our own lives and decisions, we constantly trade off bigger picture/structural/long-term considerations vs. short-term compulsions, necessities and other pressures. Just think of how we deal with our children sometimes and whether all the decisions we take are ‘long run optimal or ideal’. They have to assess the costs and benefits of favouring one set of consideration vs. the other. Yes, of course, there are political factors. But, even if we set them aside for the moment, what this tells you is that it is possible for reasonable people to disagree on the final decision, without one of them being necessarily wrong.

Interest Rates on various Small Savings Schemes for the 1st Quarter of 2016-17_18032016



Too bashful to ride the helicopter


Dr. V. Anantha Nageswaran
17 Haig Avenue
Singapore 438873

Mobile: +65-97314261

The Editor
Financial Times

Dear Sirs or Madam,

Editorial writers take an ad-hoc view of things and ignore inconvenient evidence that their newspapers publish themselves. The FTView, ‘Monetary policy is not enough to beat deflation’ (March 15, 2016) is no exception.

Two days before this Edit was published, John Plender had written about the unintended consequences of ultra-loose monetary policy pursued in the West. US dollar debt held by emerging economies had doubled since the Fed introduced QE in 2009.

Economic textbooks have to be rewritten since we were taught that banks pay interest when they borrow from us (our deposits) and we pay interest to banks when we borrow from them. Now, we pay banks to deposit money with them and banks pay us money to lend to us! Has anyone had the humility to acknowledge what it would wreak? We only get glimpses of the costs.

Two days after this edit was published, FT carried a story on problems piling up for public pensions in the United States. The scale of unfunded public pension liabilities is much higher than thought because these pension funds use generous discount rates.

On Feb. 28, this newspaper carried the news that Philadelphia public pension scheme earned just 0.29% in 2015.

Now, central banks are pushing interest rates and their prospective returns into negative territory! Switzerland can borrow up to 20 years by charging a rate of interest on lenders! How to value unfunded pension liabilities now, with negative interest rates?

If pension funds had to earn their yield by investing into stocks such that the valuation of risky assets goes even further into stratosphere, will the Edit writers and central bankers guarantee that asset bubbles would never crash? Perhaps, in their hubris, they may even venture to offer precisely such a guarantee.

If monetary policy had not acted, things would have been worse. This is the standard ‘shutting up’ argument that policymakers and their apologists like this newspaper peddle. It is a scare tactic. By their very nature, counterfactual scenarios are impossible to prove or argue against. Advancing such arguments is to push everyone into an intellectual cul-de-sac.

How would central bankers justify the real costs they are creating versus the hypothetical costs of not acting? What is the criteria and what is the model?

Hope the Edit writers noted that, after seven years of holding interest rates at 0.5%, the policy rate is expected to stay unchanged all the way up to 2019. Yet, the UK faces lower potential GDP growth, lower business investment growth than anticipated earlier. No corporate CEO can hope to get away with such a colossal failure to turn his own promise into performance. Yet, not only Edits such as the above exempt central banks from such scrutiny but encourage them to wade further into the deeper end of the sea of unprecedented policies with uncertain and unknowable consequences.

The world will never know if things could have become better in a more lasting way if only central banks and governments had been more selective in their interventions, had operated with a sunset clause on their interventions and demanded change from those who could afford them and who were obliged to change their behaviour, given their contribution to economic troubles.

They never bother to answer these questions. Central bankers are beyond accountability. Alan Blinder, in his book, ‘When the Music Stopped’ scrupulously avoids examining the unintended consequences of actions of the Federal Reserve. Yet, even he could not avoid remarking that the US government and the Federal Reserve remarkably failed to extract any sense of accountability from bankers when they were ready to sign away their lives in 2008-09. A new government had just been elected in the United States on the slogan of change.

Usually, elites scoff at fiscal policy and worship at the altar of monetary policy. More public spending by a democratically elected and accountable government is anathema to them whereas untested monetary policy is kosher. However, these days, the intellectual sophistry of Edit writers is incomplete without a homily to the virtues of fiscal expansion. Yes, it would have been worth a try, years ago. Even when fiscal deficits widened, not much thought went into the application of extra fiscal spending. Now, seven years later, with low and negative interest rates wreaking havoc on public pensions and with no effect on lifting economic growth rates, higher public spending runs the risk of compounding the policy errors made already and the risk of jeopardising the already unsustainable medium term fiscal outlook of many advanced countries.

The Edit ends conveniently with a call for monetary policy to become bolder. Why this sudden bashfulness and where did this come from? Bring on the helicopters.

Thank you.


Anantha Nageswaran

Weekend reading links – 19.03.2016


Manufacturing employment elasticity is fine in India. But, it includes construction. No surprises, hence.

Underlying documents behind the Financial Crisis Inquiry Commission report released five years ago are now available.

February’s astounding global temperature record

Water storage at 29% of the capacity of reservoirs in India.

This summary (of a longer paper) argues that informal networks based mostly on caste provide insurance and hence, reduces the incidence of rural to urban migration in India. H…mm

Ajit Ranade correctly argues for a correction in the road-rail skew in India. India is atypical of other countries but in an inefficient way. Is the article missing the ‘how’, especially the political economy part of it? But, it flags a uniquely Indian solution.

India’s services exports dropped for the third month in a row.

A waxwork of PM Narendra Modi will now adorn the gallery in Madam Tussauds.


Microsoft seeks deeper collaboration with the Chinese government which is pursuing an anti-monopoly investigation on the company.

‘Economist’ on the double-faced China property market. Prices are up more than 50% in Shenzhen.

You too can forecast China’s GDP growth rate for 2016!

China floats a trial balloon on tax on foreign exchange transactions involving the Yuan and receives criticism. The surprise is not in the criticism but in the mindset that gave rise to the idea of the tax at all. Does not reflect confidence in fundamentals at all. The article notes the failure of other countries in the world to impose Tobin tax. The power of the financial sector is pervasive.

Independently, and the above news will hasten it, yuan has been losing its appeal in cross-border trade.

Japan mulls taking dispute with China on disputed islands to international arbitration.

The International Court of Justice would likely rule on the Philippines case against China in April/May

China establishes ties with Gambia to the obvious displeasure of Taiwan

The graphic on the proportion of Chinese students in the total international students in the US is insightful. Herd behaviour by American universities.

A Chinafile panel on censorship in China. Catch the Xinhua error.

Developed economies

Britain introduces Obesity tax.

You should not be surprised by the decline in US retail sales in February and the large downward revision in January if you also noticed that subprime Auto bond delinquencies were at a 20-year high!

Gideon Rachman in FT: ‘the (German) chancellor still seems too willing to base her policy on comforting illusions rather than uncomfortable facts.”

What has changed after the crisis for US banks? Nothing.

Global and General

Brazil judge suspends Lula’s appointment to the Cabinet as police wiretaps conversation between the President and her party leader, ex-President of the country!

Iran warns of Armageddon if Syria disintegrates.

Myanmar leader Aung San Suu Kyi has said she will be “above” the president and rule from behind the scenes, meaning that any NLD candidate would effectively be her proxy.

Lucy Kellaway thinks that email is best suited for display of passive aggression.

When does coffee work best?