Rate cut dissent

If Andy Mukherjee is right that India’s financial stress is spreading, then why should one be surprised that RBI cut rates? Shouldn’t one be surprised about the dissent in the meeting? Credit Suisse research says that financial system stress is slowing the economy.

Viral Acharya’s reply at the press conference does not mirror any of the frantic distress signals that Andy is writing about:

I think this issue has come up quite a bit over the last six months I would say starting with the default of IL&FS. We have looked quite carefully at the data and our assessment is that since the peak of the stress in the short-term commercial paper markets in September and October, things have eased quite comfortably, they have eased especially for the better quality NBFCs and HFCs. So I think what is happening is that the liquidity conditions that had been extremely in surplus mode post-demonetisation have finally reached some normal level so that mutual funds and others who are providing capital to these entities are finally doing quality sorting themselves. I think that needs to be allowed to happen but nevertheless we remain watchful and if we think that there are extremely healthy borrowers who are also struggling with the funding, then we would consider that. [Link]

Heartache recalled

Siddharth Vaidyanathan pens a lovely piece in ‘Cricket Monthly ‘ (ht: Amol Agrawal – who else?) on the India-Pakistan cricket test match at Chepauk Stadium in Chennai in January 1999.

I was one of the many who went back home speechless and heavy on that day. But, it was a great cricket match. I can say that dispassionately now after twenty years.

I remember speaking to Harsha Bhogle the previous night over phone. He said that India’s two best batsmen were at the crease and if they got out, the match was over. They were Rahul Dravid and Sachin Tendulkar.
Rahul did get out to a beauty from Wasim Akram. Saurav was dismissed by an umpiring howler. My dad gave up and left the ground at lunch time. The excitement started after that. Mongia and Sachin made batting look so easy. But, the end was not what we were all looking for. The tail choked. Anyway, one has to concede too that Wasim and Saqlain were a class act in that match.

Read the well-written article with a lovely touch in the end.

Recommended reading (10th Feb. 2019)

Brett Stephens’ story in NYT (ht Rohit Rajendran) on anti-semitism and anti-zionism is well written and spirited. I am sympathetic. There is nothing liberal about inconsistent application of liberal principles. Then, it is only tribalism. Illiberal tendencies of the self-anointed liberals have been exposed on numerous occasions but what is ‘impressive’ is the resilience and their persistence.

Sun may be bad for the lighter skin but it is good for darker skin especially when it comes to avoiding hypertension. On this article about sunlight, vitamin D and hypertension, these lines caught my eye:

Salt was long considered the main high blood pressure culprit because it can raise blood pressure to dangerous levels in people who already have chronic hypertension. But it’s not clear salt causes the chronic problem in the first place. [Link]

Law of unintended consequences: one more example: Bill and Melinda Gates Foundation gave one-year maternity leave. It did not quite work out the way it was intended. [Link]

Is UBI or Universal Basic Income delivering as promised – running results from Finland pilot. I consider the results not mixed but positive.

Manu Joseph makes a good point the deification and the demonisation of Aung San Suu Kyi tells us more about the western/global elites than about her. Article from September 2018 but well written.

Amy Chua’s piece in ‘Foreign Affairs’ (July/August 2018) that ‘Tribalism is all’ is a very good read. Tribalism is looked down upon by only those who benefit from not being identified with any particular tribe – in other words, they are part of a tribe! (ht: Sanjay Anandaram)

I don’t think either the writer of this article or that of the author of the book he cites gets what Amy Chua gets.

Matt Levine’s conclusion on this article about how ‘self-obsession’ in Bridge water is paying off is a brilliant summary:

You might naively think something like “if we get together a team of smart people who all have a single-minded focus on making good investment decisions, then the interpersonal dynamics and managerial techniques will take care of themselves.” Many hedge funds — and tech startups for that matter — more or less consciously take exactly that approach, with mixed results. But in fact, at Bridgewater, it is precisely the opposite: If you get together a team of smart people who are willing to spend 100 percent of their time doing weird interpersonal exercises and subjecting themselves to managerial experiments, somehow they will make good investment decisions as a byproduct.  [Link]

In other words, we simply have no idea of what works nor, one should add, do we have any idea if this would work in another place.

Article on a generic drug manufacturer (an American company manufacturing generic drugs in India) comes across more as “agenda driven reporting” (as a friend put it) than as a reliable account of reality because, even within the company that the article focuses on, the incidences of suspect quality or fraudulent or deliberate deception have been declining and not getting worse. Nonetheless, this last time should make Indians think:

Rishikesha Krishnan, a professor at the Indian Institute of Management in Bangalore, related a story of one foreign regulator visiting a drug factory of a company he declined to name. The inspector’s first question when he arrived after negotiating India’s chaotic roads was, “Guys, how can you maintain quality in your plant if this is the way things are outside?’”

Wages and profits in India

I had not realised that I last blogged on 31st January. It is indeed becoming difficult to dedicate time to blogging. Reading is happening somehow, even if not on the same scale as before. But, the ‘dereliction’ with respect to blogging is becoming more glaring. In any case, here goes.

One of my students in the class I am teaching sent me this useful link. Wages and profits are going in the other direction in India – i.e, good direction. Profit share of GDP has fallen but real wage growth has been brisk at 5.5% during the decade 2008-17. This raises doubts on whether some of the unemployment statistics touted by political opposition are as suspect as some of the government’s macro-economic numbers are.

The real wage growth numbers come out of the ILO global wage report which is available here. I am yet to go through it. The Executive Summary of the report is here. The ILO report was published in November 2018. Nikkei Asia Review had published a report on this already in November.

Cost of rural services

While newspaper reports talk of rural and agrarian distress in India, India’s statistical organisation produced a monthly CPI report for December 2018 in which rural healthcare and education costs jumped sharply higher. Headline inflation rate: 2.2%. Core inflation rate: 5.7%. Rural healthcare inflation: 9.0% and rural education inflation: 8.4%. That defies explanation. SBI Chief Economist wrote:

The most puzzling aspect of the inflation data is the increase in rural health and education inflation at the time when rural demand is collapsing. A deep analysis of this completely contrarian behavior is warranted, however, as of now it seems that it could be a combination of methodological changes in data collection and implementation of Aayushman Bharat  Scheme which might have led to an upgradation of health services at least in rural areas. However, even then the jump in healthcare costs is happening mostly because of jump in medicine costs from non-institutional sources, that begs explanation.  Another baffling aspect is the jump in education inflation in rural areas. Clearly, the CSO should clarify the doubts of such a significant increase in service costs in rural areas since October 2018. Is it a data error? We don’t know yet. 

With such data collection and lack of proper statistical and seasonal adjustments, it may not be possible to make sound public policy. Bad data can and do beget bad policy.

Independence and interdependence

What follows are verbatim extracts from a speech delivered by Dr. Y.V. Reddy at a conference held in Patna nearly a month ago on public finance:

In brief, the three policies like all other policies have an over-arching objective of welfare with each policy having its own defined set of objectives and appropriate operating instruments to achieve the specified objectives.  It is believed that one of the contributing factors to Global Financial Crisis (GFC) is underestimating the inter-dependence of these policies, and over-emphasising their independence. 

[The three policies he is referring to are fiscal, monetary and regulatory]

Exclusive focus of monetary policy on price stability had its pitfalls.  It has become clear that financial stability considerations, in particular, the asset prices, cannot be ignored.  The possibility of excess liquidity provided by the monetary authorities for a prolonged period impacting the excesses in finance is noted. 

The assumption that financial markets correct themselves and have a benign influence on growth is questioned.  The incentive mechanisms in the financial institutions and the possibility of excessive financialisation in the financial markets are recognised. 

[In the paragraphs above, he is pointing to the lessons learnt from the crisis of 2008. I guess, they are lessons that ought to have been learnt but not quite learnt]

As regards monetary policy, RBI rejected inflation targetting and single objective, unequivocally.  It did not share the enthusiasm for capital account convertibility and decided to manage impossible trinity.

[That is a nice summary of the policy framework of RBI under his leadership]

While concerted action was possible for strengthening the private sector banking system, the regulatory actions of a prudential and counter-cyclical nature by the RBI were undertaken despite some resistance from government and financial markets. 

[He is rather understated here, on the tensions that existed between RBI and the Government of India in 2006-08 on the regulation of the financial sector]

The objectives of monetary policy in India continued to be price stability or credit for productive activities, depending on the context.  Inflation targeting was not adopted in India. Dominance of banking, in particular, public sector continued though presence of private sector increased.  There was a cautious deregulation of the banking sector.  Counter-cyclical prudential policies were followed, and capital account was managed.

[That is an excellent summary of the differences in the global ‘best practice’ (?) and Indian policy framework between 1993 and 2008. After 2008, the world has copied some of the above practices.]

A common thread in all these arrangements is that they were intra public sector transactions that were transparent and strengthened effectiveness of public policy.  All of them strengthened the balance sheet of RBI to enable it to serve the economy and government. 

[He is referring to the various arrangements put in place between the GoI and RBI on management of foreign exchange reserves, sterilisation costs, on the guarantees that RBI had extended on foreign exchange losses, etc. Indirectly, he is hinting that the current differences could have been handled if there was recognition that these were ‘intra public sector transactions’]

Government continues to be a privileged owner of enterprises in the financial sector – thus constraining the regulator’s effectiveness. 

He is right to reiterate his reservations on the Government ownership of the banking system inasmuch as it adversely affects RBI’s regulation of these banks. He endorses Urjit Patel’s comments in this regard.

The overall thinking in Government about reforms changed from the moment Raghuram Rajan Committee gave its recommendations in 2008; and Justice Sri Krishna Committee gave its report in 2010.  The influence of RBI on the general thinking on reforms changed and a new framework took its place.

[In the above comments, he leaves more unstated than state them. Justice Sri Krishna Committee’s recommendations were made in 2013, I think. I think Dr. Reddy is referring to the recommendations of the Financial Sector Legislative Reforms Commission. Or, it could be another Committee.]

The government by virtue of its role as a coordinator and at the same time as the owner of the regulated entities puts / makes the central bank and the regulators somewhat ineffective unless they are on the same wave length as the government. The financial intermediaries in banking, insurance and even non banking mutual funds, etc. continue to be dominated by the presence of public sector.  Hence, the regulators’ standard tools are ineffective. 

[A rather forthright comment by the former Governor. The votaries of public sector banking in the present ruling dispensation must take note of these observations.]

Under the new regime, the financial stability considerations are not explicitly taken into account. In regard to external sector also, the stability considerations are not explicitly built into the monetary policy objectives. Is there a danger that the advantages of in-built coordination available in full service central bank been foregone?  Is there an identity crisis because of the juxtaposition of the MPC in a full service central bank? 

[Dr. Y.V. Reddy has raised some very important questions here on the monetary policy framework, on the government-RBI relations, etc.]

The effectiveness of “independent” monetary policy is blunted by the criticality of government owned banks for transmission of monetary policy.

[In a sense, he is highlighting the incompatibility of independent monetary policy and government-ownership of the banking system]

The regulatory framework of banks is not neutral to ownership in the sense that governance of public sector banks continues to be determined by the government.  The fiscal authorities use the banking system to implement some of the government developmental programs and RBI as a regulator does facilitate the use of public deposits with the banks for pursuing governmental programs. 

[Dr. Reddy again reminds us of the complexity that the RBI has to deal with, given government’s ownership of the banking system and its fiscal and development imperatives.]

This speech is not yet uploaded on his website. Once uploaded, you will find it here.

Mysuru’s clean success

A good story and well reported too.

This is a good example of specific policy proposal or recommendation that experts should be putting forward.
Use case studies – successes and failures – for emulation. There are plenty of such stories from India itself.
The ‘India Today’ 43rd anniversary issue (Dec. 31, 2018) is a lovely collection of inspiring stories, of individuals who are making a difference for the better.
In the story on Mysore’s ‘cleanest city’ tag, two management lessons stand out:
(a) No layout plan is approved unless it comes with a waste disposal plan. (I guess a similar condition should be laid down on water self-sufficiency too
(b) The roping in of religious organisations and students to spread the message