The Indian Economy Blog

February 11, 2009

Weekend Reading: 8 Feb, 2009

Vivek Wadhwa’s latest column in Business Week,which says we shouldn’t blame H1-B workers for job losses, invites a (predictable) barrage of comments.

Here’s an earlier IEB post on Wadhwa’s research — Don’t Try Kicking Sand In America’s Face.

On another note, Sunita Narain’s at it again — after colas, now it’s edible oils. (HT: Amit Varma, via email)

February 8, 2009

Is Emerging Market Art An Alternative Investment Class?

Filed under: Capital markets,China — Prashant @ 5:58 pm

FII to broker: Hold off on those INFY shares, get me a bunch of Hussains & Pynes nstead

Two academics evaluate the returns of the art markets in India, Russia and China over the last decade, using a portfolio theory/ CAPM framework.

Investors constantly hunt for alternative assets that might improve the risk-adjusted returns on their financial portfolios. When stock markets experience a downswing, investors search for more profitable alternatives. Financial newspapers fill headlines with record prices paid for certain works of art, giving rise to the idea that investing in art might be a profitable pursuit. Moreover, Artprice recently reported a booming emerging art market for Russia, 780% growth for the Chinese
15 (contemporary) art market since 2001, and 830% for the Indian (contemporary) art market in
the past decade.

To determine if these reported returns are feasible and indicate reasonable investment alternatives, we analyze whether investing in emerging art markets yields a competitive risk-adjusted
return in comparison with other, more traditional asset classes that could be used optimally to
diversify a financial portfolio.

India exhibits the strongest Sharpe ratio of all three emerging art markets and by far the strongest average annual return. Moreover, the Indian art index has a negative market beta and a nearly zero correlation with the S&P 500, which makes it another interesting investment for a well-diversified portfolio. Link

I know very little about art or art markets, since my “right brain” never progressed beyond those sunsets and sunrises in 4th grade, and hence can’t really offer any opinions here. Perhaps some readers are better informed?

HT: Felix Salmon

February 7, 2009

Protectionism Is The Crack Cocaine Of Economics

Filed under: Basic Questions,Business,Trade — Prashant @ 7:52 pm

Are we going to see a sequel to Smoot-Hawley?

Richard Fisher, President & CEO of the Federal Reserve Bank of Dallas, tells it like it is. Commenting on C-Span about the “Buy America” provisions in the stimulus package:

Protectionism is the crack cocaine of economics. It may provide a high. It’s addictive. And it leads to economic death…We just cannot afford to go down that path. And I hope our senators, Democrats and Republicans, will be very sensible on that front (Link)

Alas, I fear we’re already started going down this slippery slope, whether it’s the “Buy American” guff or this ban on TARP recipients hiring H1-B visa holders (HT for latter link: Mohit Satyanand, via email)

February 5, 2009

A Lazy Argument

Filed under: Basic Questions,Miscellaneous,Politics — Pragmatic @ 11:43 pm

Tying defence expenditure to GDP is no substitute for policy making.

India’s defence expenditure this year is pegged at less than 2 per cent of the GDP which is lower than India’s defence spending in 1962 — 2.1 per cent of the GDP. After the Chinese debacle, it jumped to 4.5 per cent in 1964. By 1994, it was slightly less than 5 per cent of GDP and it has been on a downward path since. In the mid 1980s, there was a demand to peg defence expenditure to a minimum of 5 per cent of the GDP.  For the last few years, the Parliamentary defence committee, Eleventh Finance Commission, retired military brass and strategic analysts have been active in the media asking for that figure to be pegged at 3 per cent of the GDP.

GDP is an important measure for determining how much India could afford to spend on defence, but it provides no insight into how much India should spend. Proponents of fixing a certain percentage of GDP as the minimum defence expenditure are status quoists, who use this argument as mere rhetoric, rather than as an articulation of defence policy. After the Mumbai terror attacks, it is politically taboo to disabuse this notion of a GDP-indexed minimum defence expenditure. Any analyst, politician or policymaker who dares to publicly question this argument risks being labelled unpatriotic, soft on terrorism and anti-national.

(more…)

February 4, 2009

Weekend Reading: 31 Jan, 2009

Filed under: Basic Questions,Business — Prashant @ 4:55 am

Some links from the FT’s weekend special on India

Ambitions dimmed but not abandoned: the lead piece, which seems more optimistic than I would have expected

Foreign policy: Craving greater influence: on India’s foreign policy, which offers nothing new for readers of the Acorn. Most readers of the FT don’t read the Acorn. They should. At least, if they’re interested in India’s foreign policy.

February 2, 2009

A Global Corruption Map

Filed under: Business,Corruption/ Red Tape — Arjun Swarup @ 4:11 pm

An interesting map, published by Forbes, detailing corruption across the globe.

It’s interesting how the bulk of the world is corrupt, and there is some level of correlation between overall wealth levels and corruption (the wealthy nations are less corrupt – Western Europe, Japan, Australia, North America).

It sure as hell doesn’t seem to impact growth rates though – some of the fastest growing countries are pretty corrupt. It would be interesting to see if there is a link between income inequality and corruption levels…

January 17, 2009

Can We Trust Economists?

Filed under: Basic Questions — Prashant @ 10:18 pm

How does one differentiate between facts-based analysis and personal opinions?
Uwe Reinhardt, an economics professor at Princeton says

Matters are worse when, wittingly or unwittingly, economists infuse their analysis with their own (or a political client’s) preferred ideology.

Consider, for example, President Bill Clinton’s 1993-94 health-reform plan. In this plan, President Clinton proposed a mandate on employers to provide their employees with health insurance.

Politically conservative economists predicted that the mandate on employers to provide employees with health insurance would lead to vast unemployment. Economists supporting the Clinton health plan predicted that the negative employment effect of the mandate would be small, and that the effect might even be to increase employment.

It can be shown with a simple mathematical model that an economist’s prediction in this regard is powerfully driven by two assumptions about the behavioral responses to mandated employer-paid health insurance.

(more…)

January 10, 2009

Et Tu, Gurcharan?

Filed under: Basic Questions,China,Politics,Regulatory reforms — Prashant @ 11:42 pm

Old Jungle Saying: “If you see India and China in the same article, it’s time to run for cover :-)”

The entire China vs India debate is so overdone and (mostly) futile. Unfortunately, it seems to elicit the most number of comments on IEB – largely bakwaas, unfortunately – which we have to perforce edit or delete.

Here’s Gurcharan Das, one of my favorite essayists with a rather strange op-ed in the New York Times that begins with the Mumbai terror attacks and the public’s reaction thereof, and then flits from meme to meme — India vs China, the role of Vaishyas in India’s growth, the Argumentative Indian, the 21st century rise of India (and China) and the role (or lack, thereof) of government, and the need for India to get its infrastructure right. Talk about a khichdi of ideas. For all I know, there may be a couple of other memes that I’ve missed. My head was spinning at the end.

Anyone else with similar reactions?

January 7, 2009

Yeh Kya Ho Rahaan Hai?

@**&#!! (!*!)!##! And, in addition, dazed and confused :-)

Here is the full text of Satyam CEO Ramalinga Raju’s resignation letter

Reactions/ comments?

January 4, 2009

A Real Estate Triggered ‘Stimulus’ Idea

Filed under: Fiscal policy — Arjun Swarup @ 11:10 pm

IEB reader Durgesh Prasad, sent in this idea, via email to some of the IEB contributors.

In today’s slow economy, where government is trying its best to keep the real estate market rolling and attracting investors to invest in real estate market in order to keep market live, I had an idea through which it can be achieved by government without loosing anything. Presently, the deciding period of differentiating a CAPITAL GAIN as Short term or Long term is 3 years period. If one sells his new house in less than 3 years and incurs profit, the gain is termed as Short term capital gain. And if he sells his new house after 3 years and incurs profit, the gain is termed as Long term capital gain. Now there is no way to avoid tax in short term capital gain, whereas there is way to save tax in long term capital gain, if the profit incurred is re invested in another residential house of price more than the profit.

The above way of saving tax from long term capital gain will help in rotating money in market to some extent, as it will result in at least two transaction of selling and buying a residential property. Considering this advantage, if Government can REDUCE The differentiator period from 3 years to say 2 years, then the market player who might be waiting for next year to sell his house to re invest, may do it so today and in a way will improve rolling of transactions in Market. Government will not loose anything , but will just be helping in moving the selling environment for its public to one year sooner. ( later on when economy improves, the years can again be raised to original 3 years )

IEB reader Piyush Goyal (pgoyal77@gmail.com) sent in the following comment -

Good idea without working out Revenue ramifications for the Govt. – Decreasing revenue would lead to further increases in deficits. Not a desirable side effect of the Capital Tax change prescribed.

Real estate in India was a bubble that needed to be pricked and was rightly so in this current market turmoil. The bubble was largely an effect of $’s looking for homes. As $ flow reversed course (for a myriad of reasons including margin covers, unwinding large diversified derivative positions etc etc), the bubble burst. My guess is that the affordability index of residential properties reached heights never seen in the Indian market during this bubble and popping of the bubble was a good thing. The 3 year lockdown on Cap-Gains is a great policy that needs to remain. MY TAKE – Real Estate (Residential Real Estate) should in a country like India never become an investment asset. No more Cap Gain benefits, not even after 3 years holding period.

One school of thought blames the “CapGains Clause” and “Income Tax gains on Interest Payments” as the excacerbating cause of the bubble in the Real Estate space in US and the resultant crash.

As the situation around the globe/US improves over a period of 3-4 years, the tremendous amounts of $’s being printed by the US Fed will once again look for homes to park and India will once more be ripe for a bubble of sorts in the RE space.

India needs to manage not just this current slowdown but also the impending bubble that might follow. Monetary policy cannot be ad-hoc and directed towards one marketplace or another, but deliberate and planned affecting prices across the economy – It should not cause bubbles and rolling recessions, instead should be used to smoothen the growth rate of the economy/GDP to Trend Growth Levels. Price stability is tantamount not fixing a market or two.

The sincere thoughts of the writer are appreciated but slowdown in a sector (mostly irrelevant and excess prone sector like RE) cannot and should not be cause for myopic policy – Long Term (Medium Term at the very least) price stablity should be the goal of both Monetary and Fiscal policies.

December 29, 2008

Whither Now, India?

Filed under: Basic Questions,Growth — Tags: , , , — Prashant @ 8:41 am

What does 2009 hold for India, given the global credit crisis and the aftermath of the 26/11 Mumbai terror attacks?

Joe Nocera, one of my favorite business journalists, thinks that India’s banking sector has managed to avoid getting dragged down by the financial maelstrom.

Do you agree?

And what is the outlook for the rest of the economy?

November 10, 2008

Is India’s Economy About To Turn The Corner?

Filed under: Energy,Growth,Trade — Edward @ 2:15 pm

Indian inflation fell back again in the last week of October, as energy and commodity prices continued to fall, and the impact of the global financial turmoil and credit crunch ricocheted its way across one country after another. The IMF last week forecast annual growth for India of 6.3% in 2008 while India’s manufacturing expansion, which continued to weaken, still held out against the global trend, according to the latest JPMorgan global manufacturing PMI.

So, as we enter November, and a number of Indian indicators start to improve, it is certainly worth asking ourselves, has India turned the corner? Will India lead the emerging markets charge during the next global expansion?

I am not, I am sure, alone in feeling that this is a distinct possibility, and, indeed, a similar view was expressed only last week by Sharmila Whelan, senior economist at CLSA Asia-Pacific Markets.

“We do expect the Indian business cycle to be the first to bottom in Asia. And, it should, in theory, be first to emerge,” Sharmila Whelan, senior economist at CLSA, said “The worst will be over by mid-2009 and by 2010 you should be able to see the next investment-led business cycle taking root.”

To the two reasons Wehlan offers us as an explanation for why we should expect India to do better than most (and, perhaps of particular nore here, better than China) – the fact that Indian trade constitutes only about 32.5% percent of gross domestic product (only about half the China figure – thus India is better protected from fluctuations in global trade) and the fact that India (unlike say Russia or Brazil) will be a large net beneficiary from falling commodity prices – I would add a third, India’s very favourable demographic profile, which will mean that over the next decade India can continue to draw on the benefits of a young and rapidly growing labour force at just the time when 30 years of once child per family policy starts to bite really hard on the new labour market entrant cohorts in China (for example). (more…)

November 7, 2008

India’s Development Prospects: Between Doomsday and Utopia?

Progressive critiques of India’s recent development prospects are often marked by schizophrenic worldviews – between what is and what ought to be.

Mira Kamdar’s recent piece in the World Policy Journal illustrates this well. By Ms. Kamdar’s account Indians are heading down an inevitable path to doomsday. Malthusian population pressures, resource scarcity, global warming, environmental degradation, industrial capitalism, and political corruption have combined with an inherently fractured society that is likely to erupt in caste, religious, and class warfare, terrorism, and self-destruction. Mix in the recent US-India civilian-Nuclear deal and the presence of unstable neighbors – Pakistan, Bangladesh – along with an aggressive China, and Ms. Kamdar offers up all the ingredients for a nuclear holocaust. The only uncertainty we are left with is: which doomsday will India break into first — internal implosion or external explosion?

And if this is not enough, Kamdar has one more concern: Indians are taking to cars rather than following the example of bicycle aficionados in Amsterdam, Paris, and New York.

All this, because Ms. Kamdar wishes to disabuse her readers of taking too seriously the rosy-scenarios painted for India in the 5 year old Goldman Sachs BRICS (Brazil-Russia-India- China) report. Perhaps the BRICS authors expected a less fundamental critique of their growth-accounting models? Instead, Ms. Kamdar offers her own BRICS dream in the very last para of her piece: India’s under-class and lower castes having finally usurped political power will magically transform Indian democracy, to root out corruption, poor governance, and “…will have delivered quality education and healthcare, housing, clean water and sanitation…. Its policies will reflect the active civic engagement of an informed electorate, becoming a model for the world of the advantages of truly democratic governance. Now that is what I call dreaming with a BRIC.”

An ongoing doomsday scenario in India that ends in a future utopian vision for India: Ms. Kamdar offers no intellectual bridge from here to there. So how can one trust the reality of either worldview?

Perhaps if she had considered the half-century lost under the unproductive haze of the License Raj; or the pernicious harm done to Indian polity by a caste based reservation system that actually reversed upward caste mobility and institutionalized caste divisiveness in Indian society — an outcome that ironically is the one real ingredient in Ms. Kamdar’s utopia; or, if Ms. Kamdar had considered the woeful neglect of land markets in India instead of choosing to paint the Nano plant site controversy in West Bengal in class-warfare terms; or, that even assuming the worst case global-warming outcome and its impact on agricultural productivity in India, opening up the rural economy to trade and investment offers the individual farmer more, rather than less, options – of goods, technology, and mobility – when dealing with a changing environment.

All of the problems Ms. Kamdar touches on are real and require incremental but genuine responses – to be provided by markets, entrepreneurship, leadership, and good governance. And these responses will by necessity emerge from what India is and not from some radicalized new society that Ms. Kamdar dreams.

Too bad Ms. Kamdar has chosen to neglect the reality and promise of progress in India, while conjuring up wild lurches between doomsday and utopia. One can only hope that the readers of WPJ are more grounded than the author.

Guest post by Nimai Mehta, Assistant Professor of International Trade and Business at American University, Washington DC.

October 16, 2008

The ‘Indian Political Business Complex’

Filed under: Business,Miscellaneous,Politics,Regulatory reforms — Arjun Swarup @ 10:32 pm

An article of mine got published on TCS Daily on the evolving political and business landscape in India. The article can be found here. The article is reproduced below as well -

The decade and a half following India’s economic reforms of 1990-91 has been an exciting and transformational one for India and its people, and has also had a significant impact on the entire world. Much good has happened, with increasing growth and prosperity benefiting millions. The world has observed the rise of a large and vibrant middle-class, an aggressive and innovative private sector, and the growth of a soft culture. It is true that severe challenges still remain, caused mainly by massive disparities in income and access to resources, which mean that over 300 million people remain desperately poor, and large parts of the country not benefiting from growth.

(more…)

September 30, 2008

Biggest Lesson From The Great Depression

Ilian Mihov, Professor of Economics at INSEAD, holds forth on the lessons of the collapse of the ‘golden age’ of the late 1920s.

What is the biggest lesson from the Great Depression? In my view, it is that monetary policy and the financial sector play a crucial role in economic development. Let me put it more precisely: good monetary policy is unlikely to accelerate the speed of economic growth – after all we have more income year after year because mankind comes up with new ideas, with new products, with more efficient ways of producing output. However, bad monetary policy can easily derail economic development. It is true for rich and poor countries alike.

Why are financial markets and the banking sector so important? Banks fulfill a very important role in the economy by matching borrowers and lenders. When we deposit $100 in a bank, the bank keeps, at most, two to three dollars in its vaults (in fact the money is often in the central bank), the remaining $98 or so is lent to a borrower.

Most businesses require loans for their normal operations. When the banking sector does not work properly, businesses cannot get loans and they have to curtail their production and lay off workers. As they curtail production, they demand fewer products from their suppliers and therefore their suppliers have to reduce their output and fire workers. If manufacturers cannot sell their goods because the firm downstream does not need as many products as before, they cannot generate enough revenue to repay their earlier loans. Businesses go bankrupt and banks experience further problems as their balance sheet deteriorates due to non-performing loans. At this point, banks want to lend even less because of the uncertainty generated from bankruptcies. As they lend less, the vicious circle continues – with producers cutting production and firing workers. On the top of this, depositors start worrying about their deposits because the non-performing loans have made some banks go belly up – your bank has lent out your money to borrowers who cannot return it. Depositors start withdrawing their cash and banks have even fewer possibilities for lending as they have to hoard cash in case there is a run on the bank. If the financial sector does not work, the real economy can go into a deadly spiral and shrink by 30 per cent as during the Great Depression.

And one thought like Ilian that this would be obvious to all the policy makers. However all the lessons from the Great Depression seem to have been lost within three-quarters of a century. It seems, to paraphrase Marc Bard, that politics [especially of the petty and partisan variety] eats policy for lunch seven days a week.

« Newer PostsOlder Posts »

Powered by WordPress