Meaning that 'public policy'

Prof Ila has a very interesting piece on the ultimate impact and true use of Aadhaar in India. Read NIPFP study finds large returns from Aadhaar project

The FTI Team has also announced huge prize for public policy competition. 

Back to Marx and banking in 21st century. Read "Marx would have been proud of bankers".

Market process reduces inequality

Prof Ila has comprehensive review of a recent research paper in which she finds that:

• A focused study of Dalits finds that the growth of the market economy has ushered in a reduction in caste and social inequality with an impact more fundamental and far reaching than the changes in average income or expenditure patterns. Dalit well being, when measured by personal consumption patterns, practices around social events, personal relationships across castes and expansion into non-traditional economic activities and occupations, shows rapid improvement in the market reform era in contrast to previous decades.

Moreover, there are number findings which are really fascinating to see at this juncture.

False clime went to Honor Mr Y V Reddy, Padma Vibhushan

One thing I constantly argued with my friends on Mr Reddy’s monetary policy but they never agreed. But the devil’s is in detail now!

According to economist Ila Patnaik

• Governor Reddy came in, at first, exchange rate flexibility was increased. But the RBI then shifted gears to fighting appreciation. But now, currency trading was hard. Every time the RBI bought dollars, it injected rupees into the economy. This resulted in persistent inflationary pressures. Every lever that the RBI controls — monetary policy, public debt management, banking regulation, securities regulation, capital controls, etc — was used by Dr Reddy to focus on the exchange rate. The longstanding effort of phasing out CRR was reversed. The tools of prudential regulation of banking were pressed into service. Tactical details of issuance of government bonds were adjusted to suit the RBI’s need to undo the flood of rupees unleashed by its currency trading. Help was requested from the finance ministry for fiscal resources for this battle, through the “Market stabilisation scheme”.

• Dr Reddy was on the wrong side of history. When a central bank prevents rupee appreciation today, financial markets expect that appreciation tomorrow, which triggers off a capital surge into the country with investors seeking to profit from the coming rupee appreciation. When Indian companies expected rupee appreciation, it was advantageous to borrow in dollars and not hedge this currency risk. Capital inflows are driven by the policy stance of the RBI on the exchange rate, and the Reddy regime sucked capital into the country.

• This battle overshadowed Y.V. Reddy’s period as governor. A cost-benefit analysis of this period is instructive. On the cost side, Reddy generated distortions of monetary policy, banking, securities markets, capital controls, public debt management and public finance. On the benefit side, Reddy subsidised

Read full article here

Economically died but politically alive-II

On this Monday Ila wrote another article which is very opt to the titled of this post.

Some excerpts:

“..Many sectors of industry were not allowed to grow large by deliberately keeping them small. Bank nationalisation was followed by small-scale industry reservation. The policy of explicitly reserving certain items for production by small companies was created. Indian industry has lost out for years because of being unable to harness economies of scale. While the list of reserved items has become shorter, it has not been before China has thundered ahead building large scale industry, while Indian industry has helplessly stood by and watched.

Until then factories with over 1,000 workers used to require government permission for lay-offs. The size threshold was amended in 1976 to 300. In 1982, when Indira Gandhi was back in power, this was further reduced to 100. Even today many industrial establishments require prior permission of the appropriate government before lay-offs, retrenchment and closure. Most problems connected with the IDA arise from this since the government becomes a third party to the dispute even if the employee is satisfied with the severance package. These sections of the Act need to be considered along with other elements of the act which makes any dispute between an employer and an individual workman an industrial dispute.

The central planning logic went into other areas was well. For example, on February 17, 1976, the Urban Land Ceiling Act was passed. It covered 73 towns and cities and imposed a ceiling of 500 to 2,000 square metres on urban land holdings. It constitutes a major distortion of the urban land market. While this was a state subject, the Constitution allows Parliament to pass a bill if more than two states agree, and this path was chosen during the emergency. Another law giving disproportionate powers to the state was the Monopolies and Restrictive Trade Practices (MRTP) Bill proposed in 1967. It became an act and came into force from June 1, 1970. The MRTP Act, which gave huge powers to the government, sought to check the expansion of large industrial houses with assets over Rs 1 crore or where their share in the market exceeded 33 %.

….Until governor Subbarao changed the rules recently, they even needed licences to open ATMs. Only 18 foreign bank branches are given the licence to open every year. If banks open branches abroad, they need permission. Every product that is launched needs permission from RBI. The authorities decide what the savings bank interest rate is. The authorities decide what the interest rate on lending to certain sectors is. The authorities define who to lend, how much to lend and at what rate to lend. They decide how much a bank has to lend to the government, to the central bank, to agriculture, to small-scale industry, to exporters, to students, to rural businesses and so on. Every element of the life of a banker is dictated by the authorities.

………..everything that can kill the growth of a healthy and competitive banking system plagues Indian banking. Undoing all this is going to be a formidable task.”

Tim Harford on India’s Bank Nationalization and Airport Infrastructure

In an interview to ET Tim said:
Do you think India did the right thing by nationalising its banks?

According to the conventional wisdom, the mainstream economies were in recession and India was perhaps right in its strategy because it avoided recession, especially the Asian downturn. But, when it comes to openness for foreign capital, there is need to be more rational.

What do you observe when you look at India as an economy?

One of the first things that strikes me is that India is leaping forward in chunks. So, the airport infrastructure is fantastic, hotels are really good, but there is problem with traffic and other infrastructure. I see new and old worlds exist together in India, which is a good thing, but it’s going to put India under strain.

Here come two important piece of argument on Indian bank nationalization and airport infrastructure development.
Very convincingly Ila Patnaik says what is true in bank nationalization.

"The larger employment generated by PSU banks is a cost to the economy. PSU banks have much lower productivity than private banks. The profit per branch of public sector banks is Rs 0.5 crore, a fifth of the Rs 2.5 crore for private banks. The profit per employee at Rs 2.6 lakh is only a third of the Rs 7.6 lakh for private banks. This is despite much higher wages at private banks. They lag behind on efficiency and profitability, thereby making financial intermediation costly for the economy. This reduces growth and productivity in the Indian economy.

However, as the Raghuram Rajan report argues, if efficiency and profitability are not the correct yardsticks by which to measure the success of public sector banks, and “social goals” such as financial inclusion and credit to the priority sector are the right objectives to look at, PSU banks have failed even on those. India continues to have a very poor performance on financial inclusion, even though a certain recipe of bank nationalisation, directed credit, etc, has been tried for many decades.

While in the ’70s and ’80s, opening branches to raise deposits may have been a priority, today the experience of many countries, including India, has demonstrated that access to credit is very important in the reduction of poverty as it helps smooth consumption. It is claimed that the right way to get this done is to force PSU banks to open rural branches. Empirical evidence shows that these approaches are not delivering results. In addition, these old approaches have failed to take into account India’s urbanisation and the increasingly important needs of financial services by the urban poor. The anti-competitive policies of the authorities, such as preventing branch opening or preventing the entry of new private banks, directly hurts the agenda of improving access to finance for the urban poor."

Bibek Debroy on airport infrastructure development

Dr. Y V Reddy model doomed!!

Ila Patnaik has a nice piece on how India fared in the current global financial crisis and shoots people who argues that India was saved from severe financial crisis because of the government and RBI role in controlling everything.

Thus, she concludes:

• “It is important to recognise that India is a very poor country. We know very little about how to establish institutions or regulate markets that can support a sophisticated economy where a billion people can enjoy high productivity. Nobody in the world wants Indian-style monetary or financial policymaking. Our path ahead lies in learning how fiscal, financial and monetary institutions work in countries where per capita GDP is many times bigger than what we have in India. Our hope for making progress lies in learning these things with an open mind, and demanding a pace of change in India so that we can become more like an OECD country. A villager with no roads may foolishly boast of having no accidents, but he cannot teach people how to regulate traffic on busy intersections. It is important for policy-makers to remember that India has no lessons to offer to regulators operating in the sophisticated world of finance, and proposals suggesting that they should learn our style of regulation only make us look foolish.”