Do India really lag behind other BRIC nations?

In Telegraph, during last month, Jim O'Neill written an article titled "Jim O'Neill: BRICs' rapid growth tips the global balance" In that article he said that "My only regret on the first BRICs analysis of 2001 is that we weren't bolder. Between 2001 and 2010, the BRIC economies' GDP rose much more sharply than I had thought possible even in the most optimistic scenario" [Note: Jim O'Neill was the one who coined the term BRIC, in December 2001. To describe the four biggest developing economies, Brazil, Russia, India and China.]


Recently (i.e. 7 December,2011), an Article Titled "India most disappointing among BRIC nations: Goldman's O'Neill". The chairmen of  Goldman Sachs Asset Management, Jim O'Neil, said on Tuesday that "Growth in all four BRIC economies has surpassed expectations in the decade since the term came into existence but India's record on productivity, FDI and reform has been the most disappointing". He further stated that "All four countries have become bigger (economies) than I said they were going to be, even Russia. However there are important structural issues about all four and as we go into the 10-year anniversary, in some ways India is the most disappointing," The glacial reform pace has hit India's hopes for double-digit economic growth, O'Neill said, adding: "India is as bad as Russia is on governance and corruption and, in terms of use of technology, Russia is in fact much higher than India."(Source: Economic Times.)


My reflection


If anyone who follows the news on India would know that the first and foremost reason, for Jim O'Neill statement on India (i.e. "India is most disappointing among BRIC nations"), is because of  decision on FDI on retail had been put on hold by the Government of India.  As per OECD Q2 report, FDI inflow to BRIC nations are as follows:  Brazil US $15 billion, Russia US $10 billion, India US $13 billion and China US $60 billion. 


Many may agree with Jim O'Neill in comparison as well as taking the present situation in consideration. But, India, did do well among BRIC nations considering its circumstance and limitations. No doubt, that the world had expected more from India, which India failed to fulfill. From Jim O'Neill statement one can see that he had expected India to take the lead among BRIC nations. 


Jim O'Neill said that "India is as bad as Russia is on governance and corruption..................", but, when we see the latest Ranking on  Corruption Perception Index 2011, we can see that India is far better than Russia (India ranks 95 (3.1) and Russia ranks 143 (2.4)). India may not be good at governance and technology, but they are not lagging behind any other BRIC nations. 

Can Europe Revive and Euro Survive?

In last week edition (i.e. 11.11.2011) of Economist an Article entitled "Staring into the Abyss" with sub-sentence "The Euro Crisis might wake Europe up. But more likely, argues Edward Carr, it will be lead to compromise and decline". The article gives us more clear picture on the on going Euro Crisis and how Europe should take necessary steps to get out of the crisis. The authour says that "The euro zone still has the capacity to stop this run on its banks and governments. As a block, it is less indebted than America and its public-sector deficit is lower." and also he feels that "It has the money to fortify its banks against the default of Greece—and Portugal and Ireland, if need be. And it is minded by the European Central Bank (ECB), which can in principle stand behind those vulnerable governments by buying their debt in unlimited quantities on the secondary market." 

The authour further states that "While the world waits for Europe to make up its mind, catastrophe is in the air. It could take many forms. A country might storm out of the euro—which the treaty forbids, but who could stop a determined government? European banks might suffer a fatal loss of confidence. Italy or Spain might become unable to borrow on decent terms. Or a government trying to impose austerity might be replaced by one that rejects it. Any of these could cause contagion and plunge the world economy into depression." In the article, it is stated that ' ...... writes David Marsh, authour of a history of the Euro, "Europe's Melancholy Union." ' It concluded that "Can Europe turn back from the abyss? Only if the core countries will support the rest as they submit themselves to radical political, social and economic reform. Nobody should be under any illusions about how difficult that will be." 

My Reflections

The present Euro crisis is becoming deeper with vigour. The ongoing Euro Crisis will be one of the biggest crisis ever happened in the history. Before going further, I would like to quote few important phrases and quotes.


I remember the quote of Friedrich August Hayek in his paper (later published as a book) entitled "Denationalisation of Money - The Argument Refined". The paper/book was An Analysis of the Theory and Practice of Concurrent Currencies. In that paper/ book, F.A. Hayek had mentioned that

"During the Middle Ages, however, the superstition arose that it was the act of government that conferred the value upon the money. Although experience always proved otherwise, this doctrine of the valor impositus was largely taken over by legal doctrine and served to some extent as justification of the constant vain attempt of the prince to impose the same value on coins containing a smaller amount of the precious metal." (chapter III, The Origin of the Government and Prerogative of Making Money)

As we all know the fact that the Euro was introduced coercively & its purchasing power is determined by the group of experts. If we re-read the above paragraph of Hayek then we can understand  clearly what exactly happens when we move from one currency to the other (whereas here, in case of Euro, many currencies to one singly currency). It's not easy to determine the value of purchasing power when group of countries moved to one single currency, yet, we should really appreciate the Euro nations who had done it more tactfully without any haphazard, esp., at that point of time. 

As I quoted earlier somewhere in my earlier posts, that in 1999, the year leading up to the launch of the euro, Milton Friedman stated that he did not believe the Eurozone could last ten years and even as late as December 2005 (less than one year before he died at 94 years of age). He said that  

"The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states. There have been unions based on gold or silver, but not on fiat money—money tempted to inflate—put out by politically independent entities" (Interview with New Perspectives Quarterly Magazine, 2005)

He also stated (after one year of launch of Euro) that 

"If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles."

Now, coming back to my reflection of existing crisis, still many economist believe that Europe have more resilient and also believe that Euro may survive . No doubt that (as the authour of the above mentioned article said) "Euro zone has the money to fortify its banks ...... ", but, the spread of crisis had already become wider. If Euro zone should come out of this crisis (remember the recovery cannot be quick) then   the major countries of the Euro zone should make more sacrifice  and should give complete support to the suffering nations. But these cannot happen easily, because, no Euro zone countries (as of now) are ready to support the crisis affected nations and they don't want there countries to suffer.

Two important things should happen if Euro wants to survive, as I always said earlier, Greece should default. Many people may feel this is too pessimistic view, but, if this does not happen now, it will happen later and that will affect the Europe and Globe severely. Secondly, the major Euro zone countries should  fortify the banks in order to give more support and save other weaker nations (except Greece, because the spread of crisis is much deeper than what they expect to be). Even if they follow these steps, we cannot say that the Europe will revive and Euro can survive. 

As the proverbs say "Time is the Healer; Time is Great Physician", so only time can say whether Europe will revive and Euro can be saved. Let's see how the Group of Experts act to save Euro and Europe.

Europe is in Jinx - Greece should Default!

Europe, Europe, Europe!!!!! Europe is everywhere in the news for the past few months, since Greece Crisis. The Trouble is creeping up faster than expected and faster than inflation. As everybody knows that it was started in Greece and spreading rapidly all over Europe now. Yesterday (i.e. 31.10.2011), Organisation for Economic Co-operation and Development (OECD) slashed its growth forecasts for some of the world’s biggest economies. It said that the “without decisive action the outlook is gloomy”. At the G20 Summit the OECD had warned that bold action needs to be taken to ward off another recession in Europe.

In its forecast, OECD said that the economic growth in the Eurozone would stall at 0.3 percent next year but only after just 1.6 percent growth in this year (the current forecast is down from the OECD’s May forecast of 2 percent growth in 2012). It is believed that this will remain weak in the US, while emerging markets will see slower growth than before the financial crisis began. It also said that the growth in G20 nations will have a gradual decline of 3.8 percent in 2012 from 3.9 percent this year, although it is expected to accelerate to 4.6 percent in 2013. The OECD added that the scenario could be worse if the Eurozone rescue deal fails to restore confidence in market. 

In its appropriate policy response it suggested the following to resolve the Euro area crisis: 

1. Important to clarify and implement fully and decisively the measures which was already announced. 
2. It should break the link between sovereign debt and banking distress.
3. To deal with Greece.
4. Europe should ensure that the sovereign debt crisis does not spread to other European countries.
5. To secure appropriate capitalisation and funding for banks

It further added that “Detailed information is needed on how the package will be implemented” which was announced last week (i.e. on 26.10.2011) to resolve the crisis.

My Reflection:

I am not surprised by the OECD forecast, but, I am surprised by the policy response for the crisis. If one follows the European crisis from the beginning then one can easily point out some of these policy responses without any further analysis of the present condition. What really startled me was that the OECD, being one of the world reputed organisation, had made such naive suggestions as a policy response to Euro Area along with a note that detailed information about the package is needed on how it will be implemented. Many of the people, not only from Economics background, know that if Europe wants to move from crisis then it has to deal with Greece and it should stop the sovereign debt crisis spreading to rest of the European countries. It is really astounding to hear these things from a world reputed organization. I know that I am not expert on any of these lines, but as a student of economics and also the person who follows the happenings I feel that something can be added. They are as follows: 

1. If the Europe needs to avoid another recession, then the foremost thing it has to do is to strengthen its banking system along with sound monetary policy (keeping in mind that one policy is for all the Euro countries, so more careful measures of policy needs to be taken). 

2. To restore the people's confidence in the system, the policy measures should be in such a way that it should generate more employment and also should stimulate the investment activity in the economy.

3. The foremost thing which I feel should happen at least now is allow Greece to Default. I again repeat the quote of Ludwig Von Mises, from his book Human Action, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."  

Perfect quote, "..... a voluntary abandonment or later as a Final and Total Catastrophe ......." , even though he said this for credit expansion, this  is perfectly suitable for Greece considering the depth of the current crisis. The time has come and it is now, that Euro should allow Greece to default else the entire Europe will definitely fall in another recession which may lead to another global crisis soon. Let the time and the policy makers decide the fate of the Europe and the Global Economy.

RBI's Second Quarter Review - An Analysis

It's back in news. Yes, Inflation is back again in the headlines only difference is this time with the RBI policy. The Wholesale Annual Inflation was 9.72 percent in September, which had made RBI to again rise its policy rate by 25 basis points . The RBI on Tuesday hiked its policy lending rate, the repo rate, by 25 basis point to 8.50 per cent. This means that the reverse repo rate, at which RBI drains excess liquidity from the economy, will also be increased by same basis point to 7.50 percent (as per the RBI policy rate the corridor of one percentage point is maintained between the two). This also means that the Marginal Standing Facility (MSF) will stands adjusted at 9.50 percent. 

RBI says that the Stance of Monetary Policy is Intended to 

• Maintain an interest rate environment to contain inflation and anchor inflation expectations
• Stimulate investment activity to support raising the trend of growth
• Manage liquidity to ensure that it remains in moderate deficit, consistent with effective monetary transmission

This the 13^th  time RBI had hiked its interest rate since March last year (i.e. 19 months). 

RBI had not only hiked its prime lending rate but also it had lowered its growth forecast from 8% to 7.6% fro the current fiscal year. It came with the supportive statement by citing the slowing world economy and declining domestic growth. Surprisingly, it had retained the fiscal year-end projection of inflation at 7%.  

My Reflection

First, after reading the RBI's second quarter review, I asked myself that, Do you think RBI's policy will have any impact on Inflation? The immediate answer (like many of the people, I think) was NO. Another interesting point which I would like to reflect here is on the policy stance which RBI had mentioned that "Stimulate investment activity to support raising the trend of growth". I really doubt this RBI policy stance, that by increasing interest rate one can stimulate the investment activity in the economy.  

Second, last month in the post titled "RBI's Goodwill at Stake" it was clearly mentioned how often RBI changes its own stance from one forecast to other. The recent Second Quarter Review of Monetary Policy 2011-12 by RBI proves the same.

Third, is inflation still monetary phenomenon in India? I feel that RBI policies had failed to reflect the real pulse of the economy. 

QE and Economic Growth

Last week Monday (i.e. September 19, 2011) the Bank of England claimed that "Quantitative Easing (QE) alleviated economic crisis" It is stated that " .... its first to measure the effect of QE on the economy, found it provided a "significant" aid to growth and helped GDP increase by between 1.5% and 2%. This was equivalent to dropping interest rates by between 1.5 and 3 percentage points .... "

This article remembered me another article which was published in Buttonwood of Economist on Jan 4, 2011 titled "Show me (the Effect of) the Money". This article states that "David Ranson of Wainwright Economics is a sceptic on this issue and has analysed the data over the period of 1950-2007. He has looked at monetary base growth rather than M2 or broader measures for one very good reason. It is clear that QE has had a much greater impact on the monetary base (doubling it in the autumn of 2008) than on other measures such as credit growth" (Note: The analysis is done on US Data)

It is further stated that "Ranson divided the 57 years period from 1950-2007 into two-years  when the monetary base grew at an above average rate (8.1%) and years below average growth (3.5%). Economics growth was higher (3.7%) in the years of slow money growth than it was in the years of rapid growth (3.2%). The same is true for industrial production. Even the stock market performed better in years of sluggish money growth". The Economist went on to claim that QE will not really help the economy. Now, Bank of England claims that QE helped their economy to move further. 

For some point of time QE was not in newspapers or aticles; but now they are back, thanks to the EURO debt crisis and Bank of England. Three days ago (i.e. 27.09.2011) in Economist again there was an article titled "Which region needs QE?", the article made comparisons on three economy's namely U.S. , England and euro area over the QE. It went on to say that euro area have slowest of the money growth.


After reading these three articles few questions raised in my mind 1. Do QE will really help the economy to move faster away from any crisis? 2. Why QE fails in U.S. when it can help the other economies? (I think probably due to poor banking managment) 3. Is there any direct relationship between QE, Inflation and Growth Rate? It's not easy to answer all these questions, but history and repeated economic events/crisis gives some near answers for these questions. (Leaving open ended for analysis)

RBI's Goodwill At Stake?

From the recent review, actions and projections of RBI, I am really baffled on What RBI is trying to do? and raised the question that whether RBI had Gone Mad? I may not be an expert on these lines, but, being an economics student one can at least feel the pulse to certain extent. 

In an weekend newspaper M.D.Nalapat had written an article titled "The RBI had Gone Mad". In this article, the writer says that "India Inc has been crippled by the duo's policy of relentless rate hikes, ostensibly to "rein in inflation". Neither Reddy nor Subbarao had IQ needed to understand that Inflation in India is caused by factors other than the Interest Rate is a Tragedy for the Country". 

He further stated that "Inflation since the UPA took office in 2004 has been largely caused by uncontrolled Government spending, mostly on programmes that are designed to increase the tally of the congress for the next elections. Thus, instead of public works programme that would expand rural infrastructure, what has been implemented is a dole that does nothing to ensure that permanent employment opportunities form as a result of the huge Financial Outlays of the Sonia Gandhi-approved schemes" 

Of course, this post is not about the writer's political view or his general view.  But the above mentioned article have few valid points, which we need to note, that Inflation in India is not only because of the money supply but it is due to various factors. (Austrian economist may argue differently - but, we are not here for any debate). This article further strengthen my queries and doubts on RBI, here are the 2 major points from this article which supports my query on credibility of RBI


1. The article says that Inflation in India is not due to the prevailing interest rates but it is due increase in uncontrolled Government spending. (RBI failed to feel the pulse?)


2. The Interest rate in India is much higher compared to any developed nation(not even UK and Europe) and China is the only country which comes closer to our interest rate.


This article is not the only reason which made me to raise question on RBI's credibility. There are more valid reasons, they are as follows: 


Few days before (i.e. on 16 September, 2011) RBI had announced its quarterly review with an hike of 25 basis points (as expected). They came with the usual reply that this move is to control prevailing inflation. Despite the fact (I hope they know) that raise in interest rate alone cannot contain the present inflation rate. 


For the past few years, predictions and revisions of the Central Bank (RBI) have gone hand in hand. In recent past, whenever RBI makes prediction it hardly takes a month or so that it revises its own estimates. After 3 times revision, RBI had predicted the Inflation level of 8% for the year 2010-11, whereas, the actual Wholesale Price Index (WPI) by March 2011 ended at 9.68 %. In the latest review it predicts that inflation will be 7% by the year-end (i.e. March, 2012). (Note: The current (August) WPI stood at 9.78% (Provisional) as compared to 8.87% corresponding month of last year (2010)) 


Being the Central Bank of country, if RBI fails to feel the pulse of the economy, then it will be a great difficulty for the nation to achieve its macroeconomic objectives. Already people have started losing their confidence on RBI. RBI's credibility and laud which it had received from across the globe are now at stake. In simple, RBI's Goodwill is at stake. 

Some Basic Economics Lessons - Fiscal Deficit

      The Standard & Poors (S&P’s) had recently downgraded U.S. in their credit rating from AAA to AA+. After a week of the downgrade, Deven Sharma, then the president of S&P’s, got fired from the post (even though many newspapers quoted that he had step down) .
         

    The S&P’s report stated that “We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.” It also stated further that “ The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.”
                

     Many people criticised the downgrade of the U.S. credit rating and few people supported the downgrade of U.S. credit rating with statement that it is due to growing fiscal deficit in U.S.. Of course, it will be a very interesting topic do an analysis on the latter part and one can write a good article on it. But, that's not going to be done here now.

      Now let's go to the basic lesson and see what does fiscal deficit means, its components and what does it indicate to us?

    Fiscal deficit is an economic phenomenon, when Governments total expenditure exceeds its revenue. In simple terms, it is the difference between government's total receipts (excluding borrowing) and total expenditure. There are two primary component of Fiscal Deficit; they are Revenue Deficit & Capital Expenditure.

    Revenue deficit is defined as the actual net amount received (i.e. revenue minus expenditure) fails to meet the projected (or predicted) net amount to be received. In other words, when the actual amount of revenue received and/or the actual amount of expenditures do not tally with the projected revenue and expenditure figures. Capital Expenditure is famously known as CAPEX. It is the expenditure incurred for creating future benefits. In simple terms, the expenditure incurred to create physical assets like buildings, machineries, equipment’s, property etc.... A capital expenditure is incurred when the money is spent on either to buy fixed assets or to add to the value of an existing fixed asset.

    Fiscal deficit is an indicator to the government, about the total borrowing requirements from all sources.

Fiscal Deficit in India:

       In India, the fiscal deficit is financed by obtaining funds (money) from Reserve Bank of India (this is also called as deficit financing). The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks). As per RBI Annual Report, the Fiscal Deficit for the year 2010-11 (Revised Estimates) is 7.7% (combined – Centre (5.1) and State (2.6)); whereas the Budget Estimates for 2011-12 is expected to be 6.8% (Centre - 4.6% & State - 2.2%)  

    

    

U.S. Debt Ceiling

On 27^th July, 2011, an article titled "Q. and A. on the Debt Ceiling" was published in New York Times. The same article was published in "The Hindu" on 29^th July 2011 titled "A Crash Course in all the things Debt Ceiling - Michael Cooper, Louis Story" 

Today (i.e. 1^st August, 2011), U.S. President Barack Obama had announced their deal on debt limit. Even though it is announced, the deal still has to be passed by both the Senate and the House of Representatives. However, it is expected that, the deal will get approved before the deadline (i.e. midnight of Tuesday), beyond which the U.S. Treasury had warned that the federal government would not be able to pay its bills.

The new deal was tied to cut the $14.3 trillion national debt amid of higher public spending. The deal will be implemented in 2 stages. In the First stage of plan, Special Congressional Committee has to find $ 1.5 trillion in savings by the end of December. The Second stage of plan is to cut the public spending by $ 1 trillion over the next decade (i.e. next 10 years). The deal is expected to have certain relief for U.S. economy.

My reflection

Perhaps, this is the best possible debt ceiling deal which U.S. would have struck. There are few question arises over the deal; they are 1) why there is emphasis only on cutting public expenditure and there is no signal or even utterance on taxes? (This is pointed out by some of the senate and house of representative members) 2) why did U.S. took so long to strike this deal (when it is to be without mention of tax), despite the debt crisis had started way back and got further deeper in May, 2011?

Will Euro Survive?

Last year, when I started to write this blog, (in May, 2010 - more than a Year Now!) in a post titled "Austerity Measures - everywhere around Europe" I had mentioned that I would not be surprised if EURO fails or dissolved. The current crises in Europe are showing some sign of Euro breakdown, even though it may not happen much sooner. Analyst and economist may feel this is a skeptic view, but, truth is always hard to accept.

Before going further, let me give a brief introduction on Euro "Euro is the official currency of the Eurozone which consist of 17 countries out of the 27 member states in the European Union. The euro was launched on 1 January 1999, when it became the currency of more than 300 million people in Europe. For the first three years it was an invisible currency, only used for accounting purposes, e.g. in electronic payments.  Euro cash was not introduced until 1 January 2002, when it replaced, at fixed conversion rates, the banknotes and coins of the national currencies like the Belgian franc and the Deutsche Mark" (Source: ECB website)

Coming back to the topic, that many economists and analyst now feels that Euro may fail and soon it may get dissolved. But, Professor Milton Friedman, Nobel laureate and Famous Monetarist, had this view even before Euro came into operation. In his interview to ABC Australia on 17 July 1998 that 

"In establishing the common currency area, the Euro, the separate countries are essentially throwing away this adjustment mechanism. What will substitute for it?

Perhaps they will be lucky. It may be that events, as they turn out in the next 10 or 20 years, will be common to all the countries; there will be no shocks, no economic developments that affect the different parts of the Euro area asymmetrically. In that case, they'll get along fine and perhaps the separate countries will gradually loosen up their arrangements, get rid of some of their restrictions and open up so that they're more adaptable, more flexible."

Friedman kept his view unchanged even in 2005, less than one year before he died (at age of 94 years)

"The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states. There have been unions based on gold or silver, but not on fiat money—money tempted to inflate—put out by politically independent entities. - Interview with New Perspectives Quarterly Magazine, 2005"

Some economist felt that Friedman was pessimistic in his view, and few said that Euro will not break-up or dissolve. They support their argument with the following stance that "Countries in the European member states are incredibly linked far beyond just sharing a common currency. The Borders of the countries have essentially been erased, the trade and even citizens can move freely between the Eurozone countries." It is true that Prof. Milton Friedman’s prediction is yet to come true, but it may happen sooner or later.

The current crises are showing the sign of break-up in Euro currency in the near future. The Greece crisis, which is slowly spreading to the rest of European member countries, will eventually make the member economies to move to their own currency after certain period of time. Still it’s too early to say how things will take its own shape.

Greece Austerity Measures - An Analysis

For the past one month, there is severe protest happening in Greece against the Austerity Measures. European Central Bank (ECB) and IMF had asked Greece to take essential Austerity Measures before they claim the bail-out package. ECB watched Greece very closely on their decision on austerity measures.

Let us have a look on the Austerity measures. The Austerity measures are mainly classified into 2 parts, one is Tax Increase and other is slash in Public Spending. They are as follows:
Tax increases include

• A solidarity levy: At 1% for those earning between €12,000 (£10,800) and €20,000 a year, 2% for incomes between €20,000 and €50,000, 3% for those on €50,000 to €100,000, and 4% for those earning €100,000 or more. Lawmakers and public office holders will pay a 5% rate.

• A lower tax-free threshold: People will now pay tax on income over €8,000 a year, down from €12,000. This basic rate of tax will be set at 10%, with exemptions for those under 30, over 65, and the disabled.

• Sales tax: The VAT rate for restaurants and bars is being hiked from 13% to the new top rate of 23%. This rate already covers many products in the shops, including clothing, alcohol, electronics goods and some professional services.

Spending cuts include:

• Public sector wages: Salaries will be reduced by 15%.

• The public sector wage bill: The goal is to cut 150,000 public sector jobs, through a hiring freeze and abolition of all temporary contracts. This should cut the total bill by €2bn by 2015.

• Social benefits and pensions: The retirement age is being raised to 65. Increased means testing, and cuts to some benefits, will reduce the total amount spend on benefits by €1.09bn in 2011, then €1.28bn in 2012, €1.03bn in 2013, €1.01bn in 2014 and €700m in 2015.

 (Source: Guardian.co.uk)

 The current Greece crisis raised few questions like, whether the Greece will take the Austerity measures despite of huge protest in the country? whether it will default or will continue with Euro?

Many economists and experts expressed that Greece have only one solution and that is to leave EURO and Default. But, leaving EURO is not easy and unfortunately, not an option for Greece at this point of time. In 1998, the founding members of the euro-area agreed to lock their exchange rates at the then-prevailing levels. Leaving the Euro means breaking its commitment and the very  motivation for leaving would be to change the parity. Leaving Euro will not only allow Greece to deal with sovereign debt crisis, but also it will be in middle of a bank run, while everyone would be trying to avoid ending up with devalued drachma (Greece currency before joining EURO).

If Greece leaves, then the other countries like Ireland, Portugal and may be even Spain might also follow on the same line (because they are also looking for the bail-out package since their economy is also in tussle to pay off their debts). This will lead to banking crisis in all these countries, by holding their debts which might lead to banking crisis in UK and German (because they are the major creditors for these countries), which will put entire Europe in crisis. These are the some major constraints and problems why Greece cannot leave EURO.

But, the economist who expressed their views that Greece should leave EURO have their own reasons. If the Greece does not leave EURO at the this time, when the economy is already very weak, then there is a risk that the economy will spiral down further in the crisis. It's hard decision which Greece had made for Austerity measures, since they did not have any other better option.

I remember a famous line of Ludwig Von Mises in his book Human Action, which is as follows:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

How True it is, a voluntary abandonment or later as a Final and Total Catastrophe of Currency System, even though he said this for credit expansion, this line is perfectly suitable for Greece.

What do you do while waiting for the revolution? - An Interview by Abhijit V Banerjee and Esther Duflo

"There is an easy confusion between "big questions" and "big answers". It is not that because the problem of poverty is large that the solution also must be large. "

How true it is!! It is not at all essential that big problems will have big or large solutions. Many times (even in Life) big problems have small solutions. The above mentioned line in quotes was from an Interview by Abhijit V. Banerjee and Esther Duflo authors of the Book titled "Poor Economics: rethinking poverty and the ways to end it". Their Interview had recently appeared in Times of India Crest (Special Saturday Edition) this week (i.e. 11.06.2011): the registered user (free registration as of now) can see full interview here and others can read the gist of the interview below:

Abhijit V Banerjee and Esther Duflo are among the most respected, watched, and discussed economists in the world today. Banerjee is currently the Ford Foundation Professor of Economics at MIT. Duflo, is Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics at MIT. In 2003, the duo co-founded the Abdul Latif Jameel Poverty Action Lab at MIT, which is best known for its pioneering efforts in conducting randomised control trials to test the real-world effectiveness of interventions believed to alleviate poverty. Their new book ‘Poor Economics: rethinking poverty and the ways to end it’ powerfully argues for a focus on the “smaller” questions in development. They make a case for more evidence-based policy-making , and warn that a great deal of development policy today hinges on “the three Is: ideology, ignorance, inertia.” The authors discussed their new book with Rukmini Shrinivasan in an email interview.

The success stories you talk of are of modest successes - how school attendance can go up, how to promote mosquito net usage etc - but we aren't seeing mass educational or health transformation. The NYU economist Bill Easterly calls this a lowering of ambitions. But do you think that these 'quiet revolutions' add up?

Not only do they add up, by themselves they can also have effects that would put some of the big macro reforms to shame. Consider the impact of de-worming, for example. The 20 per cent increase in wages resulting from de-worming is more than the effect of many years of wage growth in a country like Kenya. There is an easy confusion between "big questions" and "big answers". It is not that because the problem of poverty is large that the solution also must be large.

You say in the book that it is possible to improve governance and policy without changing the existing social and political structures. Aren't you running the risk of enraging mass movements across the world currently engaged in those very transformative processes?

We are not saying that you cannot change the world through a revolution. Just that really transformative revolutions are few and far between, hard to predict, and even harder to engineer. The question is, what do you do while waiting for the revolution? Is there anything useful we can do? What we are pointing out is that there are lots of changes that can happen at the margins, within the broad institutional structure that is in place. It is also possible that these changes can pave the way for more. We show that simple interventions can affect the way people vote, for example, making them more likely to vote on issues and less likely to vote according to ethnicity or castes.

You say that the poor often take bad decisions, but the richer you get, the more 'right' decisions have already been made for you.

Our point is that people in rich countries (and also rich people in poor countries) should become aware of something that they generally ignore about the poor: that the poor actually bear much more responsibility for many aspects of their lives than the rich. If you are poor, you have no water at home, let alone clean water. If you are rich, you can just open the tap and get clean water. If you are poor, you don't have a salary, you are selfemployed, or a casual worker. You worry everyday whether you will earn enough to feed your family. You have no safe place to save. All of this makes their everyday life so much more stressful that it is no surprise that the poor don't always make correct decisions. No one in that position could. It is possible to make life easier for the poor by trying to make the 'right choices' the easier ones.

An Overview of Global Development Horizons 2011 - Multipolarity: The New Global Economy

On Tuesday (i.e. 17.05.2011), World Bank has released a Report titled "Global Development Horizons 2011 - Multipolarity: The New Global Economy". The Report said that Six major emerging economies - Brazil, Russia, India, China, Indonesia and South Korea - will account for more than half the global growth by 2025. It further stated that  international monetary system will no longer be dominated by a single currency.

The Reports projected that these economies will grow on an average of 4.7 per cent annually,  while, the developed economies will grow at an average of 2.3 per cent annually (in the period of 2011-2025). In this report it is stated that, the Developing countries percentage share in the international trade flows has risen steadily, from 30 percent in 1995 to an estimated 45 percent in 2010.

The report also says that " ...... high-income countries are only gradually recovering from the financial crisis, most developing countries have swiftly returned to their fast pre-crisis growth trend." It further states that China was one of the first economies to emerge from the crisis and returned quickly to around 10 percent growth rate. While, India had experienced a stronger contraction, still attained more than 10 percent growth in 2010 and the government is putting in place an ambitious new Five Year Plan (with improved policies and necessary investment programs) to keep growth at that level.

It also expressed that "Even in the absence of such exceptionally high growth rates in the developing world, the balance of global growth is expected to shift dramatically." In the report, the world bank further stated that "The changing role of developing countries will come with major transformations to their economies,corporate sectors, and financial systems" 

Mansoor Dailami, lead author of the report and manager of emerging trends at the World Bank, in a press release said that "The projected changes in the global economy are fundamental. Overall, these shifts will likely be positive for developing countries. However, a key question is whether existing multilateral norms and institutions are sufficiently strong to accommodate the passage toward multipolarity. The challenges of managing global integration among power centers makes strengthening policy coordination across economies critical to reducing the risks of economic instability"

World bank report forecasts that there are 3 possibilities of changes in international currency scenarios during 2011-2025. They are

1. U.S dollar's may remains dominance without any Challenger.

2. Multipolar international monetary system might emerge most likely with the Dollar, Euro and Renminbi at the centre of the system.

3. Dissatisfaction with an international currency system based on national currencies leads to reforms that make supply of world's currency the result of  multilateral decisions. It is a role intended for the SDR when it was introduced.

The report provides us a clear view on the transformational changes happening in the developing countries and how the emerging economies are going to take the lead of global economy in near future.

RBI's Annual Monetary Policy Statement for 2011-12 - An Overview

Yesterday (i.e. 03.05.2011)  RBI have announced Annual Monetary Policy Statement for 2011-12. Whoever read the Monetary Policy Statement  would be little puzzled with what RBI is trying to do. The Statement as usual starts with Factors which have shaped the outlook and monetary strategy for the year (2011-12) followed by Monetary Policy Stance. Everybody who follows Monetary Policy knows that there will be Changes in Operating Procedure of Monetary Policy.

The Changes in Operating Procedure of Monetary Policy is as follows:

Last July, the Reserve Bank of India constituted a Working Group to Review the Operating Procedure of Monetary Policy. The report of the Group, chaired by our Executive Director, Deepak Mohanty, was put out in the public domain in March 2011, also invited for feedback and comments over the Report. Based on that Group’s recommendations, and in light of the feedback received, it has been decided by RBI to make the following changes to the operating procedure of monetary policy: 

First, the weighted average overnight call money rate will be the operating target of monetary policy of the Reserve Bank.

Second, there will henceforth be only one independently varying policy rate, and that will be the repo rate. This transition to a single independently varying policy rate is expected to more accurately signal the monetary policy stance.

Third, the reverse repo rate will continue to be operative, but it will be pegged at a fixed 100 basis points below the repo rate. Hence, the reverse repo rate will no longer be an independent variable.

Fourth, we will be instituting a new Marginal Standing Facility (MSF). Banks can borrow overnight from the MSF up to one per cent of their respective net demand and time liabilities or NDTL. The rate of interest on amounts accessed from this facility will be 100 basis points above the repo rate.

As per the above scheme, the revised corridor will have a fixed width of 200 basis points. The repo rate will be in the middle. The reverse repo rate will be 100 basis points below it, and the MSF rate 100 basis points above it.

These changes in the operating framework, except that pertaining to the MSF, will come into force immediately. The MSF will come into effect from the fortnight beginning 7th May, 2011.

When one go through the Report one may find the descritpiton about Standing Marginal Lending Facility (same has been put  as MSF in the statement). But, What exactly Standing facility means? here is the definition

"Standing facilities are aimed at providing and absorbing overnight liquidity, signal the general stance of monetary policy and bound overnight market interest rates."

The Bank of England gives the Definition of operational standing facilities as follows

"The operational standing deposit facility is uncollateralised. The operational standing lending facility is for overnight reverse repo against Narrow Collateral. The operational standing facilities are available all day subject to operational constraints arising from deadlines in payments and securities settlement systems."

Not going further on the MSF but let us see what the Monetary Measure was and RBI have decided to take the following policy measures:

The repo rate under the liquidity adjustment facility (LAF) has been increased by 50 basis points. Accordingly, it goes up from 6.75 per cent to 7.25 per cent.

As per the new operating procedure, the reverse repo rate under the LAF, determined with a 100 basis point spread below the repo rate, will stand adjusted at 6.25 per cent.

The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, gets calibrated at 8.25 per cent.

The Bank Rate remains at 6.0 per cent. The cash reserve ratio (CRR) remains unchanged at 6 per cent of NDTL of scheduled banks.
RBI have decided to increase the savings bank deposit interest rate from the present 3.5 per cent to 4.0 per cent with immediate effect.

So by these measures RBI expect that Inflation will be tamed and  they can put anchor on inflation expectations along with sustained growth in medium term.

In the beginning  as I said that "Whoever read the Monetary Policy Statement of RBI may be little puzzled with what RBI is trying to do". The main reason for this comes in the form 2 questions as follows:

1.  Why RBI has raised 50 basis point in one go?
2.  What this neccessity for new MSF?

To curtail inflation (alongwith expectations) RBI have hiked 50 basis points on repo rate as a quick remedy. The MSF has been introduced to absorb excess money overnight and to give more clear signal to the market about interest rate. It's too early to say whether the MSF will make any impact on the market right away; whether it will able to make sustainable growth in the medium term and also whether it will tame the inflation along with repo rate. (Note: According to my perspective the prevailing Inflation is still a structural problem and not monetary problem).