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Wednesday, May 21, 2008

Big, fast and unstable

A few weeks ago, I wrote an opinion piece in The Australian titled Big, fast and unstable, describing the problems of stabilising the business cycle in India and China. While on this subject, you might like to read this article.


  1. Ajay - the things that you mention in your article would seem obvious to people in charge of monetary and fiscal policy in the Govt too (I hope). Do you get any feelers based on your interactions with people that the GoI may be thinking of setting up institutional frameworks of the kind you mention? Or for that matter, I have not yet read the Raghuram Rajan report, but I would think the report would also touch upon these issues and make recommendations for the same. Do you think the Govt. is working on those?

  2. RD,

    As this article argues, in the good old days, there was no business cycle in India, and India was a closed economy without financial markets. As a consequence, many people who have spent decades doing macroeconomic policy thinking in India are steeped in a closed economy without financial markets and no business cycle. Hence, it's really hard for them to retool to comprehend the new environment and operate optimally in it. In addition, changing course is hard because a lot of law and institutions were constructed in the old world, and are singularly out of touch with today's India, but can't be incrementally changed to do useful things in today's setting. So even if some individuals know what to do, what is needed is not just the right individuals manning the wrong agencies, but righting the agencies themselves.

    You should read the Mistry and Rajan reports. They are both top quality products.

  3. Ajay, I was wondering if it would be a feasible solution for the government to mop up excess liquidity from the Indian public by floating oil bonds and using it to pay Government OMCs like IOC, BPCL. This would possibly serve the twin measure of reducing money supply and effecting an indirect increase in oil-prices. The interest rate should be attractive enough for people to park their savings( may be 5 % above current inflation levels)

  4. Some of my ideas may seem fancy and impractical.Kindly put up with it: The fact is, I am trying to rack my brain(whatever little I have) to partly address this oil-price impact.

    1) Imposing a city tax on urban consumers of oil. They should be reasonably well off to afford to subsidize their village brethren.
    2) Collecting some social-obligation fee from private companies like Reliance/Essar who dig oil from KG Basin and export it at market prices.( I know this sounds as silly and stupid as US politicians crying foul on Oil companies making huge profits).

    3) How feasible is a differential pricing mechanism. Will it be possible to charge Indian IT companies( who pay handsome salaries to their employees and enjoy tax holidays from the government) to ask them to pay an OIL-tax in the larger national interests.

    I am trying to explore whether an export-oriented industry can help subsidize an import oriented commodity.


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