Friday, February 27, 2009

Institutional change as a tool for dealing with fiscal stress

Ila Patnaik has an article in Indian Express about the usefulness of a Debt Management Office in these difficult times.

Thursday, February 26, 2009

Fiscal crisis again

I have an article in Financial Express today about India's fiscal problem in the immediate context of the S&P rating downgrade.

Wednesday, February 25, 2009

The BPO path to international finance

In thinking about India's evolution into the world of international finance, the MIFC report broke the problem into two parts. The first set of problems were those which could be done in a business process outsourcing mode. This requires good human capital, good telecom, and good urban infrastructure.

The other were the set of problems which required local and foreign financial firms, markets, and regulators. This requires sound financial and monetary policy.

Writing in DNA, N. Sundaresha Subramaniam has a story about a financial firm named Fountain Securities Analysis setting up a team of 150 people who will do day trading on international markets. The article says that this will go up to 650 traders in time. I think this is a very smart move. India's capabilities in this area are quite remarkable: for a wage like $200 to $400 a month, with a profit sharing contract on top, one can hire a very smart trader in India.

The legal architecture would work as follows. The Indian staff would use the Internet and log into some computer systems kept outside the country. Through this they would get trading screens on exchanges and execute trades on behalf of a legal person which is kept safely outside India, so as to avoid the infirmities of Indian taxation, capital controls and financial regulation. There is an increasingly large range of problems where such arrangements can be setup. Some of the most exciting finance that takes place on Indian soil could thus come about at a safe distance from the faulty mechanisms of Indian legal/regulatory/tax systems. This does not yield a full fledged international financial centre (IFC), but it does yield progress towards that direction in terms of (a) human capital development and (b) visibility in the eyes of the global financial industry.

In Chapter 5 titled Augmenting IFS provision via BPO, the MIFC report emphasises the opportunity for India in the field of algorithmic trading, since this relies more on raw intelligence and less on the human-centric flows of information that tend to take place out of physical proximity and old boys clubs. What starts off as establishing teams of traders in India can easily grow into that.

Tuesday, February 24, 2009

Comments to discuss, 24 February

Investment of NPS assets

Comment by Gautam Bhardwaj:

I agree Ajay. Its much more desirable to have a single national pension scheme. An identical scheme for civil servants and the rest of India would generate significant public confidence and serve as a powerful sales proposition for voluntary coverage. This would also help differentiate the NPS from any other voluntary retirement scheme.

Also, civil service NPS members will evolve as a powerful lobby that will have a direct incentive to ensure that the NPS delivers on its objectives. The benefits of any future improvements to the NPS for civil servants would then automatically flow to everyone else.

Fragile institutional foundations of free speech

Comment by Salil Tripathi:

My rants, along similar lines, on the Statesman episode, FYI: and

Netbooks have reshaped the market for portable computers

Comment by Naman:

I purchased a netbook (Asus Eee 904HA) last month and have been using it as my primary machine ever since. Back then, the same model was among the top 10 bestsellers. Its relocation to number 18 within the span of a month explains the pace of innovation taking place in this space. A netbook is meant for basic usage (browsing, blogging, office functions) and expecting it to fulfill your gaming or multimedia needs is unfair. The machine is very sturdy and it comes with a VGA slot which gives you the option of connecting it to a monitor in case you need a bigger display.

The Intel Atom processor works fine and I would recommend upgrading to 2GB RAM (US$20) if you intend to have a dual boot รข€" both Windows and Linux running on your machine. If you want to save yourself the hassle of traveling with an external CD/DVD drive, time and money, I would strongly recommend running Linux on your netbook. Unlike Windows, Linux recognizes the eventual mass move towards netbooks and has designed operating systems specifically for these machines. You can get most softwares (for free) therefore partially eliminating the need for a CD/DVD drive. Linux operating systems are well supported by users. Two forums which help are the Eeebuntu forum and EeeUser.

Netbooks have reshaped the market for portable computers

A few days ago, I had blogged about the netbook revolution, but at the time I didn't have data. Amazon has a page of the bestselling laptops, which is updated hourly. At 4:30 PM IST on 13th February, it shows:

1.ASUS Eee PC 1000HE XP Netbook
2.ASUS Eee PC 1000HAXP Netbook
3.Acer Aspire One AOD150-1165XP Netbook
4.ASUS Eee PC 1000HEXP Netbook
5.Acer Aspire One AOA150-1126XP Netbook
6.ASUS Eee PC 900HAXP Netbook
7.Acer Aspire One AOA150-1672XP Netbook
8.Samsung NC10-14GBXP Netbook
9.ASUS Eee PC 1000HAXP Netbook
10.Acer Aspire One AOA150-1359XP Netbook
11.MSI Wind U100-432USXP Netbook
12.Apple MacBook MB466LL/AUnix notebook
13.Acer Aspire One AOA150-1784XP Netbook
14.Apple MacBook MB881LL/AUnix notebook
15.Toshiba Satellite A305-S6908Vista notebook
16.Samsung NC10-14GWXP Netbook
17.Acer Aspire One AOA150-1447XP Netbook
19.Apple MacBook Pro MB134LL/AUnix notebook
20.ASUS Eee PC 904HAXP Netbook

This data shows quite an upheaval, in many dimensions.

Fat notebooks vs. netbooks
Suppose we caricature these machines as netbooks vs. `fat' notebooks. The picture here is that of the top 20 machines, there are four fat notebooks and 16 netbooks. Of these four, three are Apple and one is a Toshiba running Vista.
This is clearly not going well for Microsoft. Windows XP was launched in 2001. Vista was launched in 2006. And today, in early 2009, the above data shows that the biggest selling notebooks in the world are ignoring Vista. The highest ranked machine that's using Vista is at rank 15 above, and this is the only one of the top 20 which is using Vista.
Apple has three titles in these twenty hits, starting with #12. It is really quite an astonishing performance. Unix has never seen such mass-scale consumer adoption before. Apple's #12 title is at $1000. If they did a netbook at $500 it'd likely hit number 1. If they try that, the world of notebook computers will shape up as Apple versus Asus.
Linux and netbooks go very well together. Part of what is going on is what was pointed out by Naman in a comment on this blog post: Windows XP is a design frozen in 2006, while Linux is moving forward today and particularly in response to the unique engineering tradeoffs found on netbooks. Yet, as of today, customers are clearly favouring XP netbooks: this suggests that while they are able to dual-boot their machines with Linux, they are not yet ready to close the option of running Windows XP. The above data is one snapshot, and the picture fluctuates. E.g. I just looked and Linux netbooks were at #24, #36 and #49.
Hardware vendors
The top ten products are all Asus, Acer or Samsung. Traditional notebook vendors like Lenovo, HP or Dell are nowhere to be seen.

Monday, February 23, 2009

Interesting news flow on Pakistan

There seems to be interesting information flow on Pakistan, though there are contradictions and the picture is not clear.

Joby Warrick has an article in The Washington Post about a forthcoming piece by Steve Coll in The New Yorker magazine about India and Pakistan having made progress, but then slid away from it, on achieving a peace treaty. I am not yet able to find that article on the website of The New Yorker.

David Sanger has come out with a new book, The Inheritance, which I have not yet got, which seems to have some new information about the US/Pakistan relationship. Among other things, he seems to say that the US chose to do attacks in the badlands of Pakistan because they became increasingly convinced that the ISI was actively working with the Taliban. Here is a piece from the New York Times by him which seems to be linked to the themes of this book.

Finally, Eric Schmitt and Jane Perlez have a story in the New York Times saying that US military staff are inside Pakistan helping in the fight against the bad guys.

Investigating the deaths of journalists

Seven journalists were killed in India in 2008. There must be 700 who were intimidated in some fashion or the other. As an example, see my recent blog post on the fragile institutional foundations of free speech in India. Here is an inspiring story, from the US, about peers embarking on an investigation into the murder of a journalist. It is by Tim Arango, and was published in The New York Times.

Tuesday, February 17, 2009

Investment of NPS assets

PFRDA has released a committee report on investment of NPS assets. By and large, I agree with what's in the report. Updates: See Deepak Shenoy on one element of this (investment in corporate bonds). Financial Express has an editorial on this report, and Dhirendra Kumar weighs in on the NPS.

But on the larger scale of thinking about the evolution of NPS, things are unfortunately getting a bit messy. The original vision of NPS was a single pension system which would be used by civil servants and others in the economy, where there would be only one concept of an NPS account, and this would work identically regardless of the identity of the employer of the participant. However, what seems to be shaping up right now is that NPS has forked into two variants: a civil service variant (with one set of rules about investment and fund managers) and an other-employers variant (with another set of rules about investment and fund managers.

This induces three problems:

  1. Fund managers manage smaller sums of money, and the NPS loses economies of scale.
  2. When a civil servant switches to private employment or vice versa, special effort will have to be taken to design for easy portability across the transition.
  3. Complexity goes up, which is bad at many levels. A key insight of the NPS is that a simple system will be understood by a large number of participants, regulatory staff, other government employees, etc. This will make the system work well. Simplicity of functionality of the NPS makes it easier and cheaper to build and run the central recordkeeping agency (CRA). Every wrinkle of complexity in the NPS does damage to simplicity, which was one of the core design goals of NPS.

Looking forward, PFRDA and MOF need to struggle to avoid the extent to which this diverges into two distinct pension systems. So far, the CRA is identical (which is good). The fund management has forked. The picture on the points of presence has yet to clarify. Over time, PFRDA and MOF need to bring these strands back together into a single unified and simple NPS. This is going to take special care and effort; it isn't going to happen by itself.

A vote on account, not a budget

I have an article in Financial Express today titled Is not, and should not be, a full budget. I disagree with the media hype about the `interim budget'. Also see the editorial in Financial Express, the editorial in Indian Express, M. Govinda Rao in Business Standard, Jahangir Aziz in Financial Express, and Bibek Debroy in Indian Express.

Saturday, February 14, 2009

Lalu Prasad Yadav and the transformation of Indian Railways

Grame Wood has an article The Indian Railway King about Lalu Prasad Yadav and the turnaround at Indian Railways, in The American.

The ecosystem of ideas in public policy

Suman Bery has an article in Business Standard today on the nascent beginnings of a world of ideas in Delhi. I agree with him that Delhi is ahead of other cities in India in having more activity: more people, more interesting lunches, seminars and other meetings. I also agree with him that Delhi has gained considerable momentum in the last 25 years in this regard - things are much better than they used to be.

Centripetal forces are starting to come about: the relatively liquid market in Delhi pulls in people to give talks, supply labour, and give out contracts. These agglomeration externalities have helped shrink the staff quality and intellectual life in other cities. Just as young people in India who are interested in making money gravitate to Bombay, and young people interested in science and technology gravitate to Bangalore, young people in India who are interested in economics gravitate to Delhi.

One important thing that has gone right is the creation of effective think tanks that are disconnected from the universities. In an ideal world, the universities would have been good. But places like DSE or ISI, which used to be good a half century ago, have fared badly for the last 25 years. Given the absence of effort in putting the universities back on track, the world of policy discourse has hinged on the relative success of the think tanks. One key element of this was the effort led by Rakesh Mohan at NCAER many years ago, of breaking away from government wages, which has since percolated to a few other places like ICRIER and IDF. Higher wages have helped pull in better people.

But at the same time, I feel the situation is quite weak in absolute terms. The two symptoms which, to me, convey weakness, are as follows:

  1. As Suman says in his last paragraph, we haven't yet begun on a good fusion of an empirical economics literature and the policy process. Most of the empirical economics done in India is focused on the Western journals and not on the domestic discourse. People who are closer to the discourse tend to not do the hard work of looking at data; the people looking at data are other worldly and could equally be sitting in the US. Writing stuff that sells to the journal editors is seldom an effective way of writing stuff that matters for realworld issues in India. As an example, there is almost nothing going on in India in financial economics today, of the sort described here.
  2. There is a real shortage of people. As a fair thumb rule, by the time you get down to one focused question (e.g. the Goods and Services Tax, or banning futures trading in wheat, or capital controls on debt capital), it is impossible to put together a panel of five people who can do a high quality discussion on it. With fewer experts occupying any one niche, competition is lower, and individuals tend to inefficiently defocus into too many fields.

Friday, February 13, 2009

Fragile institutional foundations of free speech

A few days ago, Johann Hari's article in The Independent was reprinted in The Statesman, a Calcutta newspaper.

This got the editor of The Statesman arrested. That the CPI(M) dislikes this editor is widely known, but a civilised country is one in which it's safe to be disliked by governments.

Read Hari's response (which appeared in The Independent), a blog post by Pratap Bhanu Mehta and a blog post on the `Law and other things' blog.

Since I'm a card carrying economist, I think about incentives. The bad guys think that such intimidation will suppress free speech. Do forward this to your friends so that Hari's article gets the maximal possible readership. If the bad guys see that such interference actually increases visibility for the articles that they dislike, this might reduce their incentive to behave like this. The Internet is the greatest weapon in favour of free speech in India, since there is no possibility of a Great Firewall of China coming about.

Tuesday, February 10, 2009

Communicating with the global financial system

Lord Turner worries that IMF warnings are being toned down. In India, we do not even want to hear these toned down warnings! In Indian Express yesterday, Ila Patnaik says that India needs a genuine FSAP followed by public release of the report.

Friday, February 06, 2009


Last month, Brad Stone and Ashlee Vance had an interesting article in the New York Times on `netbooks'. If you haven't been noticing the `netbook revolution', this is worth reading.

Netbooks are small and cheap notebooks. The tradeoffs that they emphasise are low price, low weight, ruggedness and plentiful connectivity. These things are achieved by ceding ground on screen size and by using cheap CPUs (which are still surprisingly fast). The free operating system Linux plays an important role on netbooks, which helps reduce prices in two ways: by avoiding the payment for the operating system and by being resource efficient. Netbook users emphasise doing things on the network: e.g. instead of running OpenOffice on a notebook computer, the netbook user is more likely to use Google documents to edit and share a document `in the cloud', on the Internet. At the same time, today's netbooks have the horsepower required to run Open Office. Here is one example of a relatively expensive netbook, which is 1.3 kg. Here is another example, this one from Dell.

From an Indian perspective, the rise of netbooks is particularly precious because it puts computing on the go within reach of more people in the workforce. The relative ruggedness of netbooks will also help in India. Netbooks seem to range from $200 to $400 which is roughly Rs.10,000 to Rs.20,000.

I suppose in a year from now, good netbooks will be at Rs.10,000. By that time, 3G networks will be available all over India, and given their emphasis on connectivity, netbooks will put in HSDPA support as standard equipment. This will make possible innovations in business process design in many industries. It's time to start thinking about what markets you could revolutionise, given a portable computer at Rs.10,000 with broadband Internet connectivity.

Many people thought that cheaper computers matter to education, and the `OLPC' project tried to push towards that goal. In retrospect, I think both those propositions have fared poorly. It seems increasingly clear that computers aren't important to elementary education, and that real progress towards cheap computers came from the ordinary forces of capitalism, with firms like Asus or Dell trying to discover new products and markets, rather than from OLPC.

NCDEX vs. FMC, continued

I had blogged about NCDEX vs. FMC a few days ago. Today in Financial Express, MCX has a defence. I found it interesting that it was MCX that was responding to criticism of FMC.

The comments on my blog post are quite interesting. In particular, Anonymous says that pages 28-48 of this document are relevant for us. I agree; the document is hair raising and insightful on scams and regulators; everyone interested in finance in general, and crooks and their regulators in particular, should read it. Jayanth Varma has also blogged this document.

Wednesday, February 04, 2009


I wrote a piece in Financial Express titled Law and regulation shape the character of the regulated industry drawing on the recent court case filed by NCDEX against the Forward Markets Commission.

In the article, I describe this case in the context of the unique regulatory problems of for-profit exchanges [link, link]. I locate this discussion in the deeper problems of how weak legal and regulatory structures give out incentives for the wrong kinds of skills to succeed. While NCDEX/FMC/MCX is a live example of this problem, these issues are surfacing in many other areas such as telecom, electricity, etc, where malfunctioning government structures distort markets.