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Thursday, November 29, 2012

Rupee and Real futures at ICE

Intercontinental Exchange has announced cash-settled futures on the Indian Rupee and the Brazilian Real [press release] [Saabira Chaudhuri in the Wall Street Journal]. With this, ICE is the first serious global exchange to start trading in the rupee.

Vimal Balasubramaniam and I have pointed out that the global market for the Indian rupee is adding up to some fairly big numbers. I recently noticed that in 2010, even though China is a much bigger economy than India, rupee trading was 0.9 per cent of global currency trading while RMB trading was at 0.7 per cent. Similarly, it appears that the INR NDF is bigger than the RMB NDF, even though China is a much bigger economy. Something is going right in the growth of the rupee as a big currency by world standards. Rupee trading at ICE would strengthen that process.

The ICE announcement also connects to the issues of global competition for Indian underlyings. The two biggest financial markets in India are Nifty and the rupee. So far, NSE faced serious competition with Nifty futures trading at SGX and CME, but there was no significant rival with the rupee. With the arrival of ICE, the competitive dynamics for the rupee changes, which is a welcome development. NSE now faces genuinely difficult competition from three first-tier rivals: CME, ICE, SGX. At the same time, the outlook for rupee trading in India is hobbled by an array of constraints:

  • ICE can pitch for business from non-residents, while NSE cannot, since foreign participation in currency futures is banned. We seem to think that OTC trading of currency forwards requires encouragement from industrial policy operated by RBI.
  • ICE is able to start contracts any time it likes on (say) the Brazilian Real while NSE is forbidden from starting any new contracts.
  • India has mistakes on tax treatment, lacking residence based taxation, while the world has all this well sorted out.
  • India has an array of other policy and regulatory mistakes that hobble local players. The ICE transaction charge is zero. I wonder if litigation will now start at CCI to try to block this.
A process is afoot, at present, through which the Indian financial system is being hollowed out. If this process runs unchecked, RBI and SEBI will be left lording over nothing. There is a need to reverse this  policy framework of reverse protectionism.

Sunday, November 25, 2012

Interesting readings

A talk by Pratap Bhanu Mehta.

Governance 2.0 by Ila Patnaik, on the notions of autonomy and independence for agencies like the CVC.

Trampling on the individual in India:
Jim Yardley in the New York Times. An `Oppressive' Regime Limits Free Speech in India, Civil Liberties Expert Says in the New York Times. How two Mumbai girls changed the Thackeray conversation by G. Pramod Kumar on Firstpost.

Why are India's politicians scared of social media? by Mahima Kaul on UnCut. Conceived in haste, India's Internet law now targeted for change by Niharika Mandhana on the New York Times. It is not enough to solve the IT Act, we need to fix the IPC also.

Ila Patnaik on what ails the Indian economy today: Growing pains and Policy easing won't lift investment.

In the aftermath of the Emkay crash [link, link], Mobis Philipose in Mint worries about where SEBI is going.

A great piece by Devesh Kapur on how wrong Indian official thinking in higher education is.

Morten Jerven on economic measurement in Africa. Seems like a fair description of Indian official statistics to me.

Shareholder lessons: Stay away from Ponty Chadha-like businesses by Arjun Parthasarathy, is linked to a theme from Indian capitalism is not doomed.

One head is better than many: Ila Patnaik on the need for modifying the present Indian financial regulatory architecture.

The misery of a sixteen year old in 1984 in the USSR.

A great debate between Justice Scalia and Justice Breyer of the Supreme Court of the United States.

Marco Arment walks into a new Microsoft store. And, see Charlie Demerjian on the difficulties that they face. Jakob Nielsen, the expert on usability, analyses Windows 8 on the tablet and the computer. So far, the market is giving Microsoft a thumbs-down, with a -9% return over the last six months, net of macroeconomic fluctuations..

Tuesday, November 20, 2012

Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?

A recent article: Did the Indian capital controls work as a tool for macroeconomic policy, Ila Patnaik and Ajay Shah. IMF Economic Review, page 439--464, volume 60, 2012.

At the main page for this paper, you will find all the materials: a video presentation, PDF paper, link into the journal, a compact summary on voxEU.

Thursday, November 15, 2012

The IRR of UIDAI is over 50 per cent in real terms

We have released a cost-benefit analysis of the UID system. In one line, the result of the calculations, under fairly conservative assumptions, is that the IRR of building the system is 53% in real terms. Hence, building UIDAI is a pretty good use of public money.

Through this page, you can access a short and accessible explanation, a video presentation, and the full PDF paper. We have also released the spreadsheet used in our calculations, so that others can modify the assumptions or other numerical values, and obtain alternative answers.

This is true in the Indian case. Is it true in general? I feel the answer depends on (a) The scale of expenditure on subsidy programs and (b) The extent to which present implementation systems suffer from the kinds of leakages that UID readily addresses (multiple payments to one person, payments to ghosts). If a country has small welfare programs, that would undermine the case for UIDAI. If a country is doing a pretty good job of paying out subsidies through conventional procedures, that would undermine the case for UIDAI.

Monday, November 12, 2012

Land and property rights workshop at IRMA, Anand

Venue: Institute of Rural Management, Anand (Gujarat).

Dates: 04-06 December 2012.

In recent years, land related issues have emerged at the top of the social and political agenda. A three day workshop on theoretical aspects and practical implications of property rights for rural transformation is being organised at IRMA, jointly with ARCH, Gujarat, and Liberty Institute, New Delhi, with the support of Friedrich Naumann Foundation.

The workshop will deal with topics such as the political evolution of property rights, their constitutional significance, the changing nature of land conflicts, the significance of property for economic well being, political empowerment and democratic participation. The Forest Rights Act provides a practical illustration of the changing contours of the discourse. Both national and international legal instruments around property will be discussed. The objectives of the workshop are:

  1. To deliberate on the significance of property rights as a pro-poor instrument
  2. To create a network of scholars and practitioners around property and land rights
  3. To gain ground level understanding of the progress in forest rights implementation

Please visit, to get a glimpse of a new initiative which allows remote rural communities to document and map their own land. If you are interested, contact and see the details.

Sunday, November 11, 2012

Macroeconomics workshop at NIPFP on 12 November

Five papers in macroeconomics at NIPFP tomorrow. All are invited.

I should like to call you all by name

Friday, November 09, 2012

Blindly sending money down leaky pipes

Proposals to spend more on government programs in India are generally criticised on the grounds that this is sending more money down a leaky pipe. In addition to the problem that the pipes leak, there is an equally big problem that we have no idea about what happens at the other end.

In order to build and refine a system, the first foundation that has to be laid is that of measurement. What you measure is what you can manage. In India, all too often, government agencies and programs start out with lofty ambitions, and embark on spending money to get there. But there is little measurement about the extent to which those objectives have been achieved. Under these conditions, there is little chance of programs being designed properly, and of wastage and theft being checked.

I was reminded of this as I read As Dengue fever sweeps India, a slow response stirs experts' fears by Gardiner Harris in the New York Times. There may be an epidemic of Dengue out there. Or there might not be one. The point is, we just don't know. The statistical system simply does not measure this.

A public goods perspective

What should government do, and what should government not do? The government should work on the provision of public goods and stay out of private goods. In the field of health, what are the public goods and what are the private goods?

When I have a toothache, and I go to a dentist, and I get better, this is a private good. Yet, most government spending is oriented towards building `primary health centres' and hospitals and such like. Even if these worked well -- i.e. even if they were not characterised by theft and incompetence -- they are a bad use of public money as they deliver private goods and not public goods.

A public good is something that is `non-rival' (my consumption of that good does not reduce your access to it) and `non-excludable' (it is not possible to exclude me from benefiting from this good). The best example is clean air. My breathing in clean air does not diminish the amount of clean air available for you. When one more child is born, it is not possible to exclude him from benefiting from clean air.

What are the public goods in health? A few examples that come to mind:
  • Statistics. Measurement of what is going on about health in India.
  • Epidemiology. Tracking down and eradicating Smallpox. Mounting a response to fresh strains of the common cold.
  • Running public systems that measure and ensure that medicines are not counterfeited, are properly stored in a cold chain.
  • Running certification systems. Enforcing against quacks that practice medicine.
  • Getting research done on diseases that matter on India, and releasing the findings into the public domain (i.e. unencumbered by patents).
We in India have this essentially upside down. Health policy in India is unfortunately shaped by the views of doctors, and is low on skills in public economics. We like to focus on Primary Health Centres that are run by the government, and we cut corners on all the five critical public goods listed above.

It is fashionable to say that India should spend more on health. I would advocate spending less on the things that the Indian government does in health. Until the pipes are fixed, we should be closing the taps.

An objectives-and-accountability perspective

The Indian State is in a crisis. The two key factors at work are mission creep and a lack of accountability.

Mission creep has set in because in India, almost any do-gooding is seen as the responsibility of the State. We need to narrow the mission statement of the State to a tangible set of public goods. Clarity of mission, and a controlled and narrow mission, is of essence to obtaining performance.

Consider the principal-agent relationship between you and your contractor. If the contractor is failing to deliver, you would narrow down the specifications given to him, and monitor him tightly to make sure the work gets done. That is precisely what we need to do, in the principal-agent relationship between citizens and the State. The State has failed on a sprawling mission. We need to narrow down the tasks given to the State, and tightly monitor the delivery of results.

Government and government agencies will work well when they have narrowly defined functions and strong accountability mechanisms. In the field of health, absent measurement of health outcomes, there is no accountability.


Is there a Dengue epidemic in India? We don't know.

An information system about the health of the people of India is a public good. It should achieve pride of place in the responsibilities of the State. However, health expenditures in India are squandered on private goods. To add insult to injury, there is theft and incompetence, so even these attempts at delivering private goods do not work so well. But the main point is that running PHCs and hospitals should not be done, even if the Indian State had the ability to run these things well.

In order to reconstruct the Indian State, we need to push on the combination of narrowing the mandate (focusing on a few core public goods) and strong accountability mechanisms.

Finding the right path in consumer protection

by Anand Sahasranaman.

The recent approach paper of the Financial Services Legislative Reforms Commission has brought a fresh focus on consumer protection. What are the possible frameworks for financial consumer protection in India, and what would be the core elements of an ideal framework? This is the question that the IFMR Financial Systems Design Conference 2012 sought to answer. The Conference titled Envisioning the Future of Financial Consumer Protection in India was held at IFMR Trust, Chennai, on 31st August and 1st September 2012.

The Conference was designed to take a first principles look at financial consumer protection, deliberately setting aside constraints that reflect the current realities of the Indian context of consumer protection. The conference was organised to carry out deliberations around three stylised approaches to consumer protection, namely: an Emphasis on Disclosure, an Emphasis on Eliminating Conflicts of Interest, and an Emphasis on Suitability. In reality, any consumer protection framework would include elements from all three approaches, and the objective in setting up the conference as a debate between approaches was meant to sharply identify the way in which these approaches would fit into an overarching framework for India.

Keeping in mind the two-fold agenda of creating a framework for solving the current failings of the Indian market and providing a meaningful long-term solution for consumer protection in view of the future of Indian finance, Suitability emerged as the paradigm of choice to be placed at the heart of the consumer protection framework for India. The Suitability framework shifts the onus of consumer protection from the buyer to the seller of financial services through legal liability on the latter. However, it was also felt that very important aspects of Disclosure and Eliminating Conflicts of Interest would need to be built around this foundation of Suitability.

A Suitability Framework

Suitability is defined to be a process that pervades all functions within financial services manufacturers, intermediaries, and their representatives, such that at all points of time, the provider acts in the best interests of the consumer. The power of the Suitability framework will derive from the imposition of legal liability on financial services providers to act in the best interest of consumers, and thus decisively shift the onus of consumer protection from the buyer to the seller.

Suitability will not take away the right of the consumer to choose. The final decision, on whether to accept the financial advice or buy the product recommended by the seller must always lie with the consumer. What Suitability is meant to ensure is that the consumer gets expert unbiased recommendations that are in her best interest.

For Suitability to be realised, every citizen must have the right to be provided suitable advice or recommended suitable products. The principle of Suitability needs to be enshrined in mother regulation and the interpretation of suitable behaviour would be best determined by the build-up of case law precedents over time, thus ensuring that our understanding of Suitability comes from the realities of the financial marketplace and its evolution over time

Role of Disclosure in Suitability Framework

India has so far relied on caveat emptor, or a disclosure based framework of consumer protection. Participants however noted the fact that increased disclosure has resulted in information-overload for consumers and, along with behavioural biases, led them to make sub-optimal decisions resulting in bad financial outcomes. Despite this, it was felt that there were aspects of Disclosure that would be essential in a Suitability framework. Within the Suitability framework, it was felt that disclosure of real time transaction level data that could be meaningfully analysed be analysed by neutral third parties - industry analysts, financial advisors, market aggregators, media - or "wholesale" consumers could be useful in developing comprehensible welfare enhancing consumer-level outputs. Other aspects of Disclosure such as the need for comparators and benchmarks for products, and the need to make some financial terms commonly understood were also deemed important.

Eliminating Conflict of Interest in the Suitability Framework

Regulatory regimes all over the world have used a variety of approaches to eliminate conflicts of interest that exist within providers of financial services. The most common approach is to disclose the existence of such a conflict to consumers and let the consumers decide for themselves. Within the Suitability paradigm, however, eliminating conflicts of interest is naturally built through the legal liability channel. Even in scenarios where is it is not possible to separate out advice from sale, given the legal liability in the form of a fiduciary responsibility on the provider, the provider is obligated to ensure that they act in the best interests of the consumer, ahead of their own self-interest.

The conference also raised a number of questions for research on the Suitability framework related to its implementation, legal framework, regulatory and institutional costs as well as lessons from international experiences.

The detailed conference proceeds can be found here.

Tuesday, November 06, 2012

Modified dates for financial law seminar

In consideration of a number of requests for extension of the last date for paper submission for Financial Law & Policy: An Inter-disciplinary Approach, the dates for submission of paper and intimation of shortlisted papers have been extended which are as follows:

Crucial Dates

  • The last date for submission of the completed paper: November 12, 2012 (23.59 hrs)
  • Intimation of shortlisted papers: November 20, 2012
  • Date of the seminar: December 01, 2012

Other details about the seminar are as provided in my earlier post.