Influence of Malaysia on Indian thinking on economic policy

Where do India's policy makers distill their frenzy from? Mahathir Mohamad?

Malaysia	India
Runs an elaborate system of discriminatory policies designed to favour Malays (the `bumiputra') over the economic elite - the Indians and the Chinese.	Runs a less elaborate system of discriminatory policies designed to favour the `lower caste' over the economic elite - the `upper caste'.
The former prime minister indulged in vitriolic outbursts during which he said "immoral" currency speculation should be banned and rumour-mongers should be shot. He called George Soros, the US financier, a "moron" and suggested that a Jewish "agenda" might be behind the assault on the ringgit, Malaysia's currency. He ascribed great power to `currency speculators' : They can speculate with any currency, and their speculation is so designed that they can either revalue a currency or devalue a currency to any level. They hold this power, and they can literally make or break you by just by doing that.	The petroleum secretary says that in the global crude oil market, supply and demand are not imbalanced. Rather, trading on exchanges like the New York Mercantile Exchange, or Nymex, is contributing enormously to high prices and the solution is to ban crude oil related futures trading at Nymex.
Was the only country affected by the Asian Crisis which tried to address the problem using capital controls.	Is known to resort to capital flows hatao when facing implementation difficulties with a inconsistent monetary policy regime.
The former prime minister was suspicious of short selling: As far as the stock market is concerned, we know that players in the stock market can also destroy the stock market simply by short selling. And to short sell you don't even need to have the shares. That is why we decided that we would stop that, and as a result, the market has recovered.	Policy makers have blocked short selling on the equity spot market.
The former prime minister said: We have welcomed foreign capital a long time ago, and they came in, they built factories, and they exported goods from our country, creating jobs for our people, improving our economy. Yes, that is the kind of globalization that we want. At the same time, of course, they respected our laws and our policies and allowed our own companies to be protected until such time when they were able to compete with the foreign countries. That kind of globalization, yes. But the sudden inflow and outflow of currency is too destabilizing: That we cannot accept as a part of globalization.	Traditional policy thinkers have the same `goods illusion' -- support FDI but work to block financial globalisation.

However, the Mahathir breaks with the caricature in one respect: he criticises the system of reservations - it is not a long-term solution, it reduces the incentive for Malays to compete, moving towards a meritocracy is desirable. In India, reservations are, as yet, a holy cow.

I thought I was being clever with the phrase `goods illusion'. But it's been around since atleast 1959.

The weak rupee policy

The Fed cut rates, and India appears to have responded by raising the limit on MSS issuance by RBI. Let's chalk out the rough fiscal costs --

• Each month with over $10 billion of MSS issuance uses up Rs.40,000 crore of bond issuance. Roughly speaking, assuming a net cost of 4%, a stock of MSS of Rs.250,000 crore runs up a tidy cost of Rs.10,000 crore a year.
• In addition, assuming India has roughly $125 billion in USD assets, each 1% depreciation of the USD is a cost of roughly $1.25 billion or roughly Rs.5,000 crore on account of depreciation of the reserves portfolio.

Ila Patnaik looked at monetary policy in Indian Express a few days ago.

Martin Wolf on competition policy

Martin Wolf reminds us of the importance of competition policy.

A coming of age for private equity

I wrote an article in Business Standard today about what private equity funds are doing in India.

Reasons why the PN/ODI market is attractive

The edit in Business Standard today points out that one of the many reasons why global customers favour the PN/ODI market lies in the Indian tax treatment of derivatives, where profits are treated as ordinary income.

Jamal Mecklai makes monetary policy interesting

In Business Standard today, Jamal Mecklai makes monetary policy fun:

In the four weeks to October 12, the RBI bought over $24 billion — that’s more than the forex reserves of the Netherlands, Saudi Arabia or Kuwait! This enabled them to cage the rupee at about 39.30, with liquidity splashing around everywhere. With inflows unabated — indeed, accelerating — and the half-hearted (old, uncommitted and terrified) efforts to stimulate outflows completely ineffective, the RBI’s nightmarish screams were finally heard in Delhi and the ministry of finance pushed Sebi to try and raise the barricades.

Of course, the market tanked and the government backed down — welcome to Thailand. While markets have recovered much of their composure, it seems that the government continues to turn a deaf ear to the real issues — at least to judge from the politics-as-usual sentiment that prevails. This means that while markets will get back to business as usual soon enough — after all, this is India and it is going to grow at 10% a year for some time come — there will certainly be another, and then another, wobble, each one larger than the last.

The good news, however, is that, if you leave the political establishment out, change is in the air. Indeed, almost everyone would agree that there is a complete disconnect between the essence of the country today and that of the government, and, in this day and age of market determination, this means that sooner rather than later we will see substantial change in the nature of our government.

And here's the Indian improvement upon `google' as a verb:

Indeed, there are several straws in the wind. Note, for instance, the continuing impact of the Right to Information Act — in a few short years, it has become a part of life; indeed, my wife points out that “RTI” has become a verb as in “just RTI it.”

Improvement in Indian public finance

In the late 1990s, the #1 area of concern in India was the fiscal crisis. As an example, here is a gloomy piece that I wrote in 2001. A remarkable amount of progress has been made on that front. Tax policy is more rational; tax administration has improved; the FRBM Act has tied down the government; the Twelfth Finance Commission has triggered good improvements at the state governments also. In Economic Times today, Mythili Bhusnurmath talks about developments at the state governments.

In my reckoning, the fiscal consolidation is roughly half done. We aren't out of the woods yet, but a good down payment is visible. As Mythili points out, the focus has now shifted to monetary policy, where a comparable transformation of law and institutions has not begun.