Materials from the 4th Research Meeting of the NIPFP DEA Research Program

All the slideshows and papers are up on the web.

Of broader interest within this collection is the presentation India in the Great Recession.

Contours of finance after the crisis

I have a piece in Financial Express today titled Contours of finance after the crisis where I look at the first glimmers of how financial regulation is going to be modified in response to the crisis. This is based on the Turner report (in the UK) and the Geithner proposal (in the US), both of which were released this month.

Also see:

• A quest for other ways by David Pilling and Ralph Atkins, in Financial Times, 15 March.
• Do not let the `cure' destroy capitalism by Gary Becker and Kevin Murphy, in Financial Times, 19 March.
• Liberalise now! - The only chance for emerging economies to become a major player by Andreas Freytag and Sebastian Voll, on voxEU, 25 March.
• Do we really want to regulate everything that moves? by Jon Danielsson, on voxEU, 25 March. Prof. Danielsson, if you'd like to see a country where this is done, I can help you setup a visit.

Currency exposure of Indian firms

Under a floating exchange rate, firms have a correct estimate of how risky it is to have unhedged foreign currency exposure. When a central bank artificially distorts currency volatility downwards, as RBI has often done, this gives out the wrong incentives to take on foreign currency risk. Now firms in India are lobbying that they be permitted to delay marking to market of exchange rate losses in the aftermath of a surprising rupee depreciation. Mahesh Vyas has facts on Indian firms and currency exposure, in the immediate context of the debate on fudging AS 11 disclosures. Also see editorials in Financial Express and Business Standard.

Netbooks and operating systems

by Naman Pugalia.

Recently, this blog (1,2) discussed the netbook revolution.

My experience with the Eee PC

I purchased the Asus Eee PC and upgraded the RAM. This allowed me to run 2 operating systems, as I was originally wary about working with Linux only. In the event, I used Windows once : to install Ubuntu. I thought it would be a travel gadget, but I have used it as my primary machine for 3 months now.

Weighing 2.2 kilograms, it is lighter than most books and with a 4 hour battery life, it is made for the on-the-go user. The built-in mic, speakers and camera work well with chat programs like Skype. The 7-inch screen is a fine compromise between a smartphone (in fact, Dell is banking on netbooks and not smartphones to ride the 3G wave) and a laptop. The lack of a CD/DVD drive does not bother me as I use flash drives for backup, and software for Ubuntu is easily installed over the network so reading CDs or DVDs isn't required.

OpenOffice, the open source competitor to Microsoft's office suite, runs smoothly and recognizes most formats used by Windows users, thus giving inter-operability with others. The pre-installed Transmission BitTorrent Client, GIMP Image Editor and VLC Media Player fulfill other basic needs. The Eeebuntu forum and the Eeeuser forum offer elaborate tech support.

Larger implications of what is going on

Netbooks are important for India as they can revolutionize the way the economy works due to the mobile-phone-like multiplier effects. Barring Apple, most manufacturers have released such a smaller, lighter and cheaper laptop. Considering the critical mass this product category has acquired, Apple is probably working on a prototype. Most netbooks come with a low cost CPU such as the Intel Atom processor, designed specifically for this new breed of notebooks.

Netbooks are a new battleground for operating systems. Given the open source code, and long experience in coping with underpowered hardware, the Linux kernel has easily adapted to netbook conditions. Linux usability is assisted by the availability of free applications software such as Firefox (a web browser), Thunderbird (an email program), Openoffice (a word processor, spreadsheet, etc) and programs that play music and video. The Taiwanese hardware vendors such as Asus, who are some of the top sellers of netbooks, have got closely involved with Linux device drivers and distributions in ensuring that their netbooks work well with Linux.

Microsoft's Windows 7, expected to ship later this year, will come with a Starter Edition which will be light enough to run on netbooks. It will permit the user to run a maximum of three applications at once. Users will have to choose between this, and a Linux environment where there are no artificial constraints.

In rich countries, netbooks are used as secondary gadgets which help in executing basic tasks such as e-mailing, browsing and blogging. Many users in low income markets will, in contrast, embrace netbooks as a primary computing device. Therefore, a light OS with free software is more likely to succeed in emerging markets characterized by customers with small budgets. For the price sensitive Indian consumer, Ubuntu Linux is a natural choice for an OS for a netbook.

Looking into the future, there are two interesting dimensions to what is taking place with netbooks. For Microsoft, the price points that Windows 7 can support are limited by (a) The low price of netbooks and (b) The availability of a credible competitor at a price of zero. This will force Microsoft to fundamentally modify its business model.

The second interesting dimension is the new embrace, by hardware vendors, of Unix (i.e., OS X and Linux family including Google's `Android'). Whether it is Ubuntu Linux, Google's `Android', or other Linux variants, the Taiwanese / Japanese / Korean producers of netbooks and mobile phones are now much more tuned towards finding ways to put flexible and free operating systems on their hardware while enjoying healthier profit margins. This will have many interesting long-term implications for the future of computer devices and hardware.

Serious numbers

In the currency volatility of yesterday, the NSE currency futures got turnover of $714 million off 25,518 trades.

At the heart of the problem is the task of fixing the financial architecture

Hank Paulson has an article in the Financial Times where he emphasises that a key part of fixing financial regulation in the US is the task of changing the architecture of financial regulation. This is essential for avoiding problems like AIG being regulated by the State of New York. As he says:

Creating a fundamentally different regulatory system is complex and will take months, if not years. But policymakers can achieve significant near-term regulatory reforms that represent progress towards the ideal. These include giving the Fed expanded powers to regulate market stability, combining the Office of Thrift Supervision and the Office of the Comptroller of the Currency to strengthen regulation by reducing duplication, centralising the scrutiny of mortgage origination, creating an optional federal insurance charter, beginning the process of integrating the Securities and Exchange Commission and Commodity Futures Trading Commission and continuing to improve arrangements for clearing and settling over-the-counter derivatives, including development of well regulated and prudently managed central clearing counterparties for OTC trades.

For some of the background, see this speech, and see here.

Like many democracies, the US is very bad at solving such problems under normal times. The SEC vs. CFTC separation was a silly thing to have, but for decades, it has lingered on. Now, in the aftermath of this crisis, there's a good chance that it will get fixed. I hope the merged agency draws its organisational culture more from the CFTC than from the SEC.

In the UK, the architecture was fixed in the late 1990s: regulation of all financial firms was placed at the FSA; investment banking for the government was placed at the DMO; the Bank of England was given independence in return for (a) transparency (b) accountability and (c) a narrow mandate to only do monetary policy. The gap in that framework was the lack of a deposit insurance mechanism akin to the US FDIC; this is now being fixed. In the new framework, FSA regulates banks; when FSA makes a decision that a bank is in a bad way, the bank gets handed to the Bank of England which chooses whether to give liquidity support or to shut it down. For the rest, the basic structure of agencies and laws is fine, unlike what's seen in the US.

In India also, the deeper problems of Indian finance are critically about the accidents of history, which have given us a warped financial architecture. The RBI Act, the FC(R) Act, SC(R) Act, etc., were all done decades ago when knowledge of finance in India was absent. That task before us is that of now replacing all these badly drafted laws by sensible ones.

In the UPA period, we have understood these problems and done a lot of the technical work that lays the groundwork for what comes next. The task for the next goverment is to implement this technical work. The regulation and supervision of all organised financial trading needs to be placed at SEBI (thus merging functions that are presently at FMC and RBI); banking needs to come out into a BRDA; the regulation of all pension activities (and not just the NPS) needs to be placed in PFRDA; the investment banking for the government that's presently done at RBI needs to go out into a professional and independent Debt Management Office (which is termed NTMA). At the end of this, we would be holding four regulators (SEBI, BRDA, IRDA, PFRDA), one investment banker (NTMA) and one independent central bank.

Indian finance readings of the day

Read Mahesh Vyas in Financial Express on SEBI's new initiative on transparency requirements for people selling mutual fund products. For background reading, see: link, link. I have two comments here:

• The debate about transparency in the relationship between the customer and the mutual fund agent reminds me about the debate which took place a long time ago on the transparency in the relationship between the customer and the BSE broker. In the bad old days, when you purchased shares, the BSE broker gave you a consolidated bill for the consideration which you had to pay. You were not supposed to ask what was the actual execution price at which shares were bought and what was the markup charged by the broker. It was as bad as buying a currency forward from a bank.
  Thanks to SEBI's pushing, transparency came into the contract note of the BSE broker: today the contract note clearly shows the price at which the share was bought on the market and the markup charged by the broker. The same can and should be done with mutual funds.
• The second dimension is the extent to which the mutual fund agent is conflicted. I feel the mutual fund agent must be required to first show the customer a tariff card containing the fee earned by him on all the various products that he sells. This will help the customer have an better perspective on what advice is being given out.

And, Mobis Philipose has an article on the unique governance challenges of financial exchanges. I have long argued that profit-oriented and valuation-focused exchanges present difficult problems, particularly given the weaknesses of the legal system and regulation in India. See: link, link.