Before World War II, the developed countries were on the gold standard. For every dollar printed, there was a dollar's worth of gold in the vault. After World War II, under Bretton Woods, gold was notionally valued at $35 an ounce but the discipline of the gold standard was gone. America could now issue paper money as basically IOUs to the world, where each dollar could buy a dollar of gold. The gold didn't have to actually exist.
By 1971, thanks to the free spending of the Vietnam War and rising trade deficits, the credibility of the dollar came under threat.That year, Richard Nixon abolished the fixed price of gold. The US could now devalue the currency and expand money supply freely.
The US is now the world's biggest borrower. But this period of debt financed expansion and printing of money may have gone too far.That is why countries Like China, who are major investors in US T Bills have cautioned the US government to control the fiscal deficit. What a reversal. China actually advising US how to manage its economy!
Thursday, March 26, 2009
Friday, March 06, 2009
Central and eastern European currencies
Ref Financial Times dt March 6, 2009
The Hungarian forint has hit a fresh record low against the euro following comments from Jean-Claude Trichet, president of the ECB. In response to a question about whether the ECB’s collateral framework could be expanded to include eastern European assets, Trichet said that ’”sticking to rules as they are is important”. Concerns over the region’s ability to cover its funding requirements in the face of tightening credit markets and a slowdown in global trade have driven down currencies in the region in recent weeks.
Earlier an FT editiorial mentioned that a probable solution is to pursue a flexible approach and allow early entry of some if not all these currencies into the Eurozone. Currently, the Mastricht Treaty rules remain rigorously enforced on countries outside the eurozone even as some insiders flaunt the rules. For example, euro candidates must keep inflation at most 1.5 per cent above the three lowest rates in the EU; those three rates will probably soon be negative. Many new EU members have pursued a disciplined fiscal policy. The Czech Republic and Poland almost meet the criteria. Estonia’s and Bulgaria’s high inflation can be blamed on the Maastricht criteria themselves. By maintaining stable exchange rates in a credit boom, these countries became wide open to capital inflows that inflated their economies.
Many countries in the region are now under pressure in markets that fear a balance of payment crisis. They can be helped by speeding up euro accession. A quicker entry into the euro for countries with proven fiscal responsibility will help stabilise exchange rates. The requirement of two years’ participation in the EU’s exchange rate mechanism before being admitted into the Euro should be waived.
In contrast to Trichet's pronouncement, the FT editiorial mentioned : "A currency union needs rules. They must in the future be applied more strictly than they have been across the eurozone. But today they must be interpreted flexibly. A prudent Poland should not be made to atone for the sins of profligate Italy."
The Hungarian forint has hit a fresh record low against the euro following comments from Jean-Claude Trichet, president of the ECB. In response to a question about whether the ECB’s collateral framework could be expanded to include eastern European assets, Trichet said that ’”sticking to rules as they are is important”. Concerns over the region’s ability to cover its funding requirements in the face of tightening credit markets and a slowdown in global trade have driven down currencies in the region in recent weeks.
Earlier an FT editiorial mentioned that a probable solution is to pursue a flexible approach and allow early entry of some if not all these currencies into the Eurozone. Currently, the Mastricht Treaty rules remain rigorously enforced on countries outside the eurozone even as some insiders flaunt the rules. For example, euro candidates must keep inflation at most 1.5 per cent above the three lowest rates in the EU; those three rates will probably soon be negative. Many new EU members have pursued a disciplined fiscal policy. The Czech Republic and Poland almost meet the criteria. Estonia’s and Bulgaria’s high inflation can be blamed on the Maastricht criteria themselves. By maintaining stable exchange rates in a credit boom, these countries became wide open to capital inflows that inflated their economies.
Many countries in the region are now under pressure in markets that fear a balance of payment crisis. They can be helped by speeding up euro accession. A quicker entry into the euro for countries with proven fiscal responsibility will help stabilise exchange rates. The requirement of two years’ participation in the EU’s exchange rate mechanism before being admitted into the Euro should be waived.
In contrast to Trichet's pronouncement, the FT editiorial mentioned : "A currency union needs rules. They must in the future be applied more strictly than they have been across the eurozone. But today they must be interpreted flexibly. A prudent Poland should not be made to atone for the sins of profligate Italy."
Recession fears mount due to uncertainty
Ref Gillian Tett, Financial Times March 5 2009
In the past few weeks, concerns about a sharp decline in global economic activity have mounted. In part, this can be blamed on tightening of credit by banks. But the sheer speed and global nature of this slump suggest that psychology is also to blame. People are feeling gloomy and uncertain on almost every front.
In the financial markets, the collapse of Lehman Brothers has created huge worries about counterparty risk. Also financiers are finding it increasingly hard to engage in the market “hedging” strategies they used to employ to mitigate risk. The pattern of deleveraging and forced sales has been so intense that traditional price relationships have completely broken down. Trading models have gone haywire.
Western governments do not seem to be doing much to remove this sense of uncertainty. The Lehman collapse has sown a sense of terror about creditors losing money on any bank bonds they hold. Governments must persuade investors that banks are so healthy they cannot collapse. Alternatively they must promise to protect creditors if they do.
The US and many European countries are rolling out piecemeal solutions. Meanwhile, efforts to persuade the public that banks are healthy, have been unconvincing mainly because there is still so much uncertainty about asset values.
In the past few weeks, concerns about a sharp decline in global economic activity have mounted. In part, this can be blamed on tightening of credit by banks. But the sheer speed and global nature of this slump suggest that psychology is also to blame. People are feeling gloomy and uncertain on almost every front.
In the financial markets, the collapse of Lehman Brothers has created huge worries about counterparty risk. Also financiers are finding it increasingly hard to engage in the market “hedging” strategies they used to employ to mitigate risk. The pattern of deleveraging and forced sales has been so intense that traditional price relationships have completely broken down. Trading models have gone haywire.
Western governments do not seem to be doing much to remove this sense of uncertainty. The Lehman collapse has sown a sense of terror about creditors losing money on any bank bonds they hold. Governments must persuade investors that banks are so healthy they cannot collapse. Alternatively they must promise to protect creditors if they do.
The US and many European countries are rolling out piecemeal solutions. Meanwhile, efforts to persuade the public that banks are healthy, have been unconvincing mainly because there is still so much uncertainty about asset values.
Thursday, March 05, 2009
Will the dollar remain strong?
Ref : Dollar strength will linger, Mansoor Mohi-uddin, Financial Times March 4 2009
What explains the strong dollar? The inability of non-US banks to roll over short term funding of investments in illiquid US assets has been a key factor behind the dollar’s strength since last summer according to Mansoor Mohi-uddin, managing director of foreign exchange strategy at UBS.
At the height of the credit bubble in mid-2007, major European banks’ dollar funding needs was around $1,300bn. As the credit crunch worsened after the bankruptcy of Lehman in September 2008, securing this funding became very difficult due to the severe disruptions in interbank and foreign exchange swap markets and in money market funds. Also, some central banks withdrew dollar foreign exchange reserves they had placed with commercial banks before the crisis.
To ease the dollar shortage, the Federal Reserve provided swap lines with other central banks in October 2008. These have been extended until October this year, reflecting the need of foreign banks to keep borrowing dollars from domestic central banks.
While the dollar funding shortage in global banking persists, the greenback may continue to be strong against the other major currencies.
What explains the strong dollar? The inability of non-US banks to roll over short term funding of investments in illiquid US assets has been a key factor behind the dollar’s strength since last summer according to Mansoor Mohi-uddin, managing director of foreign exchange strategy at UBS.
At the height of the credit bubble in mid-2007, major European banks’ dollar funding needs was around $1,300bn. As the credit crunch worsened after the bankruptcy of Lehman in September 2008, securing this funding became very difficult due to the severe disruptions in interbank and foreign exchange swap markets and in money market funds. Also, some central banks withdrew dollar foreign exchange reserves they had placed with commercial banks before the crisis.
To ease the dollar shortage, the Federal Reserve provided swap lines with other central banks in October 2008. These have been extended until October this year, reflecting the need of foreign banks to keep borrowing dollars from domestic central banks.
While the dollar funding shortage in global banking persists, the greenback may continue to be strong against the other major currencies.
Bank of England cuts interest rates to 0.5%
Ref : Norma Cohen Financial times, March 5 2009
The Bank of England’s monetary policy committee (MPC) cut its key interest rate by half a percentage point to 0.5 per cent on Thursday and rolled out a programme to buy up to £150bn in government gilts and corporate bonds. It is the first central bank in Europe to begin quantitative easing – in an effort to kick-start demand. The programme will begin with an initial £75bn of asset purchases, to be composed mostly of government gilts.
The size of the full programme will be up to a maximum of £150bn but £50bn of that may be used to support the purchase of private sector assets – corporate bonds and commercial paper.
The MPC agreed that in future meetings it would monitor the effectiveness of the programme in boosting money supply “and in due course, raising the rate of growth of nominal spending, adjusting the speed and scale of purchases as appropriate.”
In deciding on the 50-point rate cut, the MPC considered the forecast in its March inflation report, which implied a substantial risk of inflation undershooting its 2 per cent target in the medium term. Moreover, data released since that report had done nothing to suggest an improving economic outlook.
The Bank of England’s monetary policy committee (MPC) cut its key interest rate by half a percentage point to 0.5 per cent on Thursday and rolled out a programme to buy up to £150bn in government gilts and corporate bonds. It is the first central bank in Europe to begin quantitative easing – in an effort to kick-start demand. The programme will begin with an initial £75bn of asset purchases, to be composed mostly of government gilts.
The size of the full programme will be up to a maximum of £150bn but £50bn of that may be used to support the purchase of private sector assets – corporate bonds and commercial paper.
The MPC agreed that in future meetings it would monitor the effectiveness of the programme in boosting money supply “and in due course, raising the rate of growth of nominal spending, adjusting the speed and scale of purchases as appropriate.”
In deciding on the 50-point rate cut, the MPC considered the forecast in its March inflation report, which implied a substantial risk of inflation undershooting its 2 per cent target in the medium term. Moreover, data released since that report had done nothing to suggest an improving economic outlook.
Paul Keating calls for a new global financial architecture
Former Australian prime minister writing in the Financial Times has stressed the need for democratisation of the global financial governance process and improved
policy coordination across the world. Keating suggests the need to radically restructure the IMF with a governance structure that truly represents the wider world it claims to serve.
Keating adds that big fiscal deficits and recapitalisation of banks offer only a temporary respite to the crisis. Fiscal policy also has its limits. The US federal deficit may hit $1,700bn this year, or about 13 per cent of gross domestic product. Clearly the US is reaching the limit. What we need is for deficit countries to save more and spend less and surplus countries to do the opposite. This savings imbalance will not be remedied unless the global governance structure changes.
For instance, China has no intention of dealing with its surpluses by letting its real exchange rate redirect national resources. We cannot fully blame China for this stance. Following the crisis of 1997, what every Asian government fears is the political consequence of capital outflow. A good example is Indonesia, where Suharto was forced out of office in 1998. Until international monetary governance is sufficiently democratised, or at least is made more representative, no major developing country, will fall in line.
For Keating, inclusion is the only way to make the world anew. If it happens, the impact on confidence will be profound. What the world badly needs today as the recession deepens is for confidence to be restored quickly.
policy coordination across the world. Keating suggests the need to radically restructure the IMF with a governance structure that truly represents the wider world it claims to serve.
Keating adds that big fiscal deficits and recapitalisation of banks offer only a temporary respite to the crisis. Fiscal policy also has its limits. The US federal deficit may hit $1,700bn this year, or about 13 per cent of gross domestic product. Clearly the US is reaching the limit. What we need is for deficit countries to save more and spend less and surplus countries to do the opposite. This savings imbalance will not be remedied unless the global governance structure changes.
For instance, China has no intention of dealing with its surpluses by letting its real exchange rate redirect national resources. We cannot fully blame China for this stance. Following the crisis of 1997, what every Asian government fears is the political consequence of capital outflow. A good example is Indonesia, where Suharto was forced out of office in 1998. Until international monetary governance is sufficiently democratised, or at least is made more representative, no major developing country, will fall in line.
For Keating, inclusion is the only way to make the world anew. If it happens, the impact on confidence will be profound. What the world badly needs today as the recession deepens is for confidence to be restored quickly.
ECB slashes interest rates to 1.5%
Ref Ralph Atkins, Financial Times March 5 2009
Eurozone interest rates have been slashed by a half percentage point to the lowest level ever. The interest rate in the Eurozone will fall from 2 per cent to 1.5 per cent, bringing the total rate cut since early October to 275 basis points.
But official borrowing costs are still higher in the Eurozone than in the US and the UK - highlighting the central bank’s conservative stance in relation to the US Fed and the Bank of England.
The latest cut came after ECB governing council members received updated forecasts that indicated much worse contraction than in previous projections, released in December.
Spain reported industrial production in January was 20.2 per cent lower than a year before. German engineering companies reported January’s foreign orders were almost 50 per cent lower than a year before.
Eurozone interest rates have been slashed by a half percentage point to the lowest level ever. The interest rate in the Eurozone will fall from 2 per cent to 1.5 per cent, bringing the total rate cut since early October to 275 basis points.
But official borrowing costs are still higher in the Eurozone than in the US and the UK - highlighting the central bank’s conservative stance in relation to the US Fed and the Bank of England.
The latest cut came after ECB governing council members received updated forecasts that indicated much worse contraction than in previous projections, released in December.
Spain reported industrial production in January was 20.2 per cent lower than a year before. German engineering companies reported January’s foreign orders were almost 50 per cent lower than a year before.
Wednesday, March 04, 2009
AIG's huge losses.
Ref : AIG still facing huge credit losses
By Henny Sender in New York Financial Times, March 3 2009
AIG has declared a $62bn fourth-quarter loss and confirmed that it would give the US government a stake in its two biggest divisions as part of a fresh $30bn rescue.
Meanwhile more losses may follow. AIG retains $12bn in exposure to credit insurance on positions mostly involving subprime mortgages. As of February 18, AIG could have to pay counterparties up to $8bn on these positions.
Ben Bernanke, Federal Reserve chairman, expressed his strong sentiments in an appearance before the Senate budget committee: "If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG.There was no oversight of the financial products division. This was a hedge fund basically that was attached to a large and stable insurance company.”
AIG burnt its fingers badly when it moved agggressively into selling credit default swaps to provide credit protection for collateralised debt obligations.AIG ran into trouble when its credit rating was downgraded and the value of the CDOs it insured fell, This forced it to post tens of billions of dollars in additional collateral with its counterparties. Pushed to the wall, AIG had no option but appeal to the government for a bailout in September.
In November, the Federal Reserve Bank of New York set up a limited liability company called Maiden Lane III – backed by $5bn from AIG and borrowings of up to $30bn from the Fed – to deal with the crisis. Maiden Lane III would buy CDOs from AIG’s counterparties and then tear up the credit insurance issued by AIG.
In the days after the creation of Maiden Lane III, AIG and the Fed approached about 20 counterparties with an offer to buy CDOs. By the end of the year, Maiden Lane III had paid nearly $30bn for CDOs with a face value of $62bn. AIG paid $32.5bn to terminate the credit insurance on the CDOs, recognising a 2008 loss of $21bn. Counterparties received 100 cents on the dollar for the CDOs, but the prices paid by Maiden Lane III suggested that the CDOs were worth 47 cents on the dollar.
By Henny Sender in New York Financial Times, March 3 2009
AIG has declared a $62bn fourth-quarter loss and confirmed that it would give the US government a stake in its two biggest divisions as part of a fresh $30bn rescue.
Meanwhile more losses may follow. AIG retains $12bn in exposure to credit insurance on positions mostly involving subprime mortgages. As of February 18, AIG could have to pay counterparties up to $8bn on these positions.
Ben Bernanke, Federal Reserve chairman, expressed his strong sentiments in an appearance before the Senate budget committee: "If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG.There was no oversight of the financial products division. This was a hedge fund basically that was attached to a large and stable insurance company.”
AIG burnt its fingers badly when it moved agggressively into selling credit default swaps to provide credit protection for collateralised debt obligations.AIG ran into trouble when its credit rating was downgraded and the value of the CDOs it insured fell, This forced it to post tens of billions of dollars in additional collateral with its counterparties. Pushed to the wall, AIG had no option but appeal to the government for a bailout in September.
In November, the Federal Reserve Bank of New York set up a limited liability company called Maiden Lane III – backed by $5bn from AIG and borrowings of up to $30bn from the Fed – to deal with the crisis. Maiden Lane III would buy CDOs from AIG’s counterparties and then tear up the credit insurance issued by AIG.
In the days after the creation of Maiden Lane III, AIG and the Fed approached about 20 counterparties with an offer to buy CDOs. By the end of the year, Maiden Lane III had paid nearly $30bn for CDOs with a face value of $62bn. AIG paid $32.5bn to terminate the credit insurance on the CDOs, recognising a 2008 loss of $21bn. Counterparties received 100 cents on the dollar for the CDOs, but the prices paid by Maiden Lane III suggested that the CDOs were worth 47 cents on the dollar.
Tuesday, March 03, 2009
Land acquisition in India
Ref Leader, Business Standard March 3, 2009
Land acquisition remains one of the key factors which is slowing down industrial growth in the country.The government’s failure to get land acquisition and rehabilitation bills passed by Parliament before the elections is a setback to reforms in this area. The two bills — the Land Acquisition (amendment) Bill, 2007, and the Rehabilitation and Resettlement Bill, 2007, aimed at avoiding a repetition of the violent incidents that rocked Nandigram and Singur. The final version, passed by the Lok Sabha without debate and in the absence of the Opposition got stuck in the Rajya Sabha because of stiff resistance from opposition parties.
The Bill to replace the antiquated Land Acquisition Act of 1894 sought to balance the need for acquiring land for development with the interests of the land owners and moved the law quite significantly to the side of the land owners. Thus, it confined forcible land takeover to just three purposes — strategic use, public infrastructure projects and commercial ventures which are strictly in the public interest. Also industry would have to commercially buy 70 per cent of the land required for a project before the state government could step in to acquire the rest. Industry has complained in some cases that such a change in the law would have made it difficult to set up new units, because land acquisition would have become next to impossible. However, this is not really true. The experience with some of the special economic zones shows that land was privately acquired to a substantial degree, without the use of force.
The rehabilitation Bill, too, had some welcome stipulations—like undertaking rehabilitation prior to land takeover, and providing employment or equity participation to the affected families. The value of land goes up dramatically once it changes from agricultural to industrial. The benefit from this flows almost entirely to industry. It is only fair that those who did not get any benefit from such change of end use should get an additional benefit, in terms of jobs or shares.
However, the whole legislative exercise could have proved futile, since the amendments would not have been binding on states as they are free to have their own policies in these areas. Some state governments have already put in place their own land acquisition and rehabilitation policies. Considering this, it makes sense to leave it to the new government to decide on the best course of action.
Land acquisition remains one of the key factors which is slowing down industrial growth in the country.The government’s failure to get land acquisition and rehabilitation bills passed by Parliament before the elections is a setback to reforms in this area. The two bills — the Land Acquisition (amendment) Bill, 2007, and the Rehabilitation and Resettlement Bill, 2007, aimed at avoiding a repetition of the violent incidents that rocked Nandigram and Singur. The final version, passed by the Lok Sabha without debate and in the absence of the Opposition got stuck in the Rajya Sabha because of stiff resistance from opposition parties.
The Bill to replace the antiquated Land Acquisition Act of 1894 sought to balance the need for acquiring land for development with the interests of the land owners and moved the law quite significantly to the side of the land owners. Thus, it confined forcible land takeover to just three purposes — strategic use, public infrastructure projects and commercial ventures which are strictly in the public interest. Also industry would have to commercially buy 70 per cent of the land required for a project before the state government could step in to acquire the rest. Industry has complained in some cases that such a change in the law would have made it difficult to set up new units, because land acquisition would have become next to impossible. However, this is not really true. The experience with some of the special economic zones shows that land was privately acquired to a substantial degree, without the use of force.
The rehabilitation Bill, too, had some welcome stipulations—like undertaking rehabilitation prior to land takeover, and providing employment or equity participation to the affected families. The value of land goes up dramatically once it changes from agricultural to industrial. The benefit from this flows almost entirely to industry. It is only fair that those who did not get any benefit from such change of end use should get an additional benefit, in terms of jobs or shares.
However, the whole legislative exercise could have proved futile, since the amendments would not have been binding on states as they are free to have their own policies in these areas. Some state governments have already put in place their own land acquisition and rehabilitation policies. Considering this, it makes sense to leave it to the new government to decide on the best course of action.
Monday, March 02, 2009
Explaining the role of central banks in the sub prime crisis
Ref The Economist dt Sep 11, 2008
According to George Cooper of JP Morgan, one of the main reasons for the global financial melt down is that central banks have subscribed to one economic philosophy in an expanding economy and quite another when the economy is contracting. When things are going well, central banks leave the markets alone. But at the merest hint of crisis, central bankers cut interest rates to stimulate their economies and prevent asset prices from falling. Indeed, this is what the Fed under Greenspan did. Greenspan argued that it was impossible to spot bubbles while they were inflating. Instead, he felt that central banks should quickly respond once the bubble had burst.
This school of thought believes that prices reflect all available information. On that basis, asset prices are always “right”, there can be no bubbles and central banks should not intervene to restrain speculative excess. Even if there is a temporary mispricing, the market will correct itself.
Cooper argues that markets are far from efficient. Investors may simply be unable to get enough information to make correct judgments about the value of securities, or indeed may be given misleading information by insiders such as company executives or salesmen from the financial-services industry.
During a market crash, central-bank intervention to prop up markets is often popular. There are few people who relish banking collapses or recessions. But it creates problems in the long run. The first is that consumers (and companies) are encouraged to borrow, not save, thanks to the low level of interest rates and a belief that central banks and governments will always rescue them if things go wrong.
The second danger is that the system becomes progressively less stable as risk-taking is encouraged. Instead, central banks should permit some short-term cyclicality in order to purge the system of excesses. They can do this by preventing excessive credit creation. This means that credit growth should not be far ahead of economic growth.
Letting the markets have their way would risk a repeat of the Great Depression. But the danger of bailouts is that central banks may inflate another credit bubble, saving the economy from disaster in the short term but raising the stakes still further when the next crisis comes around. The Bear Stearns, Fannie Mae, Freddie Mac and AIG rescues, suggests the world is heading in that direction.
According to George Cooper of JP Morgan, one of the main reasons for the global financial melt down is that central banks have subscribed to one economic philosophy in an expanding economy and quite another when the economy is contracting. When things are going well, central banks leave the markets alone. But at the merest hint of crisis, central bankers cut interest rates to stimulate their economies and prevent asset prices from falling. Indeed, this is what the Fed under Greenspan did. Greenspan argued that it was impossible to spot bubbles while they were inflating. Instead, he felt that central banks should quickly respond once the bubble had burst.
This school of thought believes that prices reflect all available information. On that basis, asset prices are always “right”, there can be no bubbles and central banks should not intervene to restrain speculative excess. Even if there is a temporary mispricing, the market will correct itself.
Cooper argues that markets are far from efficient. Investors may simply be unable to get enough information to make correct judgments about the value of securities, or indeed may be given misleading information by insiders such as company executives or salesmen from the financial-services industry.
During a market crash, central-bank intervention to prop up markets is often popular. There are few people who relish banking collapses or recessions. But it creates problems in the long run. The first is that consumers (and companies) are encouraged to borrow, not save, thanks to the low level of interest rates and a belief that central banks and governments will always rescue them if things go wrong.
The second danger is that the system becomes progressively less stable as risk-taking is encouraged. Instead, central banks should permit some short-term cyclicality in order to purge the system of excesses. They can do this by preventing excessive credit creation. This means that credit growth should not be far ahead of economic growth.
Letting the markets have their way would risk a repeat of the Great Depression. But the danger of bailouts is that central banks may inflate another credit bubble, saving the economy from disaster in the short term but raising the stakes still further when the next crisis comes around. The Bear Stearns, Fannie Mae, Freddie Mac and AIG rescues, suggests the world is heading in that direction.
Sunday, March 01, 2009
India's growth story at a cross roads
Till the recent slowdown, we had taken India's growth for granted. But now circumspection has increased. It is a good time to look at some of the structural issues which are impeding growth. The Economist dt Dec 13, 2008 ran a detailed feature on India. Here I look at few key points covered in the report.
In 2005 some 456m Indians, or 42% of the population, lived below the poverty line. In 1981, the numbers were 420m and 60% respectively. Clearly poverty in India is not falling fast enough. India has 60m chronically malnourished children, 40% of the world’s total. In 2006 some 2.1m children died in India, more than five times the number in China.
Some 65% of Indians live on agriculture, which accounts for less than 18% of GDP. Shifting them to more productive livelihoods would be hard.
India continues to be plagued by fiscal indiscipline. Public expenditure has risen by over 20% in each of the past two years. But the spending has not been productive. Instead, the government’s largesse was handed out in the usual wasteful ways—on oil and fertiliser subsidies and public-sector pay increases—and on some high-profile welfare schemes where a lot of leakages can be expected.
If India is to sustain a growth rate of 8% or higher, it will need to manage four potential constraints- infrastructure, education, labour laws and land laws.
The infrastructure is bad. It takes an average of 21 days to clear import cargo in India; in Singapore it takes three.
India’s 3.3m km road network is the world’s second-biggest, but most of it is in bad condition. National highways account for only 2% of the total, and only 12% of them, or 8,000km, are dual carriageways. By the end of 2007 China had some 53,600km of highways with four lanes or more. India’s urban roads are choked.
India faces an acccute shortage of power. Last year peak demand exceeded supply by almost 15%. According to the World Bank, 9% of potential industrial output in India is lost to power cuts. Some 600m Indians are not connected to the electricity grid at all.In the next five years, the government plans to increase India’s generating capacity by an annual 14%, or 90,000MW. China added 100,000MW in 2007. But India last year added only about 7,000MW.
Roughly 14m Indians are now being added to the labour market each year. They cannot all work for IT companies. Indeed, because of underinvestment in education, many lack the necessary livelihood skills.
Our labour laws continue to be drag. Our labour markets lack flexibility putting insiders at a tremendous advantage vis a vis job seekers.
Land aquisition continues to be nightmare. Recall Singur. Unless this issue is resolved, there will be strong incentives for industrialists.
Clearly there are many challenges ahead for the next govt. In the past 5 years, high growth came about to favourable circumstances and the dynamism of the private sector, not because of a visionary govt. But in future, things may not be that easy. If our leadership cannot rise to the occasion, we can expect China to increase the already large gap further.
In 2005 some 456m Indians, or 42% of the population, lived below the poverty line. In 1981, the numbers were 420m and 60% respectively. Clearly poverty in India is not falling fast enough. India has 60m chronically malnourished children, 40% of the world’s total. In 2006 some 2.1m children died in India, more than five times the number in China.
Some 65% of Indians live on agriculture, which accounts for less than 18% of GDP. Shifting them to more productive livelihoods would be hard.
India continues to be plagued by fiscal indiscipline. Public expenditure has risen by over 20% in each of the past two years. But the spending has not been productive. Instead, the government’s largesse was handed out in the usual wasteful ways—on oil and fertiliser subsidies and public-sector pay increases—and on some high-profile welfare schemes where a lot of leakages can be expected.
If India is to sustain a growth rate of 8% or higher, it will need to manage four potential constraints- infrastructure, education, labour laws and land laws.
The infrastructure is bad. It takes an average of 21 days to clear import cargo in India; in Singapore it takes three.
India’s 3.3m km road network is the world’s second-biggest, but most of it is in bad condition. National highways account for only 2% of the total, and only 12% of them, or 8,000km, are dual carriageways. By the end of 2007 China had some 53,600km of highways with four lanes or more. India’s urban roads are choked.
India faces an acccute shortage of power. Last year peak demand exceeded supply by almost 15%. According to the World Bank, 9% of potential industrial output in India is lost to power cuts. Some 600m Indians are not connected to the electricity grid at all.In the next five years, the government plans to increase India’s generating capacity by an annual 14%, or 90,000MW. China added 100,000MW in 2007. But India last year added only about 7,000MW.
Roughly 14m Indians are now being added to the labour market each year. They cannot all work for IT companies. Indeed, because of underinvestment in education, many lack the necessary livelihood skills.
Our labour laws continue to be drag. Our labour markets lack flexibility putting insiders at a tremendous advantage vis a vis job seekers.
Land aquisition continues to be nightmare. Recall Singur. Unless this issue is resolved, there will be strong incentives for industrialists.
Clearly there are many challenges ahead for the next govt. In the past 5 years, high growth came about to favourable circumstances and the dynamism of the private sector, not because of a visionary govt. But in future, things may not be that easy. If our leadership cannot rise to the occasion, we can expect China to increase the already large gap further.
Will UK, Iceland, Denmark and Sweden join the Euro?
Ref : The Economist dt December 13, 2008
The assets controlled by Britain’s banking system amount to 450% of GDP. This has drawn inevitable comparisons with Iceland. Like that Nordic country, Britain does not have a global reserve currency, to draw on if it needs to act as lender of last resort. Britain has access to currency swap lines from the world’s biggest central banks, which would help it prevent a run on the banks. But the cost of this insurance will make London less competitive as a global financial centre. Among larger European countries the British government’s exposure to its banking sector is by far the highest. Switzerland, Denmark and Sweden are also not too different from Iceland. Will all these countries now seriously think in terms of embracing the Euro? Going by the current levels of public and political sentiments, only Denmark seems a possibility.
The assets controlled by Britain’s banking system amount to 450% of GDP. This has drawn inevitable comparisons with Iceland. Like that Nordic country, Britain does not have a global reserve currency, to draw on if it needs to act as lender of last resort. Britain has access to currency swap lines from the world’s biggest central banks, which would help it prevent a run on the banks. But the cost of this insurance will make London less competitive as a global financial centre. Among larger European countries the British government’s exposure to its banking sector is by far the highest. Switzerland, Denmark and Sweden are also not too different from Iceland. Will all these countries now seriously think in terms of embracing the Euro? Going by the current levels of public and political sentiments, only Denmark seems a possibility.
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