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Category Archives: politics

So Raghuram Rajan decides to go!

18 Saturday Jun 2016

Posted by paragwaknis in economic reforms, economics and governance, inflation, monetary policy, politics, RBI

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raghuram rajan, RBI Governor, Rexit

So finally what I feared about RBI Governor’s term renewal has come true! Raghuram Rajan put all the speculation about his second term to rest through a letter to his colleagues in the RBI announcing his return to academia at the end of his term. Here is the link to his letter. What stands out of all in the letter is the following statement clearly indicating the role of the government in his exit:

While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016.  I will, of course, always be available to serve my country when needed.

It is really unfortunate that Rajan will not be continuing as he brought about a lot of positive changes in the financial system, contained inflation, established a new monetary policy framework and took firm stand on issues often ruffling feathers of the Modi government. Hopefully, the new RBI governor will continue many of the reforms he initiated. The academic world should be happy as he continues contributing brilliant research papers in future.

Baba Ramdev and his unsound tax proposals!

20 Monday Jan 2014

Posted by paragwaknis in economics and governance, politics

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arthakranti, Baba Ramdev, bank transaction tax

Bad ideas driving good ideas out- that is what is happening with Baba Ramdev’s tax proposals. Tax harmonization in general is good idea. So there is a good argument for abolishing interstate custom duties creating a unified market for commodities. There is also a good argument for streamlining the income tax code to reduce distortion of consumption choices and making tax calculation easy. But to scrap all the taxes and replace it by one single bank transaction tax- bad bad idea!

One for starters, as far as you cannot observe and tax people’s ability, economic theory suggests there is an optimal mix of direct and indirect taxes. Secondly, by taxing bank transactions, we change the relative price of cash versus transactions routed through banks. It only means that transactions would be done more with cash than through banks. It also might be regressive in the sense that people who do not have access to off the book cash will benefit at the cost of people who have to route their transactions through banks.

It looks like Baba Ramdev has been infected by Arthakranti‘s misguided ideas based on very poor understanding of economics. For those who are interested can find my critique of Arthakranti Proposals here. But let me demonstrate the absurdity of these ideas in a few lines.

For example, Ramdev wants de-monetisation of currency notes of Rs 500 and Rs 1,000 to help ease inflation, improve employment generation and also lower corruption. True that inflation in the long run is a purely monetary phenomenon but that does not mean if some denominations of currency notes become unavailable inflation is going to be eased. In order to reduce inflation, in this case, would need a sustained decrease in overall money supply.

Now this would work if in fact inflation is just a monetary phenomenon for India. There is plenty of literature debating on what actually causes inflation in India and the consensus seems to be that supply side bottlenecks and rising demand for protein foods is causing it. I am not sure how making some denominations of notes unavailable is going to change that. Moreover we actually want people to eat more protein based foods rather than less and as incomes improve we should expect this demand to increase further. Eventually, production will respond and the rise in protein prices will be arrested. What actually might help stem inflation right now is not to institute the next few pay commissions and may be use that money to fund more roads, electricity and schools!

Simplistic ideas are many times just that- they are simplistic but might end up causing more damage than good. We should all be wary of those and remember that there is no shortcut to better economic performance but to invest in infrastructure, education and health.

Is it time to give up on the Nehru-Gandhi Clan?

12 Sunday Jan 2014

Posted by paragwaknis in politcal economy, politics, voting behavior

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Dynasties in Politics, India, NaMo, Nehru-Gandhi dynasty, Tim Besley, voting behavior

I have often heard people complain about the dynastic nature of Congress and how many Indians fall for the Nehru-Gandhi clan’s charm. The question is does that mean that democracy has not truly deepened in India? While there are many other indicators of the shallowness of the Indian democracy, a vote for the Nehru-Gandhi dynasty may not be one of them!

In an interesting paper on dynastic choice, Tim Besley and Reynal-Querol address this choice of a leader from dynasty by looking at data across countries since late 1840s. Acknowledging that political leaders who are part of a dynasty have been an important feature of the political landscape throughout history, they argue that dynastic selection can play a role in improving economic performance when institutions for controlling politicians are weak and policy-making skills are persistent within a dynasty. Testing this idea empirically using a sample of leaders between 1848 and 2004, they show that economic growth is higher in polities with dynastic leaders but only when executive constraints are weak. They also find evidence that dynasties end when the economic performance of dynastic leaders is poor suggesting that citizens are tolerant of selection in dynasties when economic performance is good.

So, keeping in line with this finding, it looks like choice of a leader from Nehru-Gandhi clan may actually have been a rational one, since people did not trust the ability of Indian institutions to control other politicians. Also, it made sense if status-quo on economic growth was maintained. In the recent times, however, that confidence seems to be waning. It might be because the likelihood of having a viable candidate from the clan is perceived to be very low. Rahul Gandhi just does not seem to fit the bill!  Also, public activism through anti-corruption movements, judicial activism by the Supreme court, etc might have increased people’s confidence to control other politicians from non-Congress background.

This means that NaMo might stand a chance after all! Given the rise of AAP, NaMo better rise to the challenge though or else BJP might as well write off any future chances of forming a government at the center. The AAP, Congress, and people at large are going to watch for any slip-up very closely and it is not going to overlooked in future elections.

 

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