From "too big to fail" - to "too big, will fail"

The recent banking crisis has brought to the fore the argument against letting banks become too big. For far too long, regulators and politicians (including the erstwhile finance minister - Chidambaram) have argued for the merger of government owned banks. For some strange reason (atleast strange to me) - this is supposed to increase the ability of the banks to compete. With capital adequacy requirements unchanged, why a merger will allow greater competitiveness - especially since in the Indian context the merged banks will typically not be allowed to restructure either branches or staff - has always mystified me. At last, I see a serious academic Prof. Jayanth Varma argue for smaller banks. Hope someone is listening.

Structural reduction in fiscal deficit?

Interesting point - is the Indian economy witnessing a structural reduction in fiscal deficit? This suggestion, made with utmost seriousness by a fund manager recently had me thinking. Perhaps the recent increase in fuel prices, and some changes in fertilizer policy motivated this comment? So here's my take - fiscal deficit cannot be reduced in a democratic country with income disparities as wide as India - not now, not ever (perhaps). We've had "free" pricing of fuel earlier - when the OCC was abolished. Till the need to tax fuel oil higher, and higher prices of crude combined with a pre-elecction period forced a reversion to price control. And yes, even then, Reliance had a retail distribution - that had to be shut down. So Murli Deora and his closeness to the above mentioned industrial house notwithstanding, only low crude prices (and not government policy) can prevent a recurrence of governmental interference in oil pricing.

The government spend is increasing at a trend rate higher than income. Public sector salaries are linked to an inflation rate that is galloping. Endemic corruption increases cost of service delivery across a bloated governmental apparatus. Pension liabilities are unfunded and the government is populist. Its easier to believe that I have goblins living in my closet.

When Bulls meet - Shit happens

The "Market Summit" organized by ET the last weekend revealed yet again the inability of public debate in India to rise beyond cheerleading. Despite some interesting panelists, the discussion remained largely mundane and predictable. Surprising for such a panel, many arguments were simply wrong:

Chris Wood mentioned that inflation in India was good because we need some parts of the world to grow. Whatever happened to growth with moderate inflation - the mantra the fueled the US markets for most of the nineties? Besides, why is inflation needed for growth? Is anyone making a case that India is a "full employment" economy?Inflation is BAD for the poor - who make up large portions of the Indian population, and a government that does not focus on this is hardly managing the economy sensibly. Clearly a case of poor economic argument.

Rakesh and Shankar Sharma mentioned that the Indian economy did not receive a stimulus. Rakesh even made a suggestive statement that with the youngest population in the world, the Indian economy did not need one. Unfortunately, this is completely contrary to facts. The past three years has seen double digit fiscal deficits (just add centre and state. If you take off-balance sheet items, its positively scary). The government expenditure has been well above trend. Importantly, the stimulus continues unabated - with inflation running in high double digits and interest rates low, we have negative interest rates prevailing - which even the RBI has been constrained to comment on. If this is not the largest stimulus imaginable, I am not sure we are on the same page with regard to basic definitions.

A subdued Sameer Arora did make an attempt to inject some balance in the "debate". However, in today's youthful India, it seems that voices of balance can hardly get airtime.

Update on Defence and related issues

An update on current status of defence, nuclear deterrent and our neighbours:

Pakistan receives latest F-16's with night fighting capabilities

NSG Update from Vardarajan - US attempts but fails to stop ENR technology transfer to non-NPT countries (INDIA)

K Subrahmanyam points out China is the main proliferator - an interesting analysis

An old post from Dr. Jeffery Lewis where he seeks to make out that Indian strategists support signing CTBT - Interesting but treat with circumspection

Af-Pak - the new US FAK-AP

One organization in the US that is taking the "short term" view is certainly the white house. With its Af-Pak policy predictably falling apart, and with their self-imposed deadline of 2011 to exit Afghanistan fast approaching, the US government is creating a new breed of armed goondas to manage law and order. As Chellaney points out here this too shall end in tears - except that these may involve Indian lives as well.

Keynes - dead but not buried

So. now Krugman has almost started to rant. Miffed that his generally "economically correct" arguments against austerity are seemingly falling on deaf ears, Krugman has upped the ante - he now wants all to believe that economic policy should be driven by near term factors - and in the long(er) term we are all dead.

This is dangerous thinking. On this logic, his support for climate change would seem ridiculous - after all near term pain is apparent - why take it for long(er) term benefit - when we are all dead. This same argument is what prevented the US Fed from taking away the punch bowl when the party was getting raucous. Now that the participants are suffering a hangover, the "nobel" prof would have you believe that the best antidote is more of the punch bowl. Exactly in what condition that needs to be taken away remains unanswered - just not NOW.

India announces green flag for future nuclear disasters - freedom from prosecution

Twenty three years, thousands dead, an absconding American and no one in jail. This summarizes the outcome of the long lasting case against Union Carbide - the judgement of which was pronounced today. The facts are undisputed - US company UC had an accident in its plant in Bhopal which killed approximately 6x the number of people that died in 9-11. It took 23 years to establish the fact and send NO ONE to jail. Not surprisingly, the US CEO is an absconder, refused to stand trial in India, and was not even NAMED in the judgement. No doubt another case of US-India partnership that Secretary of State Hillary Clinton alluded to a couple of days back

If anyone doubts that imperialism survives as economic coercion, the tenor of the above statement will clear such doubts. Clinton applauds India for its help "shape the Copenhagen Accord and pledged to lower its greenhouse gas emissions intensity by up to 25 per cent" - a position which has the potential to make India's own growth more expensive - and is at variance to its own, well argued, earlier position that India did not need to make any commitments of this nature. 


Another pat on the back - "During Prime Minister Manmohan Singh's visit to Washington in November, he and President Obama launched the partnership to advance clean energy" - translated, this means a large contract to buy nuclear reactors from the moribund US nuclear industry. 


To buy the nuclear reactors, India will need to pass a bill that will allow US suppliers to go scott free in the event of an accident. Clearly, the US had learned from the UC disaster. Equally, our rulers continue to treat Indian lives as dispensable - sitting at the "high table" of nuclear trade (wonder where this mythical table is) is worth some sacrifices to Dr. Singh.