Uncovering the Monetary Policy Rule in India

India’s central bank, the Reserve Bank of India (RBI), has an unenviable task. It is not really independent, it has multiple objectives (not all of its own making), it has to deal with a country that is extremely heterogeneous in terms of economic structures and development levels, and it often lacks good data for its […]

India’s Budget: the Good, the Bad and the Ugly

It’s been a week since India’s Union Budget was presented to Parliament, but it’s not too late to reflect on what it promises. The budget process follows the British model, and is a constitutionally required disclosure of the planned receipts and expenditures of the national government. At one stage, budget speeches by the Finance Minister […]

India: Recent Growth Forecasts

Since my last post a couple of months ago, India’s election results came in, and turned out to be the best possible outcome: a strengthened Congress-led coalition at the national level.  The stock market, which had been surprisingly slow to recover, lagging the other BRICs, has gone up dramatically after the election. Some policy pronouncements […]

India’s Stock Market and Growth Expectations

The Reserve Bank of India just cut rates by 25 basis points. Earlier, government officials had been suggesting more rate cuts were necessary and forthcoming. Then, in the previous few days, it seemed that the consensus among analysts was that the RBI would hold rates steady. One senior economic advisor suggested to me last week that, since the interest rate channel is weak, the RBI might just reduce the cash reserve ratio (CRR). As it turned out, the RBI left the CRR unchanged, but made a smaller than typical (in recent months) interest rate cut. Already, forecasters are suggesting that another small cut will be made after the new government takes over and offers a full budget. Politically, the timing may make sense, but I continue to be puzzled by the strategy of gradual cuts, when there is a lag in the impact of monetary policy. Some economists have suggested that the RBI’s timing is so badly off that its policy changes end up being procyclical.

India’s Upcoming Election

India is the world’s largest democracy, and general elections begin later this month. The voting is staggered, and will not finish till mid-May, but the results will be known almost immediately after. India has successfully adopted electronic voting machines, which appear to be quite tamper-proof. The spread out voting allows government personnel to be deployed sequentially to oversee polling places in different states. In general, the election process is conducted efficiently and fairly. Of course, campaign finance involves large sums of money, some of it not transparent, and voters are bribed and sometimes coerced. But ultimately, democracy works in India: the results are trusted and accepted. The table below summarizes the outcome of the 2004 elections, and the predictions of four different opinion polls.

India: More stimulus is coming – definitely monetary, probably also fiscal

Looks like India is getting ready to take further steps to keep the economy from slowing down any further. The latest wholesale price inflation figure (year-to-year, which includes the high inflation interlude last summer) is only 0.44 percent. Consumer price inflation is still running much higher, mostly because food price inflation has been stubbornly high, but forecasters are seeing it coming down soon as well. The high CPI inflation has probably been one reason why the Reserve Bank of India has been so slow to cut interest rates.

Even with elections around the corner, India’s top economic policy makers are not being shy about signaling what they are going to do. Prime Minister Manmohan Singh said on March 28th, “With ample liquidity and low inflation, there is scope perhaps for a further moderation in interest rates.” I would expect the RBI to act on this soon. The PM also noted specific sectors of the economy that seem to be recovering or holding up well, agriculture and automobiles in particular.

Some Views on India’s Policy Options

Every piece I write on India seems to include the observation that more monetary easing by the Reserve Bank of India is needed. I don’t seem to be alone in thinking this is a good idea for the Indian economy. On February 25th, Arvind Subramanian of the Peterson Institute wrote: “The case for monetary easing is undeniable now not just because growth is declining and inflation is decelerating towards temporary extinction but also because relative calm has been restored to currency markets.” On March 13th, after another small interest rate cut by the RBI (on March 4th), Justin Yifu Lin, the World Bank’s Chief Economist, said “Now, inflation is no more a concern. Deflation is a concern, so I think India can reduce interest rates.” All to the good.

Update on India’s Prospects

All around the world, things look a lot worse than they did two months ago. India is no exception. Growth for the last quarter of 2008, the 3rd quarter of fiscal year 2008-09, came in at 5.3 percent, but this was artificially inflated by pay hikes for central government employees. The state governments are going to follow suit later with their own pay increases, but much of the economy is showing weakness, including exports and manufacturing. The employment numbers are also discouraging.

India and Satyam: A Quick Recovery

Policy responses to the Satyam scandal continue to be very positive, and it seems like the negative fallout will be minimized after all.

First, the government has moved swiftly to appoint a high-quality board of directors (yes, the one that oversaw – or failed to see – the fraud also had high profile people, but nowhere near as experienced and prominent in India as the new appointees). At the same time, they are moving to salvage the company. The government is signaling that it want insiders to be in charge, though there is also talk of bringing in Vivek Paul, the former Wipro number two. It is also identifying assets that can be mortgaged to keep the company afloat. This is as opposed to providing bailout money.

The Satyam Scandal: Causes, Consequences and Cures

The Satyam scandal has shaken corporate India, and damaged its reputation with investors, domestic and foreign. It turns out that founder and CEO B. Ramalinga Raju invented $ 1 billion in cash, which never existed. How could the auditors miss this fraud?

Bernard Madoff relied on a classic Ponzi scheme, and the ability to hide from regulators. He could use a small, apparently renegade auditing firm, which had no reputational or ethical concerns, it seems. Madoff was called for suspicious reported actions and results, but the regulators chose to ignore these concerns. Madoff also benefited from operating in an industry where some degree of non-transparency is normal. Earlier, Enron used an incredibly elaborate scheme, with substantial off-balance sheet activities, to perpetrate its fraud. Its auditors bore some of the blame, and their firm also collapsed as a result.

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