Post offices and financial inclusion

An expert committee report: Harnessing the India Post network for financial inclusion has been released. This is a joint effort between Department of Post, Department of Financial Services, Department of Economic Affairs and Invest India Economic Foundation. It has some interesting new ideas on the unique role of post offices in financial inclusion, and the way to best harness these strengths while retaining a useful sense of the public/private divide.



Also see:

• Souvik Sanyal in the Economic Times, 29 July 2010.


• Stamps, savings, microloans and more, on the IFMR blog, 10 August 2010.


• Post offices can bring in financial inclusion, by Sanjeev Kumar Patro in the Indian Express, 3 August 2010.


• Irda’s plan to sell insurance products through post offices hits roadblock by Remya Nair and Surabhi Agarwal, in Mint, 28 February 2011.
  
  

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Monetary policy is easy; Financial regulation is hard

I wrote a column in the Financial Express today,
titled Monetary
policy is easy; Financial regulation is hard, where I
contrast the complexity in public administration of doing monetary
policy versus the complexity of getting to good financial
regulation.

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Independence of regulators and independence of the central bank

I have a column href="http://www.mayin.org/ajayshah/MEDIA/2010/autonomy.html">When
should a government agency have autonomy?, in the Financial
Express today. This is a hot subject in India today, in the
aftermath of the ULIPs ordinance. While on this
subject, also see:

• href="http://www.livemint.com/2010/06/30202552/The-taming-of-a-regulator.html">An
  editorial in Mint.
  
• href="http://www.livemint.com/2010/07/12211501/Should-Finmin-be-the-super-reg.html?atype=tp">Tamal
  Bandyopadhyay in Mint.
  
• href="http://www.hindustantimes.com/Regulators-need-autonomy-but-also-accountability/Article1-574352.aspx">Gautam
  Chikermane in the Hindustan Times.
  
• href="http://www.financialexpress.com/printer/news/649420/">Jayanth
  Varma in the Financial Express.
  
• href="http://economictimes.indiatimes.com/articleshow/6198930.cms?prtpage=1">K. P. Krishnan
  in the Economic Times.
  
• href="http://www.livemint.com/2010/07/20202034/Recall-the-Ulip-product-Compe.html?h=D">Monika
  Halan in Mint.
  
• href="http://www.livemint.com/articles/2010/04/13212045/Difficult-to-sell-Ulip-turns.html">Monika
  Halan in Mint
  
• href="http://www.livemint.com/2010/01/05224037/The-need-to-inculcate-a-8216.html">Monika
  Halan in Mint
  

One feature of the ULIPs crisis which has not been widely
appreciated is the role of the banks. While much opprobrium has been
directed at insurance companies and insurance agents (both
individuals or specialised financial distribution companies), banks
are big players in selling insurance products. Their misconduct in
selling represents a failure of RBI supervision. Most major banks are
part of this scandal. The few customers who have protested have been
sorted out, with a no-media clause in the resolution agreement that
prevents the story from getting out.

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Interesting readings

The top
selling Indian newspapers according to Amazon's kindle subscriptions.

India's courts may be in a slow process of reshaping India into a
liberal democracy. Here is
a Supreme
Court ruling which blocks the Maharasthra government from
interfering with the rights of a citizen to read a certain
book. Sadly, it was done on a technicality.

Manish
Sabharwal in the Financial Express on an important new
initiative of the Ministry of Labour.

Eric
Bellman in the Wall Street Journal on the rise of
Madras in automobile manufacturing. There is much strength there in
electronics manufacturing also.

Dhiraj
Nayyar in the Indian Express on the interfaces between
mobile telephony and
banking. [also
see].

Kerala
is Number 1 by Mahesh Vyas in the Business Standard.

On
the difficulties
of ULIPs and the recent ordinance,
see Dhirendra
Kumar in the Financial Express.

A
story by Steve Lohr and John Markoff in the New York
Times suggests that low end outsourcing to India could be
under attack from new technology.

B. S. Raghavan
in the Hindu Business Line on inflation targeting at RBI.

Hindustan Times and Mint have built an interesting
new web page
: The
Indian innovation revolution.

We in India are very convinced that it is good to have a world
where every single individual is numbered and trackeable. But there
are many nice things about anonymity and the creation of anonymous
personas. See this
story of _Why, a person who did some amazing things anonymously,
and then shut down this life when it looked like his anonymity was
under threat. The idea of being able to create and live multiple
anonymous invented personas has long been a meme in the hackish
community - e.g. see
True
names by Vernor Vinge.

An
interesting interview
by Samir Sachdeva with Nandan Nilekani in Governance NOW
magazine.

As I
read Lose
a general, win a war by Thomas E. Ricks in the New York
Times, I was struck by this remarkable flexibility of labour
contracts, which must work wonders for shaping incentives
correctly.

Tarun
Ramadorai on empirical analyses of the efforts at banning
short selling of recent years.

David Friedman
has released
a free pdf of the 2nd edition of his important
book The
machinery of freedom. Hmm, that's a good strategy: authors
should open source edition $n$ when they start on edition
$n+1$. Also
see: a
surge in interest in Friedrich von Hayek's The road to serfdom.

Ruuel
Marc Gerecht has some interesting ideas in the New York
Times on the use of information technology to assist the
resistance in Iran. I wonder if similar ideas can be deployed on the
problems of China as well.

Tom
Wright has an article in the Wall Street Journal about
Zeeshan-ul-hassan Usmani, a Pakistani scientist working on
explosions and suicide bombings. Also
see Pervez
Hoodbhoy on Pakistan's existential problems.

Calzolari,
Levi, Navaretti, Pozzolo, writing on voxEU, show that
multinational banks were a source of stability in the crisis. Also
see Internal
capital markets and lending by multinational bank
subsidiaries by de Haas and van Lelyveld, in the Journal
of Financial Intermediation.

Ila
Patnaik on the Chinese exchange rate regime and its
implications for India.

Inflation
targeting turns 20 by Scott Roger, in Finance &
Development, March 2010.

Edward
Glaeser reviews a book by Joel Mokyr on what made the
industrial revolution. It makes you think about the nascent
capitalism that we see in India.

Anyone interested in the world of the Internet and computer
technology must read:

The State of the Internet Operating
System by Time
O'Reilly: part
1
and part
2.

John Naughton in the Guardian.

Clive
Thompson in the New York Times on IBM's computer that
plays `Jeopardy'.

What's
the greatest software ever written? by Charles Babcock,
in Information Week

The
Steve Lohr and John Markoff story about speech recognition, and
system-building around it, mentioned above.

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Call auctions and their use for the opening price on the stock market

In a SEBI circular today, we have movement on the use of call auctions for the opening price of the stock market. For more in this subject, see Call auctions: A solution to some difficulties in Indian finance by Susan Thomas, June 2010.

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Who has the best sources?

Tamal Bandyopadhyay has amazing sources. He got
the full
text of RBI's letter about
the Protect
Insurance Companies Ordinance. And, he has
got a
copy of the elusive MoF FSDC White Paper. Tamal, please
release these on wikileaks! Also
see Shaji
Vikraman in the Economic Times.

And, see C. Rangarajan's
comments in the Indian Express.

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Opposition moves today

Today, opposition parties are trying to coordinate demonstrations and a `Bharat Bandh' all across India. We've got empty roads of the kind not ordinarily seen:

The focus of these protests is: High inflation.



In many other countries, the political landscape has been one where politicians are relatively reckless about inflation, and the economists and central bankers are the ones preaching the virtues of low and stable inflation, asking for an independent central bank which does only one thing: deliver low and stable inflation.



We find the opposite configuration in India: the RBI (and the economists who run with RBI) criticise inflation targeting, and preach in favour of non-transparency and multiple objectives. I suppose this is a reflection upon the professional skills of economists and central bank staff in India. Most economists in India are brought up on traditional `development economics', which is a different skill set when compared with macroeconomics. Somehow, left wing economists (e.g. the EPW) have come to think that price stability is not that important, and leftist ideas have a remarkably big footprint in India, when compared with what we see in economics worldwide. Another dimension is the self-interest of RBI, which is likely to be pleased at being a central planning agency for Indian finance, and to not be held accountable for anything.



But all is not lost. We might not get central bank reform and inflation targeting through the traditional channel (the pushing by economists and central bankers). But we've got politicians who care deeply about inflation. Indian politicians are convinced that high inflation leads to losing elections. At some point, some team at the Ministry of Finance is going to get sick of the repeated inflation crises, and of having to take responsibility for delivering low and stable inflation.

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India's inflation problem

RBI raised rates, saying that they are concerned about inflation. What is the state of inflation in India? I find it useful to look at an approximate `core WPI' that is obtained by removing food and fuel from the overall WPI. This has to be done carefully because some food is present in WPI Manufacturing.



The right way to think about inflation is to not compute the year-on-year change in prices -- this shows the average inflation over the last 12 months. The right path is to compute month-on-month changes. This requires care about seasonality. These results are taken from the http://www.mayin.org/cycle.in website:

Month	Point-on-point change (annualised)
2009 Sep	1.61
2009 Oct	-0.11
2009 Nov	9.67
2009 Dec	5.12
2010 Jan	9.33
2010 Feb	2.93
2010 Mar	27.49
2010 Apr	-4.07
2010 May	34.86

In September and October 2009, inflation was at sub-target levels: this was a time to cut rates. After that, inflation has reared up again. In particular, the rise in prices in March when compared with February was 27.49% (annualised). And in the most recent data, the rise in prices in May when compared with April was 34.86% (annualised). In other words, if prices rose for a year the way they rose from April to May, this would yield 34.86% YOY inflation within 11 months.



We find it useful to smooth this using the three-month moving average:

It makes sense for RBI to raise rates under these conditions.



Will it help matters?



Only a little.



In a well functioning market economy, small changes in the short rate by the central bank propagate all across the economy, into myriad asset prices, through the `monetary policy transmission'. In India, given the malfunctioning Bond-Currency-Derivatives Nexus and the lack of competition in banking, very little happens in the economy by way of reduced aggregate demand when RBI raises rates.



One feeble channel which works is : when local interest rates are higher, more money comes into India, which gives a stronger rupee, which helps control inflation. This effect is also weakened owing to capital controls which interfere with such adjustments.



In short, RBI was right to raise rates; inflation is a serious problem; but RBI is mostly ineffectual in fighting inflation given the weakness of the financial system and thus the monetary policy transmission.



What about the impending impact of the fuel price hike?



What about the impending impact of the fuel price hike? I have mixed feelings on this. If monetary policy was well structured in India, economic agents would have firmly grounded inflationary expectations. In that hypothetical world, economic agents would know that the central bank surely pursues an inflation target. The central bank would say what it would do, and it would do as it said. Under these conditions, the central bank governor would merely point out to agents that the oil price shock was but transient, and that the central bank will ensure that the inflation target will hold in the medium term. As a consequence, economic agents would shrug off the oil price shock, and it would not feed into broad-based inflation.



This is not the world that we live in. Inflationary expectations in India are not grounded. We do not know what RBI will do. Worse, RBI staff repeatedly gives out speeches promising us that they have multiple objectives, that the specific mix of objectives will change from time to time without transparency. So we are repeatedly reminded that RBI is not focused on inflation. In addition, the financial system is weak owing to a lack of financial sector reforms, so even when RBI moves against inflation, they are mostly ineffectual. Hence, monetary policy in India has little credibility in fighting inflation.



Hence, the shock from the fuel price hike will feed into broad-based inflation to a greater extent. Hence, it should matter to RBI's thinking about the outlook for inflation. You reap as ye sow.

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