Saturday, February 28, 2009
US Budget...
This is just so funny, I just can’t stop laughing. But it also packs a lot of meaning into it...
Friday, February 27, 2009
Government's fiscal profligacy - can't have heads I win, tails you lose
Government recently announced another round of fiscal stimulus (indirect tax cuts) and it was followed by another round of criticism and concerns over spiraling fiscal deficit. Before the tax cuts, government was criticised for not providing any stimulus to the economy. Well, we cant have it both...
Either you provide stimulus to the economy (which would involve in varying degrees a combination of tax cuts or spending increases) or you worry about rising fiscal deficit. It cannot be a situation where if it provides stimulus (or attempts to) you criticise it for higher fiscal deficit and if it does not provide you criticise it for not doing enough for the economy.
The issue of fiscal deficit is important (I am by nature a fiscal conservative, would prefer very low or balanced government accounts) but we should not get uncessarily worried over high fiscal deficit. The problem of high fiscal deficit crowding out private investment or causing high inflation etc would arise only when the economy starts to recover.
If the basic hypothesis is that the current slowdown is very severe and unless the government provides the stimulus things will get far worse, then the current worry of slowdown precedes future worries of high fiscal deficit. The thought process then has to be lets first get out of the current crisis and worry about future crisis later on.
One can logically criticise the government on its state of finances only if the basis hypothesis is that either the growth deceleration is short lived and given the steps already taken growth will recover within a reasonably short time (3-4 quarters) by itself or that the growth deterioration is not severe enough to warrant the fiscal deterioration of the magnitude that we are seeing. Growth will slow from unsustainable levels (>9%) to more sustainable trend level and thus we should keep the house in order to be prepared for the next cyclical uptick. If this is not the basic hypothesis, criticism of the government on its fiscal profligacy is unjustified in my view...
Either you provide stimulus to the economy (which would involve in varying degrees a combination of tax cuts or spending increases) or you worry about rising fiscal deficit. It cannot be a situation where if it provides stimulus (or attempts to) you criticise it for higher fiscal deficit and if it does not provide you criticise it for not doing enough for the economy.
The issue of fiscal deficit is important (I am by nature a fiscal conservative, would prefer very low or balanced government accounts) but we should not get uncessarily worried over high fiscal deficit. The problem of high fiscal deficit crowding out private investment or causing high inflation etc would arise only when the economy starts to recover.
If the basic hypothesis is that the current slowdown is very severe and unless the government provides the stimulus things will get far worse, then the current worry of slowdown precedes future worries of high fiscal deficit. The thought process then has to be lets first get out of the current crisis and worry about future crisis later on.
One can logically criticise the government on its state of finances only if the basis hypothesis is that either the growth deceleration is short lived and given the steps already taken growth will recover within a reasonably short time (3-4 quarters) by itself or that the growth deterioration is not severe enough to warrant the fiscal deterioration of the magnitude that we are seeing. Growth will slow from unsustainable levels (>9%) to more sustainable trend level and thus we should keep the house in order to be prepared for the next cyclical uptick. If this is not the basic hypothesis, criticism of the government on its fiscal profligacy is unjustified in my view...
Sunday, February 22, 2009
A simple solution to end the retail fuel pricing mess...
Domestic retail fuel prices (largely petrol and diesel) were to be deregulated (and made market determined) long back... But they haven't and have landed up in a big soup - the cost of subsidies on government finances is large, PSU oil marketing companies were on the verge of bankruptcy a few months back... And though in principle, everyone agrees that the subsidies on petrol and diesel prices cannot continue at this rate, there isn't a good alternative. So here's one simple solution...
Firstly, the objective of any domestic pricing regime (lets accept that domestic fuel prices cannot be completely deregulated for at least the next few years) is
1. Prices should correspond to international prices, but not be as volatile as international crude prices
2. Oil PSUs must realise a fair price for their product, lest we make them bankrupt...
3. The pricing mechanism should be transparent and not subjective prerogative of the government in charge or oil minister in charge.
So the solution i have is that domestic prices be linked to a 'moving average' of international oil price with domestic prices being rest weekly or monthly. The moving average could be a 30 day moving average or 60 day or 90 day or 365 day depending on the smoothening we desire. Obviously, the higher the period, the smoother the domestic prices relative to international prices.
Now, this moving average solves all problems. It makes domestic prices respond to rising or falling international price of Oil - but depending on the smoothening factor with a lag. So week to week or month to month domestic prices don't jump around in volatile manner and so consumers are protected from the volatility. It ensures that Oil companies recover a fair price, there will be a lag but it will work both ways, they will earn slightly less in an upcycle of oil prices and slightly more when prices correct. The mechanism is transparent in that the reset period and smoothening factor are both known ex ante and so not subject to whims and fancies of incumbent government or oil minister.
Firstly, the objective of any domestic pricing regime (lets accept that domestic fuel prices cannot be completely deregulated for at least the next few years) is
1. Prices should correspond to international prices, but not be as volatile as international crude prices
2. Oil PSUs must realise a fair price for their product, lest we make them bankrupt...
3. The pricing mechanism should be transparent and not subjective prerogative of the government in charge or oil minister in charge.
So the solution i have is that domestic prices be linked to a 'moving average' of international oil price with domestic prices being rest weekly or monthly. The moving average could be a 30 day moving average or 60 day or 90 day or 365 day depending on the smoothening we desire. Obviously, the higher the period, the smoother the domestic prices relative to international prices.
Now, this moving average solves all problems. It makes domestic prices respond to rising or falling international price of Oil - but depending on the smoothening factor with a lag. So week to week or month to month domestic prices don't jump around in volatile manner and so consumers are protected from the volatility. It ensures that Oil companies recover a fair price, there will be a lag but it will work both ways, they will earn slightly less in an upcycle of oil prices and slightly more when prices correct. The mechanism is transparent in that the reset period and smoothening factor are both known ex ante and so not subject to whims and fancies of incumbent government or oil minister.
State of our (medical) education system...
While, there can be 'N' number of stories of the state of our education system, one of the more harrowing stories is this:
My sister is studying dentistry. She has completed her Bachelors degree and wants to pursue her Masters in that field. But to her horrow, she finds that in the entire state of Maharashtra there are just 15 (yes fifteen) seats for Masters in government colleges. Of these 15, 7 are under various reserved categories so there are just 8 (eight in the whole state of Maharashtra) seats for doing Masters in Dentistry. Her friends in her current college (where she is studied for her Bacherlors) number considerably more than 15. So the available seats are not even enough to accomodate the bachelors output of a single college.
Now if my sister doesnt manage to occupy one of those 15 seats (8 actually as she belongs to open category), either she has to go abroad for her Masters which is extremely expensive proposition; take admission to one of the private colleges which are even more expensive (Fees in any decent private college are ~US$100,000; an MBA from Harvard is cheaper) or NOT pursue her Masters.
Given what I know of my sister, she is most likely to choose the final option in case she does not make it to the government colleges. Now that would be a very sad thing...
My sister is studying dentistry. She has completed her Bachelors degree and wants to pursue her Masters in that field. But to her horrow, she finds that in the entire state of Maharashtra there are just 15 (yes fifteen) seats for Masters in government colleges. Of these 15, 7 are under various reserved categories so there are just 8 (eight in the whole state of Maharashtra) seats for doing Masters in Dentistry. Her friends in her current college (where she is studied for her Bacherlors) number considerably more than 15. So the available seats are not even enough to accomodate the bachelors output of a single college.
Now if my sister doesnt manage to occupy one of those 15 seats (8 actually as she belongs to open category), either she has to go abroad for her Masters which is extremely expensive proposition; take admission to one of the private colleges which are even more expensive (Fees in any decent private college are ~US$100,000; an MBA from Harvard is cheaper) or NOT pursue her Masters.
Given what I know of my sister, she is most likely to choose the final option in case she does not make it to the government colleges. Now that would be a very sad thing...
Thursday, February 19, 2009
Growth is really scarce this year....
It is remarkable how many countries are likely to contract this year. Of the 55 countries in the table below, 38 (almost 70%) are expected to contract. And it is not just Developed countries but many EM countries and many even in our own backyard –
The top 3 countries in terms of maximum contraction of their economy –
Source: Economist
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