An Awkward Corner

Reverse Migration: Chinese Abandon Cities. And Indians?

Niranjan Rajadhyaksha — Fri, 14 Nov 2008 13:47:00 GMT

The sharp economic slowdown in China has led to factory closures and layoffs.

(Note to the CPM: what does that tell you about the state of labour rights in the workers' paradise?)

The New York Times has a very good story on this.

One part of the story caught my attention:

"The mass layoffs have led to a profound change in the movements this year of migrant workers like Mr. Wang who spend virtually the entire year away from home. Many are heading home early for the Chinese New Year, in late January, and say they might not return to work in the coastal regions. A worker in the railway station in Guangzhou said that from Oct. 11 to Oct. 27, there were 1.17 million passengers on trains leaving the station, an increase of 129,000 over the same period last year. There have been reports of a similar jump in other regions.

Once in the interior, the workers will have less incentive than in the past to return to the coastal provinces. Rising grain prices have made farming more profitable. The Chinese government announced a rural land reform policy last month that could spur some farmers to stay on their land and make better use of it."

This suggests that there is reverse migration in China right now, as people move back to their villages in search of better prospects. Does the deflation in the global industrial sector and high prices in the farm sector alter the dynamics of migration?

And what about India? Is this happening here as well. I don't know, but I suspect such reverse migration is not likely right away.

But higher food prices and the National Rural Employment Guarantee Scheme could be making it more worthwhile for villagers to stay back.

Not that this is necessarily a good thing: our future is urban.

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Recession Watch

Niranjan Rajadhyaksha — Thu, 13 Nov 2008 07:59:00 GMT

The leaders of the G20 group of rich and developing countries are to meet in Washington DC this weekend. A lot is expected from them, though I suspect they will not have enough time to come up with concrete proposals.

The mood of the meeting is likely to be grim. Here's a quick roundup of some of the news --- in no particular order --- that shows that the world is stumbling towards a recession.

1. US Treasury Secretary Hank Paulson more or less admits that his $700 billion bailout plan is not delivering results. He now has a Plan B.

2. China says that its industrial production is growing at its slowest rate in seven years.

3. The mood in Japan is glum, with companies expected to announce bad results.

4. The World Bank says global trade will shrink in 2009, the first time in 27 years. Lead indicator: The Baltic Dry Freight Index is down 90 percent.

5. The Bank of England forecasts a deep 18-month recession in the UK. Germany is already in recession, believed to be its worst in 12 years.

There's much more trouble out there. And thus reason for the leaders who will meet in Washington to stay focussed on the core issues.

There is one last thing worth noting: the problems have burst out of the confines of the financial sector and are flooding the real sector of output and jobs.

We will soon have to stop calling this a financial crisis and accept that it is becoming a wider economic crisis.

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Cold Callers, RIP

Niranjan Rajadhyaksha — Tue, 11 Nov 2008 08:01:00 GMT

Despite the vocal claims of Indian industry about a credit crunch, bank credit is growing at a torrid pace. See latest RBI data here

But I suspect that most of this money --- most of the "non-food" part, that is --- is being lent to companies rather than individuals. I haven't been in the market for a housing or car loan for a long time. But does anybody out there have personal experiences to suggest that banks have shut the lending window for individuals?

All I know is that it has been many weeks since I was last pestered by cold calls from banks trying to sell me a new credit card, personal loan, money against shares etc, etc, etc.

Not that I am complaining.

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Banks Are Not Charities

Niranjan Rajadhyaksha — Sun, 09 Nov 2008 15:11:00 GMT

There has been a lot of valid criticism about the way the finance ministry has been arm-twisting banks to reduce lending rates.

Here's a quick recap.

"A day ahead of the interaction with public sector banks, Finance Minister P Chidambaram today assured industry that he would persuade bankers to cut interest rates, even as chambers saw more measures from the RBI to ease money supply."

Source: Business Standard

That was on 3 November. The next days the main public sector banks fell in line and agreed to do what the FM reportedly asked them to during their meeting with him.

"Loans for companies and individuals are set to become cheaper with India’s state-owned banks promising to cut interest rates by up to 75 basis points after a meeting with the country’s finance minister P. Chidambaram..."

Source: Mint

Should banks offer more and cheaper loans to a rapidly-weakening economy? That's something for bankers to decide, not ministers or bureaucrats.

Chidambaram has a record of dictating to banks what to do with depositor money. But now he has company.

A report in the Daily Mail tells us that UK Business secretary Peter Mandleson has warned banks to pass on rate cuts or risk public anger. This after the head of HSBC defied a call from UK Prime Minster Gordon Brown to cut lending rates.

But more banks seem to have joined the rebellion.

The Sunday Times says that UK banks continue to defy Gordon Brown over new interest rate cuts.

"The banks have warned the chancellor they are “not charities”. They said they could not afford further to reduce mortgage payments and interest rates to businesses if, as expected, the Bank of England continued to cut rates as the economy fell deeper into recession."

The point is not the reasoning behind this show of defiance. The point is that banks in the UK can defy their government. We see no proof of it in India.

Mint has written an editorial in July on an interest rate blunder Chidambaram had forced down the gullet of the banking system.

Counterpoint: Yves Smith has this to say about the UK showdown.

"One could contest the banks' view. They enjoy a unique role, protected by special licensing requirements, of taking customers' deposits. And as we have seen, at least for large players, large banks are not permitted to fail. Losses are socialized."

That leaves two questions unanswered:

1. Why have banks at all? Why not socialize all borrowing and lending?

2. Less dramatically: Can such guidance work at all in economies such as India where rules often matter less than personalities?

Personally, I think the government should leave pricing of loans to bankers who have a better understanding of business risks.

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Interest Rate Apartheid

Niranjan Rajadhyaksha — Wed, 05 Nov 2008 04:09:00 GMT

I have never taken the statements that the major business lobbies make on the economy too seriously.

Here is a recent example.

"Mr. Rajeev Chandrasekhar, MP and FICCI President today told the Prime Minister at a meeting in New Delhi on the Global Economic Scenario that the country’s economy and business was at a critical point with confidence breaking down. Only a series of measures like getting the focus on growth in monetary and fiscal policies, deeper cuts in (interest) rate and CRR, open credit and freezing of credit lines could help repair the situation... An increase in NRI deposit rates ...was also suggested."

Read entire press release here.

Notice what Ficci is saying: domestic interest rates should be cut which means that local savers should get paid less for the money they put in banks. And then Ficci says that NRI deposit rates should be increased.

So: lower deposit rates for one set of Indians and higher interest rates for another set of Indians.

This is part of a broader paradox. Easing the domestic credit crunch points us in the direction of lower interest rates while the need to attract foreign capital to support the rupee points us in the direction of higher interest rates.

This is a paradox that defies easy solutions. But what Ficci (and so many others) suggest looks like interest rate apartheid to me.

Alas, this is also what the RBI is doing.

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A Short (And Partial) History of Dalal Street Crashes

Niranjan Rajadhyaksha — Fri, 31 Oct 2008 03:59:00 GMT

The idea for this post comes from something I read in an Economic Times front page story on Muhurat trading for Samvat 2065.

"A broker since 1957, (Jasvantlal) Shah, said he has never seen such a huge crash except in 1963 and in 1969, when forward trading was banned."

What happened in in those years? There is not much information out there about previous boom-and-bust cycles in Indian equities.

Why?

One reason is that India did not have a stock market index till recently; the BSE Sensex has been calculated only since April 1984 while the Dow Jones Industrial Average goes back to May 1896 and the Nikkei has values going back to May 1949. So there is no readily downloadable excel sheet to tell us what happened to Indian shares over the decades.

The second reason is that there is little by way of financial history available in India -- either autobiographies of old traders or academic work. This is as far as English goes. Perhaps there is stuff available in Gujarati, which is the language of most of India's old broking families.

That is why Jasvantlal Shah's statement intrigued me. What happened in 1963 and 1969?

I have tried here to piece together some fragments of that forgotten history.

1. The first equities bubble in Indian financial history burst on 1 July 1865. This was preceded by a five-year boom that had its origins in the American Civil War. The North blockaded the ports of the cotton-growing states of the South. The British textile industry was starved of a critical input and had to source cotton from Western India.

Bombay became a boom town, with wild rises in the share prices of banks, textile companies and real estate trusts. These times are wonderfully recounted by Gillian Tindall in her book, City of Gold: The Biography of Bombay.

"But, of course, it was more than a cotton boom: it followed the classic form of the financial bubble... By January 1985, there were in Bombay no less than 31 banks, 16 financial associations, 8 land companies, 16 press companies (ie cotton processing companies), 10 shipping companies, 20 insurance companies, and 62 joint stock companies."

Premchand Roychand, the king of the Bombay market, was wiped out in the crash.

2. The boom and bust after World War 1 has been mentioned in several business histories, when many of the business leaders such as G.D. Birla who rose to prominence in later decades made their mark as speculators and traders. I do not have much information about this episode right now, but will update this part. Readers too are welcome to lead me to data sources.

What I do know is that the market peaked in July 1920 --- and took a quarter of a century to regain those heights.

3. Let's jump to the Roaring 1920s and the Wall Street crash at the end of the decade. What happened in Bombay?

I have borrowed data from a paper by Bryan Taylor: Could This Decade Be The Next 1930s?

Taylor says: "Markets outside of Europe did not participate in the boom and crash that followed."

Between a market bottom in September 1925 and a market top in November 1927, Taylor estimates the Indian market moved up 18 percent. Compare that with the 394 percent that the US market went up by between its low in August 1921 and its high in September 1929.

But India was not spared the brutal bear market that followed. As I noted earlier, the market peak of July 1920 was not crossed till 1945.

4. Then we go to the ban on forward trading in 1969. The Indian economy was already reeling during previous years from a severe drought and a slowdown in growth. The government of the day believed that "speculators" were fuelling the inflation fire --- see how little we have progressed in our attitudes --- and cracked down on forward trading in commodities and shares.

The market was jolted and went into hibernation.

5. But the ban was not the unkindest cut. That came on 6 July 1974, at the zeinth of Mrs Gandhi's socialist policies, when the government of the day decided to limit dividend payouts to shareholders.

"However, the capital market received yet another setback on 6 July 1974, when the government promulgated the Dividend Restriction Ordinance, restricting payment of dividend by companies to 12 percent of the face value or one-third of the profits of the companies that can be distributed as computed under section 369 of the Companies Act, whichever was lower. This led to a slump in market capitalization at the BSE by about 20 percent overnight and the stock market did not open for nearly a fortnight."

Source: Economic Times

I have also heard from oldtimers that the market lost 40 percent of its value after this senseless legislation.

Later booms and crashes are better known: the boom of the late 1980s and the collapse after the economic crisis of 1991; the Harshad Mehta roller coaster; the Ketan Parekh scam and the dotcom bubble; and the recent crash landing.

Isn't it high time someone wrote an authoritative history of Dalal Street over the past 150 years and more?

Meanwhile, readers are invited to fill in the gaps in the patchy financial history recounted here.

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Emerging Markets: The Next Crisis

Niranjan Rajadhyaksha — Mon, 27 Oct 2008 05:42:00 GMT

The financial crisis began in US subprime mortgages in the summer of 2007 and has since then rapidly moved into every nook and crevice of the global financial system --- commercial banks, monoline insurers, wholesale credit markets, interbank lending markets, hedge funds, money market mutual funds...

Are emerging markets next?

It looks increasingly likely.

1. Paul Krugman tells us to get ready for the mother of all currency crises.

"I’ve been reading reports from Stephen Jen, a former student of mine who’s now the chief currency strategist at Morgan Stanley. He points out that since the fall of Lehman, we’ve been seeing clear signs of currency crises throughout the world of emerging markets, including Eastern Europe. This time, it’s not an Asian crisis or a Latin American crisis, it’s a global crisis."

2. Dani Rodrik says we are close to the next stage of the crisis.

"One can make a decent argument that the financial crisis has bottomed out in the advanced countries (with the real-economy consequences still to come of course). But it is barely starting in the emerging markets, and it could get much, much worse."

3. The Economist believes emerging markets are flying into the storm.

"Even as talk mounted of the rich world suffering its worst financial collapse since the Depression, emerging economies seemed a long way from the centre of the storm.

No longer. As foreign capital has fled and confidence evaporated, the emerging world’s stockmarkets have plunged (in some cases losing half their value) and currencies tumbled. The seizure in the credit market caused havoc, as foreign banks abruptly stopped lending and stepped back from even the most basic banking services, including trade credits."

Iceland is already bankrupt --- "a hedge fund with glaciers" is how Thomas Friedman has memorably described the island in his column. Banking systems in many parts of Eastern Europe are tottering. Argentina is close to default. Even the oil-rich states of West Asia are in trouble.

And what about India?

It is good to see that the government --- and especially Manmohan Singh --- accept that we too will in a spot of bother.

I had asked this question in a column that I wrote in May, when the ridiculous decoupling thesis still had its votaries. My conclusion was that India is unprepared for the next crisis.

"Rising prices and job losses are the two most direct ways an economy inflicts pain on the average citizen. In the 1960s, the economist Arthur Okun added the inflation and unemployment rates in the US to create what is now known as a misery index. This rough and ready measure of economic despair has often been used to assess how well people have done under a particular government ...

A similar proxy can be built to evaluate the macroeconomic stability of a country. Two of the biggest threats to the stability of any economy are the twin deficits — fiscal and current account. Adding the two could give us a useful proxy of how well an economy can maintain its balance when there is global financial turmoil.

The news for India is not too good.

The past five years have been a remarkably crisis-free period for the global economy. There have been no painful calamities of the type that hit Asia in 1997 and Russia in 1998. But there is no guarantee that the next few years will be equally tranquil, especially given the credit crisis in the West, the overheated economy in China, rising global inflation and the mess in the US. So, it makes sense to evaluate how the Indian economy can handle global stress in the months ahead.

I have used the economic data for 42 individual countries that The Economist publishes every week. The latest data there shows that India has a current account deficit of 2.4% of GDP and a fiscal deficit of 3.1% of GDP. Add the two. You get a macroeconomic misery index of minus 5.5. That’s outsized. And this number will grow in the months ahead as oil prices rise, the import bill balloons and the government continues to issue off-budget oil bonds to subsidize consumers.

How does India compare with the rest of the world? The US does far worse, with an index value of minus 7. Most other countries in the euro area, too, have worse combinations of fiscal and current account balances.

So, India does not do too badly compared with the rich nations. But it’s a completely different story when we turn our attention to our peers in the global arena. China and Russia both have fiscal and current account surpluses. Their index values are well into positive territory. Brazil has modest deficits that add up to minus 2.6. Malaysia and Thailand have fiscal deficits that are close to Indian levels, but these are balanced by strong current account surpluses. Actually, as far as emerging market economies are concerned, only Pakistan and Egypt are worse off than we are.

India’s fiscal and current account deficits are widening to 1991 levels. Most other Asian economies are better off

Is India slouching to a repeat of the 1991 crisis? The possibility cannot be dismissed. But though we once again have the same noxious combination of widening fiscal and current account deficits, India has several economic strengths as well. India today has a more dynamic economy, less volatile and short-term external debt, a huge pile of foreign exchange reserves and more sophisticated economic management than it did in 1991. A new report on India’s rising twin deficits by Citigroup economists Rohini Malkani and Anushka Shah points out that there are factors that “put the odds in favour of India’s resilience rather than its vulnerability”. That’s true."

Read the entire piece here.

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The Keynes Revival

Niranjan Rajadhyaksha — Sun, 26 Oct 2008 04:11:00 GMT

The worst financial crisis since the Great Depression has led to renewed interest in the economist who towered over all his clueless peers in those turbulent times --- John Maynard Keynes.

Keynes' legacy has been controversial and many believed that the monetarist and rational expectations innovations in the 1960s and 1970s gave his brand of economics a final burial.

Well, here he is with us once again.

The current crisis does not quite fit into the usual Keynesian narrative --- it has erupted because of loose monetary policies and excessive risk taking in the financial sector. Like Marx, Keynes said that economic crises start in the real economy, often with a collapse in what he called the "marginal efficiency of capital". Read Chris Dillow represent this view here.

But there is little doubt that there is renewed interest in what Keynes had to say about deep recessions.

The Financial Times has got this profile of what the newspaper calls the "Man In The News."

"Keynes, whose life’s mission was to save capitalism from itself, is more relevant than at any time since his death in 1946...

As the financial crisis has deepened, that orthodoxy has been shaken. The problems Keynes faced in the 1930s, such as the ineffectiveness of monetary policy and banking failures triggered by falling asset prices, again seem the most pressing. Keynes’ solutions, including greater public spending funded by borrowing, are becoming popular. The criticisms that this will fuel inflation and raise budget deficits are still heard but are increasingly seen as irrelevant."

Robert Skidelsky, the author of the definitive Keynes biography, has a piece in the Washington Post titled: We Forgot Everything Keynes Taught Us.

"The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made," Keynes wrote in his great book "The General Theory of Employment, Interest, and Money" in 1936. We disguise this uncertainty from ourselves by assuming that the future will be like the past, that existing opinion correctly sums up future prospects, and by copying what everyone else is doing. But any view of the future based on "so flimsy a foundation" is liable to "sudden and violent changes. The practice of calmness and immobility, of certainty and security suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct . . . the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning yet in a sense legitimate where no solid basis exists for a reasonable calculation." Keynes accused economics of being itself "one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future."

I think Skidelsky is overstating his case: we have surely not forgotten everything that Keynes taught us.

The question in my mind is which Keynes should we take our lessons from --- the one who has been tamed into simplistic textbook versions of his ideas or the more radical critic who is represented by the Post Keynesians, who denounce the textbook versions as bastard Keynesianism?

Hyman Minsky, whose unorthodox analysis of financial crises has suddenly become very popular, was firmly in the latter camp. So, was Joan Robinson, to whom this blog owes its name.

For a more serious read, here is an outstanding paper by Axel Leijonhufvud on Keynes And The Crisis.

A suggestion: everyone wanting to make sense of what is happening in the markets would do well to read Chapter 12 of Keynes classic, The General Theory of Employment, Interest And Money.

This chapter is called The State of Long-Term Expectation.

Not too many pay enough attention to this chapter. I do not remember being asked to read it at university. But now that we are in the midst of a crisis of confidence, what Keynes wrote here is worth re-reading, even if you do not agree with all the conculsions.

"The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analysed it carefully and have been content, as a rule, to discuss it in general terms."

And...

"It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organised along the lines described."

And..

"... professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees."

Update: Nobel economist Edmund Phelps says that Keynes had no sure cure for slumps.

"His insights into uncertainty and speculation were deep. Yet his employment theory was problematic and the "Keynesian" policy solutions are questionable at best."

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More On Paul Krugman And Avinash Dixit

Niranjan Rajadhyaksha — Fri, 24 Oct 2008 05:12:00 GMT

I had blogged earlier about how Krugman won his Nobel by building on work done by Avinash Dixit (in collaboration with Joseph Stiglitz). There were several comments to that post that indirectly suggested that the Nobel should have been shared by Krugman and Dixit. (Stiglitz already has his Nobel in the bag, for his work on information.)

Dixit has now written an appreciation of Krugman's contributions to theoretical economics.

He makes an important point:

"To quote and paraphrase Stephen Jay Gould (The Flamingo’s Smile, pp. 335, 345), Krugman has won his just reputation because he grasped the full implication of the ideas that predecessors had expressed with little appreciation of their revolutionary power. He had the vision to make the idea work in two ways, using it to make new discoveries and by recognising its implications as a far-reaching instrument for transforming general attitudes."

And...

"But my delight at the recognition of the scientific achievements of this friend and colleague of over three decades is great. In fact it is doubled by the joy of my having played a part in creating the tools that are proving their worth – models of monopolistic competition and product diversity, and of entry deterrence."

Read the entire piece here.

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Watching Children Walking To School

Niranjan Rajadhyaksha — Fri, 24 Oct 2008 04:17:00 GMT

To get to Goa, you have to turn off the NH4 and drive east towards the Western Ghats.

This is a completely different topography and economy. The roads are terrible. The villages on this route are far poorer than the ones we left behind as well as the ones we are driving towards --- they are neither in the prosperous sugar belt around Kolhapur nor in the tourist havens of Goa.

But I could not miss the children going to school that morning.

There are several informal ways to judge the level of development in an area you are driving through --- telecom coverage, the merchandise in the roadside stalls, the quality of housing.

I usually make it a point to take a close look at the children on their way to schools.

1. How many girls can one see?

2. Do the kids walk, ride cycles or take public transport?

3. Do they carry their books in proper school bags?

4. Do they have footwear?

In most parts of Maharashtra, the signs are very good. There are almost as many girls as there are boys going to school every morning, the children usually have clean clothes, well-oiled hair, chappals in their feet (shoes are rare) and carry their daily burden of books in school bags.

But most seem to walk to schools. There are few children on bicycles or waiting at bus stands.

An aside: Radhika Chaddha, a school friend of mine who is now a strategic consultant in Chennai, sent me an amazing book that she helped produce. It is called Going To School In India. This is how it starts:

"Getting to school in India is a wild ride. Every school day, millions of school children climb into school buses, sit on each other's laps in cycle-rickshaws, walk along the edge of mountains, cross scorching deserts on rickety bicycles and swing across raging blue rivers on dangling rope swings --- just to get to school. Against great odds they come, because they believe going to school can change their lives, and if it does, it was certainly worth the ride."

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High On Highways

Niranjan Rajadhyaksha — Thu, 23 Oct 2008 01:20:00 GMT

I drove down to Goa with my family over the weekend --- and could not help once again marvel at the way the national highways progamme has changed the country.

It took us a mere five hours to travel from Mumbai to Kolhapur, a distance of around 400 kilometres. The road that took us beyond Kolhapur and into Karnataka --- what is called the Kagal section of the NH4 --- is world class.

Driving between these two cities in Maharashtra would take at least twice the time till the Golden Quadrilateral was built. This may not be the death of distance, but it is undoubtedly a case of distance mattering far less than before.

The entire Golden Quadrilateral programme shows that India can build quality infrastructure on time. The right ingredients were there --- political vision, quality execution and sensible financing.

The starting point was the visionary leadership of Atal Bihari Vajpayee. To overcome bureaucratic resistance, he side-stepped committees and commissions. Vajpayee went ahead and publicly announced what seemed like a silly idea at the time. By making a public statement, he presented the bureaucracy with a fait accompli. They had to deliver.

Then he handpicked the efficient and incorruptible Maj Gen B.C. Khanduri to be the minister in charge of the project. Khanduri is said to have told the contractors working on the highway project: "You are not only making money; you are building a nation." Vajpayee and Khanduri then picked an excellent team at the NHAI to implement the idea.

The funding too was done imaginatively. A special cess was imposed on every litre of petrol and diesel sold in India. The money raised was ring-fenced and spent on the highways before other arms of the government hijacked it. This ensured that the fund-raising was well-targeted. Vehicle owners were paying for the cost of building betters roads. Or, the tax incidence was on the beneficiaries of the subsequent spending.

True, there were problems along the way. The most well-know was the murder of Satyendra Dubey, who wrote to the Vajpayee PMO in 2003, saying that contractors had passed on the work in Bihar to subcontractors who in turn were doing poor quality work. Dubey was shot dead a few weeks later.

Another observation: a lot has been said and written about how Indians will not be ready to pay user charges on utilities such as water, electricity, roads etc. I must have paid close to Rs 500 in tolls during the drive to Kolhapur. So do thousands of others each day. There are no protests against tolls now. People will pay high user charges if it is worth their while. The economic benefits of toll roads are clear, since I saved far more than Rs 500 in fuel costs during the journey because the highway allows drivers to cruise at between 80 and 100 km/hour.

These were the economic benefits to me as an individual. But good national highways can change the economy as well: indirectly because of faster access to urban markets and directly through the jobs created. I stopped for a short break at a McDonalds in the middle of nowhere. The young man at the counter told me that particular outlet employed 40 locals.

Not bad.

PS: It is unfortunate that something similar has not happened with the railways. High speed trains can do immense good to India. Did you know that the train journey from Mumbai to Pune today takes more time than it did 75 years ago?

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What is Capt Gopinath Really Up To?

Niranjan Rajadhyaksha — Wed, 15 Oct 2008 09:33:00 GMT

The alliance between Jet Airways and Kingfisher Airlines is expected to change the game for the airlines industry, for consumers --- and for Capt G.R. Gopinath.

There have been several reports after the alliance was made public that Gopinath may walk away and buy back Air Deccan, his pioneering low-cost airline, from Kingfisher. He had sold it to Kingfisher in May 2007. For example, see this report on Gopinath's plans.

It is hard to say whether Gopinath will actually do what many newspapers and TV channels claim he is contemplating.

I decided to see whether the stock market data on insider trading offered any clues about what is actually on Capt Gopinath's mind.

Look at this data filed with the Bombay Stock Exchange:

532747	Kingfisher Airlines Limited	Capt. G R Gopinath	06/10/2008	S	100000	13328391	5.01
532747	Kingfisher Airlines Limited	Capt. G R Gopinath	07/10/2008	S	11539	14816852	5.57
532747	Kingfisher Airlines Limited	Capt. G R Gopinath	07/10/2008	B	1500000	14828391	5.58

On 6 October, Gopinath sold 100,000 shares in Kingfisher Airlines to take his holding down to 13.32 million shares, or 5.01% of the total equity of the company. Another 11,539 shares were sold a day later. But then Gopinath went ahead and bought 1.5 million shares that same day.

I have no idea whether this is part of any strategic plan to change his holding in Kingfisher Airlines or smart day trading.

But look at that last column, which shows how Gopinath's holding in Kingfisher increased in the first week of this month. Notice there has been a jump on 7 October that is not explained by the BSE data. There may have been some buying on NSE as well, though I have not been able to track down the data as yet.

Does any of this trading activity suggest that Capt Gopinath is exiting Kingfisher Airlines?

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Paul Krugman --- The Indian Connection

Niranjan Rajadhyaksha — Tue, 14 Oct 2008 11:08:00 GMT

There is no doubt in my mind that Paul Krugman richly deserved the Nobel Prize in economics.

The Nobel prize committee usually does a good job explaining in simple English what the prize has been given for. It's no different this year.

Read this note on how Krugman helped us understand what goods are produced where. That led to a fresh and radical theory of international trade and economic geography.

Alex Tabarrok at Marginal Revolution has a typically lucid note on new trade theory. This is the Wikipedia note on new trade theory.

These links should bring forth with more clarity than I can achieve the reasons why Krugman is widely considered to be one of the best economist of all time.

I will restrict myself to an interesting sidelight: the Indian connection in Krugman's career as an economist.

1. He was taught at MIT (and not Columbia University, as I had earlier written; the mistake was pointed out by a reader in the comments section below) by the great trade theorist Jagdish Bhagwati. Dani Rodrik recounts an interesting episode here.

2. A lot of the initial theoretical work that Krugman built on was done by Avinash Dixit, now at Princeton University. The Financial Times doffs its hat to this fact in this editorial.

Neither Bhagwati nor Dixit would deny Krugman's achievements. In fact, they wrote a letter to The Economist in 2003 in disagreement with another letter to the magazine that suggested that the two of them deserved the prize more than Krugman did. Read an earlier appreciation of Krugman by Dixit here.

I had recounted that episode of intellectual honesty in my profile of Dixit published in Mint in 2007, titled Avinash Dixit: India's Future Nobel Winner In Economics?

Dixit has been kind enough to stay in online touch with me. I continue to be overwhelmed whenever I get mail from that great economist and charming man.

Update: This is what Mark Koyama says in his blog on the Krugman Nobel: "I always envisioned Krugman winning jointly with Dixit or perhaps with Bhagwati or another trade theorist.

Sigh!

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Don't Worry, Be Happy, Sell Mortgages

Niranjan Rajadhyaksha — Wed, 08 Oct 2008 07:13:00 GMT

The newspapers have a chilling front-page story today on an unemployed NRI who shot his wife, mother-in-law and three sons before turning the gun on himself. Karthik Rajaram was wiped out in the stock market crash.

Suicides are not unknown during times of financial distress --- think of the farmers of Vidarbha and the stock brokers of New York in 1929.

Some people kill themselves; others die a slow death during recessions and periods of economic trouble. There has been a lot of unusual research by economists on the link between economic health and physical health.

1. Read Chris Dillow here on conflicting research that shows how mortality rates change because of unemployment.

2. And then there is this fascinating paper published by NBER on how babies born in Indonesian villages during years of good rains and crops do better in life than the kids born during bad times.

The link runs from economic circumstances to personal health.

I read an essay this morning by Adam Hanft, where he spins the issue around: can artifically good pychological health cause economic trouble?

Hanft asks a blunt question: did anti-depressants cause the US mortgage crisis?

"We've played the blame game with just about everyone else; traders, brokers, ratings agencies, and financial engineers have all done the national perp walk.

But virtually no attention has been paid to whether there was something amiss inside the fevered noggins of those who took on these mortgages, as well as those who created and collateralized them. There are millions of Americans on anti-depressants, and my theory is that many of them might have been medicated into taking on irrational levels of risk."

Read the entire piece here.

Hanft is writing in The Daily Beast, a new website of daily news and opinion that is edited by Tina Brown, former editor of Vanity Fair and the New Yorker.

An Awkward Corner

Reverse Migration: Chinese Abandon Cities. And Indians?

Recession Watch

Cold Callers, RIP

Banks Are Not Charities

Interest Rate Apartheid

A Short (And Partial) History of Dalal Street Crashes

Emerging Markets: The Next Crisis

The Keynes Revival

More On Paul Krugman And Avinash Dixit

Watching Children Walking To School

High On Highways

What is Capt Gopinath Really Up To?

Paul Krugman --- The Indian Connection

Don't Worry, Be Happy, Sell Mortgages

How The Gale May Blow Through India: Update