Tag: rbi

On The Fiscal Position of Panchayati Raj Institutions

Getting the budget “approved” for, say, the Annual Sports Day is a rite of passage that students must go through while they are in college. It is also, if you think about it, a great way to help students understand public finance.

What percentage of your college’s revenue is due to you guys? That is, the student body, through the fees it pays, contributes what percentage of your college’s annual income? What percentage of that amount are you asking for in your Sports Day budget? What is a “fair” amount? Who is it “fair” to? How should one think about answering these questions? What framework should one use?

What if we replace the word “student body” with states, and the word college with “the central government”? What if the student body is further divided into seniors and juniors? What if the seniors are referred to as the states, and the juniors as Panchayati Raj Institutions?

Well, if you do all that, you get a “handle” as a student on thinking about a very important question: who, exactly, should actually run our country? Running a country costs money, and that money is raised by the government through taxes (duh).

Ah, but which government? Does the central government raises these taxes? Or does the state government? Or does local government raise these taxes? Who is best placed to do so, and what does best mean in this context? How have other nations done it?

What about spending this money that has been collected? Should – I’m stepping away from public finances and going back to our college for a moment – the college run annual days and festivals and sports days, or should the different programs that are a part of the college run separate events? Who is best placed to do so, and what does best mean in this context?

Thinking through the answers to these questions is one part of the study of public finance, and to aid us in our study, the Reserve Bank of India has come up with an excellent report, called Finances of Panchayati Raj Institutions. It is a most lucid report, something you can’t always accuse official reports of being, and going through it shouldn’t take you very long. And hey, incentives matter, so if you’re looking for a reason to plough through the four chapters, consider that you will have excellent economic arguments for freeing up your sports day budget!

“Hey, if our country can call for greater devolution of funds to the local level, surely the same ought to apply to our college!”

No?

Speaking of the call for greater devolution of funds to the local level, this is known as the subsidiarity principle:

Subsidiarity is a principle of social organization that holds that social and political issues should be dealt with at the most immediate or local level that is consistent with their resolution. The Oxford English Dictionary defines subsidiarity as “the principle that a central authority should have a subsidiary function, performing only those tasks which cannot be performed at a more local level”.The concept is applicable in the fields of government, political science, neuropsychology, cybernetics, management and in military command (mission command). The OED adds that the term “subsidiarity” in English follows the early German usage of “Subsidiarität”. More distantly, it is derived from the Latin verb subsidio (to aid or help), and the related noun subsidium (aid or assistance)

https://en.wikipedia.org/wiki/Subsidiarity

“…performing only those tasks which cannot be performed at a more local level”, please note. That, alas, hasn’t been the principle for much of our history, and especially so in recent times.

What percentage of our Panchayati Raj Institutions revenue comes from their own ability to administer and raise taxes, and what percentage comes from state and central governments? No reason for you to know the answer to this question, of course, but if you had to guess, what would your guess be?

Was it 1%?

https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=22402

What might be the implications of this, the fact that our PRI’s own-tax revenue amounts to only 1% of total receipts? Is this by design? Whose design? Why? Why can we not change this situation? What are the political, economic and administrative hurdles?

Panchayati Raj Institutions (PRI’s) receive funds from both the central government as well as the state governments. We’ll get to the central government later, but first, let’s deal with the state governments. This transfer of funds has been, well, less than desirable:

Article 243-I of the Indian Constitution stipulates the establishment of State Finance Commissions (SFCs) for recommending tax sharing between the State and the Panchayats. The initial SFC was to be constituted within one year of the enactment of the Constitution (73rd Amendment) Act in 1992. Subsequently, new SFCs were to be formed every five years. While the setting up of the sixth SFC was scheduled for all the States in 2019-20, its constitution has not been uniform and timely across States (Chart II.2.1). As per the Fifteenth CFC Report, only 4 States, namely Assam, Bihar, Punjab and Rajasthan, had established their 6th SFCs, and another 11 States had constituted their 5th SFC till then. According to MoPR, only 9 States have constituted their 6th SFC by 2022. Keeping in view the importance of SFC grants for the local bodies, the Fifteenth CFC recommended that the compliance to constitutional provisions in respect of SFC will be a necessary condition for disbursement of grants to local bodies for 2024-25 and 2025-26

https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=22402

But that’s the setting up of a commission. Once these state commissions are set up, how much money do they actually share with PRI’s on a per capita basis?

Get in the habit of staring at tables like these, and thinking about what seems interesting, confusing or best of all, mystifying. What’s up with Bihar, you might ask, and that might lead you to ruminations about state capacity and development in Bihar. Or you might want to learn more about Karnataka’s state finances.

But as you can clearly see, decentralization is a bit of a mixed bag in India. Some states seem to have done a good job, others, not so much. What impact has decentralization had on the development of those states that decentralized well? What about the others? Can I read papers about this?

That’s states to PRI’s. What about the central government to PRI’s? How’s that devolution coming along?

https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=22402

The good news is that over the last six central finance commissions, the quantum of grants has been consistently going up (that’s the second column). But on the other hand, the gap in disbursement remains worryingly high (that’s the fourth column).

Why should this be so? The report tells us that “this was primarily due to the local bodies’ failure to meet the conditions attached to the performance grants”.

Please do spend some time going through the report, all of the four chapters. Remember, one implication of the subsidiarity principle is that PRI’s is where India’s public policy really and truly comes alive.

For India (and Indians) to grow rapidly and on a sustainable basis, we need to get our PRI’s right.

What does getting them right mean?

Finances of Panchayati Raj Institutions (PRIs) face constraints in that they have limited own revenues from property taxes, fees, and fines. Nearly all of their revenues are generated through grants from higher levels of government, underscoring their heavy reliance on the Central and State governments. Even as grants-in-aid from the upper tiers of government have aimed at mitigating horizontal disparities, the large dependence on grants can affect their financial self-reliance, limiting their ability to decide on local spending and priorities independently. Such dependence also lessens their drive to establish independent revenue streams. For sustainable growth, Panchayats need to intensify their efforts to augment their own tax and non-tax revenue resources and improve their governance. Nevertheless, the prompt establishment of State Finance Commissions (SFCs), eschewing the sizeable delays that occur currently, assumes importance. SFCs, with roles identical to those of the Central Finance Commission (CFC), and with the obligation of tabling their action-taken reports in State legislatures, can fortify the financial position of PRIs and help them in better delivery of their responsibilities for upliftment of the rural economy.

https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=22404

And how do we make this happen?

The RBI report tells us that we should:

  1. Empower local leaders and officials (ask yourself if we are choosing to do this as a society)
  2. Provide them with ample and diverse funding sources
  3. Promote greater decentralisation
  4. Implement capacity building reforms
  5. Upgrade infrastructure

Not all of these may be directly within our own capabilities, but if you ask me, we could do with a greater impetus for the first and the third items on this list.

The RBI report ends with an exhortation:

There is also a need to raise citizens’ awareness about the functions and significance of PRIs by encouraging their increased participation in local governance processes and by enhancing people-centric administration and communication

I couldn’t agree more: please, go and read the report, and share it far and wide!

Is The Indian Economy Slowing Down?

That is a bit of a misleading title, because the focus of this blogpost isn’t about answering the question. It is, rather, about how to go about answering this question.

If you are a student new to economics, and someone were to ask you the question that is the title of this blogpost, how would you go about answering this question?

  1. Note that GDP data comes with a lag of about two months. You really should be looking at more recent data. But that being said, a good place to begin will be by tracking India’s quarterly GDP growth for the past (say) twelve quarters or so. This is actually bad advice for this specific time period, because of the pandemic, but under usual circumstances, not a bad place to start.
  2. Take a look at electricity generation numbers for the country. Check if there has been an increase, and if so, by how much.
  3. Check the trends in GST collections.
  4. Check trends in freight movement.
  5. Take a look at the Index of Industrial Production data.
  6. Take a look at India’s foreign trade data. Note that I have not used the word trend for these two points. That’s not because trends aren’t important (they are!) but because I want to lament the fact that India – the country that makes software for literally the entire world – isn’t able to come up with better ways to represent its own government’s data. Why does this not improve?!
  7. Take a look at the “Quarterly Financials of Listed Companies” on the CMIE website. Take a look at the trends for Net Profits and the PAT margins. This is usually on the right hand side of the website, you’ll have to scroll down a bit.
  8. Use the same website to take a look at the employment data.
  9. Take a look at the inflation data.
  10. Take a look at the bank credit data.
  11. Finally, note that this list is by no means complete. Other economists might well have more indicators they would like to recommend, and please don’t hesitate to show this list to them, and ask what they might like to include.
  12. Then, and only then, should you start to read opinion pieces about how well/badly the Indian economy is doing. See if your assessment matches with what is written or being said by others. If it doesn’t, ask yourself why. Check if you should look at other data sources, or other opinion pieces.
  13. But as an economist, remember: data comes first.

How To Look for Inflation

Here are links to the official sources:

The RBI’s DBIE website.

The latest CPI report on the MOSPI website.

The WPI PDF report from the EA Industry website.

If you want a secondary source with better graphs, Trading Economics is a good option.

But that’s not what I want to talk about today. What I want to talk about is how you might think about inflation.

Greg Ip, the chief economics commentator for the Wall Street Journal, speaks about how he came to deeply understand the topic of inflation when his mother told him that his pocket money would be linked to the consumer price index in Canada, which is where he grew up.

It’s one thing to ask students in a class to visit a website that provides information about inflation, and it is quite another to have a young person’s pocket money be linked to it. Guess who is more likely to follow the website keenly, and guess who is likely to ask questions along the lines of “But why should the prices of zarda, kimam and surti impact my pocket money, huh?”

(Item code 2.1.01.3.1.07.0 and these together carry a weightage of 0.04869% in our CPI. Link here, and while you are at it, look up 6.1.04.1.1.03.0, and 6.1.04.2.2.01.0, and ask yourself some very interesting questions. There’s lots more to ponder about in that PDF, these are just to get you started!)

But there’s other things to ponder about where inflation is concerned too:

If it really wanted to get ahead of the inflation challenge, India’s central bank should have paid more attention to Surf Excel.
The price of the laundry detergent went up by 20% in January. While that’s hardly news when most everyday things are becoming dearer everywhere, the interesting part was the retail price before the change: Rs 10 (13 US cents) for a bar.
Such tiny bars of detergent are targeted at less affluent consumers who are often unable to spend a rupee more without having to cut back on something else. To prevent these customers from downgrading to cheaper products, Unilever Plc’s India franchise relies on “magic price points” — such as Rs 5 or Rs 10 — that help buyers stay within their tight budgets.

https://theprint.in/opinion/magic-prices-did-warn-of-indias-sticky-inflation-but-rbi-didnt-notice/957873/

Read the rest of the article, and if you are unfamiliar with pricing, especially in an Indian context, this will help you learn about the nuances of inflation. You may or may not agree with the article’s conclusions about spotting inflation in India, and that’s fine, as far as we’re concerned. But what we should be learning is an important lesson:

Inflation is about more than just changing prices.

And finally, give a listen to this podcast – and if you can’t be bothered to listen to the whole thing, the really interesting bit starts at around the 24th minute or so, where Tyler Cowen and James Altucher help you understand how you might build your own inflation index. We got a puppy home recently, and I can attest to some of the points made in that section!

Read the news and make sure you keep an eye on inflation, sure. But learn – especially when it comes to a topic like inflation – that textbooks and newspaper articles are only a start. These topics are way more complicated than that.

The meta-epistemology of the rate hike

Soon after I started blogging, Tyler Cowen joked, “You’re not really a blogger.” His point: Unlike most of the competition, I wasn’t reacting to the latest news or whatever’s hot. My goal as a blogger has always been to write think-pieces that stand the test of time.

https://www.econlib.org/a-fond-farewell-to-econlog/

I don’t know about standing the test of time where posts on EFE are concerned, but my approach to blogging is very similar: I prefer to not write about events immediately after they’ve occurred. This for a variety of reasons, not least of which is the fact that I’m lazy, and reading a lot of stuff at very short notice is something I would rather not do.

Another reason is that the very best pieces on any event usually take time to bubble up in my feed, and waiting therefore makes sense.

By the way, if you aren’t yet subscribed to Bryan Caplan’s new blog, please do!

But that being said, let’s talk about yesterday’s rate hike.

One of the pieces that I enjoyed writing last year was on the concept of meta-epistemology, after reading a post about it by Zeynep Tufekci.

I’m going to post a screenshot rather than an extract, because the formatting of the post helps:

https://econforeverybodyblog.wordpress.com/2021/02/05/zeynep-tufekci-on-metaepistomology/

Honest question: does this apply to the Reserve Bank of India as well?

Is it the case that the cost of downplaying inflation as a major problem now exceed the benefits of doing so? Have the incentives flipped for the RBI? If so, on what basis? Is there a sense, based on preliminary data, that inflation is a problem that can no longer be ignored?

And if so, how should we be interpreting not just the fact that rates have been raised, but the manner and the timing of the raise? In other words, are there two messages being sent out by the RBI: the message itself, and the implicit message encoded in the timing of the message?

And have (or will) the markets internalize this message, and if yes, what is to follow?

Learning about inflation, monetary policy, and the efficient market hypothesis via textbooks is less than half of the story. Take your view/model of how the world works to the world itself, and update your model as the years roll by.

Fun, exhilarating and occasionally nerve-wracking.

But it is the best way to learn.

Decoding the MPC Announcement

Mandar asks a question:

This can be a short story, and a long story. Let’s make it a long one!

Here’s the very last paragraph from the third chapter of the RBI’s Annual Report of the year 2015-16:

III.39 Going forward, the focus of the Reserve Bank’s monetary policy stance during 2015-16 will be on fostering a gradual and durable disinflationary process towards the target of below 6 per cent by January 2016 in order to achieve the centrally projected rate of 4 per cent by the end of 2017-18. At the same time, the efficacy of the monetary policy transmission mechanism needs to improve since the pass-through of recent cuts in policy rate to the bank lending rate has been partial, reflecting constraints in transmission under the existing base rate system. Identifying the impediments in pass-through and implementing an alternative method, such as marginal cost based credit pricing or identifying an appropriate benchmark for the bank lending rate will be a priority for the Reserve Bank. In this regard, it is imperative to develop market based benchmarks by developing the term segment of the money market. Thus, liquidity support may have to be progressively provided through regular auctions of longer term repos with reduced dependence on overnight fixed-rate liquidity support. While doing so, it will also be important to dampen deviations of WACR and other money market rates such as CBLO rates from the repo rate in a narrow range. The Reserve Bank will continue to explore and augment its instruments of liquidity management, including standing deposit facility for absorption of surplus liquidity, as recommended by the Expert Committee.

https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1149 (emphasis added)

(Students should also look up, by the way, what WACR and CBLO are). But back to our story: in 2016, the RBI was “continuing to explore and augment its instruments of liquidity management” – including a facility that we’ve all read a bit about this past week, the standing deposit facility.

First, what is liquidity management?

The “liquidity management” of a central bank is defined as the framework, set of instruments and
especially the rules the central bank follows in steering the amount of bank reserves in order to control
their price (i.e. short term interest rates) consistently with its ultimate goals (e.g. price stability).

https://www.ecb.europa.eu/events/pdf/conferences/1b.pdf

In English: the central bank would like to try and control short term interest rates in the economy, in order to keep prices as stable as possible. The framework that allows them to do so is referred to as liquidity management.

So how does liquidity management work in practice, whether in India or abroad? In most cases, via the “repo” rate and the “reverse repo” rate. The first of these is the rate at which banks can borrow from the central bank, and the second of these is the rate at which the central bank can borrow from the banks. Here’s a good, basic, explainer.

So ok, we have a framework, and we now know how it works. Then why, Mandar asks, do we now have the SDF?

Which, of course, begs the question: what is the SDF?

At the last meeting, banks were offered a facility to park surplus liquidity through an auctioning system, which was in addition to reverse repo facility. The idea is to suck the surplus liquidity out of the system through the variable reverse repo rate. Now, RBI has regularized the same under the SDF window, which offers 3.75% interest rate for funds parked without any collateral backing. The SDF window will help banks earn a minimum return when they have surplus funds. The SDF rate of 3.75% would be the floor policy rate.

https://www.livemint.com/economy/decoding-rbi-s-latest-monetary-policy-decisions-11649613385417.html

If banks in our country have excess funds (and right now, they most certainly do) what can the banks do with them? One option is to use the reverse repo mechanism and park these funds with the central bank. Or you could use the auctioning system, as the excerpt above explains. But now, in addition to both of these, you can also make use of the SDF.

The reverse repo in our country is right now at 3.35%, while the SDF will give you 3.75%. If you are a bank with excess funds, the RBI says you can give me these excess funds and I’ll pay you a) an interest rate of 3.35% if you use the reverse repo route OR b) I’ll pay you 3.75% if you use the SDF.

The naïve response to this is to go with option b). The not so naïve response is to ask “Wait, what’s the catch?”

Well, the catch is that reverse repo’s come with collateralization. When the central bank accepts excess funds from you, what it does in practice is it “sells” you securities, and “buys” them back at a slightly higher rate when it gives the funds back. “Buying them back” is a repurchase, and hence the terms repo (bank to central bank) and reverse repo (central bank to bank). When securities are involved, we say the deal is collateralized.

SDF? No collateralization.

Why? Well, there’s so much of excess liquidity floating about that the central bank was running out of securities to offer as collateral.

But ain’t this a rather risky thing, parking excess funds without collateralization? Well, this is the RBI we’re talking about. If you don’t trust the central bank, then what else is there boss? So no, we don’t need to worry about the lack of collateralization is the current stance, and all are ok with this.

So the effective rate is now 3.75, not 3.35?

Um no, it’s actually 4.00%. Remember those reverse repo auctions? Those have been averaging around 4%. So (and if you think this is confusing, join the club), if you’re a bank and have excess funds, the central bank now gives you three choices:

  1. Good ol’ reverse repo, with collateralization, but 3.35%
  2. SDF, 3.75%, but no collateralization
  3. Reverse repo auctions, 4.00%, with the same collateralization as is applicable for the LAF. (This last point is on a “best as I can tell” basis. If anybody reading this knows better, please help me and the readers out!)

So, (phew!), in effect the floor is 3.75% 4.00%.

And that’s the answer to Mandar’s question: this is why the RBI has introduced an SDF when we already have the reverse repo rate.

Learn Macro by Reading the Paper

Macro, and I’ve said this before, is hard.

But a useful way to start understanding it, at least in an Indian context, is by:

  • carefully reading a well written article
  • understanding and noting for oneself key concepts within that article
  • recreating the charts from that article
    • That includes figuring out the source of the data…
    • … as well as acquiring the ability to build out these charts
  • And most important of all, creating a piece of your own (could be a YouTube video/short, a blog, an Instagram story, a Twitter thread) that helps simplify the article you’ve read.((Skipping this last point is missing the point altogether, rascalla!))

Now, Arvind Subramanian and Josh Felman have generously obliged us by writing a well written article. I’ll oblige you by carefully reading it and annotating it, including pointing out key concepts, sources for data and recommendations for building out the charts.

That just leaves the last point for you, dear reader. We’ll call that homework.

Now, the well written article:

For more than a decade, India’s fiscal problem has been on the back-burner, acknowledged as a concern, but excluded from the ranks of pressing issues. Now, however, the problem is back with a vengeance. COVID has upended the fiscal position, and fixing it will require considerable time and effort, even if the economy recovers. This worrisome prospect has prompted calls for the Fiscal Responsibility and Budget Management Act (FRBM) to be dusted off, reintroduced, and implemented — this time, strictly and faithfully. But before we heed them, we need to understand why the previous FRBM strategy failed and how to prevent a repeat. We argue below that the new strategy will look nothing like the current FRBM.

https://indianexpress.com/article/opinion/columns/coronanvirus-india-economy-gdp-growth-post-covid-7261915/

First things first, what is FRBM?

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of India to institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence. The main purpose was to eliminate revenue deficit of the country (building revenue surplus thereafter) and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008.

https://en.wikipedia.org/wiki/Fiscal_Responsibility_and_Budget_Management_Act,_2003

Think of it as a one-person Alcoholic’s Anonymous club. It is of the government, for the government and by the government, and the idea is to wean the government off a dangerous addiction that it is hopelessly affixed to: debt.

By the way, there are many reasons this is a good essay, not the least of which is how well structured it is. The first three sentences in the very first paragraph, excerpted above, point out the problem that is going to be addressed, without using any difficult words or jargon. Then they point out the tool that will be used to address the problem. Then they point out the tool itself has problems. Finally, the explain that the essay is about fixing those problems. And then the essay follows. You might want to keep this in mind when writing your own essays (or indeed creating your own podcasts/videos etc.)

Now, back to the essay:

  1. What is general government debt? Where can I access the data?
    Note the second hyperlink above: I’ve linked to the Fred St Louis page about India’s debt, which itself gets the data from the IMF. Here is the page from the Ministry of Finance’s own website titled Public Finance Statistics. It has not been updated since September 2015. Here is a Motilal Oswal report on the subject that pegs general government debt at INR 157,227 billion. (Exhibit 1 in the report). If you read footnote 3 of that exhibit, two things happen. The first thing that happens is that you realize that tracking down general government debt might take a while. The second thing that happens is you feel a rather large twinge of sympathy for the folks who have tried to do this exercise.
    Figure 1 in the well-written article that we are analyzing in today’s post doesn’t mention a source, unfortunately. So recreating that chart will involve a rather large part of our day – but I would strongly recommend that you do the exercise. If you want to analyze Indian macroeconomic data for a living, this will be a good initiation. And indeed, a write-up about this exercise alone is a worthy addition to your CV!
  2. Second r-g: what is r, and what is g?
    1. “r” is the policy rate, which in our case will be the repo rate. This is available on the homepage of the RBI, top-left, under current rates.
    2. Time series data? Available on the DBIE page, under key rates.
    3. “g” is the nominal growth rate of the economy, and can be found at MOSPI.
    4. A useful thing to do as a student is to try and recreate the chart in the well-written article.
    5. Pts 1 and 2 here will help you get most of the data, and try and use either Microsoft Excel or Datawrapper to recreate the chart.((Document your learnings as you go along.))
  3. Next, what is primary balance?((Read the whole article, please. It’s a good way to clear your understanding of this topic, and it is free)) Where does one get that data in India?((The Excel link under Deficit Statistics was down when I tried to access the data. Your mileage may vary.))
  4. Next, this sentence from the article: “Simple fiscal arithmetic shows that debt does not explode when the former (primary balance) is greater than the latter (interest-growth differential)”. What is this “simple fiscal arithmetic”? They’ve explained it in equations 1 and 2 in this paper.((Page 3))
  5. The next three paragraphs after Figure 1 in the article point out how precarious India’s situation is when it comes to government debt, and why. It is one thing to read about the equation in a textbook, it is quite another to “run” the numbers in practice. Give it a shot, please, and see if it makes sense.
  6. Next, this paragraph from the article:
    “First, India should abandon multiple fiscal criteria for guiding fiscal policy. The current FRBM sets targets for the overall deficit, the revenue deficit and debt. This proliferation of targets impedes the objective of ensuring sustainability, since the targets can conflict with each other, creating confusion about which one to follow and thereby obfuscating accountability.”
    This paragraph is a good way to understand the importance of reading In The Service of the Republic, by Kelkar and Shah (and also to read up about the Tinbergen Rule).
  7. The next three paragraphs after that are a good way to understand what Goodhart’s Law means in practice.
  8. And finally, see if you can explain to yourself why targeting the primary balance is better than other options. Personally, I agree that it is a better target, and I agree that rather than setting down a concrete number to reach, averaging out half a percentage point worth of reduction is better. In essence, what they’re saying is that you shouldn’t try to reach x kilos of weight on a diet, but lose x% body weight every month. As our ex-captain might have put it, process over results. One of our gods advocates this too, as Navin Kabra points out.
    My reservation comes from the fact that sticking to a diet is hard, and that is true whether you’re targeting a process or a target. In other words, it is the ongoing implementation of the plan that is the challenge, not it’s design!
  9. One last point: without creating something that you are willing to put up for public consumption, and highlighting on your CV as an exercise you have done – you haven’t really learnt. Reading either that article or this blog is the easy part – explaining it somebody else is the much more difficult (and causally speaking, therefore meaningful) bit.
  10. Please, do it!

Playing Around With Data

In yesterday’s post, I spoke about collection, and a teeny-tiny bit about the history of the institutions behind data collection exercises in India.((Really teeny-tiny bit. Please read the whole thing))

In today’s post, I’ll compare two websites – one American and one Indian – to show you how both countries allow researchers to use the data that has been collected. Spoiler alert: the American website does a way better job. The idea isn’t to run down the Indian website, but to see how much distance we need to cover in terms of improvement.

And I think it is a worthwhile question to ask – why is the American website so much better? What is it about us that we cannot come up with a website of a similar quality? Is it a question of capacity, of bureaucratic inertia, of not enough demand from the research community in India or something else altogether? This is a topic worth thinking about… but not today.

The American website is FRED, hosted by the St Louis branch of the Federal Reserve. FRED stands for Federal Reserve Economic Data, and it is a magnificent resource. It really and truly is.

Federal Reserve Economic Data (FRED) is a database maintained by the Research division of the Federal Reserve Bank of St. Louis that has more than 765,000 economic time series from 96 sources. The data can be viewed in graphical and text form or downloaded for import to a database or spreadsheet, and viewed on mobile devices. They cover banking, business/fiscal, consumer price indexes, employment and population, exchange rates, gross domestic product, interest rates, monetary aggregates, producer price indexes, reserves and monetary base, U.S. trade and international transactions, and U.S. financial data. The time series are compiled by the Federal Reserve and many are collected from government agencies such as the U.S. Census and the Bureau of Labor Statistics.

The economic data published on FRED are widely reported in the media and play a key role in financial markets. In a 2012 Business Insider article titled “The Most Amazing Economics Website in the World”, Joe Weisenthal quoted Paul Krugman as saying: “I think just about everyone doing short-order research — trying to make sense of economic issues in more or less real time — has become a FRED fanatic.”

https://en.wikipedia.org/wiki/Federal_Reserve_Economic_Data

I’ve been using the website for years now in classes that I teach, but I’m sure there are features of the website that I have not been able to use. It’s got the ability to create charts on the fly, it has embeddable widgets, it even has a functional Excel add-in.

If you’re looking at this website for the first time, try going through these exercises. Or, if you are a video kind of person, try this playlist on YouTube.

It is, all things considered, a wonderful way to take a look at data – mostly American, naturally, but it does have a whole host of other data series as well.

The Indian website is our comparable offering: the database on the Indian economy. As you will see once you click on the link, it isn’t nearly as user-friendly as FRED, and in my experience, the website itself isn’t always “up” all the time. There isn’t, to the best of my knowledge, a YouTube channel that explains how to use the website, and while there is a brochure about DBIE, it isn’t quite as helpful as it ought to be.

Indian researchers will also visit the MOSPI website often. That is the Ministry of Statistics and Programme Implementation. If you read the link supplied in the first footnote of today’s blogpost, you will know that MOSPI is the culmination of India’s data collection exercises – these have been ongoing since at least 1881.

The MOSPI website itself is a bit problematic, because there are two now. One is mospi.nic.in, which is the one I have linked to above, and the other is mospi.gov.in. This one seems to not be fully functional just yet, and the data is far from complete. Gratifyingly, what little data there is on the new website is made available in Excel formats.

That is actually a major problem, because on the old (but current, if you see what I mean) MOSPI, data is given in PDF format. There is an army of Indian researchers who have fought the Great PDF Wars, as a consequence, and therefore have learnt about Chrome extensions, and about Tabula. If you are planning on researching the Indian economy, you will have to acquire these skills sooner or later, for MOSPI and DBIE are the best we have on offer in terms of data portals((that are free and government run. There are other data portals available, but of course one must pay for them)).

I said I won’t speak about the “why” regarding data portal quality, but I would like to offer a suggestion about the “how” in terms of improving it.

Appoint an educational institute to be the nodal agency((IGIDR would be a good pick for obvious reasons)), and get them to work on a report about what needs to change, and why and how, for the DBIE website to become better than it is right now. That doesn’t mean (at all) a blind copy of FRED, awesome though FRED definitely is.

And if the team that does end up working on this is also allowed to come up with a beta version of the new website, well, that would just be the proverbial cherry on top.

I mean, why not?

Inflation: Oh ’tis problematic. Or is it?

A student messaged last week, asking some questions about inflation and its measurement in India. In particular, they wanted to know about food and its impact on inflation right now.

Well, outsourcing is always and everywhere a good idea, and Vivek Kaul had already answered the question at great length:

What this means is that, despite the end consumers of food paying a higher price, the farmers are largely not benefitting from this rise in food prices, given that they sell their produce at the wholesale level.
This difference can be because of a few reasons.

a) A collapse in supply chains has led to what is being sold at the wholesale level not reaching the consumers at the retail level, thus, leading to higher prices for the consumer.

b) This could also mean those running the supply chains hoarding stuff, in order to increase their profit.

Having said that, the former reason makes more sense given that stuff like vegetables, egg, fish and meat, etc., cannot really be hoarded. Also, hoarding stuff like pulses, needs a specialized storage environment which India largely lacks.

https://vivekkaul.com/2020/10/13/10-things-you-need-to-know-about-indias-high-inflation/

The entire article is worth reading (and so is subscribing to Vivek’s blog, so please do so!). And if you think 2020 isn’t depressing enough already, do read this article, also written by him. A short excerpt follows:

To conclude, the Indian economy will contract during the second half of the financial year. There is a slim chance of growth being flat for the period January to March 2021. Inflation, even though it might come down a little, is likely to remain high due to the spread of the covid pandemic. Hence, India will see conflation through 2020-21.

https://vivekkaul.com/2020/09/15/conflation-contraction-inflation-is-here-and-it-will-stay-this-year/

From a reading-the-tea-leaves perspective, it would seem the RBI actually isn’t that worried about inflation right now (and rightly so!). Here’s an excerpt from an excellent newsletter, Anticipating the Unanticipated that makes this point:

But the RBI wants to signal it is willing to live with inflation running above ‘comfortable’ level in the coming days. The MPC report last week claimed almost 80 per cent of the increase in inflation beyond the 4 per cent target can be attributed to supply chain disruptions and increase in fuel prices. This it believes is a short-term phenomenon and inflation will be in the 5 per cent range next year. This is underlined to give comfort to bond investors to buy government securities without the fear of a near-term interest rate hike to contain inflation. Further, the other step announced by RBI in extending the HTM (hold-to-maturity) limits by another year to March 2022 is to protect any bondholder from the volatility of prices and booking losses on account of it. The overall RBI signal is it doesn’t want the worry of rising inflation and a consequent rate increase to come in the way of growth. It’s focus now is on improving the transmission of rate cuts to the borrowers to stimulate growth.

https://publicpolicy.substack.com/p/77-the-inflation-conundrum-

… and here is Anantha Nageswaran making the same point, but by utilizing a different analysis:

This exercise generates the hypothesis that there is little or no intersection of the household inflation expectations formation and the monetary policy regime. Two, high inflation expectations peaked in September 2014. Similarly, the current high inflation expectations should peak as supply disruptions ease. So, in my view, RBI is betting correctly that the rate of inflation would ease and project policy on hold for the next few quarters. Three, inflation generation process should matter only to the extent that it affects medium-term output and employment generation. For now, other indicators suggest that it is not as disruptive as it was in 2011-13. Therefore, there is no need to turn it into a fetish. The new MPC and the central bank have done well and done good. They should be pleased.

https://thegoldstandardsite.wordpress.com/2020/10/14/the-inexplicable-16-inflation-rate/

And for the data nerds among you, here is the Inflation Expectations Survey of Households by the RBI (do keep in mind the point Ananta Nageswaran makes about trimmed means in his article). Note that currently at least, not too many people seem to be too worried about persistently high food inflation.

Side note: Jason Furman’s podcast with Tyler Cowen contained this interesting snippet:

FURMAN: GDP could be more meaningful if we measured it better. The inflation rate gets harder and harder to measure over time. So I think the one that probably has deteriorated in meaningfulness is the measure of inflation. Number one, we don’t measure it well, and number two, it’s low enough that it’s hard to get that excited about it.

COWEN: Is that a quality-of-goods problem? Or how we do chaining over time? Where are we going wrong in measuring inflation?

FURMAN: Just more and more of the economy is in areas that are harder to measure the quality of, healthcare being the most notorious.

https://medium.com/conversations-with-tyler/jason-furman-tyler-cowen-economics-b3e6d73dfd0f

I’ve said it before, and I’ll say it again: macro is hard.

Finally, here are past EFE articles on inflation.

Links for Friday, 23rd Oct, 2020

Human evolution produced gossip. Cultural anthropology sees gossip as an informal way of enforcing group norms. It is effective in small groups. But gossip is not the search for truth. It is a search for approval by attacking the perceived flaws of others.

http://www.arnoldkling.com/blog/gossip-at-scale/

Arnold Kling writes an excellent essay about gossip and (as he puts it), the ISS. That, to be clear, stands for Internet, Smart Phones and Social Media. Excellent essay, well worth your time.

Low level of CRAR not only hampers bank health but also restricts smooth transmission of monetary policy. Injection of capital by the Government of India in public sector banks is likely to increase the credit flow to the real sector and help in smoother transmission of monetary policy.

https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIWPS12.PDF

How much of this paper is signaling/laying the groundwork, and how much of it is a genuine addition to what we already know about monetary policy? The link comes via Amol Agarwal

This is exactly why I am so pleased to see how narrowly focused the Justice Department’s lawsuit is: instead of trying to argue that Google should not make search results better, the Justice Department is arguing that Google, given its inherent advantages as a monopoly, should have to win on the merits of its product, not the inevitably larger size of its revenue share agreements. In other words, Google can enjoy the natural fruits of being an Aggregator, it just can’t use artificial means — in this case contracts — to extend that inherent advantage.

https://stratechery.com/2020/united-states-v-google

The concluding paragraph from this blog post by Ben Thompson is even better, and I was tempted to go with it, but this works too! Please read the whole thing – excellent writing, as always.

If you’re looking to get an iPad right now and can afford it, the new $599 iPad Air is the best tablet for most people. Apple has taken the design from the more expensive iPad Pro and brought it down to a more reasonable price point. It’s $100 more than it was last year, but in return this year’s iPad Air has a bigger, better screen and a faster (and very intriguing) processor.

https://www.theverge.com/21525780/apple-ipad-air-2020-review

Dieter Bohn’s review of the iPad Air (2020). If I could, I would!

Miniature paintings are among the most beautiful, most technically-advanced and most sophisticated art forms in Indian culture. Though compact (about the same size as a small book), they typically tackle profound themes such as love, power and faith. Using technologies like machine learning, augmented reality and high-definition robotic cameras, Google Arts & Culture has partnered with the National Museum in New Delhi to showcase these special works of art in a magical new way.

https://blog.google/around-the-globe/google-asia/india-miniature-masterpieces

This is a must have app on your phone. I mean, it was always a must-have app on your phone, this latest collection only makes the argument stronger!

An update to fixed income markets, courtesy Vipul Singh Chouhan

Vipul Singh Chouhan, who I had the privilege of teaching about six years ago or so, has forgotten more about fixed income securities than I’ll ever know. Immediately after posting the previous post, I messaged asking if he would like to add to the list.

What follows are his recommendations, lightly edited for the sake of clarity. Thanks a ton, Vipul!

  1. Factsheets of all the Mutual Funds released on a monthly basis. I’ve linked to the Morningstar website, but I believe this is available through multiple sources. Here’s an actual factsheet, pulled out completely at random.
  2. Vipul recommends that you keep a close eye on the commentary of the Debt CIO on the current situation of the fixed income markets. See this, for one example.
    Specifically, Vipul recommends you try and get answers to the following questions:

    1. What are they holding?
    2. In what proportion?
    3. In what maturity bucket?
    4. What is the credit rating?
  3.  It doesn’t end there! After getting to know about the credit rating of a structure, read it.  For example, let’s say a particular CMBS (Commercial Mortgage Backed Security) is rated AA+ by India Ratings, go to the website and read the entire two page rationale. Then go and read rationales for similar CMBS structures – peer review, if you will. Poke around! Compare and contrast! Find faults!
    This next paragraph is quoted verbatim:

    “Pester someone like Ashish sir and tell him “Sir in my view this should be AA and not AA+, pls correct me if I’m wrong”. Take feedback from him and improve your analysis on a continuous basis. “

    Well, please don’t take up Vipul on this suggestion quite literally, but don’t ignore the larger point, which is that you must find for yourself a mentor in the subject area you are trying to learn more about, and bug that mentor about learning more. I assure you, this is a vastly under-rated, and under-exploited skill. By me as well, to be clear.

  4. Learn to look for patterns, and learn to connect the dots. This is easier said than done, and you need to bury your nose in these reports for weeks on end, but eventually, you’ll “get a feel” for what you’re looking for. Here’s an example from Vipul:

    In the fact sheet, find patterns, let’s say investment grade AUM has increased in the last few months, while the credit risk AUM has nose dived. Explore the internet for reasons.

    Maybe that didn’t make sense to you. Well, look up the terms and phrases, try to make sense of them, and then ask your mentor the question. The question should never be, “What is XYZ?”. It should be, “I didn’t understand this term, so I looked it up, and here is what I specifically don’t understand about XYZ.” Asking the right question is a great skill!

  5. Again, a straight quote, unedited:

    Among the various structures, which MFs buy what: LAS, CMBS, Corporate guarantee, Letter of Comfort, DSRA guarantee. Understand each in detail. Which structure is preferred by which issuer and for what reasons. Pros and cons of each structure.

  6. With regard to that last point, if you want to really be a part of the industry,  learn each of those terms, once again with a weighted average of research online and follow-up questions with your mentor. The internet will tell you what the terms mean, and your mentor will tell you why it matters. Both are important, and in that sequence.
  7. Vipul recommends that you browse RBI site regularly. Specifically, whether you understand the reports or not, look out for data on the following:
    1. Outstanding G-Secs
    2. Primary auctions of CMBs (s is small, not to be confused with the CMBS mentioned above)
    3. SDLs,
    4. T-Bills. 
  8. Government Securities Market for Beginners: A Primer, which I myself hadn’t read until now (Thanks Vipul!)
  9. And finally, FIMMDA for corporate bond spreads and base yield curve.

Akash (and anybody else interested in this topic), this should keep you busy for days on end. My thanks to Vipul for taking the time to respond so quickly, and for sharing a most excellent set of links 🙂