India should boost money supply, focus on infra: WB
World Bank chief economist Justin Yifu Lin on Friday, noted that by investing in the bottlenecks of the country like infrastructure, India could see pick up in demands, especially in the face of current crises, which would pave the way for a longer-term growth.
“Lin also pointed out that the monetary policy should be such that to reduce interest rates and increase money supplies, so as to spur demand. If money is invested properly, it wouldn’t lead to inflation and higher rates. Investment in infrastructure could revitalize manufacturing in India, which accounts for only 16% of the country’s total output, and contribute significantly to job creation,” said Lin who was addressing a press conference in Mumbai
Read more
Monday, March 16, 2009
Army headcount getting affected by policies
The armed forces is the greatest recruiter in India right now. Here is good example of how the government is ensuring employment for people and at the same time the army is taking advantage of the job situation/crisis. (I am refering to an article in Times of India, 16th March)
Here is another extreme example -
Taiwan to cut troops 16% over five years
Taiwan will cut troops by about 16 per cent over the next five years, officials said on Monday, in part as a streamlining measure and in part in response to a perceived lower-level threat from political rival China.
The defence ministry will reduce Taiwan’s military police to a command centre under the army, part of a long-term effort to cut troops from a 1970s Cold War high of about 600,000 to 210,500 in 2014, going for quality over quantity, military sources said.
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Although I think the Indian govt has taken the right step in this situation, Taiwan govt's step does not impress me.
Here is why-
1. This is not any normal job. People in this job are motivated not by money but by the love for their country. You cannot/should not move people like that
2. The govt could have used the troops productively. The ones that are being laid off could be given alternate employment
3. If the Taiwan govt thinks that in times of political crisis they will be able to recruit people immediately and send them to war, then it is wrong. There is a lot of training and hardwork involved. Soldiers cannot be asked to go home and come back after a year in case there is a war
Most importantly- the soldiers should be respected
Here is another extreme example -
Taiwan to cut troops 16% over five years
Taiwan will cut troops by about 16 per cent over the next five years, officials said on Monday, in part as a streamlining measure and in part in response to a perceived lower-level threat from political rival China.
The defence ministry will reduce Taiwan’s military police to a command centre under the army, part of a long-term effort to cut troops from a 1970s Cold War high of about 600,000 to 210,500 in 2014, going for quality over quantity, military sources said.
---
Although I think the Indian govt has taken the right step in this situation, Taiwan govt's step does not impress me.
Here is why-
1. This is not any normal job. People in this job are motivated not by money but by the love for their country. You cannot/should not move people like that
2. The govt could have used the troops productively. The ones that are being laid off could be given alternate employment
3. If the Taiwan govt thinks that in times of political crisis they will be able to recruit people immediately and send them to war, then it is wrong. There is a lot of training and hardwork involved. Soldiers cannot be asked to go home and come back after a year in case there is a war
Most importantly- the soldiers should be respected
Wednesday, March 11, 2009
Record fiscal deficit - Not a worry, let's invest
Just to add to what I mentioned in my previous post.
This is no time for governments to curtail investment. Countries such as USA and China and also others are investing heavily in their attempt to come out of this recession quickly.
US Fiscal Deficit Projected At 12.3% of GDP In 2009
China budgets record-high fiscal deficit in fight against global crisis
This is no time for governments to curtail investment. Countries such as USA and China and also others are investing heavily in their attempt to come out of this recession quickly.
US Fiscal Deficit Projected At 12.3% of GDP In 2009
China budgets record-high fiscal deficit in fight against global crisis
Illogical prioritization
Govt should get back to 3% fiscal deficit target by 2010-11: Virmani
Chief Economic Advisor in the finance ministry Arvind Virmani said the country should aim at limiting its fiscal deficit--the gap between
total spending and most of the receipts--to the 3% mark by 2010-11.
India's fiscal deficit is projected to more than double to 6% of GDP this fiscal against the budgetary target of 2.5%. For the next fiscal, the deficit is estimated to be 5.5% of GDP. Virmani said India has provided one of the largest stimuli in the world, leaving aside countries that are directly the source of the crisis.
I agree that fiscal deficit should always be watched. But this should not stop the government from investing. Govt should not be scared to invest just because the fiscal deficit is going up.
This is a global recession. It is an exceptional time. How can we talk about containing the fiscal deficit at this time. Government should definitely borrow more and invest in public private partnerships. Ofcourse this may drive up the interest rates. But a fine balance will need to be maintained.
To maintain the deficit new measures should be put in place to stop the revenue leakage. Still a significant percentage of the revenue is lost as people fail to pay income/sales taxes.
INDIAN GOVT- DONT STOP INVESTING. THIS IS THE ONLY WAY RIGHT NOW TO MOVE OUT OF THIS SLUMP QUICKLY
Chief Economic Advisor in the finance ministry Arvind Virmani said the country should aim at limiting its fiscal deficit--the gap between
total spending and most of the receipts--to the 3% mark by 2010-11.
India's fiscal deficit is projected to more than double to 6% of GDP this fiscal against the budgetary target of 2.5%. For the next fiscal, the deficit is estimated to be 5.5% of GDP. Virmani said India has provided one of the largest stimuli in the world, leaving aside countries that are directly the source of the crisis.
I agree that fiscal deficit should always be watched. But this should not stop the government from investing. Govt should not be scared to invest just because the fiscal deficit is going up.
This is a global recession. It is an exceptional time. How can we talk about containing the fiscal deficit at this time. Government should definitely borrow more and invest in public private partnerships. Ofcourse this may drive up the interest rates. But a fine balance will need to be maintained.
To maintain the deficit new measures should be put in place to stop the revenue leakage. Still a significant percentage of the revenue is lost as people fail to pay income/sales taxes.
INDIAN GOVT- DONT STOP INVESTING. THIS IS THE ONLY WAY RIGHT NOW TO MOVE OUT OF THIS SLUMP QUICKLY
Saturday, March 7, 2009
U.S. jobless rate hits 25-year high, payrolls dive
The U.S. unemployment rate hit a 25-year high of 8.1 percent last month as employers buckling under the strain of a severe recession axed 651,000 jobs, government data showed on Friday.
The manufacturing sector shed 168,000 jobs in February, after eliminating 257,000 positions the prior month. Construction industries bled 104,000 jobs in February after losing 118,000 in January.
The service-providing industry slashed 375,000 positions after shedding 276,000 in January.
Read the full article here
The manufacturing sector shed 168,000 jobs in February, after eliminating 257,000 positions the prior month. Construction industries bled 104,000 jobs in February after losing 118,000 in January.
The service-providing industry slashed 375,000 positions after shedding 276,000 in January.
Read the full article here
Monday, March 2, 2009
Obama's policy on bonus cut - a good political move but a counterproductive economic policy
Treasury Restricts Executive Pay for Bailed Out Companies
http://www.thecro.com/node/770
President Barack Obama and the treasury department moved to restrict executive pay packages at financial firms receiving “exceptional financial recovery assistance.”
At such firms:
• The policy limits senior executives to $500,000 in total annual compensation, except for restricted stock awards. The stock could be cashed in when the government has been repaid
• The senior pay structure and strategy at such firms must be fully disclosed and subject to a “say on pay” shareholder resolution
• A clawback provision would permit recovery of bonuses and compensation from top executives found to have knowingly provided inaccurate information or performance
metrics to calculate their own incentive pay
• Top executives would be barred from receiving golden parachute payments
• Boards would have to adopt policies relating to approval of luxury expenditures such as aviation services, office renovations, entertainment and holiday parties
• The administration said it would host a conference on “executive pay reform at financial institutions” to identify best practices and guidelines
I don’t quite understand the motive behind this decision. Is it to punish the executives who have led the economy into the recession or ensure that future executives don’t commit such mistakes again? Some may argue that the answer to both the problems is the same. But I think otherwise.
Economy is already in recession. Time is ripe to develop new leaders. From a political point of view it is understandable that Obama wants to reduce the executive pays and bonuses of executives whose companies are receiving bail-out packages. However, from an economic standpoint I don’t understand the rationale behind the decision to reduce pays and bonuses.
Obama’s policy has its pros and cons-
Pros
1. Less money will go as compensation that means more money towards operations and
investment
2. Executives might think that this is more of a punishment for their bad decision making and might start taking less risk (I am not even sure how relevant this is in the real world)
3. Obviously more votes for the democrats
Cons
1. There will be no incentive for executives to perform better (or even stay in the firm) especially because the pay is less and the stock awards would be allowed to be cashed when the government has been repaid (which will mean much more than 5 years)
2. There will be no incentive for new potential executives to join these companies. Clearly, they will get much more outside of these companies. Hence, these companies are bound to face talent shortage
Obama’s decision is driven more from the point of reducing the inequality.
His rationale- When there are millions unemployed then how can a few enjoy the millions(in compensation)
In my mind- The compensation structure should not be changed much. Only the incentive structure should be tweaked a little bit. Instead of tying the bonuses to stock value and revenue growth a new structure should be designed that ties the bonus incentives to more fundamental things. May be reduction of % of NPAs in the book, etc
I don’t know of anyone who would like to join such firms (bailed-out) as an executive. Do you?
http://www.thecro.com/node/770
President Barack Obama and the treasury department moved to restrict executive pay packages at financial firms receiving “exceptional financial recovery assistance.”
At such firms:
• The policy limits senior executives to $500,000 in total annual compensation, except for restricted stock awards. The stock could be cashed in when the government has been repaid
• The senior pay structure and strategy at such firms must be fully disclosed and subject to a “say on pay” shareholder resolution
• A clawback provision would permit recovery of bonuses and compensation from top executives found to have knowingly provided inaccurate information or performance
metrics to calculate their own incentive pay
• Top executives would be barred from receiving golden parachute payments
• Boards would have to adopt policies relating to approval of luxury expenditures such as aviation services, office renovations, entertainment and holiday parties
• The administration said it would host a conference on “executive pay reform at financial institutions” to identify best practices and guidelines
I don’t quite understand the motive behind this decision. Is it to punish the executives who have led the economy into the recession or ensure that future executives don’t commit such mistakes again? Some may argue that the answer to both the problems is the same. But I think otherwise.
Economy is already in recession. Time is ripe to develop new leaders. From a political point of view it is understandable that Obama wants to reduce the executive pays and bonuses of executives whose companies are receiving bail-out packages. However, from an economic standpoint I don’t understand the rationale behind the decision to reduce pays and bonuses.
Obama’s policy has its pros and cons-
Pros
1. Less money will go as compensation that means more money towards operations and
investment
2. Executives might think that this is more of a punishment for their bad decision making and might start taking less risk (I am not even sure how relevant this is in the real world)
3. Obviously more votes for the democrats
Cons
1. There will be no incentive for executives to perform better (or even stay in the firm) especially because the pay is less and the stock awards would be allowed to be cashed when the government has been repaid (which will mean much more than 5 years)
2. There will be no incentive for new potential executives to join these companies. Clearly, they will get much more outside of these companies. Hence, these companies are bound to face talent shortage
Obama’s decision is driven more from the point of reducing the inequality.
His rationale- When there are millions unemployed then how can a few enjoy the millions(in compensation)
In my mind- The compensation structure should not be changed much. Only the incentive structure should be tweaked a little bit. Instead of tying the bonuses to stock value and revenue growth a new structure should be designed that ties the bonus incentives to more fundamental things. May be reduction of % of NPAs in the book, etc
I don’t know of anyone who would like to join such firms (bailed-out) as an executive. Do you?
Sunday, March 1, 2009
Creating an incentivized structure
A key requirement of any policy should be to create an incentive structure for all the agents in the economic system that enables the agents to act in a manner that best allows the policy to meet its ultimate objective.
Let us understand this with a simple example. Assume a simple economy where the citizens own highly fuel in-efficient cars that run on precious petrol. The government will have multiple policy options to reduce the pollution level. Here are a few (of the many) options-
1.Regulate the production of fuel in-efficient cars (actually effectively banning them)
2.Highlight how in-efficient cars are harming the economy and hope that conscious citizens hear the government’s call to change cars
3.Announce that people owning fuel efficient cars will get a tax cut and penalize the owners of fuel in-efficient cars with a pollution tax
Let us evaluate these options-
1.Supply side action. It will just help in increasing the ratio of fuel efficient to fuel in-efficient cars. The citizens here have no incentive to convert to fuel efficient cars. Hence, this is obviously the most in-effective policy
2.Demand side action. The government assumes that the citizenry has a moral duty towards the society. The effectiveness is very unpredictable unless the assumption of the government is true
3.Another demand side action. In this case the government creates an incentive structure. The government understands that in order to flush out the in-efficient cars from the system, the citizens need to play an active role. In order to force/enable the citizens to change their cars there needs to be a system of incentives. The citizens should have an incentive to change cars
Today, a number of companies give bonuses to CEOs and other executives. Ever wondered why these bonuses even exist? Cleraly an example of an incentivized pay structure.
I strongly believe that these economic agents are the key to any policy success, hence the effectiveness of any policy depends on how strong/leak-proof the incentivized structure is
Let us understand this with a simple example. Assume a simple economy where the citizens own highly fuel in-efficient cars that run on precious petrol. The government will have multiple policy options to reduce the pollution level. Here are a few (of the many) options-
1.Regulate the production of fuel in-efficient cars (actually effectively banning them)
2.Highlight how in-efficient cars are harming the economy and hope that conscious citizens hear the government’s call to change cars
3.Announce that people owning fuel efficient cars will get a tax cut and penalize the owners of fuel in-efficient cars with a pollution tax
Let us evaluate these options-
1.Supply side action. It will just help in increasing the ratio of fuel efficient to fuel in-efficient cars. The citizens here have no incentive to convert to fuel efficient cars. Hence, this is obviously the most in-effective policy
2.Demand side action. The government assumes that the citizenry has a moral duty towards the society. The effectiveness is very unpredictable unless the assumption of the government is true
3.Another demand side action. In this case the government creates an incentive structure. The government understands that in order to flush out the in-efficient cars from the system, the citizens need to play an active role. In order to force/enable the citizens to change their cars there needs to be a system of incentives. The citizens should have an incentive to change cars
Today, a number of companies give bonuses to CEOs and other executives. Ever wondered why these bonuses even exist? Cleraly an example of an incentivized pay structure.
I strongly believe that these economic agents are the key to any policy success, hence the effectiveness of any policy depends on how strong/leak-proof the incentivized structure is
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