Real cost of corruption - One aspect.

There are several news articles speaking of road accidents in India. It is indeed a big problem. The latest report that Indian cars failed crash tests is making news. May be Indian government will mandate these tests as well. Wonderful so far.

There is also an extended discussion on stricter enforcement of laws, clampdown on drunk driving and so on. All this is good. But have we thought of the genesys of rash driving? I am sure majority of these same drunk, careless, arrogant, out-of-control drivers have a valid driving licence. Where does that licence come from? How is it given? Here is a quick process summary of obtaining a driving licence.

Option 1)
A. Go to local RTO office.
B. Appear and pass the learner's licence test where your knowledge of rules are tested.
C. Learn the vehicle and appear for driving test.
D. Get a licence.

OR 

Option 2)
Till some years ago, go to one of the many thousands of driving school with your address and identity proof.
(Even today, after the computerised learner's licence test, do the above.)

Naturally, majority people take option 2. It is convenient. The test is a breeze. A few feet ahead, a few feet in reverse, voila you have a licence. You feel happy! Happiness is good for health...but perhaps not in this case.

HAS ANYONE THOUGHT OF THE CONSEQUENCE OF THIS?

How would you like to learn that the doctor treating someone near to you was a quack and responsible for deteriorating health of the patient? Is this not similar albeit in a different context?

Read this article from The New York Times on the FDA worry on Indian Pharma. The article says India exports about 40 percent of over-the-counter & generic medicines in the US. And what does India do about ensuring that the quality served to this largest consumer base is good and as per, if not better than, the standards? Make no mistake, we are not a banana republic. We have drug regulatory body called CDSCO, but as an industry have Indian Pharma companies tried to enforce those regulations in spirit? Or are we the happy driver with the freshly issued driving license? We will drive until we run over someone by the pavement?

And our regulatory body will continue to look away as long as the authorities that be keep saying this is the industry that brings in USD 15 Billion (INR 90000 Crores) a year. This looking away implies economic profit to those benefiting from it and penalizing companies that are voluntarily ensuring compliance to the FDA standards.

But the heavy cost that India pays as the damage to its image is something that cannot be measured easily - the factors to be measured are the penalties, lossof market share, loss of licenses. These are to the corporation, also to be added are the costs of additional scrutiny, loss of jobs, increase in social issues in those areas due to these issues, decrease in confidence on Indian industry as a whole. That is the real cost of corruption.

1BHKs make a come back!

I don't know how but I again feel I said so!

Read this April 2012 blog post from me:
http://indian-eagle.blogspot.in/2012/04/strange-case-of-1-bhks-in-mumbai.html


And read this article in ET today.
http://economictimes.indiatimes.com/markets/real-estate/news/mumbai-builders-see-an-opportunity-in-small-homes-despite-rising-prices-and-market-uncertainty/articleshow/19643145.cms

I had categorized 1BHK as giffen good. Now good old supply-demand curves have kicked in.

Finally awake or U-turn on cards?

Well finally diesel has been marked up, FDI in aviation and retail allowed...

http://www.thehindubusinessline.com/industry-and-economy/government-and-policy/article3897120.ece?homepage=true

The thing that makes one worry is that is this again lip service which will follow the now routine U-turn or has this page been turned once for all?

Also, are things this bad, fiscally speaking, that this reluctant Government is now being forced to use every option they have?

Eventually things will come out. Lets hope that decision is taken with future glory in view.

MSCI rejig may benefit India & cricket

This article MSCI rejig may increase fund inflows: http://www.business-standard.com/india/news/taiwan-korea-exit-may-help-india/478002/

reminds of those days of Indian cricket, when to qualify, we needed someone else to lose to some other team by some margin.

Something that I noted in one of my earlier posts: "To qualify, India needs Zimbabwe to beat Australia in league A matches. In league B, South Africa needs to beat Namibia to ensure that the overall net run rate of Zimbabwe puts it on the 4th position ahead of Australia. In case of Australia winning, the net run rate of its...
Rest here:  http://indian-eagle.blogspot.com/2012/03/luck-runs-out-and-history-comes-back.html "

Basically, India is only relying on some other nations in the index to move up so it gets the diverted funds. Instead, why not fix the fundamentals?

Strange Case of 1 BHKs in Mumbai...

Have you ever felt when searching for a home in Mumbai, 1 BHKs charge a premium on the property rate in that very area? That is if in a area, the property is at 10000 Rs. per sq. ft for 2 and 3 BHKs. My guess is, it is a Giffen Good.


Here is the investopedia definition: Giffen Good: A consumer good for which demand rises when the price increases, and demand falls when the price decreases.

(Read more: http://www.investopedia.com/terms/g/giffen-good.asp#ixzz1rBy0aMMa)

Real Estate in India, particularly in cities like Mumbai, has typically risen manifold in price terms. So much so that it has gotten out of reach of most middle class people with usual career curves.

So about 10 years ago, a young couple of around 30 years of age in Mumbai would be stretching but being able to eventually buy a 2 Bedroom Hall Kitchen apartments ranging from 800 sq. ft. to 1100 sq. ft. depending on location, rates therein, their budgets. While that was a tough one to achieve, it was somehow managed with financing by loans, parents / friends helping and savings done in their 10 odd years of working life.

If I am not wrong the average price of such a flat would be 5 to 6 times their combined gross incomes.

Today, time has changed radically.

The apartment prices have shot through the roof. Completely through the roof. In fact,buying just the roof has also become quite difficult these days. Across board rates have shot up.

Many many of today's 30 year olds are today preferring to stay in rental homes rather than buying them. Yet, in India, as in most countries, property remains one of the major aims of life. In fact, it brings a lot of prestige for those buying one early. Home loans are easier and not frowned upon by the society. Yet, homes today are that much out of reach especially in tier I and II cities.

So the aspiration of these 30 year old pairs have moved down from 2 BHKs to 1 BHKs. 1 BHKs are generally anywhere from 500 sq. ft. to 700 sq. ft.

These 1BHKs ask for a premium in most areas, especially in areas like Borivali, Thane, Mulund etc. Yet their demand is going up.

One simple explanation I find is that the 1BHK is a Giffen Good. Because of the steep increase in rates, with incomes not rising with the same slope, 2BHKs have gone out of hand. The premium comes simply because real estate developers have virtually stopped creating 1 BHKs. Thus limiting the supply. So because 2 BHKs, which seem to be in oversupply, are beyond people's reach. Thus we have our own Mumbaikar Giffen Good, the equivalent of Potato during the Irish famine. 

Update:

I requested Prof. TT Ram Mohan to comment on the above post. Here are his thoughts on the above post:

"I read your piece. I am not sure this is a Giffen good phenomenon. Demand for 1 BHK apts would be high in the face of rising prices because they would still be cheaper than 2 BHKs. The question is why then builders don't build more 1 BHK apts. The answer, unfortunately, is that they find there is still enough demand for  2 BHK apts on which they, perhaps, make better returns."

Value of good teachers!

Are teachers relevant? The question is horrible in nature. But here in India, are they seen as relevant? In the last 60 years though literacy has gone up, it would be difficult to claim if people are any better educated? Haven't we all, at some time, felt that good teaching can improve a lot many things?

Check this paper on Value of Teachers. (Got the link from Greg Mankiw's blog. One more fine blog to read).  

This one is one of the finest and most relevant economic papers I have read. Though my economics knowledge is limited, I find this paper relevant, more relevant to our nation India than to the U.S. where the author has researched and published this one. 

Quality in teaching in India varies as much as winters in Siberia and summer in Central India. You see a very high standard in institutions like IITs, IIMs, mediocrity in a very large band in between and absolute chaos in a small but substantial percentage of schools. Unfortunately the mediocrity and chaos keep the majority back for their lives in our country. Rural landscape in India has problem of mass absenteeism and this has to do with issues of pay and lack of incentive in opting teaching as a full-time occupation. The paper addresses these and many others issues, only that it is with U.S. in purview.

But we Indians would do well to push some of our economists and policy-makers to find the root-cause of malaise in education sector. We have to fix this soon or be left behind. 

The Big Short - Book Review

Well, what do I say of this book!

As someone who was in the thick of these things in the spectacular collapse that happened in 2008, it is amazing how a book like The Big Short gives you a view in what happened in retrospect. I was a student while the collapse happened and we were grappling with the possibility of being unemployed despite passing out from one of the top ranked institutes in India.

So what happened?

Michael Lewis tells us the story of collapse through the actions of 3 protagonists - Steve Eisman, Dr. Mike Burry and Cornwall Capital. The protagonists realized the otherwise obvious fact to finance professionals. They also realized how mechanization of certain processes had converted real risk into a meagre assumption. The story then moves into how these protagonists converted their beliefs into bets that made enormous amounts of money for their investors and themselves.

The story also explores the difficult side of this story, especially that of Dr. Mike Burry of Scion Capital. The most interesting story is that of Cornwall Capital who were small time guys but made it big after having foreseen the future of the grand hubris at Wall Street.

The book defines that all 3 realized that the impact of this problem will manifest when the teaser rates give way to real rates and the subprime borrowers are no longer capable of paying EMIs.

Having said that, the book does leave you wanting to know more especially about the collapses of Bear Stearns and Lehman Brothers. It touches it but does not elaborate on it.

Also, the story speaks volumes (though not directly) on how it is necessary for regulators to remain in control. Check this article by Mike Burry on how the powers that are missed the boat.

Finally, the book is fun. You will enjoy it more if you at least know what stuff like derivatives mean (not in detail but at least high level). Recommended reading for those who want to know more on the collapse. But not for those who want to do a deep dive study.

Fiscal Deficits - View and counter view and others

Here are 2 articles about fiscal deficit. They take different views but they are being said in different contexts and are meant for different kind of economies.

Business Standard about India's budget

Paul Krugman in NYTimes on Fiscal Scare Tactics

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Something unrelated: Is Solar power picking up? Here is a NYTimes blog on it.

Economics, Globalization and News Focus

Economics deals with distribution of scarce resources amongst their seekers. Globalization has brought about a subtle competition between nations in pursuing smart economic policies. Sometimes they group together or raise barriers. Countries often attempt to replicate another country's successful policies. Sometimes desperate times invites pressure from other nations that force a country to follow certain policies.

In the past few years the term BRICS - Brazil, Russia, India, China, South Africa has been used more and more often. The reasons being that these are the growth markets that attract investors. Also, they attract sellers of various products & services from across the world because of their size and potential.

Now, some very interesting commentary on what long term and short term of economics in human history is and how effects of changes being done today will manifest in future is discussed in this NYTimes article. What I find particularly interesting is the author's comment that a nation should consider the option of being dislodged from being the top one in the long run as acceptable.

The article is also relevant to nations which are aspiring to be leaders in the new world order. It certainly takes courage to make decisions that sometimes feel incorrect in short term but help the nation and the world in the longer run. I guess, when a nation transforms at core, it also is able to muster the courage needed to make such decisions.

The article correctly points out on how news is generally focussed around major events. Now, we in India, exactly know how news on items like Economy and BRICS is played. Hype on everything is the norm, a small M&A activity by an Indian company and media may conclude that India has dislodged every other country in everything including baking croissants. The second problem is the excessive focus by business media on the stock market. Stock market is one of the indicators on how the economy is doing, but it is not the only indicator. Stock market is also correlated to international markets and foreign fund flows. So using only stock movements to understand the state of economy is obviously not correct.

Going Green in India - Story of Solar Entrepreneur

An excellent article on story of a Solar Entrepreneur in WSJ - http://online.wsj.com/article/SB126090748287292467.html

It speaks of how the costing of solar power is difficult and the entrepreneur needs incentive (or subsidy...any way you see it is fine) from the Central Government. IMHO, just reduce the environmental hazard element from the cost and the equation will get balanced. (Yes I know it is not that simple...but then what is?)

The article is also a reflection on how much more we, as a country, have to travel to become a truly pro-entrepreneurial society.

Just one question, why use farmland for such energy generation when we have deserts and mountains that are relatively free from farming / cattle grazing needs? I am sure there is a reason, just that, I am not aware.

Economics Conundrum - Case of Information Over-supply?

I read this amazing article in BusinessWeek - "Why No One Knows Where the Economy Really Stands".

Check this excerpt about the Jobs Data during the boom, "BLS overstated the strength of the economy during good times, and now that fiction will come crashing down on our heads in the first quarter of next year."

The next excerpt of note is on the Stock Markets, "But using what the stock market is doing now as factual data is potentially treating another asset bubble as financial reality."

Just makes me think if the if we are living in a world of Information oversupply where every little bit boosts one section of investor or another? It is Irrational Exuberance, but is it just unavailability of well organized data? Reminds me of our MicroEconomics Professor - Prof. Gupta's favorite phrase, "Garbage In, Garbage Out". :)

Sometimes one feels so much information just leads to more confusion. But then, without it we have the information asymmetry problem. Not sure what we can do of this paradox.

I guess, the author concludes well when he says that real issues can be tackled once accurate data is obtained and analyzed.

Warren Buffet invests in Railways.

Warren Buffet is investing in railways in US. Looks like he is convinced on the economy's rebound as well as the return of consumer buying in the US.

More importantly it seems that the he is convinced that US will see a rise in usage of railroad infrastructure over highways etc. That also indicates an interest in green infrastructure initiatives.

BNI also has presence in Asia which is continuing as the growth story across the world. The railway co.'s shares jumped a good 30% (from a P/E of 14 to almost 18).

Here is the LA Times story - http://www.latimes.com/business/la-fi-berkshire4-2009nov04,0,6604215.story

NY Times is also reporting that Buffet is paying a part of this deal in Berkshire stocks for tax purposes.
http://dealbook.blogs.nytimes.com/2009/11/03/berkshire-to-buy-rest-of-burlington-northern-for-44-billion/?ref=business

Wireless Economics Primer

Business Standard ran a very interesting article on "Spectral allocation policy". The author has given findings from a report which concludes that a great density of operators actually brings down welfare in terms of consumer surplus.

As technologists (my previous avatar in industry), we tend to forget this aspect of technology. Some questions that we need to pose to ourselves when we run behind the best, most-efficient and finest gadget should be,
(1) What is the objective of technology?
(2) Do we really need the best of the best technology? Or can we manage well with mature technology?
(3) Remember our context of a developing nation which still does not have additional money for such spending.

The point is that technology will change by Moore's law, but do we really need to pursue the best? With the large market size, we can force suppliers to continue supporting somewhat mature technology.

While mature technology may not be the most efficient, don't forget it is the cheapest and most cost effective. This is interesting. For me, this is economics refresher. Time to hit back to Microeconomics by Michael Baye and to get to the report that Shyam Ponappa refers to.

- Siddharth

Link to Business Standard article (will become subscriber only soon):
http://www.business-standard.com/india/storypage.php?autono=362655