Source: https://blog.theleapjournal.org/2008/01/
Timestamp: 2019-04-20 00:41:16+00:00

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Susan Thomas says, in Economic Times, that price limits do not help small IPOs. I think that many old-fashioned folk find price limits reassuring because it is felt that the government is in control of the price.
This influences monetary policy in India and China. In both cases, pegged exchange rates induce a loss of monetary policy autonomy. Upholding the exchange rate peg will require cutting rates. In India's case, there is a large interest rate differential that (in any case) needed narrowing. See an edit in Indian Express and Omkar Goswami in Business Standard. In the Chinese case, the game of sterilised intervention - which used to be profitable since local Chinese rates were lower than the return on US treasuries - is now starting to cost serious money.
So expect moves in monetary policy amongst the peggers (though not the floaters, who have monetary policy autonomy) in response to the decisions of the US Fed. News begets news and volatility clusters.
India - a `socialist secular democratic republic'?
This blog entry is joint work with Kaushik Krishnan.
A fascinating episode is taking place in, what I hope, is the unfolding improvement of the Indian constitution.
In 1951, the `Representation of the People Act' was enacted, which demands that any political party must state, in an affidavit, that they would adhere to the principles of the preamble to the constitution.
Then the Constitution was amended in 1976 by the Constitution (Forty-Second) Amendment to put the word `socialist' into the preamble. Combining these two facts implies that today in India, every political party is forced to adhere to the precepts of socialism. Barun Mitra tells this story in Mint, and you might like to read my earlier blog post on the Emergency of 1976.
1. a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole. 2. procedure or practice in accordance with this theory. 3.(in Marxist theory) the stage following capitalism in the transition of a society to communism, characterized by the imperfect implementation of collectivist principles.
1. Any of various theories or systems of social organization in which the means of producing and distributing goods is owned collectively or by a centralized government that often plans and controls the economy. 2. The stage in Marxist-Leninist theory intermediate between capitalism and communism, in which collective ownership of the economy under the dictatorship of the proletariat has not yet been successfully achieved.
An economic system in which the production and distribution of goods are controlled substantially by the government rather than by private enterprise, and in which cooperation rather than competition guides economic activity. There are many varieties of socialism. Some socialists tolerate capitalism, as long as the government maintains the dominant influence over the economy; others insist on an abolition of private enterprise.
None of this seems, to me, to be a part of the idea of India.
Editorial titled We're all Socialists in Times of India on 15th Jan 2008, and main piece by Gautam Adhikari titled Where we stand on the same day.
An article by Shubhankar Dam in the The Daily Times of Lahore: Part 1, Part 2.
Fali Nariman, arguing for the petitioners, said that changing a word in the preamble amounts to changing the basic structure of the constitution and requires scrutiny as with the `basic structure' doctrine. But this is going to be a tough argument to pull off since the Supreme Court has said that the objectives specified in the Preamble (socialism being one of them) contain the basic structure (Kesavananda Bharati v. Union of India, Excel Wear v. Union of India). Aparently some time ago, an attempt to revive the Swatantra Party was blocked by the election commission because this party was not willing to say that it adhered to socialism.
Why do you define socialism in the narrower sense as the communists do? ... Why don't you go by the broader definition which mandates the state to ensure social welfare measures for all the citizens as a facet of democracy?
I'm pretty clear that the word `democracy' and the words `social welfare' are very different and do not have to go together. The former is unquestionably the core idea of the modern State worldwide; the latter is a controversial vision of the State that originated in Europe and has been having a lot of trouble the world over. Perhaps our Chief Justice should consult a dictionary to know what `socialism' means. Did he just blow a chance to make it into the history books?
The story that seems to be at work is that the words in the Preamble are defined by the Supreme Court through its judgments; dictionary meanings do not matter. The Court seems to have always favored defining socialism in loose, vague and highly idealistic terms. ``Indian socialism'' is said to be about what the Constitution of India wants to have for the people of India. In the past the Supreme Court has said that socialism is about ending poverty, ignorance, disease and inequality of opportunity. This socialist concept ought to be implemented in the true spirit of the Constitution (G.B. Pant University of Agriculture and Technology v. State of Uttar Pradesh). The Court has also said that the basic framework of socialism is to provide a decent standard of life and security to the working people (D.S. Nakara v. Union of India). As recently as last year, it was held that socialism is one of the systematic and structural principles underlying the Constitution (M. Nagraj v. Union of India).
I find it very odd, that the Constitution of a country utilises a word that has a certain mainstream meaning in the dictionaries, but that word actually means something different - on the ground - as compared with what any citizen would think. What do we want every citizen of India to think about what the Constitution of India says? Should the Constitution - or atleast the preamble to it! - not be written in plain English?
There has been a recent trend in which the Supreme Court has, only slightly, been promoting liberal ideas (State of Punjab v. Modern Breweries, BALCO Employees Union v. Union of India). But in most of these cases, the Court cleverly skirts the issue of `socialism'.
Legal experts say the Court will never say that socialism should be deleted, for two reasons. The first, a reason that isn't as relevant today as it was during Mrs. Gandhi's rule, was the fear that judges who spoke out against State Policy would be transferred or superceded. The second reason is that the judiciary is not the organ of the State that can change the Constitution. At most, it can make sure that the Legislature creates law within the framework that the Constitution allows. But it cannot create law. More importantly it cannot delete law. But all hope is not yet lost, while the PIL that sought to remove socialism from the Constitution was dismissed, the PIL that seeks to remove the socialist ideology as a necessary requirement of all political parties has been admitted.
In the US, the original drafting of the Constitution was a brilliant one, and in 1791 the First Amendment was put into place which upholds freedom of speech. It was only in the 20th century that a series of judgments fashioned the full implications of the First Amendment into the defence of freedom of speech as we understand it today. This required courageous judges, who interpreted the (brilliant) text as meaning that the government cannot ban offensive speech, except to prevent a threat of serious and imminent harm. We can yearn for such judges. But the courts can only follow up on sound drafting by seeing it through to the full consequences. The drafting has to first be sound. In India's case, we have had a weak starting point to start with, and a history of faulty amendments.
Incidentally, a proposal to amend the RPA and delete the reference to socialism was introduced in the Parliament in 2005. In a remarkable speech in the Upper House of Parliament, MP Anantrao Joshi submitted eight arguments for amending the RPA and deleting the socialist pledge.
First, India's freedom struggle, Joshi said, did not have any significant connections with socialist ideology. Neither Gandhi nor Patel expressed any sympathies for socialism. Patel, on the contrary, he said, compared the socialist in India to a dog walking under the bullock cart, which thinks that it is driving the bullock cart. And while Nehru was personally committed to socialism, he acknowledged that the majority in the Congress party did not share his views.
And this opposition to socialism, he added, explains why the word was omitted from the Constitution in its original text. Socialism was inserted only in 1977 as an afterthought by some vested political interests.
Secondly, his opposition to socialism, Joshi said, was borne out of his belief in the right to dissent. I am not an anti-socialist, he declared. But it was only after visiting the erstwhile USSR that he came to realise the significance of his right to dissent, of protecting his right not to be a socialist. By necessarily requiring every political party to swear by socialism, the RPA, he said, did not allow space for disagreeing with socialism.
Thirdly, his opposition to socialism, he said, was borne out of personal experience. Based on his belief that state intervention in artificially controlling the prices of agricultural commodities was detrimental to the interests of farmers, he decided to form a political party to lobby for the interests of the farmers in India. But his application was rejected by the Election Commission because he refused to affirm his commitment to socialism. Swearing by socialism to gain the status of a political party would be rank dishonesty, he said, and he did not want to do that.
Fourthly, the RPA, he thought, promoted hypocrisy. There were many parties in India that did not believe in secularism. And similarly, there were many left-wing parties that did not believe in democracy. And yet the Election Commission was reluctant to act against them because they had, even if falsely, sworn to uphold secularism and democracy respectively. The law, he argued, should not reward (or tolerate) hypocrisy while penalising honesty.
Fifthly, a mere commitment to socialism meant nothing. The term, he thought, was incorrigibly vague and has been applied to a large spectrum of theories over the last two centuries. The term has been associated with a wide number of thinkers including Saint Simon, Robert Owen, GB Shaw, GDH Cole and John Keynes. However, when used without any qualifications, the term socialism, he added, is interpreted to refer to the system of thought propagated by Marx, Engels and supplemented by lesser prophets like Lenin, and Stalin.
And certain traits of mainstream theory of socialism, according to him, were clearly opposed, if not repugnant to the basic principles and structure of the Constitution of India: for example, class-contradiction, atheism, and dictatorship of the proletariat. In other words, socialism at best was too vague and at worst contradictory to the basic principles of the Indian Constitution.
Sixthly, the RPA, he argued, was violative of the right to equality. Individuals taking oath to hold public offices under the Constitution do not need to affirm their commitment to socialism: they merely affirm their true faith and allegiance to the Constitution. But political parties cannot be recognised unless they specifically affirm their commitment to socialism and this, he thought, was violative of the right to equality under Article 14.
Seventhly, the RPA, he argued was also discriminatory. Only parties had to affirm their belief in socialism. The RPA did not require individuals desiring to stand for elections to make any commitment to socialism. This differentiation, he thought, was wholly arbitrary and violative of the right to equality.
Finally, Joshi submitted that by tying all political parties to a particular economic ideology, the law denied the possibility of change by legal means. By appropriating the entire legal space for socialism, the RPA, he said, left no room for advocating change.
This meant that the RPA prevents committed and sincere non-socialists from agitating as an organised force and trying to get the Constitution modified in their favour by entering the Legislative State Assemblies as also the Parliament.
Not surprisingly, Joshi's arguments created a tumult in the Upper House: many staunchly opposed his amendment. EM Sudarsana and Jairam Ramesh reiterated the usual socialist banter about social and economic justice and riled against the exploitative nature of capitalism.
And with Anantrao Joshi refusing to withdraw the amendment, the proposal was put to vote. The motion was negatived: majority of the members voted against it (i.e., they voted in favour of retaining socialism in the RPA).
Why? As Indias foremost criminal lawyer, Ram Jethmalani, pointed out during the debates: To oppose socialism is a very unpopular thing. While in personal agreement with Joshi's argument, he advised his friend to withdraw the amendment: I want to tell my friend, he said he has no chance of getting this Bill through this Parliament.
But, he added, in the Supreme Court of India, [Joshi] is bound to succeed on the constitutionality of the provision. A conscientious NGO has finally brought the matter to the SC.
Though the Constitution asserts that the Directive Principles of State Policy listed in Part IV are not enforceable and are guiding principles in making laws, a zealous Supreme Court once tried to elevate one of them to the status of a fundamental right. In 1982, the Supreme Court ruled in the case of a bus driver of Delhi, that though the principle of equal pay for equal work is a directive principle, it could be considered as a fundamental right of the workers (Randhir Singh vs Union of India). It was the first and last time that a directive principle was anointed with the sanctity of a fundamental right. The experiment has failed, as recent judgements of the Supreme Court show.
The latest judgement delivered in the case of a tractor driver of Punjab (State of Punjab vs Surinder Singh) diluted the principle so much that it has been emptied of all practical utility. The court summed up the position thus: The principle of equal pay for equal work has undergone a sea change. Earlier the view of the Supreme Court was that if two persons are discharging the same functions, they will be entitled to the same wages. Subsequently this view has been changed and now the view of this court is that there should be complete and total identity between the two persons similarly situated so as to grant equal pay for equal work.
The court began having second thoughts on the application of its own principle in the nineties. In State of Haryana vs Jasmer Singh (1997), it observed that the principle was not easy to apply. There are inherent difficulties in comparing and evaluating the work of different persons in different organisations. Persons doing the same work may have different degrees of responsibilities, reliabilities and confidentialities, and this would be sufficient for a valid differentiation, the judgement explained. The court, therefore, left the decision to the administrative wisdom and bonafides of the employers, though it would be a value judgement.
This year saw further assaults on the principle. In the Indian Drugs & Pharmaceuticals case, the Supreme Court stated that granting pay scales is a purely executive function and the court should not interfere with it. It may have a cascading effect, creating all kinds of problems for the government and employers. In SC Chandra vs State of Jharkand, involving the staff of schools run by Hindustan Copper Corporation and Bharat Coking Coal Ltd, the court openly said that the principle was creating havoc. All over the country, different groups were claiming parity in pay with other groups.
The Supreme Court went so far as to say that if the court enforced the principle, it would violate the principle of separation of powers enshrined in the Constitution. Citing Madison, it said that all power was of an encroaching nature and judicial power is not immune to this human weakness. It must also guard against encroaching beyond its proper bounds, and not the less so since the only restraint upon it is self-restraint.
The court, therefore, recommends that the judiciary should keep out of the field. The equation of posts and salary is a complex matter which should be left to an expert body, it said in State of Haryana vs Secretariat Personal Staff Assn. The courts must realise that the job is both difficult and time-consuming which even experts having the assistance of staff with requisite expertise have found difficult to undertake.
Another area where a recent judgment suggests some new ideas are in the air was about women working in bars.
Has the strategy of bringing back capital controls worked?
The government has sallied forth with reversals of reforms, with capital controls against private equity in February 2007, external commercial borrowing (ECB) in August 2007, and participatory notes in October 2007. Does this work? Ila Patnaik looks at the recent BOP data and finds that the impact is limited. (I had written on a related issue last month).
In the international experience, when any one component of capital flows is targeted by a government, it is possible for sufficiently stringent action to drive down those numbers. But the real story lies in how other components then swell up.
The camel in the tent, of course, is the current account, which goes beyond the data on capital flows that she examines. Economic agents are able to move capital in and out of the country by misinvoicing on the burgeoning current account.
The bottom line is that the ground realities of the currency market are not altered by these kinds of capital controls; the scale of trading required in order to achieve the desired distortion of the exchange rate continues to be huge and induces unacceptable monetary policy distortions.
Massive and unprecedented currency purchases by RBI have taken place in recent months -- $12 billion in September and $12.5 billion in October. Data after October has not been released, but in November, reserves grew by $8.3 billion. These are all numbers that are incompatible with running a monetary policy framework that will rein in inflation.
If a pegged exchange rate is desired, and monetary policy autonomy is sought, then a much more draconian regime of capital controls - a la FERA - is required. Smaller scale efforts do not work.
Writing in the Financial Times, Larry Summers says that the odds of a US recession have risen further in the last six weeks, and that there is a strong case for a fiscal stimulus of roughly $50 to $75 billion, delivered to poor people in the US.
What are the coefficients on your Taylor rule?
He says that a sharp easing of monetary policy is a done deal, and that the policy rate will go to roughly 3 percent. I don't see how it's easy for the US Fed to cut rates given how bad things are on inflation in the US. The latest data for TIPS-derived expected inflation in the US are showing values above 2.8%. This is not a pleasant environment in which cutting rates can be envisaged. To the extent that Larry Summers is effectively advocating a high weightage on the unemployment coefficient and a low weight on the inflation coefficient of the Taylor rule, this is a source for concern.
The US lacks a de jure inflation targeting framework for monetary policy. Trusting the Fed on inflation is, then, only a matter of the personalities of the people in charge. The Fed is mistrusted more than (say) the Bank of England where, since inflation targeting is written into the law, there is no question about the credibility with which the BOE will take on innovations in expected inflation. In this paradoxical way, writing down inflation targeting into the law actually gives more space to respond to events. In the US, the law does not tie down Ben Bernanke's monetary policy rule, so he has to worry about how the market sees the coefficients on his Taylor rule, and has to be concerned about the threat to his credibility if he eases rates and ignites inflation.
Can fiscal policy do stabilisation?
A few weeks ago, I wrote a paper titled New issues in Indian macro policy which is forthcoming in a book edited by T. N. Ninan. There, I argue that the right strategy for both monetary policy and fiscal policy in India consists of devoting these tools to the task of stabilising the business cycle. The question arises: Why not lock down fiscal policy into a relatively dumb rule (like the existing FRBM), and leave the entire job of stabilisation to an inflation-targeting monetary policy? I think the answer lies in two parts.
First, a dumb fiscal rule like the existing FRBM is not implementable. If we set out to achieve a 3% central fiscal deficit every year through a dumb fiscal rule, in a bad year, the outcome will be worse. In February 2008, little is known about business cycle conditions that will prevail over 2008-09, so the budgeting process will inevitably go wrong. This will adversely affect the credibility of the fiscal rule, and possibly induce fiscal instability with a non-decreasing debt/GDP ratio.
The question is whether it is better for all the stimulus to come from discretionary monetary policy or for some of the stimulus to come from discretionary fiscal policy. A diversified policy approach seems clearly preferable in that (i) in a world where judging the impact of policy measures is difficult, the outcome is less uncertain with a diversified mix of stimulus measures; (ii) the proximate impact of fiscal policies is felt by the families bearing the brunt of recession, in contrast to monetary policies whose immediate impact is on financial institutions; (iii) use of fiscal policy reduces the amount by which interest rates have to be reduced, thereby reducing downward pressure on the dollar, which in turn contributes to upward pressure on US inflation and international instability; (iv) partial reliance on fiscal policy mitigates the various risks of bubble creation associated with excessively low interest rates.
He also offers a fifth reason: When there are difficulties in the financial sector, as in the present situation in the US, the effectiveness of monetary policy (as in cutting rates) as a tool for stabilisation is lowered.
These are all good reasons, though some of them are unique to the present situation in the US. I do think there is a case for building business cycle considerations into the fiscal rule. But this is hard; the experience of many decades, all over the world, has shown that fiscal policy is too slow and too politicised. All too often, fiscal policy flirts with the danger of a rising debt/GDP ratio and/or election cycles. The formulation that I offer in the paper mentioned above is one where government always budgets for a fiscal deficit of 1% of GDP, but slippage to 3% is considered acceptable if (and only if) business cycle conditions are adverse.
As Richard Clarida once explained to me, the 9/11 attacks were a singular moment in the history of macroeconomic policy, because on the morning of 12 September 2001, the day he started work at the US Treasury, there was full clarity that a downturn was coming. There was no difficulty of reading the tea leaves with old data; you knew for sure that a counter-cyclical response was needed. US fiscal policy and monetary policy worked very effectively in the aftermath of the attacks. We should treat that episode as being on the frontier of what is possible. Most of the time, what macroeconomic policy can deliver will be worse than that episode.

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