ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles by C P ChandrasekharSubscribe to C P Chandrasekhar

Macroeconomic Vulnerability and the Rupee's Decline

Underlying the recent dramatic depreciation of the rupee is a set of structural weaknesses that not only renders the high growth of the first decade of the 2000s brief and ephemeral, but also results in persisting infl ation and current account deficits even when growth decelerates. This combination of outcomes then feeds a downward spiral, of which rupee depreciation aggravated by speculation is one symptom. Unwilling or unable to address these structural weaknesses, the government is seeking a solution in enhanced foreign capital inflows and is therefore desperately wooing foreign investors. While the logic and potential success of that effort is uncertain, its cost is likely to be a turn to austerity that can convert a difficult macroeconomic situation into one of crisis.

Redistributing Regulatory Power

The Financial Sector Legislative Reforms Commission has exploited its ambiguous terms of reference to suggest a complete revamp of financial regulation. The recommendations, if accepted, would shift power from Parliament to "independent" bodies run by nominated experts and subject to scrutiny by a legal framework that might be capable of judging fairness of regulatory reach but not its appropriateness from the point of view of development. This is no legislative reforms commission but a commission that is serving as a vehicle to legalise a regulatory structure suited to a liberalised financial sector.

The Quiet Power of the Ratings System

Over the years, the ratings system and, therefore, the ratings fi rms have become a part of the regulatory framework in many countries which has given them enormous infl uence in the fi nancial system. But there is a basic confl ict of interest when a ratings fi rm is paid by an issuer to rate its offering. With an Australian court delivering a landmark judgment ruling that a ratings fi rm was guilty of "negligent representations", the stage is set for a number of court processes that will investigate the working of these powerful agencies.

Wages of Capital Account Liberalisation

The government and the Reserve Bank of India have taken a series of measures in recent weeks to attract a larger volume of foreign debt capital. These measures only increase the economy's dependence on capital infl ows and make it vulnerable to outfl ows, even as they do little to deal with the basic problems underlying the fall of the rupee.

Thirst for Foreign Capital

The decision to allow qualified foreign investors to invest in India's equity markets is a source of concern both for the kind of funds that will be attracted and what this says about the government's own state of mind. Unless there is some urgency about seeking out additional sources of capital inflow, it is difficult to explain why the government must open the doors to a source that is unlikely to deliver much foreign capital and would, if it does, increase rather than decrease speculation and volatility.

Debt as Bargain Counter

The agreement in the United States on raising the debt ceiling that was reached at the last minute need not have been a cliffhanger. The broad contours of a deal and whose interests it would serve were known for some time. However, it could be a pyrrhic victory for the powerful financial sector. The downgrade of US debt by one rating agency does not change anything.

Extending Private Banking

Following the reiteration in the Union Budget of the decision of the government and the central bank to issue new bank licences, the union cabinet has approved certain amendments to the Banking Regulation Act in order to enlarge the influence of private promoters. A year after the proposal was first made and months after the issue of a Reserve Bank of India discussion paper, the purpose of licensing new private banks remains unclear.

Manipulating Basel III

The global banking lobby has managed to block structural reform aimed at averting another financial crisis as in 2008. It first stalled radical reform measures to restrict the activities of banks and break down institutions that were too big to fail. The focus then shifted to Basel III proposals that would strengthen capital requirements. But the global banks have now managed to dilute even the Basel proposals so as to make the changes currently on the table insubstantial.

Global Imbalances and the Dollar's Future

The large current account deficit of the United States, the growing foreign holdings of US treasury bills and then the recent financial crisis that erupted in the US have led to a revival of the question of the worth of the dollar as a reserve currency. Those who say that it is time for the dollar to go, are not basing their argument on the greater strength of another currency to replace the dollar. Rather, the most popular alternative is the Special Drawing Right of the International Monetary Fund, which is more a unit of account than a currency and whose value is itself linked to that of a weighted basket of four major currencies. There are three implications of such an argument. First, even when the weakness of the US and the dollar is accepted, the case is not that the dollar should be completely displaced, since even in the basket that constitutes the SDR the dollar commands an influential role. Second, there is no other country or currency that is at present seen as being capable of taking the place of the US and the dollar at least in the near future. And, third, the search is not for a currency that can be used with confidence as a medium for international exchange, but for a derivative asset that investors can hold without fear of a substantial fall in its value when exchange rates fluctuate, because its value is defined in terms of and is stable relative to a basket of currencies.

The IMF on Capital Controls

Why has the International Monetary Fund argued, through a staff paper, that there could be circumstances where capital controls may be warranted. It could be that since the current surge in capital flows to developing countries is causing problems, the IMF possibly does not want to be seen as having made the mistake of opposing capital controls as a means to manage excessive inflows. It has still to forget the criticism it faced when its intervention in the east Asian crisis exacerbated the downturn. On the other hand, by boxing in the situation where such controls are warranted, it appears to be encouraging policymakers in emerging markets to avoid such controls and providing them with the ammunition to justify inaction.

Union Budget for 2010-11 and the UPA's Growth Strategy

The growth strategy underlying Budget 2010 intensifies a recent tendency wherein private consumption expenditure has increasingly substituted for public expenditure in order to induce growth. It also accepts a regressive bias in fiscal policy as part of the strategy. In the Union Budget, the government has restructured the tax system so as to curtail revenue expenditures, while maintaining past direct tax concessions and using a part of its revenues to provide new concessions that are expected to spur demand, sustain and increase corporate savings and encourage corporate investment, all with the intention of "facilitating" growth. The potentially "inequalising" fallout of such an approach is possibly seen as collateral damage in realising a high rate of market-driven (as opposed to state-driven) growth, which needs to be redressed separately - if at all it will be.


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