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

Articles by D M NachaneSubscribe to D M Nachane

Current Inflation in India

Following the standard percepts for dealing with supply shocks, monetary policy continued to be easy for an extended period, while simultaneously huge fiscal stimuli were applied. Even when a more restrictive monetary stance was taken, the measures were not strong enough to restrain inflationary expectations. A soft monetary policy with a sizeable fiscal deficit can harden inflationary expectations and a perpetuation of a new higher normal for inflation.

Flawed Cartography?

The Urjit Patel Committee has come out in favour of the Reserve Bank of India moving towards a flexible infl ation targeting system. This approach to monetary policy is a product of the much-criticised "new consensus macroeconomics", a school of thought that is credited with causing the recent global fi nancial crisis. The objectives for monetary policy that the committee suggests are not only theoretically unwarranted, but also unjustifi ed for the current state of evolution of India's financial system.

Capital Management Techniques for Financial Stability and Growth

By refraining from imposing capital controls, India is today paying a high price in the form of a loss of autonomy in monetary policy, a reduction in the available fiscal space, and bouts of volatility in the foreign exchange and equity markets. These volatility episodes have often created a penumbra of uncertainty around investment decisions. Surprisingly, the pronounced swing of opinion globally against unfettered capital account liberalisation in the light of the recent financial upheavals seems to have completely bypassed Indian policy circles. This article discusses various options for "capital management" that would contribute to growth with stability. These techniques comprise two complementary (and sometimes overlapping) sets of policies, viz, capital controls on inflows/outflows and prudential financial regulation.

Committee on Financial Sector Reforms: A Critique

This article discusses the Raghuram Rajan Committee's draft report on reforms for the Indian financial sector with reference to the committee's philosophy on financial reforms, and its macroeconomic and regulatory frameworks.

The Unity of Science Principle and the 'Unreasonable Effectiveness' of Neoclassical Economics

Neoclassical economics occupies a virtually unshakeable position in current, mainstream economic thinking, which is attributable to an uncritical acceptance of an orthodox version of the unity of science principle in philosophy. This paper traces the philosophical discourse, distinguishing between the orthodox version and the newer and more flexible version of neoclassical economics. Can we find an alternative approach that breaks away from the limitations of neoclassical economics?

Liberalisation of the Capital Account: Perils and Possible Safeguards

Capital account liberalisation is an example of "orchestrated harmonisation" of policy advice emanating from academic institutions, think tanks and multilateral institutions in the developed world, which seek to push the doctrines of new classical economies. Capital account liberalisation is one such policy advice. This paper examines the theoretical case for CAL and finds that it is subject to important caveats relating to moral hazard, asymmetric information and agency problems. CAL has proved occasionally beneficial but only for relatively developed countries and only if accompanied by appropriate prudential measures. The line taken by several apologists for CAL that the risks of financial instability are negligible and hence more than compensated by the benefits, ignores the magnitude of the potential costs of a crisis.

Approach Paper to the Eleventh Five-Year Plan

The growth forecast for 2007-12 in the draft approach paper to the Eleventh Plan is based on unrealistic levels of private investment and productivity growth. The Planning Commission also seems unaware that the current growth strategy's resemblance to the Japanese consumption boom of 1986-92 is more than superficial. Thus, there are strong instability risks attached to the strategy currently pursued, with a very real threat of a prolonged asset deflation.

Basel II and Bank Lending Behaviour

The new Basel accord is slated to come into effect in India around 2007 raising the question of how the revised standards will influence bank behaviour. Using a simple theoretical model, it is shown that the revised accord will result in asymmetric differences in the efficacy of monetary policy in influencing bank lending. This will, however, depend on a number of factors, including whether banks are constrained by the risk-based capital standards, the credit quality of bank assets and the relative liquidity of banks' balance sheets. The basic model is empirically explored using data on Indian commercial banks for the period 1996-2004. The analysis indicates that the effect of a contractionary monetary policy will be significantly mitigated provided the proportion of unconstrained to constrained banks in the system is significantly high.

Some Reflections on Monetary Policy in the Leaden Age

This article attempts to understand how key features emanating from the twin processes of globalisation and financial liberalisation - especially the growing ascendancy of domestic and financial markets - have considerably narrowed the manoeuvring window of monetary policy.

Bank Nominee Directors and Corporate Performance

Banks and financial institutions play a major role in governance of non-financial companies in India through the mechanism of nominee directors. This paper probes two allied issues: firstly, the isolation of the firm specific factors which determine the presence of bank nominee directors on boards and secondly, whether companies, with bank nominee directors exhibit better performance/governance than companies with no banker representation on their boards. A Probit model estimated over a cross-section of Indian manufacturing firms for 2003, indicates that bankers on boards seem to exert a healthy impact on the companies. In fact, large public limited companies are likely to exhibit banker representation, primarily in their role as expertise providers. The evidence from Tobit model reconfirms these results.

Analysis of the Capital Account in India's Balance of Payments

The management of the capital account in India's balance of payments has assumed importance in recent years because of the economy's increasing integration into the global financial system. Systematic studies focused on the capital account have not been forthcoming and the current study is an attempt in this direction. A moderate sized simultaneous equation model, encompassing major constituents of the capital account, as well as other macroeconomic sectors, is estimated using annual data over the period 1970-71 to 1998-99. The model is then used to conduct several contrafactual simulations, embracing alternative scenarios. The two major factors impinging on the Indian capital account are changes in world income and in non-interest domestic government expenditure. Monetary measures such as CRR or bank rate changes seem to have limited implications for the capital account as does a proactive policy of real exchange-rate targeting.


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