Here are some interesting links (most of which I had tweeted on Twitter already):

1. First-year Grad Student Wins Nobel Prize in Economics – A brilliant parody!

2. I have No Problem – A wonderful poem, must read. Obtained via Prof. Abinandan.

3. Pathetic, Useless – Dilip D’Souza’s insightful (and witty) article on the logic of MNS hating ‘outsiders’.

4. The Infinite To-Do List – An Entrepreneur’s nightmare! Prioritize, prioritize, prioritize.

This makes for sad reading: Big and Helpless

In the last budget, the Finance Minister had announced a significantly sized loan waiver for farmers. While this had economists starting to talk and the pro-farmer lobby to celebrate, I was keen to know how this plan was implemented and what is its real impact on the people concerned.

After some searching, I found that Mint has been running a sort of constant coverage of events related to the loan waiver.

There are some interesting things happening out there, cut-off from our inflation glazed spectacles:

1. On Day 6 of the Yavatmal, Maharashtra coverage, the report states that there is a new class of farmers who are agitated and disappointed. Reason? The Government had promised that waivers will be given to farmers holding lands upto 5 acres in size. Now, in the Yavatmal region, the measurement system adopted is a traditional one where 2.2 hectares make up 5 acres. According to the Government and the new measurement system, 2 hectares make up 5 acres. Therefore, many farmers who hold 5 acres according to the traditional measurement system will lose out on the waiver. In fact, this makes one question the idea of a size limit. What the article states is that in areas like Vidharbha, the productivity is low and hence farmers need to have larger holdings of land in order to earn on par with farmers in other areas.

2. In Mandya district of Karnataka, a farmer M. Maraiah has a loan of Rs. 10,000 against him. This loan has been waived off. Reason for Maraiah to celebrate right? Wrong. He had already sold off that land since he was unable to pay back that loan ages ago. So the waiver didn’t really make any difference to him. His current profession: Daily wage labourer. Agriculture is just not viable, he says.

3. In the village of Sampla, Haryana, the farmers don’t care about this whole waiver stuff. Real estate prices are so high here that almost every farmer is a potential millionaire. No debates happening here.

4. In Bharatpur, Rajasthan, less than 4 out of 10 farmers default in their loans. Quite naturally, majority of the people are highly discontent on this waiver scheme. An excerpt:

A farmer from Talimpur village, who took a Rs2 lakh loan for sinking a borewell on his farm, was also all set to start paying off his dues. “I could not start paying back last year because the crop failed,” said the farmer, who identified himself only as Ashok. “This year, with early rains, I was thinking of paying off but now I am expecting to qualify for the loan waiver.”

Check out Mint’s complete coverage here. There are views of bankers too, which convey a different picture from what the politicians say. I found the insights very interesting. Economics isn’t really just about demand and supply, is it?

The government is contemplating removing the subsidy on petrol. Which will effectively hike up petrol prices by more than Rs. 10. On a purely economic basis, this appears to be a good decision.

The subsidy on diesel shall remain. This too is good economic sense because most of the essential goods are ferried across the country on diesel fuel. Additionally, farmers make use of diesel for their agricultural activities.

However, where this will backfire is there will be a greater demand for diesel run automobiles. All the swank and big cars nowadays sport technologically advanced diesel engines. With petrol prices going significantly up (and hence the difference between petrol and diesel prices crossing a critical threshold), diesel cars shall become the natural choice of all new car buyers. Which essentially means that the subsidy on diesel shall be availed by people who don’t really need the subsidy, and hence the oil companies will continue to bleed.

What the government needs to do is classify diesel into two categories: Automobile Diesel and Essential Diesel. Automobile Diesel shall be available only at the various fuel pumps across the country and shall not be subsidized. This will bring in a parity on petrol and diesel prices and at the same time will not be a burden on our publicly owned petroleum corporations.

Essential Diesel should be the one used by essential services (including transport vehicles which are used to ferry grains and essential commodities) and for farmers. And yes, this one should be subsidized (of course, there is a whole set of arguments against the concept of subsidy itself, but I shall refrain from commenting on that here).

Now the question is: How do we prevent automobile users from misusing this system and driving their cars using the Essential Diesel? Although both the categories are essentially (no pun intended) the same fuel, a color solvent can easily be added to the Automobile Diesel without affecting the properties of the fuel.

The color solvent shall ensure that the Automobile Diesel looks different from Essential Diesel. Now, the law enforcement agencies, who catch drivers to check for invalid licenses or below age driving, should conduct random checks on the color of the Diesel used in the vehicle. A sample of the diesel shall give away whether the fuel used was Automobile Diesel or not. If not, then the fine should be a hefty one (and a share of the fine should be passed on to the petroleum corporations) and this should serve as a deterrent for users from misusing the system.

Of course, law enforcement agencies have been found wanting in executing their duties sincerely, but then that is an administration issue that needs to be looked at. If the above system is implemented, then the subsidy on diesel shall go to the rightful recipients, our petroleum companies will breathe a little freely, and there will be a reasonable demand for mass transport systems across our cities.

Foreign Policy and Prospect have come up with a list of Top 100 Public Intellectuals. (Link obtained via Cosmic Variance).

The list includes the following people from India:

Ramachandra Guha – Historian
Ashis Nandy – Political Psychologist
Sunita Narain – Environmentalist
V.S. Ramachandran – Neuroscientist (Richard Dawkins calls him the “Marco Polo of neuroscience”)
Amartya Sen – Development Economist

Also, you can vote for your top 5 public intellectuals out of this list to decide who should get the top honours.
The criteria of selection has been to consider those who have had the maximum impact on public discussions related to various matters of public importance.

From one of the graphs depicted on the site, it was interesting to see that a majority of the top 100 are political scientists. And in the minority are Environmentalists.
I suppose this confirms the trend of minimal environmental concern that the public has as compared to its focus on politics and economics? The US Presidential Elections vs. Global Warming campaigns is a good analogy eh?

It is surprising to see that the newspapers haven’t changed much for the past 4 to 5 days in India.
All you see is UPA vs. Left, BCCI vs. ICL and a speculated impending stock market crash.

About the crash, I am not sure if it is going to hit India that hard.
Banks here are still very fussy about their lending (unless of course it is a nationalized bank and you have a prospective Presidential candidate dictating the bank’s actions). Overall, sub-prime lending (the term needs to be thrown against a hard wall until it breaks into small fragments) is not quite that huge in India, as per my premature understanding of the Indian lending market.

This is primarily because sub-prime loans or loans given to people with low or zero credit history are usually not via established banks. India has the pawn brokers making merry with high interest rates and close proximity with the borrowers. A farmer in a village doesn’t go through lines of paperwork in a bank, but instead heads to the local lender’s place for some instant cash at alarming rates. The lender, of course, knows the farmer personally and thereby the issues of Moral Hazard and Adverse Selection are not that relevant.

In case of banks, these two subjects are reason enough to lead to shortage of cash and a halt on recovery of loans. In a way, although the seemingly cruel money lenders charge exorbitant sums of money for small loans, they ensure that the economy as such does not yield to doling out sub-prime loans and hence keeps you, the safe investor, cushioned from certain types of market crashes.

This social fabric involving close dealings between local lenders and borrowers is quite unique to our country and has, in my opinion, helped to withstand a crash of the kind we are seeing in the US.

A proponent of free-trade, Alan Blinder, is up against offshoring of American jobs as he writes in this article in the washington post.
It is interesting to see that an economist finally has decided to abandon Adam Smith and David Ricardo.

Excerpt:

I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation.

For these same forces don’t look so benign from the viewpoint of an American computer programmer or accountant. They’ve done what they were told to do: They went to college and prepared for well-paid careers with bountiful employment opportunities. But now their bosses are eyeing legions of well-qualified, English-speaking programmers and accountants in India, for example, who will happily work for a fraction of what Americans earn.

Keynes would probably nod in agreement.

Link courtesy: Arts & Letters Daily

Atanu Dey writes a good article on the need to liberalize Indian education at The Indian Economy Blog.

Although I do advocate liberalization but my thought is that it should be done only under the right circumstances under a favourable environment which shall enable an open market to nurture and thrive.

Mr. Dey writes:

My prescription is simple. Allow free entry into the education business. Give absolute freedom to schools and universities to charge what they wish, to hire who they wish, to pay what they wish, and to admit who they wish. By allowing free entry in the education business, there will be no competition for the market. There will be competition in the market. Prices will reflect true costs and quality will improve.

One hears the argument that if you allow free entry, would not all sorts of shady fly-by-night operators open up schools and bilk the general public? Let’s paraphrase that argument a bit. If you allow anyone to open a bakery, would not people who have no expertise in baking open up shop and sell garbage to the general public and make tons of money? Now that is a stupid argument, is it not? After all, unless the general public is totally brain-dead, the bakeries with crappy bread will go out of business because given free entry, there will be other bakeries. It is only when the government hands out limited number of licenses for bakeries that the people don’t have any choice but to take what they can get from government licensed bakeries.

In case of the current education status of our country, a majority of the population is not literate (by literate I am referring to have completed atleast 10 years of formal school education). In such a scenario, you have a significant population that is not aware of the dealings of the business world. This population cannot differentiate between what is good and what is not in the open market primarily because they do not have the ability to seek information and process it.

The government has to chip-in to ensure that these people, who are illiterate by definition of the word, are not taken for a ride by the fly-by-night “educational” institutions that will enter the market when it is opened up.
The analogy used by Mr. Dey is not quite appropriate for two reasons:
a) A bakery can be judged good or bad based on a decision making ability that does not require formal education – An illiterate man and a scholar can equally conclude which is a good bakery and which is not. That ability to decide does not require any expertise. However, in case of a school, the common man does not have the ability to decide its worth. A common man does not have the means of obtaining knowledge about various schools and then coming to a conclusion.

b) Switching costs are not high in case of a bakery. A buyer can easily buy something from another bakery down the street. In case of education, this is difficult. You make significant investment of time, effort and money to get your kid to a school. One cannot afford to have all that go waste when the supposed school shuts shop.

Hence, liberalization of education in India is definitely not an attractive idea, atleast for the near future. We first need to have our major chunk of people educated. Empower them so that they can take decisions. Only way this can be done and should be done is for the government to provide the support to people by ensuring that only credible educational institutions put up their flags in the country. I accept that the government is not doing a great job on this front – but that is a separate implementation issue. The solution to that lies in better governance and not in liberalizing the market.

When you look at it, it is like a tight circle – Government control is not needed and markets need to be opened up. But to open up the markets you need the government to have educated the people concerned. For this you need government control.

One suggestion that could be considered is the liberalization of the higher education sector – Graduate and Post graduate program providing institutions should be allowed to compete in an open market. There is an implicit assumption that students reaching a graduate or post-graduate level have the acumen and knowledge to decide on which institutions to opt for.
The government ofcourse should have a legal recourse well-defined for the students to ensure that they do not lose out on any front in case any shoddy educational institution drives away with the moolah.

I agree that the government should not be in the business of running schools – but at this moment in time, we do not have a choice. Right now, we need the government to regulate our schools. Atleast for some time in the near future.