Divine Humor: When Deity goes wrong!

Dear Reader,

Hi! The draft encryption policy created by Deity (Department of Electronics and Information Technology) has created a lot of excitement in Silicon Valley! This spoof appeared under my satire column “Tweakonomics” which I write for the Hindu Business Line. You can read it at http://www.thehindubusinessline.com/opinion/divine-comedy/article7694952.ece. Else read on…Enjoy!


Silicon Valley is thrilled to bits and bytes. The Draft Encryption Policy by the Department of Electronics and Information Technology (DEITY) has been nothing less than a godsend for GOD, the Gathering of Developers. Even as the Indian PM goes into the valley to charm the IT honchos, the Deity has already got their attention fully.

Store all electronic communication, unencrypted, no matter how private, for 90 days? How exciting! Mark Zuckerberg was moved to tears on spying this huge opportunity. What! Save the FB status updates for 90 days! The Indian government is really making me feel special. Given that there are some 5 million status updates done in a day on FB in India, 90 days storage means a database of 450 million status updates! That is not a cloud computing opportunity, folks, its a crowd computing one. This itself would create billions of dollars in wealth and add another 2000 people to the FB employee base.

He is now thinking of launching the FB Utsav, along Star Utsav lines. FB will only show the new updates while the older data will automatically go into the FB Utsav memory. FB Utsav will also have an automatic tie-up to the regular FB; when you open your regular FB account, the Utsav account will tell you “You had received 326 likes 3 months ago” making you feel instantly wanted and desired and maybe also a bit wistful.

This’ll enhance the emotional connect between FB and the user. There’ll be more scope for emoticon development as well, as newer shades of wistfulness and jealousy get identified by the user. Pixar is looking animatedly happy about this and Disney stocks have been rising ever since the Deity announced their grand storage plans last weekend.

FB Utsav will also host a real- time webcam option to capture the emotions on the user’s face when she sees her slim image from 3 months ago. This, together with the speed with which the user surfs away from the page, will give rise to a new fitness-panic index, say psychologists. Higher the speed, more is the speed with which dieticians and gyms will advertise on your FB account. This should give a total business boost of $5 billion, say Ad Gurus and fitness professionals.

FB Utsav will further carry an add-on option of telling you “This guy has not liked you in 3 months now, the bugger” and will immediately flash “Remove inactive friends” button at you. Optionally, the Utsav platform will automatically “unfriend” people who are not that fond of you, helping you to manage your life better.

Once the FB Utsav steadies as a product in India, its global counterpart FB Nostalgia would be launched. Howard Schultz, the CEO of Starbucks, has already started bidding to get FB Nostalgia launched exclusively at Starbucks Cafes, since nothing helps nostalgia along like the aroma of coffee. CCD has urged the PM to make nostalgia in India and to secure exclusive rights for Utsav and Nostalgia only for the Indian chain.

Tim Cook has decided to come out with a special iPhone for India. Only, it’ll be called “we-phone 90”; 256 GB local storage, at ₹90,000.

IMF has heralded the move by the Deity to be a supreme move by India to make sure that the global recessionary winds do not persist. Even though the draft Encryption Policy has been withdrawn, there is now pressure that it be re-instated with immediate effect in global interests. New ideas, apps and platforms are in line. All that is needed is the policy. Make it in India.

Zero, the new Fed hero

Zero. One of the definitive contributions of India to the world of mathematics. The number Aryabhatta is known by. But even Aryabhatta would have been unable to explain the strange fascination that the Fed has for the zero.

They firstly pumped up the banking system with nearly zero real backing. This zeroic, errr, heroic leveraging was done with zero financial regulation so that the zeros on the other side of one would keep rising. This not only got them the necessary excitement in growth but also created numbers out of pure zero for other markets. The excitement proved unsustainable and in 2007, the Fed fell down and broke its crown and the world came tumbling after.

They managed a spectacular zero growth rate in 2008 and 2009, only wavering in their eternal tryst with the Arya number by sometimes recording a negative. Even in the negative however, they experienced maximal satisfaction by finding their favourite number moving markets elsewhere. Ah! Here’s the EU showing zero growth. OMG! Greece has just crossed the double zero limit and is showing more than 100% debt numbers. Greece was not alone though in its century point. The OPEC also showed oil prices moving beyond $100 a barrel starting 2008. Finally. The world started on a recession.

The Fed was upset about two thorns in the East. Thorns that wouldn’t let the zero dominate. China and India, willing to post zeros neither on their inflation account, nor on their growth account. But what is this? The Chinese Central Bank works with zero transparency. Hurrah! Looks like there’s hope after all. And India? That’s simple. Zero governance. The US tried not to look too gleeful and slashed the interest rates, all the way down to zero in December 2008.

6 long years later, things were beginning to look up. Jobs data started looking upbeat; growth was picking up. Finally, it looked like inflation was around the corner and the Fed would officially be required to move away from its fav zero interest rates. How terrible! Dismay of the nth order crept in as the Fed realized that data itself now calls for a rate hike. Solution? Simple. When you can’t change the data, change the analyst! Get a dove in the Chair. Same data, different interpretation. There was a tough fight between Larry Summers and Janet Yellen, but the Fed “zeroed” in on the dove with certainty. Yellen made the perfect move by not moving; Fed funds rates continued to delight Aryabhatta.

There were also others hired to tell the globe about deepset Amercian woes. Thomas Piketty went so far as to say that it’s too premature to say that problems were over; they in fact have not begun at all.

Finally in 2015, US data became so bright that it was impossible for even doves to ignore the tell-tale signs of growth. Consumer spending had never looked so good before and the Labor Bureau simply couldn’t hide the better employment numbers anymore. Drat it! Aryabhatt frowned heavily on Yellen. However, this is one strong dove. She calmly placed a call to China. Wreak havoc, she ordered Xiaochuan, else I swear I’ll send the Arya number to your BoP.

She smiled as China devalued and all hell broke loose. Any increase in the funds rate would now cause even more turbulence. Now no one can ask me to raise interest rates anymore. But there was now a new problem on her horizon. Sigh! DeBeers had sent her a notice of IPR violation. They apparently had an issue with the new Fed tagline “Zero is forever.”



Fed funds rate will rise in 2016

It’s status quo. She has not changed the rates.

With a growth rate of around 3.5% and better and brighter jobs data, the general expectation in early August was that the Federal Funds rate would be hiked in this policy meeting. However, as China devalued the yuan, global markets went into a major turbulence episode. Further, reduction in the Chinese interest rates caused uncontrolled outflows from all asset classes in EMs and showed markets moving to the dollar, like they always do in troubled times.

A hike in US interest rates, at such a time, could cause further disruptions in an already volatile environment; it is with this view in mind that the Fed has not changed the interest rates in this policy review.

However, this keeps us in a tentative state of mind and markets till December, which is when the next guidance is scheduled.

What I attempt in this blog is to try and see where the rates are headed in a medium term outlook, as we move into 2016.

The Taylor Rule and the Fed Funds Rate

The Taylor’s Rule is a rule that prescribes the nominal interest rate charged by the Fed be dependent on output gap, divergence of actual inflation from the target and on the equilibrium interest rate in the following fashion.

it = πt + 0.5 (πt – πt*) + 0.5 (GDPt –GDPt*) + rt*;

where it is the is the nominal Fed funds rate, πt and πt* are the actual and targeted inflation rates, GDP* is potential output and rt*is the equilibrium real interest rate.

Is the rule really used by the Fed to set interest rates? As Ben Bernanke said recently, Fed fund rates should be set systematically, not automatically. Using the Taylor’s rule to determine Fed funds rate is too simplistic, given that economic conditions keep changing all the time. Thus, the Fed does not actually set its rates by the Taylor’s rule; however, studies do show correlations between the rate as determined by the rule and the actual Fed fund rates.

If the Achilles heel of the rule is its simplicity, that perhaps is also its biggest strength. The rule connects movements in economic fundamentals to interest rates, giving us an analytical tool to create a baseline understanding of how rates will move in the future.

Higher is the inflation as compared to the target inflation (about 2% for the past 4-5 years in the US) and more is the GDP as compared to the potential GDP (that level of GDP at which all labor and capital resources are fully employed), more is the nominal funds rate that the Fed ought to set in order to cool down economic activity. The Fed Funds rate also depends on rt*, the equilibrium real interest rates in the economy. Equilibrium real interest rates are those at which the output and inflation are absolutely at target and monetary policy is said to be neutral. In a recession and low asset prices, the equilibrium real rate required to get the system to a higher growth level would have to be very low. Easier said than computed.

The following table shows the output gap (OECD data) and core inflation (Bureau of Labor Statistics) for the US from 2009 to 2015. Core inflation was chosen rather than CPI due to the high volatility that oil and food prices have shown in the time period. Under the very simple assumption that the Fed fund rate corresponds closely to the Taylor rate computation, we realize that the equilibrium real interest rates in the US for the said period have been extremely low, in fact negative at times, as many analysts have suggested.

Year Core inflation (Fed data) Output gap (OECD data) Fed Funds Rate Equilibrium real rate
2009 1.7 -4.535 0.25 0.97
2010 1.0 -3.786 0.25 1.64
2011 1.7 -3.913 0.25 0.66
2012 2.1 -3.428 0.25 -0.19
2013 1.8 -3.016 0.25 0.06
2014 1.7 -2.476 0.25 -0.06
2015 1.7 -2.363 0.25 -0.12
2016 (forecast) 1.8 -1.631 0.75






Taylor’s Rule to forecast interest rates

It may be fruitful to attempt understanding the movement of Fed Funds rate in the next one year using this analysis.

There are plenty of signs of strengthening in the US. As per OECD forecasts, the output gap will reduce in 2016, indicating better utilization of resources. Unemployment rate is already at around 5.2%, which is lesser than 5.5%, the natural rate of unemployment for the US, at which we assume that labor is almost fully employed. Since January, personal consumption expenditure index has been growing at an average of 2.2%. Real interest rates are bound to rise in the immediate future.

Even if we assume the same low negative real interest rates for 2016, the Taylor rule calculation tells us that the Fed Funds rate will jump up by 50 bps in the immediate future (Graph shown below). More realistically, if we assume the real interest rates to be 0% or 0.5% in 2016, the corresponding funds rate would jump to 0.88% and 1.38% respectively.


Ceteris Paribus, the way the fundamentals are evolving right now, a rate hike over the next one year seems imminent. This is not only because the fundamentals are strengthening; it is also because keeping interest rates unnaturally low beyond the required time-frame can have heavy costs in terms of asset bubble formations. To presume that the Fed will delay internal adjustment to allow a smoother glide path to EMs is just too naive for words.

Even if the hike has been postponed as of now, directionally the markets will have to get poised for a higher Fed funds rate between 1 to 1.5% in the next one year.

PM Modi’s Big Boss House!

Dear Reader,

Hi! When PM Modi hosted industrialists and bankers at 7 RCR, I couldn’t help thinking of the Big Boss House with the dramatic inmates! Well, so I created a satire piece out of this, which appeared today in my column titled “Tweakonomics” in the Hindu Business Line. You can read it directly at http://www.thehindubusinessline.com/opinion/columns/pms-big-boss-house/article7633818.ece or you can see it here. Enjoy! And do post in a comment with your views!


September 8, 2015. There was a flurry of activity at 7, Race Course Road. After all, PM Modi had decided to host the Big Boss show in his own house. The who’s who of industry, banks, industry associations, ministries, mutual funds and the RBI would be called in as inmates. The event was bound to be full of masala and histrionics.

Inmate selection had been a nightmare. Cyrus Mistry had been extremely ruffled by the huge outlays that Big Boss had promised on roads and infrastructure in the last budget. “After all the pain we took to create a toy car which can navigate all the potholes! This guy is going to kill my small car business!” Even after 10 phone calls from the PMO, the man refused to attend. It was only after FM Arun Jaitley cleverly pointed out that there is a difference in outlay on roads and laying out the road that Mistry came to the House.

Sunil Mittal pooh-poohed the whole idea of having a physical meeting in digital India and offered 5G connections to ModiG. “What an absurd idea!” remarked Kumar Mangalam Birla, deciding to nominate the Airtel candidate for eviction immediately.

“Hehehe. Do what you will, guys, but end of the day, there’ll be only one winner. RIL.” That was Mukesh Ambani, the one inmate who had immediately accepted the Big Boss’ invite. He had already won several Big Boss seasons. Mallya did not have dates in his calendar and was not invited.

Culinary conundrum

There was a big issue over who would cook. Chief Economic Advisor Arvind Subramanian, having established himself firmly in the culinary department with the introduction of JAM (Jan Dhan, Aadhar and Mobile scheme) in the Economic Survey, was called in to cook up some steam in the stale economy. Pancake would be cooked by Panagariya, the other Arvind. Minister Goyal, the “power” factor, was jealous of Minister Dharmendra Pradhan, whose job of supplying oil at low prices was being undertaken by the Saudi Prince himself.

The Governor of the People’s Bank of China Zhou Xiaochuan was invited as the firang guest. However, he cleverly declined seeing that the mutual fund inmates had donned “khali” looks at the mere mention of yuan devaluation. It is a nice game of thrones, thought Big Boss, with the policy team at loggerheads with implementation. “Take risks!” he boomed and the game began.

The games begin

RIL wanted all taxes to go; no I-T, no MAT, and certainly no GST. It also demanded no SIA and no ecological assessment when it acquired land. FM Jaitley, startled at such extreme demands, remarked that Mukesh needs to be the next FM. Mutual funds wanted bears out of the house. The bears said volatility needs to be evicted. The industry pointed fingers at banks for keeping rates so high. SBI chief Ms Bhattacharya bristled visibly and asked why the inmates had taken loans they couldn’t repay.

“But why don’t you reduce interest rates?” There was a sudden silence as Big Boss spoke. Ms Chanda Kochhar delicately looked at her empty glass. “No liquidity, Big Boss.” RBI Governor Raghuram Rajan, who was brought in to keep “interest” on the show high, started uncomfortably. No matter how slowly the government moves on critical infrastructure, he knew that eventually his interest rate policy would be blamed for the slow pace of investments. “The weak transmission,” he began but was shouted down by the other inmates. The show had begun.

Big Boss smiled. He could see his TRPs going up.


Econ Mom in the gym

After having undergone some heavy training on the IMF macro data analysis for three days, I was a bit stressed. Nah, make that TOTALLY stressed. Tired. Slow. Down. Even in my dreams, I was exploring linkages in the different sectors. And my awake time was a real nightmare.

While undertaking innocent simple transactions like buying vegetables, the mommy in me was exclaiming in horror at the prices of vegetables while my poor, over-wrought econ mommy brain was hypnotically recording the effect of my money sector on the Sabzi waala’s real sector. That it would eventually lead my home account into a fiscal deficit seemed certain. Aaaargh!

I need to stop this. Let me watch some TV. Switch on the news and there was this continuous talk on the external sector. The rupee has plunged to new lows thanks to the Chinese, who apparently have not undergone the IMF macro data analysis training in centuries.

The newspapers were turning blue arguing when the dashing Governor would finally employ FOREX reserves to make the system dash once more. Despite the fall, there was also this talk of how the Rupee fall has been amongst the lowest in all Emerging Markets. The IMF declared that the Indian economy was actually amongst the more bright EMs.

After listening to a particularly loud debate by Arnab Goswami on how the Indian Rupee depreciation is actually tantamount to a depreciation of Indian politics (WHAT??) and how the Indian nation now demands an answer from Chinese authorities (WHHHHAAAAAT?), it looked like the Rupee low would co-incide with my post-training tiredness low. I was tired. I needed a break. Why am I an economist?

I went to the gym and realized guiltily that it was Friday. The day we are put on the scale. Hmm, I have generally behaved and not gone off diet this week. Except for those 3 gulab jamuns I had for lunch in the training break. And all participants were having ice-cream. How could I refuse it? Of course, the scale, like a dementor, cannot be reasoned with. And like a dementor, it wipes off every good feeling, every smile off the faces of all plump ladies, mine included.

Having said my prayers, I climbed on to the scale. Imagine my surprise, when my trainer said “Hmm, that’s 66.5 and climbing.” Really? I said reflexively, “But 67 is a psychological benchmark. I really think he’ll use those reserves now to break that fall.”

“Manasi? What are you talking about?” That was again my gym imstructor, looking a bit scared at my crazy reaction.

I suddenly grinned. “Ahm, ah, no, that was nothing. How much did you say the ideal number is?”

She looked through all my records and history. “Well, you aren’t doing too bad, actually. In fact, amongst the batch today, your numbers are the best. But I still think that you should try to get to 65. That indicates really good health.”

I was laughing as I realized how close she was to the truth. I couldn’t agree more.



Econ mom talks Mann ki Baat on Land Ordinance and GST

Lil One has always been good at chess. But this week, his game has suddenly become quite indestructible. I was getting frustrated as he was anticipating almost every move of mine and was giving me a tough match, often winning the board. “Losing to one’s kid is a wonderful feeling!”, my elderly neighbour informed me after she saw this most embarrassing spectacle of Lil One finally rupturing my rook defence and yell in delight, Orc style. I tried to look positively delighted to find this little speck of a boy beating me; my neighbour glowed in approval and left to inform the entire building of my successful motherhood milestone.

AAAAAAARRRGH! I am SO upset! Ok, I can see Saintly Sacrificing Mommies Inc. including women like Karan-Arjun’s mommy glowering at me in disapproval. But frankly, I am so frustrated! Ok, so here’s the world’s most well kept secret. Losing to one’s own kid in chess is quite an awesome feeling, once you overcome that strong urge to go and yell real loudly in frustration.

“You are reluctant to sacrifice, Mom, that’s your problem”, piped Lil One, getting into groove on his pet subject “3001 Favorite Mommy Errors.” “You have to be able to give up a minor piece in order to capture my rook. The power of exchange sacrifices is BIG. Let go a small thing today for BIG gains tomorrow. It always works. That’s what all chess masters say.”

Hmm. A sacrifice? He’s talking about a trade-off! Perhaps we are witnessing the same kind of a trade-off in the politico-economic-parliamentary space today. PM Modi declared in the “Mann-Ki-Baat” show a couple of days ago that the Land Ordinance would not be re-promulgated. Is this a small exchange sacrifice to get the rook, the GST Bill, going? It does look like it.

Frankly, I was never comfortable with that Land Ordinance. You can see some of my arguments regarding land acquisition in India in my earlier blogs here. The archaic Land Acquisition Act 1894 was replaced by the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (RFCT- LARR) in 2013. This Act was passed after a lot of discussion in the Parliament. LARR required consent of 80% of the land owners, if the acquisition was being done by a private party and 70% , if it was done by PPP. It also mandated Social Impact Assessment (SIA) before the land acquisition is done. The BJP, which was then on the Opposition bench, had been vociferous about certain clauses pertaining to Social Impact Assessment. Those clauses were duly inserted and then the Act was passed.

Now once the NDA came to power, it made an attempt to make the Act more “industry-friendly.” How does one do that? Well, there were two main changes that the NDA wanted to make in order to hasten the process of acquiring the land. First, it sought to dilute the SIA compliance for projects such as industrial corridors, rural infrastructure, affordable housing and “infrastructure and social infrastructure” projects. This last category includes sectors ranging from urban public transport to hospitals. Second, it provided an exemption to the consent clause for the Section 10A projects, as listed above.

This, it was felt, would reduce the time required in terms of acquiring land, thereby helping the industry to reduce project costs. To quote a CII estimate, the time required for consent and rehab and resettlement could increase the project costs of a 1000 MW power plant from Rs.150 crores to Rs.450 crores.

What I was uncomfortable with was the fact that the NDA chose to take the Ordinance route in order to get this on track. When we are talking about land, the most politicized of all assets, the asset mostly closely associated with land grab and conflicts and farmers’ welfare programs, and there simply CANNOT be a case for promulgating an ordinance. This is one issue on which one wants full transparency. These amendments to the Act should have been passed after full discussion in the Parliament.

The Ordinance was passed and was renewed three times. There was a hope that the issues would get duly discussed in the Parliament in the monsoon session and the amendments would be passed; but what we’ve seen is a monsoon washout. There were two key discussions to be tabled in the monsoon session; the GST Bill and the Land Ordinance, both of which couldn’t be tabled.

In the meanwhile, the industry lobby is getting restive about policy reforms promised by Modi Sarkar. The external environment has become unstable and volatile, monsoons in India have been 12% deficient causing the agriculture growth rate to fall to only 1.6% in FY16, the IIP is showing sluggishness in industry and interest rate continues to be high despite low inflation. Tabling and passing the GST Bill will be a shot in the arm for industries wanting to see some action on the indirect tax front.

Surprising many, the PM declared on his radio show that the Land Ordinance would be allowed to lapse on 31st August 2015. He mentioned that the Ordinance was about getting a better deal for farmers, whose land was acquired, but it had backfired and had created an environment of mistrust within the farmers. He was hence allowing it to lapse. Interestingly, the tone in which he spoke was not accusing or bitter but reconciliatory and warm. Full points on delivery!

Well, what happens to industrial growth then, one may well wonder. We are back to square one. Project time will now escalate and so will project costs. How do you take care of that, PM? What we’re witnessing is a trade-off. Let’s get the GST rolling smoothly. Now that the land issue is null and void, it’ll be easier to get the Opposition back to the Parliament. The Opposition cannot really take too much of a stance against GST; it was their idea in the first place and is undeniably required for taking growth ahead. Once the GST Bill is passed, we can get back to the more sticky issue of land acquisition (I hope this time through a discussion route.)

He’s let the land ordinance go so that he can take the more required and infinitely more flashy GST reform ahead. If the NDA can get the GST Bill passed, no industry lobby will be able to claim that they have not done enough for growth. Sacrifice the knight for the rook.

After dinner, I challenged Lil One to one more game of chess. As we were lining up our pieces, he suddenly said, “Can you feel it in your heart when you’re going to win, Mom? I can. Dil se.” I had a sudden urge to tell him it’s not Dil ki baat. It’s Mann ki Baat.