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Popular myth and, allegedly, the laws of aerodynamics have it that the bumblebee should not be able to take flight. Yet still, our good bumblebee refuses to be pulled down by such details and year after year it takes flight as if nothing has happened. This allegory applies, with some imagination, to Japans economy too. Year after year it consequently appears able to simply ramp up domestic debt to cover the shortfall of domestic demand at the same time as low investment demand, a savvy export sector, and a strong net foreign asset position mean that Japan does not have to rely on foreign investors to finance government debt outlays. Together with a central bank stuck in perpetual QE mode due to persistent deflation this has so far constituted the core of Japan’s bumblebee moment.

Recent comments and analysis however suggest that while the bumblebee should certainly continue to enjoy the ability to defy gravity, Japan’s time just may be up. In particular two pieces of research authored by Societe Generale’s Dylan Grice (see here and here) as well as a recent piece by Kenneth Rogoff have added to the concerns that Japan may be headed for a Greek party of their own. In reality of course, the sudden focus on Japan is a direct function of the change in market discourse since end 2009 and the focus on government debt sustainability and how to rein in fiscal policy (if at all). Thus it is only logical to expect the great eye of the market to also turn to the biggest sovereign debtor in the world which just happens to be the oldest (demographically speaking) too.

In order not get confused here is Grice himself;

To recap, the thesis I outlined back in January 1 was that since Japanese households (the biggest effective drivers of JGB demand) are set to dis-save in coming years as they retire (left-hand chart below) there will soon be no one left to finance the government’s nosebleed deficits at current yields. Indeed, the chart below suggests households are already running down assets. And because the interest rates which might attract international investors will inevitably blow up the budget (debt service is already 35% of government revenues at existing yields) there is a very clear and present danger that the government reverts to the well- established historical precedent for cash-strapped governments of currency debasement.

As you can see, the issues here are complex but intellectually they are hugely important since what happens in Japan may tell us a lot about what will happen in other ageing economies such as, most notably, Germany but essentially a whole host of OECD economies (and China) who are set to move in the same direction as Japan. In this sense, I should immediately admit that on an intellectual level I agree with almost everything Grice says and especially his focus on Japan and the nature and extent of dissaving.

But, and in order not to make this into a fan letter, I am going to quibble a little bit with Grice in what follows.

Firstly, and on a very specific point, the chart (in Grice’ last note) which shows how Japanese households are actually running down their assets does not fit with the picture I get from my data (BOJ).

Now, I certainly don’t want to start the chart wars II here and obviously, there are many ways to define the stock of savings which might prove me as wrong as Grice is right (and vice versa). What is certain is that the incremental flow from household saving (if any) will not be enough to offset the incremental flow of bonds issued by the ministry of finance. This leaves the crucial role of corporate savings which is quite high in Japan and which also seems to be responsible for the Japan’s external surplus (on the trade balance at least).

Yet, in order not depart down the path of reinventing the wheel I will immediately refer to my most recent notes on Japan and this in particular in which I butt heads with the FT’s Martin Wolf on exactly the issue of (dis)saving in Japan and the distinction between corporate and private savings. Essentially then, this is a question of perspective and timing since I agree with all parties involved here on, at least, two accounts. Firstly, Japan government finances in an extraordinarily bad shape and the future ability of Japan to ever hone up to its liabilities is very, very slim. Secondly, dissaving is very likely to become a binding constraint in Japan at some point which would epitomized by how Japan would need to borrow from foreigners in order to finance an external deficit. In this case, and I agree with Grice here, it is game over.

But how we get from here to there may be just as important as what happens when we get there. In fact, yours truly have just defended his master’s thesis on exactly this topic and the overall conclusion, which fits quite well in the present discussion, is as follows;

Ageing societies are not, in the main characterised by aggregate dissaving but rather by the fight against it.

While my thesis councillor did indeed like the entire ouvre he was none to happy about this one. And can can you blame him? Isn’t it almost tautology? As I did on my day of graduation I will stand my ground and argue that it isn’t.

The crucial issue in my opinion is the change in perspective from waiting for the inevitable pop in Japan, Germany etc to a look at the main characteristics of an ageing economy such as Japan, Germany [1] and soon others. In a nutshell, these sum up to a deeply export dependent economy which exactly manages to keep the boat afloat because of higher domestic savings than merited by domestic investment demand and thus an external surplus. Naturally, and as a very important aside, Japan also has its own central bank who has been in QE for the better part of two decades and thus serves to allow government debt to grow without Japan needing foreign money.

This perspective provides us with two very important pieces of insight I think. One is that a rapidly ageing economy will not be able to revert to a growth path characterised by external borrowing and thus a net contribution to the unwinding of global imbalances. The second is that the global process of ageing becomes an externality to the whole global macroeconomic system because it puts more and more economies in a situation where they need to maintain external surpluses in order to prevent the forces of dissaving or, more accurately, the slump in internal demand as ageing pushes up the dependency ratio.

Now, think about the discourse we are having exactly at this point in time. It is a perfect mirror on the two points above with the added spice, in the context of the Eurozone, of how economies embarking on internal devaluation are also forced to find growth based on external demand because whatever growth they were able to generate from domestic activities in the first place are now being effectively choked off.

Moving back into the real world, Grice believes that Japan’s time may just be up and he specifically points to the fact that Japan needs to roll over 213 trillion while at the same time, the biggest holder of Japanese government bonds has openly announced that it has no inflows with which to suck up extra JGB supply.

I honestly don’t know whether he is right. He may be and if so, Japan will stand as a poster example of just how an ageing economy can take it before it folds in on itself in the sense of trying to maintain a modern market economy that is. However, I am inclined to call him on his bet and in this sense I am much closer to Buttonwood’s take on the situation;

(…) the huge amount of Japanese debt rolling over this year need not be a problem. Investors will simply recycle their existing holdings. Takahira Ogawa, a sovereign analyst at Standard & Poor’s, thinks there is more scope for the Bank of Japan to buy government debt, as central banks have done elsewhere.

Of course, such measures just postpone the evil day. The crisis will surely arise when Japan becomes dependent on foreigners for finance, or if a sharp rise in inflation or a sudden slump in the currency causes domestic private investors to take fright. But since the country is still running a current-account surplus, the yen is trading at 90 to the dollar (compared with 124 in June 2007) and deflation is forecast for the rest of the year, the apocalypse seems unlikely to occur in 2010.

Thus I would point to the continuing surplus in the corporate sector, the fact that households are not yet drawing down their deposit base, and most importantly; the fact that the BOJ has every right and reason to continue keeping the QE taps open as long as deflation is running at +2% on an annual basis. In fact, here is one of the other feedback loops from ageing right here; namely that as domestic demand simply spirals downwards, the economy gets caught in a deflationary trap (the liquidity trap in monetary policy circles) which only serves to push up domestic government debt thus forcing the central bank’s hand on QE and making it even a larger imperative to maintain an external surplus.

However, before I myself try to emulate the bumblebee by defying gravity with another complex argument, I think I will hold off with this one for another day.

—

[1] – See this excellent piece by Edward which exactly touches on a similar issue in the context of Germany.

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In NY Times, Paul Krugman discussed (link) the painfulness of financial crisis in Ireland and the U.S and suggesting what we should learn from banking regulation in Canada to prevent future crises of similar proportions.

In Waging War on Black Teens, Richard W. Rahn and Izzy Santa wrote (link) about the high unemployment rate among young African Americans. Furthermore, they suggest that minimum wage mandate is the main cause of steep unemployment rise thereupon.

The Economist (link) summarized the estimated total cost of reconstruction after the earthquake in Chile at $20-30 billion (13-19 percent of the GDP). Chile’s sovereign wealth fund has just over $11 billion saved during the pre-crisis period of high copper prices which, at that time, stood at record levels.

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Winning on a global scale in finance and in movies has some common features : it involves raw materials like human capital, top end computer technology, freedom of speech, openness to other cultures, a large home market, the natural opportunities of connecting up with the disapora, and Schumpeterian creative destruction.

With all these in place, Bombay’s movie industry is nicely globalising itself. Finance requires all these – and that bodes well for BIFC. But finance requires a few more things. It requires sophisticated financial regulation, and a sound macroeconomic policy framework. It requires that the government get out of producing financial services just as the government does not produce movies. India has a tonne of work to do on these.

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In a news item today, I saw Domino’s say that they have 300 branches in India and will go up to roughly 500 in three years. With RBI giving out permissions for all foreign banks (put together) to open 18 branches in India a year, this means we’ll soon have more outlets of Domino’s in India than all foreign banks put together.

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(from the FT)

Germany and France are planning to launch a sweeping new initiative to reinforce economic co-operation and surveillance within the eurozone, including the establishment of a European Monetary Fund, according to senior government officials.

Their intention is to set up the rules and tools to prevent any recurrence of instability in the eurozone stemming from the indebtedness of a single member state, such as Greece. The first details of the plan, including support for an EMF modelled on the International Monetary Fund, were revealed at the weekend by Wolfgang Schäuble, the German finance minister.

“I am in favour of stronger co-ordination of economic policies in the EU and in the eurozone,” Mr Schäuble told newspaper Welt am Sonntag.

If France and Germany can agree on such proposals – long urged by Paris – they are likely to set the basis for the most radical overhaul of the rules underpinning the euro since the currency was launched in 1999. The German thinking emerged as George Papandreou, the Greek prime minister, flew to Paris to seek the support of Nicolas Sarkozy, French president, for his government’s drastic austerity programme.

“We must support Greece, because they are making an effort,” Mr Sarkozy said before the meeting. “If we created the euro, we cannot let a country fall that is in the eurozone. Otherwise there was no point in creating the euro.”

His words appeared to underline the greater readiness in France than in Germany to provide some sort of financial support or guarantee for the Greek economy. Angela Merkel, the German chancellor, insisted that no such support had been sought or discussed when she met Mr Papandreou on Friday.

Both France and Germany agree Greece should not turn to the IMF for support, so the idea of an EMF has clear attractions for Paris, though it could hardly be set up in time to help Greece. Mr Schäuble said: “We are not planning a competitor . . . to the IMF, but we do need an institution for the internal equilibrium of the eurozone that would have at its disposal both the experience of the IMF, and comparable intervention mechanisms.”

According to German thinking, the plan could include tough penalties for eurozone members that fail to curb deficit spending or run up excessive government debt. Ideas include cutting off countries that fail to curb deficit spending from EU cohesion funds, temporarily removing their right to vote in EU ministerial meetings and suspension from the eurozone.

Those may prove very difficult for France to swallow, given its own record of greater fiscal laxity than Germany.

Needless to say, this would draw the wrath from Euro skeptics and those, in general, opposed to tighter cooperation among Eurozone member countries. However, as Munchau argues splendid in another FT piece today; a monetary union needs a tight political and fiscal supranational framework to really make it work. Now, we must choose which solution we prefer.

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In a week when the Greek leadership declares it a historic moment for the European Union that the ailing country has agreed to swallow an additional austerity plan which, so far, seems to have calmed markets it would almost be too much to continue picking on the Eurozone. Yet pick I am going to nonetheless even if I should add my support, and scepticism, to the road Greece currently appears destined and determined to travel.

A Greek Plan and a Believing ECB

On the plan itself Macro Man pretty well sums up my reading of the situation too but more concretely, it is difficult to point a finger on the measures themselves. Consequently, George Papandreou’s government approved this week of an additional 4.8 billion euros ($6.6 billion) of deficit cuts which include raising value-added tax to 21 percent from 19 percent, further increasing taxes on tobacco alcohol as well as of course further scything the public sector wage bill. All this is of course exactly what Greece needs to quell international investors of the worry that Greece will ultimately throw in the towel and default. However, at 2% of GDP (according to Bloomberg) it is almost but a drop in the ocean for an economy running a public deficit well in excess of 10% (which is pledged to be reduced from 12.7% to 8.7% of GDP this year).

Moreover, it was interesting to observe the manner in which Mr. Papandreou resoundingly used this week’s additional deficit cuts as a way to articulate over to you then pointing towards coming bilateral talks with Germany and France in which the implicit message was that now that Greece was honing up to its side of the bargain France and Germany should give something the other way. Alas both German chancellor Angela Merkel and her finance minister Wolfgang Schaeuble explicitly pointing out that aside from a friendly tête-à-tête over a bottle of Metaxa future bilateral talks would deal with no such thing as aid commitments. In any case, as Wolfgang Schaeuble noted; the recent measures taken by Greece will probably convince international investors. Let us hope our good Wolfgang is right here and while this in itself may turn out to be a tight call, Germany (and France) have so far dodged the bullet in terms of engaging in direct bilateral aid talks with Greece (let alone Spain).

So far it also seems that EU has dodged the bullet of whether the Greek affair will end up in the arms of IMF which, one assumes, would pave the way for other parts of the Eurozone periphery seeking out the aid of the fund. Moreover, the ECB moved at its monthly conference strongly backing the measures by the Greek government while also noting that it would be inappropriate for Greece to seek help from the IMF.

Yet, all is not well.

As Edward noted earlier this week, recent PMI data from the Eurozone confirms what we already knows in the sense that the recovery is moving very slowly and is essentially non-existing in key economies.

In the first place we have the latest batch of Eurozone PMI data, which suggest that the process of economic recovery is going to be neither so rapid, nor so straight forward, as was initially thought. And even more to the point, exit from the recession is being more characterised for its unevenness than it is for its uniformity. Growth in February was heavily weighted to the manufacturing rather than the services sector, and in manufacturing there was more dynamic in demand from the ex-Eurozone export area, than from internal orders, suggesting that the 6% drop in the Euro is having a positive impact on external competitiveness, while domestic demand remains weak and lacklustre.

Turning to the issue of monetary policy I have to admit that I did not look forward to Thursday’s session of ECB newspeak with the same eager as did Edward, but it was interesting to scrutinize the announcement by the ECB that it intends to continue withdrawing liquidity from the system despite the obvious travails of Greece and Spain. It appears then that the ECB is currently playing by the book believing that EU and Greece may sort out the problems without further aid from either the IMF or extraordinary ECB funding. Yet, as Edward shows with a very telling graph Spanish graphs are completely dependent for ECB financing at the current juncture which raises the question of what happens as we move forward towards the summer. Especially the expiration in July of the 1 year bn 442 € bumper tender could mark a turning point.

Reverse Decoupling in the Eurozone?

(click on picture for better viewing)

The steady build up of problems in the Eurozone and the consistent divergence in bond spreads among Eurozone economies have had a notable effect on the Euro. In a post Lehman world the EUR/USD peaked so far in the autumn of 2009 at around 1.44 to 1.45 with some analysts at the time hailing the return of a EUR/USD poised to move into the 1.50s and perhaps even to break the, so far, “magic” 1.60 sticker. Alas, this was not what happened.

Since the autumn of 2009 the Euro has consequently lost some 6% against the USD and is currently trading in the range of 1.35 to 1.36. This value will hardly scare anyone either side of the neutral fence and actually, in my humble opinion, still signifies a grossly over valued Euro based on economic fundamentals. Yet, the recent slide of the Euro (as tepid as it may be) actually represents a double edged sword. In the first instance it is naturally a direct function of the growing problems in Greece, Spain, Ireland etc and thus a sign of weakness. Yet, its real economic effect is decidedly positive as it helps support Eurozone exports which is now, more than ever, instrumental as a driving force of aggregate Eurozone economic growth. In the jargon of Alpha.Sources market lingo, the Eurozone seems to be passing on old maid to the US which of course itself needs a weaker currency. This of course, as debated before, is exactly the rub in a world where would be exporters are a plenty while importers are not.

In this context, it was with some fascination that I recently read the following Bloomberg headline implying that the Eurozone might be subject to reverse decoupling.

(quote Bloomberg)

Europe’s economy may be coming unstuck from the global recovery as governments to the south of the region struggle to reverse budget deficits and consumers in the north pull back spending.

After the 16-nation euro economy almost stagnated in the fourth quarter, data this week showed the weakness reaching into 2010. Confidence among households and companies worsened unexpectedly, French consumer spending fell and bank loans to the private sector slid for a fifth month. At the same time, Standard & Poor’s said it may soon downgrade Greece again as the country grapples with the region’s largest budget shortfall.

Signs of a flagging recovery risk extending the euro’s slide against the dollar. They are also prompting Citigroup Inc. to advise investors to favor German government bonds and UBS AG to recommend European stocks with links to the faster-growing U.S., such as Daimler AG. As they cut their growth forecasts, economists predict slower interest-rate increases from the European Central Bank, whose governing council meets next week.

Astute readers will notice immediately that it is not the first time that decoupling has been used in a Eurozone context, but this time of course it means something else entirely. The last time was back in the heaty days of 2006 when Bernanke slashed rates and where Japan and Europe were pinned as the economies who were to take over the baton from the US in a new Bretton Woods II(I). I shall not belabour here just how misplaced that was, but merely note how this alternative idea of Eurozone decoupling from global growth might be equally misplaced; at least if using a falling Euro as a premise. I emphasize might here since the irony is that the extent to which the Euro takes a beating on the back of the travails of the problems in the periphery it should actually help the Eurozone lock on to whatever global growth there is in the pipeline in the coming years. The main qualifier here is naturally that the homegrown problems themselves may still lead to an implosion in the form of a sovereign debt crisis as well as the real difficulties in terms of actually sticking to the code of an internal devaluation lies ahead of us, in this respect the following point by Edward is very important I think;

Ironically, market concerns will in all probability now shift to worries that Athens has gone too far in slashing budgets and raising taxes, and that the fiscal measures announced will simply act as a massive brake on economic activity. The risk is that Greece is now in a vicious circle in which fiscal austerity sends the country ever deeper into recession – and Athens has to react even more aggressively to bring down the public sector deficit as a share of GDP.

No easy way out here at all it seems and this more than anything signifies the current position in the Eurozone.

(Slim)Pickings?

Another week, another show of good will by the Greek government and another indication that the ECB means business in terms of withdrawing excess liquidity provisions. In this sense there is not much new under the sun. However, this comes on the backdrop of a growing realization among market participants and analysts that the recovery, despite policy makers’ most ardent efforts, just isn’t coming. In fact, the real preoccupation now is what happens on the backdrop of an increasingly hawkish stance towards what is deemed excessively loose fiscal and monetary positions since if we could not foster a recovery with such impressive stimulus measures, what happens next?

The best thing we can hope for at the current juncture is to muddle through and specifically that we manage to prevent some of the more scarier and all together realistic scenarios from materializing. Here I would like to see a little more team spirit from Germany in terms of supporting Greece in her endeavors even though of course, what Merkel probably really wants is for Greece to move to the IMF and thus one step closer to a break with EMU.

Overall, growth prospects in the Eurozone remain weak and with this also the uncertainty. Greece should take whatever comfort it can in Thursday’s nod of approvement from the ECB as well as take whatever direct support it gets from the EU. On the latter, this week’s message is, not unlike above I hope, that it will be slim pickings indeed.

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So far, in India, regulatory coordination was based on the HLCC. This has not been a particularly good experience. The HLCC was not statutory and there was no defined mechanism through which decisions would be obtained. Many inter-regulatory difficulties simply languished. One peculiar aspect of the HLCC was that it was chaired by the RBI governor, while RBI was at the centre of many inter-regulatory disputes. It was awkward, having one of the competing views on a question being the chair.

On these questions, the Raghuram Rajan report had said:

A Financial Sector Oversight Agency (FSOA) should be set up by statute. The FSOA’s focus will be both macro-prudential as well as supervisory; the FSOA will develop periodic assessments of macroeconomic risks, risk concentrations, as well as risk exposures in the economy; it will monitor the functioning of large, systemically important, financial conglomerates; anticipating potential risks, it will initiate balanced supervisory action by the concerned regulators to address those risks; it will address and defuse inter-regulatory conflicts, and look out for the build-up of systemic risks.

The FSOA should be comprised of chiefs of the regulatory bodies (with a chair, typically the senior-most regulator, appointed from amongst them by the government), and should also include the Finance Secretary as a permanent invitee. The FSOA should have a permanent secretariat comprised of staff including those on deputation from the various regulators. There should be a prescribed minimum frequency of meetings of the FSOA. All issues of regulatory co-ordination, and supervision of systemically important financial conglomerates and financial institutions will be taken up by the FSOA.

The discussions of the FSOA with the management of systemically important institutions will be principles-based, and ts will initiatete the process of gradually implementing more principles-based regulation throughout the system. It will be important that the FSOA add value by substituting for some existing processes instead of adding another layer, while bringing collective regulatory views to bear. It is not our intent that the FSOA be a super-regulator displacing existing regulators. Instead it provides needed coordination and fills gaps that current structures have proved inadequate for.

In addition, there is merit in setting up a Working Group on Financial Sector Reforms with the Finance Minister as the Chairman. The main focus of this working group would be to monitor progress on financial sector reforms (such as the proposals of the Patil, Parekh, Mistry, and this committee), and to initiate needed action. The working group’s membership would include the regulators, as well as ministries on as-needed basis. The working group would be supported by a secretariat inside the Finance Ministry.

There was a contrasting view. After the global financial crisis, we got a strong campaign by RBI, based on the proposition of financial stability. It was claimed that now that financial stability is important, the original role and structure of RBI (as envisaged in the 1934 legislation) is the right one, so all reform proposals should now be shelved. Suggestions were made that the financial stability function should be handed over to RBI, which could ultimately lead to RBI becoming the super-regulator of finance, with the power to give instructions to other regulators such as SEBI based on financial stability considerations. Every bureaucracy likes to stave off change, and to grow its turf, so the arguments put forward by RBI were less than persuasive given its self-interest.

I have been skeptical about the idea of placing financial stability functions at RBI, for a few reasons:

• Crisis management involves utilisation of taxpayer resources, which can only be authorised by the treasury. Indeed, if a banking regulator is given a stability function, he will be inclined to cover up for the failures of banking supervision by utilisation of taxpayer money.
  There is a similar problem when a banking regulator who is also a central bank is inclined to cover up for the failures of banking supervision by giving `short-term liquidity support’. This problem is already with us in India. We should not make matters worse.
• The essence of financial stability thinking is to break out of India’s silo system, and look at the overall financial system. The inhabitants of any one silo in India are likely to be ill equipped to think about the overall financial system.
• Financial stability thinking repeatedly involves asking any one regulatory agency to question its existing way of thinking. If an existing agency doing a lot of financial regulation is asked to do financial stability, this will not come about. Worse, there is the danger of `regulatory capture’ where every regulatory agency tends to adopt the world view and maximisation of its firms. If RBI is asked to do financial stability work, we run the risk that these new levers of power will be used to favour banks at the expense of other kinds of financial firms.
• It is hard to obtain sensible notions of transparency and accountability in the nascent field of financial stability. There is much merit in a principal-agent problem approach in designing the block diagrams of government. When a clear document can be written down specifying a job that has to be done, then it is better for government to contract that out to an external agency, since the clarity of mandate makes possible accountability. But for the things where a clear contract cannot be written down, contracting-out to an external agency is hard, and it is better to in-source these functions.
• New work that we initiate in India should not interfere with our long term goals of establishing a proper central bank.

I am quite comfortable with the two interesting models out there. In the US, there are many financial regulators, and stability functions are being placed in a council of regulators. That makes sense. And in the UK, the Bank of England does no financial regulation, and it has been asked to do stability work. That also makes sense since the BoE takes an outsiders view of the work of the FSA. The staff quality of the Bank of England also encourages confidence that this will be in a technically sound way, without being imbued with an ideology of hostility to finance. In an Indian setting, both approaches make sense. Either all financial regulation is removed from RBI, a high quality central bank is created with staff quality matching that of the BoE, and this is tasked with the financial stability function. Or, we go for a council of regulators.

This debate had simmered for some time. In the budget speech today, the Finance Minister announced the decision taken by government on how this should be handled:

37. The financial crisis of 2008-09 has fundamentally changed the structure of banking and financial markets the world over. With a view to strengthen and institutionalise the mechanism for maintaining financial stability, Government has decided to setup an apex-level Financial Stability and Development Council. Without prejudice to the autonomy of regulators, this Council would monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues. It will also focus on financial literacy and financial inclusion.

This seems to be some kind of fusion between the Raghuram Rajan proposals of the FSOA and the Working Group on Financial Sector Reforms. More details are awaited from DEA on how they want to play this.

Financial Sector Legislative Reforms Commission

The four major committee reports on Indian finance — Patil, Mistry, Rajan and Aziz — have all emphasised a comprehensive overhaul of outdated laws. The laws of 1934, 1952, 1956, etc. are quite out of touch with the India of today. And this job is complicated by the fact that one amendment to the laws at a time does not cut it. You might like to see my article in Pragati magazine in August 2009, where I argue that changing the laws is the essence of financial reform in India today.

In today’s budget speech, the FM said:

101. Most of our legislations governing the financial sector are very old. Large number of amendments to these Acts made at different points of time has also increased ambiguity and complexity. The Government proposes to set up a Financial Sector Legislative Reforms Commission to rewrite and clean up the financial sector laws to bring them in line with the requirements of the sector.

Large complex IT-intensive projects

Stepping away from new laws, economic reform in India is critically about big and complex IT systems. These present unique challenges of public administration, when compared with the traditional ways of working of government in India. A new process manual is required through which these big complex IT-intensive projects can be rolled out and run.

In today’s budget speech, the FM said:

104. An effective tax administration and financial governance system calls for creation of IT projects which are reliable, secure and efficient. IT projects like Tax Information Network, New Pension Scheme, National Treasury Management Agency, Expenditure Information Network, Goods and Service Tax, are in different stages of roll out. To look into various technological and systemic issues, I propose to set up a Technology Advisory Group for Unique Projects under the Chairmanship of Shri Nandan Nilekani.

Co-contribution for unorganised sector in NPS

There is an increasing sense that a government should help grow the participation of the informal sector in a defined-contribution individual account pension system by having co-contribution. In today’s budget speech, the FM said:

90. To encourage the people from the unorganised sector to voluntarily save for their retirement and to lower the cost of operations of the New Pension Scheme (NPS) for such subscribers, Government will contribute Rs.1,000 per year to each NPS account opened in the year 2010-11. This initiative, “Swavalamban” will be available for persons who join NPS, with a minimum contribution of Rs.1,000 and a maximum contribution of Rs.12,000 per annum during the financial year 2010-11. The scheme will be available for another three years. Accordingly, I am making an allocation of Rs.100 crore for the year 2010-11. It will benefit about 10 lakh NPS subscribers of the unorganised sector. The scheme will be managed by the interim Pension Fund Regulatory and Development Authority.

91. I also appeal to the State Governments to contribute a similar amount to the scheme and participate in providing social security to the vulnerable sections of the society.

A coherent vision for pension reforms is not yet in place: right alongside this, the government talks about a National Social Security Fund for unorganised sector workers with Rs.1000 crore.

Entry barriers in banking

One of the key mistakes in Indian banking has been the entry barriers: until recently, the rules inhibited placement of ATMs, placement of branches, new private banks, branches by foreign banks, money market mutual funds. There has been some progress on placement of ATMs and branches in recent months. A next step was announced in the budget speech:

38. The Indian banking system has emerged unscathed from the crisis. We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services. In this context, I am happy to inform the Honourable Members that the RBI is considering giving some additional banking licenses to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI’s eligibility criteria.

A coherent vision for banking policy is not yet in place: right alongside this, the government promises to put Rs.16,500 crore or roughly 0.3% of GDP to increase the equity capital of PSU banks.

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1. At the Heart of the Problem is the Task of Fixing the Financial Architecture
2. Interesting Readings for December 23, 2009
3. Interesting Readings for September 22, 2009

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