Formula for startup success in India
The second piece in the series on start-ups in India. This one looks at the kind of companies that could work. For Indian companies, the path to global relevance is building technology products for businesses, not individuals. These products, also known as enterprise software, help companies run all aspects of their operations, from payroll to customer relationship management. As businesses grow...
Why Indian consumers aren't the path to start-up...
Entrepreneurs and investors rushed into e-commerce sites in India over the last few years. But returns from from online retail have been disappointing. This piece looks at the reasons for the false dawn of online shopping in India. Indians haven’t taken to online shopping as widely as hoped. (Quick test – what percentage of your monthly spending is done online?). People distrust using credit...
The democracy bottleneck
India’s economy has run out of steam. Years of dithering and inaction by India’s government has finally caught up. As I discuss in this piece, the policy paralysis won’t be cured anytime soon. Unfortunately, the situation isn’t likely to improve anytime soon. In the parliament no single party has a clear mandate and the largest party, Congress, is beholden to smaller...
The limits of plug-and-play development
In which I evaluate the impact of technology-based development projects. Despite best intentions and smart engineering, the results aren’t encouraging. The problem, as it turns out, is that we are too focused on the technology and not enough on how people interact and integrate with technology. There is also a big difference between well-controlled field trials and real world usage. As...
From print: Taxes and the cash stash
Overcomplicated corporate tax policies in the US are distorting financing decisions How much cash does one company need? According to Apple, $97 billion seems plenty. At the company’s shareholder meeting last week, Apple’s CEO Tim Cook conceded that the company had more cash than needed to run operations. But barring a large acquisition or an unexpected dividend payout, Apple will continue its...
The post crisis economy - tentative and risk-averse. A firm’s aversion to capital markets can persist for decades after a recession. A recent paper by Antoinette Schoar and Luo Zuo, from MIT’s Sloan School of Management, concludes that managers who begin their career during a recession have a conservative management style when compared with their non-recession peers. The authors find that early...
Still not open for business
The challenge with modernizing India’s retail sector. Opening up the retail space to foreign investment would help in overhauling the country’s antiquated supply chain. Shortcomings in the distribution systems have created huge differences between wholesale and retail prices. Inefficiencies are common. The government estimates that 40% of the fruit and vegetable production in country...
The breakfast club
What’s behind the recent round of food inflation? A look at the reasons behind the price movements of each of the commodities suggests that the rally on some of the commodities may be overdone. First, unlike the food crisis two years ago, this time around inventories of rice, corn and other commodities are at healthy levels. The Food and Agriculture Organisation estimates that after two...
Building better models
Identifying and measuring systemic risk isn’t easy. But complexity of a problem shouldn’t be a barrier. Why can’t economists use advances in network theory and computational mathematics to refine their models? A new NBER paper by Mila Getmansky, Andrew Lo and Loriana Pelizzon attempts to identify some early warning indicators that can be a useful for assessing future...
Financial reform whack-a-mole
A telling quote from Volker on his feelings about the Financial Reform bill - “[I]t doesn’t have the purity I was searching for”. A short post here.
India looking to the rain gods
Trying to make sense of the RBI’s multiple targets for India’s economy. Unlike central banks around the world, the RBI doesn’t have a clear inflation or unemployment mandate; instead it targets multiple indicators that are known only to officials within the bank. At any given point it is not clear whether the bank is monitoring inflation, exchange rates, financial stability or some...
Can Asia ever decouple from the West? There is some evidence to support this. The bank’s data show that the Asian recovery has been driven by the region’s own economic demand - there has been a rebound in intra-regional trade. The region is also less dependent on foreign capital than before. The impact of the European debt crisis has been minimal, with bond yields falling as capital continues to...
From print: When the chips are down
The latest Big Mac index suggests the euro is still overvalued Covering the annual movement in the Big Mac index has to be one of the most fun topics to write about. Where else can you “chomp” at over valued currencies, attract “yield-hungry investors” and ask readers to take your analyses with a “generous pinch of salt”? Sample this: Other currencies are...
More powerful than you think
Interesting research which shows that central banks are not helpless when short-term rates reach zero. When the Fed announced its intention to buy large portions of long-term Treasuries, which are in limited supply (in theory), the price of the bonds increased and their yields decreased. If investors were able to substitute Treasuries with comparable bonds from other countries the effect should...
Out of the shadows
Exactly how big was the shadow banking system, in the run up to the crisis? First, as the graph below shows (figures in trillions of dollars), the volume of credit intermediated by the shadow banking system is larger than that of the regular banks. Prior to the crisis, shadow banks had liabilities of $20 trillion compared with $11 trillion for regular banks. Today, the figures are $16 and $13...
Few big to fail
A short post on how a small set of banks soaked up most of the government bail out money. Between 37 and 63 percent of the support extended under capital, guarantee and asset protection schemes has been absorbed by the largest three recipient institutions. For each individual measure, the three largest recipients account for 3 to 9 percent of total euro area banking assets. The full post is...
From print: Infra red
India’s ambitious development plans hinge on attracting private capital Socialist-era infrastructure remains a bottleneck for India’s growing economy. Yet, despite a clear market need, raising capital is a challenge. One reason for the gap is that private-sector participation has been lower than expected. All infrastructure projects have an element of risk, but in India structural...
A new global reserve?
Moving away from the dollar as the global reserve currency will not be easy. A natural experiment from Hungary demonstrates just how difficult it is. A reserve currency must have a deep and liquid market. This is where the dollar scores over other currencies. Even the euro, which was a viable alternative before the current crisis, has not been able to displace the dollar’s dominant...
The coming Euro-zone storm. As Buttonwood reports, the three-month dollar Libor rate is almost as high as the two-year bond yield. Banks are reluctant to lend to Spanish and Greek banks because they are deemed too risky. This chart from the FT shows that European banks deposited €305 billion with the ECB on Monday night, despite getting only 0.25%. Banks prefer to forgo excess rates from other...
The break-even point
How do you price the systemic risk posed by banks in a financial system? The Bank of England’s Financial Stability Report has some interesting pointers. First the cost. The report assumes that banks have sufficient time to transition to the new capital levels. If not, banks would simply shrink their assets to meet the requirements. Assuming that the transition period is long, banks would...
White elephants in China?
Fears that China’s massive stimulus during the Great Recession may have led to poor investment decisions. China’s chief auditor warned that local government debt could pose risks to the Chinese economy. The National Accounting Office in its annual report said that borrowing by local governments had created debt burdens which would require assistance from the central government. It...
Are we there yet?
On microeconomic behaviour - how small factors can influence where people stay once they decide to move. Although commuting costs are a small part of overall household budgets, they do influence the location decisions of those who have already decided to move for job-related or lifestyle reasons. The authors estimate that with more than 10% of households moving every year, changes in location...
The practicalities of identifying and pricking financial bubbles. This is easier said than done. Knowing which bubble to prick isn’t always easy. It may be possible to spot deviations in specific sectors such as housing, but extending supervision across the financial system is very hard. Eswar Prasadcalls the added responsibility a “mandate creep” that can create additional...
Good capital, bad capital
Capital controls are a great idea in theory. Problem is, they are almost impossible to enforce. The issue with capital controls though is that it is very hard to gauge if they work in practice. The data show that for countries with a relatively open economy, capital account restrictions do not affect the amount of inflows, but do influence the distribution of flows. And that is where these...
From print: Cash in hand
State-backed investors are coming back into the spotlight In which I analyse the resurgence of sovereign-wealth funds as they are courted by cash strapped governments. Yet suspicions about their motives remain. WHEN markets are jumpy and cash is needed, sovereign-wealth funds have some very fetching characteristics. As well as having lots of money, they tend to make decisions quickly. During...
Straight talk from Xu Xiaonian where he claims that “China is drinking tainted economic waters” Mr Xu makes some very targeted criticisms that cut at the heart of China’s economic policies. First he says that China’s recovery was almost entirely based on government stimulus: “I believe that the excessive credit supply of last year and the extremely loose monetary...
Switzerland is surprisingly active in the currency markets WHEN talking about nations that have excess foreign exchange reserves, Switzerland probably wouldn’t be at the top of your list. It doesn’t fit the pattern that characterises the hoarders. It isn’t a developing economy, distrustful of large capital inflows or a rich oil-exporting country. Yet Switzerland is now the...
Two questions. With the standard econometric preamble (holding all other factors constant…) Does one percentage point increase in the effective tax rate lead to a $1.8 billion decrease in annual private equity investment? Does one percentage point increase in the effective tax rate lead to a 1.07% decrease in annual private equity investment? Probably not. First, the study uses a...
Blame the speculators
In which, I discuss the familiar bogeyman for currency woes. EVEN as markets have focused on the fate of the euro, governments around the world are taking steps toward greater control over their own currencies. First, the Russian central bank announced yesterday that it was modifying its currency intervention strategy to closely reflect prevailing oil prices. Since the Russian economy and the...
Set Indian financial markets free
This month the Reserve Bank of India (RBI), the country’s central bank, celebrates its seventy-fifth anniversary. Officials at the bank have much to be pleased about. In the wake of the crisis in 2008, the RBI’s decisive actions to cut interest rates and arrest the fall of the rupee through a sale of $80 billion in foreign reserves helped the economy avert a significant slowdown. Latest estimates...