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

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A Better Economics for the Indian Context

Reflecting on their experience of using The Economy to teach undergraduate students in India, two teachers of economics discuss the need for a version of the alternative textbook that addresses the needs of students who seek to understand the Indian economy. The possibilities of such a version of the textbook are discussed.

Poverty and Inequality in a ‘Principles of Economics’ Textbook

The new economics textbook The Economy, by the Curriculum Open-access Resources in Economics Team or the CORE Team is discussed from the point of view of introducing students to the topic of poverty and inequality. It is argued that mainstream textbooks adopt a framework that reduces the explanations largely to luck, choice, or ability. The new book, by paying careful attention to frictions in the economic institutions that underpin the market economy, provides an alternative framework where inequality of opportunity becomes clear and visible.

Teaching Macroeconomics

The Economy presents a new approach to teaching macroeconomics. It starts from real-life institutions of macroeconomic policy management, teaching models that engage directly with these institutions. Money and monetary policy are explained in the context of modern banking systems, while the Phillips curve is derived from the labour market model. By emphasising empirical applicability, and the linkages with microeconomics, it provides students with a more intuitive and realistic understanding than standard approaches.

Macroeconomics in The Economy

The Economy is a worthwhile initiative that seeks to teach students about the economy, as opposed to teaching economics. The macroeconomic aspects of the textbook are critically scrutinised to understand what is being taught, and how different the treatment is from extant approaches.

Can Jan Dhan Yojana Achieve Financial Inclusion?

While there has been a tremendous increase in the number of bank accounts opened, the data show that the average balance in these accounts is low and a significant proportion of the accounts are inoperative. Although there was a rise in the average deposits during demonetisation, they later settled at a lower level. Further, financial inclusion means not just the opening of bank accounts but, more importantly, access to credit from formal sources. The limited data available in this regard show that after the Pradhan Mantri Jan Dhan Yojana was launched there has not been any increase in the credit–deposit ratio and the share of small loans has continued to decline. Very few people have benefited from the overdraft facility that is supposed to be provided by the accounts under the scheme. Issues of access to banking in rural areas remain.

Deciphering Financial Literacy in India

Utilising a nationally representative data set, an index of financial literacy consisting of financial knowledge, behaviour, and attitude is constructed. The findings suggest significant variation in financial literacy across states with an over 60 percentage point difference between the state with the highest financial literacy and that with the lowest. Multivariate regressions show that there exist large and statistically significant gender-, location-, employment-, education-, technology-, and debt-driven differences in financial literacy. Much of the observed regional divergence persists even after we control for cohort effects.

Dynamics of Competition in the Indian Banking Sector

Competition is supposed to make banks more efficient and stimulate financial innovation by opening up of new markets. Given the dynamic changes within the Indian banking system in the last two decades, the effect of the developments in the market on the competitive behaviour of Indian commercial banks is assessed. The empirical analysis suggests monopolistic competition. This feature of the Indian banking market is consistent with other emerging-market economies and developing countries. We also find a decrease in competition across the two time-periods, before and after 2007. This may be attributed to the consolidation of the sector, with major banks acquiring smaller banks to gain economies of scale, market share and transaction volume.

Engineering Banking Sector Recovery and Growth

The idea of “bail-in” in cases of serious banking instability has been widely discussed in India ever since the introduction of the Financial Resolution and Deposit Insurance Bill. Given the large non-performing loans of public sector banks, the Government of India and the Reserve Bank of India as the regulatory authority have to quickly act to ensure that public confidence in the soundness of commercial banks is not breached. In this context, three approaches are explored that could be adopted either individually or in a variety of combinations in different proportions essentially to secure banking stability. The bail-in idea should not be considered except in extreme conditions of large financial stress. The idea could be tried even before the extreme situation arises with provision of incentives.

The Banking Conundrum

Neo-liberal banking reform was launched in the early 1990s to address the low profitability of the public banking system and the large presence of non-performing assets. It set itself the objectives of cleaning out NPAs, recapitalising the banks and modifying banking practices to restore profitability and drastically reduce NPA volumes. This did initially have some effect. However, while the NPA ratio fell between the early 1990s and the mid-2000s, it has risen sharply since then. Moreover, while earlier priority and non-priority loans contributed equally to total NPAs, more recently, large non-priority loans to the corporate sector account for the bulk of NPAs. An analysis of these features reveals that these trends are indicative of the failure of neo-liberal banking reform in India.

Appetite for Official Reserves

There is a strong nexus between the level of reserves, frequency of intervention, and exchange rate variability. Given the current exchange rate arrangements, there is a mandate to accumulate reserves in line with other developments such as import growth, growth in short-term external debt, and so on. The Reserve Bank of India seems to have no option, especially in times of capital flight, than to allow the exchange rate to absorb market pressure if the volume of reserves held is not adequate. This indicates a limited scope for using other instruments. The objective of accumulating additional reserves seems to override the ambition of exchange rate stability when there is a limit on the capacity to intervene imposed by the reserve shortfall. Therefore, reserves matter in times of crisis.

Long-run Determinants of Sovereign Bond Yields

Keynes’s supposition of short-term interest rates as the key driver of long-term government bond yields is investigated for India, after controlling for various key economic factors. It is seen that long-term interest rates of Indian government bonds are positively associated with the short-term interest rates of Treasury Bills. Higher long-term interest rates on IGBs are influenced by higher short-term interest rates, higher rates of inflation, a faster pace of industrial production and higher fiscal deficit (and vice versa). The bond market was disrupted during 2013 when yields rose sharply in India. Incorporating this structural break improved our findings.

Can Central Banks Reduce Inflation?

To explore the empirical validity of the proposition that a rise in the interest rate would necessarily lead to a lower rate of inflation, empirical evidence from 158 countries, during 1981 to 2013, is used to critically evaluate this widely accepted idea. Based on the findings, it is argued that from a policy perspective, the so-called “inflation targeting” should be revisited.

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