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

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Economic History and Postmodern Theory

Postmodernism questions the possibility of narratives of 'progress' in the sphere of culture, a position that disagrees with economists' faith in economic progress in which cultural change plays a large role. This fundamental incompatibility has made economic history uncomfortable for historians, and led to a breach between economics and history. Can this rift be repaired?

P R Brahmananda:A Remembrance

In the history of Indian economic thought of the last 50 years, P R Brahmananda will have a secure place. His colleagues, students and readers will long remember him for what he taught them, for the help he gave them professionally and in other ways, and, in general, for the warmth and friendliness in his relations with them.

Ecological Economics

Ecological Economics Ecology and Economics: An Approach to Sustainable Development by Ramprasad Sengupta; Oxford University Press, New Delhi, pp xvii+264, Rs 495.

Impact of Increase in Oil Prices on Inflation and Output in India

This paper attempts to study the transmission mechanism of an increase in petroleum prices on the prices of other commodities and output in India. The paper also examines the nature and the extent of 'feedback' in such a transmission mechanism and obtains evidence of bidirectional causality between oil and non-oil inflation in India.

Fiscal Responsibility : Not a Straitjacket

Even as evidence mounts of the government’s fiscal position in the current year slipping out of control, the fiscal responsibility bill has been in the news, thanks to the recommendations on the bill of parliament’s standing committee on finance. The government’s initial reaction to the committee’s recommendations was that they virtually dispensed with the notion of fiscal responsibility. This would appear to be a rather extreme view. The notable feature of the debate on fiscal responsibility has been the widespread appreciation that it has revealed of the importance of fiscal prudence. The government should build on this broad consensus rather than press for passage of the original bill without any modifications.

Interest Rate Defence of Exchange Rate

While the rationale for raising the interest rate to defend an exchange rate under speculative attack is well grounded in economic and financial theories, empirical validation of the effectiveness of such a policy stance has generally been difficult and is shrouded with conflicting findings. In India, besides forex market interventions and use of several administrative measures, the Reserve Bank of India has occasionally resorted to the high interest rate option during major episodes of significant pressures on the external value of the rupee. An empirical assessment suggests that one standard deviation shock to the call rate leads to rupee appreciation in the very second month. Similarly, for one standard deviation shock to net interventions, the exchange rate appreciates gradually by a few paise over five months. The impulse response also suggests that in response to one standard deviation shock the exchange rate appreciates by about 8 paise in the second month, but subsequently the exchange rate depreciates gradually, more than offsetting the initial impact of the hike in interest rate.

Universal Banking:Some Issues

The proposed conversion of development finance institutions into universal banks will be a major event in Indian banking and raises several important issues. It will be wise to ponder some of these issues right at this stage.

Financial Exuberance

There have been significant financial sector reforms through the 1990s. One of the major policy changes affecting the financial markets has been reduction in government's recourse to claims on loanable funds through statutory liquidity ratio as well as high levels of Cash Reserve Ratios. The central government has switched to market borrowing to finance its fiscal deficit on a larger scale than before. There is a general move towards market determined rates and flows in the financial sector. One area where administered rates are still important is the small saving instruments. The government sets these interest rates and mobilises funds for meeting the fiscal deficits at the centre and more so at the state level. If these rates were to be determined by the markets, what would happen to the interest rates in general. One argument is that the small saving rates act as a floor to the deposit rates of the banking sector and hence also determine the lending rates. If the overall balance of demand and supply of loanable funds is such that interest rates can be lower, the small saving rates do not let that emerge. Further, as interest rates decline, there would be significant gains in economic growth. This paper is an attempt to examine this viewpoint. We develop a monetarist model of the economy and assess the implications of alternative methods of financing the fiscal deficit of the government, central and states combined. The results support the view that overall interest rates would decline if the small saving rates were to be liberalised but the gains in economic growth would not be dramatic.

Modest Ambitions

The mid-term review of the monetary and credit policy for the current year springs no major surprises. It has, in the main, lowered the Bank rate by 50 basis points to 6.5 per cent and proposes to bring down, over the next two months, the cash reserve ratio to 5.5 per cent from the current effective rate (taking into account various exemptions and variable reserve ratios for particular segments of liabilities) of 6.3 per cent for the banking system as a whole. It has made further refinements of the various processes of strengthening prudential regulation of the banking system. More pertinently, it serves to highlight the constraints within which monetary policy operates in India, even going to the extent of drawing explicit reference to some of the structural impediments arising from government policy.

Aspects of Banking Sector Reforms in India

This paper examines some of the consequences of the banking sector reforms in India which were an integral part of the liberalisation process of the economy initiated in 1992. In particular, the data show that, in the post-reform period, investment in government securities by banks has remained persistently high and there has been a significant reduction in the flow of credit (as a proportion of deposits) to the real sectors of the economy. There have also been significant changes in the flow of credit to various groups and sectors within the economy, some of which might be thought not to be in conformity with the stated social goals of the government.

Imparting Dynamism to Credit Delivery

When the economy is in dire straits the Reserve Bank cannot sit back and say it has done enough by reducing interest rates and supplying liquidity to the market. It needs to operate on many fronts - interest rate, general refinance, sector-specific refinance, directed credit norms and moral suasion - to introduce dynamism into the banks' credit delivery system.


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