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

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Delinking Housing Cycles, Banking Crises, and Recession

The nexus of housing boom-busts, banking crises, and economic cycles is not unique to the last crisis and has been increasingly present in each of the major banking crises since the break-up of Bretton Woods in the early 1970s. Housing is a politically charged issue. A safer housing market, via planned fiscal intervention to steady supply, would do more to make the financial system safer than all of the other recent initiatives put together. Cheaper finance without cheaper homes only deepens housing inequality.

Should Financial Stability Be Assigned to Public Policy?

In the light of the experience with the severe financial crises of the 1990s, the responsibility for financial stability has implicitly been assigned to public policy, overturning, in a sense, the dominant paradigm until then of regarding financial development, including stability, as a function best performed by the financial markets. This paper undertakes a critical examination of this assignment, its magnitude and quality, by questioning its analytical underpinnings. The paper examines the search for the appropriate international financial architecture as the virtuous approach to the assignment and concludes that the identification of international standards and codes for adoption by countries may be a suboptimal approach. On the other hand, establishment of an international bankruptcy mechanism holds promise of filling a major gap in the efforts to strengthen the international financial architecture.

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.

Panchayati Raj : Unnecessary Confusion

Out of plan funds devolved to panchayati raj institutions (PRIs) in Kerala some amounts have been found to have been deposited with certain government institutions for works which the PRIs want them to take up in their areas. These institutions are government bodies such as the electricity board or the water authority. The PRIs in Kerala were doing this under direction from the state government. Now the making of these deposits has been objected to as a financial irregularity by the audit department.

Interest Rates on Small Savings and PF Schemes

The arguments for linking interest rates on small saving (SS) schemes to market rates and rationalising the tax benefits available to them rest on removing the government's arbitrary powers in a liberalised interest rate environment. If as a result of the suggested measures SS schemes become relatively unattractive, the government would need to borrow more from alternative sources. If total government borrowing is not kept in check, yields on government securities would go up and with it the interest rates on SS schemes would also warrant upward revision.

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.

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.

Setting Small Savings and Provident Fund Rates

This paper recommends an inflation adjustment formula for setting the interest rate on all Small Savings and Provident Funds and discusses the rationale for the suggested formula.

Dotty about the Markets

After floundering with measures, all more or less well known and much talked about, to step up the growth of the real economy, the government is now exercised with the task of pumping up the stock market. This is misplaced activism. Apart from ensuring transparent operations and preventing malpractice and any artificial liquidity squeeze, the government has little legitimate role to play in the stock market.


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