Friday, July 02, 2010

NCEUS report - contribution of the unorganized sector to GDP

Here is an interesting report by NCEUS task force on the estimation of contribution of micro enterprises to the GDP. NCEUS stands for National Commission for Enterprises in the Unorganized Sector. NCEUS has been set up to review the

1. status of unorganised/informal sector in India including the nature of enterprises, their size, spread, scope and magnitude of employment, 

2. existing arrangements for estimating employment and unemployment in the informal
sector. 

Pain at the Bottom of Pyramid

Fortune lies at the bottom of pyramid. This is being told to us repeatedly by reports, books, media etc. Yet, why there is so much lackadaisical attitude by the authorities towards the bottom? There are reports which says that MSME sector was not that much affected during the crisis as is the common perception (see this)

The paper says:
Comparative performance measure index for micro and small scale (MSEs) items and non- small scale (Non-MSEs) items is constructed to evaluate the performance of the industry groups during the period 2001-09, with a particular focus on the slowdown period of 2007-09. Econometric analysis is then performed to explain the causal factors behind variations in the MSE production index. The paper finds evidence that the cyclical slowdown in the industry that set in during 2007-08Q1, retarded the pace of growth in MSEs as well as Non-MSEs. However, MSEs have recorded relatively better performance than Non-MSEs during the slowdown period at least in the ten items under review. Econometric analysis shows that both domestic and external demand bears a statistically significant influence on MSE output. However, the impact of domestic demand is comparatively stronger. Interestingly, credit to MSEs has been found to be very significant, although the sign of the coefficient (negative in this case) is contrary to theoretical expectations.


I have one reservation. How can you club Micro with Small and look at them at an aggregate level? The statistics may hide the pain at the real bottom or at the bottom of bottom. See today's Busines Line editorial. It says:

The Karnataka numbers point to what one might have suspected anyway — that the bulk of the credit has been cornered by medium-scale units.


I suspect this may be a pan India phenomena. We need to nurture the bottom. The data must be available at a very disaggregated level in regular frequency by RBI or by Ministry of MSME. Let's segregate the first M from the MSME. Fortune lies there and we must focus on Micro enterprises. That is the way to provide employment to vast rural youth.

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A Brilliant Publication by RBI

RBI has relased its report on Currency and Finance yesterday. Over the years, this particular title has covered a wide variety of issues and what amazes me is its coverage. The elegant writing style and depth of analysis makes it a good reference source for researchers.

The list is shown below:

1. 1998-99 The Structural Transformation of the Indian Economy
2. 1999-2000 Financial Sector and Market Integration
3. 2000-01 Revitalising Growth
4. 2001-02 Stock taking of the Reform Process and its Outcomes
5. 2002-03 Management of the External Sector in an Open Economy Framework
6. 2003-04 The Evolution of Monetary Policy
7. 2004-05 The Evolution of Central Banking in India
8. 2005-06 Development of Financial Markets and Role of the Central Bank
9. 2006-07 and 2007-08 The Banking Sector in India : Emerging Issues and Challenges
10. 2008-09 (Current) Global Financial Crisis and the Indian Economy

This year's publication has focused on the current global crisis and the lessons learned.The forward written by Dr. Subir Gokarn says this:


Every crisis provides us powerful lessons. What we carry forward from this crisis is the need for some new regulatory and supervisory institutions with emphasis on a system-wide approach,some new objectives for the central banks, importance of communication, transparency and coordination in central bank functioning, a new design of the international financial architecture and renewed faith in some of the safeguards adopted by the emerging market economies. This crisis has raised questions about the adequacy and efficacy of the current international financial architecture to prevent and manage global crises. In fact, the speed and intensity with which the US subprime crisis exploded into a global financial crisis and then into a global economic crisis has led to a whole new debate on dominant tenets of macroeconomics and has challenged established views on self correcting market mechanisms and the role of public policy. The depth and breadth of the crisis tested the limits of conventional and unconventional policy options available to policymakers around the world.


This particular volume is a must read for MBAs who have specialized in MBA (Mortgage Backed  Assets).

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Thursday, July 01, 2010

Power of Context


I have come across a speech by Dr. Subbarao, Governor, Reserve Bank of India. He is simply brilliant in his elocution. In my last posting, I have raised questions about the role of finance in an economy. Dr. Subbarao has delivered a speech linking ethics with finance. His broad views are - Ethics is contextual and varies from person to person. However, there is no such water tight compartmentalization as these set of people are extremely ethical and others are not. It shows great spatio-temporal and individual variations. He argues that People in the field of finance are not highly unethical as compared to people from other parts of life/society. There may be greater temptation due to involvement of pecuniary interest.

In the context of the current crisis, I find his observation quite fascinating. As per my understanding he argues what is legal need not be always ethical. Ethics is above the mundane law. To quote Dr. Subbarao:
At one level, it is possible to argue that nobody in the entire chain did anything legally wrong. But that is too simplistic an argument. We do not govern our behaviour simply by what is allowed by law or regulation. Our code of conduct should be held to a stricter test. Was the behaviour of actors across the chain of the financial sector fair, ethical and moral or was it swayed by the opportunity of making quick profit afforded by information asymmetries? Were sub-prime borrowers adequately warned that there is a good chance that asset prices would fall? Did investment advisers tell their clients of the risk they were taking in buying MBAs and CDOs? Did credit rating agencies not compromise their standards and cut corners? In sum, were professionals in the financial sector legally right, but only legally right and morally wrong?


I believe to answer these questions does not require great effort. It needs a little bit of soul searching, a little bit of courage, a little bit of honesty towards yourself.

It reminds me a great vedic story of India - the story of Lord Shiva and Bhasmasura. Being pleased at his severe penance Lord Shiva had granted him a boon that whatever he would touch with his right hand would be reduced to ashes. Bhasmasura wanted to test this boon and said "Lord, you have granted me the boon alright, but how will I know it is true? Once you disappear now, I will not be able to get you for the next few hundred years perhaps. I would like to test your boon. This is a mountainous, snowy area. For miles around there is no object that can be touched. Therefore, come forward. I will touch your head and see if what you say is true". Perhaps, Bhasmasura knew that he would become more powerful once Lord Shiva disappears for forever.

Well, I have cited this story for two reasons - A. (In case of Shiva) one may fall victim of his/her own actions if he/she is not adequately thoughtful of his/her actions. If you leverage yourself too much, you may see the value of your assets plummeting to zero one day. If you run excessive fiscal deficit, you may become bankrupt and people may brand you as Pigs (no disrespect towards the Pigs though!). If you mis-sell your product, you are only entering into a repo transactions which you have to buy back ultimately when the value is negative. B. (In case of Bhasmasura) Great responsibility must come with great power. If you try to misuse of your power, then you may be the next one to be ruined by the more powerful.

Please read the speech. Each of his lines is quite powerful.