Why Won’t You Accept My 10 Rupee Coin?

The 10 rupee coin seems to be out of favour with the general public. It is getting increasingly difficult to use it as a means of payments. Vendors and customers are refusing to accept it. The Business Line reports: “From roadside vendors to even beggars, people have started saying a polite ‘no’ to the Rs 10 coin”. The problem is that many people believe that the coin is no longer legal tender. The RBI has issued multiple circulars and notifications urging people to accept the coin and reaffirmed the legality of the coin. Even banks have begun to refuse the coin as they have no space to store them, reports The Hindu.

Fiat money works on trust. Trust in this case takes two forms – trust in the government that has issued the currency and trust that the others in the system will accept the currency as a payment method. With the 10 rupee coin, both forms of trust are rather low. Social media and Whatsapp have had its role to play in spreading rumours about the coin. The RBI even tackled this in one of its notifications:

It has been reported that some less-informed or uninformed persons who suspect the genuineness of such coins are creating doubts in the minds of ordinary people including traders, shop-keepers, etc., impeding the circulation of these coins in certain pockets of the country causing avoidable confusion.

The Reserve Bank has advised members of the public not to give credence to such ill-informed notions and ignore them and continue to accept these coins as legal tender in all their transactions without any hesitation.

Payment systems and currencies have huge network effects. It gains value with more number of people using it. A currency in circulation gains acceptability based on its intrinsic value and the expectation that a large number of people will accept it as a form of payment. There are known instances where cigarettes have been used as currency in prisons because everyone else agreed on its value. In today’s fiat money system, the currency has no intrinsic value; only a government mandate declaring it as legal tender. The currency gains value because everyone else uses it.

However, in the case of the Rs 10 coin, no amount of government (RBI) assurances and orders has managed to infuse trust. Wonder if this is another side effect of demonetisation?

Consumer Confidence in the Economy has Diminished

The Reserve Bank of India recently released the consumer confidence survey, which had some interesting insights. The survey was conducted in May with a sample drawn from the 6 major cities of New Delhi, Mumbai, Bengaluru, Chennai, Kolkata and Hyderabad. So, we must be aware of the extreme urban bias of the survey. Nonetheless, consumer perception about their current state and their expectations about the future can sometimes capture what the statistical data cannot.

In short, 48% of the population believe that the overall economic condition has worsened from a year ago, while 32% believe that their situation has improved. The rest believe that there is no significant change.

These tables from an article in Mint captures the summary of the consumer confidence survey.

Similarly, nearly 44% believe that their job situation has worsened and a majority of people believe that their incomes have remained constant in the last one year. This should ring alarm bells for the ruling government. In a fast growing economy, it should be worrying if a majority of people believe that there is a worsening or even a status quo of their income, job prospects and overall economic conditions.

The perception of those surveyed are contrary to the data. While GDP growth in the latest quarter has been the highest in the past two years, people believe that the economy is siding. Inflation perception does not correlate with the data as well. People largely believe that the inflation situation has improved in the past year, though CPI has been rising continuously.

The question, then, is whether we can take the results of this survey seriously. The answer is yes. People make decisions based on their perception and expectations of the future. They do not necessarily follow data released by the Central Statistical Office. Those decisions can result in a self-fulfilling prophecy. If enough people believe that the economic situation will worsen, they will postpone investment and big consumption decisions, and will choose to save instead. This will result in reduced demand and slack in the economy.

On that note, it is slightly reassuring to note that people are quite optimistic about the future. A majority of the people believe that all 4 of the parameters spoken above will improve in the coming year. However, the article also points out that the numbers were higher in 2014.

Payment Chaos After Visa Card Crashes

The Visa payment system had crashed on 2nd June due to a network error. This resulted in chaos in the UK and some other parts of Europe. Quite a few people were unable to make the necessary payments or make purchases.

This led to customers being stuck at long queues in departmental stores and even in front of ATMs while attempting to withdraw cash. Retailers were left unable to take payments in shops, bars and other outlets, forcing them to resort to only taking cash or not making sales at all. Petrol stations and toll booths were unable to process the payments, leading to huge queues again.

Apart from customers who use Visa cards, many other financial systems who have built products on top of the Visa infrastructure or retail stores who used Visa card machines were also affected by the network outage.

While the issue was resolved in a day and a half, this incident should give pause to the blind race towards a cashless society. Electronic systems can fail or be hacked, which can leave thousands stranded. Always good to have cash as an option.

The Indefatigable Chinese

The US, worried about its increasing trade deficit with China, the decreasing number of jobs created at home, and the ailing steel sector in the US, decided to import a tariff of 25% tariff on all steel imports. It also decided to levy a special 200% import duty on import of Chinese steel and justified it by using the dumping argument.

Briefly, according to the WTO rules, a country cannot impose selective tariffs on goods based on geographical origin. Thus, in case a country is worried about increasing amount of steel being imported from China, it cannot selective put tariffs on only Chinese steel. Thus, the US imposed a tariff on all steel imports, which left many of its trading partners livid. It then made a few exceptions to Canada and Mexico, only to withdraw those later. However, there is one clause in the WTO, which allows you to target a country for tariffs – by showing that the country is involved in a process called dumping. Dumping is a case of price discrimination, where the producer is charging a different price to different customers. This is generally believed to be anti-competitive.

In China’s case, the allegation of dumping is based on the differential pricing of Chinese steel for consumers in China and the rest of the world. Since most Chinese steel companies are state funded, they charge a higher price at home and subsidises the export of steel, in order to conquer the other markets. China denies this, of course.

What is really interesting here though is that the Chinese have found a way to circumvent the additional dumping duties imposed by the US. China state-owned steel manufacturers are buying steel plants in other countries and then, shipping to the US, as reported in this WSJ article.

By owning production abroad, Chinese steelmakers aim to gain largely unfettered access to global markets. Their factories back in China are constrained by steep tariffs imposed by the U.S. and numerous other countries—largely before President Donald Trump took office—to stop Chinese steelmakers from dumping excess production onto world markets. But their factories outside China face few so-called antidumping tariffs.

“China is just moving whole industrial clusters to external geographies and then continuing to overproduce steel, aluminum, cement, plate glass, textiles, etc.,” says Tristan Kenderdine, research director at Future Risk, a consulting firm that tracks China’s overseas investments.

Hesteel, a Chinese state-owned manufacturer, purchased a dying steel mill in Serbia, invested millions of dollars, ramped up production and has started exporting to the US. Not only that, it also gets to circumvent the high tariff on steel by the EU. By producing within the EU common market area, it can export to the rest of the European Union, without any tariffs or customs. Similarly, China is already investing in steel plants in India, Pakistan, Indonesia, Brazil, and many other emerging economies.

What China has managed to do is put US in a very peculiar position. If it wants to stop import of Chinese steel, it would now have to impose higher duties on a whole host of countries. If it does this, it will face severe backlash from these countries, which would end up severely hurting the US.

The cleverest move perhaps is that China has now forged a joint venture with Pittsburgh-based stainless-steel producer Allegheny Technologies Inc. The joint venture is restarting a stainless-steel rolling plant in western Pennsylvania and is importing 300,000 metric tons of semifinished stainless-steel slabs from an Indonesian plant owned by Chinese state-owned companies. This puts the US in a real pickle.

 

India’s Economic Growth Rate is Overstated

In a brilliant article in Mint, Rajeswari Sengupta, Assistant Professor at IGIDR, has shown that India’s real GVA growth rate is around 5% and not 7.1% as the CSO claims. The reason is the use of deflator in converting the nominal GVA to Real GVA.

In nominal terms, GVA increased by 7.9% in the third quarter (October-December) of the fiscal year 2015-16, below its usual level of 10-15%. This increase translated into a 7.1% real growth, because the deflator reportedly increased by only 0.7%.

Could India’s inflation be so low? In effect, the CSO is saying that despite India’s booming economy, producer inflation is lower than that of the recession-wracked economies of the West, or even that of Japan, which has been wrestling with deflation since the 1990s. This is not plausible.

It does seem extremely fishy that an emerging economy, growing at 7% (5%?) can have an inflation of 0.7%. The article then goes on to explain why this might be the case. In the absence of a credible deflator figures for all sectors, the CSO approximates it by using Wholesale Price Inflation as a proxy. This can be extremely problematic as the WPI has been on a downward trend in India and there is also significant divergence between the WPI on one hand and the deflator and CPI on the other. This divergence has been occurring since 2014 at least and I had written about it earlier.

If we were to use better proxies for the deflator instead of the WPI, like the CPI in services and IIP for manufacturing, we get a real GVA growth rate for the third quarter at 5% instead of 7.1%. The figure of 5% seems a bit more in tandem with reality.

Elections and Rupee Volatility

The rupee has tumbled to the lowest point in the last 18 months, when it crossed the Rs68/$ mark this week. Analysts have posited multiple reasons for this occurrence – India’s sluggish export growth and an increasing import bill due to rising oil prices, the dollar strengthening, rising US interest rates, and the inflation differential between India and its main trading partners. However, one other reason could be elections – both the just concluded Karnataka election and the upcoming 2019 Lok Sabha elections.

A chart from 2013 that shows strong correlation between elections and rupee depreciation. Source: The Economist

There has been a historical relationship between elections and the exchange rate. Election time is usually associated with greater volatility of the rupee. Investors generally fret about populist schemes leading up to the elections. They are also afraid of policy uncertainty if a new government is elected. Chances of policy reversals or abandonment of certain policies can create jitters.

Post liberalisation in 1992, the rupee had a bout of weakness in 1997, and then, just after the 2004 elections, again in 2009 before the elections, and the biggest one in recent memory was in 2013. These have coincided with the elections and also major global macroeconomic shocks. There was the Asian crisis in 1997, the global financial crisis in 2009, and the episode of the taper-tantrum in 2013. It is hard to isolate these factors and establish causality between elections and rupee weakness, but there seems to be a strong correlation.

Episodes in other emerging economies can give a clue. Mexican Peso and elections have followed a similar pattern. The Economist explains:

Between 1976 and 1994 the peso regularly suffered a massive slump roughly every six years, around presidential elections—even though the country was effectively a one-party state at the time. Mexico tried to create stability by pegging the peso to the dollar in 1988, but by 1994 suffered a full-blown crisis. The pattern of boom and bust was broken only when authorities reverted to a freely-floating exchange rate—but also, crucially, put in place sound monetary and fiscal policies. There is a lesson there for India.

The Cost of Privacy

It is becoming increasingly difficult to purchase any good or service without giving up your mobile phone number. Most of the stores that you go to now will ask for your phone number when the bill is made and they later spam you with promotions. There is always a look of incredulity in the cashier when I refuse to give out my phone number. At times, I have tried to explain that it is an invasion of my privacy and that I like to avoid spam notifications, but it is extremely difficult to get across that concept. It is far easier to either give a fake phone number or just state that one doesn’t have a phone.

The reason that the bill desk is genuinely surprised by the refusal to share one’s personal phone number is that not many people do it. I am in the minority. In exchange for your phone number, they promise to put you in a loyalty programme that promises discounts on future purchases. Most people are happy to make that trade-off: give up your privacy and data in exchange for discounts. I am definitely willing to forego any discounts or offers in order to retain my privacy. That foregone discount is the cost of privacy and peace of mind.

 

The Logistics of Cash

I was in Budapest recently for a conference on the relative importance and usage of cash and non-cash methods of payments. The primary message from the conference was that cash is reliable, secure, and accessible to people. It was organised by a non profit organisation that is an association of companies dealing with cash management. Before heading to the conference, it seemed strange that there would be multiple companies involved in cash management and logistics in a country. We largely tend to take cash for granted and do not think about the vast logistical network that exists behind the usage of cash.

Here’s a brief glimpse into the fascinating world of cash logistics and management:

First, you would need specialised paper to print the notes on, which is supplied by few companies in the world. The material on which the notes are printed differ from country to country. India uses a pulp made of cotton and balsam, whereas the US dollars are made of cotton and linen. Australia, and a few countries, have shifted to an innovative polymer (or plastics).

The ink used to print the notes are also highly specialised and secure ink that does not get worn out easily. The ink would be made from a special dye that is not available to anyone except the central bank. Then, comes the host of security features, such as the hologram, watermarks, security threads, serial numbers, anti-copy marks, magnetic ink and microprinting. Each of these would be manufactured and supplied by a set of private companies, according to the central banks’ specifications.

Then, for distribution, you would require armoured vehicles to move the cash from the vaults of the reserve banks to the commercial banks and finally to the ATMs. There are private companies that specifically design these armoured vehicles and provide security guards as well. You also need specialised large vaults in commercial banks to store the currency. There are also machines developed exclusive to count the currency notes.

There are companies that manufacture and distribute ATM machines and who maintain them. A separate company would take charge of managing the ATM machine and making sure that they have enough cash to distribute. On the retail side, you have companies that manufacture tills to hold temporary cash required at point of sale. Of course, the complexity of the business determines the level of sophistication required for the cash handling machines. A Casino will require a more customised and complex machine to handle and store cash, as against a corner retail store selling milk. There are also companies that manufacture paper rolls for till and ATM receipts.

This is just a sample of the number of companies involved in cash management in a country.

P.S: I am reproducing the steps involved in cash printing and distribution in India from this Business Standard article:

HOW MONEY TRAVELS: PRESS TO PURSE

* The Reserve Bank of India (RBI) chalks out the requirement for currency notes before the start of the financial year

* The requirement is then communicated to the government

* When the government gives permission to RBI, the central bank raises ‘indent’ or order for printing specific bank notes to four presses

* Papers for banknotes were earlier procured from overseas but now the material is supplied locally

* The security features are installed by the mills first and then sent to the printing presses

* The printed notes are sent to RBI’s 19 regional offices

* There are 4,000 currency chests where the notes are kept

* RBI then raises a voucher for the notes needed

* Banks raise their demand for cash with RBI’s regional offices

* RBI then sends money to banks

* Banks keep the money in their currency chests and engage cash management firms to fill the ATMs

* ATM service providers do a daily calculation of cash required at night for the next day, called indent

* Banks validate the indent and the cash is transferred to the bank branch linked to that ATM

* These bank branches generate their own cash and in case of shortage, they borrow from currency chest

* Cash management companies transfer cash from branches to ATMs

* The companies fill up the ATMs with four ‘cassettes’, which can hold up to 2,500 notes each

* The money is dispensed when customers use their card

Do Coasian Solutions Work in Real Life?

One of my students from the Graduate Certificate in Public Policy – Satish Terala (@satisficed– wrote a rejoinder to my Pragati blog post on why I should get compensated by my neighbour who is building a house. While he is sympathetic to my cause, he believes that the trade will not actually takes place. His post follows:


Anupam Manur in his post “Dealing With Construction in Your Neighborhood” sets up an interesting problem – construction activity in his neighbourhood undertaken by his neighbour is disturbing the peace and tranquility of his life. Anupam then rightly concludes that his neighbour’s actions are imposing a negative externality on him (actually the entire neighbourhood) and then invokes the Coase Theorem to solve for it. The solution would involve the offending party (his neighbour) paying Anupam a certain amount. Anupam would then promptly buy a new pair of heavy duty earbuds, soundproofs his house and perhaps gets some extra cleaning help.

Sounds simple enough. But why did that not happen in this case. I would surmise that getting his neighbour to understand the economics of externalities and Coase theorem is still not going to help matters here. Why is it that then perfectly rational actors fail to trade even when there are gains to be had by doing so. The answer to this comes from another equally important but not as famous theorem called the Myerson-Satterthwaite theorem.

In presence of private information about the value of certain good (Anupam’s peace and tranquility) to the buyer and the seller, Myerson-Satterthwaite theorem says that no mechanism exists that guarantees that a trade will always happen. The problem here is that of information-asymmetry. In a Coasian world, all information about the externality is public and bargaining will ensure that an efficient outcome for both parties is reached.

In Myerson-Satterthwaite’s world, people’s valuation of the good are private i.e. the buyer only has a vague sense of the what the seller is willing to accept and similarly the seller only has a notion of what the buyer is willing to pay (for the math inclined: buyers view of sellers cost is uniformly distributed on the interval [0,1] and vice versa). This private information induces sellers to act as if the costs of their goods are higher than they actually are and similarly for the buyer to act as if good is of lesser value than their private valuation of it. The theorem then shows that the gains of trade are not sufficient enough for either of the players to honestly reveal their costs and values. This implies that no fool proof mechanism can be designed that guarantees a trade will happen even when there is a price that would be agreeable to both parties.

Turns out that worst case scenario is the case of a single buyer and a single seller. As the number of buyers and sellers increase, these informational problems disappear and markets become ‘efficient’.

So Anupam might then just be better off buying those heavy-duty earbuds himself; Coase is not going to help him much in this case.

Note: While I highlight only the applicability of M-S theorem in case bargaining does occur, there are many other reasons why bargaining might not even occur. Social norms, inability to assign the responsibility of the externality, hold out problems and other issues often have large transaction costs dissuading the participants from even bargaining in the first place.

Satish is a technology professional based out of Boston. He has degrees from UC Berkeley and University of Toronto in ‘doing marginally useful things’. He still hopes to finish his GCPP – some day.

Dealing With Construction in Your Neighbourhood

Dealing with construction activity near your place is a real pain. There’s a house that is being constructed right opposite my place and it is alarming how much it has disrupted my life. My productivity and peace of mind has been severely affected. This is a perfect example of negative externality, where a third-person (me) is affected by a transaction of which he is not a part.

The construction noise, from digging the borewell to cement mixers, have made it impossible for me to work from home. I find it hard to think about regulating platform economies or give a webinar while a guy outside my place is hammering on iron. That adds a couple of hours of travel to work and back.  Then, there’s the problem of fine dust that is deposited in all corners of my house. I have to either pay extra to the domestic help or spend a couple of hours to clean it myself. Not to mention, the added health risk of inhaling the particulate matter. All of these presents a real cost to the neighbours of a house that’s newly constructed.

The externality presents a market failure. The price of a house (whether it is rent or the cost of production) does not include the damage/suffering caused to others who will not benefit from that house construction. How do you solve for this  externality?

Most people would silently go through the suffering with minor complaints made to the owner and a lot of internal whining. Very few would have the power to stop the construction or put significant hurdles in the way, so as to increase the project timelines. Neither of it is an efficient solution. The owner has a right to construct a house on a plot of land that he has purchased and the neighbours have a right to peace and quiet and a right to expect their house not to get inundated by cement dust.

The only solution seems to be a Coasian solution. The owner can pay an amount to compensate for the damage caused to the neighbours and carry on with the construction activities. The externality will be internalised this way. The receivers of the payment can use the money to hire cleaners, install an air purifier, or invest in sound proofing. The additional payment gets added to the cost of construction, which can be passed on to the eventual occupiers of the space. The rent can be slightly higher to reflect this charge or if the owners decide to stay there themselves, they will bear the cost over many years that they live there.

Now, I’m off to find the owner and give him a lesson on Coasian solutions to externality and try extract compensation payments.

The Ten Commandment for Economists and Non-Economists

This is a fascinating set of rules I came across in Dani Rodrik’s book Economic Rules:

The Commandments

I really liked the 6th commandment for non-economists, which states “When an economist uses the term “economic welfare,” ask what he/she means by it”. While you are at it, make sure you ask them what they mean when they use the term “structural reforms” as well. It seems to be the single greatest solution to all of mankind’s problems. The specifics are often missing though, and perhaps, therein lies the reason why they have not been carried out.

 

Election Manifestos and Cow Dung

There seems to be no dearth of effort from the two national parties to woo the voters of Karnataka. Unfortunately, very little of it is geared towards long term growth strategies, employment creation, or raising the income levels. Can you identify the key differences between the two parties’ manifestos?

Spot the difference! From The Indian Express, found on Twitter.

As you can notice, there is actually not much of a difference between the two parties’ promises. Both the manifestos are ripe with populist schemes – from free laptops and smart phones, to Indira Canteens and gold and cash for marriages. Why does the government have to pay for ornaments and weddings, I will never understand.

To add to all of this, the BJP is also promising a farm loan waiver for loans up to 1 lakh. This follows a mini farm loan waiver done by the present Siddaramaiah government in 2017.  How many more times should we do farm loan waivers before the farmers are made better? The answer is not blowing in the wind. (Apologies to Nobel Laureate Mr. Dylan)

Finally, the BJP manifesto also proposed the launch ‘Gobar-dhana Yojane’ to help farmers monetise cow dung. Then, at least the cow dung will be worth more than these manifestos.