Avinash M Tripathi

Avinash M. Tripathi is an Associate Research Fellow (Economics) at the Takshashila Institution. His research interests include competition policy and financial risk management. He prefers a profound answer to a silly question rather than the other way around.

Which States are Financially Underdeveloped in India?

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Which states are the least (most) financially developed in India? To answer this question, I construct a Financial Deprivation Index (FDI); the higher the FDI, the less financially developed a state is. FDI is based on three dimensions: branch coverage, deposit mobilisation and credit disbursal. The first dimension relates to the financial infrastructure, other two are the variables relevant for the long-term saving, consumption smoothing and investment.

To construct the FDI, deprivation scores are calculated by dividing the population of each state by the number of reporting branches, total deposits and credit outstanding as on 31st March, 2017, respectively. A simple average of these scores would be misleading as they carry different units. To get around this problem, the scores are centred about the mean and normalised by dividing by the range. Finally, a simple average of the normalised score is calculated which serves as the Financial Deprivation Index.

So much for the data and methodology. As for the results, they are depicted in the map shown above. The least financially developed states in India are Manipur, Bihar, Assam, Nagaland and Uttar Pradesh.

The most financially developed states/UTs in India are Chandigarh, Goa and NCT of Delhi. Given the level of urbanisation, this is hardly surprising. Among the larger units, Punjab, Kerala, Haryana, Karnataka and Maharashtra are the most developed states. Somewhat surprisingly, hilly states such as Uttarakhand, Sikkim and Himanchal Pradesh have fared well.

One surprising finding of the analysis was the extent of heterogeneity in the North-Eastern states. Assam, Manipur and Nagaland figure among  the least financially developed states in the country; Arunanchal Pradesh, Mizoram and Sikkim show decent performance in terms of FDI. Understanding the reasons of uneven development may provide valuable lessons for policy formulation.

Market Microstructure and Monetary Policy

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Conventional wisdom holds that the monetary transmission mechanism (MTM)– a collection of pathways that connect the central bank actions such as increasing repo rate to real economic decisions such as taking a home loan–is quite weak in India. In theory, MTM is supposed to act in two separate legs. After the monetary policy committee decides to change policy rate, the RBI conducts liquidity management operations to bring overnight interest rate which happens to be operating target–the weighted average call rate (WACR)–within the policy rate corridor.

Since WACR, at the margin, determines the funding cost to the banking sector, it should ultimately change banks’ benchmark lending rates and affect economic variables like investment and savings etc.

But there is theory and there is practice. Recent repo rate hike by the RBI has been a very different story altogether. After the hike, there seems to be plenty of liquidity in the system. RBI is still conducting reverse repo operations to mop up excessive liquidity.

On the other hand, even before the hike was announced, a number of banks led by the State Bank of India and ICICI, had already increased their lending rates, increasing the borrowing cost both for prospective and existing borrowers.

Rather than the textbook monetary mechanism, interest rates seem determined by the market leader and imitated by other banks. There are striking similarities with  the Stackelberg market leadership model. The bottom line is that market microstructure is an important part of the price formation in Indian banking sector.

In this respect, Urjit Patel committee’s observations about the India-specific peculiarities of the MTM may be recalled:

Significant asymmetry is observed in the transmission of policy rates changes between surplus and deficit modes suggesting that maintaining suitable liquidity environment is critical to yielding improved pass-through.

Could it be that the ‘significant asymmetry’ is less due to liquidity environment and more due to market structure? The hypothesis can not be ruled out.

 

The Ocean of Humanity

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Ex-President Pranab Mukherjee’s speech at the Rashtriya Swayamsevak Sangha (RSS) headquarter has stirred up the proverbial hornets’ nest.

The RSS is not an academic institution. It is a cadre-based organisation with strong ideological moorings. Certitudes are important both for it’s existence and survival. Despite this, they invited probably the most cerebral and scholarly ideological opponent to address their valediction. It shows a certain confidence and suppleness that must be appreciated.

As for the citizen Mukherjee’s speech, it was impressive to say the least. The central feature of his speech was neither the invocation of Jawaharlal Nehru nor of the constitutional patriotism. For me, it was the reference to Tagore’s celebrated poem ‘Bharat Tirtha’. Tagore’s formulations on the nationalism and patriotism are important and have a contemporary resonance for a variety of reasons.

Tagore was in the search of an authentic Indianness. He expressed his vision lyrically in a number of poems and more concretely in the form of Shantiniketan, the institution he established and nurtured. His vision was rooted, yet cosmopolitan; traditional yet modern. Synthesis and reconciliation, and not recrimination, was it’s essence. Tagore was also the most important spokesperson of the Indian version of liberalism. His ‘Ekla chalo re’ is possibly the best articulation of an individual spirit unafraid of the collective tyranny and his ‘Chitto jetha bhayashunyo’ the most appropriate translation of the Kant’s Sapere Aude.

Needless to say, Tagore’s vision of India is very different from the ethnicity and identity centric versions of nationalism. If the subsequent discussions of Mukherjee’s provocative speech can bring out those nuances and rescue the richness of Tagore’s message from the collective amnesia, it will have served it’s purpose.

How you Could Have Made Money From the Karnataka Election Coverage

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Elections throw up a dizzying number of possible coalitions and outcomes. In the recently concluded Karnataka assembly elections, many newspapers, TV channels and political analysts learnt it to their dismay. Based on the initial leads, they declared BJP the winner, only to realise later that the political script was unfolding in a very different way.

Around 10:30 AM yesterday, there was a strong consensus on my twitter timeline that BJP had ‘bagged’ Karnataka. Convinced of the ‘verdict’, commentators moved on to ‘explain’, ‘analyze’ and ‘draw lessons’ from the verdict! It puzzled me to the extent that I put out the following tweet:

Wrong to call Karnataka right now. If BJP doesn’t cross halfway mark, a Congress/JDS alliance may not be ruled out.

Why one should have anticipated the possibility of Congress and JD(S) coming together? To see the logic, begin with a basic tautology: a politician covets political power. Politicians, while forming a coalition, wish to form government. This is partially correct; but, not the whole story. Otherwise, what prevents the whole legislative assembly from coming together and forming a ‘super alliance’?

Such an alliance is guaranteed to rule forever.

The reason why such ‘super alliances’ never get formed is not because they are unethical or ideologically incongruous. The real reason is that politicians worry about ‘intra-alliance’ power too. They dislike being a small player in a large coalition. That is why a ‘typical’ political coalition is medium-sized: big enough to cross the halfway mark, but not big enough to make each slice of the pie too small.

Following this general principle, it was obvious from the initial leads that Congress and JD(S) combine was the most natural post-poll alliance. A BJP-JD(S) combine would have been too big to be stable, given the numbers. In a way, the initial bounty of MLAs that BJP harvested also diminished the probability of BJP-JD(S) coming together! BJP had to cross the halfway mark on it’s own, possibly aided by independents and/or poaching.

Looking at the election this way totally changed the interpretation of the emerging scoreboard. Except may be for a brief period, BJP never crossed halfway mark on it’s own. And from 1.15 PM onward, they were firmly trailing behind the combined strength of the Congress and JD(S). And then around 2.00 PM came the bombshell announcement: Congress had offered unconditional support to JD(S) which wasted no time in accepting it.

And this was not merely an academic speculation. Since stock market was bullish on the BJP victory, there was a narrow window in which you could have capitalized on the misleading headlines: you could have shorted NSE benchmark index and made some quick bucks.

I am still regretting the missed opportunity.

Why do Women get Charged More for Haircuts? Some Explanations

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There is nothing so mysterious as the commonplace, said Sherlock Holmes. I was surprised by one such ‘commonplace yet mysterious’ incident reported in this article. The author, drawing on her personal experience, has reported that hair salons charge more (well, almost double) for the hair cut from women compared to men. Why would a barber, more interested in earning profit than anything else, want to charge more than the cost of service, even at the cost of being competed out?

There are two plausible explanations.

Basic economics tells us that when firms exercise market power, actual price need not be based on the cost of service. In fact, it is a standard undergraduate exercise that profit markup will depend on the willingness to pay (aka demand elasticity). If women, for some reason, are more willing to pay for their personal care products, it makes economic sense to charge differentially. This practice, known as ‘price discrimination’, is ubiquitous; it is the reason why book vendors charge differently for the domestic and international editions of their books (which have almost similar content).

The second explanation could be related to switching cost. Switching costs refer to the costs that must be incurred by the consumer for changing their current service provider.

Assume that, on average, men have greater mobility. They use modes of transportation which are more flexible and personalized (bikes, cars). When presented with a bad deal, they can easily say no and walk away. Now assume women, on average, use less flexible modes of transportation (say taxis or autos). Once they are in the salon, it will be more costly, both in terms of money and convenience, to say no and walk away. Knowing this, a barber would offer less favorable price deal.

In fact, this ‘theory’ can be empirically tested. If a number of salons are located nearby, the switching cost will be low and prices will be driven down to their cost of service by competitive pressure.

Sherlock Holmes has also said that it is a capital mistake to theorize before one has data. It is possible that none of the explanations make sense and something else is going on. But certainly it is a mystery that needs to be examined more closely.