How bad governance and an elephant footed Judiciary is derailing the Indian economy...

How bad governance and an elephant footed Judiciary is derailing the Indian economy...

By all estimates India is poised to be the third biggest economy by 2050 sharing space with China and America. It is all set for a very high growth trajectory eclipsing China’s high growth rates anytime between 2015-2020. The basis of these estimates remains that India’s political landscape remains stable and policy framework remains strong. But as we are all set to board a high speed growth train, suddenly we have acquired travelling sickness (in terms of poor governance, policy logjam and slow justice). We are not in the best frame of mind to board the train. Rather the train is apprehensive to board us, lest we spoil their spick and span train with our sickness. It is thus giving us time to sort out our sickness before we are afforded an opportunity aboard the fastest economic growth train. This is one train we cannot afford to miss and this is one train we want to board with our best foot forward.

India is an emerging economy with a young population and strong economic fundamentals. Free judiciary (though the speed of justice remains a drag), democratically elected government, independent central bank and developed financial markets are the pillars of our economic growth and red tape, corruption and poor infrastructure remains the irritants in the growth process.

The question that we are answering here is how and why bad governance and elephant footed judiciary jeopardizes the good work and threatens to derail the economic growth engine?

India remains heavily dependent of foreign investment in order to sustain and increase our GDP growth rate. Currently we import more than we export, thus the current account deficit and we pay for our imports (which are more than our exports) by borrowing from abroad (foreign investment). FDI in any form is welcome as that is helping the country generate growth and thus this form of foreign investment is pro growth. Foreign investors when investing in a country look for the following parameters:

1.     High growth rates – India is currently in the high growth phase and thus investment by foreign investors in India is giving them high return on their investments.

2.       Current account deficit

3.       Fiscal and monetary policy

4.       Fiscal deficit

5.       GDP/Debt

6.       Liquidity

7.       Political Risk Premium

8.       Stability of currency

I ‘ll try and brief on parameters in the next blog. 

Central Bank's Toolbox

What are the policy tools available with the Central Bank in a bear zero interest rate environment?

Normally a Central Bank’s preferred choice of policy tool for inflation is short term interest rate. But when happens when the interest rate drops to zero and the central banks commits to keep interest rates are near zero in the near future? What are the policy tools available with the Central Bank in such a low interest rate scenario?

QE or quantitative easing is the answer. QE, a form of asset purchase has now come to refer to several flavours of asset purchase programme. It is generally used when the traditional measures/ tools like lowering interest rates are exhausted. One version of QE is credit easing in which the aim is to support the economy by boosting liquidity and reducing interest rates when credit channels are clogged. Fed’s purchase of MBS demand for which has weakened sharply during the financial crisis fall into this category. Another type of asset purchase aims to boost the economy without creating new money. An example of this is the Fed’s ongoing Operation twist in which Fed sells short term debt and uses the proceeds to buy long term debt giving investors cash for long term debt prompting them to invest more money in other assets. QE proper is a third type – the most straightforward way is portfolio rebalancing – the investors who sell the securities to the central bank then take the proceeds and buy other assets raising their prices. Lower bond yields encourage borrowing, higher equity prices raise consumption, and both help investment and boost demand.