AIEFS NEWSLETTER

AIEFS is a non-profit academic organization founded in 1975 at Bloomsburg State University, Pennsylvania

Volume 5 Issue 2

October 26, 2012

Association Objectives Promote interest in the study of Indian Economics & Finance Encourage inquiry into, and analysis of the problems facing the Indian economy Facilitate communication and discussion among Scholars

The Biggest No-Show on Earth Why Indias Power Outage Happened (And May Happen Again!)
Prodipto Ghosh, PhD Distinguished Fellow The Energy Resource Institute, Delhi, India

Executive Committee 2011-2013 President

Amitrajeet Batabyal
Rochester Inst. of Technology

Executive Director
Kusum W. Ketkar Assistant Executive Director Chandana Chakraborty Montclair State University Assistant Executive Director Meenakshi Rishi Seattle University

At the end of July last, the inter-connected electricity grids in Northern India tripped twice in 3 days, causing some 600 million people to go without electricity. In sweltering heat (100+ deg F) and high humidity (60%+). Masses of common-folk sweated without air-conditioning or fans; factories from giant steel mills, oil refineries, and power plants to humble cottage crafts workshops shut down, and, with ominous political implications, scores of millions of small farms could not irrigate the land in the sowing season which had just commenced. The proximate cause of the outage was excess drawal of power by just these farmers in agriculturally important states Haryana, Uttar Pradesh, Bihar. This caused a cascade of tripping by the grids, which are interconnected to enable transfer of power from one to another to even out supply and demand in the system. The Federal grid administrators do not have the legal authority to isolate individual errant grids a fact reflecting a political consensus among the states and the Federal government that enabled interconnection of the grids in the first place. This ensured that excess drawal by some states impacted all the interconnected states. At a second level of causality, farmers drew excess power because of a delayed monsoon (although later the critical monsoon rains picked up). The excess was in relation to the supply that could be made. And the reasons why the supply response was deficient brings us to a still deeper level of enquiry the nature of the Indian political economy.
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Treasurer
Artatrana Ratha St. Cloud University Elected Members Chandana Chakraborty Montclair State University Atrayee Ghosh Roy Minnesota State University Sushanta Mallick Queen Mary Univ. London Roby Rajan University of Wisconsin Neha Khanna Binghamton University Kalyan Chakraborty Emporia State University

Program Chair & Newsletter

Kusum Ketkar

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India is the worlds largest democracy. How large is that? All persons age 18 and above may vote, without further qualification. The electorate numbers c. 700 million. In each election, more than 60% of registered voters cast their vote. This means that at each Indian national election, more people vote that in the rest of the democratic world put together! (An interesting fact the results are known within two hours of start of counting, owing to robust, advanced electronic voting machines). However, India has also the greatest heterogeneity among its people than any other country. The 1.2 billion population is divided among all the major religions Hindus, Muslims, Christians, Sikhs, Buddhists, Jains, Jews (one community of which claims it is a lost tribe of Israel), and tribal animists. Each, in turn, is divided into numerous sects. The Hindus, comprising the largest group some 80% of the total, but also Sikhs and some others, are further divided into numerous consanguineous castes. To complicate matters further, traditionally castes were arranged in a hierarchy, also largely reflecting occupational, and hence economic and social, status. The hierarchy however, has undergone tremendous rearrangement in the last four decades, as the one-person-one-vote rule has ensured that effective political power has shifted to the more numerous castes lower down in the traditional hierarchy. Indias wealth of political parties (national level 10, state level 61 recognized), have responded to this immense diversity and inter-group power and status shifts by fine tuning their political agendas. These are premised on a certain conventional wisdom that interests of individual voters can be categorically mapped to their respective group identities; that each group is myopic, and looks only at immediate largesse and cannot discern the long-term impacts of proposed policies; and that there are certain benefits that are not zero-sum across groups in the near-term (however fiscally damaging they may be in the long term). This conventional wisdom has placed a premium on political agendas focused on garnering immediate, perceived benefits to groups that are the clientele of particular, and competing, political parties. However, many of the relevant immediate benefits cannot feasibly be limited to the client groups, but of necessity need to be more broadly targeted across groups. Accordingly, a great deal of political effort has been expended on securing legally binding affirmative action (reservations in public employment, college seats) for particular groups which may have been historically disadvantaged, but without regard to their evolution in the past decades and their current status. Equally the political agendas include publicly subsidized provision of goods and services to wider sections, e.g. food to the poor, electricity and diesel to farmers; irrespective of group identity.

AIEFS Contact: Kusum Ketkar, 15 Dorset Lane, Short Hills, NJ 07078 Phone: (973)-912-8960, kwketkar@hotmail.com

Volume 5 Issue 2, October26, 2012

Since the conventional wisdom is widely believed, few politicians have the gumption to point out the pitfalls in fiscal impacts (e.g. subsidized electricity), or corruption in delivery (e.g. of food). Each political party, accordingly, espouses an ever-expanding agenda of benefits to their affiliated groups (where the benefits can be targeted to particular groups), as well as subsidies directed more generally, calculating that when the fiscal situation becomes untenable, their term of office would be safely over. In respect of subsidies for goods and services, in several cases the fiscal impact is indirect with tariffs for customers set below procurement costs, the balance sheet of the concerned utilities become weak, and there is no money for proper O&M, let alone fresh investment. New investment from fiscal resources has to contend with the prior claims of subsidies to these resources. Investment from resources raised through the market, including foreign capital flows, is associated with high risks of payment by the utilities with weak balance sheets. Indian elections are also outlandishly expensive. The campaign for election to a Parliament seat would typically be several million dollars for each candidate. Liquor is illicitly distributed to male voters, sarees to females, and cash to both. The 5 year cycle of elections and their high cost for parties and candidates places constant pressure on them to raise resources, not only for the next election, which they could well lose, but at least so that they may contest the election after that, and then some, for themselves, their family and kinfolk. Thus, another enduring feature of the Indian political economy is excessive executive discretion, as opposed to reasonable, defensible rules, in allocation of publicly held resources (e.g. coal mines), public contracts (e.g. building roads), and regulatory approvals (e.g. diversion of designated forest land to other use). It is this exercise of discretion that yields the resources needed to fight elections. However, it is just such rent-seeking that is responsible for perceptions of poor governance and consequently high turn-overs of incumbent legislators and Ministers at each election. Thus, in respect of highways, a deliberately flawed PPP bidding model, for a number of years led to gridlock in assignment of contracts to developers. In case of railways, cross-subsidization of passenger fares by freight, has led to loss of freight traffic to roadways and consequent insufficient revenues overall, and thus to insufficient investments. Irrigation tariffs throughout the country are way too low for meeting O&M costs, let alone new investment. In urban infrastructure, reluctance to recover costs by way of realistic property taxation or user fees have constrained investible funds with the municipalities. In ports, powerful longshoremen unions
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AIEFS Contact: Kusum Ketkar, 15 Dorset Lane, Short Hills, NJ 07078 Phone: (973)-912-8960, kwketkar@hotmail.com

Volume 5 Issue 2, October26, 2012

resist investments in modernization, even though there are fewer constraints, in principle, on raising tariffs. In respect of coal, apart from a faulty, non-transparent mode of allocation of mines, inadequate transportation connectivity means that sufficient coal cannot be taken out. And finally, in case of power, apart from insufficient coal availability, hugely subsidized tariffs for farmers have led to state utilities becoming near-bankrupt, leading to inadequate investment in transmission and distribution, and perception of high risks for payments to generators. Hence the power outages of July last. The conventional wisdom on the Indian electoral system may, however, be largely based on myths. Numerous individual elections have shown that beyond a relatively small critical mass, money matters little for electoral outcomes. And repeatedly, state elections Gujarat, Orissa, Madhya Pradesh, Bihar, and the Federal elections in 2009, have shown that what really drives the voters are growth and good governance. Nevertheless, since the myths are widely believed, they are competitively pursued by the political class. The short-term political economy thus undermines the countrys long term interests in growth, creation of employment, and improving governance, themselves, as shown by recent experience, the actual guarantor of continued electoral success. Is there a way out of this mess, short of abandoning a noisy, vibrant democracy? Indian democracy has a history of coming into its own at times of national crisis. Thus the food crises of the 1960s led to stepped up agricultural research and a determined policy effort aimed at food sufficiency. It success surprised even the optimists, and at present India is a significant net exporter of food, despite a much increased population compared to the 1960s. In the early 1990s, the consequence of several decades of flirting with state planning of the economy was a foreign exchange crisis and risk of default in external payments. The response was a series of reforms which in the space of a few years not only reversed the foreign exchange situation, but also led to near 8% GDP growth rates, compared to a trend rate of 3% previously. The breakdown of the power grid is but one sign that India is again heading towards an economic crisis. There are other disturbing signs. GDP growth is a hairbreadth away from 5% - a minimum of 7% is needed to create jobs for the new entrants to the workforce. The fiscal deficit may reach 6% of GDP this year. And the Indian rupee has lost nearly 20% of its value against the US dollar in the past several months.

AIEFS Contact: Kusum Ketkar, 15 Dorset Lane, Short Hills, NJ 07078 Phone: (973)-912-8960, kwketkar@hotmail.com

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However, in the past one week, several important reform measures were adopted by the government despite predictable, loud political opposition. This gives hope that Indian democracy may yet again demonstrate its inherent resilience. One cannot, however, take it for granted.

Association of Indian Economic and Financial Studies (AIEFS)

AIEFS Program at ASSA 2013 San Diego January 05, 2013
AIEFS Executive Committee Meeting: January 05, 2013 4.45-5.45pm, Marriott Marquis and Marina, Room Encinitas Invitation: Executive Committee Members AIEFS Reception: January 05, 2013 6.00 - 8.00PM, Marriott Marquis and Marina Invited Speaker: Sajal Lahiri, Can the Most Favored Nation Clause of WTO be Welfare Improving Under Asymmetric Oligopoly? Vandeveer Professor of Economics, Southern Illinois University Carbondale Invitation: Members, colleagues, friends and others

AIEFS sponsored Sessions

Jan 05, 2013 10:15 AM, Marriott Marquis & Marina, Orlando Association of Indian Economics & Financial Studies (AIEFS) Is There a Policy Paralysis? (O2) Presiding: AMITRAJEET BATABYAL (Rochester Institute of Technology) India's Long Term Growth: 1900-2010
UMA KAMBHAMPATI (University of Reading) SIMON BURKE (University of Reading)

Is Your Government Closer to Its People? Worldwide Indicators on Localization and Decentralization
ANWAR SHAH (World Bank) MAKSYM INVANYNA (Michigan State University)

AIEFS Contact: Kusum Ketkar, 15 Dorset Lane, Short Hills, NJ 07078 Phone: (973)-912-8960, kwketkar@hotmail.com

Volume 5 Issue 2, October26, 2012

Can Rural Public Works Affect Rural Wages? Evidence from India
SAMBIT BHATTACHARYYA (University of Sussex) ERLEND BERG (University of Oxford) MANJULA RAMACHANDRA (Institute for Social and Economic Change)

Understanding Bank Runs: Do Depositors Monitor Bank Runs?

MANJU PURI (Duke University) RAJKAMAL IYER (Massachusetts Institute of Technology) NICHOLAS RYAN (Massachusetts Institute of Technology)

Do Curbing Corruption and Promoting Financial Integration Serve as Complements or Substitutes in Reducing Inequality?
SOURAV BATABYAL (State University of New York) ABDUS CHOWDHURY (Marquette University)

Food Inflation in India: Causes and Cures

PRADEEP AGARWAL (Indian Institute of Economic Growth)

Discussants:
KALYAN CHAKRABORTY (Emporia State University) KESHAB BHATTARAI (University of Hull) RAJA KALI (HEC, Montreal) ANIL KUMAR (Federal Reserve Bank of Dallas) KUSUM MUNDRA (Rutgers University) DEBASRI MUKHERJEE (Western Michigan University)

Jan 05, 2013 12:30 pm, Marriott Marquis & Marina, Orlando Association of Indian Economics & Financial Studies Innovations, Currency, Exports & Growth (F4) Presiding: KUSUM KETKAR (AIEFS) A Multi-Region Model of Economic Growth with Human Capital and Negative Externalities in Innovation
AMITRAJEET BATABYAL (Rochester Institute of Technology) PETER NIJKAMP (Free University)

Currency Safe Havens during Global Financial Stress: India vs. Other Emerging Markets
VALERIE CERRA (International Monetary Fund)

AIEFS Contact: Kusum Ketkar, 15 Dorset Lane, Short Hills, NJ 07078 Phone: (973)-912-8960, kwketkar@hotmail.com

Volume 5 Issue 2, October26, 2012

SWETA SAXENA (International Monetary Fund)

How Does Openness and Exchange Rate Regimes Affect Inflation? Evidence From Asia
AMIT GHOSH (Illinois Wesleyan University)

Understanding Foreign Direct Investment & Economic Growth in Export Oriented Economies: A Case Study of Fiji & Mauritius
RAJEEV SOOREEA (Dominican University of California) RUKMANI GOUNDER (Massey University)

Selection into Exporting, Market Size and Export Prices: Evidence from India and China
SUSHANTA MALLICK (Queen Mary, University of London) HELENA MARQUES (University of the Balearic Islands)

Private Equity Exits: Do Multiple and Foreign PE Investors Matter?

RAMA SETH (Indian Institute of Management, Calcutta) ROHAN CHINCHWADKAR (Indian Institute of Management, Calcutta)

Discussants:
RASIKA CHIKTE (University of Oklahoma) ARUN SARKAR (University of Wisconsin) CHANDANA CHAKRABORTY (Montclair State University) BASANTA CHOUDHRY (Rutgers University) MEENAKSHI RISHI (Seattle University) PARUL JAIN (Baruch College and Macrofin Analytics)

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AIEFS Contact: Kusum Ketkar, 15 Dorset Lane, Short Hills, NJ 07078 Phone: (973)-912-8960, kwketkar@hotmail.com

Volume 5 Issue 2, October26, 2012

ASSOCIATION OF INDIAN ECONOMIC & FINANCIAL STUDIES (AIEFS)

Department of Economics, Rochester Institute of Technology 90 Lomb Memorial Drive, Rochester, NY 14623-5604 kwketkar@hotmail.com kwketkar@gmail.com (Please type or write everything in capital letters)

Name: __________________________________________________________________ Affiliation: ______________________________________________________________ Mailing address: ________________________________________________________ _________________________________________________________ Phone: ( ) (H); Phone: ( ) (W); Fax: ( ) .

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Circle your preferences, if you plan to participate in any AIEFS programs: 1. AIEFS biennial conference, held generally in summer months every other year (next one due in 2013) 2. AIEFS-sponsored occasional seminars 3. AIEFS sessions at Eastern Economics Association, generally in February/March every year 4. AIEFS sessions at ASSA, held generally in the first week of January every year 5. Contribute short, 1-2 page articles to the AIEFS Newsletter, occasionally or on a regular basis Please check the membership category you have chosen. ____ Life ($ 350), ____ Full ($ 40), ____Family ($ 50),____ Student ($20) (Except Life, all other categories of membership are for a calendar year) To pay membership fee online, go to: www.aiefs.org or make the check payable to the Association of Indian Economic and Financial Studies (AIEFS) and mail it, along with this completed form to the Executive Director at the address : Kusum W. Ketkar, Executive Director, AIEFS 15 Dorset Lane, Short Hills, NJ 07078 Phone: 973-912-8960 Paper presenter/discussant Paper presenter/discussant Paper presenter/discussant Paper presenter/discussant

AIEFS Contact: Kusum Ketkar, 15 Dorset Lane, Short Hills, NJ 07078 Phone: (973)-912-8960, kwketkar@hotmail.com

Volume 5 Issue 2, October26, 2012

About AIEFS
AIEFS sponsors sessions at the annual ASSA, Western Economic Association and Eastern Economic Association. It also holds biennial meetings either in the US or India. First biennial meeting in India was held in collaboration with Research and Information System for Developing countries (RIS) in June 2011 In Delhi. The 2013 biennial meeting will be held in collaboration with Indira Gandhi Institute of Developments Research in Mumbai. AIEFS brings out Newsletter twice a year fall and in spring. From time to time, AIEFS also publishes edited books or proceeding of papers presented at ASSA and biennial meeting. In recent years, papers have been published in special issues of peer reviewed journals.
For futher information of AIEFS or to become a member, please visit the website: www.aiefs.org. Or contact executive director: Professor Kusum W. Ketkar kwketkar@hotmail.com or kwketkar@gmail.com

AIEFS Contact: Kusum Ketkar, 15 Dorset Lane, Short Hills, NJ 07078 Phone: (973)-912-8960, kwketkar@hotmail.com