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Tuesday, June 20, 2017

Interesting readings

How genetics is settling the Aryan migration debate by Tony Joseph in The Hindu, June 19, 2017.

The botanists' last stand: The daring work of saving the last samples of dying species by Zoe Schlanger in Quartz, June 17, 2017.

45 years of Watergate: Why the journalism of the Washington Post-NYT holds lessons for today's media by Saikat Datta in Scroll, June 17, 2017.

Dangerous nonsense: Once we put the Indian military above criticism we become Pakistan by Kanti Bajpai in The Times of India, June 17, 2017. Also see: How will your armed forces perform? by Ajay Shah in Ajay Shah's Blog, October 12, 2016.

Eyes in the forest by Aakash Lamba in Mint, June 17, 2017.

Where are India's TV comedy shows? by Mitali Saran in Business Standard, June 16, 2017.

Lessons from the US in Business Standard, June 15, 2017.

Modi's Message to the Media by Sadanand Dhume in The Wall Street Journal, June 15, 2017.

Keep official abuse of governance in check by Somasekhar Sundaresan in Business Standard, June 15, 2017.

The power paradox by Pratap Bhanu Mehta in The Indian Express, June 14, 2017.

Jeff Sessions and the Trail of Unanswered Questions by Amy Davidson in The New Yorker, June 14, 2017.

Want More Time? Get Rid of The Easiest Way to Spend It by David in Raptitude, June 13, 2017. Why did social media work badly? Perhaps an adverse selection process is afoot: a vicious cycle of low quality giving selective exit giving lowered quality.

Is Trump's definition of 'the rule of law' the same as the US Constitution's? by David Mednicoff in The Conversation, June 13, 2017.

Trump and the True Meaning of 'Idiot' by Eric Anthamatten in The New York Times, June 12, 2017.

Pirate Bay founder: We've lost the internet, it's all about damage control now by Már Másson Maack in Nextweb, June 10, 2017.

Donald Trump Is the Worst Boss in Washington by Britt Peterson in The New York Times, June 9, 2017.

The forking of the Indian rupee by J P Koning on Moneyness, June 9, 2017.

Blood from the Sky: Zipline's Ambitious Medical Drone Delivery in Africa by Jonathan W. Rosen in MIT Technology Review, June 8, 2017.

Bengal and business by Ashok K Lahiri in Business Standard, June 6, 2017.

Monday, June 19, 2017

Movement on the law for the Resolution Corporation

by Suyash Rai.

Capitalism without bankruptcy is like Christianity without hell.
- Frank Borman

On June 14th, the Union Cabinet approved the proposal to introduce a Financial Resolution and Deposit Insurance Bill, 2017 ("the FRDI Bill"). This is an important step forward for a critical component of the overall strategy of India's financial sector reforms. Shaji Vikraman has insight on this in the Indian Express. In this article, I look deeper into the concept of the resolution corporation, why it matters, how we got to this milestone, and what comes next.

The slow unfolding of the banking crisis reminds us of the fragility of our financial system. The financial system, especially the banking system, is generally disaster-prone. On one hand, financial firms can make mistakes and experience losses. In addition, there is a link between problems of the economy and hardship in financial firms. When an economic downturn happens, the value of business activities declines, and this induces losses upon financial positions. We need to build a financial regulatory apparatus which will reduce financial fragility. This involves three main elements of machinery : micro-prudential regulation (which aims to push the failure probability of each financial firm to a desired value), systemic risk regulation (which aims to reduce the probability of a disruption in the overall financial system, and have tools to respond to such a disruption when it does arise) and resolution (a specialised bankruptcy process for most financial firms). At present, in India, we have weaknesses on all three elements.

Consequences of a weak resolution system

When micro-prudential regulation works well, the failure probability of financial firms is at a low level chosen by the relevant financial agency. The failure probability is not zero. Failure of inefficient firms is essential for `creative destruction'. The process of failure of inefficient firms, and the shift of capital and labour to efficient firms, is essential for productivity growth. The question is: How can we make the failure of financial firms orderly?

The failure of financial firms can often be quite disorderly. Unlike real sector firms, many financial firms manage a large amount money belonging to households and businesses, with only a small amount of capital brought in by their owners. Banks in India typically have leverage of 18$\times$ to 20$\times$, which means that their balance sheet size is 18 to 20 times the amount of equity capital. Such leverage is never seen with real sector firms. When the firm gets into trouble, there is clamour by the creditors who want to see a fair and efficient process through which they get some of their money back. Matters are more challenging with some financial firms which are so large and complex that their failure could induce instability in the financial system.

An orderly failure is one where a) the consumers either get their money back quickly or continue to get services without any significant inconvencience, and b) the stability of the financial system is not threatened. If we are not able to obtain orderly failures in the financial system, this has many adverse consequences:

  • Consumers of failed financial firms suffer. As an example, in India, many cooperative banks fail every year. In spite of high entry barriers, larger institutions also fail (e.g. Global Trust Bank in 2004). Consumers lose money in these failures. These bad experiences make consumers wary of engagement with the financial system, and increase the share of gold and real estate in their portfolios.
  • Financial stability is threatened, because even if one systemically important financial firm fails, the entire system could be destabilised by a messy, long-drawn bankruptcy process. This forces government to bail out such financial firms. So, a financial crisis ends up having a fiscal consequence.
  • When faced with the possibility of harm to consumers, and threats to financial stability, governments get cold feet in situations of firm distress. They are then prone to bail out financial firms using taxpayers' money. We in India are familiar with this story. Public sector banks are routinely recapitalised with public funds to ensure they do not fail. This is almost never a good use of public money.
  • Regulators sometimes respond to these problems by setting up entry barriers, which harm competition and economic dynamism. They justify the every day harm to competition on the grounds that this averts harm to consumers, risks to financial stability and the fiscal cost of bailouts.
  • Financial firms suffer from moral hazard, and take greater risks. At its worst, financial firms obtain supernormal profit from these two interlinked channels: the certainty of being bailed out and the lack of competition.

A system that ensures quick and orderly resolution of failed financial firms can help avoid these outcomes. The system should be such that government, financial firms and consumers believe that the failures will be orderly. The present system of resolution in India is inadequate.

First, it mostly empowers the respective regulators (eg. RBI for banks) to do the resolution. Since regulators give the licenses and are supposed to ensure safety and soundness of the firms they license, they tend to be tardy in acknowledging their mistakes. This regulatory forbearance leads to delays in recognition of failure, which increases the costs of resolution, and may lead to losses for consumers and increases risk to stability of the financial system. There is a conflict of interest between micro-prudential regulation (achieving a target failure probability for a financial firm) and resolution (gracefully closing down financial firms which are nearing failure).

Second, the present system gives very limited powers of resolution. The powers that are given are: forced mergers/amalgamation, and winding up. Some of the other powers, such as bail-in (discussed later), are not available.

Third, even these limited powers are not enjoyed over many of the financial firms. For example, regulators do not have resolution powers over public sector scheduled commercial banks and regional rural banks.

Fourth, the way the system is structured, a bankruptcy resolution can take years, sometimes even longer than a decade. This is partly because the regulators do not have powers to take timely resolution action.

The Financial Resolution and Deposit Insurance Bill

Indian policy thinking on this began in the RBI Advisory group on reforms of deposit insurance, 1999, chaired by Jagdish Capoor.

This slumbered until we got to the Financial Sector Legislative Reforms Commission, chaired by Justice BN Srikrishna, which worked from 2011 to 2013. In its full design of Indian financial regulation, it recommended a Resolution Corporation.

In 2014, a Working Group of Ministry of Finance and Reserve Bank of India, co-chaired by Shri Arvind Mayaram and Shri Anand Sinha, also recommended a resolution capability for financial firms.

In 2014, the Ministry of Finance constitued a Task Force for the Establishment of the Resolution Corporation, under the chairmanship of Shri M. Damodaran, to work out the plan for establishing the Resolution Corporation. This was part of the two-part creation of task forces for building the new institutions required in the FSLRC architecture, which came about as four task forces followed by one more.

The budget speeches of 2015-16 and 2017-18 announced a plan to draft and table a Bill on resolution of financial firms. In September, 2016, a draft of the Bill was placed in public domain for comments.

On June 14th, the Cabinet approved the proposal to introduce a Financial Resolution and Deposit Insurance Bill, 2017 ("the FRDI Bill") in Parliament. The FRDI Bill, when enacted, will create a framework to ensure that failure of financial firms is orderly. It will establish an independent Resolution Corporation tasked with resolving failed financial firms. The Corporation will also subsume the deposit insurance function presently performed by the Deposit Insurance and Credit Guarantee Corporation.

This Bill stands at the intersection of two long-term reform projects: 1) financial sector reforms, of which bankruptcy resolution of financial firms is an integral part; 2) bankruptcy reforms, of which financial firm resolution is an integral part. So, this Bill moves both these projects forward, and is an important building block for an efficient system of capital allocation in India.

FSLRC had envisioned a separation between the resolution corporation, which would apply for most financial firms, and the bankruptcy code, which would apply for the remaining financial firms and for all non-financial firms. The Bankruptcy Legislative Reforms Commission (BLRC), which drafted the Insolvency and Bankruptcy Code (IBC), worked with this scheme. IBC does not cover financial firms, unless the Central Government notifies certain financial firms to be covered under that law. Many types of financial firms, especially firms handling consumer funds and firms that are critical for financial stability, require a specialised resolution mechanism. For firms handling consumer funds (eg. banks, insurance companies), the process under IBC is not suitable, as a large number of small value consumers will find it difficult to invoke that process. The processes of IBC are designed for creditors who are firms, not individuals. For systemically important financial firms (eg. central counterparties, larger banks), a creditor-led resolution process under IBC is not suitable, because what is at stake is not just the interest of creditors but the stability and resilience of the financial system. Hence, for such financial firms a specialised resolution regime is required. The FRDI Bill will create such a specialised resolution regime.

What is resolution?

In the world of financial firms, resolution complements regulation. Regulators and the Corporation are expected to work in tandem, with the regulators focused on maintaining financial health and, when a firm gets into trouble, pushing for its recovery. The Resolution Corporation will take over and resolve a firm after recovery efforts have failed. Although the version of the Bill approved by the Cabinet is not yet in public domain, based on the version that was released for public consultations last year, the framework is divided into four stages.

First, when the financial firm is healthy, the respective regulators will monitor the firm and work to ensure it continues to stay healthy. At this stage, the Resolution Corporation will only get information indirectly through the regulators. Substantive powers to monitor the firm or to take any other action with respect to the firm will not be available to the Corporation.

Second, once the financial firm starts deteriorating, the respective regulator will attempt recovery. At this stage also, only the regulators will continue to have substantial powers over the firm.

Third, if the recovery efforts fail, and as the financial firm get close to failure, the Corporation will get substantial powers to instruct the firm to improve its resolvability and prevent actions that may erode the values of assets available for resolution. At this stage, the role of regulators is restricted.

Finally, when the firm fails, the Corporation will take charge and resolve it. Resolution typically means selling the failed financial firm, as a whole or in parts, to another financial firm via a competitive bidding process. However, resolution could also involve other instruments. For example, the firm could be "bailed-in", which means that the rights of and obligations to creditors may be written down to recapitalise the firm from within. Bail-in typically includes converting some junior debt into equity, but may also include writing down other types of claims. This is the opposite of a bail-out, wherein outside investors rescue a borrower by injecting money to help service a debt. Finally, liquidation may be a tool used for resolution.

There is a certain degree of tension and potential conflict between the Regulators and the Resolution Corporation. This is a healthy check-and-balance. Resolution works as a check on regulatory incompetence and forbearance. Both sides will need to be mature, respect the role of the other, and coordinate.

The idea of a specialised resolution regime for financial firms is well-accepted globally. The US has had a resolution system for banks for more than 80 years. The scope of this system was extended after the financial crisis of 2008. There have been more than 600 bank failures in US since the crisis. In this time, there has been not been even one bank run in the US, because depositors trust the resolution system to work. Why the crisis happened in the first place is another matter, which is beyond the scope of resolution. Resolution comes into play only after regulation fails, and the occurrence of crisis resulted from regulatory failure, among other factors.

Many other countries have put in place comprehensive resolution systems. These include: all European Union member states, Switzerland, Australia, Canada, Japan, Korea, Mexico, and Singapore. Many jurisdictions have ongoing or planned reforms to resolution regimes. These include: Australia, Brazil, Canada, China, Hong Kong, Indonesia, Korea, Russia, Saudi Arabia, Singapore, South Africa, Turkey.

Next steps

We are still a few years away from having a full-fledged resolution regime. Now that the Bill is going to the legislative branch, it remains to be seen what version of the Bill eventually gets enacted. If the essential features of a good resolution regime are diluted in the final version, the chances of success will be low.

Even after the Bill gets enacted, it would still take some time to build an independent and competent Resolution Corporation. Since this capability currently does not exist in the system, it will have to be cobbled together, and then strengthened over a period of time. Consider the example of human resource strategy. There are many models out there. While the Canadian authority works with fewer than 100 employees, the US authority has more than 10,000 employees. The Corporation could choose to run a tight ship, and rely on contractual work to scale up capacity in times of crisis, or it could choose to build a large organisation that is able to, on its own, deal with a crisis. Similarly, given the skill sets required to do this job, the Corporation will have to think innovatively about attracting top talent within the constraints of a government agency.

The Task Force on Establishment of the Resolution Corporation, led by M. Damodaran, has done considerable work that lays the groundwork for constructing the agency. The implementation of their project planning needs to commence immediately, so that the delay between enacting the law and enforcing it can be minimised.

It will also take our governance system some time to get used to this kind of a system of taking over and resolving a failed financial firm in a decisive and quick manner, as opposed to the present approach of allowing things to linger on. If things do go right, there are many potential benefits of this reform.


The author is a researcher at NIPFP.

Wednesday, June 14, 2017


Positions at DAKSH

DAKSH is a Bangalore based organisation working on judicial reforms using quantitative and legal-empirical methods. We focus on judicial process, procedures, management, administration and capacity building. Visit for more details.

We have an opening for the position of Research Associate at Bangalore.

Essential requirements

We are looking for graduates in law or public policy with 2-5 years post qualification experience.

Desirable requirements

Candidates with experience or interest in inter-disciplinary legal research. Experience with litigation or consulting / advisory experience would be an added advantage.

Candidate will work in a collaborative, non-hierarchical and open environment on a unique project with a judicial body.

Salaries will be competitive and commensurate with experience, as per social sector standards.

Contact us

Interested candidates may please send their resumes to

Monday, June 12, 2017

Interesting readings

Firms are fearful as uncertainty has gone up by Ajay Shah in the Business Standard, June 12, 2017.

Time for reflection, fellow doctors by Vikram Patel in The Indian Express, June 10, 2017. There is a similar problem with lawyers.

Comey Drama A Reminder Presidential Disaster Often Hits In Times Of High Confidence by Ron Elving in NPR, June 9, 2017.

How to Write Like James Comey by Beth Skwarecki in Lifehacker, June 8, 2017. The Comey statement.

The Bounty Hunter of Wall Street by Jesse Barron in The New York Times, June 8, 2017. We need to careful to ensure that IFC market abuse, and laws about freedom of speech, do not interfere with such activities, which the richest 1000 families of India dislike.

Presstitute chronicles by Pratap Bhanu Mehta in The Indian Express, June 7, 2017.

Conspicuous consumption is over. It's all about intangibles now by Elizabeth Currid-Halkett in Aeon, June 7, 2017.

Smart policing and safer streets start with better data; this is not the norm in India by Neha Sinha, Avanti Durani, and Rithika Kumar in Hindustan Times, June 7, 2017.

Aadhaar's potential for financial inclusion by Bindu Ananth and Malavika Raghavan in Mint, June 7, 2017.

The crisis of expertise by Tom Nichols in Aeon, June 6, 2017.

Policing by consent: The reassuring face of the British police in trying times by Prasun Sonwalkar in Hindustan Times, June 6, 2017.

Where schools struggle, students seek out English themselves by Aman Sethi, Heena Kausar and Saumya Khandelwal in Hindustan Times, June 5, 2017.

Britain's Secret Weapon Against the Nazis? Refugees by Simon Worrall in National Geographic, June 4, 2017.

What Winston Churchill and George Orwell had in common by John Gray in NewStatesman, June 4, 2017.

Indian Council of Social Science Research: Past, present and a troubled future by Ramachandra Guha in Hindustan Times, May 28, 2017.

Loan Waivers Are Duds: India Needs An Exit Policy For Unviable Farming by R Jagannathan in Swarajya, March 20, 2017.

Tuesday, June 06, 2017

Interesting readings

Grey market for IPOs: A case for regulation? by Suranjali Tandon in NIPFP Blogpost, June 2, 2017.

Downgraded China Doth Protest Too Much by Benn Steil and Emma Smith in Council on Foreign Relations, May 31, 2017.

Masha Gessen in the New York Times: 'incompetence and autocracy are not in opposition: They are two sides of a coin'.

Why India's growing religiosity is an economic challenge by Pramit Bhattacharya in Mint, May 31, 2017.

The Politics of Clan: The Adventures of Jared Kushner by David Brooks in The New York Times, May 30, 2017.

The Loneliness of Donald Trump by Rebecca Solnit in Literary Hub, May 30, 2017.

The severity of the NPA crisis by Harsh Vardhan and Rajeswari Sengupta in Mint, May 30, 2017.

Dealing with protests in Kashmir: The army chief has spoken. Why is the prime minister silent? by Saikat Datta in Scroll, May 30, 2017.

The Aadhaar legal framework is broken by Vrinda Bhandari and Renuka Sane in Mint, May 30, 2017.

Czeslaw Milosz's Battle for Truth by Adam Kirsch in The New Yorker, May 29, 2017.

Minerals as a shared inheritance: Implications for public finance by Rahul Basu in NIPFP YouTube Channel, May 29, 2017.

Wall Street's Endangered Species: The College Jock by Justin Baer in The Wall Street Journal, May 25, 2017.

The Virus Hunters by Jeffrey Marlow in Undark, May 25, 2017.

How the Nazis Made Art Fascist by Ian Beacock in New Republic, May 23, 2017.

There has been no Aadhaar 'data leak' by Ram Sewak Sharma in The Economic Times, May 9, 2017.

Why Arendt Matters: Revisiting "The Origins of Totalitarianism" by Roger Berkowitz in Los Angeles Review of Books, March 18, 2017.

What It's Like to Live in the World's Most Polluted City by Melody Rowell in National Geographic, April 26, 2016.

The Spread of Dengue in an Endemic Urban Milieu: –The Case of Delhi, India by Olivier Telle, Alain Vaguet, N. K. Yadav, B. Lefebvre, Eric Daudé, Richard E. Paul, A. Cebeillac and B. N. Nagpal in PLoS ONE, January 25, 2016.

You Can't Trust What You Read About Nutrition by Christie Aschwanden in FiveThirtyEight, January 6, 2016. We in Economics would do much better if we understood how much these problems afflict us also.

Professor Who Learns From Peasants by Jennifer Schuessler in The New York Times, December 4, 2012.

Monday, May 29, 2017

Interesting readings

The task of MOF by Ajay Shah in Business Standard, May 28, 2017.

India Second Most Complex Tax Jurisdiction After China, Deloitte Says by PTI in Bloomberg, May 28, 2017.

Three Years of Modi Management: The Numbers Don't Tell a Good Story by M. K. Venu in The Wire, May 27, 2017.

A bleak outlook - The road to mob rule in Uttar Pradesh by Ramachandra Guha in The Telegraph, May 27, 2017.

Modi Government's New Restrictions on 'Cattle' Slaughter Will Hurt Indian Farmers the Most by Sagari R. Ramdas in The Wire, May 27, 2017.

Rise of war porn: The hyper-nationalism being unleashed today has electoral rather than strategic considerations by Manoj Joshi in The Times of India, May 27, 2017.

Why the BJP must fear its own fringe by Abhijit V. Banerjee in The Indian Express, May 26, 2017.

If Creating Institutions of Eminence is to be More Than a Naming Exercise, Here Are a Few Ideas by Gautam Desiraju in Swarajya, May 25, 2017.

Publishers fear red tape, censorship, Govt gets a warning by Ritika Chopra in The Indian Express, May 25, 2017.

Why religion and building temples is a profitable business in India by
Mohan Guruswamy in Hindustan Times, May 25, 2017.

Farm policy: Dis-ease of doing the business of agriculture by Pravesh Sharma in The Indian Express, May 25, 2017.

Donald Trump' Base Is Shrinking by Nate Silver in FiveThirtyEight, May 24, 2017.

There is no one right way to react to terror. There is a wrong way by Anne Applebaum in The Washington Post, May 24, 2017.

Trump's budget is simply ludicrous by Lawrence H. Summers in The Washington Post, May 23, 2017.

Google's AI Invents Sounds Humans Have Never Heard Before by Cade Metz in Wired, May 15, 2017.

It took a century to create the weekend - and only a decade to undo it by Katrina Onstad in Quartz, May 6, 2017.

Saturday, May 27, 2017

Improved measurement of Exchange Market Pressure (EMP)

by Ila Patnaik, Joshua Felman, Ajay Shah.

Exchange rates vs. exchange market pressure

Changes in the exchange rate are very visible. But is the apparent change in the exchange rate a fair depiction of the pressure on the currency market? As an example, consider China's story with the exchange rate:

Figure 1: China's monthly exchange rate returns (upper) and foreign exchange reserves (lower)

The upper panel is monthly returns on the CNY/USD. Positive returns are depreciations and vice versa.  We see large periods of zero change separated by a few months in which there was an appreciation. Does this mean that in the long periods of zero change in the exchange rate, the currency market was quiescent? No. This is a period in which the Chinese central bank was trading in the currency market on a large scale. As the graph of their foreign exchange reserves shows, they went from \$0.4T in 2004 to \$1.9T in 2009. There was a lot of pressure on the currency to appreciate. What we see, as zero or small negative returns, understates the true story.

In order to address this problem, economists aspire to construct a measure of `exchange market pressure' (EMP), which would show the true conditions on the currency market in each month. To borrow a phrase from Amit Varma's podcast, there's an important difference here between the seen and the unseen. The apparent exchange rate change is what we see. What's really going on, in terms of the macroeconomic situation on the currency market, is the exchange rate pressure.

Conventional thinking in EMP measurement

Attempts at EMP measurement have been in progress since Girton and Roper, 1977. There are many EMP measures in the literature. An important one, which expresses the mainstream strategy, is by Eichengreen et. al., 1996 . They propose an EMP index for a country is given by:

\textrm{EMP}_{t} = \frac{1}{\sigma_{e}} \frac{\Delta e_{t}}{e_{t}} - \frac{1}{\sigma_{\bar r}} \left ( \frac{\Delta \bar r_{t}}{\bar r_{t}} - \frac{\Delta \bar r_{US_t}}{\bar r_{US_t}} \right) + \frac{1}{\sigma_i} \left (\Delta \left (i_{t} - i_{US_t} \right) \right)

Where the exchange rate is denoted by $e_t$, reserves divided by base money is $\bar r_t$ and intervention of the central bank at time $t$ is $i_t$. The change in $e_t$ is denoted by $\Delta e_t$; the change in $\frac{r_t}{m_0}$ is denoted by $\Delta \bar r_t$. The three sigmas, $\sigma_e$, $\sigma_{\bar r_t}$, and $\sigma_i$, denote the standard deviations of the relative change in the exchange rate, difference between relative changes in the ratio of foreign reserves and base money in the home country against the reference country (US), and the nominal interest rate differential.

This EMP measure is essentially a weighted average of changes in exchange rate, foreign exchange reserves, and interest rates. To prevent the most volatile component of the index from dominating (usually the forex reserves), each component is weighted by its standard deviations. The resulting EMP index is dimensionless. There is a literature (Pentecost et. al., 2001, IMF.,2007) which finds that these kinds of measures are useful in forecasting currency crises.

Problems with conventional EMP measurement

This approach to measurement has several problems. When there is a fixed exchange rate, the standard deviation in the denominator goes to zero. When a country with an inflexible rate (low $\sigma_e$) experiences a modest change in the exchange rate, this shows up as a large value of EMP. As an example, consider the Chinese experience in the time period covered in Figure 1:

Figure 2: Conventional EMP measure for China

In some months, it is not possible to compute the EMP as we get a divide by zero. In other months also, the graph above does not square with our understanding of what was going on. As an example, consider the period after the Lehman collapse. The EMP measure seems to suggest that this is where the highest pressure to appreciate was seen, which seems incorrect.

A better EMP measure

A recent paper, Patnaik et al., 2017 introduces a new method for measurement of EMP. This new approach seeks to measure EMP in the units of percentage change of the exchange rate of the month. The EMP reported for a month is an estimate of the unseen - the exchange rate change (measured in per cent) which would have taken place if there had been no currency intervention in that month.

Let's treat this new method as a black box and examine how well it works.

Example: EMP in China

Figure 3: Conventional vs. new EMP measures for China

The figure above juxtaposes the conventional EMP measure against the new proposed measure.

There are two gray blocks in the conventional measure, where EMP can't be computed as it was a fixed exchange rate and we encounter the divide by zero. The new measure has no such problem.

In the long period of pressure to appreciate, the new measure shows an interpretable value such as a 5% appreciation in the month, which would have taken place if there had been no trading by the central bank in the currency market. The conventional EMP index is dimensionless and cannot be interpreted in similar fashion.

At the Lehman crisis, the new measure shows a sudden shift in exchange market pressure, followed by a return to the pressure to appreciate. The conventional measure suggests the highest ever pressure to appreciate was found at the time of the Lehman crisis, and this pressure subsided later.

Example: EMP in India

Figure 4: Conventional vs. new EMP measures for India

For macroeconomists who know the Indian experience closely, the new measure makes a lot of sense.

In early 2007, it is rumoured that RBI was purchasing as much as \$1B a day, and there was very high pressure to appreciate prior to the structural break in the exchange rate regime on 23 March 2007. This shows up correctly in the new measure. The conventional measure, in contrast, thinks there was not much going on then.

The conventional measure seems to say that at the Lehman crisis, there was a switch from depreciation pressure to appreciation pressure. This seems unlikely. The new measure shows the highest-ever pressure to depreciate right after the Lehman crisis. This seems correct.

Example: EMP in Russia

Figure 5: Conventional vs. new EMP measures for Russia

There was a long period (2002-2008) with one-way pressure to appreciate. This is picked up in the new measure but not in the conventional measure.

The Russian invasion of Georgia (08/08/08), followed by the Lehman shock in the next month, are associated with an immediate shift to depreciation pressure in the new measure (from August itself, reflecting the Georgia invasion). The conventional measure does not pick up these events correctly.

The Russian invasion of Crimia is followed by pressure to depreciate, in the new measure. This does not appear as clear in the conventional measure.

Example: EMP in Brazil

Figure 6: Conventional vs. new EMP measures for Brazil

The Lehman failure, and the Taper tantrum, show up as episodes of pressure to depreciate in the new measure but not in the conventional measure.


Exchange market pressure is an important tool for better understanding macroeconomics. While the concept has always been attractive, conventional methods for measurement have had limitations. The new measure makes it possible to take interest in EMP as a tool for macroeconomic analysis. This article aims to unveil the new measure as a black box, to show that it works better than the conventional measure. The methodology is presented in the underlying paper. The resulting dataset, with monthly EMP data for 139 countries, has been released, and has diverse potential research applications.


Eichengreen, B., Rose, A., Wyplosz, C., 1996. Contagious Currency Crises , Technical Report. National Bureau of Economic Research.

Patnaik, I., Felman, J. and Shah, A., 2017. An exchange market pressure measure for cross country analysis . Journal of International Money and Finance, 73, pp.62-77.

Desai, M., Patnaik, I., Felman, J. and Shah, A., 2017. A cross-country Exchange Market Pressure (EMP) Dataset . Data in Brief.

Pentecost, E., Van Hooydonk, C., Van Poeck, A., 2001. Measuring and estimating exchange market pressure in the EU . J. Int. Money Finan. 20, 401¡V418.

IMF, 2007. Managing Large Capital Inflows , Technical Report. International Monetary Fund.

Thursday, May 25, 2017

Regulatory Policy in India: Moving towards regulatory governance

by Lalita Som.

Regulatory policy, a comparatively young discipline, is evolving in different ways across the world, reflecting the diverse range of legal, political and cultural contexts on which countries have built their public governance. Regulation, one of the key levers of state power, is of critical importance in managing the economy, in sequencing business behaviour, implementing social policy and influencing behaviour. Regulatory policy thus helps to shape the relationship between the State, citizens and businesses.

In OECD countries, policies to increase competition in markets, and to "roll back the frontiers of the state" in the 1980s and 1990s, broadened to become regulatory reform. Regulatory reform became an essential adjunct to structural reforms, reaching out beyond the network sectors to encompass product market reforms and the liberalisation of professional services. Independent regulatory agencies were developed to manage key aspects of economies and society at an arm's length from the political process. This became known as the regulatory state. The regulatory state paved the way for the idea of regulatory governance (OECD, 2010a).

In OECD countries. regulatory policy has made a significant contribution to economic growth and societal well-being - through its contribution to structural reforms, liberalisation of product markets, international market openness, and a less-constricted business environment for innovation and entrepreneurship. Regulatory policy has supported the rule of law through initiatives to simplify the law and improve access to it, as well as improvements to appeal systems. Increasingly, it has supported quality of life and social cohesion, through enhanced transparency which seeks out the views of the regulated, and programmes to reduce red tape for citizens.

Many OECD countries are concerned about distributional equity – to maximise the welfare of the most disadvantaged, paying attention to distributional consequence of policy actions, albeit not beyond the point at which they would impede on overall prosperity. These insights have had a strong practical influence on approaches to the impact assessment of regulations and especially, analysis of costs and benefits, including distributional aspects and under conditions of uncertainty (OECD, 2010a).

Regulatory reform can be viewed strategically, in both developed as well as emerging markets, as one of the core instruments at the disposal of policy makers. The modern State will have to utilise its regulatory power wisely if it expects to be smarter in order to face challenges like the growing fiscal burden for providing key public services such as health, education and social insurance schemes, in establishing governance arrangements and rationalising complexities to manage the consequences of decentralisation, in supporting the investment climate and in reducing the state's role as an active investor in the economy.

In fulfilling these objectives in an effective way the overall framework of the formulation of laws and regulations requires an explicit whole-of-government approach for regulatory policy, including: responsibility for co-ordination and oversight of regulatory policy; a commitment to assess the cost-benefit of new regulatory proposals and existing regulations, and; the effective implementation of the principles of transparency and public consultation in regulatory decision making (OECD, 2010a).

In emerging markets, extensive state ownership and interference have led to regulatory uncertainty and a business climate that is not conducive to fair competition in open markets. The state's dual role as an active investor and referee has meant that the government is uniquely positioned to shape the applicable legal regime with its interests as shareholder in mind. In many cases, state ownership has created conflicts of interest for the authorities and distorted or suppressed competition. Regulatory institutions and processes are still young in emerging markets, and often regulatory authority is fragmented across a number of bodies, some of which have conflicting mandates. Inadequate co-ordination among government bodies at the national and sub-national levels is a widespread problem, leading to unclear, duplicative, and often conflicting efforts in a number of areas. The lack of sound regulatory governance has meant that popular perceptions of endemic patrimonial politics have persisted, with vested interests and collusion being assumed to operate at the expense of the national interest.

A recent OECD Regulatory Policy Working Paper, Regulatory Policy in India: Moving towards regulatory governance, looks at India’s existing regulatory regime and its evolution in the last two and half decades. The mechanisms of regulatory governance have weaknesses, and in some cases have fallen short of expectations. The paper looks at India's uneven regulatory environment and how its legacy features constrain the evolution of regulatory governance.

Foremost is the difficulty in designing and implementing regulatory policies given the government's inclination to maximize its revenue at the expense of social welfare. This trade-off has compromised effective regulation in the country because of a lack of understanding of what constitutes the objectives of regulatory governance. The paper highlights how the dichotomy between the interests of governments and businesses, as well as that of citizens, has manifested itself over the years in four distinct sectors i.e. mining, hydrocarbons, power and telecoms.

Basic regulation in India is implemented via the concerned line ministries, which may proceed to create industry-specific regulatory authorities that have varying degrees of autonomy, functions, and power. There are significant variations in the structure of the governing bodies, tenure of the members, sources of finances, and interface with the government. A noticeable feature of many of the regulators in India is that they are charged with the promotion and development as well as the regulation of a certain industry. That can result in the regulator thinking of the interests of the industry rather than the users of the industry.

In sectors like insurance, coal, petroleum, telecoms, banking, regulatory strategies are hampered by the presence of State owned firms. The inadequate institutional distance between regulators and state-owned firms, especially when there are no firewalls between them, has meant that the regulators have not promoted enough competition.

In these areas, the State is obliged to play a dual role: i.e. that of market regulator when it is also the owner of commercial SOEs, particularly in newly deregulated, often partially privatised industries. Whenever this happens, the State is inevitably conflicted in its opposing interests as: first, a major market player/firm owner in its own right, and second, as an arbitrator in the (supposedly) neutral, impartial, dispassionate role of regulator.

Regulators are expected to behave independently, and the challenge of independence is to avoid capture by interest groups who stand to benefit from regulation. It is equally significant to avoid regulatory capture by local politicians. Local politicians are attracted by the possibility of large economic rents in perpetuity. Too often, regulators have actively internalised political sentiments in their decision-making. In addition, the elite governmental bureaucracy has a ubiquitous presence in regulatory bodies. Regulatory independence from the executive is difficult to administer if regulators themselves come from a career backdrop of directing political decisions. This strain is exacerbated when regulators are appointed directly from senior governmental positions, requiring them to shift, from administering and defending government positions, to acting as an impartial referee (Dubash, 2008).

Many areas, such as agricultural markets, warehousing, or land, require coordinated approaches to regulation (both rule-making and enforcement) by the central government, and sub-national governments at the state and city levels. Economic liberalisation, coming on the heels of political federalisation, has transformed federal –state relations unleashing unintended and unplanned decentralisation (Sinha, 2004). Any regulatory reform agenda depends crucially on a close co-operation between different levels of government. Federal-state relations have been affected significantly with the rise of multi- party coalition governments and alliance politics in the 1990s. Coalition and alliance partners from states have become progressively more powerful at the national level and more capable of bargaining with the national government. That political reality has added considerable complexity to the environmental and social dimensions of economic decision-making which need the cooperation, and an explicit ethos for regulatory governance, of both national and state governments. The need for multi-level policy coordination has been felt making way for the creation of technical and regulatory agencies at various levels, at times adding to the complexity of policy processes, at others to the bypassing of traditional forms of accountability at all levels (Arora, 2014).

In addition to the legacy features of India’s regulatory environment, the country lacks a coherent policy on regulation. A whole of government policy towards "regulating" would provide the connectivity of different reform efforts and help the concerted effort towards regulatory governance instead of disconnected regulatory reforms. This may include a combination of creating or enabling institutions to embed good regulatory principles into their functioning, but also include the systemic implementation of good regulatory practices such as regulatory impact assessments, public consultation and administrative simplification in priority sectors.

Some sub-national regulators in the power sector and the airports regulator have embedded stakeholder engagement with discernible positive outcomes. the more active use of Regulatory Impact Assessment (RIA) and stakeholder consultation, can inform the government on the cost of some of the trade-offs that India faces in the design of its regulatory policy. Although there exists a certain consensus on the importance of RIA and half-hearted efforts have been made so far to implement it, lack of political will, capacity constraints and limited awareness amongst other stakeholders are impeding its further application. Experience with regulatory governance in the last two decades has resulted in the Regulatory Reform Bill 2013 which intends to legislate an overarching regulatory law to introduce further regulatory reforms and standardise some basic institutional features and processes across all regulatory bodies. The OECD would welcome the opportunity to engage with the NITI Aayog during the redrafting process of this bill.

In addition, India could learn from the experience of both mature and young regulatory governance countries in implementing its regulatory policies. Malaysia which has undertaken large market reforms leading to initiatives for greater regulatory coherence. Australia and New Zealand’s Productivity Commissions, show, most importantly, that the regulatory environment needs to be constantly evaluated to make sure it is keeping pace with the changing technology, business environment, and consumer needs and demands (OECD 2010b). The United Kingdom’s Regulatory Policy Committee provides opinions and scrutiny over the quality of analysis by government departments and are engaged in setting "regulatory guidance" across the government. Korea's Regulatory Reform Committee drives forward the regulatory reform agenda (OECD, 2015).


OECD (2010a). 'Regulatory Policy and the Road to Sustainable Growth', OECD Publishing, Paris.

Dubash, Navroz (2008). 'Institutional Transplant as Political Opportunity: E-Practice and Politics of Indian Electricity Regulation', Comparative Research in Law & Political Economy Research Paper No. 31/2008.

Sinha, Aseema (2004). 'The Changing Political Economy of Federalism in India: A Historical Institutionalist Approach', India Review, Vol. 3, No.1.

Arora, Dolly (2014). 'Trends in Centre-State relations', Indian Institute of Public Administration, New Delhi.

OECD (2010b). 'Review of Regulatory Reform: Australia', OECD Publishing, Paris.

OECD (2015). 'Regulatory Policy Outlook', OECD Publishing, Paris.


Lalita Som has worked for the Organisation of Economic Cooperation and Development, Paris. She can be reached at

Wednesday, May 24, 2017

Interesting readings

The hazards of farm loan waivers by Tanika Chakraborty and Aarti Gupta in Mint, May 24, 2017.

Workers At Tata's Sanand Plant Have Been Awaiting Wage Hikes For Over Two Years, As Unfair Labour Practices Abound by Surabhi Vaya in The Caravan, May 23, 2017.

Banking ordinance opens up Pandora's box by Rajeswari Sengupta and Anjali Sharma in Mint, May 23, 2017.

As Modi and his right-wing Hindu base rise, so too does a celebrity yoga tycoon by Rahul Bhatia and Tom Lasseter in Reuters, May 23, 2017.

Where are the 10 million jobs the govt promised? by Mahesh Vyas in Business Standard, May 22, 2017.

Medicine Is Going Digital. The FDA Is Racing to Catch Up by Megan Molteni in Wired, May 22, 2017.

India's New Tax Is Too Complicated by Mihir Sharma in Bloomberg, May 22, 2017.

Why India needs another statistical revolution by Pramit Bhattacharya in Mint, May 22, 2017.

The New IIP Series: Necessary But Not Sufficient by Deep Narayan Mukherjee in Bloomberg, May 20, 2017.

The Real Power of Journalism? Blockbuster Scoops by Liz Spayd in The New York Times, May 20, 2017.

Washington Post, Breaking News, Is Also Breaking New Ground by James B. Stewart in The New York Times, May 19, 2017.

The Most Important Scientist You've Never Heard Of  by Lucas Reilly in Mental Floss, May 19, 2017.

China Is Building Its Way to an Empire by Noah Feldman in Bloomberg, May 18, 2017.

Yes Bank : RBI Finds 5x More NPAs Than Bank Reveals, Bank Says It's Not Hiding NPAs by Shreesh in Capitalmind, May 17, 2017.

President Trump needs single-page memos filled with charts and his name for first foreign trip by Jason Silverstein in NY Daily News, May 17, 2017. In this: Trump has admitted many times that he likes to avoid reading on the job. He told Axios in January that he likes "bullets" and "as little as possible" on his intelligence briefings, which he rarely attends anyway. He also seemed to admit on the campaign trail that he never reads books.

How army rations helped change food by Veronique Greenwood in BBC, May 16, 2017.

Walmart and Banking: It's Time to Reconsider by Lawrence J. White in Money and Banking, May 15, 2017.

Platonically irrational by Nick Romeo in Aeon, May 15, 2017.

Ease of business still just lip service; red tape, taxes put brakes on Modi's Make In India push in The Economic Times, May 14, 2017.

Chasing Cures for Deadly Scourges, and Getting in Our Own Way by Clyde Haberman in The New York Times, May 14, 2017.

Notes From An Emergency by Maciej Ceglowski on Idle Words, May 10, 2017.

Is India lying about its world beating economy? by Derek Scissors in AEI, May 6, 2017.

American banks think they are over-regulated in The Economist, May 4, 2017.

Tuesday, May 16, 2017

Understanding judicial delays in debt tribunals

by Prasanth Regy and Shubho Roy.

The problem

The present system of measuring judicial statistics in India may highlight the magnitude of the problem of judicial delays; it lacks information which may inform court management on the ways to deal with it. In India, we only measure pendency: The total number of unfinished cases left at the end of the year. It is arrived at by adding the total number of new cases (in a year) to last year's pendency and subtracting the cases which have been closed. For example, the annual report of the Supreme Court notes that total pending cases rose from 59,272 to 60,938 between 2015 and 2016. While this gives some idea about the magnitude of the problem, it does not tell us how to solve it. When we see pendency go up, we can only conclude that the courts have been unable to keep up with their workload. This system has three shortcomings:

  1. There is no definition of what constitutes delay in a case as opposed to total number of pending cases. Therefore, there is no actual measure of delay in the Indian court system.
  2. There is no identification of the cause of the delay. We do not know what delay was caused due to the litigants asking for adjournments, the lawyers being absent, the court administration being slow, etc.
  3. There is no attribution of delay to a party. It ignores the fact that there are multiple parties to every judicial proceeding: the plaintiff, the defendant and the judge. Any of the three parties may cause delays.

An ideal system to measure judicial delays would provide extremely granular data about the court. We would have all information about judicial processes and capture video of proceedings in a court. Such information would allow us to carry out time-motion studies of court functioning. Detailed statistics like that require a dedicated management system for courts which records every step in a judicial proceeding. Dedicated court management entities like the Her Majesty's Courts and Tribunal Service or the Administrative Office of the United States Courts produce detailed statistics of court functioning in their countries. We do not have such systems in India. This creates the problem of: How to measure judicial delays in a manner which helps policy analysis on judicial reforms?

A new approach to measurement

What we have in India, are case files. These are the official records of a judicial proceeding, kept in the court and with the litigants. Case files include all documents filed before the court/tribunal by all parties to the litigation, and all documents generated by the court/tribunal. One important class of documents in a case file are the interim orders. Interim orders are generated every time a case comes before a judicial officer. This gives us a glimpse into what happened in the judicial proceeding (called hearings) on the days it was presented before a judicial officer. Even if the hearing did not result in any judicial work being done, an interim order is generated.

In a recent working paper (Regy and Roy, 2017) we study individual case files, with attention to each interim order, to reconstruct what happened in each hearing of a case. We use the interim orders to determine if the hearings were failure or not. We define a hearing to be a failure if no judicial work was done at that hearing and no penalty was imposed on any party. If a hearing is determined to be a failure we try to determine two additional facts from the interim order for the hearing:

  1. The party was responsible for the hearing failure.
  2. A standardised reason for failure.

This system of measurement has advantages over the present system of measuring pendency. It determines the delay in individual cases without any need to imagine what time a case ought to take. Delays are calculated by the number of failed hearings and the time each such hearing added to the total time of the case. The system also provides the reason for delay and the party causing delays. This information can inform court managers and policy makers on strategies to reduce judicial delays.

One dataset

We deploy this measurement system to orders of the Debt Recovery Tribunal - III, New Delhi (DRT). A research team went through the case file of 22 decided cases of the DRT. For each case the following information was recorded:

  1. The case name, type, and the party who had filed the case (lender or borrower)
  2. Date of filing and final order (finishing the case)
  3. Decision of the tribunal, which was standardised into: dismissed (withdrawn or otherwise), disposed, closed (as fully satisfied or with liberty to revive later)
  4. Date for each hearing of the case;
  5. Brief subject for the hearing and the next date of the hearing
  6. If the hearing was a failure, then: which party was responsible for it, and a standardised reason for failure
This gave us granular data about a total of 474 hearings.

Preliminary findings

Of the 474 hearings, 274 hearings (about 58%) were hearing failures. These failures accounted for more than half the time taken by the cases. We could reduce the duration of the average case by half if we were able to avoid hearing failures. The majority of delays are due to requests from the parties for more time to submit documents. Other common reasons include the absence of lawyers or of tribunal officers. Figure 1 highlights the standardised reasons for delays.

Figure 1: Reasons for hearing failure in Debt Recovery Tribunal.

The other interesting finding is the person causing the delay. One would expect that borrowers would be interested in delaying cases to delay eventual recovery of dues through coercive means like auctioning off collateral. On the other hand, lenders would be interested in quickly finishing cases to recover dues. However, the data does not bear this out. Figures 2 and 3 identify the party causing hearing failure in the cases. Figure 2 identifies parties when the borrower has filed the case (borrower is plaintiff). Figure 3 identifies parties when the lender has filed the case (lender is plaintiff).

Figure 2: Party responsible for hearing failure in cases filed by the borrower (borrower = plaintiff, lender = defendant).
Figure 3: Party responsible for hearing failure in cases filed by the lender (lender = plaintiff, borrower = defendant).
Surprisingly even when the plaintiff is the lender, the plaintiff is the party responsible for most number of hearing failures. Lenders here are financial institutions who are expected to have processes and systems to pursue defaulting borrowers in court, yet they seem to ask for adjournments at rates similar to borrowers who may not have experience in litigation.


Computerisation is seen as a panacea for judicial delays. The Supreme Court plans to move to a paperless system soon. The government had started a process of computerising DRTs in 1997. The National Institute of Smart Governance has been running a project on this since 2011. Yet, there is little information about the functioning of DRTs in the public domain or what are the reasons for delays in them. Computerisation, by itself, will not lead to better management of courts. We need a complete loop, which: Collects granular data of court functioning; analyses the information to identify causes of delays; changes court processes and legal rules (process re-engineering) to reduce delays; and goes back to collecting granular data to check for effects. In this, computerisation will play an important role in gathering information. But computers have no idea about which information is relevant and how to use it. This still requires human intervention and scientific enquiry.

Interesting readings

Does the ordinance solve the banking crisis? by Ajay Shah in Business Standard, May 15, 2017.

Don't expect the next generation to save liberalism by Mihir Sharma in Mint, May 15, 2017.

How Google Took Over the Classroom by Natasha Singer in The New York Times, May 13, 2017.

A Run for Their Money: The Struggle to Exchange Demonetised Notes Did Not End in December at the RBI's Branch in Delhi by Ashish Malhotra in The Caravan, May 13, 2017.

The Nepal-Sikh Alliance That Could Have Changed History by Amish Raj Mulmi in The Wire, May 12, 2017.

The satellite imagery in Google maps and Google earth has gone from 5m to 1m resolution! 'Lost' forests found covering an area two-thirds the size of Australia by Andrew Lowe And Ben Sparrow in Phys, May 12, 2017.

The woman who saved old New York by Jonathan Glancey in BBC, May 12, 2017. She is celebrated in Seeing like a State.

Bankers, proxy firms question sudden orders for transferring CEOs of PNB, BOI by Gopika Gopakumar in Mint, May 12, 2017.

Demonetisation and the Delusion of GDP Growth by Ritika Mankar and Sumit Shekhar in Economic and Political Weekly, May 6, 2017.

Comey's Firing Is a Crisis of American Rule of Law by Noah Feldman in Bloomberg, May 10, 2017.

Scaling the World's Most Lethal Mountain, in the Dead of Winter by Michael Powell in The New York Times, May 9, 2017.

Only 36% of Indian engineers can write compilable code: study by Sam Varghese in Itwire, May 9, 2017.

What Happens When Authors Are Afraid to Stand Alone by Jason Guriel in The Walrus, May 9, 2017.

This data set took six years to create - Worth every moment by Hudson Hollister in Data Coalition , May 9, 2017.

Indian Parliament does not make laws, and MPs have little scope to keep govt accountable by Athreya Mukunthan in The News Minute, May 8, 2017.

China faces resistance to a cherished theme of its foreign policy in The Economist, May 4, 2017.

Why You Need More Dirt in Your Life by Simon Worrall in National Geographic, April 30, 2017.

Irreplaceable Pioneer - Obituary: Ravi Dayal (1937-2006) by Rukun Advani in The Telegraph, June 11, 2006.

Monday, May 15, 2017

Author: Pramod Sinha

Measurement of exports in India

by Radhika Pandey, Ajay Shah and Pramod Sinha.

The Indian statistical system has many difficulties. In general, a certain mistrust of official statistics is well placed. Every user of data must skeptically examine all data that is sought to be used. In this article, we kick the tyres of exports data, juxtaposing two different sources. We are pleased to report that there is no large discrepancy. We conjecture a third possibility for constructing a quarterly measure of exports, based on firm data, and find that this does not work out. In the future, it may work, thus giving a 3rd measure of quarterly exports.

There are two independent sources of exports data:

  1. RBI produces the Balance of Payments data. This obtains information about the exports of goods and services by watching flows of money through banks. This is released quarterly.
  2. The Department of Commerce (DGCI&S) releases monthly data for exports of goods (only). This is based on the daily trade data that it receives from Customs authorities, SEZs and Ports. The phrase 'exports' is used when describing this data, but it is important to always refer to it as 'merchandise exports' or 'exports of goods'.

In order to assess the sanity of these two series, we compare the year-on-year change for them against each other.

The above graph compares the year-on-year change for the BoP exports and the merchandise exports series. Although varying in magnitude, the figure shows broad similarity in the ups and downs in the two series. The rank correlation between the two is 0.93. This seems sound.

The above graph plots the seasonally adjusted point-on-point growth (annualised) for the two exports series. This uses our work on seasonal adjustment. We observe similar trends in the two series. The rank correlation here is 0.83, which is mildly worrisome.

Can firm data yield a third measure of exports?

Large firms are important in India's exports, across both goods and services. As an example, in 2014-15, of the total exports of goods and services of USD 474.24 billion, the annual report data for 4666 exporting companies in the CMIE database reveals exports of USD 248.60 billion. Hence, we wonder: Could we use firm data to construct on exports time series?

The legal framework on reporting of annual financial statements requires that companies report their export income. Section 134 (3)(m) of Companies Act, 2013 states:

There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include: ---(m) the conservation of energy. technology absorption, foreign exchange earnings and outgo , in such manner as may be prescribed.

Rule 8(3)(C) of the Companies (Accounts) Rules, 2014 states:

The report of the Board shall contain the following information and details, namely-- ---(C) Foreign exchange earnings and outgo The Foreign Exchange earned in terms of actual inflows during the year and the Foreign Exchange outgo during the year in terms of actual outflows.

This clarity in legal drafting shapes the disclosure of export income of firms in their annual reports. A large chunk of firms disclose their export income in their annual reports. As an example as on 31st March, 2015, out of 4038 listed firms, 1795 firms are identified as exporters using this annual filing of financial statements. We could use quarterly data for these firms, which is required to be disclosed by all listed companies, to construct an exports measure. In terms of methods, we could do for exports what we have done previously for net sales using firm quarterly data.

When we turn to quarterly data, however, the legal instruments that define disclosure requirements do not clearly require information about exports. Under Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI requires companies to diclose their quarterly results, following the accounting standards prescribed by the Central Government under Section 133 of the Companies Act, 2013. The field on "Income from Operations" includes: (a) Net sales/income from Operations, and (b) Other operating income. (See Annexure I of this circular.) As a result, most firms do not report their 'export income' in their quarterly disclosures. Some firms voluntarily disclose information on exports, but this is part of the "Notes" to financial statements. As an example see Point 4 under Notes of this report.

In the table below, we present a comparison of firms that report exports in their annual reports versus those that report export income as part of their quarterly disclosures. The table shows the proportion of listed exporting firms that report 'export income' in their quarterly disclosures. It shows that a miniscule proportion of firms that are `exporters' as disclosed in their annual reports publish export income as part of their quarterly disclosures.

Year Total Listed Firms Exporters (As per AR) Exporters (As per QR) Share of firms
2000-03-31 3976 1891 54 2.9
2001-03-31 4373 2046 76 3.7
2002-03-31 4800 2013 97 4.8
2003-03-31 4876 1986 106 5.3
2004-03-31 4820 1986 108 5.4
2005-03-31 4990 1982 118 6.0
2006-03-31 4998 2037 131 6.4
2007-03-31 4884 2067 135 6.5
2008-03-31 4882 2084 101 4.8
2009-03-31 4893 2086 109 5.2
2010-03-31 4897 2046 88 4.3
2011-03-31 4867 2032 78 3.8
2012-03-31 4755 1996 49 2.5
2013-03-31 4612 1958 42 2.1
2014-03-31 4436 1911 43 2.3
2015-03-31 4038 1795 34 1.9

Recent improvements in the quarterly disclosures of firms

On 5 July 2016, SEBI has modified the format for publishing financial results under the SEBI (Listing Obligations and Disclosure Requirements) Regulations. This new circular mandates that the quarterly financial statements should follow the format prescribed in Schedule III to the Companies Act, 2013. Schedule III to the Companies Act, 2013 lays down general instructions for preparation of balance-sheet and statement of profit and loss of a company. Through requirements of 'additional information', companies are required to disclose income from exports. The relevant text from the legal instrument is as follows:

5. Additional Information The profit and loss account shall also contain by way of a note the following information, namely-- (e)Earnings in foreign exchange classified under the following heads, namely-- I. Export of goods calculated on F.O.B. basis;...

The revised reporting format becomes applicable for the period ending on or after March 31, 2017. From March, 2017 onwards we hope to see improved reporting by firms of quarterly exports data, which would make possible the construction of a third quarterly exports time series.


The Indian statistical system is riddled with problems of measurement. Critical pillars of the statistical system -- NAS, NSSO, ASI, IIP -- are not trusted. Every user of data must bring critical thinking into the choice of data that will be used. Our analysis above is reassuring in finding agreement between exports data released by RBI and the Ministry of Commerce, and rejects the possibility of constructing an exports measure using the present framework of quarterly disclosures by listed companies. Going forward, with improved reporting by firms we could get a third measure of quarterly exports.


The authors are researchers at the National Institute for Public Finance and Policy.

Tuesday, May 09, 2017

Interesting readings

So how did that demonetisation thing work out for you? by Tony Joseph in Scroll, May 8, 2017.

When will the jobs come back? by Mahesh Vyas in Business Standard, May 8, 2017.

The journey of a 400 kg buffalo by Harish Damodaran in Indian Express, May 7, 2017.

1965 Nanda Devi spy mission, the movie by Shail Desai in Mint, May 7, 2017.

The great British Brexit robbery: how our democracy was hijacked by Carole Cadwalladr inThe guardian , May 7 2017.

How Machiavelli Trolled Europe's Princes by Erica Benner in The Daily Beast, May 6, 2017.

How Censorship Works by Ai Weiwei in The New York Times, May 6, 2017.

Data is giving rise to a new economy in The Economist, May 6, 2017.

Dhabas and Japanese food: Visit mini Japans in rural Haryana and Rajasthan by Manavi Kapur in Business Standard, May 6, 2017.

Supreme Test by Pratap Bhanu Mehta in Indian Express, May 6, 2017.

Antecedent Transactions: An Anomaly in the Insolvency and Bankruptcy Code, 2016 by Rahul Sibal and Deep Shah in Indiacorplaw, May 5, 2017.

A tighrope walk for Sebi by Somasekhar Sundaresan in Business Standard, May 4, 2017.

What eastern bloc dissidents can teach us about 'living in truth' by Philip Boobbyer in The Conversation , May 4 2017.

Money & Medicine: the odd couple - Complexities of health system financing by Margaret Faux on the NIPFP YouTube Channel, May 3, 2017.

For first time, Naxal heartland begins to be mapped plot by plot by Dipankar Ghose in Indian Express, May 2, 2017.

Is China the World's New Colonial Power? by Brook Larmer in The New York Times, May 2, 2017.

Moving towards a principles-based drug retail policy in India by Amey Sapre and Smriti Sharma in Ideas for India, May 2, 2017.

Highway network designs and regional economic development by Simon Alder in Ideas for India, April 3, 2017.

Land in India: Market price vs. fundamental value by Gurbachan Singh in Ideas for India, February 29, 2016.

The Nanda Devi mystery by Shamik Bag in Mint, April 18, 2015.

Wolf Reintroduction Changes Ecosystem by Brodie Farquhar.