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Financial Innovation, Did it really help!

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Bob Litan of Brookings Institution has come out with a very provocative paper   “ In Defence of Much, But Not all Financial Innovation.” Therein he discusses “good vs bad” that has happened with financial innovations.

Kevin Drum at Motherjones has summarized the paper beautifully for all of us who don’t want to give time to understand the details of paper, and intricacies of the argument.

Financial Innovation, Source Motherjones.com

Written by SK

March 8, 2010 at 4:00 pm

40 Years of Bank Nationalization

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Here are  major points raised by Ashok V Desai on an article written on telegraph on forty years of bank nationalization. Ashok V. Desai is consultant editor of The Telegraph, and a columnist in Businessworld. He was my favorite columnist in 2002-03, when I used to read BW. Later on I came to know that he is a highly respected personality, and I took pride in myself that I do have an eye for talent. 🙂

1) Recently banks declared that their NPA are not over Rs 20k crore, and government announced that they are writing off loans of Rs 60k crore issued to farmers. These two figures of 20k and 60k crore imply that either banks have understated their NPA (20k is total NPA, not loans only to farmers) or government has written off loans to farmers who were diligently paying their debt.  Third possibility is major chunk of money those 60k crore is warming pockets of politicians and bureaucrats. (from BW editorial)

2) Banks were nationalized to give credit to government’s favorite sectors (agriculture and small industries). But they didn’t do so. Later on government imposed them to lend 40% of their credit to these sectors, they did so for a while, but ironically soon ran out of worthy borrowers.

3) In last ten years, banks have been financing infrastructure sectors – power, telecommunication, roads, ports. Almost 25% of their loan goes to these sectors. This goes against traditional rules that required banks to give short term loans against liquid collateral. These sectors should have raised loan from capital market. On pretext of it’s lack of development in India nationalized bank financed long term loans to them, though for long term financing government had created -IDBI,ICICI,UTI.  Consequently, these three entities got converted into banks.

4) It was envisaged that nationalized bank will expand their operation in rural areas. They did expanded their business, but more in urban area than in rural areas.

Note: One may question, why should we raise question over what they have done as long as they are profitable. The point is they are not profitable, and they have not done what they have been nationalized (insurance of getting bailed out) for.

He concludes his article with following words.

My findings are based on a cursory analysis of easily available banking statistics. So much more could be inferred from the masses of statistics accumulated by the Reserve Bank of India. All it needs is a good, elementary economist. The RBI employs economists by the hundreds; the finance ministry gives generous grants to many more. But their minds are focused on higher matters; looking at easily available figures and calculating simple ratios would not occur to them. So we continue to have one of the world’s best documented and least analysed banking systems.


Written by SK

September 17, 2009 at 7:49 pm

A Comparison of Tax rates

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Reacting to UK’s plan to raise top personal tax rate to 51%, a stream of hedge fund and financial service professionals are leaving UK for relative tax heaven lands. WSJ reports that hedge funds managing fund of $15 billion have moved to Switzerland in last one year.

There would always be debate on what should be ideal tax rate. What would be ideal for corporate, and what would be for individuals? Should Government extract more tax from corporates or should it be from individuals. In eighties, Laffer popularized a relationship between tax rate and government revenue. The idea being, increasing tax rate will increase revenue, but only up to certain limit. it is because, with higer tax rate individuals as well as corporates loose incentive to work.

Here is the curve. The major pain point is that from practical point of view it’s very difficult to decide the optimal tax rate. Optimal tax rate would change from time to time with changing demographics and culture. In these time of flattened world, it has become even tougher, as individuals don’t mind moving away. It’s evident from above news item.

Laffer_Curve

Here is a comparison of tax rates among major countries. I have sorted it by corporate tax rate. Note that corporate tax rate in India is highest.  Understandably, this might be effect of Nehruvian affinity for socialism.

Tax_rate_Comparison

Observe all yellow colored cells. Denmark has highest personal top tax rate, almost 60%.  Japan too have higher individual tax rate. USA have lower corporate tax rate but higher personal tax rate compared to India. Russia, a country who is birth place of communism, has lower corporate and personal tax rate.  A comparative study on how these countries have played with tax rate, and how have they done in last fifty years will help us better understand the mechanism of tax rate. Will see if there has been any work on this.

Written by SK

August 25, 2009 at 3:35 pm

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