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Showing posts from August, 2017

Why Should Modinomics Be Bestowed With An Ignoble Prize In Economics? Demonetization’s Spectacular Failure.

This lesson from history is quite well known: Muhammad bin Tughlaq thought that may be if he could find an alternative currency, he could save some money. So he replaced the Gold and Silver coins with copper currency. Local goldsmiths started manufacturing these coins and which led to a loss of a huge sum of money to the court. He had to take his orders back and reissue Gold/Silver coins against those copper coins. This counter decision was far more devastating as people exchanged all their fake currency and emptied royal treasure. And nothing seems to have changed ideatically even after close to 800 years since, when another bold and bald move or rather a balderdash move by the Prime Minister of India Narendra Modi launched his version of the lunacy. Throw in Demonetization and flush out black money. Well, that was the reason promulgated along with a host of other nationalistic-sounding derivatives like curbing terror funding, expanding the tax net, open to embracing digital economy an…

PSU bank mergers get the go-ahead from Union Cabinet

With cabinet approving the ministerial panel, the proposed merger of PSBs moves ever closer. FM Arun Jaitley, who will head the panel, outlined that the objective would be to create strong banks. To better understand this vague goal, we must first define what a strong bank should be and then determine if merger has any merit. 

Keeping with times, let us drop any pro people sentiments and analyze the situation from purely a business perspective; in hope that it may help us perceive the government’s rationale, if any exist. A strong bank, or any business for that matter, would be one that is able to meet the market's demand, with the most efficient and appropriate productive processes extracting maximum profit. The modern market, post the 80s, has moved away from the towering economies of scale that characterized the fordist era. Demand, including the demand for credit, is highly diversified and is met by flexibility in supply. This is not to say that mega entities are non-existent b…

Debt versus Equity Financing. Why the Difference matters?

There is a lot of confusion between debt and equity financing, though there is a clear line of demarcation as such. Whats even more sorry as a state of affair is these jargons being used pretty platitudinously, and this post tries to recover from any such usage now bordering on the colloquial, especially on the activists’s side of the camp. What is Debt Financing? Debt financing is a means of raising funds to generate working capital that is used to pay for projects or endeavors that the issuer of the debt wishes to undertake. The issuer may choose to issue bonds, promissory notes or other debt instruments as a means of financing the debt associated with the project. In return for purchasing the notes or bonds, the investor is provided with some type of return above and beyond the original amount of purchase. Debt financing is very different from equity financing. With equity financing, revenue is generated by issuing shares of stock at a public offering. The shares remain active from th…

Economics is the Science which Studies Human Behaviour as a Relationship Between Ends and Scarce Means which have Alternative Uses. Is Equilibrium a Choice?

What is the place of choice in equilibrium theory? Alfred Marshall and Leon Walras, who introduced competitive equilibrium theory, employed the theory of choice in terms of utility, analogously to the Austrian school. Enrico Baroneand Karl Gustav Cassel (the latter introducing general equilibrium theory in the German speaking world.Walras-Cassel System) used demand and supply functions as starting data, disregarding the theory of choice. Pareto, on the one hand, argued that the two approaches are compatible. However, he discarded cardinal utility introducing the notion of preferences, i.e. ordinal utility, as sufficient foundations for the theory of choice, thus starting the modern analysis of choice.Pareto also suggested that these data can be derived directly from choices, so short-cutting the theory of choice (since choices are not to be explained) and anticipating the theory of revealed preferences. This theory is, perhaps, the point of maximal distance between equilibrium theory …

Project Finance and CSOs

Disclaimer: There are many concerns that CSOs have in regard to finances and fundings of projects. The following has not covered them either due to my ignorance, or reasons thereof. Here, I have laid stress on Project Finance, since for me this is where its differentiation with other vehicles of finance (a comparison is given towards the end of this note) could be outlined. Moreover, Project Finance is now looked upon as the most viable form of financing that there is with highly mitigated levels of risks, at least, according to the financial worldlings! What follows is a writeup, where potential points could be identified and the whole exercise could start with lines of difficulties and challenges/needs/necessities (in short applied/application) delineated. Additionally, a study on Project Finance leads inherently to a study on PPPs, another preferred mode in use in India at present. CSOs need to keep in mind that one of the fundamental trade-offs for PPP designing is to strike a righ…

Model Concession Agreement, or Why Environmental Clearances are Not Required Before Financial Closures?

There is something called a model concession agreement, which is tied with what is termed a financial closure. Model Concession Agreement (MCA) forms the core of public private partnership (PPP) projects in India. The MCA spells out the policy and regulatory framework for implementation of a PPP project. It addresses a gamut of critical issues pertaining to a PPP framework like mitigation and unbundling of risks; allocation of risks and returns; symmetry of obligations between the principal parties; precision and predictability of costs & obligations; reduction of transaction costs and termination. The MCA allocates risk to parties best suited to manage them. The preparation of contract documents can be a major administrative task in PPP development and may also require a considerable amount of time. The availability of standardized contract documents or model contract agreements with the provisions of model clauses can be of great help in this respect. It helps considerably in st…

Financial Entanglement and Complexity Theory. An Adumbration on Financial Crisis

The complex system approach in finance could be described through the concept of entanglement. The concept of entanglement bears the same features as a definition of a complex system given by a group of physicists working in a field of finance (Stanley et al,). As they defined it – in a complex system all depends upon everything. Just as in the complex system the notion of entanglement is a statement acknowledging interdependence of all the counterparties in financial markets including financial and non-financial corporations, the government and the central bank. How to identify entanglement empirically? Stanley H.E. et al formulated the process of scientific study in finance as a search for patterns. Such a search, going on under the auspices of “econophysics”, could exemplify a thorough analysis of a complex and unstructured assemblage of actual data being finalized in the discovery and experimental validation of an appropriate pattern. On the other side of a spectrum, some patterns…

Accelerated Capital as an Anathema to the Principles of Communicative Action. A Note Quote on the Reciprocity of Capital and Ethicality of Financial Economics

Markowitz portfolio theoryexplicitly observes that portfolio managers are not (expected) utility maximisers, as they diversify, and offers the hypothesis that a desire for reward is tempered by a fear of uncertainty. This model concludes that all investors should hold the same portfolio, their individual risk-reward objectives are satisfied by the weighting of this ‘index portfolio’ in comparison to riskless cash in the bank, a point on the capital market line. The slope of the Capital Market Line is the market price of risk, which is an important parameter in arbitrage arguments. Merton had initially attempted to provide an alternative to Markowitz based on utility maximisation employing stochastic calculus. He was only able to resolve the problem by employing the hedging arguments of Black and Scholes, and in doing so built a model that was based on the absence of arbitrage, free of turpe-lucrum. That the prescriptive statement “it should not be possible to make sure profits”, is a s…