The Contrarian January 2015

From the editors’ desk

‘If you ask three economists a question, you’ll get three different answers’Our breed is notorious for not being able to reach a consensus on most issues. On one hand we have classical economists who believed in ‘The Invisible Hand’ propagating that free markets were a solution to all problems, but on the other the ‘Keynesians’ advocated for government intervention. Economic theory has been ‘blessed’ with differing theories but this is primarily a result of us exploring every topic from multiple angles.In the January edition of the Contrarian we also follow suit, however with a TWIST! Instead of making future predictions (which we fail at, so often!), we walk down the aisle of history making an attempt to predict what could have happened in the past had we used a different lens…We explore the theme 'What If?' wherein the newsletter features articles on what could have happened, if at a point in time, a radically different course of action had been taken.$

For those who are not satiated by the academic curriculum, in this second edition we bring to you a resource section containing a recommended list, to plunge deeper in the waters of Economic theory$

Happy Reading!$

Laxita Mithal and Srishti Singh Editors-in-chief$

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Chief Editors

Laxita Mithal ! ! III year!Srishti Singh! ! II year!Senior editors

Gauri Gaur ! ! III year!Ann James ! ! II year!Meher Anand ! ! II year!Kuhu Mehrotra !! III year!Sonakshi Garg !! II year!Junior editors

Anna Brittas ! ! I year!Khushboo Hanjura ! I year!Jenny Marria ! ! I year!!Formatting Head

Himanshi Arora! ! II year!!Online content manager

Amritha John ! ! III year

THE CONTRARIAN

The Contrarian January 2015

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WHAT IF?

What if resources weren’t finite?$

Free goods? Inefficient technology? Peaceful co-existence?$

Hmm..slightly unimaginable plight.$

What if demand curve was upward sloping?$

“Normally” that does not happen,$

Unless everyone’s doping$

What if USA had a socialist economy?$

Is that even a question? Obamacare, writing off bad loans, subsidies.$

Capitalism is just hypocrisy$

What if Quantitative easing didn’t exist?$

Money would still be printed,$

It might’ve been called quantitative injection, money pumping, or loosening the fist.$

What if Rajan was not so stubborn?$

Well, once inflation was in control, rates would be cut,$

And the indian economy would run$

What if INR was convertible?$

Large cash outflows, speculative trading, weakening, etc.$

Yes, our economy will be in trouble$

What if OPEC didn’t cartelize?$

Shale might not have been discovered, but with US still in the market,$

We would be grappling with oil price rise$

What if the Great Depression didn’t take place?$

Economic science would not be impacted,$

As there would be someone else in place of Mr. Keynes$

What if even one economic event hadn’t occurred?$

We would still have all the prevalent theories and models$

‘cause knowledge and progress are competitive suckers.$

-Sonakshi Garg, Economics, II year$

The Contrarian January 2015

What if the Shale Gas Revolution had not come about in the United States of America?Introduction!Hydraulic Fracturing popularly known as Fracking was first discovered around 1947. Its development commenced in Texas in the early 1980s. It was only till late 1990 or early 2000 that hydraulic fracturing was combined with horizontal drilling to perfect the production of this gas. Its impact on US and the world economy became conspicuous by 2008.$

In Hydraulic Fracturing, rocks are pressurized by liquids (usually chemicals and sand suspended in water) in order to create cracks on their surface. Through the cracks are obtained: natural gas, petroleum and brine.$

Impact on the US Market!Shale gas contributed 27% to the overall natural gas production in the US in 2010. It provided directly and indirectly jobs to 600,000 aspirants. It is estimated that by 2015 it will provide 800,000 jobs and 1.6 million by 2035! Had the creation not taken place, an avenue for job creation and hence revenue creation would have disappeared. These aspirants would hence have to hunt in the market, spend money on acquiring further skills etc. $

The presence of domestic natural gas will reduce the electricity cost of American households by 10% providing citizens with a whopping gain of $926 in disposable income between 2012 and 2015. This will swiftly increase to $2000 by 2035. $

Production of shale gas will also bolster the American GDP and state and local tax revenue. By 2035 shale gas production will add more than $231 billion to the GDP of the US and will provide a relief to the government budget with a surplus of $57 billion in taxes.$

The tables below explain in detail the contribution of shale gas to the US economy.$

Source- http://anga.us/issues-and-policy/jobs/us-shale-gas-benefits$

Oil is a defining factor of international prices and economic scenarios. Without the exploration and development of Shale Gas, USA would lose an opportunity to control world prices and international economies.$

Monopoly of OPEC !Until the 70s, Texas reined as the largest producer of oil globally. Even when the Arab War resulted in an oil embargo upon Israel’s western allies, Texas came to the rescue by increasing its production of oil. Rising consumption however, eroded the efficacy of the state to produce any more oil. When later OPEC increased oil prices further, America could not provide any respite to the world economies. Prices were then under the control of the OPEC. With the massive development of shale gas, oil prices have plummeted in 2014. Currently it stands at $57 a barrel. Countries are now shifting to the US for cheaper oil imports. Without shale gas, the world would still have suffered from high oil prices. Economic situations in countries would have depended heavily on OPEC prices.$

The shale gas revolution has aided America in reducing oil imports drastically. From net imports of 2 million barrel per day in 2007, the US has switched to exporting 1.2 million barrels per day. With the replacement of coal with natural gas, the US has achieved the largest decline in the emission of C02. In the absence of shale gas, America would have been under heavy line of firing by environmental groups for having the most evident carbon footprint, while itself cajoling developing economies to reduce emissions.$

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Global Impact!Without shale Gas, the demand for liquefied natural gas (LNG) by the US would have been significant. Hence availability of the gas for Japan especially after the Fukushima Nuclear Disaster would have been poor. With the US oil independent, Japan can exploit LNG for its own purpose in its aim to switch from nuclear energy for the time being.$

Germany is touted as one of the most powerful manufacturers in the world. With Shale Gas of the US in picture, factory outlets will soon be shifting to the US due to the more economical gas availability. There is anxiety in Germany, since exports support half its GDP. With the onset of shale phenomena, Germany is fast approaching its doom in the global market.$

The world is stunned by the nuclear negotiations being conducted between the west and Iran. The supremacy of Iran as an oil producer gave it leeway to discount US dislike of its nuclear stockpiles. With greater shale production and export, Iran has lost its edge as an oil maker. Nuclear negotiations would have remained a distant dream without Shale Gas.$

The European Story!The Transatlantic Trade and Investment Partnership is a trade agreement being proposed between Europe and the US to allow free trade between the two and abolish trade barriers. With the entry of Shale Gas, oil prices all over have plummeted due to price wars. This could aid various European countries in reinforcing their economies. Without Shale Gas, Eurozone countries would not have received any respite from rising debts.$

With Shale Gas in picture, coal can be freed up by the US and provided to Europe. Hence this will undermine the efforts of the European Union to cut down its carbon emissions. A study has shown that EU consumption and import of coal rose to 2% and 9% respectively in 2012.$

Shale gas exploration and production has had a deep and long lasting effect on the economies world over. Scenarios in various countries changed with its production. Had the gas not been produced, some would have been at an advantage and some at a

disadvantage. But the effects would still have been intriguing and challenging. An as example of a disadvantage, Shale Gas has given immense might to the US to destroy the Russian Economy after the annexation of Crimea. With plummeting oil prices and better choice, Europe, a key buyer of Russian oil has moved on, severely affecting the Ruble. $

References!http://www.economist.com/news/united-states/21596553-benefits-shale-oil-are-bigger-many-americans-realise-policy-has-yet-catch$

http://www.lexology.com/library/detail.aspx?g=6891b1b8-2314-484c-a48a-f356db51eb6d$

http://www.energypost.eu/five-global-implications-shale-revolution/$

http://www.project-syndicate.org/commentary/daniel-yergin-traces-the-effects-of-america-s-shale-energy-revolution-on-the-balance-of-global-economic-and-political-power#FoYRq2VpK25rx6DT.99$

http://carnegieeurope.eu/strategiceurope/?fa=53190$

-Meher Anand, Economics, II year$

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BOOK REVIEW

WHAT IF HUMAN BEINGS DON’T MAKE RATIONAL DECISIONS? !

Thinking fast and slow by psychologist Dr. Daniel Kahneman is one of those few books written by an academic that became an instant best seller. What is so special about it that it managed to enthrall millions and yet stayed true to its pedagogical roots? Israeli-American psychologist Dr. Kahneman achieved this feet with this simply worded volume,by explaining the theories that he formulated in collaboration with Amos Tversky (who passed away in 1996) and others over the decades. One of these is the Prospect Theory for which he was awarded the Nobel Prize in Economics in 2002. He gives a summary of his research, which includes explaining the psychology behind judgment and decision-making under risks in this book. $

Behavioural economics is the study of psychological, social, emotional and cognitive factors that affect an individual making economics decisions. An important component in understanding how people make economic decisions is to find out whether their decisions are rational or irrational. Though the traditional utility theory in microeconomics takes it as an assumption that people are rational, it has been proved that people don’t always make choices that are considered best for them (i.e., those which give them the highest utility) and hence don’t make decisions rationally. Their judgment is usually impaired due to a variety of reasons, which I will explain through this article. $

• In the first section of the book, Dr. Kahneman explains the two kinds of thought processes: System 1 and System 2. System 1 is the subconscious part of the brain; it is frequent, fast, automatic and intuitive. System 2, on the other hand, is conscious, slow, logical and infrequent. System 1 is what we use to perceive the world around us, to recognize objects and can be either voluntary or involuntary. For example, it helps us to understand sentences in our native language. System 2 is slow $

!and requires intense focus; it is as if the brain asks it to pay attention and System 2 comes into play; for example, a woman looking for a white hair. Since System 1 is more frequently used than its counterpart, it is also responsible for some of the irrational decisions (in our daily lives sans important matters) and judgments we make .$

• Heuristics and biases: Heuristics can be thought of as the ‘mental rules of thumb’ that people employ while making judgments. System 1 makes use of heuristics while making judgments. Essentially, there are three kinds of heuristics:$

1.$ Anchoring heuristic: When asked to estimate the value of an unknown quantity, people usually assume an initial value before adjusting it to get the final estimate. A number of experiments show that people stayed close to the number they had initially supposed, which acts as an anchor and that the adjustment is not always sufficient. People also have a tendency to be influenced by numbers irrelevant to the question.$

2.$ Availability heuristic: This heuristic occurs when people make assumptions about the probability of the occurrence of the event which in turn, depends on the frequency of the examples they can think of concerning the event in question.$

3.$ Representativeness heuristic: The “Linda problem” experiment depicts this heuristic best. This controversial experiment showed that when people were shown a brief description about a person’s personality, they judged the person based on the description irrespective of its probability of occurrence.$

• Prospect Theory: Prospect Theory encompasses all of the above and many more sub theories and discusses how people make decisions under risks and uncertainty. Most people are by

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nature, risk-averse, or more precisely, loss averse. Loss aversion implies that ‘losses hurt more than gains feel good.’ For example, if a person is given a choice between a 95% chance of getting $10,000 and a 100% chance of getting $9499, he/she chooses the second offer, even though after comparison of mathematical expectations, $9500 is greater than $9499. Here, the person’s risk aversion is what is responsible for his/her seemingly irrational choice.$

This article is just the tip of the iceberg in understanding why people don’t make rational decisions without going into much detail of the author’s research papers. Though the book is lengthy, it will open your eyes to the truth about how people actually make decisions contrary to what we perceive.$

SOURCES:!• Thinking fast and slow.pdf$

• Stirling behavioural science blog: Judgment, heuristics and biases; October12,2013$

Stirling Behavioural Science Blog Lecture Summary Judgement, Heuristics and Biases.html$

-­‐   Ann James, Economics, II year$

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WHAT IF INDIA GAINS SELF-RELIANCE IN OIL? Oil and India are two words that are creating a buzz across the globe even at this very moment, though independently. So imagine the kind of impact it will have if used in the same sentence, yes imagine if we start moving towards self-sufficiency in oil.$

A country which is the 4th largest importer of crude oil and supports 75% of its oil needs through imports estimated at $150 billion can change its dynamics altogether even if it reduces imports by 10%. The recent fall in the barrel price of oil had an ultra positive effect on India’s economy, a $10 a barrel fall in price can bring down our import bill down by $17 billion and also reduce our fuel and petroleum subsidies.$

Now instead of looking in a retrospective manner, this article focuses on what happens if we start now.With the recent shale oil revolution, it has become easier for India to plunge into the industry giving new dimensions to energy formation for the country. While a whisper here and a rumour there are heard about our next step regarding the oil scenario nothing seems solid and we are still clearly in the thinking mode, whereas China has already taken steps forward with its shale oil plans.$

Recent statistics show that India has vast shale reserves near Arunachal Pradesh and Assam, this along with the news that “India would have increased its GDP by 6.5 per cent if the import of crude oil were avoided completely” poses questions on the road to be taken.$

It is also known that the further addition in the oil sector would provide employment for 9.4 million persons over a period of 20 years, a solution to our unemployment crisis.While we’re hearing about Indian Oil Limited and ONGC exploring some sites, multiple tidbits about them investing in Canada can also be heard.$

There is also a downside to this so-called clean source of energy. If India was to start now with explorations and refining, the initial cost is definitely

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somewhat of a barrier,with huge geopolitical researches and need for new equipment .But, while these can be ignored keeping in mind the future benefits ,it will be hard to miss the ecological implications. Environmentalists fear that the usage of poisonous chemicals by the explorers will have major consequences in the future. Added to this, massive quantities of water is needed to release energy trapped in the reserves, causing water shortages in the areas nearby as well as health problems due to the chemicals mixed. The Ministry of Environment and Forests as well as TERI have opposed the use of shale technology.$

Hence the shale oil revolution and therein self-reliance in oil in India looks like an uphill battle where we clearly need to calculate the tradeoff between environment and development, but there is hope. Narendra Modi in his recent visits is said to have had talks with the US about possibilities for shale oil in India. A US-India Energy Partnership Summit is also scheduled for September 30 and October 1, which will further decide our stance. Let’s keep our fingers crossed and see where this leads, who knows we might succeed in the shale business resulting in a reduction in deficits and a more stable economy and maybe, just maybe, a better future.$

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SOURCES: !• www.business-standard.com/article/economy-policy/good-news-for-india-as-oil-slips-below-93-a-bbl-114100300048_1.html$

• oilprice.com/Energy/Energy-General/Should-India-Dive-into-the-Shale-Boom.html$

• articles.economictimes.indiatimes.com/2012-10-10/news/34363597_1_pwc-india-energy-security-india-s-gdp$

• www.livemint.com/Opinion/NJATVzwDg7amvbctnlXNxJ/Gas-pricing-What-India-can-learn-from-the-shale-revolution.html$

• archive.financialexpress.com/news/shale-tops-pm-narendra-modi-s-agenda-for-us-visit/1288069$

-Anna Brittas, Economics, I year$

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The Contrarian January 2015

WHAT IF THE OSCAR TROPHY WROTE AN ARTICLE ON LEONARDO NOT WINNING AN OSCAR? AND THE LEO GOES TO…

They say that a Knight is chivalrous.$

They say that a Knight never loses his cool.$

They say that a knight is above all, loyal and fair.$

I am all this and much more! So, why do I have to bear the brunt of the angst of a million screaming young ladies (teenage girls) and fans who go by the name of Leonados (a portmanteau of Leonardo and aficionado)? For all I’m doing is carrying out my mandate of protecting and serving my lord- King Leonardo Di Caprio I (and only).$

Oh! Pardon me, for I have failed to adhere to the common courtesy of introducing myself first! I am Sir Academy Award of Merit (Best Actor Male), a knight holding a crusader’s sword. I also answer to the sobriquet -Oscar. $

Since the past two decades I’ve been engulfed in the absurd cacophony of deafening calls that have been demanding that I, Oscar, be given to my lord, King Caprio. I fail to comprehend such an illogical demand! How can a servant be awarded to his master! Now, many might question the reason why my lord is himself nominated? Well, that is because the King is a humble and democratic servant of his people, the selection process is always democratic with members of the Academy of Motion Picture Arts and Sciences choosing the nominees and the winners. He is nominated on public demand (for everybody knows how dangerous teenage girls can be if their demands are not fulfilled).Yet, he has never been selfish and kept me to himself. He has always secretly passed me on to who he feels has been

extraordinary that year. (He has been covertly winning me every year)$

It all started in the year 1993 , the year he earned his first academy award nomination for the Best Supporting Actor for his portrayal of an autistic boy in the film ‘What’s Eating Gilbert Grape’. The actor then all of 19 years lost to Tommy Lee Jones, which many believe he lost because of his young age. Now, my family may look easy to tame but at 8.5 pounds and at a height of 13.5 inches, how could I have let my own brother Best Supporting Actor Male, inconvenience my King ?For then he was a skinny little boy. He wouldn’t have been able to handle him! Thus, all I did was secretly tell him that his contemporaries (he calls them that, I’d call him his subjects!) might feel dejected if they’re never able to win me. Since then he has always been handing me on.$

Then came Cameron’s Titanic, a film that propelled the then 22 year old King onto the International film scene into the arms of a few hundred thousand screaming teenage girls. It was for his personal safety that he wasn’t even nominated for the award, even though he did do an impeccable job.$

For years my fair King has been refusing either nominations or the award for his incredible work in movies like Inception, Blood Diamond, The Departed, Revolutionary Road, J.Edgar Hoover, The Aviator, Django Unchained, The Wolf Of Wall Street in favour of Matthew McConaughey, Daniel Day-Lewis, Forrest Whittaker, Jamie Foxx et cetera et cetera..$

At 84, however, this statuette can’t take it anymore! It may not matter to my Lord, but it does matter to me. I belong to him. The Oscar belongs to him. So, I’ve decided to retire and be with him.$

What would happen to the awards now? Well, from next year the following words will reverberate in the Dolby Theatre:$

AND THE LEO GOES TO.... $

!-BY ACADEMY AWARD OF MERIT ALIAS

OSCAR and Srishti Singh

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The Contrarian January 2015

ECONOMICS FOR FUN

CAN YOU GUESS THESE TERMS FROM THE WORLD OF ECONOMICS?

1.$ $ $ $ $ 2. $ $ $ $ $ 3. $

!$ $ 4.$ $ $ $ $ 5. $

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6. $ 7.

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The Contrarian January 2015

MATCH THE ECONOMISTS TO THE THEORIES PROPOSED BY THEM

Adam Smith Theory Of Employment, Interest And Money $

David Ricardo General Equilibrium Theory$

Thomas Malthus Principles Of Political Economy$

John Stuart Mill Theory Of Consumption$

Leon Walrus Theory Of Comparative Advantage$

J.M. Keynes Quantity Theory Of Money$

Irving Fischer Absolute Advantage Theory $

Milton Friedman Population Theory $

!WORD SEARCH

!

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Lorem Ipsum Dolor January 2015

HINTS :- 1) When a single company dominates the market.

2) The name of the author who wrote the wealth of the nations.

3) When demand exceeds supply.

4) Period of economic expansion.

5) Name of the governor of RBI.

6) Goal of a consumer is always to ....................... his profit.

7) The money that people receive for working.

8) Name of the policy for dealing with monopoly.

9) Things that have earning power.

10) Value of final goods and services.

11) Name of the good whose, demand increases as price increases.

12) An investor with a positive market outlook.

13) A consumption tax added to a product’s sale price.

14) The rate at which the RBI lends to the commercial banks.

15) Name of the global organisation dealing with the rules of trade between two nations.

NOW COPY ALL THE UNUSED LETTERS IN THE ORDER TO FORM YOUR HIDDEN MESSAGE.!

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The Contrarian January 2015

WHAT IF WE COULD HAVE PREDICTED THE 2008 FINANCIAL

CRISIS? !DRAGON KINGS

What if we could have predicted the 2008 financial crisis? What if we could have done something to stop it? Or perhaps reduced the intensity with which it has affected billions of lives around the world?

There are two very different ways of looking at events and observations. Some observations such as the height or marks obtained by students in a classroom follow the Gaussian distribution i.e. the Normal distribution. This forms the bell curve with a significant hump in the middle and two relatively flat tails on either side of the hump. Such a distribution is seen in observations that are typically independent of each other.

Where one observation is in some way dependent on other observations such as in the occurrence of earthquakes, distribution of internet traffic (the fact that a website has a lot of links increases the likelihood that others will also link to the website) etc., observations follow another distribution called the Pareto or Power Law distribution.

Power Law distributions present the idea that rare and extreme events such as a devastating earthquake, sudden popularity of computers and internet sites or even financial meltdowns are difficult to predict because they stem from the same organizational mechanisms that cause smaller earthquakes or smaller everyday changes in the stock market. For example, a great earthquake is just an earthquake that started small ... and did not stop. Therefore if an event causing a large impact is part of a population that is described by a Power Law then it is inherently unpredictable due to its sharing of all the properties and characteristics with smaller sibling events (except for its size).

Black Swan events also espouse the same theory. Such events other than the characteristics of rarity, extreme impact and unpredictability also portray retrospective approval.

Our institutions are designed for a Gaussian world where there is tendency to seek out the typical averages or predictability in systems. Thus, while

standard statistical forecasting models are efficient for predicting the behavior of standard markets or consumers, extreme events are seen as outliers that according to the Black Swan theory are too complex if not impossible to predict.

But as business landscapes and nature change and display events that have an increasingly larger impact on society, it becomes more important to predict events that the Black Swan theory claims unpredictable. The Dragon King theory by Didier Sornette from the Swiss Federal Institute of Technology aims at doing so.

The Dragon King theory claims that Power Laws are not the whole story. A number of complex events are not sufficiently explained by power theories alone. Certain outlier observations that exist outside the realm of regular expectations because nothing in the past can convincingly point to their possibility, cannot be explained by Power Laws at all. Such events are called “Dragon kings”; “Kings” because they have a profound impact and “Dragon” because they have extraordinary characteristics.

According to Sornette, extreme events such as rapid growth in stock markets are a result of positive feedback mechanisms. He says that in a given financial bubble, it is the unrealistic expectation of future earnings rather than present economic reality that is the cause of a financial bubble. Better technology or a perception of lower market risk amplify instability by increasing asset demand and asset prices and further increases demand because investors think higher growth will follow. When feedback mechanisms in a system are all in the same self-reinforcing direction, then any small change or disturbance can cause the system to collapse very quickly.

"When herding behavior among investors ramps up, a stock's or index's growth rate can increase faster than exponentially leading to more herding. This positive feedback brings the system to a tipping point. About two-thirds of the time, a crash results," says Sornette in a paper in 2009.

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Sornette claims that studying these positive feedback mechanisms enables statisticians to predict bubbles and may also provide information about how best to tackle such events.

In fact not only can he predict the probability of a bubble bursting, he can do it with remarkable accuracy and of course, before the event! He has graphs that show the predictions of the S&P 500 US Index and oil prices — made before the crash in 2007-08. These and others can be found on the website of his Financial Crisis Observatory.

With models such as those formed by Sornette we may soon be able to predict and mitigate the effects of financial crises and natural calamities with accuracy. This would certainly make our existence more predictable.

SOURCES:!• http://wallstcheatsheet.com/business/

dragon-king-or-black-swan-can-we-predict-the-next-financial-crisis.html/?a=viewall#ixzz3MjBt9rXc

• http://www.nytimes.com/2007/04/22/books/chapters/0422-1st-tale.html?pagewanted=all&_r=0

• http://www.investopedia.com/articles/trading/11/black-swan-events-investing.asp

• http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Power_law.html

• http://necsi.edu/guide/concepts/powerlaw.html

• http://arxiv.org/ftp/arxiv/papers/0907/0907.4290.pdf

-! Avanija Rao, Economics, II year

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WHAT IF INDIA FOLLOWED EXPORT LED MANUFACTURING POST INDEPENDENCE ?

‘Make in India’, an initiative by Prime Minister Mr. Narendra Modi is the title of the ongoing discussion in the country. This initiative basically aims at concentrating on the skills of local manufacturers and workers, thus increasing the number of opportunities availed by the Indian people. Mr. Raghuram Rajan, the governor of the RBI lauds this initiative but strongly feels that “it would be better for India to focus on its domestic market than emulate the export led growth path…the world as a whole is unlikely to be able to accommodate another export led China”. But, what would be the case if, just after independence, rather than manufacturing for import substitution, India followed export led manufacturing based on small scale industrial products?!

As a newly independent country, India tried many new governance techniques and economic policies after 1947. But, gradually it mended its mistakes through policies like privatization, globalization, etc. It was initially too proud to be using foreign goods and thus, made importing goods a very difficult task. Mostly, only domestically manufactured goods were used in India so that there was self-reliance. Lack of competition proved detrimental for the quality of the goods supplied. Would that have happened if the main aim of manufacturing was export? I personally feel, no. Manufacturing for export purposes brings out initiative, unlike the no competition scenario. If that was actually what had happened, the Indian economy would be very different from what it is today. !

What are the basic problems that lead India to where it is going? The answer is- unemployment, poverty, lack of funds, large deficits, insufficient foreign exchange, etc. All these problems further lead to the dualistic nature of the Indian economy, that is, there is a large gap between the rich and the poor in our country. All the above stated issues would have been considerably less if India followed export led manufacturing. The people from rural areas would have been independent in what they do. The skills and expertise of Indian villagers would have been utilized by which they would have supported

their own living and thus, would not have to depend on anyone else. This would have helpeed in two ways. The migration from rural to urban areas would have decreased which would have automatically decreased the urban density of population and the vicious circle of poverty that is present within the villages would have come down. This would have reduced the dualistic nature of the economy. !

China is one of the best examples of countries that have flourished over the years and export led manufacturing was what helped it. Their poverty rates declined drastically and they were successfully able to conquer the world market. In a country like India, that is rich and diverse, such industrialization would lead to reduced poverty rates and less wastage of the human resource that it has in abundance. If export led manufacturing was initiated right after independence, India would have had a very high chance of being named wherever China appears today, because at that time, India would have been a competition for China. But, it is also important to note that, even though it started out to be a socialist economy, India ended up having a mixed economy. So, the proceedings of such policies would have been far different from that of China’s. It might have had a better hand at it or a weak one, depending on the priority given by the government to this undertaking. This weak democratic hand could have been a drawback if it had existed. But, whatsoever, the figures of poverty and unemployment would have definitely gone down and those of foreign exchanges and funds would have gone up leading to a whole different path of functioning. !

Although not like ‘export led’ China, India has presently taken various steps to become competitive enough through foreign trade. But, there are some weaknesses in its implementation of the schemes and policies formed for export promotion. Even now, improved quality of work in every field of export can give new hope for the future of India. !

- Jenny Abraham, Economics, I year

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WHAT IF INDIAN RUPEE WAS

CAPITAL ACCOUNT

CONVERTIBLE? Before we begin discussing the consequences of the above suggestion, let us first understand what exactly a convertible currency is. A convertible currency, as the name suggests, is a currency which can be easily converted to another currency. It can be for any purpose; transactions, indirect conversions etc. Convertible currencies are also sometimes called hard currencies or safe-haven currencies as they are mostly associated with stable economies which have a healthy economic and political outlook. The United States Dollar, Euro, Swiss franc, British Pound Sterling and Japanese Yen are the most commonly used convertible currencies. The most important feature of such currencies is that they can be used for any purpose anywhere in the world. If you wish to purchase a television, say in Singapore and you are not carrying enough Singapore dollars, you may make the payment in any of the above currencies, provided the shopkeeper agrees to accept it, which he generally does since he knows he can go to the bank and get the money exchanged for his local currency. Similarly, you can visit any bank in India and exchange these currencies for INR at whatever rate the bank is offering. But you cannot just walk up to a bank with say, Mauritian rupees, and hope to get INR in exchange since the Mauritian Rupee is not fully convertible. !

Coming back to India, INR is convertible only on the current account. In case of current account convertibility, it is important to have a transaction – import/export, inward/outward remittance, etc, involving payment or receipt of one currency against another. For full convertibility, we need to introduce Capital Account Convertibility (CAC henceforth) which, according to the RBI, is the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange without any intermediation or regulation.

With CAC, a European citizen will be able to buy land in India, sell it when its price appreciates and take away his investment and profits. With CAC, a currency can be converted to another currency without any transaction. This is also known as Capital Asset Liberalization. !

What if India had CAC? At first, it may seem like a very rosy situation. India will enjoy greater integration with the world economy. With easy convertibility, our dependence on foreign currency for imports would decline and it will lead to greater trade and capital flows between countries. It sends out a positive sentiment about the strength of the Indian economy and the abundance of foreign exchange reserves available to meet any large-scale transfer of capital from the country. It is expected to increase FII and FDI which will lead to industrialization, employment, and growth. Also, it incentivizes residents to invest in international securities and assets. But what about the downsides? The other side of the coin? It can cause complete financial disarray in the economy. Firstly, many Indians may convert INR to dollars or any other strong currency and park it outside India out of fear of the Rupee weakening due to a lack of confidence. In such a situation, the value of rupee will come plummeting down, which will be detrimental for our economy. This will not only lead to further capital flight but also reduce capital inflows. Secondly, speculative currency traders may hoard the currency, thus increasing the market price, and then release it in huge quantities to bring its price down. As a result, the currency becomes unstable which shakes the confidence of the public in the currency, which in turn adversely affects its reputation as a safe-haven currency.!

But why do countries like Japan and US who have CAC not face such problems? That is because they have very different economic dynamics as compared to India. For such adverse events to not take place, the economy has to be stable and strong. The citizens should not feel insecure about the currency. If they have confidence in their currency they will obviously not convert it into other “safe-haven” currencies. But, for that too, our economic conditions should be favourable. The Tarapore Committee set up by the RBI in 1977 for looking

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into the convertibility of the Rupee, formulated some preconditions that ought to be met before Rupee can be made capital account convertible. They are as follows!

1)! Fiscal deficit should be reduced to 3.5%. Government debt should be reduced.!

2)! Inflation should range between 3-5%. !

3)! The Indian financial sector should be strengthened by taking requisite steps such as deregulated interest rates, liquidation of weak banks and reduction of proportion of NPAs (Non Performing Assets) to about 5%.!

Also, to prevent speculative trading, the central bank should put in place preventive measures and have huge excess forex reserves in order to meet the fluctuations which may be caused by such speculative trading. The government should increase exports greatly through investing in R&D and coming up with unique goods and services. This will not only lead to current account surplus but also make our currency strong. !

Thus, at the moment, when we are grappling with around 4.28% inflation rate (as measured by CPI for the month of November), high fiscal deficits, tight monetary policy, high dependence on imports and decreasing investor confidence, if rupee was made convertible, it would land us in a disastrous situation. Full convertibility of INR is still a distant dream, but, with economic growth and improved position of the Indian economy on the global stage, full capital account convertibility is an excellent option. Till then, we will have to keep debating on the endless possibilities of what ifs and should haves.!

-Sonakshi Garg, Economics, II year!

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WHAT IF SUBSIDIES ARE REPLACED BY CASH TRANSFERS? Since 2005, the government has indicated a preference for a policy of cash transfers in lieu of subsidies it provides to people under various welfare schemes (health, education, agriculture, food rations, etc.). Their logic is that people are then free to ‘buy’ these services in the open market. !

The main approach to social protection in India has been the provision of subsidized food and kerosene through the PDS, involving a vast bureaucratic edifice. Subsidized food for ‘the poor’ presumes that what they lack most is food. That may be true on average. However, in the emerging market economy, a presumption that all poor people suffer from ‘food poverty’ may not be as reasonable as in traditional village India. Other ‘lacks’ may be as or more important. The PDS is costly and provides low-quality food. Although its defenders claim that the PDS could be improved, inefficiency is enormous, not marginal. !

Keeping in mind equitable distribution of resources and not just efficient distribution, governments provide the economically weaker sections of society with transfers in kind, or subsidies. From an economic viewpoint, we know that subsidies in kind constrain the consumer and narrow their choice set which implies lesser utility or satisfaction. The second theorem of welfare economics states that any Pareto efficient allocation of resources is also the optimal allocation (point of competitive equilibrium) if lump sum redistribution of income is done and then the market is allowed to work. This implies that if an economic policy authority wants to impose an efficient allocation as an outcome of social economic interaction, i.e. an efficient as well as an equitable outcome; it does not need to close the markets but instead apply the right fiscal policy that does not interfere with the allocative property of prices. In the case of subsidies versus cash transfer debate, it

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would imply that people be endowed with cash rather than being given quantity or price subsidies. Subsidies tweak with prices and may disrupt the normal functioning of the markets. Cash transfers, on the other hand, affect the income or initial endowment and will lead to a competitive equilibrium as well as a Pareto efficient allocation; granted that all assumptions hold. !

If microeconomic theory is anything to go by, the government should do away with subsidies and replace them with cash transfers. But these theories cannot be directly applied to the real world because of the assumption set on which they work: people are assumed to act like Homo economicus, it is assumed that there is perfect information in the economy and that preferences are convex etc. Replacing subsidies by cash transfers has practical problems. There is a problem of regular and timely indexation that takes inflation into account. In a developing country like India where inflation is not stable and where the Government took 12 years to increase the old-age pension, cash transfers are obviously not very popular among people. Due to lack of roads, public transport or no shops besides government ration shops in certain areas (like some coastal towns, tribal settlements etc.); buying commodities from cash is a challenge inn itself. Given the patriarchal set-up of a majority of Indian communities; if cash flows in place of food, it would go to the men and not be spent on food grain but splurged on liquor, gambling and other such frivolous pastimes. !

In the debate on cash transfers, positive experience of other countries that have implemented cash transfer schemes, especially Brazil and Mexico, are often mentioned. While there are many reasons why their experience cannot be directly translated to the Indian context, there are three important differences that need to be kept in mind.!

1. Both these countries (Brazil and Mexico) have much higher levels of human development indicators compared to India. For example, the proportion of households with GDP per capita of less than $1.25 a day was 46 per cent in India, but 5 per cent or less in Brazil and Mexico. Therefore, whereas cash transfers are used in these countries towards including a small section of the population who are left out, in India

where a much larger population is poor and malnourished there is an urgent need to first provide universal basic services and strengthen these.!

2. Related to this, is the issue of supply of provision of social services. In cash transfers, especially in the case of conditional cash transfers for health and education, there is an implicit assumption that the problem is in lack of demand for ‘appropriate’ services. Cash is therefore expected to act as an incentive for households to access services such as antenatal care or improve school attendance and so on. In India, where there is still a problem with supply of services in the form availability of functional and good quality schools or health centers the immediate need is to improve such services.!

3. It is important to note further, that while the debate in India seems to be looking at cash transfers as a substitute to the government providing services, in these countries the cash transfers were a complement to many other strategies that included strengthening public services. !

If subsidies are replaced by DCTs (Direct Cash Transfers), there will be a wider choice set and people will be able to buy what they want to but at the same time in a country like India, DCTs may not serve their purpose.!

Sources:!• http://infochangeindia.org/agriculture/analysis/the-case-against-cash-transfers.html!

• http://articles.economictimes.indiatimes.com/2011-06-01/news/29608448_1_pds-shops-public-distribution-system-national-food-security-act!

• http://infochangeindia.org/agriculture/features/a-pds-that-works-is-better-than-cash-transfers.html!

• http://www.princeton.edu/~jcurrie/publications/Inkinddsurveyrevised3.pdf!

• http://www.imcnet.org/cms/public/content/ertf_thoughtpaper/5.%20Subsidy%20through%20Direct%20Cash%20Transfer-%20A%20Critique.pdf!

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• http://www.thehindu.com/opinion/op-ed/cash-transfers-can-work-better-than-subsidies/article6665676.ece!

• http://www2.warwick.ac.uk/fac/soc/economics/current/modules/ec221/notes07/lecture_notes_vi.pdf!

• http://www.guystanding.com/files/documents/IJLE_cash_transfers_basic_income_2014_as_published.pdf!

-Arushi Gupta, Miranda House, Economics!

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WHAT IF THE DEBEERS DIAMOND CARTEL HAD NEVER HAPPENED? DIAMONDS ARE A MONOPOLIST’S BEST FRIEND

Let me tell you a story. It starts with an extremely intrepid American entrepreneur who reaped the benefits of good old colonialism by pulling off one of the best monopolies in history, cuckolding not only one generation but every one thereafter. We’ve all heard of diamonds haven’t we? Those sparkling rocks with the magical property of reasserting the supremacy of the woman who possesses it and the man who bequeaths it (or vice-versa). Countries go to war for this stuff, literally. !

Reality check. Three words. DeBeers diamond cartel. Heard of it? (I actually expect all Economics students to know this, it was in our prescribed readings). Initially, diamonds were found only in India and Brazil, and were therefore extremely rare and precious. However, in the 1890s, when diamond miners were reaping the benefits of colonialism in South Africa, they discovered numerous diamond mines, which increased supply and caused panic amongst said miners. Enter Cecil Rhodes whose brainchild was the DeBeers Mining company who took control over the Diamond Syndicate, a group of diamond mining merchants with mutual profit-oriented interests. Due to the high cost of infrastructure required, the merchants were happy enough to go along with Rhodes’ plan.!

The basic tenet of monopoly involves the exclusive possession or control of the supply or trade in a commodity or service. In September 1938, after the Great Depression, Harry Oppenheimer, son of Ernest Oppenheimer (who took control of DeBeers in 1926), decided to take it one step further, helping to devise an ad campaign in the United States that would represent diamonds as symbols of

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indestructible love for generations to come. They all proclaimed that ‘A diamond is forever’ as the tagline, not something that should be resold. This is possibly one of the best examples of a mass brainwashing in the history of ever. Fashion designers would talk about the upcoming trend of diamonds, lectures were organized, targeted towards millions of young women over 15 years of age, encouraging them to see diamonds as a symbol of romantic courtship, they published issues of newspapers that depicted famous celebrities wearing diamond and even convinced Queen Elizabeth to travel to South Africa and accept a diamond from Oppenheimer. Behavioral economics, ladies and gentlemen, existed long before Amos Tversky and Daniel Kahneman ever talked about it. !

Coming to the central theme of the newsletter’s edition, I ask ‘What if the DeBeers diamond cartel had never happened?’!

It’s a more bizarre question if you really think about it. Maybe it’s because of the almost godlike status associated with diamonds today. India,especially, has always had a love affair with diamonds, it’s status symbol remains unmatched. A whole lot of us will be relieved of the pressure to acquire the bazillion carat ring in our attempts to move up another rung of the society ladder. Because, well, without monopoly diamonds are basically worthless. Says who? Oppenheimer for one, the chairman of the DeBeers diamond cartel. Diamonds have no resale value. So trying to sell one off in order to pay off a debt is actually not a good idea. If put to industrial use, diamonds won’t fetch a price of more than $2 to $30 (INR 126.48 to INR 1897.2 at current exchange rates). You can say that to the next aunty who shoves her ring underneath your face. The joke’s on you lady. !

DeBeers isn’t the only diamond producing entity in the world. Reserves have been discovered in Canada, Australia, and most noticeably, Russia. The latter has been the biggest competitor to the cartel till date. However, after the splitting up of the Soviet Union, owing to a lack of funds, Russia had to concede to the demands of the cartel and trade accordingly. I’m not saying that, assuming DeBeers hadn’t existed, there wouldn’t have been price inflation and manipulation of supply. However, it goes without saying that the market that would have existed would

have been MUCH less lopsided. For example, when Israel started to try and hoard diamonds, Israeli sightholders were dismissed from the Syndicate’s diamond sightings and every one in four Israeli employees lost their jobs. Imagining the non existence of this all pervasive Godfather is like imagining the world without the United States of America.!

What I can conclude for sure is that without the cartel, we wouldn’t have half of the (annoying and entertaining in equal parts) advertisements on television today. No more ads on women agreeing to get married because they saw some random female relative decked up in diamonds. Watching the ethereal Ms. Munroe sashaying to ‘Diamonds are a Girl’s Best Friend’ would no longer be as memorable. !

And if diamonds were no longer that precious, maybe Mr. Cameron could finally be persuaded to return our Koh-i-Noor.!

SOURCES:!• http://pages.stern.nyu.edu/~lcabral/teaching/debeers3.pdf!

• http://www.theatlantic.com/magazine/archive/1982/02/have-you-ever-tried-to-sell-a-diamond/304575/!

-Gauri Gaur, Economics, III year!

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RESOURCE SECTION

LIST OF RECOMMENDED BOOKS AND WEB RESOURCES

!BOOKS TO READ BEFORE YOU GRADUATE:

!Professors’ and Editors’ Picks:!1.! Economic Theory In Retrospect by Mark Blaug:!

From the doyen of the history of economic thought, this book helps students understand theories that form the base of Economics. The detailed Reader’s Guides enable you to truly comprehend what those who proposed the theory meant!!

2.! An Economist’s Miscellany by Kaushik Basu: !

This is a book that should be in the miscellany of books owned by all economics undergraduates. From his experience as a lecturer to his take on the phrase ‘What is the time by your watch?’, this book is an eclectic mix of essays on global economic crisis, public policy; games constructed by him, and it also includes his work as a translator! !

3.! Poor Economics: Rethinking Poverty & the Ways to End it by Abhijit Banerjee and Esther Duflo :!

It helps to analyse the efficacy of public distribution schemes and makes the reader realise that generalisations (in the book- generalisations about the behaviour of the poor) can be the main cause of failure of a policy. Also, it can be seen that the policy makers however benevolent their aim might be, may not be able to draft an effective policy because of little knowledge about what is actually happening at ground level.!

4.! The Communist Manifesto by Karl Marx :!

An oldie, but a goodie, we consider the Communist Manifesto to be the Bible for any individual doing an Economics (Hons). Maybe it's because Marx combines History, Political Science and Economics in the most succinct manner possible.  It's a hopefully optimistic outlook from a man in the past who perhaps didn't how much his successors would misinterpret his world view.!

5.! Everyone Loves a Good Drought:  Stories from India's Poorest Districts by P.Sainath : !

The book goes beyond listing statistics exemplifying poverty in India. It is a recitation of the stories of the lives of the sub stream. This is a must read for those who wish to understand how policies affect those for whom they are made. The book is capable of moving the reader to tears. !

!Suggestions from Greg Mankiw’s blog:!

1.   Milton  Friedman,  Capitalism  and  Freedom  

2.   Robert  Heilbroner,  The  Worldly  Philosophers  

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3.   Paul  Krugman,  Peddling  Prosperity  

4.   Steven  Landsburg,  The  Armchair  Economist  

5.   P.J.  O'Rourke,  Eat  the  Rich  

6.   Burton  Malkiel,  A  Random  Walk  Down  Wall  Street  

7.   Avinash  Dixit  and  Barry  Nalebuff,  Thinking  Strategically  

8.   Steven  LeviW  and  Stephen  Dubner,  Freakonomics  

9.   John  McMillan,  ReinvenYng  the  Bazaar  

10.  William  Breit  and  Barry  T.  Hirsch,  Lives  of  the  Laureates  

!Books for Masters Entrances: !Micro  Economics:Workouts  in  Intermediate  Microeconomics  by  Bergstrom  and  Varian Microeconomic  theory  by  Nicholson  and  SnyderOsborne’s  Tutorial:  Markets Macro  Economics:Macro  Economics  by  Dornbusch,  Fischer  etal Macro  Economic  Theory  and  Policy  by  Branson Sta/s/cs:MathemaYcal  StaYsYcs  by  Freund Basic  StaYsYcs  by  Nagar  and  Das  

Source:  Economics  Entrance  (economicsentrance.weebly.com)  

RECOMMENDED BLOGS AND WEBSITES:!1.   Greg  Mankiw’s  blog:  (gregmankiw.blogspot.in)  

2.   VOX    CEPR's  Policy  Portal:  (  www.voxeu.org)-­‐  Research-­‐based  policy  analysis  and  commentary  from  leading  economists  

3.   Paul  Krugman’s  blog:  The  Conscience  of  a  Liberal  (krugman.blogs.nyYmes.com)  

4.   Project  Syndicate  (www.project-­‐syndicate.org):  Commentaries  and  analysis  on  Economics,  Finance,  Development  to    Culture  and  Society.  Its  contributors  include  the  likes  of  Dani  Rodrik,  Kenneth  Rogoff,  Nouriel  Roubini,  Jeffrey  Sachs,  Shashi  Tharoor  and  Raghuram  Rajan.  

5.   Economics  Entrance:  (www.economicsentrance.weebly.com)-­‐  A  guide  to  help  one  write  various  masters  entrances.  The  blog  has  secYons  on  the  books  to  use,  solved  examinaYon  papers,  and  a  guide  to  various  masters  programs  in  Economics  in  the  country.    

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