EPS Magazine Pragati

VOLUME I No.
FEB 2013
Editorial Board
Debtanu Dutta
Biswa Prateem Das Manjunatha D Belgere (Designing)
Coordinators
Batch 2012-14
Batch 2012-14 Batch 2012-14
Akash Deep
Siddhartha Roy Sukriti Jain Swati Gupta
Batch 2011-13
Batch 2011-13 Batch 2011-13 Batch 2011-13
Contact us at eps@iimk.ac.in
Presented by
Economics Politics & Social Sciences Interest Group Indian Institute of Management Kozhikode
Indian Institute of Management, Kozhikode
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Editorial
We are very happy to present you the inaugural volume of Pragati, magazine from Economics, Politics and Social sciences (EPS) Interest Group of IIM Kozhikode. This is a result of tireless effort and dedication from the student members of the group and endless inspiration and help from the faculty members of our Faculty Advisory Board. EPS Interest Group is a cohort of enthusiasts on economic, political and social issues. Main aim of this group is to create awareness about recent related issues and sensitize the community on the importance of human initiatives. As a group we facilitate debate, discussion, article writing and other activities. Our teachers always say that creating awareness is the first step of mobilizing people. EPS strives to engage people in various activities to create a vibrant and sensitive human community. Pragati, one of the many activities undertaken by EPS, represents the thinking jewel within the academia. The first issue of the magazine consists of independent researches by students about various pertinent economic issues, novel social perspectives from faculty members and brief descriptions about some activities done by EPS group till date. Pragati aims to inspire thought leaders to come forward and articulate their research on contemporary issues on economic, political and social importance. We hope that such endeavor will generate future debates or discussions in the intelligentsia. Hope all of you will enjoy the magazine!
Sincerely, Team EPS
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Contents
An Interview with Dr. Debashis Chatterjee, Director IIM Kozhikode FDI in Multi Brand Retail in India A Game Theory View Foreign Investment in recent times - Trends, Issues and Challenges Global Financial Crisis: Impact on India The Impossible Trinity and its Implications on the Indian Economy Crime and Misery: the Indian Case Monetary Policy Transmission Mechanism Fiscal Deficit An Indian Perspective The Current Account Deficit Crisis An Analytical Insight Evaluating decisions on Brand Ambassadors - a Game Theoretic Framework Caste Politics in Karnataka - A Game Theory Perspective Life between Shopping malls Talk on the work of Nobel Laureate Economists Roth and Shapley EPSiz: A Quizzical Journey Pol-Trics Talk & Tease EPS The Facebook page
06 08 12 15 18 21 24 27 30 33 37 41 46 47 49 51 52
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An Interview with Dr. Debashis Chatterjee, Director IIM Kozhikode

on 26 January, 2013 by Biswa Prateem Das & Debtanu Dutta, EPS members
We are seeing so many incidents of social crimes, what may be the reasons? Todays youth is under pressure of huge expectations, backed by an outbound life and a frantic mass media which is driving them for seduction fulfillment. They always see a well-dressed woman as well packaged merchandise. Thus they are such type of consumers who couldnt contain their urge to consume. In a nut-shell todays youth are less contributor, and more of a consumer who wants to consume at any cost. Earlier people used to grow onions and potatoes in their field, and then used to consume them. So they had respect towards what they have produced. Today people are just buying them from supermarkets and carelessly throwing them after their needs are fulfilled. We can see that there is gross degeneration of institutional values as a whole making India a democracy that is not just dented but also badly painted for the world to see (please refer to Elections 2014: Rethinking democracy published in The Economic Times, dated 26th Jan, 2013).
In such scenario, how do you want to see IIM Kozhikode students making any difference to society? The ecology of IIM Kozhikode helps the students to build their own capability which leads to development of social capital that can be deployed at proper places in future. For example, take the course of Social Transformation of India taught by Prof. A F Mathew to the PGP first year students. In such a course the participants engage with the real modern day issues like gender and caste discrimination etc. and thus develop a problem solving capability. This capability, which is since intangible, remains with the students even after they leave this institution, and thus get transmitted in to their career. Also the students of IIMK have the priority towards contributing to the society. This is because, as told to me by a senior manager from a reputed corporate house, IIMK students have sensitivity towards social issues. You can refer it as some kind of unconscious conspiracy where the professors are knowingly or unknowingly sending signals and students are assimilating them, and thus inheriting the legacy. After all, an institutions culture always stays with the students, even after they leave the place.
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What is that Indian thought which IIM Kozhikode strive to globalize as its vision? Globalization is not westernization. The western world is not the ideal global space. India has onesixth of worlds population and hence every Indian is by definition global but he doesnt have any voice. World Bank, IMF, Davos all are counter-points to the Global idea as they do not consider nonwestern views as such. The Indian thought is nothing but that binding idea which represents unity in pluralism, cosmos out of chaos. In Indian market we can see a lot of diverse products consumed by diverse income group of people. In recent times India has become testing land for all these products, we saw all conceivable experiments happening in India. Take the case of Tata, one of the oldest Indian corporate houses. Earlier Tata had their presence only in the Indian sub-continent. But soon they realized that unless they become one of the top ten global players through expansion, they will lose their market share in India. This proves that India is no more a local entity. To globalize this Indian thought IIMK provides the platform for generating real ideas, diverse thoughts and last but not the least the people who can perform. The social sensitivity, impregnated deep into the DNA of these people can never be divorced from them. We dont always have to look up to the western world to understand Leadership, as we can already find them in Bhagavad Gita (see the book Timeless Leadership: Learn the art of war from the Bhagavad Gita).
EPS interest group is a students initiative for learning and collaboration beyond classroom activities. What are your views on EPSs role in IIM Kozhikode? EPS interest group plays a very critical role in generating a vibrant intellectual life in the campus. Through its different activities like Pol-trics, Talk & Tease, EPSiz, etc. EPS creates an idea space where different minds converge digitally or directly producing non-linear thinking. EPSs activities are in line with IIMKs vision of Globalizing Indian thought. Such student-driven initiatives are the core of any B-school and it is a great pleasure to me that such initiatives are carried out so passionately in this campus.
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FDI in Multi Brand Retail in India A Game Theory View

Sowmya R, Tarun Chadha, Chandraprakash, Ravi Giri Batch 2011-13, PGP, IIM Kozhikode
Context
FDI in multi brand retail in India has been a hotly debated issue for the last one year. The ruling government and corporate honchos argue that allowing FDI will usher in huge benefits and create jobs; by creating a sustainable back end infrastructure, supply chain, benefitting the farm sector and also by curtailing supply side inflation. But opposition groups, traders and some allies of the government argue that allowing FDI will hurt small stores and Kirana shops and lead to massive job losses. While many recognize the need for strong reforms especially in the current poor economic climate with huge dip in growth figures, the question that remains to be answered is: Can FDI in multi brand retail be allowed in such a way that it does not hamper the current unorganized market? What kind of safe guards or contractual agreements need to be initiated such that it can be made possible? The paper approaches these questions from a Game Theory perspective by analyzing the strategies available to the various stakeholders that have emerged as key in the past year. It can be seen that by introducing appropriate policy frameworks and a system of checks and balances, it can be ensured that a conducive environment is developed that favors coexistence of new and existing players.
The current situation regarding multi-brand Retail FDI in India can be constructed as a game by defining the players involved and their strategies and payoffs. Players: The Government, Opposing Allies (TMC and Left) and Multinationals (like Walmart, will be referred to as FDI henceforth for simplicity) Strategies: Guided by factors like ideology of the ruling Congress party, economic climate in India, the quality of FDI expected, the expected benefits of FDI inflow and the International economic climate, the Government initially has two strategies towards FDI in Multi Brand retail Show intent AND Do not show intent for FDI in India. If the government shows intent towards FDI, the Opposing Allies like TMC, driven by political (vote bank politics, clout etc.) and ideological motives, then have two options- be extreme left and oppose the bill, i.e., Protest OR be a moderate left and not protest, i.e., Dont Protest. In response the government, driven by politics, ideology and diplomacy in the international arena, makes a final call of allowing the FDI bill to pass in the parliament (Allow FDI) OR retract and not pass the bill (Do not Allow FDI). With the passing of the FDI bill, the multinationals that enter the Indian markets based on agreements, will have 2 major strategies. A company like Walmart based on its history, can play an aggressive role-expanding, utilizing its financial and resource muscle to monopolize the market. It may get influenced by the norms of the land and if it notices lack of strength in the institutions, may also indulge in bribery or corruption. If the institutional frameworks are in place, and arrangements are reached between the several stakeholders, possible co-existence arises allowing all the players to flourish. We call the two strategies as Monopolize& Co Exist.
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The Game Tree

The game boils down to a sequential game with three players. The player 1 is the Government, Player 2 is Left and Player 3 is FDI.
The different variables are: -Q: +q: -q: R: -R: -R R R gamma: A: A/n: B: B: -c: c: x: L: L L omega: L government with no political will, stagnant and not interested in moving any policies strengthen of bilateral relationships on an international basis and with corporates) government loses on International and Corporate ties gain in the governments ideology (increased clout and confidence), R > q loss in governments ideology given backlash, lack of political clout, etc. - (R + beta); (beta: increased loss due to governments loss of face and clout), R < R R + q; (q: further increase in governments ideological clout), R< R R gamma: ideological loss for the government mitigated by gamma, R > R decrease in ideology as because the public view is that they didnt protest beforehand. revenue gain in capturing market share revenues in a shared market scenario cost involved in operations (aggressive mode of expansion and monopolization) cost of operations (during co-exist), B >> B cost of protest, c < q time delay in passing the bill due to the protests across the country (opportunity cost) the loss to the country in terms of employment and indigenous growth strengthening of the Lefts ideology, R < L, L > c L + delta: an ideological gain for the Left (delta: the We told you before syndrome) - (L + delta): ideological loss in Left gain due to the early entry in FDI, as there were no protests in passing the bill. L gamma: ideological gain for the left, L<L<L<L
The different strategies adopted on the basis of the above variables are Government - No intent Government Intent, Left Protest, Dont allow FDI: Government Intent, Left Protest, Government allow FDI, FDI Monopolize Government Intent, Left Protest, Government allow FDI, FDI Co Exists: Government Intent, Left Dont Protest, Government allow FDI, FDI Monopolize: Government Intent, Left Dont Protest, Government allow FDI, FDI Co Exist Indian Institute of Management, Kozhikode Page 9
While the payoffs have been determined by analyzing strategies based on the above variables, a numerical representation makes the payoffs more intuitive. These payoffs are obtained by setting constraints on the variables based on common world observation. Each players payoffs must be viewed independent and unrelated to the payoffs of the other players, thereby possessing information regarding relative strategies for each player. It can be intuitively seen how these payoffs make sense. As an example consider the governments payoffs which are higher when it allows FDI even if the left protests and foreign players choose to coexist, resulting from ideological gain and improved international relations compared to governments payoffs if foreign players monopolized.
Playing the Game

Evaluating the payoffs and rolling back it can be observed that Government Intent, Left Protest, Dont allow FDI becomes a SPNE and an equilibrium point.
This equilibrium explains the current scenario in which government is in. With intense protests there has been a deadlock for the last one year and the FDI bill has not been passed. While the desired condition for all the stakeholders considering the economic climate in India, need for an impetus for growth can be provided by the FDI. But at the same time considering the structure of retail market in India, it is necessary to draft certain clauses and put checks and balances such that co-existence becomes a Nash Equilibrium. Thus, Government Intent, Left Dont Protest, Government allow FDI, FDI Co Exist, is the equilibrium point that can provide a favorable climate for all stakeholders.
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It can be seen that by ensuring that coexisting becomes the strategy of choice for FDI, the Government can garner political consensus resulting in No Protest by the Left.
The Government can introduce checks and balances through policy frameworks to safeguard the interests of all stakeholders. In order to ensure this, policy measures can be taken as such: The limitations on the proposed multi-brand FDI should be strengthened. For example, the backend infrastructure requirement should be more carefully defined and increased. Detailed local sourcing requirements should stipulate production in India, rather than simply sourcing from an Indian supplier who has imported the product. The retail giants should be required to recognize unions and bargain collectively. Regulations can be adopted which require foreign retailers to set prices of goods paid to suppliers to be at or above cost so as to preclude monopsonistic purchasing practices by big retailers. Creation of a state run agency to monitor the application of established conditions with clear consequences (heavy penalties) which can act as deterrent against undesirable behavior.
It can be seen that these policies would result in an additional cost to the Multinational retailers, thereby making the Monopoly strategy less attractive than the Coexist strategy. By rollback it can be seen that the SPNE now becomes Government Intent, Left Dont Protest, Government allow FDI, FDI Co Exist. No player benefits from unilateral deviation from this equilibrium. The Government will thus be able to resolve the current deadlock in matters of Retail FDI thereby spurring growth in this sector.
References
Neumark, David, Junfu Zhang, and Stephen Ciccarella, The Effects of Wal-Mart on Local Labor Markets, IZA Discussion Paper, Jan 2007 Stone, Kenneth E, Georgeanne Artz and Albert Myles, The Economic Impact of Wal-Mart Supercenters on Existing Businesses in Mississippi, Iowa State University, 2003 Switching channels: Global Powers of Retailing, Deloitte, 2012. Affidavit of Kenneth Jacobs to the Competition Tribunal of South Africa, CT Case No. 73/LM/Nov10. Andrajit Dube, T. William Lester and Barry Eidlin, Firm Entry and Wages: Impact of Wal-Mart Growth on Earnings Throughout the Retail Sector, Institute of Industrial Relations Working Paper No. iirwps-126-05. Page 11
Foreign Investment in recent times - Trends, Issues and Challenges

Amit Kr. Das, Biswa Prateem Das, Mohul Roy, Rohit Kumar, Shruti, Tapas Rastogi Batch 2012-14, PGP, IIM Kozhikode
Putting the issue in context

In light of the recent debate on Foreign Direct Investment (FDI) in multi-brand retail, we examine the impact that foreign money can have on the economy of a country. Our results suggest the benefits may accrue more to the capital markets than the broader economy, at least in the short run, but it does bring in technological efficiency and global management practices which improves Indian competitiveness.
The Indian economy has been on a downward spiral for the past few quarters with growth slumping to 5.3% in Q2 of the current fiscal from 6.7% in the same period in FY12, along with bloated public finances (the budgetary target of fiscal deficit at 5.1% of GDP is likely to be breached) and chronic inflation (it refuses to come down to RBIs comfort zone of 5% inspite of 13 consecutive rate hikes amounting to a 325 bps increase till October 2011). The principal factors blamed for this gloomy economic scenario have been policy paralysis, anaemic global growth and structural factors like outdated infrastructure, supply chain bottlenecks et al. The ruling UPA coalition, cornered by charges of lack of decision making and crony capitalism, suddenly sprang into action with a slew of reforms like FDI in multi-brand retail and aviation and pruning of wasteful petroleum subsidies. Apart from these measures, there have been other steps taken to encourage foreign investments like: A systematic increase in the limits set for FII in government and corporate bonds Postponement of measures like the General Anti avoidance rules (GAAR) which were perceived as an avenue of harassment of foreign investors at the hands of the taxman
Key Findings
FII flows dominate FDI flows Foreign flow depends on a host of factors Spatial and sectoral trend in foreign investment have remained stable over the years No significant correlation between Foreign Investment and GDP growth Foreign capital flows largely determine the movement of headline indices
In this backdrop, the report aims to examine the following: Trends and issues in Foreign investments flowing into India since 2001 Determinants of FDI flows Influence of FDI and FII on GDP growth and capital markets
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Key Trends and Issues in Foreign inflows in recent years

FII flows dominate FDI flows
FDI Variance
Portfolio investments have started dominating FDI ever since 2003-04 20000 FII Variance when the global economic boom began. 10000 In FY2011, the gap has grown to $14 0 billion, official figures suggest. Over the past decade, FII flows have been -10000 approximately 50% more volatile than -20000 FDI flows. Although its good for -30000 financial assets, it has led to concerns that Indias capital account surplus is being increasingly financed by hot money which are unstable and hence their reversal can bring about a systemic crisis, given Indias high current account deficit (at 3.9% of GDP in Q1FY12). Hence, policy measures must be geared more towards encouraging stable FDI flows than fair weather friend FIIs.
30000
2008-09
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2009-10
2010-11
Foreign money is influenced by a host of macroeconomic factors Policymakers have sometimes given the impression that higher economic growth will de facto boost foreign money inflows. But our analysis suggests that Indias attractiveness as a destination for foreign capital will depend on various factors like: EXRt : Exchange Rates RESGDPt : External financial robustness (measured by forex reserves/GDP) TRADEGDPt : Trade Openness (measured by total trade/GDP ratio) FIN. Positiont : Ratio of External Debt to Export (used as a proxy for financial position) INTt : Interest Rates (bank lending rate)
We estimate that the FDI amount is a function of the above factors with the help of the ordinary least squares regression technique using annual data from 2001-12 :
ln FDIt = 5.88 0.05 EXRt + 0.02 RESGDPt + 0.02 TRADEGDPt + 0.62 FIN. Positiont - 0.13 INTt (P-value) (0.04) (0.14) (0.47) (0.06) (0.13) (0.27)
We determine that the above mentioned factors can explain around 90% of the FDI flows.
Impact of Foreign capital on GDP growth: One of the major arguments put forward by the pro-foreign investment camp has been that it boosts GDP growth. But our analysis suggests that foreign capital can have only a minimal impact on GDP growth.
The coefficient of determination, R2 of 16% for FDI growth and of 1.77% for FII suggests that foreign investments have not had too much of an impact on Indian GDP growth.
Indian Institute of Management, Kozhikode Page 13
2000-2001
2011-12
GDP growth (in mn USD)
11.00 9.00 7.00 5.00 3.00 -50 0 50
y = 0.0141x + 7.1288 R = 0.1656
GDP growth (in mn USD)
GDP growth vs FDI growth
GDP growth vs FII growth

11.00 9.00 7.00 5.00 3.00 -4 1 6 11 FII growth (in mn USD) 16 y = 0.0471x + 7.493 R = 0.0177
100
150
200
FDI growth (in mn USD)
Impact of Foreign Capital on Capital Markets: We studied the impact of foreign capital on Indian stock market indices with the help of the ordinary least squares regression technique using annual data from 2001-12 as follows:
BSE Sensex = 1828.79 + 0.33 FDI (mn USD) + 0.24 FII (mn USD) (P-value) (0.06) (5.55) (0.001) S&P CNX Nifty = 628.70 + 0.10 FDI (mn USD) + 0.07 FII (mn USD) (P-value) (0.03) (5E-06) (0.001)
Using the Sensex as a proxy for the capital markets, we estimate that FDIs and FIIs have a very strong effect on the index movements as measured by R2 of 93.76%.
Insights

It is evident from the study that foreign investment does not bring any economic growth in the short run. But over time, its likely that it will have a beneficial impact on the country through : new technologies coming in through Technology Transfer management practices which improve efficiency in operation more industrialization which can be expected to generate employment over time
References
Rajput Namita et al., Relationship of FDI and growth in India: A diagnostic study in Asian Journal of Management Research, Vol 2, No. 2 - 2012 K, S Chalapati Rao and Dhar, Biswajit, India's FDI Inflows: Trends and Concepts in working paper of Institute for Studies in Industrial Development, Feb 2011 Sultana Syed, Pardhasaradhi S., Impact of Flow of FDI & FII on Indian Stock Market, in Finance Research Vol1 No.3, July 2012
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Global Financial Crisis: Impact on India

Kanika Vanvari, Karthik V, Vardan Walia, Chhavi, Bala Meenakshi, Bahniman Rynjah Batch 2012-14, PGP, IIM Kozhikode
Background
With the current economic scenario with huge economies- US and EU experiencing a major slowdown, we examine its impact on India. The most significant effect has been on our Trade balance which has trickled down to other areas of the economy including currency, inflation as well as the stock market. Our analysis suggests that Fiscal deficit will be one of the key challenges in this scenario. In addition, we have analyzed the impact of the policy measures initiated by our government to curb these problems and thereby restore growth.
Two different countries meaning two different worlds are the stories of the past. With the rise of globalization, the entire planet has been reduced to a global village. People, governments, firms etc. transact easily across the globe. But globalization did bring along its share of ill-effects on the economies. When the crisis broke, both advanced and emerging economies resorted to frenetic macroeconomic measures to avert financial catastrophe and assure global confidence in the international financial system could return. Major reasons for the global financial crisis were two. One, the Subprime Crisis in USA which started around 2007, mainly because of real estate bubble burst, leading to a series of economic failures and financial institutions like Lehman Brothers turning bankrupt overnight. Second, the European Sovereign Debt Crisis in Eurozone which is mainly caused by the Euro area being unable to repay or re-finance their government debt due to overspending by government on public workers. Since there is a monetary union there, they could not go for seigniorage to bail out their own economies and had to rely on European Central Bank. With major financial disasters taking place in various parts of the world, Indian economy couldnt keep itself immune to the world activities. The FIIs lost confidence and withdrew money to feed their own ailing economies, resulting in a severe fall in the stock market and depreciation of INR. There was a rise in food and commodity prices around the world, leading to high levels of inflation. With the economies failing in the other parts of the world, Indias exports fell due to inability of those nations to import goods like gems and jewelry from India. This subsequently led to increase in unemployment level and a fall in GDP growth rate, which explains the Okuns law, establishing an inverse relationship between the two.
Findings:
Reduction in Exports Validation of Okuns Law of inverse relationship between unemployment and GDP Correlation of Indias exports to Worlds imports is 0.8 Indias fiscal response was initiation of rural employment schemes and increase in subsidies Monetary response was decrease in CRR as well as introduction of Market Scheme Stabilization Securities.
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Key Trends and Issues

Reduction in Net Exports along with currency depreciation
Indian Rupee depreciated significantly in the year 2008-09: This should have increased our exports and hence led to a decrease in the trade deficit or in other words an increase in Net Exports. However, this did not take place due to the high proportion of Indias trade with US Same phenomenon observed in 2011-12: The effect was all the more high because of decrease in trade with both EU and US. This has been due to a combination of Euro crisis and the slowdown of US economy. EU occupies 26% of Indias exports As a result, , India has been unable to reap the benefits of depreciating currency due to the Global Economic slowdown
Interdependence of FIIs, Sensex and Exchange Rate

With the slowdown in the world economy, foreign investors lost confidence in the Indian markets. Also, they had to feed their own ailing economies at the first place. This fall in FIIs invariably resulted in fall in Sensex, which fell by about 8000 points in 2008-09. This caused depreciation of INR as well. The markets revived in 2009-10 a bit and showed some promise as FIIs came back to India. Much to disappointment, it again went down in the next 2 FYs. Impact on Foreign Direct Investment: From US $3250 million in 2004-05, the FDI has leaped to over US $247329 million in 2008-09 However, since February 2008, a reversal in the trend was observed. Monthly inflow of FDI between January 2008 and January 2010 suggests a clear decline over a period of 24 months In fact, the current FDI may also prove to b temporary as the emerging economies are considered as safe havens. Once, US and EU economies recover, reverse trend may be observed
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Monetary and Fiscal Responses

India resorted to extreme measures like unwinding of MSS securities, changes in CRR etc. rather than only Open Market Operations (OMO). The repo rate (by 425 bsp), reverse repo rate (by 275 bsp) and CRR (by 400 bsp) were reduced to aid the crisis by easing the economy through higher money supply. Decreasing CRR induced Rs. 1.6 Trillion liquidity into the Banking system. Indian government had taken a few measures before the crisis, which protected India to a great extent. These measures included increase in public outlays, employment guarantee schemes, pay commission rewards, Bharat Nirman, PMs Rural Road Programme, increase in food subsidies etc. All this lead to an increase in GDP and NREGP helped reduce the unemployment levels in rural areas. Government increased their expenditure in agriculture and consumption in India didnt fell at a fast pace.
Visions
Leveraging on US policy of Quantitative Easing: This would strengthen Rupee resulting in decrease the value of imports. Foreign investments would also rise due to higher expected returns Pursue a Twin-Prolonged Strategy: Educating people to adopt other investments apart from gold also. And use modern technology (eg. Ashanti from South Africa) to exploit our current gold reserves better Structural reforms: Promote SMEs in both domestic and foreign sector. Also encourage small businesses as an attraction for FDIs Facilitate ease of doing business in India: By reducing and speeding the processes of paperwork and sanctioning of permits. Currently India ranks 132 in World Banks Doing Business Ranking Development of Manufacturing Sector: By setting up more manufacturing hubs or Life-spaces to promote manufacturing Attraction of FDI: By granting tax holidays and gaining Investors confidence. At present, India does not feature in the top 10 of the FDI Attraction Index. With countries like Hong Kong, China, Singapore, Malaysia etc., India has to adopt measures to encourage FDI Investment in R&D to foster innovation: With opening up of sectors for FDIs, government should also ensure that our domestic businesses are strong enough to compete with them. Presently, India invests only 0.9% of GDP which should go up to at least 2%
References
Global Investment Trends & Regional Trends in FDI, United Nations Conference on Trade And Development (UNCTAD), World Investment Report, July, 2012 Eurozone crisis: three years of pain interactive timeline, Nick Mead and Garry Blight, The
Guardian, 2nd Nov 2012

Indias Gold Mine, Minhaz Merchant, The Economic Times (Mumbai Edition), 11th Dec 2012, The Edit Page (page 14) Global Transparency Index: Rankings, Jones Lang Lasalle (http://www.joneslanglasalle.co.in) Corruption Perception Index 2012, Transparency International (http://www.transparency.org)
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The Impossible Trinity and its Implications on the Indian Economy

Gunveer Singh, Mamata Madhumita, R A Raghavendra, Silajeet Debnath, Vaibhav Sharma, Zeeshan Hassan Batch 2012-14, PGP, IIM Kozhikode
Free Capital Flows
Context
Domestic Stabilization
Exchange Rate Volatility
The Impossible Trinity
Independent Monetary Policy
Closed Economy
Fixed Exchange Rate
The Impossible Trinity also known as the Unholy Trinity, the Irreconcilable Trinity, the Inconsistent Trinity or the Mundell-Fleming trilemma means that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement and an independent monetary policy. As a result, a country has to make a tradeoff between three policies i.e. choosing exchange rate flexibility, or means to have a stable domestic economy, or policies imposing restrictions on the openness of trade. With this backdrop, the report aims to examine the following: Relevance of the concept in the Indian context Indias stance in different economic conditions Shifting paradigm in todays times
Abstract The study is in tandem with the economic stance taken by India to combat the dilemma posed by the trinity. From the early 1990s to 2007, INR was allowed to appreciate only by 15% despite great upward pressure on the rupee, indicating greater emphasis on exchange rate stability, less monetary independence and free capital flow. However, following the global crisis, a more managed float rate has been adopted. The report goes on to quantify the three trinity parameters, and validates the economic policies adopted by the RBI over the years. Also, the capital flows in developing Asian countries is analyzed in conjunction with the FOREX reserves over the years.
Indian Economy and the Impossible Trinity

The dilemma faced by India is to choose two out of the three options, each one having its own advantagesNecessity for Free Capital Flow Access to foreign savings, promoting growth Access to wide range of investment opportunities FDI brings in technological growth Improves institutional quality of financial markets Necessity for fixed exchange rate Rising exchange rates damage export sector Falling exchange rates impair investor confidence, and sparks inflation
Necessity for independent monetary policy Stability during domestic and exogenous shocks Execution lag is much smaller than fiscal policy Low inflation and reduced volatility Good investment climate
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Combating the Impossible Trinity-Trends in Indian Economy

Early 1980s: Very limited capital movement was allowed and very less foreign reserves were present, as India was still following a nearly fixed exchange rate system. So India had greater monetary independence and exchange rate stability. Late 1980s: Indias macroeconomic health began to deteriorate, because of the huge Current Account Deficit (CAD). To finance this CAD, capital controls were relaxed, and hence, exchange rate stability as well as monetary independence decreased. 1993-1995: There was a surge in capital inflows, and the RBI chose strict exchange rate stability over monetary independence-maintaining it at Rs.31/dollar from April 93 to August 95, resulting in lesser monetary independence and free capital flows. Late 1990s: Crises in Latin America, South Asia, and India reduced capital inflows and prompted the RBI to let the rupee depreciate, loosening exchange rate but gaining more monetary independence. 1999-2003: The declining capital inflow revived, and there was a current account surplus. This was countered by the RBI by selling bonds and thus increasing dollar reserves to over $40bn in order to maintain exchange rate stability but compromising on monetary independence. 2003-2008: Due to appreciating currency, RBI resorted to sterilization to prevent intervention in the FOREX market which could have led to a sharp increase in monetary base. However, the rising cost of instruments such as Market Stabilization Scheme led to an incomplete sterilization and increase in money supply growth. Thus, there was less Monetary Index (MI), free capital flow and exchange rate stability. 2009-2012: After the global financial crisis subsided, RBI faced increasing capital inflows, but did not intervene in the FOREX market and focused on exchange rate stability. Thus, rupee appreciated 17.5% from March 2009 to April 2010. However, it depreciated 20% in 2011 due to global risk aversion and the RBI admittedly intervened only slightly. So, the RBI followed a Managed Float Rate.
Quantifying the Trinity parameters and their evolution over the years
(adapted from Indias Trilemma: Financial Liberalisation, Exchange Rates and Monetary Policy Michael Hutchison, Rajeswari Sengupta and Nirvikar Singh, The World Economy, Vol. 35, pp 3-18, Jan 2012.)
Means
Coefficients
Contributions
MI ES KO MI ES KO Observations 2 R MI ES KO Sum
1996:Q2'00:Q3 0.5348 0.7601 0.0385 0.64 1.798 6.169 21 0.9738 0.342 1.367 0.238 1.947
2000:Q4'05:Q1 0.4197 0.8107 0.0788 -0.063 2.041 4.021 18 0.9921 -0.026 1.654 0.317 1.945
2005:Q2'09:Q3 0.4828 0.5901 0.314 0.515 2.294 1.148 15 0.971 0.249 1.354 0.361 1.963
2= aMI + bES + cKO

The RHS is equated to two because we can have absolute control over only two parameters of the Impossible Trinity Monetary Index (MI)-Reciprocal of correlation between interest rates in India and United States Exchange Stability (ES) Index-Measures the quarterly standard deviations of the change in log of Rupee to US dollar exchange rate Capital Account Openness (KO) Index-Ratio of sum of inward and outward foreign investments to GDP
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Interpretation
Although the coefficients in the table do not have great precision, the high R2 values suggest a very good fit. The means of the three indices are used to arrive at the contribution for each index. We thus see that in all three sub-periods, MI is in an intermediate range. It reduces in the second period and then rises up in the third. ES has high values in the first two periods and then decreases in the third. In the first two periods, KO increases only a little, but takes a very high value in the third. The average contributions are obtained by multiplying the coefficients with the means for each sub period. Due value, it is found that the contributions add up to nearly two in each sub-period. It is found that in the three sub-periods, ES receives a high policy weightage. In the second sub-period, as KO increases, the control over MI is forsaken completely, whereas ES seeks to strengthen by having a greater value than the previous period. The KO continues to increase in the third sub-period, and with it, ES is somewhat sacrificed to salvage some MI. But, when compared to the first sub-period, MI reaches a lesser value and KO a greater value in the final sub-period.
Capital Flows of Developing Countries
The capital flows of developing Asian countries have been consistently improving over the past 10 years. However, the FOREX reserves of these countries too have been increasing over this time-India (4 times), China (3 times), Korea (8 times), and Malaysia (3 times). This validates the choice of these countriesindependent monetary policy and relatively stable exchange rates.
References
Fear of Floating, Calvo and Reinhart, NBER Working Paper No. 7993, Nov 2000 The Dynamics of Exchange Rate Regimes: Fixes, Floats, and Flips, Klein and Shambaugh" Journal of International Economics, Elsevier, vol. 75(1), pp 70-92, May, 2008 The Impossible Trinity-from Policy Trilemma to Policy Quadrilemma Aizenman, Joshua, 2011, Working Paper Series, Department of Economics, UC Santa Cruz. Price stability, financial stability and sovereign debt sustainability policy challenges from the New Trilemma, Dr. D. Subbarao, 2nd International Research Conference of the RBI, 1 Feb 2012 Indian Institute of Management, Kozhikode Page 20
Crime and Misery: the Indian Case

Prof. Rudra Sensarma Indian Institute of Management Kozhikode
The opposing views on the crime - economic condition nexus

Economists have explained criminal behavior using two effects viz. the motivational effect and the opportunity effect. Becker (1968) suggested the first which means that criminals commit crime if their returns from doing so exceed the returns from legitimate work. In other words, during economic decline, a potential criminal is encouraged to commit an offense if he feels that he can earn good money by say robbing someone rather than looking for a job where the expected benefits will be very low (given the low probability of finding work as well as the low remuneration even if he finds work). According to this explanation, crime rates should rise when unemployment is high. Others (such as Ehrlich, 1973) have posited that crime is pro-cyclical which means that growth generates wealth in the neighborhood that attracts criminals. Therefore, when unemployment is high, crime rate should be low. There is no consensus on which effect is stronger in India.
Without going into details of any specific instance or type of crime, the objective of this study is to understand the general relationship between economic conditions and crime rate.
International research has reported mixed results. Some studies show that deteriorating economic situation may lead to less crime (e.g. for the US evidence see Cantor and Land, 1985) while others find that it leads to more crime (e.g. for the UK evidence see Bandopadhyay et al. 2012).
However unemployment is not the only determinant of economic conditions. To go beyond unemployment I consider the so-called misery index which is a simple yet comprehensive measure of general well being. Initiated by Arthur Okun in the 1970s, the misery index is the sum of the unemployment rate and the inflation rate. It denotes the combined effect of people being out of work and prices rising both of which cause economic hardship and can have severe social costs. International evidence (e.g. Tang and Lean, 2009) suggests that the misery index is positively correlated with crime rate which means that the criminal motivational effect is stronger than the opportunity effect. This study is an attempt to uncover the nature of this relationship for the Indian case.
This study finds that for Indian states economic conditions measured by the misery index (that takes into account both unemployment and inflation) is positively correlated with crime. That is, more miserable economic condition is associated with higher crime rate.
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Macroeconomic analysis
I compare the rate of violent crimes in India during 2002-2011 with inflation (based on consumer price index) and unemployment (see figure 1). Till the 15 outbreak of the financial crisis it seems that crime rate 10 was falling (since 2003) along with unemployment indicating the presence of criminal motivational effect. 5 The link with inflation is not very clear since inflation 0 remained largely stable during this period. However in the crisis period crime rates went down while both unemployment and inflation increased. In fact the Unemp Inflation Violentcrime correlation between crime rate and the misery index during the entire period shown in the graph comes up Source: NCRB, RBI websites as -0.68 with a probability value of 0.03. This suggests that there is a negative and statistically significant correlation between crime rate and misery index. To ascertain the nature of relationship between crime rate and misery index, I conducted an ordinary least squares regression analysis which generated the following equation:
Figure 1: Violent crime & economic conditions India
Crime rate = 3.28 0.11 x Misery index (P-value) (0.001) (0.03) While it is tempting to interpret this finding as evidence in favor of the opportunity effect (i.e. declining economic conditions offering less opportunities for criminals), one must be careful of the pitfalls of timeseries analysis. For example, the above analysis has not considered lagged response of crime to economic conditions. Indeed the crisis may be a temporary shock which may not alter the fundamental relationship between crime and economic conditions. Finally the time period may be too short to arrive at a firm conclusion.
What do data from Indian states tell us?

To avoid the problems of time-series analysis, I constructed misery indices for Indian states to the extent that publicly available data allow. Complete information was available only for 10 states and union territories for 2005. Interestingly Kerala a state known for high human development factors shows the highest unemployment rate as well as crime rate. On the other hand, West Bengal not known to be amongst developed states shows the lowest crime rate and a low unemployment rate.
30 20 10 0
Inflation
Unemp
Violent crime Source: Indiastat website
Figure 2: Violent crime & economic conditions - Indian states in 2005
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The cross-state correlation between crime rate and misery index turned out to be 0.57 with a probability value of 0.08 indicating that across the states of India criminal motivational effect may be stronger than opportunity effect. To support the correlation analysis I estimated the following regression using the ordinary least squares method: Crime rate = 13.43 + 0.65 x Misery index (P-value) (0.006) (0.08) The regression result shows that if a states misery index is lower by 1 percent, then crime rate could come down by 0.65. This finding has interesting policy implications.
Implications
While all-India data show some evidence for criminals in India being driven by opportunity effect, cross-state data show that miserable economic conditions are associated with higher crime i.e. the motivational effect may be stronger. Macroeconomic policymakers should be cognizant of the socio-economic effects of their policy changes such as the impact on crime in society. Policing or crime fighting strategies especially for acquisitive crimes such as burglary or robbery should be complemented by policies that generate employment and stabilize price rise. This study is only a first attempt at unraveling the relationship between crime and economic conditions in India and is by no means exhaustive. More detailed research is needed to understand the dynamics and strength of the crime economic condition nexus.
References
Bandyopadhyay, S., Bhattacharya, S and Sensarma, R. (2011) "An Analysis of the Factors Determining Crime in England and Wales: A Quantile Regression Approach", Discussion Papers 11-12, Department of Economics, University of Birmingham. Becker, G. (1968) Crime and Punishment: An Economic Approach, The Journal of Political Economy, 76 (2): 169-217 Cantor, D and Land, K. (1985) Unemployment and Crime Rates in the Post-World War II United States: A Theoretical and Empirical Analysis, American Sociological Review, 50 (3): 317-332 Ehrlich, I., (1973) Participation in Illegitimate Activities: A Theoretical and Empirical Investigation, The Journal of Political Economy, 81 (3): 521-565 Tang, C and Lean H., (2009) "New evidence from the misery index in the crime function", Economics Letters, 102(2): 112-115
Indian Institute of Management, Kozhikode Page 23
Monetary Policy Transmission Mechanism

Alok Kr. Singh, Depak D K, Karthi Vignes S E, Pankaj Kumar, Saumya Dikshit, Umakanta Sahu Batch 2012-14, PGP, IIM Kozhikode
Context
Inflation and GDP growth are towards which people and policymakers are attracted. However, Monetary Policies help in controlling inflation. We examine the impact of monetary policy over inflation and the channel involved through which transmission occurs. We determined that there is a lag between Monitory Policy and inflation. Highlights Correlation between the policy instruments and inflation is slender Growth in GDP increases WPI but with a lag of some time Total time lag is come out to be two Quarter i.e. approximately six months The empirical results in the augmented VAR models suggest the importance of the bank lending channel in India
According to the standard monetary transmission mechanism, variations in interest rates first impact aggregate demand and GDP growth, which, in turn, then impact inflation. Therefore, inflation management needs some temporary loss of output. In this context, as the Economic Survey 2011-12 (Government of India (GoI), 2012) observes, the question is: How sharp are the connections between monetary policy instruments and inflation? While the simple correlation between the policy instruments and inflation is slender, a careful statistical analysis by putting in lags indicates that the policy instruments do have an impact on inflation with a lag.
Monetary Policy Transmission Channels

There are four key channels of monetary transmission: (a) interest rate channel; (b) quantum channel relating to credit; (c) asset price channel; and (d) exchange rate channel.
Channel Explanations
The first channel - the interest rate channel - is the key channel of monetary transmission in market-based economies and refers to changes in domestic demand and inflation brought about by changes in the policy interest rate. Credit channel complements and amplifies the interest rate channel. The credit channel operates through the availability of bank credit and through the impact of interest rates on asset prices, and cash flows and net worth of borrowers .For bank dominated economies, the narrow credit channel is important and for financial market dominated economies, the broader credit channel is Indian Institute of Management, Kozhikode Page 24
important. In asset price channel, the impact of changes in interest rates on movements in asset prices like real estate and equity prices - generate wealth effects in terms of market valuations of financial assets and liabilities, which then impacts consumption and investment. Finally, the exchange rate channel - higher domestic interest rates induce an appreciation of the domestic currency has a direct impact on domestic and aggregate demand. The various channels are not mutually exclusive and there is considerable feedback and interaction among them.
Analysis of Interest Rate Channel

CRR affecting Call Rate and Loan Rate
Call Rate Vs CRR

10 9 8 7 6 5 4 3 4 6 CRR Call Rate
Call money Rate Vs loan Rate Plot

13 11 9 7 3 5 Loan Rate
y = 0.8477x + 1.3084 8
y = 0.3623x + 8.9401 7 Call Rate 9 11
On analyzing the CRR data from 2000 to 2010, it has been observed that there is a strong relationship between the average CRR in a year and the commercial call money rate offered by major banks in the country. It has been observed that one base point change in CRR there is an average change of 0.97 base points in the call money rate. This shows that banks respond positively to interest rate changes by the RBI. Theres been a 250 basis point change in CRR from Q1 to Q3 which will induce a 242.5 basis point change in the interest rates within two quarters i.e., within June 2013. A weak correlation of value 0.23 shows that monetary policy has no impact on long term loan rates. Some of the factors leading up to this in Indias case are low level of deposits which leads to bank having to offer higher interest rates on deposits to attract customers. In fact for 2012, deposits for the industry as a whole grew at little over 13%, while non-food credit grew at 16.8%. An obvious result which came out from analysis was the low correlation between the call money rate and the long term retail loan rates as well. This was due in part to the high level of correlation between CRR changes and call money rates. This leads us to believe that the various lending rates of commercial banks are loosely correlated.
Effect of LAG When Monetary Policy Change Affect Inflation

The simple correlation between the policy instruments and inflation is slender, a careful statistical analysis by putting in lags indicates that the policy instruments do have an impact on inflation with a lag. Monetary transmission through a VAR using the CRR, Repo Rate, Call Rate and wholesale price index, and exchange rate had been analyzed. The peak effect of an interest rate shock on output and inflation occurred after 6 months i.e. 2 Quarters, consistent with analysis of RBI. In India, the wholesale price index (WPI) is composed of 435 commodities and is available on a weekly basis with a short time lag of two weeks and is generally considered as an indicator of the inationary process in the economy. Indian Institute of Management, Kozhikode Page 25
The analysis of monetary transmission mechanisms is sensitive to the choice of interest rate used to capture the monetary policy stance. Interest rate channel has been chosen for analysis, i.e. when RBI uses any of its monetary tools like Bank rate, CRR or Repo rate.
12 10 8 6 4 2 0 Q1, 2001 Q1, 2002 Q1, 2003 Q1, 2004 Q1, 2005 Q1, 2006 Q1, 2007 Q1, 2008 Q1, 2009 Q1, 2010 Q1, 2011 Q1, 2012 0.08 0.06 0.04 0.02 0 -0.02 300.0 250.0 200.0 150.0 100.0 50.0 0.0 Q1, 2001 Q1, 2002 Q1, 2003 Q1, 2004 Q1, 2005 Q1, 2006 Q1, 2007 Q1, 2008 Q1, 2009 Q1, 2010 Q1, 2011 Q1, 2012 0.08 0.06 0.04 0.02 0 -0.02
The above Indicates when repo rate change Call money rate changes and hence it changes GDP. However if we closely look at the graph we observe that when repo rate changes , average call money rate changes in same quarter however change in GDP is not reflected in the same quarter . For example Repo rate has been increased in quarter 1, 2010, Changes in Average call rate has been reflected in same quarter. However change in GDP has been reflected in quarter 3, 2010. This is defined as lag and optimal lag in terms of quarter has been calculated by Vector auto regression (VAR) method.
Insights and Conclusions
It has been inferred that Indian Monetary Policy is constrained by monetary tools and policy of Reserve Bank of India. Therefore an analysis of Indian monetary policy requires the inclusion of fund rates such as Bank rate, repo rate, and reverse repo rate and, Cash reserve ratio. A proper model specication, considering the external constraints on monetary policy and controlling for international economic events, reduces the bias. A proper comprehension of the monetary transmission mechanism in India requires the analysis not only of the response of GDP, but also of the response of the exchange rate to a monetary policy shock. It has also been noticed that banks play an important role in financial in intermediation in the Indian economy, and their strong representation reects the lack of alternative sources role in nancial of funding for the private sector.
References
Transmission mechanism of monetary policy in India ;Abdul Aleem,Journal of Asian Economics 21 (2010) 186197 How effective are monetary policy signals in India? - Indranil Bhattacharyya, Rudra Sensarma Journal of Policy Modeling, 30(1), pp 169-183, 2008
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Fiscal Deficit An Indian Perspective

Ankit Agarwal, Anuj Kr. Loomba, Kanupriya Tibrewal, Prapti, Prateek Gupta, Sahil Jindal, T Durgalakshmi Batch 2012-14, PGP, IIM Kozhikode
In light of the recent discussions on the growing fiscal deficit in India, we examine the impact of fiscal deficit on various macroeconomic variables . We also carry out a brief historical perspective on fiscal deficit and study the reasons for high deficit in India. We also study the measures taken by the Government towards reducing deficit and its implications.
Context
While the euro zone is under constant threat of falling apart because of large accumulated debt and high fiscal deficit in a number of countries, lawmakers in the US do not see eye to eye on any deficit reduction plan. The situation in India is not very different. India faces the serious threat of being downgraded to junk status if the deficit is not quickly brought under control; the government is targeting a fiscal deficit of 5.3% of the gross domestic product (GDP) in the current fiscal. The current economic situation in India can be described as follows: Fiscal deficit for the year to end-March 2013 could be as high as 6 percent of GDP. The emergence of current account deficit (CAD) in the balance of payments at an unsustainable level of 4.2% of GDP has further aggravated the situation with the potential risks of twin deficit Government could be forced to borrow extra Rs 40,000 crore via bonds. The International Monetary Fund sharply cut its economic growth forecast for India for 2012 to 4.9 percent from 6.1 percent previously This report aims to examine the following in greater detail: Impact of fiscal deficit on macroeconomic variables Financing of fiscal deficit Reasons for high fiscal deficit in India Reduction of fiscal deficit and its implications
Findings
To restrict fiscal deficit, financed primarily through market borrowings, to its target of 3% of GDP by 2016, the government needs to take taking tough policy measures Increase revenues by implementing Direct Tax Code, increasing FDI and Disinvestment and widening ambit of service sector tax Reduce expenditure by regulating populist policies, fuel prices, other subsidies and curtailment of defense expenditure
Impact of Fiscal Deficit on Macroeconomic Variables

1. Impact of Fiscal Deficit on Interest Rates:
Prima facie it seems very plausible that a higher fiscal deficit would raise interest rates: the government borrowing more leading to an increase in the demand for credit, everything else remaining constant, which would lead to an increase in the interest rate. However, the above argument assumes that the pool of savings is fixed. If the government borrows to finance expenditure, it leads to higher income and savings, supply of the credit increases by the same amount as demand, no consequent rise in price of credit. Page 27
2. Impact of Fiscal Deficit on Trade: This can be explained using the twin deficit hypothesis, which says that a fiscal deficit is accompanied by a concomitant current account deficit. It is also explained by the Ricardian equivalence hypothesis which states that economic agents will increase their savings in anticipation of higher future taxes owing to fiscal deficit. Hence, there is no impact on trade deficit. 3. Impact of Fiscal Deficit on Capital Inflow: An increase in the fiscal deficit, results in an increase in investment or fall in NX. Imports +Capital outflow = Exports + Capital Inflow Trade Deficit = Net Capital Inflow 4. Economic Growth and Fiscal Deficit: The fiscal deficits can be financed through domestic borrowing, foreign borrowing or by printing money. While excessive domestic borrowing can lead to a hardening of interest rates, too much of foreign borrowings can culminate in an external debt crisis. Printing money stokes inflationary pressures. The same level of deficit can have different implications, depending upon how it is used. For instance, a fiscal deficit used for creating infrastructure and human capital will have a different impact than if it is used for financing ill-targeted subsidies and wasteful recurrent expenditure. A large fiscal deficit implies high government borrowing and high debt servicing (the total debt servicing will be 37 per cent of revenue expenditure in 2009-10), which in turn could mean a cut back in spending on critical sectors like health, education and infrastructure. This reduces growth in human and physical capital, both of which have a long-term impact on economic growth. Large public borrowing can also lead to crowding out of private investment, inflation and exchange rate fluctuations (impacting exports). We observe that, for the period 1981-82 to 2007-08, the GDP growth is lower when the GFD-GDP ratio of the Government is high as shown above.
Fig 2: Showing the relation between growth and fiscal deficit
Capital inflow should increase to account for increase in fiscal deficit.
Reasons for High Fiscal Deficit in India

Fiscal deficit in India remains high due to Subdued tax revenues High spending Substantial interest payments due to a high debt burden (16%) High social spending including health, education and welfare schemes (24%) Fuel, food and fertilizer subsidies (8.6% of general government expenditure) Global macroeconomic situation
Financing Fiscal Deficit

Fiscal deficit could be financed either by foreign borrowing or by borrowing from the domestic market (from commercial banks or individuals) or by borrowing from the central bank popularly known as monetization. The government has resorted to market borrowing to fund its fiscal deficit primarily.
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Fig 3 1,200Fiscal deficit funding at state 1,000 800 600 400 200 0
Fig 4 3,500 Fiscal deficit funding at center 3,000 2,500 2,000 1,500 1,000 500 0
Rs. bn
Rs. bn
Reduction of Fiscal Deficit and Its Implications

Fiscal consolidation can be achieved in the following ways: Government could increase its revenues by By increasing the tax rate on existing items and improving the efficiency of collection-reform in trade and excise taxes Rightsizing the size of Plan support Disinvestment in the loss making PSUs Go for massive useless asset sale Stimulating foreign investment in key sectors like retail, aviation, defense, pensions Easy Implementation of DTC Government should reduce its expenditure by: Efficient management of subsidies- reduce subsidy, increasing administrative price, switching to direct cash payment. Better PDS Reduce populist measures like farm loan waiver which make the fiscal situation vulnerable. Taking substantial steps to reform public enterprises which are making huge losses
Conclusion
As per Kelkar Committee report the country's fiscal deficit for FY 2012-13 could touch 6.1 per cent of GDP. FRBM targets to reduce Indias fiscal deficit to 3.5% The Indian fiscal deficit is mainly financed through market borrowings A high fiscal deficit leads to a vicious cycle where in countries are forced to borrow to finance their interest expenditure rather than utilizing the funds for planned capital expenditure The government has to ensure that its policies, global economic scenario and the sentiments of the investors and public at large area all in tandem. On Financing the Fiscal Deficit and Availability of Loanable Funds in India, Surajit Das, April 10, 2010, Vol. XLV No. 15, Economic & Political Weekly Does Fiscal Deficit in India influence Trade Deficit in India? An Econometric Enquiry, Debabrata Datta, Suparna Basu, July 23-29, 2005, Vol. XL No. 30, Economic & Political Weekly
References
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The Current Account Deficit Crisis An Analytical Insight

Anant Dayal, Dipankar Biswas, Kunal Kumar, Nandini Priya M, Saksham Srivastava, Supriya S M Batch 2012-14, PGP, IIM Kozhikode
The Challenge: Increasing CAD

This study provides an insight into the causes and implications of increasing current account deficit in Indian economy and suggests ways to curtail (if not eliminate) the current account deficit crisis.
Just about a decade ago, the Indian economy had a positive current account balance. But the trends have changed in the recent past and since the fiscal 2005-06, India is running a large trade deficit. According to the Reserve Bank of India, the Current Account Deficit (CAD) is likely to remain high in the near future on the back of feeble export growth and volatile crude oil prices. The central bank also pointed out that financing of the CAD would be an enormous challenge in light of sluggish demand from advanced economies that has led to deceleration of exports. RBI also expects global growth to be lower than anticipated due to negative growth in euro zone. High crude oil prices also pose a risk to Indians Current Account balance. The constant increase in the Current Account Deficit has led people to fear that the country is losing its competitiveness. The need for imminent corrective measures is being felt. This report provides insights into the causes and implications of Indias large Current Account Deficit. The report further goes on to provide recommendations that can be implemented to curtail the widening CAD.
Key Findings
Indian CAD is countercyclical. Indian CAD is fuelled by heavy gold and crude oil imports. Expansion of fiscal deficit leads to large Indian CAD. CAD is enhanced by increasing MPC. Depreciation of rupee against dollar is not an effective measure to ascertain CAD.
Causes of Indias large CAD Our Claims

Indian CAD is countercyclical If oil shocks raise import costs, the growth rate in an economy falls and CAD would rise along with falling growth. On the other hand, when export rise, they raise the income and reduce the CAD and vice-versa when there is a sudden collapse of export markets. In year 2011-12, India saw both a sharp rise in oil prices and fall in growth raising CAD to its peak value of 4.2% of GDP. However, CAD was only 1.3% of GDP in 2007-08 when there was a high consumption, investment and output growth.
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Indias large CAD is fuelled by heavy gold and crude oil imports Two separate regression analyses were performed between (i) Oil imports and GDP, and (ii) Gold imports and GDP and a relatively high correlation was found in both the analyses.
3 2.5 2 CAD 1.5 1 0.5 0 2000
Oil import VS CAD

y = 0.001 x - 0.592 R = 0.233 2.53 1.9 1.23 0.98 0.65 Oil Imports (k bbl/day) 2500 3000 3500 Gold Imports (in tonnes)
Expansion of the fiscal deficit (G-T) leads to large Indian CAD Fiscal Deficit VS CAD
y = 0.138 x + 2.200 R = 0.020 CAD 2.53 0.65 -12 -10 3.07 1.9 2 1.23 0.98 0 -4 -2 -2 0 4.2 6 4
CAD
-0.11 -8 -6 -1.35 -1.42
Fiscal Deficit (% of GDP)
Since the expansion of fiscal deficit lowers public saving therefore it reduces national saving thereby widening the CAD. The results of the regression analysis shows a low correlation (correlation coefficient = 0.143) due to crowding out of private investment and consumption.
Reduction in private saving rate or increase in marginal propensity to consume enhances CAD
Private Fixed Investment(USD) versus CAD
4 3 2 CAD 1 0 1500 -1 -2 1700 1900 2100 2300 y = -0.004 x + 7.581 R = 0.258
A negative correlation between private fixed investments and CAD suggests the structural shift in saving and spending behaviour.
Private Fixed Investments
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Depreciation of rupee against dollar is not an effective instrument for ascertaining CAD
Exchange Rate Versus Trade Deficit

0.00 -2,000.00 30 -4,000.00 CAD -6,000.00 -8,000.00 -10,000.00 -12,000.00 -14,000.00 Exchange Rate 35 40 45 50 -4713.7
A regression analysis between USD-INR exchange rate and trade deficit depicts almost no correlation between the two. While gold and crude oil form major share of imports, machinery and intermediate goods are inputs which increase production costs. Effect of depreciation on exports is delayed and uncertain.
y = 95.333 x - 12,778.239 R = 0.006 -6341.1 -7095.4
-10308.4 -10,849.50 -11774.6
Recommendations
Based on our analysis we suggest few recommendations which are enlisted below: Building a strong manufacturing base and diversification of current economic basket Encouraging inflow of FDI/FII through policies such as FDI in retail and aviation. Replication of an agricultural model like Green Revolution of the 1970s to enhance exports. Reducing gold imports by increasing domestic gold production and reducing domestic gold demand. Reducing total demand in the economy through deflationary fiscal policies Imposing foreign exchange controls which increase the black market premium.
Conclusion
Current Account Deficit is one macroeconomic parameter that has received much attention in the last decade. Increasing CAD has developed a fear that Indian economy is losing its competitiveness and a corrective measure is required. As a matter of fact, negative CAD is not necessarily bad for an economy. Developing countries may choose to run a CAD in the short term to increase local productivity and exports in the future. However, going forward, India should monitor its external sector very critically. Today, the economy is well poised to absorb the widening CAD but this shall not be a persisting trend.
References
Higgins, M. and Klitgaard, T. (Dec 1998) Viewing the Current Account Deficit as a Capital Inflow in Current Issues in Economics and Finance Vol. 4[13]. Shah, A. and Patnaik, I. (2005) Indias Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit in NBER Working Paper Series. Williams, M.F. (2009) A Short Run Model of a Large Open Economy with Floating Exchange Rates getyourecon.com, (retrieved from http://getyourecon.com/macro/macro-openmacro.pdf, Dec 10, 2012)
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Evaluating decisions on Brand Ambassadors - a Game Theoretic Framework

K Shiv Shankar, Namith Najeeb, Nithya M, AkshayAnand Batch 2011-13, PGP, IIM Kozhikode
Introduction
In this article, we have tried to create a game theoretic framework for to analyze the factors that go into the consideration for the set of managers when they decide on whether or not to go for celebrity endorsement, and if yes, who the Brand Ambassador has to be. The companies would have to make their decision based on the value that these personalities would add to improving their brand image against the expenditure that they would have to incur to do the same. This game would have multiple stages for each company to decide on which personality to use for brand endorsement. Given the costs and payoffs associated with a Player, a Brand Manager has to decide on the Brand Ambassador to use. This is also a function of the popularity, current and forecasted fan base of the player.
The Game
This game can be illustrated in a simple manner by taking Pepsi and Coke, the major players of the bottled beverage industry, as an example. Let us say that the brand managers here have an option of choosing one of the two famous personalities (Sachin Tendulkar and Virat Kohli in this case) or choosing neither. At each node of decision making, the brand managers base their decisions on the revenue that would be generated by using the player as their brand ambassador and the cost incurred in employing the personality. It has been assumed, for simplicity, that the personalities accept the offer that is made to them irrespective of which of the two companies make the offer. This is a sequential game consisting of several stages, which can be repeated again. At every stage, the company at play can either choose to select a celebrity or reject him. It is assumed that each celebrity can endorse only for ONE brand and once the offer is made to him (at the value of the average endorsement fee calculated), he chooses to accept it and endorse the product). The game is played till both the soft drink giants have either accepted or rejected either of the two maestros of cricket. There is an underlying assumption that a company cannot choose a player after it has rejected it once.
We all know that a company is represented in the minds of the consumer through the Brand Ambassador and once a person thinks about any particular brand, he/she will immediately be able to reconnect it through the image of the popular person who endorses it in the popular TV Commercial (popularly called as Ads). One can take examples of beverage companies (like Coke/Pepsi), Sports Apparel (Nike/Adidas), Watch Companies (Rolex/Fast Track), Textile Companies. They are many. Companies spend crores of money in branding and in advertising in order to get their intended image to the customers through a celebrity who is generally a sportsman/actor /model, etc. But have we ever thought on what goes in the drawing board in the companies while making these decisions? What sort of methodologies do they adopt in selecting the right person? How do they evaluate the net payoffs coming from the celebrity?
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The payoffs for each stage of the game are calculated based on real-life data. For example, the total size of the Indian Carbonated drinks market as taken from secondary data is at Rs. 60 Billion, out of which Pepsi commands nearly 65% of the market share and Coke the remaining. However, out of the total value, only a small percentage is taken to be the actual size which can be targeted by Pepsi and Coke brands specifically as the companies portfolios also consist of other Brands. In order to find the reach of every celebrity, a proxy of the fan base size in Facebook has been considered. For Sachin, the fan size is around 7.5 Million and it is around 2.2 Million for Kohli. It is considered to be 50% of Kohlis fan base i.e. 1.1 Million are fans of both Sachin and Kohli. In case of both the people endorsing different brands, out of the 1.1 Million, it is assumed that 50% is considered to follow the endorsement of Pepsi and the rest to follow Coke for simplicity. Another important point with regard to payoffs which must be considered here is the reduction in the base market share in case the corresponding company doesnt use any brand ambassador and in the eventuality of the other player using him. For this condition, some percentage of market share erosion must be taken into account. Here, in case of Sachin endorsing a brand the competitor not employing any personality, the erosion is taken as 20% and in case of Kohli, it is taken as 10%. The average endorsement fee for Sachin was found out to be Rs. 55 Million and for Kohli to be Rs. 30 Million. Table A provides the details of incremental revenues and endorsement fees for each player. From the table, it can be found out that Kohlis charges a much higher endorsement fee on a per fan basis. Also, the total endorsement fee exceeds the incremental revenue thereby justifying the initial assumption of the companies choosing Sachin over Kohli. Table B in Appendix provides how the payoffs were arrived at each node. Pepsi is considered to be the first-mover in this game. This is a game of complete information wherein each player knows the others decisions. The payoffs as explained earlier are decided based on the base revenue, the incremental revenue from brand endorsement and the endorsement costs. TABLE A: Incremental Revenues and Endorsement Fees
Endorsement Fee (Rs. Millions) 55 30 Fan base (Millions) 7.5 2.2 Incremental Revenue from endorsement (Rs. Millions) 75 22 Cost per fan (Rs.) 7.33 13.63
Name Sachin Tendulkar Virat Kohli
TABLE B: Payoff Calculation at different nodes

Node Decisio n Pepsi's Payoff Base revenue + Incremental Revenue from Sachin - Revenue lost from Kohli's endorsement Sachin's endorsement Calculation Net Coke's Payoff Base revenue + Incremental Revenue from Kohli - Revenue lost from Sachin's endorsement - Kohli's Endorsement fee Calculation Net
Coke Chooses Kohli
3802+750.5*0.5*2255
3816.5
2197+300.5*0.5*22+2 2
2183.5
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Coke Doesn't choose Kohli Coke chooses Sachin Pepsi chooses Kohli
Base revenue + Incremental revenue from Sachin - Sachin's Endorsement fee Base revenue Revenues lost from Sachin's endorsement Base revenue + Incremental revenue from Kohli - Kohli's Endorsement fee Base revenue Revenues lost from Kohli's endorsement
3802+75-55
3822
Base revenue - Revenues lost from Sachin's endorsement Base revenue + Incremental Revenue from Sachin - Sachin's Endorsement fee Base revenue - Revenues lost from Kohli's endorsement fee Base revenue + Incremental revenues from Kohli's endorsement - Kohli's endorsement fee Base revenue
21972197*0.2
1757.6
38023802*0.2
3041.6
2197+75-55
2217
3802+22-30
3794
21972197*0.1
1977.3
Coke chooses Kohli Coke Doesn't choose Kohli
38023802*0.1
3421.8
2197+22-30
2189
Base revenue
3802
3802
2197
2197
The Game Tree
The game tree is shown in the above Figure. For the game, a method known as rollback equilibrium is employed where the best strategy at the end nodes are taken first and then the game is brought back to the preceding nodes to find out the other players best decision. From the methodology, at node E, it can be seen that Coke chooses not to go for Kohli as it gets a better payoff (2197 > 2189). Seeing this, Pepsi, in node D, chooses not to go for Kohli as the payoff is better in that case (3802 > 3794). Rolling back to the previous stage, Coke sees this and opts to go for Sachin for endorsement in node C (2217 > 2197). Also, in node B, Coke chooses to go for Kohli for endorsement as it gets a better payoff (2183 > 1757). Now, in node A, Pepsi opts to go for Sachin as 3816 > 3041.
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Therefore, the Nash equilibrium (Where no player unilaterally deviates) is given as: (Pepsi : Coke) :: (Sachin at A, No Kohli at D; Kohli at B, Sachin at C, No Kohli at E) The way to understand this is that, the optimal strategy for Pepsi at node A is to select Sachin and at node D is NOT to go for Kohli. For Coke, this means that, given Pepsi doesnt unilaterally deviate from its Nash Equilibrium, it would now opt for Kohli at node B, Sachin at node C and would NOT go for Kohli at node E. At the equilibrium path, the game would end with Pepsi opting for Sachin and Coke opting for Kohli for endorsements. At every node of decision making, companies have a choice of hiring or not hiring one of the sportsmen. There exists a value for the fee that is paid to the personality at which the companies are indifferent between choosing and not choosing him. This value can be evaluated for different conditions and is called the inflexion point. Taking one of the nodes as an example, Node b. Pepsi has already chosen Sachin and now Coke has to choose between hiring/not hiring Kohli. Assuming the fee to be paid to Kohli is x, the condition for Coke to indifferent between choosing and not choosing is Base revenue+ Additional revenue through Kohli Kohlis fee = Base Revenue Drop in revenue due to Pepsi employing Sachin. That is: 2197+16.5 - x = 2197 0.2*2197. We get x to be as high as 465.5 Million INR. The implication here is that it does not make sense for Coke to not hire Kohli as long as his fee is as high as 466 million INR, given Pepsi is hiring Sachin. Taking another example at Node e. Pepsi and Coke have already decided not to opt for Sachin and Pepsi has also chosen not to hire Kohli. Now, Coke has to choose between hiring/not hiring Kohli. We get the Inflection point, x to be 22 million INR. The Managerial Implication here is that Coke would hire Kohli only if the fee he charges is lesser than 22 million INR. As is seen from the game tree, under the given condition of Kohlis fee= 30 Million INR, Coke would be better off by not hiring him. Therefore, it can be seen that there are many Managerial Implications of this game provided we take the assumptions which come with it. Also, this game can be played for any industry which opts to make a decision of going for celebrity endorsement.
References
Magotra, A. (2012, March 21), "Will soaring brand value kill Virat Kohlis cricket?" FIRSTPOST SPORTS Rahul Gupta Choudhury, N. K. (2011), "MARKET ANALYSIS AND BRAND PREFERENCES FOR COCA-COLA SLIM CANS", International Journal of Research in IT & Management. Srivastava, M. (2010, Sept 16), "For India's Consumers, Pepsi Is the Real Thing", Bloomberg Business Week.
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Caste Politics in Karnataka - A Game Theory Perspective

Darshan Sullia, K.V.Thanmai, Nishanth Appaiah Mittu, Shushanta Guha Batch 2011-13, PGP, IIM Kozhikode
On 12 July 2012, Karnataka witnessed a third leadership change in four years of Bharatiya Janata Party (BJP) rule; hit by intra party feud. Caste considerations have played a dominant role for the party to survive in power and performance has taken a back seat. The public has suffered in this battle of power in the BJP between the Vokkaliagas and the Lingayats. The party high command has played a mediating role to try and keep everybody satisfied. The players involved in the game are the Vokkaliga MLAs, the Lingayat MLAs and the BJP High Command. We have tried to explain the intra party politics as a bargaining game between the Lingayats and the Vokkaligas with the High Command playing the role of a mediator. The objective of the party is to stay in power by appeasing the demands of the two factions. While this model is a simplified form of reality, it is very much applicable in the Indian political scenario and such caste based negotiations are common in other states.
Introduction
The Bharatiya Janata Party (BJP) has been in power in Karnataka since 2008. Following his indictment by the Lokayukta for illegal mining in the state, Chief Minister B S Yeddyurappa was told to step down by the High Command in July 2011. There has been a lot on infighting in the party since then and caste considerations have played a considerable role, primarily between the Lingayats and the Vokkaligas. The party is in crisis and even L K Advani has blogged about the scandalous rule of BJP in the state. This issue is important because the political infighting has consequences not just for the two caste groups within the party but also for the general public. On 12 July 2012 when we had to submit our term paper proposal, Jagadish Shettar was appointed the third Karnataka CM in four years, replacing D.V. Sadananda Gowda who in turn had replaced Yeddyurappa. And being residents of Karnataka, this situation is highly relevant and of specific interest to us. We are looking at the issue from the perspective of game theorists and observing how the situation unfolds by applying game models and concepts that we have learnt in the course.
The Game
V1
ONE
V0
ZERO
MinL
LINGAYAT MLAs
MinV
x y
P2 P3
a
P1
VOKKALIGA MLAs
ZERO
ONE
L0
L1
Figure 1: Resource distribution Page 37
Here: V0 = Point of minimum resource (power) for the Vokkaliga MLAs V1 = Point of maximum resource (power) for the Vokkaliga MLAs L0 = Point of minimum resource (power) for the Lingayat MLAs L1 = Point of minimum resource (power) for the Lingayat MLAs The line ab represents the power continuum. Power in this case takes the form of the following possibilities Appointment of CM from the concerned faction Appointment of Deputy CM belonging to the concerned caste Appointment of MLAs of the particular caste to key ministries in the cabinet such as Home, Public Works Department, Revenue , Road and Transport Increase funding to constituencies headed by the Minister of the respective faction
ax = Min L: Given the above scenario, the distance ax represents the minimum demands for power made by the Lingayat MLAs. It is to be noted that the minimum power demanded by the Lingayats effectively corresponds to the power that they can unilaterally obtain independent of the BJP, by withdrawing their support of the party and becoming a part of the Congress, which is also open to including Lingayats in their fold. by = MinV: This distance represents the minimum demands for power made by the Vokkaliga MLAs. As is the case above, the minimum power demanded by the Vokkaliga faction effectively corresponds to the power that they can unilaterally obtain independent of the BJP, by (moving out?) of the party and becoming a part of the Janata Dal (Secular) (JDS), which is predominantly a Vokkaliga party, headed by Deve Gowda - an influential politician in Karnataka. xy = Total power aggregate of minimum power acceptable by both parties. This essentially represents the area conducive to bargaining/negotiation. Also it is to be noted that ax < by :- This is because the Vokkaligas are better positioned to obtain power unilaterally due to the existence of the predominantly Vokkaliga JDS party, which will be willing to consider the inclusion of more Vokkaligas in their fold. Knowing the above scenario, the BJP High Command must play arbitrator and distribute power in a way to prevent either faction from withdrawing from the party and salvage chances of winning the forthcoming State elections slated to happen in 2013.
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Being a rational player and wanting to win the elections, BJP will refrain from choosing either P1 or P3 as they represent points which give the MLAs of the respective factions an amount of power<than what they can unilaterally obtain, therefore forcing them to withdraw from the party. The BJP High Command therefore picks a point P2 along xy, which gives both parties an amount of power equal to or greater than what they can unilaterally obtain. The diagram below represents the bargaining scenario involving the BJP High Command and the Lingayat and Vokkaliga factions.
Figure 2: The Bargaining (Arbitration) Model Z = the total resource (power) offered by BJP High Command to the Lingayat faction. It is the distance measured from point a (lowest Lingayat power) to point b (highest Lingayat power). If Z = P1 the resource offered is lesser than what the Lingayat faction can unilaterally obtain (Z < Min L) and hence the faction, being a rational player will reject the proposal by the BJP High Command. This will yield a payoff of 0 to all the parties involved. If Z = any of the P2 points, the Lingayat faction will accept the power proposal as Z > Min L. 1-Z = the total resource (power) offered by BJP High Command to the Vokkaliga faction. It is the distance measured from point b (lowest Vokkaliga power) to point a (highest Vokkaliga power). If 1-Z = P3, the resource offered is lesser than what the Vokkaliga faction can unilaterally obtain (Z-1< Min V) and hence will reject the proposal made by the BJP High Command. This will yield a payoff of 0 to all the parties involved. If 1-Z = any of the P2 points, the Vokkaliga faction will accept the power proposal. When Z and 1-Z are both points in the P2 range, it will yield the following payoffs to the three parties as below: Z = Lingayat factions payoff 1-Z = Vokkaliga factions payoff 1 = BJP payoff (as the factions remain within the party ensuring that the BJP government is not dissolved and giving BJP a chance to get re-elected in the 2013 State elections)
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Final Outcome of the above Negotiation

Eventually the BJP High Command was able to foresee the bargaining game and offered both parties a compromise such that the final Z and 1-Z offered to the Lingayat and Vokkaliga parties were greater than or equal to Min L and Min V respectively. The details of each of these payoffs in terms of the real life scenario is as followsLingayat faction payoff = Z ,which in this case was the appointment of a Lingayat Chief Minister, Mr. Jagadish Shettar to replace the former Vokkaliga Chief Minister Mr. Sadananda Gowda Vokkaliga faction payoff = 1-Z, which in this case was the Appointment of a Vokkaliga Deputy Chief Minister, Mr. R Ashok. Additionally, Vokkaligas were appointed as Ministers in key Ministries including the all-important Home Ministry.
Applicability of the model

The model used to describe the above game has been derived from the bargaining model commonly used to explain games in International Relations. Having extended its applicability to the political scenario in Karnataka, it can be applied to various situations of conflict in understanding the complexity of coalition Governments, caste politics and other potential scenarios of political conflicts.
Scope for further research

One of the limitations of the model used above is that it is assumed to be in the nature of an ultimatum game. In reality however, political negotiations are a result of multiple bargaining rounds with the arbitrator readjusting the payoffs as desired by the parties involved to an extent which balances the payoffs of all parties involved to leave them at least as good or better than their previous position.
References
Dixit, A., Skeath, S., & Reiley,Jr., D. H. (2009), Games of Strategy, 3rd edition New York: W. W. Norton Powell, R. (1999), In the Shadow of Power, Princeton: Princeton University Press Ramesh, Rohan, Where BJPs own dice is caste, published in www.governancenow.com July 09,2012 Wydick, B. (2008), Games in Economic Development, Cambridge University Press
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Life between Shopping malls1

Our Home and our World
Prof. A.F. Mathew2 Indian Institute of Management Kozhikode First and foremost, I wish to thank all of you for inviting me to pen my thoughts for your publication. As Aristotle proclaimed, it is the ordering of ideas that remains the basic starting point of any conversation. Drawing from my many years of experience, I write as a teacher. These thoughts are drawn from many sources which serve as a template for all professions whether one belongs to the sciences or the social sciences. Let me begin by stating that as teachers it is imperative that we speak of basic and structural issuesit is simply not enough to talk just about skill enhancementotherwise there is no point of calling ourselves teachers. We must focus on the relationship between the subject, the medium and power and this in turn is defined by variables such as patriarchy, religion, caste, sexuality, nation, class and race. Every act of ours has a narrative underlying any one or more of the above factors. Whether we like it or not, nothing in this world is neutral. If one says that one is not political, that is an act of lying; it is an act of denial of what is happening in the world. Power is the defining factor which determines relationships between nations, communities, religions, institutions and even friends, lovers, and colleagues. The same applies to people like us who constitute and function within it. In continuation, a vital question arises as to how we operate in our professions. What are our tasks? Is it to just remain focused on the immediate task of operations, be skill oriented or is it to integrate critical thinking to our professions? Albert Einstein, Neils Bohr, Madame Curie and many other eminent scientists have always stressed on the integration of Science with the Social Sciences. They have stressed that only when people of science are given inputs on social sciences such as History, Sociology, Economics and Philosophy that they would direct scientific research to the good of humanity. Unfortunately, these perspectives are rarely raised in classrooms. Markets and neo-liberal ideas seem to rule the roost. Erroneously it is assumed that that is the only way. And people are reduced into irrelevant, obscene mathematical models. The view is that everything in life can be measured. Shouldnt there be space for debate and discussions on the frailties of life? We are now living in a world which is seeing shrinking of spaces and thereafter the destruction of diversity. The markets have reduced us to being robots and parrots. We say the same things, believe in the same things, wear the same cloths and we have even begun to look the same. Milton Freidman and the Chicago school of market economics dominate the world and our thinking.
Since this is not an academic article, the author has not mentioned specific references.. However, care has been taken to mention names and sources within the text. 2 A.F. Mathew is presently Associate Professor at the Indian Institute of Management (IIM), Kozhikode and can be contacted at mathew@iimk.ac.in . This text is part of the keynote lecture that is going to be delivered in a forthcoming seminar for teachers in Mangalore on February 15 th, 2013. Parts of this text have also appeared in a local college magazine in Kozhikode.
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This is where the subject of the Social Sciences comes in. It is a subject that lays the foundation to the way we think about the world and the people that live in it. Our world view in turn influences the work that we do. Hence it follows that if social sciences is taken seriously, then architects3 would not identify a building as a Muslim building (as if bricks go to mosques to pray); a designer would see meanings in design; the creative person would not bring biases in his/her advertising, a doctor4 would give Muslims, Dalits and other downtrodden equal attention or a scientist5 would not compare blood of a Dalit and a Brahmin or Black and White and; claim that one has discovered the gene to variance in behavior and intelligence. In culmination to this obscenely one-sided process, the MBA would come along brandishing a market survey claiming that not just intelligence (IQ) but human emotions can also be measured and graded. If only all of them knew the social sciences, then the illumination would set in that the IQ test emanated from racism and the flawed experiments of Cyril Burt. Subsequently, it was discredited by the splendid Leon Kamin four decades ago; who proved that IQ was born out of philosophies of racism and an idea that some people are more intelligent than others. On the contrary, all are equally efficient and intelligent provided that there is access to opportunity. Yet the thought that some people are better than the others stubbornly persists within us. No, Charles Darwin did not proclaim survival of the fittest as it is understood today; Herbert Spencer and Francis Galton should be held guilty on that countFrom Spearman to Alfred Binnet to the instruments of testing by Terman, Stoddard and Robert Yerkes, Eugenics achieved its sophisticated best Psychology was also transformed for the service of the powerful The normal curve is certainly not normal! Having said all that, the next vital question would be what is history and whose history should one read and connect. Power relations determine even that! Dominant History is usually written by assassins and the powerful. But as Howard Zinn put it, when history is recorded from the point of the view of the Slave, the Peasant, the Woman, the religious minority, the Dalit, the homosexual or the Black, then it can truly be called A Peoples history. This is what teachers should echo in the classrooms. Living peopletheir histories and linking that to the present. As a way of an example, let me quote the great commentator Susan Sontag. In one of her last essays before her death, Sontag compares the pictures of tortured Iraqi inmates in Abu Gharib by American soldiers with the photographs of black victims of lynching taken between the 1880s and 1930s; which show small town Americans, no doubt most of them Church going, respectable citizens grinning and laughing beneath the naked mutilated body of a black man or a woman hanging behind them from a tree. We must demonstrate such connections in the classroom.
3 4
In conversation with students of architecture at two leading Architecture Colleges in India... Many researches have pointed out to discrimination in the practice of medicine by doctors. 5 Historically and in recent research, many have attempted to study the same to advance racial and caste superiority.
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What is alarming is that we find these pictures intoxicating but nevertheless circulated and accessed widely thanks to the Internet. We seem to have become immune to verbal violence around us. At best we have become selective in our ways at looking at the world. We do not react when the best- selling author Anne Coulter (who has sold millions of copies of her books and is an important expert on American TV) publicly proclaims that the United States should invade Muslim countries, kill their leaders and convert them to Christianity; she also said on live TV post 9/11 that Islamic fanatics do not know pain so a couple of well- aimed nuclear weapons can transform them into gentle lambs There are innumerable examples of such statements all over the world which demonize Muslims post 9/11. For instance, Fred Ikle who was the US undersecretary of Defense said that we can solve all the problems of the world by reducing Mecca and Medina into two large radioactive craters Never has copy writing looked so innovative Just one more example to show innovativeness in copy A suggestion made on live US primetime TV by the Louisiana state Republican, John Cooksey went like this that any airline passenger wearing a diaper on his head should be pulled over Fundamentalism is never applied to dominant religions like Christianity. It is only Islam that is focused upon and subsequently demonized in such a manner that Muslims bear the brunt of war and invasions. You might say that all these people who make such fundamentalist statements are on the periphery and do not matter. This is certainly not true for all these statements are being made by articulate, educated and public peoplemany of them even elected. These brazen statements made on western media and acts of war are of great worry but what is of utmost concern is when teachers start exhibiting the same biases. ThenIt is the end of reason. May I quote Arshin Adib Moghaddam Consider the symposium organized by the American Enterprise Institute held at an Ivy League University where teachers and academicians such as Nancy Korbin (University of Haifa) Peter Raddatz and Gudrun Eussner (a Communications strategy specialist) dwelled upon how the Muslim rape epidemic is sweeping Europe and the world who host Islamic immigrants I was under the impression that all kinds of men rape not just Muslim men Getting back to the symposium, it went on to state the direct connection between raping and Islam. All this was backed by statistical data. Citing the book by Temple Grandin and Catherine Johnson entitled Animals in Translation, there are many empirically backed researches by teachers which link the behavior of Muslim boys to that of dogs. Suggestions have also been made, that neutering and sterilizing would calm the boys downlike you do to dogs. The point being that if mainstream scholars exhibit biases and start linking Arab Muslim men and dogs, (as is borne out by many public statements on American TV) it is that much easier to interpret why US soldiers participate in sodomizing Iraqis with chemical lights; beat them or force them to perform sexual acts. If educated experts and strategists like Joshua Muravchik, Micheal Leeden and Patrick Clawson
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rationally dehumanize Muslims as animals, what can one expect from US soldiers who see the army as the last option to go to college as well as to earn a living? What is Arshin Adib Moghaddam trying to say? Let us forget all the conservatives baying for war. One must focus on the rather subtle ways that are employed to habituate us to violenceto make it appear normal to be brutal; the computer games that we play that stimulate war and destruction; the cartoon shows that our children see on TV, the CNN footage of yet another laser guided bomb that hit the living rooms of civilians in Afghanistan, Iraq, Palestine, Bosnia, Congothe list of nations is endless making us dangerously habituated to scenes of violence. Compounding to all this is are the highly successful talk shows of Jerry Springerall of this is now being normalized and disseminated through the internet, chat rooms and other communications channels. Need one say that there are many consequences to this? One must extend the brutalization of people by the powerful few to categories such as caste, gender, race nation and sexuality. We must respond equally to all forms of oppression. We must react against all rapes not just when a rape happens in Delhi. We must respond with equal disgust when Dalit or Muslim or women in Manipur, Punjab, Kashmir or Nagaland are raped. It must be acknowledged that all rapes are brutal. We must acknowledge and respond when more and more people are marginalized by markets. We must also have the courage to act against religious and other traditions that discriminate against women and Dalits. We must go deep inside our minds that link fairness of skin to beauty. All this requires tremendous courage and soul searching. These are not easy acts. To end, all I am trying to say is that the world is dark and complex. However much we want to think it that way, the world is not as bright as a fancy mall or a 1000 km flat TV. And if you think that the world is just a bright shopping mall, then we are all doomed. We must recognize the world as diverse. We must see brightness in struggles for more freedom and that there is enough place in this world for allwoman, black, homosexual, poor, disabled, minority, Dalit or whatever. For all this and more, one must engage in critical thinking. The world is beautifulone must see beauty in the kind of struggles that people engage in
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Talk on the work of Nobel Laureate Economists Roth and Shapley

by Debtanu Dutta, EPS member The 2012 Nobel Prize on Economic Sciences was given to Alvin E. Roth and Lloyd S. Shapley for the theory of stable allocations and the practice of market design". To understand their legendary work and to discuss it, we organized a talk session by Prof. Krishna K. Ladha, IIM Kozhikode. In this session sir let us know about the research work of these two great economists and helped us understand the application of their work through a small simulation on matchmaking. In the simulation he matched 4 boys with 4 girls according to their preferences to have stable marriages. Such best possible match-making is possible in case of Placement of students in a college, Assignment/allocation of resources, Organ exchange scenario. These applications are very crucial for optimal and stable matchmaking. For the readers of our magazine we are giving the following link to try, enjoy and understand the match-making. http://sephlietz.com/gale-shapley/ The session was attended by students and professors alike. The light environment created enjoyable time for all who learned with fun. Lots of interaction between students and professors made the session lively. The takeaway from the session was immense and everyone liked such initiative.
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EPSiz: A Quizzical Journey

- by Sudipta Samanta, EPS member
Nicknamed the Schindler of his domain of business, he established what was called the ______ Freedom Train, a covert means of allowing Jews to leave Germany to the various sales offices of his firm around the world. Each new employee of the firm arriving on the New York pier would have around his neck something which was a symbol of freedom from the Nazis. Name him and the brand he pioneered. After Independence who was the first woman on an Indian postage stamp? A lifelong Gandhian, he allowed bacilli from a leprosy patient to be injected into him to prove that leprosy was not contagious. Who? Questions such as these were on the block for quiz enthusiasts all over the country to answer as the Economics, Politics and Social Sciences Group at IIM Kozhikode hosted EPSiz, a series of quizzes open to college students from all over the country. All four editions of the quiz witnessed huge participation with the second edition receiving entries from 210 colleges of the country. Held fortnightly, the quiz generated huge interest among the quiz loving junta of the country. The idea behind the quiz was to encourage awareness among the college going youth about matters both national and international. While the questions asked were mostly related to politics, economics and the like, topics such as media and entertainment had their share given the important role they play in shaping the fabric of the society. Another unique feature of the quiz was the extensive use of social media to conduct it. From promotions to the final quiz, every bit was conducted through the EPS Facebook page allowing the quiz to reach a scale that is unimaginable otherwise.
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Another interesting feature was the theme on which each episode of the quiz was based. EPSiz 1.1 held on the 15th of August aptly had a theme called Love, Peace and Independence. The winners of different editions of EPSiz were: EPSIZ 1.3 Winners: NamChin represented by Namrata Basu and Sachin Maan, IIM Kozhikode Runners: Wild Bunch of Grapes represented by Ajay Kumar KS and Lohit Ahuja, IIM Ahmedabad EPSIZ 1.2 Winners: Anil TN, Akhil K Balachandran, Praveen RS, IIM Calcutta Runners: Wild Bunch of Grapes represented by Ajay Kumar KS and Lohit Ahuja, IIM Ahmedabad EPSIZ 1.1 Winners: Azaadi ke Deewaney (Vivek Prakash, Hari Naidu, Rahul Kaushik), NITIE Runners: Chuck It (Nikhil Lukose, Vishal Kapoor, Smruti Lenka), XIMB EPSIZ 1.0 Winners: Azaadi Anil TN, Akhil K Balachandran, Praveen RS, IIM Calcutta Runners: Pavitra Agrawal, IIM Rohtak Questions were set by Robin Biswajeet and Siddhartha Roy of IIM Kozhikode who found setting the questions extremely engaging and interesting particularly given the high standards and level of participation that the quiz witnessed.
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Pol-Trics
- by Poulami Roy Choudhary, EPS member Team EPS, along with Backwaters Committee, IIM Kozhikode, organized a nationwide event Pol-Trics (political cartoons), thereby inviting entries in teams of two from the B-Schools across the nation. The event was sponsored by www.wordpandit.com. It was a time to unleash the creative lashes in us to become the next R.K. Laxman!! The theme was to concentrate on the notion, Politics is the art of postponing decisions until they are no longer relevant. We got a huge response from the various colleges, making tough for us to decide on the top entries!! We decided on the top 15 entries, which can be viewed here http://www.facebook.com/media/set/?set=oa.267072146732046&type=1 On the basis of the discussions generated, and the likes in the Facebook page, here we go on few of the best entries of the event.
With the tagline, Sorry Didi by Team Kolkartoon, Udhav Malik & Nandita Koch, from the Indian Institute of Foreign Trade (IIFT), this entry generated quite a sort of discussions on our Facebook page!! And it won a huge 308 likes and still counting. . !!
This entry was from Vinay Kumar & Abhinav Verma, from the Great Lakes Institute of Management, Chennai. The cartoon depicts the sorry state of Indian economy due to which Indian currency is taking a new dip every day.
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With the witty caption Supply Chain Management of Indian President exploring the confusion in the country regarding the presidents candidature, here comes an entry by Priyang Agarwal , from T.A. Pai Management Institute. This entry won 305 likes!
With the tagline, aka moral: Ride now, so that you can drive later, this entry is by Mahesh Koppad, from IIM Kozhikode, won 229 likes!
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Talk & Tease

by Surbhi Verma, EPS member The Economics, Politics and Social Sciences (EPS) Group has recently kick started a new initiative which brings together speakers, thinkers, debaters - basically anyone who has and wishes to share an opinion, under the same roof. The event titled Talk and Tease is a one of its kind activity on Kampus which dares one to speak her mind out. Although started on an informal basis with a dedicated group of K-ites, it quickly gained steam in the second week itself when the much beloved and respected Professor Matthew agreed to become the moderator for the debates. The weekly debate tries to encompass pertinent issues ranging from politics to social sciences.
The first debate dealt with: Is the raising of import tariff on gold justifiable considering most of the unorganized sector still prefers gold as a collateral - a problem which has given the Indian government many sleepless nights. Diverse viewpoints were shared and heard. The students not only discussed the burgeoning trade deficit problem but also suggested measures to curb the Indian hunger for gold. Ways and means like trading on gold markets via ETFs and derivatives were discussed.
The second debate followed on the heels of the recent Gujarat Election. The topic floated was "Is Modi an acceptable Prime Ministerial candidate for 2014 LS polls?" The topic was contentious and the audience witnessed a range of arguments from Modis investment genius to his questionable rise to power. And with the introduction of Professor Matthew as a moderator, the debate was bound to be livewire with the contestants having a free pass to mock, challenge and tease their opponents.
The debates are slowly gaining popularity with the masses and the EPS hopes that it triggers a passion among all to be argumentative and a chance to bring forth their opinion on issues which are relevant to our fraternity. A future roadmap has been charted by the group which includes introduction of faculty in the debates against the students to get a more balanced viewpoint of the concerns. Inspired by the event called The Great Debate which is organized in Backwaters, the annual management fest of IIMK, EPS wishes to invite speakers ranging from industrialists to politicians and probably pit them against students to achieve an outsiders perspective as well. Indian Institute of Management, Kozhikode Page 51
EPS The Facebook page

- by Diksha Bajaj, EPS member
Social Media has now become something which defines acceptability, popularity and relevance of a particular subject. A talk about any relevant subject is incomplete without its presence of social media and a talk about social media is incomplete without a mention of Facebook. Economic Social and Political Interest Group at IIM-K also has a very vibrant page at Facebook. Starting some seven months back with the three admins, we currently have more than 3500 members from diverse backgrounds. We represent one group who share a common interest, who wish to exchange thoughts on the economic, social and political issues going on across the globe. In terms of diversity we have people from all streams, be it management, engineering, commerce, economics or humanities graduates using the space to represent their thoughts. Where we have representation from an engineering college Thapar University of Punjab, we also have representation from the diverse D.U. colleges SRCC, LSR, Hansraj or DCE/NSIT or from the colleges of Mumbai and Bangalore. Management colleges like other IIMs, NMIMS, Symbiosis and engineering colleges like IITs and NITs also provide active participation and add to the knowledge exchange. Our topics of discussion are also as diverse as our theme. Where we make a point to salute Netaji on his birthday for bringing a revolution, we even discuss the Prisoners Dilemma to help people finally understand it. We have discussions on global imbalances and UID card, we also are a platform where various economic surveys are conducted to study the response of the people. The basic idea behind having such a page is to encourage awareness among the college going youth about matters both national and international. While the discussions are mostly related to politics, economics and the like, topics such as media and entertainment can also be put up and talked about. We leave the participants free to talk about topics as diverse as they feel and encourage learning through this platform that we have created.
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The following snapshot gives an example of what we do and how we do it.
So, all you enthusiasts there, keep talking, keep discussing and keep posting.
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Photograph Courtesy Suvradipta Basu Batch 2012-14
Economics Politics & social Sciences Interest Group Indian Institute of Management Kozhikode IIM Kozhikode Campus P.O, Calicut - 673 570

EPS Magazine Pragati

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VOLUME I No.

Indian Institute of Management, Kozhikode

Sincerely, Team EPS

Indian Institute of Management, Kozhikode

Indian Institute of Management, Kozhikode

An Interview with Dr. Debashis Chatterjee, Director IIM Kozhikode

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Indian Institute of Management, Kozhikode

FDI in Multi Brand Retail in India A Game Theory View

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The Game Tree

Playing the Game

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Indian Institute of Management, Kozhikode

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Putting the issue in context

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GDP growth (in mn USD)

11.00 9.00 7.00 5.00 3.00 -50 0 50

y = 0.0141x + 7.1288 R = 0.1656

GDP growth (in mn USD)

GDP growth vs FDI growth

GDP growth vs FII growth

FDI growth (in mn USD)

Indian Institute of Management, Kozhikode

Global Financial Crisis: Impact on India

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Key Trends and Issues

Interdependence of FIIs, Sensex and Exchange Rate

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Monetary and Fiscal Responses

Guardian, 2nd Nov 2012

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The Impossible Trinity and its Implications on the Indian Economy

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The Impossible Trinity

Independent Monetary Policy

Fixed Exchange Rate

Indian Economy and the Impossible Trinity

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Combating the Impossible Trinity-Trends in Indian Economy

2= aMI + bES + cKO

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Capital Flows of Developing Countries

Crime and Misery: the Indian Case

The opposing views on the crime - economic condition nexus

Indian Institute of Management, Kozhikode

What do data from Indian states tell us?

Violent crime Source: Indiastat website

Figure 2: Violent crime & economic conditions - Indian states in 2005

Indian Institute of Management, Kozhikode

Monetary Policy Transmission Mechanism

Monetary Policy Transmission Channels

Analysis of Interest Rate Channel

Call Rate Vs CRR

Call money Rate Vs loan Rate Plot

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Effect of LAG When Monetary Policy Change Affect Inflation

Insights and Conclusions

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Fiscal Deficit An Indian Perspective

Impact of Fiscal Deficit on Macroeconomic Variables