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Showing posts with the label public policy

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Indian Economic Growth 2020-21: Some Thoughts

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  The GDP data of the first quarter 2020-21 is out. India has experienced YOY decline of 23.4% in the Q1. It is hardly surprising. The period of the first quarter of the pandemic year 2020-21. It was a period where there was a lockdown through the country for most part of the period. In fact, the lockdown began to be eased only in the middle of May which of course triggered the migration back home of the thousands of migrant workers from Maharashtra, Gujarat etc. Therefore, even though the economy began taking baby steps once again, the paucity of labour added to the shortage. Hence there was a widespread expectation of rapid collapse in the economic growth rate. Therefore, prima facie, the quarter was an outlier. In fact, the quarter has seen decline in economic growth across the world. The US recorded a YOY decline of 30%+ while Singapore recorded a decline in excess of 40%.   There is no surprise anywhere about the direction of the global economy. As the world reels from the pan
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Will the Indian Lockdown Create Inflationary Tendencies?

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Some studies indicate a possibility of high inflation even in the excess of 10% within the next year. The expected inflation as per the surveys seem to point towards a jump of 3-4%. Interestingly, there is a divide among the economists over the after-effects of the Wuhan pandemic. The world having locked down for more than a month has without doubt created economic disruption both through Aggregate Demand (AD) and Aggregate Supply (AS) There has been an induced halt to aggregate demand with a similar restriction on aggregate supply. Furthermore, even with the lifting of lockdown, the propensity to self-protect might make prospective consumers wary of shopping thus lower AD. At the same time, the reluctance of the workers given the risks associated with the job tasks might make them skip from work thus adding to constraints in AS. Therefore an analysis would be worth pursuing over the likely inflationary impact or otherwise of the economic shutdown caused by the Wuhan flu. There
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Perverse Incentives!

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There is a proverbial story about snakes in Delhi. During British days, apparently there was a time when Delhi was infested with snakes. The authorities were challenged to find a solution to the snake menace. People respond to incentives and one might not take recourse to economics for the same and instead follow common sense. So the authorities announced a reward for all those who kill snakes. The condition was the dead snake has to be produced as proof for claiming reward. The story goes when the reward was stopped, Delhi was infested with far more snakes than it began with. In other words the problem had multiplied. Without doubt, one needs to look why the policy failed. Does this story remind us that economics is not infallible and incentive mechanism does not work? Let us probe it in some depth. As Adam Smith first pointed out, at least in documented modern times, people function in their self interest. The self interest as an aggregate is what culminates into enlightened c
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Caselets in Macroeconomics

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Caselet I- Rupee depreciation and textile industry The recent rupee depreciation has enabled the Indian textile industry to hold yarn prices and also increase yarn exports.   Though Indian industry demonstrates stronger backward linkages, low labour costs have enabled countries like Bangladesh, Pakistan and Vietnam to overtake India in terms of capturing textile export markets.   With Chinese Yuan appreciating, Indian exports have become more competitive. Indian textile export share is marginal ( 5% as compared to China’s 30%). Many analysts advocate leveraging the current scenario to capture the global market at the expense of China.   As a CEO of leading textile manufacturer, you are planning to go in for capacity expansion. Capacity expansion necessitates funding and thus you approach a consortium of banks. Prepare the detailed projections convincing the bankers how the global economic trends portray well for Indian textile exporters. (Note: Use financial statements sh
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Economics and Policy Design- Right to Education

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The Right of Children to Free and Compulsory Education Act, 2009, popularly known as the Right to Education (RTE) Act, came into being in India from April 1, 2010 and is expected to lead to revolutionary change in the education delivery through schools in India. RTE mandates e very child from 6 to 14 years of age has a right to free and compulsory education in a neighborhood school till completion of elementary education. The economics of education rests on the fundamental premise of education being an investment.   Education is a good and has social benefits.   But pricing of education leaves the population groups unable to afford these fees outside the system. The market failure is visible and the government has to step in. There are four ways in which the government can influence the allocation of resources. In his celebrated ‘Code’ Larry Lessig presents the modes of Law, Market, Norms and Architecture to ensure the allocation or non – allocation of a resource. Let us tak
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Overview

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The blog is to understand  corporate life, public policy and life of common man through the prism of theoretical frameworks provided by social sciences particularly economics. It is aimed at all students of social sciences in particular economics who have developed a phobia for the subject. Also aimed for those who find the concepts too abstract and find no relevance or applications in real life
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