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Battle of Economic Ideas

11 Nov

I recently had the opportunity to write a three-part series on the history of economic thought for the IFMR Blog. It turned out to be an immensely enriching experience. I titled the series “Battle of Economic Ideas” as my voyage took me through the work of great thinkers who had different visions of how society should be organized. Below are the links to the three parts,

Part I – 1650s to 1880s


Source: Battle of Economic Ideas, IFMR Blog

The underlying theme of the first post is the emergence of a rational and modern society during the Age of Enlightenment (1650s-1780s). Thinkers like Rene Descartes and John Locke questioned feudal doctrines of the past, paving the way for the rise of scientific thinking and political freedom. The subsequent era of the Classical Liberals (1750s to 1880s) witnessed the birth of modern economics through the works of Adam Smith. Smith’s ‘invisible hand’ hypothesis provided the justification for non-interference by the government in the workings of the market. This ‘free-market’, ‘laissez faire’ approach to economics coupled with political self-determination and the emphasis on ‘individual’ over ‘society’ was the hallmark of the Classical Liberal era.

Part II – 1850s to 1970s

Economic Thinking

Source: Battle of Economic Ideas, IFMR Blog

In the second post, we provided an overview of the Marxian and Keynesian backlash (1850s to 1970s) that challenged the ideas of Classical Liberals. This era witnessed the emergence of two great political-economic (and philosophical) thinkers – Karl Marx and John Maynard Keynes. Their writings provided a damning critique of classical liberalism and challenged long-established doctrines.

Part III – 1970s onwards

The third post provides an overview of the neo-liberal era (when a diluted version of Classical Liberalism was reincarnated), and comments on the current crossroads in economic ideas.

Hope you enjoy reading the posts!

I also delivered a talk on the above at the IFMR Spark Spring Edition – 2015. The link to video is below,


Tax pass-through for Alternative Investment Funds

18 May

Now that the Finance Bill 2015 has received the President’s assent, we can all rejoice that Alternative Investment Funds (AIFs) in India have been granted tax-pass through status. This has been a long standing industry demand and it was heartening to hear the Budget announcement regarding the tax-pass through status.

I had written on this issue for Mint prior to the budget. You can access the same here.

Hopefully, tax certainty becomes a permanent feature of our capital markets rather than being occasional gusts of clarity.

A few updates..

29 Oct

Some blogging has shifted to the venerable IFMR Blog, which I would highly recommend to anyone interested in the financial inclusion sector in India.

I have been quite fascinated with digital currencies, and you can view my article on Bitcoins here.

Thomas Piketty’s book Capital in the Twenty-First Century has been quite a sensation. My two cents on the inequality debate the book has ignited can be read here.

And of course, I recently had the pleasure of visiting Fort St. George in Chennai. A short note on the trip can be read here.

Hope you guys had a great Diwali.

Its a wonderful life with capitalism

30 Oct

The Libertarian Reading List – The 30 day challenge

26 Jun


F.A. Hayek

I recently came across a collection of 30 articles, meant to be read over 30 days, to understand the Austrian school of economics. Why I think this is important –

1) With the global economy in turmoil, we keep hearing about different policy prescriptions to deal with the crisis. It is a good time now to get acquainted with the different school of economic thoughts. This will help in making sense of the wonderful debate that brews everyday in the blogosphere.

2) I feel the Austrian perspective on Economics is ignored in educational institutes. The set of 30 articles may be a good starting point to coherently understand the Austrian school. So while we know quite a bit on Keynesian economics, the above looks like a good place to read about a starkly different point of view.

Disclaimer – I have not yet read any of the articles. 30 articles in 30 days seems difficult for me. So I have customized the challenge as the 120 day challenge. Will try to cover one article in 4 days. In case I stick to this and have something interesting to share, will update on a follow up blog post.

Driver for EM Equities?

2 Dec

I read an article on Business Standard (click here) a few weeks back that offers a very nice perspective about the direction Emerging Market (EM) equities will take next year. It tries to analyze the question by looking at the relationship between US monetary policy and EM equities. It goes like this,

1990-1995 : Inverse relationship between US interest rates and EM equities

Low US interest rates drove capital  into EM economies. This was also a period when most Asian economies had current account deficit (CAD) and a leveraged private sector. They benefitted from low US interest rates.

1995 onwards: Relationship breaks down. Direct relationship between US interest rates and EM equities

Asian equities became a function of global growth expectations. Rising interest rates in the US signalled good health of it’s economy, which bode well for global growth and export demand.

So to answer the question what will drive EM equities next year, we need to access whether global economic recovery or loose monetary policy will impact EM more.

If we believe loose monetary policy will be the driving force, its bulls all the way with QE2 nicely lined up. (Capital controls and assets bubbles may be spoilers though)

If we belive do not believe in decoupling, then EM equities are a function of global growth expectations.

And obviously, if we believe, EM economies will successfully align themselves to be driven by domestic consumption, none of the above really matters.

Lets wait and watch.

How the Global Economy functions…

28 May

A simple and lucid framework to help you understand the present functioning of the global economy-

Balance of payments of a country can be broken down into two parts- trade balance and capital account balance. Summing up the two parts should give us zero as they are an accounting identity. So,

Trade balance (surplus/deficit) = Exports – Imports

Capital account balance (surplus/deficit) = Capital inflows – Capital outflows

Balance of payments = trade balance + capital account balance

If trade balance is in surplus, the capital account balance will be in deficit of an equal magnitude and if trade balance is in deficit, capital account balance will be in surplus of an equal magnitude (to finance the deficit).

The developed nations (read US, EU) import like crazy from developing nations (read China, India). Thus,

Trade balance (developed nations) = deficit (imports > exports)

Trade balance (developing nations) = surplus (exports>imports)

As we know, the US$ is the world currency. So, if Chindia (China + India) exports, it receives US$. And if it imports, it pays in US$. Since exports > imports for Chindia, these guys are getting more dollars than using them. So, they are accumulating dollars.

What does Chindia do with these dollars? They need a safe avenue to invest them, and what can be more safe than the US govt bonds. So Chindia buys US govt bonds (which the US govt issues to finance its deficit).


Capital account balance (developed nations) = surplus (inflow of dollars from Chindia that buy US govt bonds)

Capital account balance (developing nations) = deficit (outflow of dollars for buying dollar denominated US govt bonds)

These capital account surplus/deficit offset the surplus/deficit trade balance.

In summary,

Chindia produces,  sends the good for US consumption and accumulates dollar. The US consumes. And in huge quantities. It starts running a deficit and has to print bonds to finance the deficit. These same bonds are then bought by Chindia, so the dollars come back to the US. The US can now again buy from Chindia and Chindia can now again start exporting to the US.

And the cycle continues…..