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Do you write as well?

It was November. Shorts were fading rapidly out of the streets. Many girls queued to the ATM machines near my home in night clothes around midnight, their t-shirts knotted at their waist. Aren’t their parents home? I don’t read newspapers, and I don’t watch TV. The bright fellows I follow on Twitter and Facebook don’t like news either.  So, I didn’t know what was coming. I slept for many hours without knowing that those clever girls were trying to get cash before the news got through to everybody.

There are always enough such girls to go around in Noida. My landlady’s niece is one of them. When I first met her, she was sitting on the bed, pouting and sulking, complaining about some ridiculous thing. My landlady and her mother tried to calm her down, but that didn’t have any effect on her. I, the scholar and gentleman, was at my desk, poring over tomes on economics of culture. It was not that I did not see her, but my mind wasn’t there. When her mother said that it was time for them to go, she snapped straight and scratched her back, raising her top. She then turned  around  and  smiled  at  me,  her  eyes  twinkling.  I  raised  my eyebrows, glanced at her and smiled. “Bye”. Continue Reading

Books, Uncategorized

To borrow an invaluable metaphor from Voltaire, if Alain Bertaud did not exist, it would have been necessary to invent him. When I read about Indian real estate, I almost never come across anything that is good. Alain Bertaud’s work is a rare, honorable exception. If Mumbai were a beautiful, livable city,  many great minds would have lived in Mumbai. They would’ve written about Mumbai. Even in such a dense city, there isn’t anyone who can write intelligently about housing and urban policy.

But, I find Alain Bertaud’s position that raising the floor area ratio (FAR) will not raise Mumbai’s population density strange. For beginners, Floor Area Ratio is the ratio between the floor space constructed on a plot to the area of the plot. For example, if the FAR is 2, a 2000 square feet building can be built on a 1000 square feet plot. If the FAR is 3, a 3000 square feet building can be constructed on a 1000 square feet plot. The higher the FAR, taller buildings can be. In Mumbai, the FAR is 1.33, while in some cities, FAR in the city core can be as high as 25. In Hong Kong’s city core, for example, a 100 storey building can be constructed on the plot on which a 4 storey building can be built in much of South Mumbai. In fact, this is the major reason why space is so congested in Mumbai. This is the single biggest reason why housing is so expensive in Mumbai.

To put it shortly, this is Bertaud’s argument, as best as I understand it.

Density=Population/Built-up Area.

So, density would change only if the amount of land developed changes or if the number of people in the city changes. For reasons unknown to me, Alain Bertaud maintains that changing the FAR does not change either the population in the city or the land developed. Bertaud thinks that if FAR is lowered, people will deal with it by consuming less floor space. Similarly, if FAR is raised, people will, at best, consume more floor space. Bertaud claims that this will not change Mumbai’s population.

But, I suspect people are more likely to move to a city where floor space is abundant, and rents are low. Wouldn’t that happen if FAR is raised in Indian cities? Better amenities attract more people. Spacious houses will have the same effect, right? How on earth can someone believe that this wouldn’t happen? Wouldn’t Mumbai attract more people if it were a more livable city? I have never lived in Mumbai. I would love to live in India’s most cosmopolitan city. But, I have never considered moving there. Why? Having lived in large houses much of my formative years, I won’t be able to adapt to such congested spaces. Delhi is bad enough. I can’t be the only guy who thinks along these lines. Remember: I am a misanthrope who loves density.

When there is more floor space, there will be more job opportunities too. This would, again, have the same effect.  I am willing to believe that this is an empirical problem. I am willing to believe that the number of people who wish to migrate to Mumbai has nothing to do with how spacious Mumbai’s houses are. But, I would like to hear why.

Post Script: Tyler cowen thinks that Indian cities are under-crowded. And if they are in fact, under-crowded, wouldn’t more people migrate cities when it is easy to build tall? (Alain Bertaud would say that density and crowding are not the same.) Robin Hanson thinks the same, though I am not sure in what sense he used the word density:

“City density, and hence city size, is mainly limited by the abilities of the conflicting elements that influence local governments to coordinate to enable taller buildings. Remember those futurist images of dense tall cities scraping the skies? The engineers have done their job to make it possible. It is politics that isn’t yet up to the task.”

Bryan Caplan thinks that if real estate markets are deregulated in such cities that would lead to more affordable housing elsewhere. This is perhaps the most interesting view I have come across. But, I’m not sure how easily it can be reconciled with the fact that Mumbai has about the highest disparity between personal incomes and housing prices. 

Tyler Cowen has a very interesting post, on why migration to cities is unusually low in India, where financial returns from migration is high: 

Indian migration to the cities is much lower than for China or Indonesia. The explanation that we propose for India’s low mobility is based on a combination of well-functioning rural insurance networks and the absence of formal insurance, which includes government safety nets and private credit. In rural India, informal insurance networks are organized along caste lines. The basic marriage rule in India (which recent genetic evidence indicates has been binding for nearly two thousand years) is that no individual is permitted to marry outside the sub-caste or jati (for expositional convenience, we use the term caste interchangeably with sub-caste). Frequent social interactions and close ties within the caste, which consists of thousands of households clustered in widely dispersed villages, support very connected and exceptionally extensive insurance networks. Households with members who have migrated to the city will have reduced access to rural caste networks.”

Books, Uncategorized

“I swear—by my life and my love of it—that I will never live for the sake of another man, nor ask another man to live for mine.”, so ends the speech of John Galt, the hero of heroes of Atlas Shrugged.

The above sentiment is echoed by many in the libertarian movement, especially Ayn Rand’s followers. Objectivists single out Altruism as a scapegoat for most, if not all of the problems faced by mankind. I myself believed much of the rhetoric years back, when I came across her works for the first time in my life. I still find much merit in them. Given the fact that Voters have systematically biased beliefs, selfishness is likely to significantly improve the way democracy works.

GMU economist Bryan Caplan puts it well: “Why? If selfish voters misinterpret markets as a method for the rich to exploit the poor, at least the rich will still favor markets. They’ll want what they falsely see as their “pound of flesh.” But if unselfish voters misinterpret markets as a method for the rich to exploit the poor, the rich and poor alike will unite against the imaginary evils of the market. Instead of petty squabbling, we get a consensus for folly.” It should be obvious that it is important to emphasize that altruism is not an unconditional virtue in a world where most people wrongly believe that we are our brother’s keepers and get that notion institutionalized. Self interested actions are generally virtuous, as long as it doesn’t involve taking advantage of others. When Caplan says: “I often wish the people around me were more selfish – or at least better at being selfish. I know how to deal with rational, self-interested actors. They’re really quite charming. If I want them to change their behavior, I offer them a deal. While they might hold out for more, at least they don’t take offense.”, I tend to agree. Continue Reading

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Ayn Rand summarized the attitude of present day intellectuals in these words: “Forgive me, Father, for I know not what I am doing-and please don’t tell me.” She continued: “Observe how noisily the modern intellectuals are seeking solutions for problems-and how swiftly they blank out the existence of any theory or idea, past or present, that offers the lead to a solution. Observe that they profess to be moved by compassion for human suffering –and close their eyes indignantly to any suggestion that man does not have to suffer.” Such an attitude was evident in Sumati Mehta’s article on George Soros’ “Institute for New Economic Thinking” in Business Standard. George Soros, who pushed for a world central bank in his book “The Crisis of Global Capitalism”, founded the institute “to provide fresh insights and thinking, with a view to promoting changes in economic theory and practice”. Continue Reading

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The appreciation of rupee against dollar is hitting hard up on the small exporter. The Rupee, which in a nine year high, and trades just over 39 Rupees, has risen around 13% in the past one year. . It has taken an economic toll on the export community, and has led to a slackening in Industrial Production, as a stronger currency has made exports less competitive. It is opined by an economist that it would move to close to 30 in course of time. Rupee is now the second best performer in the past year in the currencies traded in Asia outside Japan.

As the rupee appreciates, the exporters earn less in rupees for each dollar of revenue they bill overseas clients. The hardening of the Rupee makes Indian products more expensive to foreign customers. Industries which source their raw materials from the domestic market now have to face the competition from the low cost nations such as China. In the past four months, the export growth had fallen 30 percent. The effect is seen across the sectors and millions are put out on the streets. The Government has woken up to the fact that its export target of $160 billion can’t be met. The most affected are the textiles, leather and handicrafts industries. The fastest growing IT industry, too, is no exception. Seafood exports too, are taking a hit.

Many are to put up their shutters and reduce their workforce. Some have made up their mind to export their raw materials from low cost Asian countries. They are in some cases, unable to turn to other markets, as they too are dollar traded. IT firms like Infosys are reusing their code. Textile exporters are exploring the possibility of exporting through Rupee billing to pass over the currency risk to foreign buyers, allowing themselves to earn profits through manufacturing alone. In other words, buyers are being asked to pay more for their exports. Pharma companies, one of the key sources of foreign exchange, too are hurt, and are busy lobbying for Government sops.

Earlier some economists were of the opinion that an appreciation in Rupee wouldn’t necessary lead to a decline in exports as a sizeable percentage of the exports are import led. With rupee appreciation, imports were supposed to become cheaper and the manufacturers were expected to leverage that benefit to make good of the erosion in the price competitiveness on account of hardening. RBI was expected to relax its grip on the interest rates, which would have made the exporters to source goods for export purposes at a cheaper cost. They seem to be right, but only when taking some aspects in account. The strengthening of the Rupee has made sourcing of cheaper raw materials from abroad easier, as it makes imports seem less expensive. There is a surge in the exports of petroleum products, gems and jewels, all of which are import led exports. The overall export growth rate was the highest in the past year and a quarter in October. The figures could as well be misleading, as bigger firms are likely to suffer loses to keep their presence. But, exports have taken a hit in other sectors such as IT, textiles, handicrafts and pharma.

Exporters are running to the Government for handouts in the form of customs duty reductions, tax exemptions and interest subsidies. “There is an urgent need for the government to take measures to bring relief for exporters and help them not lose their markets,” said Ganesh Kumar Gupta, president of the Federation of Indian Export Organizations in New Delhi. The Commerce & Industry Minister, Mr. Kamal Nath, had written to the Prime Minister, Dr Manmohan Singh. “You have to make exports competitive. Rupee appreciation is obviously hurting the exporters.”The government, in October, had notified refund of tax paid by exporters on three additional services of general insurance, technical testing and analysis, and inspection and certification.

The Finance Minister P Chidambaram had ascribed the fall in inflation to the appreciation of Rupee. He added that the appreciation of Rupee is not that bad as, “Strengthening of the Rupee has led to a decline in rupee prices of imported goods, contributing to a fall in inflation from its highs in 2006-07″. To link the fall in inflation to the appreciation of Rupee, but, is to substitute the cause for the consequence. It should be obvious that it is a fall in inflation which must lead to the appreciation of Rupee.

Whenever a currency is overvalued in relation to the other, it encourages imports and discourages exports. It is the overvaluation of Indian currency which has made the imports cheaper and exports less profitable than they otherwise would have been. It makes the price of imports less in terms of the Indian currency and the price of exports high in terms of dollar. It discourages United States from buying Indian exports.

As the overvaluation of rupee makes Indian goods expensive in terms of dollars, the Indian exporter would have to reduce his price in terms of Indian rupee in order to meet the competition of other sellers in the American market. The exporter keeps away from that, as he can realize much more profits from the local market as of inflation. The favoring of imports over exports in the recent times certainly is not a coincidence. We have only our own policies to blame here.

When exporters push for Government handouts, it is forgotten that it is the very Government regulations which lead to fluctuating exchange rates. Exchange ratios are, ideally, not to be arbitrarily set by the government, or to be left to the market to decide. Each currency should be strictly defined in terms of gold, and fixed permanently that it is interchangeable and redeemable at that weight. When done so, each and every currency would be anchored to each other at a fixed exchange rate, that seasonal fluctuations wouldn’t wreak havoc on the export or import communities. The maintenance of fluctuating exchange rates and Government subsidies would only reduce the incentives to innovate and hence impede it.