Thursday, May 22, 2008

Economics of Cycle-Rickshawaala

Before starting to talk about the economics of cycle rickshawaala, let’s look the evolution of these street entrepreneurs, first. Cycle rickshaw has evolved from being hand pulled to leg operated tri-cycle rickshaw, utilizing technological evolution of cycle chains. Subsequently these cycle-rickshaws are giving ways to auto rickshaws running on petrol/diesel or CNG gases! Going towards the same fate as of hand pulled carts that we now see in old Indian movies only!

As incomes rise, people switch from using the non-polluting, energy-saving bicycles and non-motorized cycle rickshaw to highly polluting motorcycles and three-wheelers, and taxi, resulting in a dramatic increase in air pollution. Despite the environmental benefits of the cycle rickshaw and the economic importance of the industry particularly to low income families, public attitudes towards the cycle rickshaw in India are negative. Negative attitudes about the cycle rickshaw are based on views that their use is exploitative to the driver, the vehicles are not safe, and are backward. Much of the stigma against the vehicle was based on its perception of being 'backward.' In fact, the current vehicles in operation are 'backward,' in the sense that the technology being used was developed more than fifty years ago based on indigenous modifications of a British-designed bicycle, and only very limited modifications have occurred since then.

However, cycle rickshaws offer something which most of the ‘modern’ public transport vehicles do not: energy conservation! People might wonder why would we need energy if not for vehicles. Do you want your fan to be running in the hot Indian summer or not? Well they are not the ones to be blamed it’s the unawareness about the severe shortage of energy options. Countries are struggling to keep their economy growing in the era of energy shortages. Recent spike in global crude oil prices are just one symptom of much worrying phenomena.

Let’s try to look at how can economy benefit from wide usage of cycle and cycle rickshaws. I’ll start with cycle against the motor cycle and alike. Cost saving both for the rider and for the economy due to saving on fuel, steel is obviously the first one. Second benefit would be in form of reduced air and noise pollution. Third one increased employment, wondering how? Well production of one cycle compared to one motor cycle requires 30% more labor! More people employed means more wide distribution of growth, reduction in poverty, increased happiness and last but not the least reduced crime rate.

Moving on to the economics of cycle rickshawaala……

Friday, May 2, 2008

Annual Monetary Policy 2008-09

- Bank rate, reverse repo rate and repo rate kept unchanged
- Following a CRR hike by 50 bps on April 17, the ratio hiked by further 25 bps to 8.25%, with effect from the fortnight beginning May 24. This cumulative hike of 75 bps is expected to suck out liquidity worth Rs 277.5 billion
- Survey on GDP growth for 2008-09 in the range of 8.0-8.5%
- Inflation target raised from 5 to 5.5%, with a medium-term objective of 3.0%
- M3 growth to be contained within the range of 16.5-17.0%
- Deposits projected to increase by around 17%
- Growth of non-food credit to be contained around 20%
- The limit of bank loans for housing enhanced from Rs 20 lakhs to Rs 30 lakhs for applicability of reduced risk weights at 50%
- Indian companies allowed to invest overseas in energy and natural resources sectors such as oil, gas and coal in excess of the current limits

RBI Governor Yaga Venugopal Reddy is known to often surprise the market and the annual policy review this time around showed him being true to form again with his decision to raise the cash reserve ratio for the third time without touching key policy rates.

The Monetary Policy of 2008-2009 comes in the backdrop of a slowing economy facing a sudden and a sharp surge in inflation. The WPI-based inflation touched 7.41% in March way above the virtual roof (RBI’s comfort zone of 5 per cent). The growth moderating effects of tight monetary policy over the last two years are still coming through and a moderating global economy is reducing the external stimulus to growth. Also, the inflationary surge is largely because of higher food, metal and energy prices. This is creating strong supply side (cost-push) inflationary pressure on the economy with significant threats to growth.

As monetary tightening is more effective in controlling demand-driven inflation, the central bank faces a difficult choice of balancing downside risks to growth along with upside risks to inflation. In our April 2 note (“Inflation: through the roof – way forward?”) we forecasted the inflation number to hover in the range of 7-7.5% and for last four weeks it has. We expect inflation figure to slow down due to the fiscal measures taken on supply side along with further tightening of money supply in the range of 6-6.5% for next few weeks, and to be in the range of 5.5-6% until June’08.

Money is the ultimate commodity because all prices have only money in common. And it is the only thing that a central bank directly controls. With increase in CRR by 75bps in three fortnights, would force banks to reduce their short-term deposit rates to contain their borrowing cost and to protect their margins. Such action would also impact the deposit growth contain M3. As of the aggregate deposits mustered banks are required to park 25% of their net demand and time liabilities in SLR securities and 8.25% of as CRR balances with the RBI. Only the balance 66.75% of total deposits along with the borrowings, are available for deployment towards advances. If lending rates and the yield on investments remain constant, SCBs as a whole have had to take a hit of 7 bps (annualised) on their spreads and net profitability margin solely due to CRR increases.

The move enhancing the limit of housing loans from Rs 2 million to Rs 3 million is a positive one and may partly help in addressing the current slowdown in housing loan disbursements. The enhancement of loan limit will, positively impact the capital adequacy of banks, with a 25% savings in capital charge. This measure might indirectly create a cushion of margin money in the event of a likely fall in property prices.

Policy document says, “It is critical at this juncture to demonstrate on a continuing basis a determination to act decisively, effectively and swiftly to curb any signs of adverse developments in regard to inflation expectations”.

Though most of the inflationary pressure is imported and not necessarily due to supply shortage. Mostly due to soaring commodity prices in global market due to weakening dollar, as most of the commodities are denominated in dollar. Such impact is clearly visible in crude oil prices, world oil demand grew by just 1% annually over the past two years while crude oil prices had shot up by over 90% in dollar terms, hitting $120 a barrel. Over 70% of the price rise in just few months, oil was at $70 in late August.

According to Wall Street Journal, since 2003 the dollar price of oil has climbed far more rapidly than has the euro price – 273% in dollars, compared to 146% in euros. Had the dollar merely retained the same purchasing power as the euro, today's price of oil would be below $70 a barrel.