Why Do We Need Reforms in Money Market?

The following are the major defects of the Indian Money market:

1. Major portion of money market held by unorganized players and incoherence between organized and unorganized money market

2. RBI's monetary policy becomes ineffective because of lack of integration between various sub-markets as well as various institutions and agencies.

3.    Diversity In Interest Rates. In the rural and urben segments, there are different rates of interest which create differences in costs of operation.

4.    Seasonality Of Money Market. Agriculture turnover happens twice in a year and hence there are seasonal fluctuations in rate of interest, liquidity and investment cycles. 

5.    Shortage Of Funds. Inadequate banking facilities, low savings, lack of banking habits, existence of parallel economy are a few reasons for shortage of funds and mobilization of funds.

6.    Absence Of Organised Bill Market. The bill market in India is not popular due to overdependence of cash transactions, high discounting rates, problem of dishonour of bills etc.

7.    Inadequate Banking Facilities. The reach of banking system is low and uneven across the country.

8.    Inefficient And Corrupt Management. Lack of professionalization and deficient service are the most important factors in inefficiency.


Comment further by researching more on this topic...

Festivities and Federal Reserve

"For only the second time in a decade, the U.S. Federal Reserve (Fed) raised U.S. interest rates by 0.25%. The move had been widely expected following firm evidence the U.S. economy is on the road to recovery.

This was the Fed’s final meeting before President-elect Donald Trump’s inauguration. Following his numerous campaign-trail promises of tax cuts and infrastructure spending, members of the Fed’s interest-rate setting committee may have been wary of the potential for such policies to further fan the flames of inflation.

Bond investors clearly expect interest rates to continue on an upward trajectory next year. The yield on two-year Treasuries, which are particularly sensitive to changes in interest rates, jumped to its highest level since 2009 as investors sold bonds." - Blog - Thinking Aloud Aberdeen Asset Management

Questions:

Q:1 Why would the Federal Reserve's action of raising interest rate coincide with recovery in US?

Q:2 How is a rising interest rate related to inflation?

Q:3 What is the benefit to Bond investors in this new scenario?

Q:4 If you had purchased bonds this Christmas, what would be your expectation in future?

Semester II students, show me what you know about these issues by posting answers a your reactions and view...

How Do Banks Operate?

Excerpt Taken from: 
Blog: Pragmatic Capitalism, Authored by Cullen Roche
 

The following is a general overview of the purpose of modern banks and how they operate in a simplistic sense.  This passage is an excerpt from Cullen Roche’s book “Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance”

The monetary system is designed to cater to the creation of the public’s money supply, primarily by private banks by establishing a money supply that is elastic. That is, it can expand and contract as the demand for money expands and contracts. Most modern money takes the form of bank deposits, and most market exchanges involving private agents are transacted in private bank money. As I have discussed, inside money governs the day-to-day functioning of modern fiat monetary systems. The role of outside money, which is created by the public sector, is comparatively minor and plays a mostly facilitating role.

Like the government, banks are also money issuers but not issuers of private sector net financial assets. That is, banking transactions always involve the creation of a private sector asset and a liability. Banks create loans independent of government constraint (aside from the regulatory framework). As I will explain, banks make loans independent of their reserve position with the government, rendering the traditional money multiplier deeply flawed.

The monetary system in the developed world is designed specifically around a competitive private banking system. The banking system is not a public-private partnership serving public purpose, as the central bank essentially is. The banking system is a privately owned component of the system run for private profit. The thinking behind this design was to disperse the power of money creation away from a centralized government and put it into the hands of non-government entities. The government’s relationship with the private banking system is more a support mechanism than anything else. In this regard I like to think of the government as being a facilitator in helping to sustain a viable credit-based money system.

It’s important to understand that banks are not constrained by the government (outside the regulatory framework) in terms of how they create money. Business schools teach that banks obtain deposits and then leverage those deposits ten times or so. This is why we call the modern banking system a fractional reserve banking system. Banks supposedly lend a portion of their reserves. There’s just one problem here: banks are never reserve constrained. Banks are always capital constrained. This can best be seen in countries such as Canada, which has no reserve requirements. Reserves are used for two purposes—to settle payments in the inter-bank market and to meet the Fed’s reserve requirements. Aside from this, reserves have little impact on the day-to-day lending operations of banks in the United States. This was recently confirmed in a paper from the Federal Reserve:

Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.

Growth, Development and Financial Markets (Anna O Krueger's Views)

Read this interesting write up by Anna O Krueger's speech (as Special Advisor to Managing Director, IMF) which talks about the ways and means to development and growth where financial markets matter throughout different stages of economic development and growth. The speech was given in Tokyo, in 2006.

Thinking about economic development has evolved over the past half century, partly in response to perceptions of poverty and theorizing about its causes (and inferring from those the presumed needed policy actions) and partly through the experience of development in countries both successful and unsuccessful. During these years, there have been a number of "fads", or virtually single causation theories, as to "the" causative factor (or, perhaps, two factors), largely in response to perceptions that development was less rapid than it should have been.

During the past decade, much of the "fad" and the emphasis has been placed on understanding the role of the financial sector, in part because earlier lessons were learned, and in part as a consequence of the financial crises of the 1990s. Understanding of the role of the financial sector has increased markedly, but research and insights continue to mount. As that has happened, some have turned to "governance issues" as "the key" to development, but lessons about the importance, and key role, of the financial sector in development have certainly been learned.

 

For countries experiencing rapid growth, development of a healthy financial sector is critical. Hence, in many emerging markets and developing countries today, emphasis must be placed (among other things) on reforms that enable improved functioning of the financial system. At early stages of development, this entails strengthening the rights of borrowers and lenders, development of a credit rating system, lowering the costs of obtaining credit (not the interest rate), and streamlining means for settlement of disputes.

The World Bank has recently provided data on a number of these phenomena across countries. It has created a scale ranging from 1 to 10 (highest) to indicate the degree to which borrowers' and creditors' rights are protected. Industrial countries generally (but not always) receive high ratings, with the US and Australia for example receiving ratings of 10 and 9 respectively. By contrast, Argentina scores 3, Mexico 2, and some countries 1 and even 0.

Provision of credit ratings, normally through private credit bureaus, is also highly variable across countries. Again, industrial countries normally score well, with coverage of most of the economy, whereas Brazil has coverage of about half the population, and Costa Rica less than 5 percent. More than half of the 55 countries surveyed had no private credit bureau coverage at all.

The cost of creating collateral for loans also varies widely. World Bank numbers estimate that it is less than 0.1 percent of per capita income in the United States and the Untied Kingdom. By way of comparison, it is 8.1 percent of per capita income in Korea, 2.7 percent in Japan, 11.7 percent in India, 20.7 percent in Nigeria, and 62.2 percent of per capita income in Morocco.

The ability to enforce contracts also matters. In most industrial countries, the time to achieve legal enforcement is around 6 months (250 days in the Untied States, 75 days in France), while in developing countries it can be much more: 591 days in Bolivia, 425 in India, and 1,000 in Poland. Clearly, inability to enforce loan obligations can itself stymie financial development.

Policy reforms entailing increasing the efficiency of bankruptcy proceedings, reducing the cost of collateral, enforcing contracts, and improving other aspects of the financial nexus are clearly important. But so, too, is the development of an efficient (and implemented) regulatory framework, and competition within the banking system. How this is achieved can vary greatly from country to country, but there is a strong presumption that the development of arms-length lending, competition within the banking system, and arrangements that permit timely enforceability of contracts clearly matter.

In Korea, reforms in many of these dimensions were undertaken in response to the crisis, and, as already indicated, growth resumed quickly and has been sustained. In some other emerging markets, reforms are proceeding, although with varying degrees of rapidity. And, as some of the numbers just mentioned indicate, there are many countries where significant improvements will need to be made in order to enable the financial system even to begin to carry out its role.

Clearly, the financial sector is not THE key to development, any more than human capital or physical capital accumulation were. Equally, however, failure to develop the financial sector can put an enormous brake on growth prospects and, indeed, if the issue is not addressed, can thwart development efforts. For countries where there is a strong commitment to growth, the lesson is clear: attention needs to be paid to financial sector issues as growth proceeds, unless it is preferred to wait for a crisis to force the necessary reforms.

How Law Can Be Made Dynamic: Principle of Prospective Overruling

Doctrine of Prospective Overruling – Meaning

The basic meaning of prospective overruling is to construe an earlier decision in a way so as to suit the present day needs, but in such a way that it does not create a binding effect upon the parties to the original case or other parties bound by the precedent. The use of this doctrine overrules an earlier laid down precedent with effect limited to future cases and all the events that occurred before it are bound by the old precedent itself. In simpler terms it means that the court is laying down a new law for the future.
 

There are two aspects to the doctrine of prospective overruling. The first aspect was laid down by Lord Blackstone, according to this theory Judges don't make the law; their job is to define the law. They should however follow the doctrine of Stare Decisis. The doctrine of Stare Decisis means "to stand by precedent and not to disturb the settled point of law"(N.K Jayakumar “Judicial Process in India” APH Publishing Corporation); the logic behind this doctrine is that people should not get confused as to what is legal and what is illegal.

The second aspect was propounded by Cardozo J. and Lerned Hand J. who were strongly in support of the Doctrine of Prospective Overruling. According to them if this doctrine is not given effect it will wash away the whole dynamic nature of law, it will be against the concept of judicial activism. Cardozo J. was of the view that the law should keep up with the changes occurring in the society, the law has to be dynamic and not static. If in a new and changed society, the citizens are bound by an old law it will lead to grave injustice. The citizens whose lives are bound by the law of land should be given laws according to changed needs. Therefore the doctrine of Prospective Overruling is an important tool in the hand of judiciary to give fair and timely justice to its citizens.

The Doctrine of prospective overruling supplies the gap in legal theory and offers the doctrinal foundations for an extended view of judicial function with built in discretion in the Court to indicate the time dimension and the type of cases for which the holding in a particular case shall have operative effect. Mathew J. explains the thrust of the rationale behind the doctrine of prospective overruling by observing that it is not meant to supplant the Blackstonian doctrine but' is a necessary device in any system of law to protect the interest of the litigant public when judicial overruling of a precedent entails a change in the law.

 

Source: Blog: Indian Law, Owner: Pavithra, LL.M. Student, Mangalore

Strange Case of Fundamental Rights

As Reported in The Times of India, on January 6, 2016

Madurai: A member of the Southern Districts Women's Federation has filed an appeal in the Madurai bench of the Madras high court against its single judge order prescribing a dress code for devotees visiting temples.

The petitioner Sarika said that if the order was implemented, the women's right to worship would be affected and violated. "The restriction in the form of a dress code is against the fundamental rights guaranteed in the Indian Constitution. Temple is a public place which is visited by persons of diverse culture and thus prescribing a dress code is a violation of customary practices," said the petitioner.

Besides, the Tamil Nadu Temple Entry Authorisation Act also says that no person shall enter any temple premises unless he or she has had a bath and wears clothes of such materials and in such a manner as is customary in such temples. Hence there is no need for a court dress code, she said. On December 1, the Madras High Court bench directed the state government and the Hindu Religious and Charitable Endowments Department to implement the dress code.

Disposing of a petition, Justice S Vaidyanathan had said, "we should dress for public worship in a way that is generally considered appropriate." "The department should consider implementing the dress code as follows: for men dhoti or pyjamas with upper cloth or formal pants and shirts, and for women saree or half saree with blouse, churidhars with upper cloth, for children any fully covered dress," the judge had said.

What is your opinion on this matter?

Human Capital & Economic Development

Human capital is a term popularized by Gary Becker, an economist from the University of Chicago, and Jacob Mincer that refers to the stock of knowledge, habits, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value.

Alternatively, human capital is a collection of resources—all the knowledge, talents, skills, abilities, experience, intelligence, training, judgment, and wisdom possessed individually and collectively by individuals in a population. These resources are the total capacity of the people that represents a form of wealth which can be directed to accomplish the goals of the nation or state or a portion thereof.

 

It is an aggregate economic view of the human being acting within economies, which is an attempt to capture the social, biological, cultural and psychological complexity as they interact in explicit and/or economic transactions. Many theories explicitly connect investment in human capital development to education, and the role of human capital in economic development, productivity growth, and innovation has frequently been cited as a justification for government subsidies for education and job skills training. 

 

Reference:

Simkovic Michael, (2013). "Risk-Based Student Loans". Washington and Lee Law Review. 70 (1): 527. SSRN 1941070. 

 

Spence, Michael (1973). "Job Market Signaling". Quarterly Journal of Economics. 87 (3): 355–374

 

Considering the above understanding of Human Capital, comment on the aspects that you have developed and the skills and competencies that you have not developed..

Conscience Protection Act Passed ... What is Your Opinion?

What is you take on this Act Passed by the US Congress? In the Development discourse, how do you find this move? Can we adopt such practices / laws in India? Justify your answer.

In a bipartisan 245-182 vote, House members July 13 passed the Conscience Protection Act, which would provide legal protection to doctors, nurses, hospitals and all health care providers who choose not to provide abortions as part of their health care practice.

"We're grateful to House Speaker Paul Ryan for bringing the Conscience Protection Act to a vote, to all the co-sponsors for their leadership, and to those members of both parties who support the civil right of conscience," said Cardinal Timothy M. Dolan of New York and Archbishop William E. Lori of Baltimore in a statement.

As Found on: https://www.congress.gov/bill/114th-congress/house-bill/4828/text

Congress finds as follows:

(1) Thomas Jefferson stated a conviction common to our Nation’s founders when he declared in 1809 that “[n]o provision in our Constitution ought to be dearer to man than that which protects the rights of conscience against the enterprises of the civil authority”.

(2) In 1973, the Supreme Court concluded that the government must leave the abortion decision “to the medical judgment of the pregnant woman’s attending physician”, recognizing that a physician may choose not to participate in abortion. Roe v. Wade, 410 U.S. 113, 164 (1973). The Court cited with approval a policy that “neither physician, hospital, nor hospital personnel shall be required to perform any act violative of personally-held moral principles”, 410 U.S. at 143 n. 38, and cited State laws upholding this principle. Doe v. Bolton, 410 U.S. 179, 197–8 (1973).

(3) Congress’s enactments to protect this right of conscience in health care include the Church amendment of 1973 (42 U.S.C. 300a–7), the Coats/Snowe amendment of 1996 (42 U.S.C. 238n), and the Hyde/Weldon amendment approved by Congresses and Presidents of both parties every year since 2004.

(4) None of these laws explicitly provides a “private right of action” so victims of discrimination can defend their conscience rights in court, and administrative enforcement by the Department of Health and Human Services Office for Civil Rights has been lax, at times allowing cases to languish for years without resolution.

(5) Defying the Federal Hyde/Weldon amendment, California’s Department of Managed Health Care has mandated coverage for all elective abortions in all health plans under its jurisdiction. Other States such as New York and Washington have taken or considered similar action, and some States may go farther to require all physicians and hospitals to provide or facilitate abortions.

(6) Members of Congress have repeatedly questioned U.S. Health and Human Services Secretary Sylvia Burwell about California’s ongoing violation which began in August 2014. The Department of Health and Human Services has acknowledged California’s violations and indicated that the Department was taking them “seriously” and that the matter would be resolved “expeditiously”. Despite numerous complaints and calls for prompt enforcement of the Hyde/Weldon amendment in California, however, the Department has failed to resolve the matter.

(7) The vast majority of medical professionals do not perform abortions, with 86 percent of ob/gyns unwilling to provide them in a recent study (Obstetrics & Gynecology, Sept. 2011) and the great majority of hospitals choosing to do so in rare cases or not at all. Therefore, a policy requiring all health care providers to be involved in abortion could seriously disrupt the health care system, reducing the number and diversity of providers available to serve the basic health needs of American women and men.

(8) A health care provider’s decision not to participate in an abortion, like Congress’s decision not to fund most abortions, erects no new barrier to those seeking to perform or undergo abortions but leaves each party free to act as he or she wishes.

(9) Such protection poses no conflict with other Federal laws, such as the law requiring emergency stabilizing treatment for a pregnant woman and her unborn child when either is in distress (Emergency Medical Treatment and Active Labor Act). As the Obama administration has said, these areas of law have operated side by side for many years and both should be fully enforced (76 Federal Register 9968–77 (2011) at 9973).

(10) Reaffirming longstanding Federal policy on conscience rights and providing a right of action in cases where it is violated allows longstanding and widely supported Federal laws to work as intended.

...This is an Academic Discussion intended to initiate thought process in the Course: Economic Development and Policy... The issue is the conflict between being Liberal and Conservative. The legal interventions create social change but the moot question is what will be the mechanism of change?  

Case Laws: Fundamental Rights Vs. DPSP

Sr.No.	Milestone	Description
1.	Champakam Dorairajan Case (1951)	Supreme Court (SC) in its verdict said that in case of conflict between Fundamental Rights and Directive Principles, Fundamental Rights would always prevail. It also said that Directive principles have to work as a supplement with Fundamental rights & Parliament can’t amend Fundamental Rights
2.	Golaknath Case (1967)	SC in it’s verdict said Parliament can’t amend Fundamental Rights to give effect to the Directive Principles
3.	24th Amendment Act, 1971	It was done in reaction to Golaknath Case judgement. It declared that Parliament has the right to amend the Fundamental Right by use of Constitutional Amendment
4.	25th Amendment Act, 1971	It was done in reaction to Golaknath Case judgement. It inserted a new Article 31c which contained the following two provisions: i) No law which gives effect to the directive principles can be declared invalid and unconstitutional on the grounds that it is violating fundamental rights namely Article 14 (equality before law and equal protection of laws), Article 19(protection of six rights in respect of speech, assembly, movement, etc) & Article 31(right to property). ii)No law containing a declaration for giving effect to such policy shall be questioned in any court on the ground that it does not give effect to such a policy. Note: Remember, Right to Property was a fundamental right at this time.
5.	Kesavananda Bharti Case (1973)	SC in its verdict held that the second provision mentioned in the Article 31c is invalid & unconstitutional as it is taking away the power of court for judicial review. However, first provision of Article 31c is valid & constitutional.
6.	42nd Amendment  Act, 1976	Position of Directive Principles was made superior to Fundamental Rights
7.	Minerva Mills Case (1980)	SC in its decision declared that Directive Principles are subordinate to Fundamental Rights. But position of Fundamental Rights under Article 14 & Article 19 were made subordinate to Directive Principles. SC also said that Constitution demands to maintain balance between the Fundamental Rights & Directive principles. To give absolute primacy to one over the other is to disturb the harmony of the Constitution. Note: Right to property (Article 31 – a fundamental right) was abolished by 44th Amendment Act (1978)
8.	Present Position	For now Fundamental Rights enjoy supremacy over Directive Principles (except Article 14 & Article 19). Parliament is entitled to amend Fundamental Right to give effect to the Directive Principles as long as it does not give effect to the basic structure of the constitution. Courtesy of; Taken from: www.erewise.com/current-affairs/directive-principles-of-state-policy_art53202097534ad.html#.V3EwFhKm0qE

Case laws on DPSP

Dear All,

While we discussed the various aspects of the DPSP, I felt it of essence to look into the position taken by the Supreme Court / High Court..I am providing with the links of some cases for your reference:

1. Ranjan Dwivedi Vs. Union of India - (Art. 39-A, the social objective of equal justice and free legal aid has to be implemented by suitable legislation or by formulating schemes for free legal aid. [986 C-E]) Available at: https://indiankanoon.org/doc/1693007 

2. Miss Mohini Jain vs State Of Karnataka And Ors on 30 July, 1992 (Article 41, Right to Education) Available at: https://indiankanoon.org/docfragment/40715/?formInput=Article%2041

Contribute more cases to develop a repository.

You can give a link of the case so that all of can learn more..