21/12Growing without bubblesThe key challenge for India is to continue to ensure moderate credit creation in the real sector of the economy India needs an alternative model for economic growth. A model which is more inclusive, less dependent on credit and clearly not driven by wealth creation from manipulated asset prices alone.

The standard developed-market model of growth has significant problems since its centred on a framework of constant credit infusion. In this model, a credit-infused growth cycle creates short-term prosperity and above trend economic growth for some time before an ensuing bubble on account of this credit creation busts the economy forcing the central bank to begin a new round of monetary stimulus yet again. The global central banks need to take responsibility for these credit-related catastrophes and need a more prudent approach to money creation and credit. Printing money and lending it to consumers to get them to spend on items they cannot afford have been the drivers of growth in the developed world for quite some time. These economies exhibit low saving rates, high rates of subjective time preference and focus exclusively on current consumption. Consumers and corporations imprudently borrow because of the availability of ready-made credit only to realize this eventually becomes a huge noose around their neck.

Debt to GDP ratios in the U.S. and Europe are strong testimony to this morally hazardous behavior. At these levels of debt, the citizens and the financial institutions that serve them become prisoners to the vagaries of financial markets and panic every time growth slows down or interest rates go up since their viability is threatened at the core. Indian context is different

For India to aspire to walk in these footsteps would be truly tragic. We have a young dynamic work force, a culture where the pitfalls of leverage are well understood and a low subjective rate of time preference. This enables us to save more and think about a smoothened consumption profile over time rather than the gluttonous model of high current consumption. We, as a society, also care a lot about the next generation and are able and willing to sacrifice current consumption in order to leave behind a greater future consumption possibility set for our children.

Consumer debt-to-GDP for India is at 12 per cent and is the lowest amongst large-sized economies. To want to tweak with this framework in any way, I think is dangerous.

By no means am I asking the average Indian to compromise on a lower standard of living. Im appealing to them to consume what they can afford, use credit markets in a prudent way and work harder, longer and smarter to save and invest resources to be able to then smooth consumption over time. A model of taking a mortgage on a house that one cannot afford and hoping that real estate prices will continue to head higher and implicitly bail out the borrower, as we now know, is a failed approach from the U.S. housing and real estate crisis of 2008.

Indian corporations learned this hard lesson as well. Several infrastructure and real estate-focused companies were over-leveraged at the top of the cycle, only to be left on the verge of bankruptcy, without access to loans and credit when the financial crisis hit. Their stock prices have collapsed, leaving their lenders and banks with non-performing loans that have yet to be written down. As stock markets in India hover close to their highs, we should work hard on preventing the next round of potential bubbles.

The track record of the global central banks when it comes to spotting bubbles and pricking them on time is poor.

To be fair, they dont have either the expertise or the resources to get the job done. It becomes difficult for them to spot the excesses of greed and fear that emanate from the traders, investors, CEOs and participants in the financial markets.

After credit shocks, money and credit multipliers tend to be volatile creating the role for a central bank to smooth out large declines in the velocity of money and credit through selective intervention and monetary stimulus.

For the better part of the last 50 years, the velocity of money in India has been trending downward. This decline in velocity can be attributed to the expansion of monetization, modernization of the financial architecture and initiatives that have been aimed at financial inclusion.

The RBI should not use the decline in velocity argument too much to tweak with monetary aggregates.

What we can do is hold the RBI fully accountable for pursuing a conservative money policy, targeting low inflation, regulating with great vigilance the financial institutions that provide the credit to the economy and working aggressively to eliminate shadow banking activities at its very source. Good versus Bad Credit

Economists often remind us that all forms of money are credit but not all credit is money. The key challenge for India is to continue to ensure moderate credit creation and for this credit growth to happen directly in the real sector of the economy which contributes to GDP. Indonesia and China followed this route in the 1980s and so did Vietnam in the 1990s. These countries showed good improvement in living standards, had acceptable inflation rates and made significant strides in productivity as well.

What the RBI should avoid is credit growth directed towards financial and property assets which end up creating asset bubbles. These bubbles invariably require more credit intervention to fix them. The smartest decision for the RBI at this stage is to invest in a macro-prudential tool kit that keeps bubbles at bay. Understanding how the elasticity of bubble-prone sectors like stocks, real estate and corporate debt markets react to changes in economy-wide credit is an important step towards that goal. The RBI, through smart regulation, can get banks to focus on credit and lending to areas that improve the true productive capacity of the real economy.

Most importantly, the RBI should deliver real growth rates in monetary aggregates (M3) that are consistent with expected growth rates in real GDP. Any deviations from this simple rule should be done only to adjust the monetary aggregates for unexpected shifts in the velocity of money or to reflect elements of seasonality.

This simple rule for monetary targeting will create adequate growth without inflation or the worry of bubbles and will give the RBI time to remain vigilant in regulating the various financial institutions that offer credit to the economy at large.

22 Patented medicine and affordabilityIndias ongoing efforts at safeguarding its intellectual property rights (IPRs) have been facing challenges from different directions. In the heavily contested area of pharmaceutical patents, the Supreme Court, in an important ruling, stalled a last-ditch effort by German drugmaker Bayer to block the sale of a cheaper generic version of cancer drug Nexavar.

Upholding earlier rulings, the apex court stymied global drugmakers efforts to hold on to exclusivity on high priced drugs.

Domestic generic drug maker Natco was granted a patent in 2012 to sell a generic version of Nexavar at Rs.8,800 for a months dose, a fraction of Bayers price of Rs.2.80 lakh. Important precedentsFrom a legal standpoint, Indias case was always strong. Since 2005, patent protection has been incorporated into domestic laws. Under the flexibilities that India has been interpreting the TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement, the government can issue compulsory licences to manufacture drugs that are deemed unaffordable to large sections of the people. (Flexibilities are special dispensations given to countries to enact IPR laws to meet certain special circumstances).

Earlier, Swiss drugmaker Novartis was denied a patent for its cancer drug Glivec on the ground that there was only an incremental improvement over the existing version. Indeed, the practice of big pharma companies to tweak an existing drug formulation to extend the life of its patent, in effect seeking a secondary patent, is well documented.

Noted American doctor and author Atul Gaitonde made this point recently. That means, fewer drugs will be available for generic manufacture. In turn, there are serious implications for Indias public health programme, especially in providing affordable drugs without in any way compromising on the treaty obligations with other countries.

Needless to point out, Indian pharmaceutical companies have substantial expertise in manufacturing generic drugs to cater to the vast sections which cannot afford costly patented drugs. It is natural, therefore, that the local pharma industry has been singled out by influential lobbies in the U.S. to make a case against India.Resist pressureThe debate over IPR, especially pertaining to the pharma industry, extends beyond courts. Of special concern has been the pressure being brought to bear by the U.S. authorities at the behest of influential lobbies.

Almost coinciding with the last national elections, the U.S. Trade Representative (USTR) placed India on a priority watch list of countries whose IPR regimes would be scrutinised during the year. The saving grace was that the USTR, part of the executive office of the U.S. President, did not categorise India as a priority foreign country, which might have led to penal action against India.

The consequences would have been serious for India-U.S. trade and economic relationship. Fortunately, better sense prevailed. In a more recent development, the U.S. authorities appear to have back-tracked: an out-of-cycle review (OCR) has apparently cleared Indias IPR regime for the moment at least.

There is speculation as what brought about this change of heart. President Obamas forthcoming visit may have something to do with it. U.S. Trade Representative Michael B. Froman was in Delhi in November. Whether that has anything to do with the NDA governments IPR initiatives shall remain a matter of conjecture.

It might be a coincidence, but it was in November that the U.S. formally announced the completion of the WTOs Trade Facilitation Agreement, first mooted in Bali a year ago and virtually vetoed by India in July. India, of course, has claimed a big victory.

Led by the U.S., the WTO members have agreed not to challenge Indias domestic food procurement programme for an indefinite period. At Bali, it was agreed that the peace clause will extend to just four years.

An important initiative of the new government has been the setting up of an IPR think tank, which, among other things, will help in formulating a National Intellectual Property Rights policy for the first time. The calibre of those manning the think tank is not in doubt the person who heads it Prabha Sridevan is a retired high court judge and the chairperson of the Intellectual Property Appellate Board.Transparency helpsYet, if the governments reasons are theoretically sound, the question still arises as to what prompted it to undertake such a major revamp exercise at this juncture.

As pointed out, even though India does not have an IPR policy, it has a strong legal foundation. Important precedents have been set, especially in drug-related matters. Besides, there is a well-functioning Patents Office with the expertise to grant patents and uphold consumer interests.

The suspicion that the government is doing all these under external pressure cannot easily be eradicated. The government should dispel even the faintest suspicion of a quid pro quo a liberal IPR regime in return for the U.S. support at WTO.

There is a whiff of fresh air in the Western attitudes to the cost of developing new drugs. There is a realisation that drug majors are inflating the costs of new drug manufacture through questionable practices. India and others who question these estimates are deterred by the association of big names, including leading universities in these calculations.

The influential newspaper, The Economist (November 29), points out that it is not only patients group and aid charities that are sceptical about the startlingly high estimates of the drug development costs that are bandied about. Even the head of a major pharmaceutical company, Sir Andrew Witty of GlaxoSmithKLine, has said that it was entirely achievable for drugmakers to make their research more efficient. Fewer failures at the lab and development stage can drastically reduce the cost of a new drug. Such an approach is wholly welcome. In India, policymakers should be equipped to asses the real cost of a patented drug.