Friday, May 22, 2015

Land Acquisition Bill amendment:NDA's folly

The Modi government has headed off a confrontation over the Land Ordinance by referring to a select committee. That's timely and appropriate. The amendments should not have been a priority for the government at all. By making land acquisition a prestige issue, the government has come across as anti-farmer and anti-poor, as more than one opinion survey carried out on the government's first anniversary shows.

There's no truth to the contention that delays in acquisition are a big factor in projects being stalled. The Economic Survey has highlighted this. It's strange that the media has not highlighted the point adequately and it required Nitin Desai to point this out in his column in BS:
This year's has a full chapter on what is holding back the revival of investment. As part of this, after a careful analysis of stalled projects, it concludes that, "over-exuberance and a credit bubble as the primary reasons (rather than lack of regulatory clearances) for stalled projects in the private sector." In Table 4.3, which lists reasons for project hold-ups, land acquisition does not even figure as a reason for the stalled projects in the private sector but does for the public sector projects. The other bugbear of the corporate sector, environmental clearances, does not figure in the list, though non-do.
An RTI activist, Venkatesh Nayak, obtained more granular information from the ministry of finance for the 804 stalled projects that were the basis for the Economic Survey chapter. This detailed information showed that of the 804 projects only 66 were stalled because of land acquisition problems. Incidentally, these 66 include 10 projects for hotels, resorts, malls and airports.
Desai cites a study which makes an interesting point. There was acquisition of land by government before 1991 and after 1991. Land acquisition before 1991 did not stir up any major controversy. Why? Because it was patently for public purposes. Post-1991, acquisition became a looting game for corporates abetted by the political class. The UPA government had a big role in the misuse of land acquisition in the name of SEZs.

It's hard to disagree with Desai's bottomline on the subject:
The role of the state in land acquisition for commercial market-oriented private or public projects should be as a facilitator and overseer of transactions involving large-scale purchase to ensure compliance with the law made for this purpose, running a localised Torrens system for providing absolute titles for the acquired land, and promoting the use of land adjustment schemes where feasible. Compulsory acquisition should be restricted to very precisely defined non-commercial public purposes.

CEO pay: who will bell the cat?

What has done the most damage to the reputation of business and the free market in recent years? It hasn’t been the G20 protests or the Occupy tent cities. It has been the greed of those who demand and secure rewards for failure in far too many of our large corporations.
That's a quote from the head of UK's Institute of Directors in an article in the FT. Do people at the top need variable pay? Does variable pay have to be in the form of shares or stock options or can CEOs be paid simply in cash? Can peformance be linked to measures such as productivity and not to share price increases which can happen for reasons independent of a CEO's efforts or even the company's performance?

These questions are being asked often in the UK, US and elsewhere. Nothing has happened so far thanks to powerful interests in the corporate world (and that includes top management of institutional investors who are supposed to hold corporate CEOs to account- it turns out they are paid the same way as CEOs, as the article points out).

Here in India, these questions are not even being asked. Instead, the media celebrates massive pay packets in the corporate world ('The club of million dollar CEOs') without regard to the implications for harmony in a very poor and unequal society.  Okay, the politicians don't want to bell the cat. But how about the regulators, such as RBI and SEBI?

Tuesday, May 19, 2015

Ten commandments for errant bankers

The world's five top banks agreed last week to cough up $6 bn to settle allegations of manipulation in the forex markets. Is any banker going to jail? Nope. Is any banker or board member losing his job? Nope. The shareholder pays- and life goes on.

It can't go on like this, warns an article in the FT. The author lists ten commandments that bankers must take note if they are to stay higher in the public esteem than, say, bank robbers.

Sunday, May 17, 2015

Is higher education worth the expense?

The world over, more and more people want higher education. Is it worth it? The Economist attempts to answer this question.

It's certainly worth it for students-a bachelor's degree earns a return of 15% on the average in the US, despite escalating costs of higher education.  But does society benefit?  This is not as clear. Why? Because- incredible as it may sound- the best universities may not be adding value to their students. How do we know this? Through poor student scores on tests and the testimony of employers.

We have this state of affairs because leading universities focus on research and neglect teaching. Top professors don't want to 'waste' time on teaching when their professional rewards are linked to publishing papers. The work is delegated to adjunct faculty and research assistants who deliver indifferent material to overcrowded classrooms (since universities want to maximise fee earnings).

If so, why do employers hire the products of higher education? Well, not for what they learn but for their innate talent. Education is valued for its signalling value- if a student has made it to a good schools through a selective process, he or she must be good. Not because it makes the student more productive. In other words, the enormous amounts that students and universities spend on a degree is money down the drain.

Those of us who are at B-schools will not be shocked by these propositions. Employers have been hiring from, say, the IIMs not because they see the IIMs as adding much value but because the IIMs are highly selective. (I mention IIMs only by way of illustration- the same is true of the top B-schools elsewhere). Students coast through the two years, focusing more on placement and networking, perhaps because they believe that there's nothing much to be learnt anyway. Mind you, it's not that B-schools don't add any value- if so, employers should hire from the admissions lists, they should not wait for those who have been admitted to go through two years. But neither students nor employers think that the value addition is substantial.

What can we do about this? How do we ensure that higher education adds value. The Economist has useful suggestions:
More information would make the higher-education market work better. Common tests, which students would sit alongside their final exams, could provide a comparable measure of universities’ educational performance. Students would have a better idea of what was taught well where, and employers of how much job candidates had learned. Resources would flow towards universities that were providing value for money and away from those that were not. Institutions would have an incentive to improve teaching and use technology to cut costs. Online courses, which have so far failed to realise their promise of revolutionising higher education, would begin to make a bigger impact. The government would have a better idea of whether society should be investing more or less in higher education.

I would go further. Schools should track a sample of their products through their careers for, say, five years after graduation. They should seek to ascertain from employers whether they perceive value addition from these products, whether employers see students as having benefited from having gone through a graduate programme. This feedback can be used to modify school curricula. We also need to find ways to incentivise better teaching, say, by linking rewards to ratings of faculty by students.

Saturday, May 16, 2015

Harvard, take this!

Quote of the day:

You have to admire Niall Ferguson. There aren't many people who are willing to write lengthy diatribes on topics on which they seem to know next to nothing, but some would say that is the definition of a Harvard professor.
The quote is from Dean Baker blogging at the Centre for Economic and Policy Research.  Fergusson, the historian now at Harvard, has lashed out at Nobel Laureate Paul Krugman for his criticism of austerity policies in Europe and elsewhere.

I had referred in an earlier post to the record of the Cameron government in the UK and its impact on the recent British polls. Baker rebuts the view that the Cameron economic record is anything to write about. 

Revamping public sector banks

The government has a blueprint for revamping public sector banks even if it has not made it explicit. Broadly, it appears the government is set on the course chalked out by the RBI-constituted PJ Nayak committee on governance which came out with its report in May 2014. I have commented on the report in my blog. Just to mention some key recommendations and what the government has done so far:
  • Separate the roles of chairman and managing director: Announced. Committee to select a chairman constituted, which will be headed by the RBI governor. The Nayak committee wanted the separation to be effected at the end of Phase III (mentioned below), the government has done so right away.
  • Improve compensation at PSBs so as to attract a wider pool of talent: The finance ministry has advertised the position  of CEO at five PSBs and indicated that it is flexible on the compensation package.
  • Phase I: Set up a Bank Boards Bureau: This will comprise eminent bankers, other professionals and one representative of the finance ministry. The  BBB will select CEOs, independent directors and (in future) chairmen of banks. It will also advise banks on raising capital and restructuring strategies. This was announced in the last budget but the BBB is yet to be constituted.
  • Phase II: Set up a Bank Investment Committee to which the government's shareholding will be transferred. The BIC will take over the role and functions of the BBB. The BIC's stake in PSBs to fall below 51% so that PSBs are exempted from CVC, CAG and other requirements.
  • Phase III: Devolve all powers to independent boards of banks. Government may consider reducing its stake in the BIC itself to below 51%.
I am not sure that the political economy of the country will allow PSBs to get out of grip of the government in the near future. That apart, we need some quick decisions on PSBs. We really can't wait for the BBB to be set up before PSBs can move ahead. We need bank lending and private investment to revive quickly.

How do we achieve this? I explain my article in the Hindu, Get real with public sector banks.

Friday, May 15, 2015

Bihar as poster boy for PDS?

I had a post recently on plugging leakages in the public distribution system (PDS). I cited an article which argued that making the PDS more universal results in lesser leakage.Why? Because there is less incentive to divert from those qualifying to those not qualifying for PDS.

The evidence from Bihar appears to support this, as Jean Dreze argues in a recent article. The application of the National Food Security Act (along with other PDS reforms)- with its emphasis on more universality- appears to be resulting in lesser leakage in Bihar. The state had leakages of the order of 90 per cent. By 2011-12, it was down to around 24%. More recent surveys corroborate this piece of data.

Apart from universality, the manner in which allottees are assigned for ration cards is helping. Earlier, allottees were based on their being identified as being in the BPL category- and this was highly arbitrary. Now, allocation of ration cards is linked to the Socio-Economic and Caste Census. This is more transparent and more inclusive than the BPL identification.

Dreze says that the turnaround in PDS in Bihar is also because the NFSA and PDS are politically charged issues- politicians now have to deliver to appease the electorate.

This reinforces the point made in the earlier post: if PDS is showing such improvement, what would be the case for moving to cash transfers? We would be moving from something that is tried and tested to something that is not. And if we can't plug leakages in PDS, there's more than a fair chance we won't be able to plug leakages in cash transfers either.

Thursday, May 14, 2015

To PDMA or not PDMA?

The finance minister has withdrawn the provisions in the budget related to the creation of an independent agency for managing public debt and moving the regulation of the secondary market for government debt from RBI to Sebi.

Some in the media have interpreted this as a victory for the RBI governor; others have suggested that the PMO got the finance minister to back off. I have no comments on these reports. Be it noted, however, that what is now proposed that the finance ministry will work with the RBI on the creation of a PDMA.

Former finance minister P Chidambaram has blasted both the finance minister and the RBI governor and demanded explanations from both. In an article in the Indian Express, he wrote:
RBI was among the first to recognise the conflicts of interest and, therefore, in its Annual Report 2000-01, proposed the idea of a PDMA. It was supported by the Percy Mistry Committee on Making Mumbai an International Financial Centre (2007), the Raghuram Rajan Committee on Financial Sector Reforms (2008), the Jahangir Aziz Internal Working Group on Debt Management (2008), and the Financial Sector Legislative Reforms Commission (2011). The reports of the two last named bodies also suggested a draft law to create the PDMA...

Mr Rajan is the Governor of RBI. He chaired a committee that supported the two reforms. Even a few weeks ago, he publicly backed an independent PDMA. If the RBI that he heads is now opposing the reforms — proposed through statutory changes — he is obliged to disclose the RBI’s reasons and also explain why he changed his own views. Equally, Mr Jaitley is obliged to explain why he gave in to RBI’s opposition, what is the “further consultation” with RBI expected to yield, and what is the time line for the next move on the two proposals....
Fair enough. But the question is not whether we need a PDMA. The question is whether it is needed right now. After missing the FRBM target for the fiscal deficit for several years, the government promises to meet the target in 2017-18. Until then, its borrowing needs will be substantial. And banks will have to finance the borrowing needs. That means the RBI must use the SLR weapon to mobilise funds for the government. If primary debt is independent of RBI, then the RBI cannot stipulate an SLR- as many have pointed out.

The only solid argument that people are able to make for a PDMA is that there is potential conflict of interest where the RBI is concerned- the RBI cannot set interest rates while also trying to raise debt for the government at the cheapest rate. But many ex-RBI governors have categorically stated that this conflict is only notional- it does not exist in practice.

Interestingly, opinion among former RBI top brass seems to be divided. On TV the other day, I heard D Subbarao saying he did not see a great need for an independent PDMA. It appears, however, that C Rangarajan is favour.

The sensible thing to do is to plan a PDMA properly- remember, the expertise in the area resides mostly in the RBI today. So, proper staffing and training has to be planned for before we can think of an independent agency.

Wednesday, May 13, 2015

The end of global banking?

With some of the biggest banks retreating from overseas markets, there is an impression that the age of global banking is over.

This isn't true. The form of global banking is changing- less cross-border flows, more lending through local affiliates. Moreover, the large international banks are being replaced in some markets by regional banks.

Regulation is the principal driver of these changes, followed by politics and shareholder pressure on large banks to perform.

More in my article in EPW, Global banking in retreat?