Sunday, July 24, 2016

RETHINC now available in paperback

I am happy to share with you that my book RETHINC: What's broke at today's corporations and how to fix it  will be available in paperback from July 27. It's a slightly abridged and more accessible version of the hard cover- I've cut out some of the technical portions and simplified the language.

As readers of this blog would know, the book won  the Best Business Book of the Year award for 2015 at the Tata Literary Festival.

Here's are some of the links to the media coverage of the hard cover:

1. India Inc's attitude problem, Business Line.

2. Why you should question the cult of the charismatic CEO, Quartz

3. Offices without bosses? Achievable, says book by IIMA Prof, MoneyControl. Com

4. Can workplace democracy work across organisations? Business Today

5. Start from the bottom, Business World

6. The Statesman

Tuesday, July 19, 2016

Subbarao and RBI autonomy

D Subbarao's recent book on his tenure as RBI governor has occasioned another bout of government-bashing. Ministers trying to browbeat the RBI, we are told, is nothing new. What happened to Rajan also happened to Subbarao.

I haven't read the book but I have gone through the excerpts and reports that have appeared in the media. I can't resist the feeling that the idea of the RBI's autonomy being threatened by the government is hugely overblown.

When it comes to internal matters of the RBI, there is virtually no interference. On recruitment, pay and perks (broadly within the government framework), promotions, and numerous other matters, the RBI has a free hand.

On matters that impact on the economy- monetary policy, bank regulation, exchange rates, etc- yes, the government does seek to influence outcomes. But seeking to influence is not the same as browbeating or imposing. There are discussions and phone calls and the government conveys its views. There is nothing wrong with that as long as the it's left to the RBI governor to take the final call- and that has been pretty much the case with both Subbarao and Rajan.

What many people mean by autonomy is that the RBI should be left to its own devices in these matters and also that terms of RBI governors should be automatically renewed. That's too much to expect of any government, it won't happen and it isn't even desirable. The government is responsible for overall economic outcomes and thus will influence decisions at RBI and will also want to have as governor or deputy governor individuals with whom it has a degree of comfort. This does not, in my view, conflict with central bank independence.

More in my article in the Hindu, Limits to autonomy

Friday, July 08, 2016

Chilcot report: Blair is not the only guilty one

Former British PM Tony Blair has been justifiably skewered by all and sundry following the publication of the Chilcot report on the Iraq war.

To me, the most striking part is not Blair's role- that was plain enough even without the report. It is the role played by the rest of the British establishment- the spineless characters in the cabinet, the acquiescent bureaucrats, the willingness of MI6 to oblige a war-mongering PM and, not least, a jingoistic and baying media (supposedly the 'free press' of Great Britain). Every part of the establishment was party to the American effort to oust Saddam Hussein by force and in defiance of the United Nations.

Leaving aside a few luminous exceptions such as Robin Cook, the foreign secretary who made a terrific speech in the House of Commons and then resigned, the barbarity and manifest injustice of what the British government embarked upon did not evoke outrage or protest. After the horrors of the Third Reich became known and the Nuremberg trials highlighted the enormity of the atrocities perpetrated, the question was asked: how could a whole nation have been complicit in such thing?

Well, after the Chilcot report, it is worth asking: how was the behaviour of the British establishment different from that of the Germans in the time of Hitler? That was a totalitarian regime and dissent would have carried a huge price. But what about democratic Britain? Is the price of dissent so high that nobody is willing to pay it? Or is it simply that even the modest price that dissent involves- such as losing a ministerial job or lack of career progression in the bureaucracy- something that supposedly decent people are not willing to pay?  For all the claims that democracies make, a culture of dissent is noticeably absent in all walks of life- politics, the bureaucracy, the corporate world, the media and even academics. It's so much easier to simply toe the line.

I was thrilled, therefore, to read the story of a whistle-blower from GCHQ, the British equivalent of the National Security Agency in the US. The whistle-blower, a lady, received an email from somebody in NASA asking for information on countries on the UNSC that were holding out against a vote in favour of a war. She leaked the email and ended up getting charged by the government for violation of the Official Secrets Act. The charge was dropped when it became clear that pursuing the case would not be rewarding for the government. The leak of the email should have prompted scrutiny from parliamentarians and others of what the Blair government was up to. It didn't happen:

I believed that on receiving the email, UK parliamentary members might question the urgency and motives of the war hawks, and demand further deliberations and scrutiny. I thought it might delay or perhaps even halt the march towards a war that would devastate Iraqi lives and infrastructure already crushed by a decade of unrelenting sanctions. A war that would send UK and US service men and women into harm’s way, leaving hundreds of them dead, disfigured and traumatised. Unfortunately, that did not happen. It couldn’t, for now we know via Chilcot that Blair promised George W Bush he would be “with him, whatever”.
Amidst the yes-men and sycophants everywhere, there is the odd brave soul that is willing to speak up. There were a few other heroes and heroines-  amongst them, the head of MI5 who warned Blair of the dangers of Muslims everywhere being radicalised.

How do we nurture a society where more people are emboldened to express dissent? Unless we do so, all so-called democracies are seriously flawed. The mindset is essentially totalitarian with only one difference- you get a chance to vote every few years.

There's one other aspect of the Chilcot report that Robert Fisk, the well-known journalist, highlights. We do not hear the voices of the victims, the people of Iraq. The Chilcot enquiry did not seek their testimony:
The Arabs of Iraq – and now Syria – endure human disaster on an unprecedented scale because of the Blair-Bush lies, yet all Chilcot can produce with his seven years of literary endeavour and volumes to break the strength of any library shelf is a puny little domestic report on British politics and the self-righteousness of the midget who got it all wrong.

Tuesday, July 05, 2016

Sudha Murty, IIIT Dharwad and institutional autonomy

This is one item I have been following with disbelief- and, of course, I am assuming that ET has got the facts right.

The story, as you can see for yourself, is that IIIT Dharwad has plans for constructing buildings which were to be financed by MHRD (50%), the state government (35%) and Keonics, a state PSU (15%). After Sudha Murty was appointed Chairperson, she proposed that Keonics be replaced as a partner by Infosys Foundation. In return for the funds that Infosys Foundation would provide, the buildings at IIIT would be named after Infosys.

The MHRD referred the proposal to the law ministry. The law ministry objects on grounds of conflict of interest involving Ms Murty. I have a more fundamental objection: how can an institution funding 15% of a project want its name to be assigned to the project? At best, there could be a plaque in the buildings thanking Infosys Foundation for its contribution.

The story doesn't end there. Ms Murty apparently wants the mentoring institution, NIT Suratkal, to be replaced by IIIT Bangalore of which she happens to be a board member- another conflict of interest.

This little episode reinforces a point that I have long been making and that readers will be familiar with: it is most unwise to leave the governance of public educational institutions entirely to boards of governors in the name of autonomy. Those sitting on these boards have little stakes in these institutions and cannot be expected to take care of the long-term interests of the institutions. The government needs to keep a watchful eye through its own representatives and by requiring the institutions to obtain government approval in important matters.

This is the reason I favour the IIM Bill. TOI reports the Bill is being held up following objections raised by the PMO to certain provisions. The PMO does not want the HRD minister to head the IIM council and it also has reservations about the President being the Visitor to the IIMs. The PMO does not think that the IIT model is appropriate for the IIMs.

I'm afraid the PMO is mistaken on these counts. Matters cannot be left to the IIM boards- there has to be an independent authority to oversee the boards of the IIMs. This is because there would otherwise be no checks and balances otherwise on the functioning of the boards. Boards are ineffective even when they are subject to the discipline of the financial market. Where market discipline is absent, boards can become seriously dysfunctional and harmful.

This is not just my view. Matters haven't been put to vote at the leading IIMs but my sense is that a majority of faculty feel that way. We feel that faculty autonomy is better safeguarded by having the ministry watch over the boards than by leaving matters entirely to boards. Our greatest apprehension is that faculty autonomy will be undermined if matters are left to IIM boards as, in practice, this would result in unchecked powers for the directors of the IIMs. We see the government as the saviour and protector of faculty autonomy, not as a threat. As long as we are governed by the rules of service of the government of India, we believe we can express ourselves freely as academics.

It would be worthwhile for MHRD and the PMO to engage faculty at IIIT Dharwad and at the IIMs in these conversations. The PMO may be well-intentioned but it seems unware of the facts on the ground. It would benefit by eliciting faculty views on these matters.

Saturday, June 25, 2016

Fixing the banking system

The banking system is floundering. The NPA burden, which seemed manageable a few months ago, threatens to get out of hand partly because the government has not moved decisively to fix the problems in the banking sector.

We are in a situation where public sector banks (PSBs) don't want to lend or are not in a position to lend to corporates. At the most, they may provide working capital. Project finance is a no-no. Like private banks, they are happy to seek to retail loans.

PSBs don't want to lend because they don't have enough capital and because of a pervasive fear psychosis. They don't have enough capital because they are unable to effect recoveries on loans (on which they have made provisions), because the government is not infusing enough capital into them and because they are not generating enough earnings for want of adequate credit growth.

How to get out of this low-level equilibrium? First, the government must provide them enough capital- and the Rs 70,000 crore earmarked under Indradhanush just isn't enough. Secondly, they must be empowered to effect recoveries but taking suitable hair-cuts on loans and seeing viable projects through to conclusion. This isn't happening because any banker who takes a loss on a loan exposure will be implicated as a 'scamster'.

Bankers are not going to do what it takes to get projects completed and effect recoveries until they have the assurance that they won't be hauled for writing off some portion of loan dues. I have been saying for long that an apex authority which vets all loan proposals is required, otherwise bankers aren't going to lift their little fingers. The news is that such an authority is being constituted. It will have to get cracking on large loans quickly.

Some banks don't have chairmen or MDs. The Bank Board Bureau must remedy these lacunae as fast as it can. Amidst all this comes the talk of the decision to merge SBI with its associate banks. This could well go down as one of the worst decisions in banking ever. SBI needs to focus on sorting its bad loan problem first. Trying to assimilate associate banks will drain the energies of the bank for at least two or three years- and even after that one is not sure of the outcome.

Make no mistake: the SBI merger has the potential to weaken one of the strongest banks in the country and a key pillar of the banking system. A good way for the next RBI governor to give an early demonstration of his independence and assert the RBI's autonomy would be to dissuade the government from staying with this ill-advised course.

More in my article, Banking revival must be a priority.

Also read Montek Ahuliwalia's article on the subject.

Thursday, June 09, 2016

8 per cent growth in 2016-17 ? Unlikely

The growth rate of 8 per cent in the last quarter has revived talk of a return to 8 per cent growth rate in the near future. Sorry to be a bit of a spoilsport but I'm afraid this is highly unlikely.

In 2015-16 the Indian economy grew at 7.6 per cent compared to 7.2 per cent in 2014-15. This was mainly on account of the steep fall in oil prices which translated into a surge in private consumption and also into higher government capital expenditure through higher taxes on oil products.

The hope was that this bonanza would continue in 2016-17 although in a muted form, with oil prices falling further to $30. This hope is being dashed by the rebound in oil prices to $50, which was the average for 2015-16. This takes away the whole of the contribution of 1-1.5 percentage points to growth that arose from the sharp fall in oil prices in 2015-16.

Some analysts think this will be compensated by greater rural consumption following better monsoons and better urban consumption because of the Pay Commission hike. I estimate the benefits on account of this two factors at 0. 3 per cent and 0.6 per cent of GDP respectively. As you can see, this doesn't compensate for the impact of oil prices.

Another blow is that the world economy is not only not reviving but is likely to slow down. The Economic Survey (2015-16) expected exports to contribute a solid 1.3 percentage points to growth. This looks likely to get washed out. In fact, export growth could slow down even further, dragging down economic growth.

Lastly, analysts have been making a hoopla over increased public capital expenditure. They overlook the fact that this is being offset by compression of government expenditure on other counts and also higher taxes. The fiscal deficit is going to shrink by 0.4 percentage points. That, basic economics should tell us, means a shrinkage in demand from the government. Using a multiplier of 1, this means minus 0.4 percentage points of growth.

I add up the numbers and find that the Indian economy is likely to grow at 7 per cent rather than 8 per cent in 2016-17- unless oil prices fall back to well below $50.

That's the short-run view. The medium-term outlook is just as sombre. Whoever is forecasting a return to 8 per cent growth has some explaining to do.

More in my article in the Hindu today, Tempering economic ebullience.

Monday, May 30, 2016

Committee to review FRBM targets

I was on ET Now along with Prof M Govinda Rao to discuss this topic.

My view is that there is  a strong case for revisiting the targets. I give many reasons. Here I will mention two. One, our deviating from the FRBM target for nearly a decade past the deadline has not led to an unsustainable debt  situation. On the contrary, India is among the few economies whose debt to gdp ratio has declined over the past decade- at 67% of GDP today, it looks quite okay.

Two, we worry about the fiscal deficit because it can impact on interest rates. The impact on long-term rates of fiscal deficits is negligible, as empirical work has shown. However, the deficit can impact on short-term rates. On this count, concerns must be subdued at the moment given relatively low oil prices.

More fundamentally, I would question the idea that the way to reduce the fiscal deficit to GDP ratio is to attach the numerator, that is, reduce expenditure and, if possible, raise tax rates or increase the tax base. The point is that that is not how our ratio came down significantly in the first decade of the 2000s when we were almost close to attaining the 3% FRBM target at one point.

Rather, the numerator, the GDP, shot up due to exogenous factors, such as the global boom, and also due to the increase in the savings and investment rate over time. This also caused the numerator to decline because tax revenues rise with rising GDP.

The bottomline: the presumption that reducing the fiscal deficit is the key to better or stable growth must be questioned. It's very often the other way round. You do various things to boost growth - and the the fiscal deficit to gdp ratio takes care of itself.