Tuesday, September 20, 2016

Rhetoric over Uri attack

The sound and fury over the attack on the army camp in Uri is understandable. The loss of soldiers' lives has been heavy and tragic. But the rhetoric and the jingoism evident in the media make little sense. It's important to underline two key points.

First, as an editorial in today's Business Standard points out, there have been lapses on the part of the security forces. The infiltrators were able to cross the LOC and they were able to get into the camp quite easily. Among other things, it points to unsatisfactory vigil at the border. This is not just a matter of equipment or terrain, although these factors do count. BS makes the point that the border is porous because there's laxity on both sides. And the laxity is on account of the thriving drugs trade. Smugglers are able to move in and out because sections of the establishment make this  possible. And once you relax the vigil for smugglers, the jihadis get their opportunity. So it's no use simply pointing the accusing finger at the Pak army.

Secondly, all talk of retaliation is futile because the international community at large and especially the US will not take kindly to a military strike, as ambassador M K Bhadrakumar points out. The writ of the US runs across the world and the Indian establishment has cosied up to the US in recent years. The question of any major military action on India's part without US approval does not arise. And hostilities with nuclear Pakistan is the last thing the US wants today:
...despite the government's sustained public diplomacy to create an impression in domestic opinion that its foreign policies have burnished India's international standing and image and so on, in reality, India's actions -- especially any military moves -- will come under close scrutiny and be weighed in terms of international law and the United Nations Charter.
The bottom line is that the present ruling elites dare not think of crossing any 'red line' that Washington demarcates.
The US State Department, in a series of statements, has distanced Washington from the Indian positions with regard to the situation in the Kashmir valley, India-Pakistan tensions and Balochistan.
Conceivably, the Americans have cautioned our leadership already against making any precipitate military moves. The kind of brazen military adventures that many self-styled Indian defence analysts are espousing will not get Washington's approval.
As the Barack Obama administration tiptoes toward the lame-duck period, the last thing Washington wants as legacy is an India-Pakistan conflict.......
.....If the Americans do not want a war between India and Pakistan or any precipitate Indian military moves that violated international law, Modi cannot act otherwise.The umbilical cord that ties the Sangh Parivar and our ruling elites to the US establishment may be invisible, but remains robust.
So that's it- the rhetoric and sabre-rattling on our part will remain just that. The media pundits can rant as they much as they want. Perhaps the saner course for us is to simply put our house in order first.

Monday, September 12, 2016

Tread warily on labour reforms

India's labour unions fired a warning shot across the bow of the government on September 2 by having a mammoth all India strike. They were relaying their concerns about the proposed reforms in labour laws and other issues such as privatisation and FDI.

The way people go on and on about our labour laws one would think that simply by allowing hire and fire we can generate massive employment. The academic literature on the subject is by no means as clear cut as that. India's labour laws are not more restrictive than that of France and you can't say that France has not developed manufacturing over a century.

When you begin to look closely, you find that not hiring labour often has to do with other factors such as tax incentives for capital, which makes it worthwhile for business to substitute labour with capital. In the present context, we have serious issues constraining private investment, such as weak global demand, high interest rates, high leverage in industry, etc. Tweaking labour laws isn't going to help. On the contrary, by provoking a labour backlash, it might make things worse. It would also cost the ruling coalition dearly at the hustings.

More in my article in the Hindu today, Labour's love's lost.

Friday, September 02, 2016

Do we need universities?

I know that's hardly the right question for somebody sitting in an elite educational institution to ask. And it may sound dumb coming from anybody- who could argue against higher education? But the case needs to be made rigorously. Tim Harford, the undercover economist, takes a look at the pros and cons.

Pro: a recent study suggests that universities boost the growth of economies in the region:
Valero and Van Reenen find that universities do indeed seem to boost the income of their region. Double a region’s count of universities — say from five to 10 — and GDP per person can be expected to rise by 4 per cent. Double the university count again, from 10 to 20, and that’s another 4 per cent on GDP per person. Neighbouring regions also benefit. This is not a trivial effect.
Con: a degree from a reputed university is no more a signal of talent. You got into a good school, so you must be worth something. It's not that you have learnt something at the university that is useful at the workplace:
....undergraduate degrees have no value to society: they enable employers to pay higher wages to smarter workers, but lower wages to everyone else — and in order to enjoy these higher wages, smart people must waste time and money going to the trouble of acquiring a degree. Everyone might be better off if the whole business was abandoned.
In other words, as we at B-schools understand very well, universities, more often than not, are about placement, they are not about learning. But one mustn't carry this too far. What people learn at engineering and medical schools is, indeed, of value. To put it differently, you may start off as a trainee at a company without any B-school degree and rise to become CEO. But it's doubtful that somebody can simply land up at a hospital and be trained to become a doctor.

Thursday, September 01, 2016

Coal scam and HC Gupta

H C Gupta, the former coal secretary, has drawn enormous support from the IAS association, assorted bureaucrats and the media in connection with the many CBI cases he's facing. He's an upright man, everybody says, the last person to use his position to make money for himself. His is a case of how the Prevention of Corruption Act can be used to harass an honest, retired bureaucrat.

As this article in Scroll.in points out, the issue is not just whether Mr Gupta made money out of the allocations are not. The issue is whether he was party to a seriously flawed process, whether he abetted wrong decisions on the part of higher-ups:
From all accounts, Gupta is an honest and upright officer. But when the coal scam was underway, what was needed from him was more than personal incorruptibility. He needed to hold his responsibility to the country higher than what the functionaries in the Congress seemed to have been telling him to do....

....The Screening Committee that Gupta headed disregarded its own internal comparisons of all the applicants, as a Central Bureau of India official had pointed out. Subsequently, as we know, several of the files pertaining to the allocations went missing as well.
In other words, Gupta is not in the dock because he made recommendations that benefitted some companies. He is in the dock because he cannot explain why those companies were chosen. He cannot explain those decisions because he is not the one who made those decisions to begin with. Politicians, especially from the ruling Congress Party, influenced the allocations, this reporter was repeatedly told while covering the coal scam.

The charge against Mr Gupta, then, appears to be that he looked the other way. Bureaucrats are riled because that's precisely what many of them are required to do- in order to move up the ladder, if not to keep their jobs. It frightens them that something that's considered routine now in the bureaucracy- looking the other way- can bring retribution down the line.

And why single out bureaucrats? In PSUs, in private sector companies, indeed, in every organisation, safety, comfort and prosperity lie in looking the other way, not raising the voice of dissent. People know that wrongs are being perpetrated but they rationalise their silence by telling themselves that they are not profiting directly from questionable decisions. (They do profit indirectly because the reward for keeping silent is that you get your promotions and bonuses).

The amendment that bureaucrats want now in the law against corruption is that they can prosecuted only if they are shown to have derived a personal benefit. If they did not uphold or defend the public interest, that's fine. Politicians may well be inclined to oblige them because otherwise the basis of the neta-babu nexus gets broken. Without pliant bureaucrats who will not stand in their way, the netas cannot make hay.

It will be interesting to see how Mr Gupta's case plays out- and whether the amendment sought by the bureaucracy will be forthcoming.


P2P lending: early warning signs

A storm has erupted over P2P (peer-to-peer) lending in China, FT  reports.

P2P platforms offer higher returns for savers. They do so in two ways. First, they identify borrowers who are willing to pay high rates because they do not have access to formal lending channels. Secondly, they reduce the intermediation cost- there are no branches and large staff that these platforms have to pay for. These platforms claim to have evaluated borrowers by using big data.

Alas, matters are not that simple:
Within the past year, ordinary Chinese people have fallen victim to scandals in which online financial platforms have disappeared with billions of dollars, provoking angry protests on the streets.
In February, more than 20 people were arrested for their involvement in Ezubao, a “complete Ponzi scheme”, that allegedly took more than Rmb50bn ($7.6bn) from investors, China’s biggest case of financial fraud to date. A month later, a court in southern China jailed 24 people for defrauding about 230,000 investors of nearly Rmb10bn in a similar scam.
In response to such problems, the regulator last week issued rules forbidding online lenders from accepting deposits or guaranteeing principal or interest on loans they facilitate. It also capped borrowing at Rmb1m for individuals and Rmb5m for companies.

One of the China's best known businessman calls P2P lending a "scam".  Looks as though those who think banks will disappear because of the arrival of such platforms need to wait for a while.

Tuesday, August 30, 2016

Storm over the revolving door

Former EU president Jose Manuel Barroso is the latest high-profile figure to go through the revolving door to the private sector. He joined Goldman Sachs as non-executive chairman of the bank's London operations in early July. This has triggered a massive online protest, with 76,000 signatures being collected already.

Barroso- not to be confused with the Hindi word bharosa - collects a cool 100,000 Euro as pension every year. Clearly, this isn't enough for him- it would be small change compared to what Goldman would pay him. Barroso complied with the 18 month cooling off period mandated by the EU. But the storm over his joining Goldman shows that people don't believe this limitation is adequate. As EU president, you would be dealing with cases involving high-profile companies. How you act is bound to be influenced if you know that there are post-retirement plums to be picked up from the companies you are dealing with.

No wonder French president Hollande calls it "unacceptable". The current EU president Jean Claude Juncker has a more nuanced comment. “The fact that Barroso works for a bank doesn’t bother me. But the fact that it’s that one causes me a problem.”

Thursday, August 25, 2016

Change of guard at RBI

On the Saturday that Raghuram Rajan sent his letter to employees saying he would not be staying on after completing his term, I got a call from the correspondent of a foreign paper seeking my reaction. The correspondent told me that the name of Rajan's successor would be announced on Monday itself as the government wanted to ensure there was no uncertainty. I told him that was most unlikely- a process would have to be followed, including approval by the Cabinet Committee on Appointments. He insisted his information was from reliable sources.

Well, it's taken a while since then for the appointment to be announced. In the intervening period, the media speculation on the subject has been unbelievable. They said the appointment would happen by mid-April, soon after the PM returned from his visit to Africa. It didn't. Modi had told WSJ that the RBI governor's appointment was an administrative decision. Since the governor's term expired in early September, a decision would be taken close to that date. He has been true to his word. One hopes the media begins to take the PM more seriously hereafter.

As for the candidates, the front-runner kept changing every few days. Initially, it was said that it would be some internationally known economist of stature comparable to Rajan's. Perhaps Arvind Subramanian?.. he was well known and was also less hawkish than Rajan, so he had a great chance.  A little later, it was ...no, no, it would be a bureaucrat who was on the same wavelength as the government. Shaktikanta Das, Expenditure Secretary, emerged as a favourite. Further on, BREAKING NEWS....Arvind Panagariya was set to be named (never mind that he had Cabinet Minister rank and this would be a step down for him). 

A few days later, it Arundhati Bhattacharya's turn. Sorting out the banking mess was now the priority, hence a banker! Two other names entered the fray at some point, K V Kamath and Kaushik Basu. Then, one day, there was a buzz around Subir Gokarn... he had met Rajan and Das, so there must be something to it? (As though the government would first share the news with the RBI governor).

One is glad this silly game has ended. To give the media its due, Urjit Patel was always in contention although I don't recall his being cited as the hot favourite.

One thing is clear. The government runs a tight ship, so the media is pretty clueless on these matters. It also appears that a rigorous process has been followed. Two rounds of the Committee on Financial Sector appointments followed by discussions between the PM and the FM. This is as it should be. Due process must be followed in the case of high appointments, so all credit to the government for adhering to one.

After the announcement, the excitement moved to a dissection of the governor-designate. Would he continue Rajan's hawkish stance? Or would he be something of a dove? Neither, they said, he would be an owl!

The usual platitude was rolled out- there would be continuity with change, although it wasn't clear what would continue and what would change. One paper quoted government officials saying that they expected Patel to take a more "balanced" approach to inflation. Fighting inflation was, of course, a priority but he should not ignore growth.

The fact of the matter is that no governor has much of a choice on interest rates, now that the Monetary Policy Framework has articulated the inflation rate band (4 plus or minus two per cent) and also said that the indicator used would be CPI. The governor is also somewhat constrained by the proposed constitution of a Monetary Policy Committee. We are bound to have continuity in respect of monetary policy.

The more interesting question is whether there will change in respect of the banking sector. Patel does have the option of relaxing the accelerator on NPA recognition and giving PSBs and the corporate sector a bit of a breather. Whether he opts for this course or not depends on the view that he and the government will take on PSBs. It does appear that there is an effort on to shrink the market share of the PSBs by curbing their access to capital and hence their ability to lend. Even if this is the game plan, it would be unwise to push it at this point because then lending to the corporate sector and infrastructure will be stuck. That would not be good for the economy. One has to see whether pragmatism trumps ideology in the incoming governor's approach to PSBs.

There's just one other observation I'd like to make. Perhaps Rajan's biggest contribution, which has gone unheralded, is that he changed the stuffy, hierarchical culture of the RBI. He made himself accessible to staff at all levels (I was told they only needed to check with his secretary whether he was free and could walk in). Rajan himself did not hesitate to drop in at colleagues' offices, sometimes just for a casual chat. In more ways than one, he took away the aura of aloofness and inaccessibility attached to the governor's office (and now the governor's floor)- this was no small achievement in an organisation in which the governor had always been some distant God perched on the top floor.

In meetings, he was refreshingly free from airs of any kind, unfailingly polite and courteous and a good listener, as I can myself vouch for. This was not an affectation, it was a genuine something, just an aspect of the personality of a very cultured person. Perhaps, it helped that Rajan came from an academic background, not a bureaucratic one.

This was a great contribution because organisations are ultimately about team work, motivating and leading by example. In an organisation such as RBI, you cannot motivate through bonuses and stock options. You can only motivate by creating a culture where people feel respected and cared for. Three years is too short a period in which to bring about a radical change in culture but we must salute Rajan for his efforts.

Friday, August 19, 2016

Deutsche Bank whistle blower refuses SEC award

A former investment banker who blew the whistle on Deutsche Bank in a case involving wrong valuation of its derivatives portfolio has declined the $8.5 mn award given to him by SEC ( his ex-wife and lawyers have a claim on some of it).

In an article in the FT, he explains he's doing so because he's unhappy that the SEC let off senior executives of the bank:
But Deutsche did not commit this wrongdoing. Deutsche was the victim. To be precise, the bank’s shareholders and its rank-and-file employees who are now losing their jobs in droves are the primary victims.
Meanwhile, top executives retired with multimillion-dollar bonuses based on the misrepresentation of the bank’s balance sheet. It is therefore especially disappointing that in 2015, after a lengthy investigation helped by multiple whistleblowers, the SEC imposed a fine on Deutsche’s shareholders instead of the managers responsible.
Compare this outcome with a contemporaneous SEC enforcement action against the less connected executives of a smaller firm, Trinity Capital, and its subsidiary Los Alamos National Bank. The violations at Trinity seem similar to Deutsche, but orders of magnitude smaller. Five executives at Trinity were charged, the chief executive settled and paid a fine, and litigation continued against two senior officers. 
He explains that this happened because of the "revolving door" sydrome about which I have written often:
So why did the SEC not go after Deutsche’s executives? The most obvious concern is that Deutsche’s top lawyers “revolved” in and out of the SEC before, during and after the illegal activity at the bank. Robert Rice, the chief lawyer in charge of the internal investigation at Deutsche in 2011, became the SEC’s chief counsel in 2013. Robert Khuzami, Deutsche’s top lawyer in North America, became head of the SEC’s enforcement division after the financial crisis. Their boss, Richard Walker, the bank’s longtime general counsel (he left the bank this year) was once head of enforcement at the SEC.
This goes beyond the typical revolving door story. In this case, top SEC lawyers had held senior posts at the bank, moving in and out of top positions at the regulator even as the investigations into malfeasance at Deutsche were ongoing.
This is a classic case of regulatory capture. And because regulations will always be weak and will be undermined by crony capitalism, the idea that free markets can function efficiently, subject to their being regulated properly, will remain a myth.

Lehman Brothers should have been saved

One of the biggest controversies around the financial crisis of 2008 is about the decision to let the investment bank Lehman Brothers fail.

The moment that happened, it was as though somebody had dropped a bunker-busting bomb on a shaky and dilapidated building. The money market mutual funds, on whom the banks depended for short-term funds, withdrew their funding raising the prospect of the collapse of the financial system. It required a series of bailouts, including that of insurance giant AIG, and the guaranteeing of money market mutual funds' investment in banks, to rescue the system.

One argument trotted out at the time was that the US Treasury Secretary Hank Paulson wanted to send out a clear message on moral hazard to big players: no more rescues. However, since further rescues followed the failure of Lehman, that argument has worn thin. The official position since has been that the Fed simply could not provide liquidity to Lehman because it was not solvent and could not provide the necessary collateral. The Fed would violated the laws applicable to it had it tried to save Lehman.

Larry Ball of Johns Hopkins has done a brilliant analysis of the Lehman failure and he finds that the arguments don't stand up to scrutiny. He believes that Lehman was allowed to fail because the US Treasury and the Fed didn't quite anticipate the disastrous consequences that would follow. He also contends that the Fed has failed to provide the necessary documentation to substantiate its contention that Lehman wasn't solvent at the time.

More in my article in the Hindu, The cost of political interference