Thursday, February 23, 2017

India's private universities fail to make a mark

Shiv Nadar, Aziz Premji, O P Jindal, Munjal, Bennett.... we have quite a few universities started by private industrialists. Yet, none has made a mark thus far as a quality institution, notes Anjuli Bhargava in BS.

That's true of professional colleges as well. There's no engineering institution that can match the IITs, hardly any that match the IIMs and the AIIMS or even other prominent government medical colleges.

Why so? One reason that Bhargava mentions is the lack of high quality admission standards. Indeed, many of these universities go all out to woo student candidates, something no self-respecting institution would do. Another is that they are far too focused on hardware and too little on software, namely, faculty and research. And a third is that promoters run them as they do their own businesses- by calling the shots and not giving enough leeway to professional educators.

I guess all of this is true. But another crucial factor is that most private universities have a profit motive in mind- they are looking for returns, preferably quick returns. Whereas the striking thing about private universities in the US and some other places is that these are non-profit in orientation and are sustained by large endowments.

No educational institution that aims to generate surpluses out of its operations- mostly running degree programmes and, in some cases, consultancy and executive training- can be expected to produce high quality in the long run. There's a view that, ever since the IIMs have been left to set their own fee, they too are focused on revenue generation. Their reputation was built in a period when they were sustained by government funding and did not have think about surpluses.

Worldwide, the combination of quality and access is possible only when there's a large element of subsidy built into higher education. In India, it's public universities that conform to this model. The worry about IIMs now must be whether they will end up in the same bracket as private universities.

Friday, February 17, 2017

Budget for FY 2017-18

I was amongst those who produced instant wisdom on the budget this year- wrote up my piece by 5 pm after the budget speech was announced. Quite an experience because it was hard to access the details until about 2:30 pm at the finance ministry website, perhaps due to the heavy load on the server.

To do justice, you need to have the budget estimates for the previous year, revised estimates and budget estimates for the current year on a spreadsheet. This is next to impossible when you are writing to a tight deadline.However, one can get a sense of whether the budget got it right on the whole.

Here's my analysis in the Hindu, A budget few can quarrel over.

Thursday, February 16, 2017

Can a public asset reconstruction company resolve India's bad debt?

I have a piece in Business Standard today.

Since the article is behind a pay wall, it's reproduced in full below:

The Economic Survey has proposed a Public Asset Rehabilitation Agency (PARA) – a so-called “bad bank” – for tackling bad loans in the Indian banking system. We already have several Asset Reconstruction Companies (ARCs). So what’s new?

PARA will be much bigger in scale and will have substantial government equity. Besides, a big chunk of bad loans relates to valuable projects in infrastructure and related areas. Many of these projects need to be completed through further infusion of capital from promoters. Some of the debt has to be written off and some restructured in order to restore viability.

The existing ARCs are just not equipped for such a role, at least on the scale required. They are mainly in the business of effecting recoveries through liquidation of assets.

The Survey argues that leaving it to banks to resolve bad loans has not worked. At public sector banks (PSBs), management is unable to write off debt for fear of inviting investigation. In many bad loans, several banks, public and private, are involved. This gives rise to problems of coordination. Banks can’t agree on the write-off required in a given case.

Transferring some of the biggest bad loans to a well-capitalised PARA could help resolve the coordination problem. As the government stake in PARA will be 49 per cent, managers can resolve loans without fear of inviting scrutiny.

This sounds fine — until you get down to the details. One challenge is the prices at which bad loans will be sold to PARA. Determining the market prices for bad loans is not easy. Getting banks to agree on a sale price could pose its own problems of coordination.

If the sale of bad loans to PARA were perceived to be under-priced, PSB management would be exposed to the wrath of the CAG, CVC and CBI. If they were over-priced, private investors in the proposed PARA would begin to fret.

The challenge of writing off debt remains. Managers at PARA may be able to exercise their discretion a little more freely. But the government is ultimately accountable for decisions taken by an entity in which it is the dominant investor. Every resolution will be closely watched. Expect howls of “scam” to be raised given that high-profile corporates are involved.

The Survey estimates that of the top 100 stressed debtors, 10 would need debt reductions of 51-75 per cent and 57 would need reductions of 75 per cent or more! Over 40 per cent of the debt is owed by companies with an interest coverage ratio of less than one. As the top 50 companies in this category owe an average of ~20,000 crore, the write-offs required are of staggering proportions.

Unlike many of the shrill critics of the public sector, the Survey doesn’t see recapitalising PSBs as throwing good money after bad. Even more striking, the Chief Economic Advisor doesn’t believe that finding the necessary capital for PSBs is a big deal- he thinks it’s “the easiest part” of the loan resolution problem. (“Rehab for the balance sheet”, <i>Indian Express<p>, February 8). Only, the Survey doesn’t favour promising large infusion of capital to PSBs <i>before<p> bad loans are resolved. This, it believes, would create incentives for unduly large write-offs.

So, none of the issues associated with bad loan resolution in the present scheme of things goes away with the creation of PARA: Coordination amongst banks; large write-offs and the potential for controversy; and the substantial capital that would have to be infused into PSBs.

If anything, we stand to lose two advantages we have with the present system. One, banks’ intimate knowledge of projects and hence the ability to arrive at the right resolution. Two, banks’ ability to use the leverage they have with large corporate groups to ensure that they restore viability to troubled projects within the groups.

If the primary motivations for PARA are to have the right incentives for write-offs and to get resolution going, there’s a simpler option: create an oversight mechanism for vetting bad loans. The Survey mentions that the Banks Board Bureau has created such a mechanism — we don’t know whether it’s operational. We need to merely strengthen the mechanism by getting one created through an Act of Parliament.

In sum, it’s not clear that setting up a new agency is a superior way to address the issues that bedevil bad loan resolution. Giving PSB management statutory backing to resolve bad loans and the capital infusion to cover write-offs could achieve superior outcomes.

Still, there’s merit in trying out competing models. Let’s walk on two legs: facilitate better resolution under the present system and set up PARA as well by transferring loans amounting to, say, ~1 lakh crore. Let’s see which model does better. There could be useful lessons to be learnt.

Thursday, January 19, 2017

Has demonetisation compromised RBI's autonomy?

I don't think so, contrary to what many have been saying.

Here's the link to my article in BS, Much ado about RBI autonomy.

As the article is behind a pay wall, I reproduce it below:

Much ado about RBI autonomy

These are not the happiest of times for India’s central bank. The Reserve Bank of India (RBI) has faced unprecedented criticism over its handling of the demonetisation of high-value currency notes.
Some allege that the RBI governor and its board of directors caved in to pressure from the government. Others contend that the RBI stumbled on implementation. Yet others see the episode as another sign of the Narendra Modi government’s penchant for undermining the autonomy of institutions. The critics are getting carried away.
Let’s begin with the decision to demonetise. The RBI has outlined the sequence of events in its response to Parliament’s Standing Committee on Finance. The government advised the RBI of its intention to demonetise on November 7. The RBI Board met the next day and approved the measure. This was followed by Prime Minister Modi’s address to the nation. Aha, say the RBI’s critics- here's proof that the decision to demonetise was that of the government and that the RBI tamely fell in line.  
Not so fast. It’s not as if the advice on demonetisation was sprung on an unsuspecting RBI. Reports in the media indicate that the sequence mentioned above is not the whole story. It relates only to the formalisation of the decision to demonetise. It had been preceded by consultations on the subject during the tenure of the previous governor, Raghuram Rajan. These consultations are said to have commenced as early as in May-June 2016.  
Nor is there reason to believe that RBI management had reservations about the decision or the timing of it. RBI has told the Standing Committee that last November when it was presented with the government’s advice on demonetisation, it felt that the time was opportune as it coincided with the planned introduction of a new series of notes.  
Let’s turn now to the role of RBI’s central board of directors. Critics say that the board failed to satisfy itself about the decision and its likely impact. They point out that that since a large number of non-official positions on the board (ten, according to some reports) have not been filled, the board was not well placed to take an independent decision in the matter.
If the suggestion is that the board of RBI could have stopped the government from going ahead with demonetisation, it is completely untenable. Any decision to demonetise is the prerogative of the government- and the government is accountable to Parliament and the people.
Whether demonetisation was an unsound decision and whether it caused economic dislocation without any compensatory benefit are matters that must be decided at the next general elections. It is not for the RBI board to judge. At best, the RBI board can satisfy itself that the government’s advice in the matter does not constitute any infringement of the RBI Act.
It is also not true that an independent RBI board can overrule the RBI governor in such a matter. The position of the board of directors of RBI in relation to the Governor is not the same as that of the board of directors of a company in relation to a CEO -and we all know how good corporate boards are at standing up to the CEO despite the fiduciary obligations that board members have.
It is almost unheard of for the board of RBI to oppose the governor or even to actively question the Governor’s decisions — most members would not even be competent to do so.  In practice, the board of RBI is a sounding board for the Governor. It can provide advice or feedback but it does not overrule. The idea that a fully-manned RBI board could have somehow resisted the government’s advice on demonetisation verges on the ludicrous.
It’s possible to suggest that the RBI might have done a better job of implementation.   Maybe the RBI could have ensured that there was an adequate stock of ~500 notes. Maybe it was unwise to issue ~2000 notes. Given time and better planning, the dislocation might have been better contained. But all this is sheer speculation. We don’t know whether better planning would have been consistent with the need for secrecy. And we don’t yet know the extent of dislocation caused either.
Former RBI governor Y V Reddy thinks RBI could have done a better job of communicating with the public as demonetisation unfolded.  He suggests that if a governor is not comfortable communicating himself, he should let one of his deputies do so. This could be useful advice for the reticent Urjit Patel who will soon acquire an articulate professor from Stern School of Business as his deputy.
Demonetisation hasn’t quite evoked the public anger its critics had hoped for. It does appear that they have latched on to the supposed erosion of autonomy of RBI as an instrument for Modi-bashing.
The challenge for RBI is not any erosion of autonomy caused by demonetisation. It’s the whole attempt to reduce the stature and role of RBI that has been under way consequent to the report of the Financial Sector Legislative Reforms Commission submitted in March 2013. The attempt commenced in the time of the United Progressive Alliance government and has merely continued under the present government.
The moves to create an independent agency for public debt, hand over the supervision of the government bond market to Securities and Exchange Board of India and give statutory powers to the Financial Stability Development Council are all part of a larger design to cut the RBI to size. The RBI governor used to head the panel to select a deputy governor. He is now a member of a panel headed by the Cabinet secretary.
Resentment of the RBI’s stature runs deep in the political class and the bureaucracy — and it has nothing to do with the complexion of a particular government. Dr Reddy is right in urging a national debate on the role of RBI.

Thursday, December 22, 2016

Demonetisation could transform Indian banking

Demonetisation, in my view, is not primarily about black money and corruption nor  about moving to cashless economy. It's about financial deepening. This could transform Indian banking and boost the Indian economy.

Here's my article in today's BS, 

Since the article is behind a pay wall, it's reproduced below:

Way back in 1969, Indira Gandhi decided to nationalise private banks.  She summoned I G Patel, then special secretary in the ministry of finance, and gave him 24 hours to prepare a Bill for Parliament, a Cabinet note and a speech Mrs Gandhi would make to the nation. Patel dutifully carried out madam’s orders.

In his memoirs, Patel records that he would have liked the move to have been better planned. Nationalisation should have been accompanied by restructuring to produce  one or two large national banks and multiple regional banks. Little of this has happened to this day. Mrs Gandhi judged correctly that planning every detail would take her nowhere.

Mrs Gandhi’s detractors denounced the move as politically motivated. They saw it as part of her battle against the old guard in the Congress and an attempt to weaken the Swatantra Party which was backed by the private owners of the banks. They said it was an effort on Mrs Gandhi’s part to portray herself as pro-poor and anti-rich — exactly what Prime Minister Modi’s critics are saying today.

All this was, of course, true. But, then, politicians will always be driven by political motives. The most important motivation is to acquire and hold on to power. The right question to ask is whether their political motivations are married to the larger good. Bank nationalisation passes this test — and there is every prospect that so will demonetisation.

Bank nationalisation marked a watershed in India’s post-independence history. Government-owned banks spread their branch network into the interior and mopped up small savings of millions. As a result, the household saving rate jumped from 8.1 per cent of GDP in 1968-69 to 14.4 per cent in 1978-79, causing the overall saving rate to jump from 12 per cent to 21 per cent. The rise in the saving rate set the stage for an increase in the growth rate from the Hindu rate of 3.5 per cent of the previous decades to 5.5-6 per cent in the eighties.

Public sector banks’ (PSBs) access to low-cost savings in the seventies and eighties enabled them to become profitable in the post-liberalisation era. Exposing PSBs to private competition while keeping over 70 per cent of banking in the public sector allowed efficiency to improve while maintaining banking stability.

Mrs Gandhi thus created a serious disruption that yielded benefits over a long period, thanks to financial deepening. Mr Modi has done exactly the same with demonetisation — and the outcomes are likely to be very similar.

Demonetisation is not primarily a drive against black money or even a change to a less-cash economy, although it has been packaged as such. Observers are right to be sceptical on both counts. Without follow-up measures, demonetisation is unlikely to make a big dent on black money. The role of cash can come down only over a long period.

Demonetisation is best seen as carrying forward the agenda of financial deepening that commenced with bank nationalisation. The gains to banking  promise to be  substantial.

Bank nationalisation brought a large number of individuals into banking on the liabilities side. It also brought in SMEs on the asset side. Demonetisation promises to deepen individual relationships on the liabilities side. It also promises to bring a large number of merchants, traders and SMEs into banking on both the liability and asset sides. It’s a great leap forward in terms of financial inclusion.

This has the potential to transform Indian banking and revitalise it precisely at a time when a large chunk of it is moribund. Banks will have access to more deposits and a larger proportion of low-cost deposits. This should cause interest rates to decline. The fall in interest rates will be gradual, given that we cannot afford a flight of foreign funds invested in the financial markets.

Once cash flows of small businesses begin to get routed through the banking system, their accounts will become far more transparent. This will translate into more lending to small businesses which carries higher yields than corporate loans. Banks have already woken up to the potential of microfinance. The two together will give a big boost to profitability in banking.

The decline in interest rates will lead to capital gains on banks’ holdings of government securities and help recapitalise PSBs. K V Kamath estimates that the banks have gained ~1 lakh crore in the last quarter. He thinks they will gain another ~1.5 lakh crore through a one per cent decline in interest rates in the next six months. This seems too optimistic but the basic point is valid: A fall in interest rates makes the job of recapitalising PSBs easier.  No wonder bankers are upbeat about demonetisation even as economists are divided on it.

Mr Modi’s critics say he should have planned better: More notes printed in advance, more of small-denomination notes, faster recalibration of ATMs, etc. Many of the criticisms are valid. The short-term distress is very real.

But the critics miss the larger point: The most serious distress the nation faces today is not creating new jobs. Two of the most important constraints to job creation are global economic conditions and the state of Indian banking. There isn't much we can do about the first. By revitalising banking, demonetisation promises to ease the second constraint and open a path to faster growth in the medium term.

For some two-and-a-half years now, Mr Modi has proceeded cautiously, allowing himself to be guided by those familiar with the Delhi durbar. He seems to have sensed that plodding along the familiar path would not yield much — in political or economic terms. A game-changer was required. This is the risk-taking Mr Modi of the Gujarat days.

The insight of the gifted politician can often bring about a transformation in ways that cannot be arrived at through a strictly analytical process. So it was with Mrs Gandhi and bank nationalisation. So it could well turn out to be with Mr Modi and demonetisation.

Friday, December 02, 2016

Demonetisation and interest rates

Demonetisation was widely expected to bring about a sharp fall in lending rates on account of the surge in deposits in the system. The RBI's move to impound 100 per cent of incremental deposits starting from September 16 to November 11 has raised doubts over such a decline.

The RBI has said it will review its decision on December 9 (when it announces its quarterly monetary policy). The removal of currency is hugely deflationary and the economy could do with a monetary stimulus. However, we're seeing an exit of FIIs from the debt market and the currency has fallen. Given the knock to GDP and earnings and a forecast increase in the Fed rate mid-December, the RBI will have to be careful about dropping the policy rate. It would be a surprise if it cut the rate by 50 basis points as analysts had forecast and it would not surprise me if held firm.

Over a long period, however, we can expect demonetisation to usher in lower rates. Various other benefits will also kick in, notably greater financial inclusion and a reduced use of cash. I cannot resist noting how many respected bankers are upbeat about the  move in a way in which economists are not.

My guess is that more measures to attack black money will be forthcoming after December 31. What's being attempted is a paradigm shift- or, if you like, Big Bang reform. This is what economists have long been clamouring for but they couldn't have imagined it would happen this way.

More in my article in the Hindu, Dashed expectations.

Tuesday, November 22, 2016

Larry Summers thinks costs of demonetisation outweigh benefits

Larry Summers, the well-known economist and former US Treasury secretary, thinks that India's demonetisation  drive is ill-judged. It penalises honest users of cash without being able to flush out black money in a meaningful way. And the costs imposed on the economy may outweigh the benefits. In the American and European context, he argues that the right way forward is to stop fresh issue of high denomination notes, not declaring existing high denomination notes illegal:
There are also questions of equity and efficacy. We strongly suspect that those with the largest amount of ill-gotten gain do not hold their wealth in cash but instead have long since converted it into foreign exchange, gold, bitcoin or other store of value. So it is petty fortunes, not the hugest and most problematic ones, that are being targeted.
Without new measures to combat corruption, we doubt that these currency reforms will have lasting benefits. Corruption will continue, albeit with slightly different arrangements.
Nothing in the Indian experience gives us pause in saying that no more large notes should be created in the United States, Europe, and around the world. We were not enthusiastic previously about the idea of withdrawing existing notes from circulation because we judged the costs to exceed the benefits. The ongoing chaos in India and the resulting loss of trust in government fortifies this judgement.