Thursday, May 31, 2007

Asking for the moon!

FT reports that India and China are in a race for a moon landing:


China and India are both planning to launch moon shots within a year in the latest sign of the two Asian powerhouses’ intensifying rivalry and growing technological prowess.

.. ....China said this month that it expected to launch its first unmanned lunar orbiter, the Chang’e-1 (named after China’s mythological “lady in the moon”) before the end of this year, while India this week announced that it could send up a similar space probe as early as April 2008.

........the Chandrayaan-1 probe, which will map the moon’s surface for chemicals using a spectrometer and terrain-mapping cameras during a two-year mission, would cost Rs3.9bn ($96.3m), a 10th of ISRO’s annual budget.


Under Beijing’s three-stage plan, the Chang’e orbiter will be followed by a lunar landing and then by a mission to bring back rock and soil samples. India is building a two-legged robot for a possible follow-up mission to the moon’s surface in 2011.

........Madhavan Nair, chairman of ISRO, said this week that his organisation would submit a report to the Indian government in a year’s time on whether a manned space mission, likely to cost about Rs100bn ($2.4bn), would be needed.

Nasa will provide two scientific instruments for Chandrayaan-1, illustrating the Bush administration’s drive to build a strategic partnership with India

Why India Inc must heed PM's call

The PM's call for restraint on executive pay during his address to the CII last week continues to make waves. Today, Assocham meets to take a view on it. The barrage of comment, mostly negative, continues.

The point about executive pay was only one of ten points on a Social Charter the PM outlined for Indian industry and the PM did not make out a strong enough case for restraint. So, his plea came across as an attempt at moral policing. But a case for restraint certainly exists. Even in economies with good governance systems, excesses on this account are common and these tend to provoke outrage all round. In our system, where governance is still evolving, excesses can be egregious and the outrage, in our conditions, could spill onto the streets. Read my comments on this subject in my ET column today.

I notice that many commentators have simply lobbed the ball back into the PM's court. Corruption? See what your ministers are doing. Conspicuous consumption? Look at politicians' lifestyles. Inequalities? The problem is not executive pay but inadequate and badly targeted government spending on social infratructure.

These points are all valid. But there is another that is overlooked: politics is not a meaningful career option for large numbers of ordinary people in the way the corporate world is. A political career is also more risky, the rewards are long in coming and they accrue to a relatively small number of people. In this respect, a political career is comparable to celebrity sports and music. Besides, for good or ill, politicians and their lifestyles are not chronicled and celebrated the way those of corporate chieftains are.

Corporate pay thus has the potential to generate resentment as large a scale as the wrongdoings of politicians (for which latter there is some recourse through the election process). So, yes, while there is a lot that needs to be set right in politics, India Inc is not exempt from responsibility.

Wednesday, May 30, 2007

Governance of IITs and IIMs

Yesterday's ET carries a debate on how the IITs and IIMs should be structured. The three participants are: V Ranganathan of IIMB, Mohandas Pai of Infosys and Pankaj Jalote of IIT Delhi. The context is the proposed IIM Bill. There have been reports saying that the idea is to bring IIMs under an Act similar to the IIT Act. That would make the IIMs directly accountable to parliament. Today, they are accountable to their respective Societies and their relationship with government is defined by a Memorandum of Understanding.

I must confess I had to pinch myself in disbelief when I read some of the analysis and the prescriptions. Ranganathan concedes that the IITs and IIMs lag in research. He concedes that the IIMs have leaned too heavily towards executive training (which helps faculty make easy money) at the expense of research. How do we address these?


The government can solve this problem by pouring money on the IIMs but keeping their hands off after that.
Indeed! The government should keep their hands off so that faculty can keep ignoring research and focus on making more money for themselves?

A plausible inference, going by Ranganathan's diagnosis, would be that the present governance structure is inadequate. Indeed, it is in many ways. The IIMs have large, unwieldy boards. Most members fail to show up for meetings. This is not a situation that is conducive to effective monitoring and it may account for the problems Ranganathan mentions.

On a broader note, we do know from the corporate governance literature that boards are effective where there is a dominant shareholder who takes active interest. They are ineffective where there is dispersed shareholding and there is no major shareholder who is willing to take the trouble of watching over management. The governance revolution worldwide is about dispersed shareholding giving way to dominant, institutional shareholders who exercise effective oversight.

In the IIMs, the dominant shareholder is the government. It follows that governance would be more effective if the government took more interest, not less. If the IIMs do not want this to happen, they must propose alternative governance mechanisms that could be as effective. Ranganathan is not inclined to do so. His solution is one that every body of professionals - managers, doctors, lawyers, judges- would love to have: leave it to us faculty, we know best. (In a system where board monitoring is weak, 'leave it to the board' means 'leave it to faculty' or, worse, 'leave it to the director').

Mohandas Pai gives us the usual rubbish about government dominance of education affecting quality. He thinks all problems will be solved if government should get off the backs of IITs and IIMs and education in general. Readers of this blog at least should not buy this. I have repeatedly posed this question: out of the hundreds of engineering, medical and management institutions in the private sector, how come none measures up to the IITs, AIIMS and IIMs? Who has stopped private institutions from beating the hell out of the top government ones? The constraint, I daresay, is motivation: where the motive is to maximise profit, you are not going to get great quality of education.

Pankaj Jalote also advocates a hands-off approach but one linked to a vision outlined by IITs and IIMs for their future- the kind of objectives they could achieve over different time-frames. Subject to this, the government should keep off.

That is nearly what we have now through the MoUs! The government has indeed kept off in most respects except one- salary levels. I have argued elsewhere in my blog that increases in salary, while necessary, will not by themselves propel the IITs and IIMs into a different league.

Nature abhors a governance vacuum. The unpalatable truth is that since there appears to be one at the IIMs, the government is moving to fill it.

Tuesday, May 29, 2007

UTI Bank: running circles around RBI

UTI Bank will seek shareholders' approval for the appointment of P J Nayak as Executive Chairman, BS reports. If approved, it will give the RBI a proper headache.

Nayak has been CMD since the bank was set up. The RBI's governance norms require that the posts of chairman and MD be separated in private banks. The idea is that there should be a non-executive chairman and an MD who is the operating head.

The UTI Bank decided to solve the problem by naming Nayak executive chairman. What to do about the MD? Apparently, there's nobody at the bank who immediately fits the bill. So the bank will have to look for an MD. However, to meet the RBI's norms, substantial operating powers would have to be delegated to the executive directors.

I don't believe this solution is at all in keeping with the spirit of RBI norms- the intention clearly is that the chairman should have an oversight role, not an operating one. The board's attempted solution merely circumvents RBI norms.

I am also astonishied at the suggestion that the bank can't find a successor for the MD' s post. UTI Bank has been around for over a decade now. Are they saying the CMD hasn't groomed a successor all these years? And what was the board doing all this while ? Does it believe that succession planning is part of its job? Are they saying no talent can be found from outside the bank?

This is the state of governance in an institution in which the government-owned UTI still has a substantial stake. Imagine what would happen if there were no dominant investor and matters were left entirely to professional managers!

One more rap on the knuckles.....

These are not the most auspicious times for the IIMs. The latest rap on the knuckles from the HRD ministry relates to processing fee for admissions. Remember, when the OBC issue was before the SC, the HRD ministry got the AICTE and UGC to send directives to private schools asking them to limit the fee to Rs 1000? This was to save students huge costs arising from uncertainty as to which offer they would finally accept.

The IIMs, however, kept their fees higher. IIMA raised its fee from Rs 500 to Rs 5000. At IIMB and IIMC, the fee is as high as Rs 50,000. Now the HRD ministry has issued a directive saying the fee cannot exceed Rs 1000. For the leading IIMs, the dropout rate is pretty low- at IIMA, it is around 10. No point in insisting on high processing fee when it does not entail a huge cost.

Another view on the PM's address at CII

I mentioned in my post yesterday, No takers for PM's homilies, how the PM has been panned for his sermonising to industry. In today's TOI, we get a different viewpoint from Arun Maira, chairman of Boston Consulting Group in India. Maira argues that restraint on executive pay may not be such a bad thing:

Two arguments are made against restraining CEO salaries: one, that salaries must conform to market forces, and two, that it is good for people to show off their wealth because it encourages others to strive for such wealth. Let us consider these arguments. The first says that since there is competition for leadership talent, industry has no option but to pay to get the best. However, there is no clear correlation between salaries paid to CEOs and the performance of their companies. Even in the US, companies with the best paid CEOs do not necessarily produce the best results. In fact, companies with lesser paid CEOs often perform much better. The explanation is simple. ....

Besides, real leaders have goals that go beyond their personal wealth. Indeed, they have options about how much they want to be paid, how they will spend their money, and what they will do with their lives. Though they should be paid a reasonable salary, it is often not more money that those with real leadership potential seek.

Monday, May 28, 2007

No takers for PM's homilies

The PM spoke at the CII last week. He spoke on the theme of "inclusive growth". He exhorted industry to rein in executive pay ( I will have more to say on this later), to do more by way of affirmative action, community service, fighting corruption, etc. Industry must do its bit by way of corporate social responsibility in order to stave off social unrest.

The media reaction has been pretty hostile. The general tenor is: industry has done pretty well by the country, it is government that has let us down. It is government that needs to do a lot more- in, say, education and health care.

In today's edit Business Standard (May 28) wonders whether the media reaction is a trifle excessive. It asks, "If the same speech had been made by, say, a suitable figure of eminence from the world of business (one can think of names like Ratan Tata and NR Narayana Murthy), and not by the Prime Minister, would the reactions have been different?"

Well, BS seems to have forgotten that a few years ago, Narayana Murthy had made one of the suggestions the PM made last week, curbs on executive salaries. He had proposed a reasonable ratio of the highest and lowest pay in a firm- say: 5:1. He was laughed out of court.

BS goes on to explain why there are no takers in the media for the PM's homilies.

The fact that the response has been so different merely because the speech was made by the Prime Minister, suggests two things. First, the level of frustration on account of what people see as the Manmohan Singh government’s failure to do that seems blindingly obvious in so many areas, is widespread and deeply felt. ...... Second, the days when people would accept lectures and sermons from politicians may be over. People in public life are no longer seen as occupying the high moral ground, from which they can give sermons to ordinary folk. Indeed, those in public life are seen as having failed the rest of the system, while businessmen have risen to the challenge of competition presented to them in the age of reform

I will have more to say on this later. For now, let me just say this: I believe the PM, who has a helicopter view of the landscape below, is entirely right in asking industry to be more mindful of its social obligations.

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Indian Bank bad loan sell off

Banking is a core interest of mine ( I offer a second year elective on banking at IIMA), so this blog, you will have noticed, contains posts on banking every now and then.

ET reports that Indian Bank plans to sell off all its remaining bad loans worth Rs 1500 crore at one shot. They will be sold through an action. Three asset reconstruction companies (ARCs) have bid for the portfolio. This is the biggest bad loan sale in Indian banking.

Why does it merit attention? Because Indian Bank had thus far relied on its own recovery cell to chase defaulting borrowers and has had commendable success. The bank was regarded as a basket case not long ago but it has made a remarkable turnaround and successfully launched its IPO a few months ago. The IPO trades at a premium now of nearly 30% to its issue price.

So why would India Bank want to sell its assets to ARCs instead of making recoveries itself? I can think of two reasons. The ARCs have become good at their job and hence can offer an attractive price for the bad loans- a better price than Indian Bank can hope to recover. ARCs can offer to pay a certain fixed amount plus a certain percentage of the amount actually recovered. Let's say an ARC offers to pay a fixed amount of Rs 500 crore for the Rs 1500 crore portfolio. It can offer to pay another 10% on the amount recovered. If the amount recovered is, say, Rs 800 crore, Indian Bank will get another Rs 80 crore.

Two, the bad loan book ties up people and this may not be worth it unless the amount recoverable is really large. Indian Bank expects the sale to free 250 people from its recovery unit. They will be used for marketing products. Presumably, with bank business booming, Indian Bank has figured this is a better way to use the people than to have them chase bad loans.

Nixon and Kissinger

Robert Dallek, who has produced many acclaimed biographies of American presidents, has now come up with a book, Nixon and Kissinger: partners in power, which details the profound mistrust between the two Machiavellian characters.

The Economist (May 17) has an excellent review of the book that mentions how the distrust destroyed Nixon's presidency.

Nixon's downfall was in the end brought about by the “smoking gun” contained in his own White House tapes. The taping mechanism had been installed to provide an accurate account of his conversations with his national security adviser in order to prevent Mr Kissinger from falsely claiming credit for Nixon's accomplishments

The book also details the paranoia that had gripped the principal characters in the Nixon administration:

Among those whose telephones were tapped were close aides of the secretaries of state and of defence; this was tantamount to recording the conversations of their bosses. The secretary of defence used the National Security Agency and the army's signal corps, which was in charge of secure White House telephone calls, to keep tabs on both Mr Kissinger and Nixon. A naval yeoman attached to the National Security Council was instructed to go through secret files of Mr Kissinger's that had been put aside in “burn bags” for destruction and make copies for the joint chiefs of staff. Alexander Haig, Mr Kissinger's deputy, would surreptitiously supply the president with transcripts of Mr Kissinger's telephone conversations. No wonder Mr Kissinger believed his line was tapped. And no wonder both president and national security adviser were routinely described by their colleagues as “paranoid”.

Now, that's being progressive!

Indian Express (May 27) carried a lead story that said that the Pune-based Symbiosis college was going ahead with OBC reservations, whether the government dictat holds or not. The constitutional amendment on OBC quotas, be it noted, holds for private institutions as well, not just to centrally-administered ones.

This option was mooted by a colleague of mine at IIMA during the recent stand-off between the IIMs and the HRD ministry over admissions. His argument was that such a solution would be fair to those who had applied under the OBC category (and who would otherwise have competed in the general category) and whose admission was being held up because of the legal process.

Could we have done it voluntarily when the SC had stayed the government order? I wonder what the legal eagles have to say. If there's any expert out there, I am all ears.

Banking quote

The latest issue of the Economist has a terrific quote: Better to have loaned and lost than not to have loaned at all.

They are making a point about banks having to take risk. But if you are with a public sector bank and have loaned and lost, try making this argument to the Vigilance Officer or, if your luck is really bad, the CBI!

Thursday, May 24, 2007

Alfred Chandler

Way back at b-school, one heard the dictum, "Structure follows strategy". Meaning, once you have decided on a strategy, you must put in place an organisational structure that helps you carry it out. The man who coined those words, Alfred Chandler, professor at HBS and business historian par excellence, passed away recently. The Economist has an excellent obit on him. It has an interesting tit-bit: Chandler helped Alfred Sloan, the legendary CEO of GM, pen, "My years with General Motors."

The obit highlights two other significant contributions of Chandler:

For Mr Chandler it was managers, patiently building and running large organisations, who were the real heroes of the industrial age, and not fly-by-night entrepreneurs, as some romantics taught.

He also challenged the reigning assumption that oligopolies were inherently inefficient. On the contrary, he argued, the industries that drove economic growth for much of the 20th century—oil and chemicals, cars and electronics—were quickly dominated by a small number of vertically integrated firms that nevertheless continued to grow and innovate. These companies were successful precisely because they were able to make huge investments in management and production.

That 'autonomy' thing

ET has an edit today that lambasts the governments' reported attempt to enact an IIM Act along the lines of an IIT Act (See my post, IIM Bill). The edit remarks at one point:

In the name of safeguarding autonomy and excellence, they have often been non-transparent about the use of their existing corpus

I can't figure out what is meant here. The size of the corpus is no secret. The interest income on the corpus helps the IIMs augment their revenue flows. The HRD Ministry wants the corpus size to be limited to Rs 50 crore. The rest, it argues, must be spent on expansion of infrastructure. If the IIMs fall short of revenues, the HRD ministry will provide grants as required. The IIMs would rather like to have the cushion of interest income. I am not aware that there is any lack of transparency in respect of the corpus.

Wednesday, May 23, 2007

IIM Bill

With the SC going into summer recess, I thought the IIMs were in were for a spell of quiet for at least a month or so. I was wrong. The IIMs are in the news today, with an ET report on the proposed IIM Bill.

The government is working on a law that would limit the financial freedom enjoyed by the IIMs. The proposed Institutes of Management Act, modelled on the Institutes of Technology Act 1961 would make it virtually impossible for the B-schools to have recourse to funds outside of annual grants from the government

I find the second sentence rather odd. The IITs have raised significant funds abroad by setting up overseas trusts- indeed, they have had more success in raising funds than the IIMs. So, I can't see how an IIM Act modelled on an IIT Act would come in the way of fund-raising.

How else would the proposed Act change things at the IIMs? From the ET story, I was able to pick the following:
  • The IIMs would have to present their financial statements to Parliament. Not a big deal since the IIMs are anyway subject to CAG (Controller and Auditor General) audit.
  • New investments made by the IIMs would have to be with the approval of the central government. I wonder whether this refers to all capital expenditure or only to items such as setting up new campuses elsewhere. I doubt that the IITs clear routine capital expenditure with the government.
  • The IIM Board may have to include two MPs as in the case of IITs.


Excuse me if I sound naive but from what has appeared in today's report, I can't see any major threat to the IIMs' autonomy. Each of the IIMs is now governed by a separate Memorandum of Association. The government wants to replace these with a common administrative framework for all IIMs that underlines IIMs' accountability to Parliament.

The IITs have been operating under such a framework and have done quite well for themselves. So, unless there is something different in what finally emerges, I don't see that there is cause to fret and fume.

Monday, May 21, 2007

OBC quotas- permanence is the vexed issue

I noted in an earlier post (More on OBC quotas, May 9) that one reason why reservations arouse so much hostility is that they are seen to be permanent, not a temporary measure meant to enable some sections to overcome long-existent handicaps. You have the classic position of the oppressed turning oppessor and dominant groups within reserved categories reducing reservations to a naked grab for spoils.

In an article in today's ET, Bodhisatva Ganguli touches on this point:

Much more relevant is one of the questions posed by the SC’s division bench, as to whether reservations can continue indefinitely and whether the government has unfettered power to reserve any percentage of seats. The question to be answered is whether this amounts to a violation of the fundamental right to equality for those denied the benefits of quotas. Not even the most sophisticated pro-reservation argument is willing to clarify whether reservations will eventually end, particularly in states where they have been in place for many decades, or are they part of a stable permanent arrangement. Clearly, some indeed see it as a semi-permanent arrangement as revealed by remarks that OBCs have ‘waited’ 56 years for their due. But there has been no legal bar on OBCs competing on merit. Indeed, one striking aspect of the debate is the lack of data on how many members of the OBC communities have made it on merit to IITs and IIMs in the past.

Incidentally, Ganguli thinks that the chances are that the SC will eventually uphold the policy of OBC reservation in educational institutions.

Saturday, May 19, 2007

A tricky issue of governance

What happens to Esops issued to nominee directors of financial institutions? This issue has come to the fore following Esops given by engineering giant L & T to nominee directors of GIC and LIC, both government-owned financial institutions. The nominees proceeded to exercise the options. GIC's nominee had options worth Rs 35 mn. LIC's nominee had options worth Rs 45 mn.

When the institutions got to know about the Esops, they issued directives to their nominees in June 2006 asking them not to exercise the options. The nominees ignored the directive and proceeded to exercise their options.

GIC and LIC have since removed their nominees and filed suits in courts against their nominees and also against L & T for not informing them about the issue of options in the first place.

These days independent directors on boards get Esops. When the institutions nominate directors, they advise them that they are entitled to sitting fees But any commission paid out of profit must go to the institutions. The standard directions to these effects were drawn up when Esops did not exist. So, the advisory makes no reference to how Esops should be handled. The nominees in the present instance have taken advantage of this ambiguity.

Board memberships especially at companies such as L &T can be onerous and it is fair to expect independent directors to be suitably compensated. If independent directors can get Esops, why not nominee directors?, you might ask. Well, this can be debated but the spirit of the instructions given by the institutions is clear enough: no pecuniary rewards to nominees other than sitting fees.

Suppose we grant that the nominees should not have exercised the Esops. How should they have handled these? Esops are meant for individuals, not institutions, so it is hard to see how the nominees could have transferred the Esops to the institutions.

Okay, maybe they should have transferred the shares? But that would have required them to exercise the options first. Who would pay for this? Should the nominees pay out of their pockets and get compensated by the institutions later?

Secondly,after getting the shares, how are the nominees to transfer these to the institutions? They cannot be transferred at the exercise price. They would have be transferred at the market price. In that case, the nominees would realise capital gains on which they would have to pay tax. Are they to transfer the capital gains to the institutions? Get the idea? The more you think about it, it becomes clear enough how messy Esops for nominees can be.

Why should nominee directors not get Esops? This is for the institutions to decide. But it's broadly accepted that compensation for independent directors must not be reasonable, not excessive, if they are to preserve their independence. Compensation in the range of Rs 35-45 mn does seem excessive. That takes us into another grey area in governance. You need to pay well to get independent directors on board. But if a company pays too well, it's hard to expect people to preserve their independence.

For now, it's over to the courts to resolve the L&T matter.

Friday, May 18, 2007

New light on east Asian crisis

In my post yesterday on the east Asian crisis, I mentioned the list of "causes" commonly trotted out.

FT has an insightful edit on the subject. It argues that the vulnerability to capital outflows arose from a more fundamental cause: the erosion of competitiveness of east Asian exports following the rise of China. This is also the reason that post-crisis growth in the east Asian economies is a full 2 percentage points below pre-crisis levels.

It now seems that the crisis of 1997 was not the cause of Asean's woes but rather a highly dramatic symptom. The export performance of the "tiger" economies deteriorated in the 1990s, leading to large current account deficits, and vulnerability to capital outflows. That was partly due to inappropriately high pegged exchange rates, but also due to China's emergence as an exporter, creating a vast new competitor with an almost limitless capacity to sell at a lower price.

That has meant a change of economic model for the tigers, away from exporting finished manufactures to advanced economies, and toward exporting ommodities, components and services (such as tourism) to China. Asean can still grow, and grow fast, but there is now a speed limit. Until another generation has passed, and China itself has grown rich, export-led industrial growth will be hard for anyone to achieve. Ten years on, the meaning of the 1997 financial crisis is starting to become clear.

Wolfowitz to quit

Rediff reports:

World Bank President Paul Wolfowitz announced on Thursday night he would resign on June 30, ending a controversy over his stewardship sparked by a promotion he arranged for his girlfriend, according to a report in Telegraph. His departure was announced late Thursday by the World Bank board. Wolfowitz departed under duress after a special bank panel found out that he violated conflict-of-interest rules in his handling of the 2005 pay package of bank employee and his girlfriend Shaha Riza. The Bank board said it was clear that a number of people had erred in reviewing the pay package.

Wolfowitz's fate was sealed earlier in the week when the White House indicated that it would not be averse to his departure. The UK was instrumental in negotiating a deal with the Bank's board under which the Board accepted that Wolfowitz had “ethically and in good faith in what he thought were the best interests of the institution.”

But it doesn't look as though as the man's departure signals any change in governance processes at the Bank. Many have argued that the Bank should hereafter look for the best candidate, the president of the Bank should not be a White House nominee.

Some hope ! A statement from the White House yesterday said that Bush would nominate a successor soon.

OBC quotas

You must have, of course, seen the news- the SC's two-judge bench has decided to refer the matter of reservation for OBCs in centrally-administered educational institutions to a larger constitutional bench. The SC goes into recess for the summer from tomorrow. The media gleefully reports that this buries OBC quotas for the coming academic year.

Does it? The HRD ministry says it will move the SC for a vacation of the stay on OBC quotas. Can the plea be taken up in time for the coming academic session? I suppose yes- by the Vacation bench of the SC. Wait and watch........

Incidentally, I note that the papers have buried the OBC quota story in the inside pages. In more than one paper, I had to hunt for the item. One may be forgiven for supposing that this has to do with the fact that general category is now taken care of and admission letters have been duly despatched. As long as the general category seats were on hold, the story was front page news in the papers and it lead the stories on TV as well.

Leaders for India's top schools (contd)

I wrote in my earlier post that India's top schools should start looking for talent amonst the distinguished "academics' in the NRI community. I must qualify this. Not all schools, least of all b-schools, need academics as leaders. Two of Europe's top b-schools, Insead and LBS, have brought in consultants as deans: Insead from PWC and LBS from Bain.

We needn't look that far. IIMA's legendary founder-director, Ravi Mathai, was brought in from Metal Box, one of the famous MNCs of yesteryear. (This says something for the talent-spotting abilities of IIMA's founders such as Vikram Sarabhai !).

So, yes, when it comes to a leadership search we are at liberty to cast the net pretty wide.

Thursday, May 17, 2007

A decade after the east Asian crisis

Ten years ago, we had the east Asian crisis. It provided material for an enormous amount of literature on what had gone wrong. 'Managing volatile flows' became one of the hottest areas of concern for policy makers. The IMF is marking the event at a seminar in Washington.

Among the ideas that gained currency and have become part of the conventional wisdom are:

  • Fixed exchange rates are not a great idea in the absence of capital controls
  • The proportion of short-term debt in external debt is a variable that needs to be monitored
  • Financial regulation needs to be of a high quality in an economy exposed to large flows
  • A sound banking system and macro-economic stability are key requirements for capital account convertibility
  • Credit booms must be monitored and high bank exposures to real estate and the stock market could spell trouble.
  • Private capital flows are enormous in volume in relation to the sizes of emerging markets and this asymmetry in itself is potentially destabilising.

India did well at the time of the east Asian crisis because the economy was still relatively insulated. Today, the economy is a lot more open on both the current and capital accounts but against that we have a war chest of $200 bn. So, are we sitting pretty? Yes, but.... I have some concerns about the quality of capital flows over the past year or two.

FDI has shot up but we include private equity and venture capital in our FDI figure; both are relatively volatile compared to MNC investment. ECBs (external commercial borrowings) have also gone up and much of this could be going into real estate.

Read my comments on the Indian situation on the tenth anniversary of the east Asian crisis in my latest ET column.

Finding leaders for India's top schools

In response to my post yesterday, Pak b-school scouts for talent, Abi (of Nanopolitan blog fame) writes:

The government-mandated pay may be a drag, when it comes to attracting top talent from abroad. But this explanation works only for places like IITs and IIMs. Private institutions are certainly free to hire the best -- cost no bar! But, is there any evidence to show that our private management institutions are led by people with superior skills and accomplishments? Heck, is there any evidence that the faculty in these institutions are paid better (and are objectively better) than their (unfortunate) counterparts in public institutions?


Abi is right, nothing prevents private institutions from getting the best talent- except these institutions' short-term focus on the bottom line! However, I am not sure that the IITs and IIMs are entirely constrained by the government pay structure. Here's why:

  • Many PSUs have found ways of getting round government scales through a whole slew of allowances. I am sure the IITs and IIMs could do likewise especially the ones that can afford these.
  • Faculty at the top schools, including the director, are allowed to do consulting. In scouting for talent, it is the total expected compensation (fixed plus variable) that these schools must focus on, not the fixed component alone. The top schools could emulate investment banks' practice of throwing in a 'guaranteed' variable income for the first year or two.
  • There are many distinguished academics among the NRI community, mostly alumni of India's top schools. At least a few may be at a point in their careers where they would like to return home and make a contribution. Pecuniary considerations may be secondary to them.

The challenge is to make the leadership position itself attractive in professional terms, it must be seen as a credible opportunity to make a big difference. The Chairman of the US Fed tops off at around $200,000, which is what a HBS graduate would start off on at an investment bank. That does not make the chairmanship of the Fed any less attractive! There are positions in the realm of government whose principal attraction is not the pay packet.

Will India's top schools can succeed in getting high quality talent from the international market if they put their best foot forward? I don't know. But the effort is worth making. It sends out a signal that they are receptive to the best talent. Even if they fail to zero in on somebody from abroad, the search committee will have a sense of what it would take to bring in high quality talent. It could be that some of the best people abroad don't apply and lesser ones do, but pitting insiders at the top schools against outsiders raises the level of competition.

In other words, the search for talent itself adds value regardless of whether it has a successful outcome. If Pakistan can do it, why can't we?

Wednesday, May 16, 2007

Maran 'moles' in Tamil Nadu!

When I first read about the problems former cabinet minister Dayanidhi Maran was having with TN CM M Karunanidhi, I got the impression it was a terrible misunderstanding. It was the result of an impersonal opinion poll carried by a newspaper that happened to belong to the Maran family. The sort of misunderstanding you read about in works of fiction. But the way the episode is developing, there seems to be a great deal more to it than meets the eye.

Rediff carries a story that mentions, among other things, that Karunanidhi knew about the opinion poll and advised the Marans to stop the publication of it but his plea went unheeded. The story also brings about how suspicions between the Karunanidhi and Maran camps has been building up for a while.

Asian Age now carries a report saying that the TN government is now trying to hunt out Maran 'moles' amongst the state IAS and IPS officers!

A list of Tamil Nadu IAS and IPS officers reported to be close to former Union minister for IT and communications Dayanadhi Maran, who has fallen out with his grand-uncle, chief minister M. Karunanidhi, is being prepared on the instructions of the DMK top brass, according to official sources.This secret exercise by senior officials is being carried out to weed out potential "moles" of the Maran family in the corridors of power, the sources said.

A number of officers had managed to get transfers and postings by flaunting their
association with Mr Maran over the last year after the DMK government came to
power, pointed out an official, who said that all of them could be shifted very soon

.

Indian bank IPOs

ET reports:

A slew of bank issues are expected to set Dalal street on fire, with close to Rs 34,000 crore worth of equity set to be raised in FY08.

Following the new Basel II guidelines (for better risk management) put out by the regulator, many banks are waiting to tap the capital market through a combination of international and domestic offerings . Banks with an international presence will have to comply with the new guidelines by April next.

The current quarter is likely to see a bulk of these issuances, starting with ICICI Bank, DCB and Central Bank, hitting the markets by June-end . The State Bank of India (SBI) has also announced its intention to raise Rs 15,000 crore through a mix of equity and debt instruments. Other offerings include UTI Bank and IDFC. Apart from these, other names like Dhanalakshmi Bank are also looking to tap the market via rights.

Most bankers expect the issues, irrespective of huge volumes, to go through smoothly, given the huge demand for banking paper among investors. Bankers maintain that most investors view banking scrips as a play on the long-term growth of the economy.

The surprise for me is the Central Bank of India issue. Until even a couple of years ago, not many people, including insiders, gave the bank much chance of revival. And yet the bank has turned a tidy profit this year. Of course, the turnaround story in Indian banking is Indian Bank, declared one of three "weak" banks by the M S Verma committee in 1999. Indian Bank stormed back into the black and made a highly successful IPO in February this year. The bank's stock, issued at Rs 91, today trades at 124, an appreciation of 33% in just two months!

As I have argued often, the improved performance of Indian banks owes to the changed outlook for the Indian economy but this is not the whole story. There has been a considerable improvement in banks' productivity. One simple measure: while volumes have exploded, there was a freeze on recruitment for well over a decade and indeed attrition through voluntary retirement schemes. It is only recently that public sector banks have resumed recruitment.

Pak b-school scouts for dean

The Economist (May 12) carries an ad by the Lahore University of Management Sciences for the post of Dean of its School for Humanities and Social Sciences. A Search Committee has been created for the purpose. The same issue carries an ad by the State Bank of Pakistan for five chair professorships it has created. The compensation for the chairs: Rs 2.5 lakh per month. The SBP ad especially urges academics outside Pakistan to apply.

What this tells me is that Pakistan's educational institutions have mounted an international talent search (none of the ads state that the applicant must be a Pakistani citizen). It also points to unsuspected strengths in Pakistani institutions in general. (I have often been surprised at the quality of reporting and comment in Pakistani newspapers and the sheer courage of journalists in speaking their minds in what is essentially a military dictatorship).

How often have you seen such ads by India's top schools? There is a presumption among India's elite institutions that leaders and chair professors must be from within their fraternity. Top schools in the west have no such hang-ups. London Business School and Insead in Europe regularly bring in talent from across the Atlantic or from industry. US business schools mount an open search for deans and chair professors.

Indian academia may be very good at preaching openness, competition and globalisation to the rest of the world but is loth to practice it within its own portals.

High-spending b-school

We have all seen the full-page ads run by the business school, IIPM. Today's ET carries a report on the expenditure the school incurred on ads:

The high-profile Indian Institute of Planning and Management (IIPM), which spent a staggering Rs 49 crore on advertisements in 2004-06, did not pay either income tax or service tax for the two years. ....The institute incurred an expenditure of over Rs 17.28 crore and Rs 31.62 crore on advertisements during 2004-05 and 2005-06 respectively, but has not paid service tax, he (minister of state for finance S S Palanimanickam) said.

Tuesday, May 15, 2007

Reinventing b-schools

Do b-schools add value? How do we make b-school education more relevant?- these questions are fated to join the death penalty and globalisation as perennials in debating circuits.

The latest issue of the Economist (May 10, 2007) carries a longish feature on how business schools are trying to adapt to contemporary demands. The story is long on detail but short on concrete ideas. What are b-schools up to? The Economist story mentions the following:

  • Instead of the well-worn method of teaching functional subjects, such as marketing, strategy, accounting and so forth, students who are now completing their first year at Yale are taught with eight courses that each address different themes, such as the customer, the employee, the investor, competitors, business and society, and innovation.
  • HBS has introduced a popular new course in “leadership and accountability”.
  • Post-Enron, most business schools have introduced or have beefed up their teaching of ethics, often under the banner of leadership.
  • Many schools are trying to increase the practical side by giving a greater role to business, including inviting business people to speak to students.
  • A growing number of business schools are teaching the long-neglected subject of entrepreneurship.

Frankly, that doesn't seem like an awful lot of innovation to me! Yale's new pedagogy sounds like old wine in new bottle. Leadership and accountability issues have been flogged to death. Teaching ethics....... yawn. Inviting practioners into the class-room- happens all the time, often with poor results. Entreprenuership courses?- we have these at IIMA. Seems to me the more things change at b-schools, the more they remain the same.

The story seems to have missed out on what I believe are important innovations at top b-schools in the US:

  • An enlarged focus on internet-based learning with a whole lot of materials (lecture notes, data, exams) being made available to students when a course is on.
  • Developing elective sequences in the second year that focus on particular careers- investment banking, consulting, media, venture capital, etc.
  • Greater focus on internationalisation of the curriculum- bringing in themes related to globalisation and overseas, including emerging, markets.

My impression is that these three innovations have made a big difference to b-school programs. For Indian b-schools, the challenge is to bring in the larger regional, that is, Asian context, into curricula.

As for that hardy perennial- whether b-schools add any value or merely act as screening systems for identifying raw talent- I thought an IIM-B director had a fitting response. He told recruiters that he would put up the list of selected candidates on day one. Firms that believed that the two-year program did not add value were welcome to come in and recruit on day one. I'm told there were no takers!

Maran's ouster: sidetracking the issue

I'm amazed at the media coverage of the ouster of DMK minister, Dayanidhi Maran, from the union cabinet. Most of the coverage has focused on Maran's perceived political ambitions and how these collided with those of the first family of the DMK, that of Tamil Nadu chief minister M Karunanidhi. The financial dailies have explored the business angle as well, whether and how Maran's exit will impact on the telecom industry.

But these are secondary issues. The core issue is the barbaric attack on the office of the newspaper Dinakaran in Madurai which resulted in three deaths and the destruction of private and public property. The paper was attacked because it had carried the results of an opinion poll that showed that only 2% of those surveyed wanted Karunanidhi's elder son, M K Azhagiri, to inherit his mantle. The majority (70%) were said to favour the younger son, M K Stalin. Another 20% were said to favour "others"- a category that supposedly referred to Maran. The Karunanidhi family is said to have viewed this as mischief perpetrated by Maran and decided to boot him out of the cabinet.

It is hardly material whether or not Maran was trying to use his family newspaper to play political games. As a politician and newspaper owner, he has every right to do so. The Karunanidhi clan, in turn, has every right to put him in his place. But vandalising a newspaper office because it carries a survey that somebody does not like is just not on. The media should have focused on the violence that ensued and the nailing of its perpetrators. Can you imagine the reaction if something like this had happened to a newspaper in Gujarat because it carried a survey unflattering to its chief minister?

Happily, ET today makes amends for the media's misplaced focus with a strongly worded edit titled, Violence, not the survey, is the issue.

By compelling Union communications and IT minister and grand-nephew Dayanidhi Maran to resign, the CM has, very shrewdly, taken what would be seen as swift action in the Dinakaran arson case, without doing anything discernible to crack down on the key masterminds — allegedly his elder son M K Azhagiri and his acolytes — of the operation.

..it would have been logical for the DMK to have, before all else, proceeded against the real masterminds of the criminal act. The main issue is certainly not the motivation behind the survey, but the need for the state to crack down hard on those who instigated the May 9 violence. Maran’s ouster from the Union Cabinet is not simply a case of misplaced emphasis.

The only ground for a minister’s ouster should logically be poor performance. Maran can hardly be faulted on that score. But parties such as the DMK, key players in India’s coalition politics driven by self-aggrandisement and patronage, could not care less.

The cynicism of Karunanidhi’s dynastic manoeuvring must be condemned. Among other things, it raises serious doubts about the objectivity of any future probe into the incident. Maran’s direct role in the publication of the Dinakaran survey is, at best, tenuous.


Well said!

Monday, May 14, 2007

Wanted: pliable bureaucrats

No prizes for guessing U P Chief minister Mayawati's first moves on taking over. She has moved out bureaucrats loyal to her predecessor and brought in her own lot. Rediff reports:


Living up to her reputation of a hard taskmaster, Uttar Pradesh Chief Minister Mayawati suspended two senior IAS officers and rattled the state bureaucracy by ordering the transfer of over 100 IAS and IPS officers within hours of her assuming the new office.

.... ... As many as 64 officers belonging to the Indian Police Service including several district police chiefs and others holding key assignments were given marching orders from their existing posts. Besides, more than 35 officers belonging to the elite IAS were shifted in the shake-up. Among the key changes was the elevation of Sheshank Shekhar Singh as the state's cabinet secretary. Singh had suffered much during the Mulayam Singh Yadav regime because he refused to become an approver in the Taj Corridor scam in which Mayawati was facing a CBI probe. He had held the all important charge of UP's industrial development commissioner during Mayawati's last stint.


Two senior bureaucrats have been shunted out supposedly because they failed to maintain the Ambedkar Park created by Mayawati during her previous reign. One does not know to what extent the bureaucrats themselves were responsible- it's quite likely their bosses simply told them to sit tight or did not release the requisite funds.

Mayawati's moves will not come as a surprise. Mass transfers have become routine with each change of government although the disease is less widespread at the centre. In this, we seem to be moving towards the US system of government where nobody makes any bones about the fact that a new government wants bureaucrats loyal to itself- I remember reading after a presidential election that 40,000 jobs in the Washington bureaucracy were up for grabs! But we are supposed to be modelled on Westminster and its concept of a 'permanent' bureaucracy.

I find the absence of indignation in the media on this issue interesting. Also missing is any comment on the pending corruption charges against Mayawati. Perhaps this reflects strong negative sentiment towards the two principal blocs, the UPA and the NDA. Perhaps it merely signifies philosophical resignation towards issues such as an independent bureaucracy and probity in public life.

For the steady degeneration of the bureaucracy into a handmaiden of the political class, it's hard to blame politicians alone. Bureaucrats find it expedient to align themselves closely with particular masters, making hay while the son shines and accepting the price to be paid when it sets. It's heartening that the odd apolitical bureaucrat still has his uses. The Rediff report notes: Chief Secretary Shambhoo Nath and Director General of Police G L Sharma, both of whom were appointed by the election commission to ensure free and fair assembly elections, have however remained untouched so far.

If this continues, it would be following a distinguished precedent. TSR Subramaniam, the former cabinet secretary, records in his memoirs how, after he took over, Mulayam Singh Yadav let him stay on as Chief Secretary.

Yadav told a surprised Subramaniam that he (Yadav) had won because the elections had been conducted impartially under Subramaniam's tenure, so Subramaniam deserved to stay. Yadav apparently thinks this has not happened in the last round- he has been laying the blame for his defeat at the doors of the Election Commission!

Saturday, May 12, 2007

Exchange rate management in India

The rupee may be going up in nominal terms. But that does not stop people from arguing that we should do everything to keep it undervalued. Surjit Bhalla pushes this view in today's Business Standard.

Bhalla makes a number of points:

  • Our exports may have grown at around 20% over the past few years. But Indian exports have underperformed those of other Asian economies. Rupee appreciation will deepen underperformance.
  • The RBI's intervention in the exchange market through purchase of dollars entails a cost. This is because the return on the dollars so purchased is about 5% while the return on the rupee is 8%- we lose 3% on the dollars invested. Many argue that this is one reason why the RBI should not intervene as much as it has done in the past. Bhalla disagrees. He says that by not intervening, the rupee appreciates. The cost of rupee appreciation is much greater. Every 10%t of depreciation, he estimates, costs us 2% of GDP or $20 bn. The loss on accumulated reserves is much lower -$600 mn. So, it is much better to bear the cost of intervention than to keep the rupee from depreciating.

I' m not persuaded. Our overall growth performance is next only to China's. We should worry about exports only if overall growth disappoints. All indications are that improvements in productivity and profitability in Indian business have been deep enough for exporters to withstand the kind of appreciation we have seen.

Secondly, intervention in the forex market has become very difficult in the face of kind of inflows we are facing. It leads to huge injection of liquidity which fuels inflation. Rupee appreciation, in contrast, is a useful instrument in battling a high rate of inflation.

Thirdly, by intervening and keeping the rupee from appreciating, the RBI encourages greater inflows- there is no cost to those who borrow abroad. You need a period of appreciation to get players to understand that they cannot indulge in a one-way bet and keep bringing in dollars.

The bottomline: we are well past the days when the exchange rate could be managed in a narrow band.

Mayawati sweep in UP: first impressions

My immediate thoughts on Mayawati's victorious sweep in UP:

  • The media reaction ranges from favourable to ecstatic: like the electorate in UP, the media seems to think that an alternative to the Congress and the BJP is welcome. The reporting in the media also notes the return of the coalition that helped the Congress dominate elections until 1967: Brahmin-Mulsim- Dalit. Mayawati has recreated this coalition under Dalit leadership. Evidently, Brahmins are happy to be back in the seat of power even if they are not calling the shots. This is a reaction to OBC domination in UP and other places.
  • I am inclined to take the talk about the rejection of 'criminalisation of politics' under Mulayam Singh Yadav with a pinch of salt. The projected vote share of the SP is under 27%. Mayawati's BSP is expected to have a vote share of around 31%- a substantial gain over the 23-24% she has managed in the past and above the Dalit share of the population of 21%. It appears that Mayawati has gained at the expense of the BJP and the Congress rather than the SP. Corruption and criminalisation of politics are hardly relevant factors with the electorate. The charges in the Taj corridor scam against Mayawati has made little dent on her appeal.
  • One must not forget the OBC factor in the victory of the BSP. M S Yadav, like Laloo Prasad, represents the upper crust of the OBCs, the Yadavs and, to some extent, the Kurmis. But some of the Kurmis and also the MBCs (most backward castes) have felt left out under Yadav rule and have made common cause with Mayawati. This reaffirms what many commentators have said in the past: OBC is not a homogenous category, it conceals variations and divisions- this is relevant to the ongoing OBC quota debate.

Wednesday, May 09, 2007

Al Qaeda threat in UK

The Economist (May 3) has a fascinating article on the surveillance of potential terrorists in the UK, how it has resulted in major plots being aborted and also how it failed to prevent the sub-way bombings of July 2005. It provides details of one successful operation, "Operation Crevice".

"Operation Crevice”, as the investigation was known, was at the time the biggest anti-terrorist operation in Britain. At its peak in February and March 2004, it consumed some 34,000 man-hours of intelligence and police work. The plotters' homes and cars were bugged, hidden cameras recorded them in internet caf├ęs and undercover agents followed their movements around the clock.

The British authorities' ability to neutralise the bombing campaign is an important success, but it will also be remembered for a catastrophic failure: two of the four suicide-bombers who blew themselves up in London on July 7th 2005, at first said to have come “out of the blue”, had in fact been spotted with Mr Khyam's gang several times (in our picture, the two bombers flank Mr Khyam, who is second from right). But they were thought to be peripheral and were not followed up
.


Surveillance and counter-insurgency in the UK have moved into top gear. But the presence of a large Muslim population and its susceptibility to radicalisation mean that a terrorist threat is even present.

Counter-terrorism officials feel frustrated that the succession of court cases, such as the conviction of Mr Khyam and his fellow plotters, is failing to build more public trust. Partly this is because it can take two years for cases to come to court, and partly it is because of legal restrictions on public reporting before trials (and increasingly during and even after them, to avoid prejudicing other prosecutions).

Greater public trust is vital to improving the flow of information about extremists. For the moment, says Mr Clarke, most terrorism-related investigations begin with intelligence gathered from foreign governments, intelligence agencies or electronic eavesdropping. In other words, many Muslims are reluctant to report co-religionists to the police, even if they disagree with their militant views. Unless the code of silence is broken, more bombers will inevitably get through
.

More on OBC quotas

One of the central criticisms of reservation for OBCs in centrally-administered educational institutions is that caste cannot be the determinant of backwardness today. Another is that proportion of OBCs arrived at by the Commission rests on a badly dated census, that of 1931. The Supreme Court itself had raised these issues recently while hearing the challenges to the Quota Bill.

MS Gill, who was secretary to the Mandal Commission, addresses these issues in today's TOI. First, about the criticism that caste alone cannot be used as a determinant of backwardness, Gill says that the Commission considered as many as 11 indicators of social and educational backwardness of which caste was only one.

The remaining 10 indicators pertain to: dependence on manual labour for
livelihood; marriage at a tender age; level of female participation in work;
number of children who never attended school; rate of student drop-out;
proportion of matriculates as compared to the state average; value of family
assets; residence in kuchcha houses; source of drinking water beyond half a
kilometre; and availability of consumption loans. These indicators objectively uantify the degree of social, educational and economic deprivation as compared to the state averages, and none of them is based on caste per se.


Fair enough. But what about the second criticism, namely, that identification of OBCs based on these criteria isn't satisfactory? The way I understood Gill, the Commission's identification was based on a survey of two villages and one urban block in every district of the country. Is this a good enough substitute for a comprehensive census?

The proportion of OBCs to the population was based on the 1931 Census. The Commission's survey identified 3747 OBCs. The proportion of these to the population in 1931 was determined. The present proportion of OBCs was presumed to be the same as the proportion then because "whereas the country’s population may have grown nearly four times since then, the proportion of its various constituents has obviously remained more or less the same."

What Gill says may be broadly true but the problem arises because some of the castes identified as OBCs are perceived to be manifestly advanced. Some well-placed castes in Kerala and Karnataka figure in the OBCs. This is what upsets people. So, while the Mandal Commission's estimates may be broadly accurate, there may be scope for fine-turning.

There is, however, a more fundamental problem, one that I believe arouses the most opposition to reservation for OBCs. It is that reservations tend to become permanent and particular castes hang on to their quotas long after they have ceased to be backward.

For reservation policy to have broad acceptance, we must have a mechanism for monitoring backwardness on an ongoing basis. OBCs that cease to be backward must be eliminated from the reserved category. A basis for this could be cut-off scores in competitive exams. If scores for OBCs as a whole or for particular converge with those of the general category, that would be one indication that reservation has outlived its utility.

In other words, ensure that reservation policy for OBCs has built-in mechanisms to self-destruct once the goals of reservation have been achieved. Then some of the anger amongst other groups will subside.

Reviving IFCI

India's economic turnaround has several interesting elements to it. One of the most amazing is IFCI, one of the three long-term financial institutions that we had until the nineties. IFCI was sunk by non-performing assets in the second half of the nineties. It has been comatose since, with no incremental loans being sanctioned until recently. It seemed only a matter of time before it was formally wound up.

Yet, today IFCI's stock trades at Rs 48! Some of the company's NPAs have come alive with the Indian economy's strong performance over the past few years. Two of the company's investments, NSE and ICRA, have turned out to be extremely profitable. IFCI reported a profit of Rs 898 crore (mainly through one-off items such as sale of investment) against a loss of Rs 74 crore in the previous year.

The government is now looking at ways to keep IFCI alive. Two options being considered are:
  • Conversion into a bank
  • Turning IFCI into a foucused project lending bank

Neither sounds attractive to me. It's a little late in the day for IFCI to venture into banking on its own. Creating a network of branches will take time and resources. Focusing on projects may not be viable when you are competing with banks that are also into project lending- banks would have a tremendous cost advantage. Infrastructure finance is the most promising area in projects but we already have two specialised agencies for that, IDFC and IIFL.

IFCI needs strong financial backing and it needs a huge infusion of skills. Selling a strategic stake to a foreign bank is the best option. The foreign investor could tide along until 2009 when banking is due to be opened up further. It can then raise its stakes and venture into banking. It says something for the attractiveness of India's financial sector that players such as Citibank and Lehman are willing to expand or get in by buying a stake in a battered operation!


Tuesday, May 08, 2007

No respite for Wolfowitz

World Bank president Paul Wolfowitz is hanging on grimly to his job, thanks to the White House's support but the pressure is mounting by the day. The panel investigating complaints that Wolfowitz helped secure a special deal for his Lebanese girl-friend at the Bank has sent a copy of its findings to Wolfowitz. A top aide of Wolfowitz 's at the Bank has resigned saying, “In the current environment sur­rounding the leadership of the World Bank group, it is very difficult to be effective in helping to advance the mission of the institution.”

On top of it all, there comes the disclosure that Wolfowitz's closest aide was " involved in crafting an apparently misleading public statement on the Shaha Riza secondment for dissemination by World Bank spokespeople on an anonymous basis." (FT, May 8).

Wolfowitz has been rough with the Bank's staff. That's okay if you are squeaky clean yourself. If you are not, the insiders will get back you at the first opportunity. Happens in organisations all the time.

Writing with characteristic verve in FT, Joseph Stiglitz says that the central problem to be fixed is not just breach of ethics or procedures, important as these are. It's the process of selecting the top man for the Bank itself.

There is an old expression that fish rot from the head. So, too, good governance starts from how the head is chosen. Restoring confidence in the bank will require finally addressing the way in which its president is selected. Since the inception of the World Bank, it has been in effect an appointment by the US president, without even the vetting of the US Senate to which US officials at home are subjected. In this case, President George W. Bush sealed Mr Wolfowitz’s appointment with a few phone calls to friends, such as Tony Blair, UK prime minister. The development and finance ministers who should have been intimately involved in the decision-making were left to ratify what was essentially a done deal and the bank’s board members then ratified the deals made in the capitals.....

All of us support anti-corruption and good governance efforts, but they need to be accompanied by good-faith processes. Good governance in a democratic, multilateral institution starts from choosing the best individual, regardless of nationality, race, gender, or ethnicity. There may be honest differences of opinion about the essential, or at least desirable, characteristics. But surely the list would include a command of development economics, political experience and demonstrated managerial expertise in running a large multilateral organisation. In short, characteristics that are likely to have earned the respect of the bank’s multiple constituencies: its staff, the countries receiving assistance, the countries contributing assistance and the non-governmental organisations that have appealed to the world’s moral conscience concerning the need for foreign assistance. It may not be necessary that the head come from the developing world, but certainly someone from the developing world has a natural advantage in understanding the problems that they confront.

Monday, May 07, 2007

Now, who's being unreasonable?

The HRD ministry's directive to the IIMs to put admissions on hold (since lifted) triggered a huge bout of government-bashing in the media. Pratap Bhanu Mehta's article in the Indian Express (April 24), titled "Lessons in unreason", typified the mood among many commentators. Mehta chastised the IIM directors for caving in to the directive; he felt the IIMs should have defied it.

Former colleague Jagdeep Chhokar joined the party with an article in the paper on May 2. To my mind, it reflects the jaundiced view among many academics of the functioning of the HRD ministry.

Chhokar sees the supposed caving in by the IIMs as "the culmination of a process that began several years ago." When the IIMs sought to be make themselves financially independent by generating internal surpluses, he says, the "politician- bureaucratic combine" couldn't stomach it. This combine tried to maintain its hold on the IIMs by managing the process of appointment of the Chairman of the Board of governors and the IIM director.

Let us look at the appointment of IIM chairmen first. Chhokar cites the " non-appointment" of IG Patel for a second-term as proof that the government wants a "pliable person" for the job. But Patel was replaced by Narayana Murthy- by no stretch of imagination a "pliable person" !

Chhokar also faults the government for replacing Murthy after one term. I find this comment strange. Fixed tenures for such positions are highly desirable. One of the great strengths of the American system is that no President can stay on the job for more than two terms. The constitution of India does not mandate a fixed tenure for the Indian President but we have a healthy convention of one term. There has been talk of fixed tenures for MPs as well- again, these would be entirely healthy. At the IIMs themselves, fixed tenures for both the Chairman of the board of governors and the Director have served the system well. I say: criticise a wrong choice for these jobs by all means but do not undermine a sound governance principle.

As for the selection of IIM directors, Chhokar points out how the system for selecting the director was changed. (This happened in MM Joshi's time). Earlier, the IIM Boards used to constitute the search committee. During Joshi's tenure, the ministry chose to constitute the search committee. I do not see anything inherently wrong in this. The search committee for IIMA, for instance, was headed by a well-known academic. IIMA was represented on the panel through its then chairman, Narayana Murthy. I cannot recall anybody objecting to the composition of the panel.

Consider what happened under the auspices of the ministry's search committee. The committee ended up selecting an IIMA faculty member as director- exactly as panels appointed by the IIMA board had done earlier! I hope Chhokar is not suggesting that the IIMA director, thus selected, turned out to be a "pliable person"- I don't believe that the HRD ministry thinks so! In other words, if the HRD ministry's search committee was at all functioning under the direction of some sinister "political-bureaucratic combine", this certainly did not show in the outcomes.

Chhokar says that two of the IIM directors chosen through this process were eased out before they completed their terms. But four other directors at the leading IIMs will be duly completing their terms. The problem could be more of finding competent people for the lesser IIMs- it need not reflect on the process itself.

Those who urge that the search committee be left to IIM boards overlook an infirmity in leaving matters to the individual IIMs- there is a high probability of the search process being captured by insiders. A panel constituted by the ministry stands a better chance of pursuing a more open and competitive search. That is why it is hard to say that the ministry should not constitute the search committee. The ministry must be judged by outcomes. Does the composition of the panel inspire confidence? Do those selected for the director's job measure up? I am not aware that people had reservations on these counts during the last round.

Chhokar's comments, like those of others, reflect a deep prejudice towards government. They stem from the presumption, common in the liberalised era, that anything that emanates from government must be evil. However, when we look at the selection of chairmen and directors since the nineties, we cannot say that the choices were flawed or inconsistent with those before the nineties. Chhokar's thesis that politicians and bureaucrats have tried to tighten their grip on the IIMs since the nineties is just not borne out by facts.

Incidentally, if Chhokar had concerns about governance issues at IIMA, these were certainly not shared with faculty when he was dean and director-in-charge at the Institute.

Friday, May 04, 2007

Quotas and brand IIM

In an article in today's ET, Prof V Ranganathan of IIM Bangalore writes:



The IITs /IIMs are the one product with a ‘Made in India’ stamp that emerged as India’s global brand, and there is an apprehension in some quarters that this is now being sacrificed at the altar of caste politics. Will that brand decline in value due to a perceived fall in quality by foreign recruiters, who, after all, bestowed such sterling brand equity on those institutions in the first instance? It was these foreign MNCs, who flew down from New York, London, Tokyo and Hong Kong and recruited these students, paying them eye-popping salaries, besides conferring global recognition on these institutions

This is the standard line taken by anti-reservationists: the great IIM brand is in jeopardy. Look closely at the proposition and the flaws become apparent.

  • The international recruiters hire around 60 students at IIMA out of a batch of 250. The number must be the same or lower at the other IIMs. These are the top 60 of the batch. Assuming that those who get in through the OBC quota are all of lesser calibre, how does this affect the top 60? It doesn't. So the foreign recruiters will continue to get the quality they are accustomed to.
  • There is a problem only when overseas demand swells to a point where there is a market for the entire batch of 250-300. But we are a long way off from that point. By the time we get there, those who get in through the OBC category may not be very different from those in the general category. Why? Because cut-off scores in the reserved categories tend to coverge towards those of the general category over time.
  • We need to look at the cut-offs for those who get in through the OBC category. How much lower are these? And are all OBC students having lower scores than those in the general category? We need some data on this.
  • The idea that the IIMs exist primarily in order to create an international brand through international placement itself deserves critical scrutiny. We need the IIMs to produce managers in large numbers for the Indian economy. We need them to produce good management education. There is something demeaning about the notion that the IIMs are an exalted placement agency- faculty at IIMs would be wise not to foster this notion.

Ranganathan also refers to the proposed IIM Bill and its implications for the IIMs.



It now seems the government is rather perturbed at such a miracle of a brand being created in spite of itself, that it now wants to make amends for it and rob IIMs of their financial autonomy by bringing them on a par with IITs through an Act of Parliament. With financial autonomy gone, and the competition to attract quality faculty from international markets at its peak, the IIMs will find it very difficult to attract and retain quality faculty. All they will perhaps be left with are teachers who are no better than the bureaucrats they are trying hard to reform.



I must confess I have no clue about the Bill myself. I also do not know whether bringing the IIMs on par with IITs will mean any loss of academic autonomy. Assuming, however, this is true, I hope Ranganathan is not suggesting that the present degree of financial autonomy of the IIMs has somehow enabled them to attract quality faculty, especially, international faculty. The plain truth is it has not.

Elsewhere, Ranganthan talks about IIMs being able to attract faculty who would be able to switch jobs and go to the top 10-20 schools in the world. He seems to suggest that the IIMs should have even greater autonomy so that they can de-link from government pay scales. Once this happens, they would become attractive to top faculty. I'm afraid that in the foreseeable future, this is only a pipe-dream.

The top 10-20 business schools are mostly in the US. And in higher education in general- and not just in business management- the US reigns supreme. There is a chasm that separates US schools from even European schools. The top European schools find it difficult to lure away faculty from the US even when they are willing to match American salaries. This is because, salary apart, networking and collaboration in research is much easier if you are in the US. Faculty value this and would not give up a position in a top US school easily.

As Ranganathan acknowledges, Singapore is not able to attract top faculty with all the money it can offer. So, even if IIMs became more autonomous and were free to set their pay scales, that in itself would not enable the IIMs to compete for the best talent in the near future. Maybe 20-30 years from now they can- when India is a very different country and if the IIMs systematically go about pulling up themselves by their bootstraps.

The IIMs need to be realistic about their objectives. They need to set objectives that are meaningful in the context in which they operate. They certainly could use more funds and they need to think of ways to mobilise these. But it is not clear that having to operate within the government framework is a constraint on raising more funds.

It is convenient to suppose that there is some government devil that is keeping the IIMs from soaring to greater heights, that greater funding or greater financial autonomy will propel the IIMs into the big league. The reality, alas, is rather more complex.

Thursday, May 03, 2007

Nothing fazes the Indian economy!

The RBI's latest macroeconomic review forecasts GDP growth in 2007-08 of 8.5%. This will be on top of average growth of 8.5% over the past four years. The slowing down over last year's growth of 9.2% couldn't be more modest. This will happen against the background of several adverse factors:

  • A deceleration in the US economy
  • Rising interest rates
  • Rupee appreciation

How come nothing seems to faze the economy? Consider the above factors a little more closely.

  1. US economy: Yes, it is slowing down but that is not having much of an impact on the world economy as yet. According to the IMF, the global economy will slow down only by 50 basis points to 4.9% this year despite a deceleration in the US. Why? Because the factors slowing the US economy are US-specific, especially a slump in the housing market. The US slowdown is not the result of factors that impinge on the world at large.
  2. Rising interest rates: Nominal interest rates have risen in India. But, as I argue in my latest ET column, real interest rates are below those obtained in the second half of the nineties when rising interest rates put the brakes on the Indian economy.
  3. Rupee appreciation: This is not having much of an impact on the economy thanks to improved productivity. Improved productivity in firms itself is the result of several factors: cheaper imports, increases in scale of operations, downsizing of the workforce, lower interest rates. Merchandise export growh did slow down in 2006-07 but not as much as feared in the wake of rupee appreciation. Growth in April -February 2007 was 19.35, slower than the growth of 26.3% in the same period in 2006-07. But we must look at merchanidse exports as well as software exports. Net surplus in software grew by a healthy 29.1% despite rupee appreciation. Margins may be lower but this is offet by rising volume thanks to increased off-shoring.

So what if the US economy slows down? Merchandise exports may be hit but not software. Lower demand from the US for merchandise exports is offset to some extent by demand from Europe. And slower exports as a whole are compensated for by larger domestic demand. Nothing fazes the Indian economy!

Read my latest ET column on the subject.

Wednesday, May 02, 2007

Breaking up large banks

The fate of Dutch bank ABN Amro hangs in the balance. Barclays of the UK first made a Euro 66 bn with a provision for selling ABN's Chicago bank, La Salle to Bank of America for $21 bn. Now a consortium of Royal Bank of Scotland, Santander of Spain and Fortis, a Dutch-Belgian group, has come up with an offer of Euro 72 bn but this is contingent on ABN not selling La Salle to BofA.

Whichever way the bidding goes, two things are clear. One, both bidders are banking on huge cost savings, partly from outsourcing of operations to countries like India (one report said an estimated 10,000 jobs could move to India). Two, ABN Amro is almost certain to be broken up. This means that the constituent parts are more valuable than the whole contrary to the earlier wisdom that banks stood to gain by integrating various types of businesses.


Important investors (one of which has led the campaign to break up ABN) are not buying this at all. They do not think it is true for many European banks and they think it may not be true for the biggest behemoth of all, Citibank.

The American bank's management is under pressure to prove that the bank is worth more than the sum of its parts. Citibank's stock has been an underperformer in recent years and it has moved to address investor concerns by slashing 17,000 jobs worldwide. But it is yet to convince sceptics that the whole is greater than the sum of its parts.

In Europe, inefficiencies in large banks such as ABN Amro have been hidden by the protective regime in most countries that frowns on cross-border acquisitions of banks. But this is breaking down under relentless pressure from the European Union. The prospects are that many national sacred cows in banking will soon cease to remain so.

As somebody who has long been sceptical about bank mergers, especially those aimed at creating financial supermarkets, I am inclined to believe this marks an important retreat from the hitherto prevailing wisdom, namely, that bigger is better.

Tuesday, May 01, 2007

Long term prospects for the world economy

In December 2006, the World Bank presented an upbeat view of long-term growth of the world economy in its latest Global Economic Prospects (2007). Among the rosier forecasts for the world in 2030:

  • the number of people living on less than $1 a day will fall from 1.1 billion now to 550 million in 2030.
  • developing countries' share in world trade will rise from 30% today to 50% and their share in world GDP in PPP terms to 60%.
  • average incomes in the developing world will converge to those in high-income countries; Bangladesh will be as prosperous as the Netherlands.

So, are we on our way to Paradise?

Robert Wade, the well-known development economist, sounds a cautionary note in FT. He questions two key assumptions: one, globalisation will continue; two, globalisation will lead to better results for all.



In reality, much of the success attributed to globalisation is in fact the success of one giant country: China. The picture of the past 25 years would look quite different if we took the typical developing country rather than the average for all of them (which is pulled up by China). For example, the fall in the number of people in extreme poverty since the early 1980s is due entirely to the fall in poverty in China. Take out China, and the number rose.


Many developing countries have gained little from globalisation and export-led growth and it is unclear whether they will gain more by continuing on the same track. The World Bank’s model also assumes that free-trade norms will continue to prevail. This is doubtful. In affluent countries, a lot of evidence suggests that further affluence is reducing people’s capacity to enjoy it. Throughout the west, rates of over-eating, family breakdown and addiction are rising. It is possible that electorates will respond by seeking to “embed” certain markets more firmly in a framework of political controls, even at the cost of slower growth.


In developing countries, disillusionment with the paradigm of maximum openness is growing, as those that have moved towards free movement of goods, finance and enterprises have not experienced substantially improved economic performance. The focus on export-led growth has created intense competition between developing country producers to lower costs – including labour and environmental costs – and the exchange rate.




Wade mentions two other risks to the World Bank's rosy scenario: war and excess supply. Disruptions from war are very likely because the rise of new states always creates conflict with existing players.

I would add this: projections that extrapolate current trends far into the future are generally suspect. So also the belief that the spread of the market economy is calculated to usher in generalised prosperity. If that were so, why would governments in India get tossed out on the back of terrific economic performance?