Thursday, December 31, 2009

Forecasts for 2010.

FT's reporters and commentators put out their key forecasts for 2010. Here is an edited version:

Will the UK suffer a double-dip recession?

Will the UK government sell any of their stakes in the banking sector?

Where will oil finish the year?

oil is most likely to end the year within its present trading range of about $70-$80 a barrel.

Should investors put their money into the stock market?
Yes. ...Next year’s stock market gains will be less spectacular than 2009’s.

Will there be a trade war in 2010?
Conflict, yes. Full-blown war, no.

Will the eurozone experience a sovereign default in 2010?
No. ...Since a clean default is impossible, governments will have no choice but to retrench, however painful the consequences.

Who should I bet on in the British general election?
Forget David Cameron’s Conservatives; pity Gordon Brown’s Labour. Put your money instead on Nick Clegg’s Liberal Democrats. No, I don’t think Mr Clegg is about to sweep into Downing Street as the leader of the first Liberal government for a century. The firm prospect – to my mind as near a certainty as you can get in politics – is that Mr Cameron will be the next prime minister. But those who fancy a wager should look at the odds on the third party.

Will Putin declare his candidacy for Russia’s presidency?
Mr Putin will not formally declare his candidacy until closer to the election date but it seems likely that over the next 12 months he will send ever-stronger signals that he intends to run for the presidency in 2012.

Will the world make progress on nuclear disarmament?

Will this be the year that Israel bombs Iran’s nuclear installations?

Will Afghanistan turn into Obama’s Vietnam?

Will bonuses in Wall Street and the City of London be cut?

Sunday, December 27, 2009

Upbeat on the Indian economy

I am upbeat on the Indian economy as the year end and for reasons I spell out in my ET column,, Economy's stronger than we think. I find I am in good company- several other commentators have since come out with optimistic assessments.

My reasons are:
  • This year's growth forecast of 7% plus shows India is not a bubble economy whose growth of 8-9% earlier was linked to the global economic bubble
  • The fiscal problem will come under control as growth gets back to the normal trajectory.
  • The polity will not be a drag and fears about the country coming apart because of the demand for newer states is misplaced.
On the demand for newer states, I note:
As for the demand for new states, concerns on this account carried greater force when states were first organised along linguistic lines. Then, the greatest fear was that language would rend the country as religion had during Partition. In the early sixties, an American analyst, Selig Harrison, wrote a book, India: The most dangerous decades, in which he warned that linguistic and caste divisions — ‘centrifugal pressures’ — could tear the country apart.

Our experience has been refreshingly different. The creation of new states in the fifties and thereafter has strengthened democracy by creating a better sense of participation among people. As many commentators have pointed out, this has also been our experience in more recent times with the creation of states such as Chhattisgarh, Jharkhand and Uttaranchal.

The division of states being demanded today is not even along linguistic lines. People speaking the same language want to go their separate ways because they want better representation, because administration is too remote in many of the larger states. We have no reason to fear these demands. The movement towards the creation of newer and newer states shows that the Indian state is responsive to aspirations for self-governance. The economy will benefit as it has in the past.
Surjit Bhalla, writing in BS, echoes my optimism and goes further. He thinks India will grow faster than China in the coming years:
China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level.

This scenario will have predicted effects — China’s GDP growth should moderate to a less polluting 8.5 per cent in 2010 and then proceed on a declining trend for the rest of the decade. This will mean jobs for the rest of the world. The other side-effect of the China growth rate decline will be on carbon emissions. They too will decline, and allow China to reduce its carbon intensity of output to at least the world average. In stark contrast, India does not have pressure from the world community to mind its currency or emissions. The productivity growth advantage of 2 per cent a year that China currently enjoys will soon disappear, leaving India with a GDP growth rate in excess of China, and in excess on a sustained basis.

Friday, December 25, 2009

Family member to succeed Narayana Murthy?

There has some speculation as to who might succeed N R Narayana Murthy as chairman when he retires in two years' time. Murthy has in the past indicated that it could be somebody from outside the company. For the first time, an ET report hints at the possibility of somebody from his family taking over. This will come as a surprise as the Infosys founders have thus far been at pains to distance their families from the company:

I would not like to rule out bringing talent from outside...(but) we have to first assess the talent within the company so that we reward smart, loyal people and then look outside," Murthy told a news channel when asked about his succession plans for the company.

However, he did not rule out the possibility of someone younger from his family to take over the charge of the company either.

"We have not ruled out anyone from younger generation in joining (the company) but whatever will be done will be done purely on the basis of merit, suitability and competence," he said responding to a question on the possibility of someone from his family running the company in future.

Thursday, December 24, 2009

A sympathetic portrait of Goldman's boss

FT carries a sympathetic portrait of Goldman boss Lloyd Blankfein, not something that he has been getting over the past year. The paper has been fair to him despite the fact that he declined to be interviewed for the article. But Blankfein does have a long-standing relationship with the FT: he sits on their jury for the Business Book of the Year. ( I am not going to pronounce this a conflict of interest).

Blankfein's background is interesting. He was the son of a postal clerk and grew up in a public housing project in the New York's downmarket burrough, Bronx. Now, as CEO of Goldman, he has a $26 mn apartment in the Central Park area. (That's over Rs 100 crore- you could probably acquire an apartment building in Cuffe Parade, Mumbai, at that price). Along the way, he went to Harvard thanks to a scholarship. That's called meritocracy- the US is what it is because it has more of it than any other country.

Wednesday, December 23, 2009

Fiscal consolidation and Keynesian economics

In India, there is a clamour for swift return to fiscal consolidation. So also in the UK, despite the fact that the British economy has to still to recover from the crisis. Why fiscal consolidation? To prevent interest rates from rising and crowding out investment; and to prevent exchange rate appreciation and boost exports. In both ways, consolidation is seen as coming the way of growth.

Robert Skidelsky, the famed biographer of Keynes, questions these contentions:
If its borrowing is not rapidly reduced there will be a “gilt strike” – investors will demand higher and higher prices for holding government paper. Faced with the evidence that, despite increased government borrowing, gilt yields have been at a historic low, the critics say that this is only because the gilts are being bought by the Bank of England. Once the Bank stops buying government debt, interest rates will shoot up.

A parallel argument is that the expansion of the fiscal deficit is preventing a natural fall in the exchange rate sufficient to boost exports. The tortuous logic seems to be that “fiscal consolidation” will cause the rate of interest to fall and the fall in interest rates will cause the exchange rate to fall, thus increasing the demand for British exports......

Empirical evidence supporting the view that cutting the deficit causes the exchange rate to fall is very thin. A 1997 study by the International Monetary Fund showed that in only 14 out of 74 studied instances did fiscal consolidation promote a recovery via a fall in the exchange rate. In all the other cases fiscal policy either had no discernible exchange rate effect or it was the expansion of the deficit that caused the exchange rate to fall.
At the best of times, the arguments made for fiscal consolidation have sounded hollow; in crisis times, they sound ridiculous.

BJP's new president and competitive politics

Nitin Gadkari, the new president of BJP, has been portrayed in much of the media as somebody hand-picked by the RSS and, therefore, intended to give the RSS a better hold over the BJP. It may well be that he is the RSS's choice. But, what is ignored is that he has a great deal going for him. It was left to ET to carry a story that highlighted his strengths and accomplishments. I could not find the story in the online edition and hence am unable to provide a link.

In brief, Gadkari is credited with a great deal of modernisation that has happened in Nagpur, he was instrumental in getting the Mumbai-Pune expressway done and he was also in charge of Vajpayee's Golden Quadrilateral. The story also spoke of his performance as PWD minister when he got the state's infrastructure arm to bag projects in the face of competition from private investors and despite political pressures to favour industrial groups. The projects were executed at a much lower cost than quoted by private parties.

The media has highlighted his skills as an organiser. The ET story also mentioned that media persons found it a pleasure to meet him - and not just because he's a foodie who can serve terrific meals to his guests but because he is a man full of ideas and loves to get into intellectual exchanges.

If all this is true, then you cannot but be amazed at what has happened. The BJP has reached out beyond the Delhi coterie and brought in somebody relatively young (he's 52) and with the potential to shake up and revamp the party. This is quite an achievement when you consider how difficult it is to break into any entrenched set-up, whether the bureacracy or the corporate world or even academic institutions. It has happened in the BJP because Indian politics is extremely competitive and party workers expect to see results. If a given leadership cannot produce results, then the party dynamics contrives to bring in an outsider who can change things. The rise of Rahul in the Congress also owes to the imperative to project a new face and to come up with new ideas.

How Gadkari will perform is anybody's guess. But his rise to the top job in the BJP underlines that Indian democracy is alive and kicking.

PS: Thanks to Vishal for providing the link. Here is the relevant excerpt:

Maharashtra is strewn with Nitin Gadkari’s signature projects, almost all of them are testimony to his drive. As a former PWD minister, Mr Gadkari has shown the guts to overrule his party boss Pramod Mahajan and Shiv Sena supremo Bal Thackeray, who were keen on awarding Mumbai-Pune expressway project to a certain corporate house. Fiercely committed to the state’s cause, Mr Gadkari even offered to quit the post, but refused to give theproject to the said industrial house.

In the end, he won. The private company had quoted the project cost Rs 3,100 crore. The state-run Maharashtra State Road Development Corporation (MSRDC) — Mr Gadkari’s brainchild — completed it in just over Rs 1,600 crore. Even the currently inaugurated — though incomplete — Bandra-Worli sea link was Mr Gadkari’s idea, which he launched but could not complete because Sena-BJP failed in the 1999 state polls.

The test of his innovative skills came during 1996 when the newly formed MSRDC tried to tap the market for its various infrastructure projects. The regulator refused the state corporation permission to issue bonds since it didn’t have its own assets.

As a PWD minister, Mr Gadkari wasted no time and just in a day transferred all PWD assets in Mumbai to MSRDC. Thus came into existence a body that went on to build some 55 flyovers in Mumbai and the country’s first auto-bahn Mumai-Pune Expressway, all completed in the promised time-frame.

Monday, December 21, 2009

Subramaniam Swamy on Paul Samuelson

The best tribute to Paul Samuelson I have seen comes from Subramaniam Swamy. It is what tributes ideally should be- a combination of personal memoir and assessment of the individual. (Not that Swamy is able to do full justice to Samuleson's varied contributions). An interesting aside is on how the establishment at Delhi School of Economics prevented Swamy from getting in (and he had to settle for IIT Delhi instead):

Amartya Sen invited me to join the Delhi School of Economics as a full Professor in early 1968 stating in a hand-written letter that my 'gaddi was being dusted.' I therefore spent three months in the summer of 1968 at the Delhi School of Economics as Visiting Professor, before returning to Harvard with the intention of winding up and joining as Professor of Economics at the Delhi School.

But I did not realise then that the Left triumvirate of Sen, K N Raj and S Chakravarty had in the three months discovered that I was not only not ideologically neutral or soft like Jagdish Bhagwati, but hard anti-Left and wanted to dismantle the Soviet planning system in India besides producing the atom bomb.

So when I arrived in India in late 1969 this triumvirate scuttled my ascending the dusted gaddi. Sen was at his hypocritical best in explaining to me his volte face.

Samuelson was enraged when heard this and perhaps felt empathy because of his own experience in the late thirties at Harvard, and urged me to return. When I returned to Harvard to teach in the summer of 1971, Samuelson told me, "Stay here and write a treatise on Index Numbers and you will be worthy of a prize." But I was in a fighting mood and told him I would return.

Fortunately there was a professorship open at IIT-Delhi. Dr Manmohan Singh was the chairman of the selection committee. Samuelson with Kuznets, the 1971 Nobel Laureate in economics, wrote the committee strong letters of recommendation. Armed with it, Dr Singh did not wilt under the huge pressure mounted by the triumvirate and I was appointed a Professor of Economics in October 1971. But it did not last long.

The triumvirate then persuaded Indira Gandhi that I was a closet member of the RSS with chauvinist views, and a danger to her. With the KGB favourite Nurul Hasan as education minister, I was easily sacked in December 1972, but re-instated by court in 1991.

Thursday, December 10, 2009

Remembering Peter Drucker

If you are at a loose end and would like to spent time productively, here is a suggestion: pick up an book of Peter Drucker's, open it anywhere and start reading. Chances are you will have gained. I remember listening to him at a seminar at Stern School. Along with him were an official of the World Bank and somebody from the corporate world. He spoke briefly and succinctly. It was thought-provoking. When the others followed, it sounded pretty flat. I guess Drucker's cosmic mind had a way of making everybody else look mediocre.

Drucker would have turned 100 last month. The event was widely celebrated. I dipped into some of his writings at random and emerged refreshed as always. Drucker laid down the key principles of management some fifty years ago. They remain relevant because nobody bothers to practise them. And they are not practised because they do require an element of idealism, a commitment to a bigger something. That, alas, is not something you associate with business managers.

I highlight some striking ideas of Drucker's in my ET column, Peter Drucker lives on. One of them really hit me. It was about the board of directors being the Supreme Court, somebody to whom people down below could appeal. Do you know of any board that accepts such a role? Boards are so thoroughly captured by top management that if some middle manager wrote a complaint to them, they would dismiss it, saying, "We can't look at individual cases". Somebody should ask these fellows, "Is there anything you look at other than the cheque for your sitting fee?"

Tuesday, December 08, 2009

IIT Gandhinagar attracts quality faculty

IIT Gandhinagar has received nearly 700 applicants for faculty positions, half of whom are NRIs from quality institutions abroad, ET reports :
Director of IIT-Gandhinagar Sudhir Kumar Jain said at least three NRIs teaching in prestigious universities in the US and Singapore will join them by the end of December. ....

"This is a great development as we would get Indians who are involved in cutting-edge research and academics and are finding opportunities in India attractive. More so for us as the faculty would get to prove academic excellence given that we are a new institute compared to other IITs and hence more open to ideas," says Jain. ...

"To attract more talent from abroad, we are also offering them option to go abroad twice a year to pursue research and academics," says Jain.
So much for the supposed faculty crunch and the problems new IITs would have. I feel vindicated because I have always held that the newer IITs and IIMs would be able to attract faculty by offering suitable terms (not higher salaries but the flexibility indicated above).

In some ways, they may have a better chance of getting good faculty because in the existing institutions, entrenched interests are often the biggest obstacle to getting faculty- they simply won't let very talented or reputed academics in. Agreed, it is not easy to entice academics based abroad, so there are supply-side problems. But the artificial problems on the demand side are also a factor - and this is generally overlooked. Besides, NRIs would prefer to get back to their home town or to some place close to it and may want to steer clear of the larger metros where the older IITs and IIMs are located.

Somehow, IITs and IIMs have not used the mechanism of well-endowed chairs in order to attract talent. This is again primarily because the academics who are already in think they have first rights to any chair that is created and, often, they can't agree amongst themselves as to who deserves it. As a result, chairs are not created and, when created, go untenanted.

The IIT Gandhinagar experience is very promising indeed and augurs well for the government's decision to set up new IITs and IIMs. We need competition for the four or five IITs and IIMs that dominate the field today. So, all power to the new institutions.