Foreign bank licenses

Credit Suisse and ANZ have been given banking licenses, FT reports. The report also says that eight more banking licenses are to be awarded shortly, including to corporate groups, such as Reliance and Tatas, although a report in today's Economic Times discounts this possibility.

My own view is that both foreign banks and corporate groups can be licensed more freely for exclusively rural ventures. This mitigates regulatory problems and dovetails nicely with the overriding objective of achieving greater financial inclusion. More on this in my ET column, Let foreign banks into rural areas.

Foreign Universities' Bill

There are two issues about the Foreign Universities' Bill. Will it cause an influx of quality institutions from abroad? And should foreign universities be subject to quotas and other norms applicable to government institutions?

On the first issue, I agree with what many others have said. It is unlikely that we will have full-fledged universities with campuses set up by quality institutions. The economics militates against this possibility. Ours is a cost-sensitive market as so many foreign firms have discovered. Today, foreign car manufacturers all want to get into the small car segment. Volkswagen, Skoda, Ford all have launched small cars. Carlos Ghosn of Nissan says he would like to introduce a car that is even cheaper than Nano!

The same applies to education. To succeed, you need to be able to tap the mass market. I would say this is even more true of education than of manufacturing. Because you get the talent only if you tap the mass market. The secret of the success of IITs and IIMs is that they attract the very best- and they do so because they are affordable, despite the steep increase in fee at the IIMs in recent years. A high quality US school coming into the Indian market would be viable only at a steep cost. I would assume that an MBA fee would somewhere between the Rs 20 lakh that ISB charges and the Rs 45 lakh at a US school- say, Rs 35 lakh.

Now, somebody who can afford Rs 35 lakh will also be able to Rs 45 lakh and would prefer to go abroad and get the broader international exposure. Secondly, a price tag of that order automatically screens out the best talent in India. It will be a rich kids' school, which means its products will not be highly valued by the market.

It is striking that foreign universities have not taken off even in more affluent markets than ours- such as Singapore, China and Israel, as a very good story in today's TOI points out:

Singapore can justifiably boast about attracting some top-notch institutes — the University of Chicago, INSEAD, Tisch School of Arts, DigiPen Institute of Technology — but even today, the sector is undeveloped. .... This, despite the manner in which the country “courts the universities: the EDB played up Singapore’s cosmopolitan nature, and then used tangible material resources in the form of financial and other incentives,’’ observes Kristopher Olds, a professor at the University of Wisconsin-Madison who’s taught at the NUS for six years.

....The University of New South Wales (UNSW) also benefited from subsidies upwards of $80 million. Even so, within months of being set up, UNSW folded up citing its “unsuitable financial model’’. Three years ago, the John Hopkins Centre, which received $52 million in funding since its 1998 arrival in Singapore, also closed down as it did not meet the performance benchmark. And the UK’s Warwick University, which was to set up a full campus in the real sense of the term, backed out at the last minute.

The two universities that China can boast of are Nottingham and Liverpool - no great shakes, by world standards- and both have local partners, as required by law. Even Israel, with all its close links to the US, managed to attract only the low-grade institutions. We have to face up to the fact that no country has developed a great university sytem through imports. All great universities are home grown.

As for foreign universities being subject to quotas, well, since private universities in India are not subject to these, it's hard to see how we can impose these on foreign universities. Will the IITs and IIMs suffer as a result? Well, they haven't lost out in any way to domestic private institutions on this account, so quotas certainly won't be the reason for losing out to quality institutions from abroad- assume these come in in the first.

Shrinking CITI

Vikram Pandit told the US Congress that he expected to see Citigroup return to profit of around $20 bn by the end of 2011. He also proposes to sell 40% of Citi. In other words,Citigroup will shrink quite a bit even as it turns profitable. This is an acknowledgement that Citigroup is too big to be profitable, quite a reversal from the earlier credo that it could become more and more profitable through mergers and acquisitions.

Citigroup will be a leading case of a bank relinquishing size even without regulatory norms requiring them to do so- the proposed norms that would link bank capital to size have yet to be announced.

Separately, in an interview with FT, Pandit has spelt out what the focus of the restructured Citi would be:

The US consumer business is among Mr Pandit’s four priorities for investments once Citi stops losing money. The others are retail banks in emerging markets, the cash management unit and equities and commodities in the investment bank.

There is a bit of eastern philosophy in the interview for those interested:

"Doing the right thing for all our stakeholders – our clients, our shareholders but also other parts of society. We need to understand and embrace the responsibility that is put on banks by the general public

This belief was shaped by my Eastern upbringing, the belief that if you don’t do right now you will pay in the next life, and the importance I attach to reputation and credibility".

Pandit's remarks require a little tweaking. If he doesn't do the right thing, he and Citigroup will pay in this life, not the next.

MI 5 ex-chief criticises torture

British intelligence is exceptional in many ways- very effective, with a good international reach, especially in the Arab world, and with a good record of electronic interception. Another is that it has had women at the top- there was Stella Remington some years ago and, more recently, Dame Eliza Manningham- Buller, who headed MI 5. So, the more recent James Bond movies that have a lady as 'M' are not far-fetched. (If memory serves right, the original 'M' was Admiral Sir Miles Messervy).

Dame Eliza revealed recently that the UK government had protested to the US against the use of torture on suspects:

Asked if she had known of the use of waterboarding and other techniques of pressure while she was director-general of MI5, from October 2002 until her retirement in April 2007, she said she had done, and had disapproved. "Nothing - not even the saving of lives - justifies torturing people," she said. She added that "the Americans were very keen to conceal from us what they were doing" with suspects.

The ex-chief of MI 5 also took a swipe at the previous US administration:

"Bush, [Dick] Cheney [the former US vice-president] and [Donald] Rumsfeld [former US defence secretary] certainly watched 24 " - the Fox television drama that has run since late 2001 and features an agent, Jack Bauer, saving people and sometimes cities from terrorist destruction, often with the use of violence on suspects.

Dame Eliza's comments are refreshing indeed but one wonders what effect these would have on those in charge of security at the US. I can almost hear them saying, "We gotta cut back on intelligence-sharing with the Brits, can't trust these guys".

Stimulus withdrawal by stealth

Ahead of this budget, there was much debate on whether the fiscal stimulus given over the past two years should be withdrawn. In 2008-09, we had a stimulus of 3.5% of GDP; in 2009-10, there was a modest addition of 0.8%. This year, economists wanted the stimulus withdrawn but gradually.

The budgetary numbers make nonsense of this debate. The correct fiscal deficit, after taking into account the off-budget items, was 7.8% in 2008-09 and it declined to 6.9% in 2009-10. So the stimulus was withdrawn last year. Withdrawal by stealth, if you please. You might think that the stimulus withdrawal was greater this year because the fiscal deficit for 2010-11 is projected at 5.5%.

Not true, I argue in my ET column. The fiscal deficit measures the stimulus inaccurately. A more accurate measure would be changes in government expenditure net of centre's tax revenues. By this measure, the withdrawal of stimulus was greater in 2009-10 than projected for 2010-11.

Unknown to ecnonomists, most of the stimulus has already been withdrawn!

Budget discussion

I was on CNBC the other day. The topic was the post-budget impact on the economy.

Quote of the day

Martin Wolf in the FT:

India’s nominal GDP grew at an average rate of 14 per cent between 2004-05 and 2009-10. That makes deficits of 10 per cent of GDP quite sustainable.

Precisely the point I have been trying to make over the years. How come India's policy-makers and analysts don't get it and go on and on about fiscal consolidation?

Wolf, incidentally, goes on to suggest that the UK vacate its permanent membership at the UN in favour of India:

Exhausted by the burden of its pretensions, the UK should soon offer its seat on the security council of the United Nations to its former colony. Its condition would be that France does the same in favour of the European Union. Whether or not such enlightened statesmanship is forthcoming (presumably not), we are moving into the age of continental superpowers. Asia will be home to not one, but two, of them.