Wednesday, December 18, 2013

RBI paper on banking structure

The RBI came out with a discussion paper on banking structure last August. It outlines the RBI's thinking on issues such as bank consolidation, differentiated licensing, continuous authorisation and the role of small banks.

I'm afraid I find myself in disagreement with the RBI's position on these issues. Consolidation of public sector banks is a bad idea because it poses managerial challenges that public sector banks are not equal to. It will result in paralysing large banks as they go through the merger process. If the problem is funding the weaker PSBs, then adopt a two-pronged approach. Accept that government can no longer support the weaker PSBs and let them fund themselves in the market. This, of course, means letting government stakes in these banks fall below 51%. Then, government can focus on strengthening the better PSBs. Consolidation of the strong with the weak will end up weakening the entire PSB system.

Differentiated licenses- giving licenses for banks that cater to niches such as infrastructure or only wholesale or retail banking appears attractive in principle. But it won't work without special regulatory dispensations for such players. That would mean turning the clock back on the idea of a level playing field for all banks, which was the rationale for asking long-term financial institutions to become banks in the first place.

Continuous authorisation of bank licenses seems very reformist. Anybody can apply for a license any time. But you can't have bank licenses available on tap. In banking, you have to limit entry for a variety of reasons. After pausing to take stock, you decide when to let in players, once you have a view on whether there is enough competition or not, whether regulatory capacity is adequate or not and so on. Let us not get carried away by tokenism in one form or another.

As for small banks, these have proved not viable in general. Whether it is regional rural banks or the cooperative banking system, small banks have proved a headache because governance is an issue in these banks. Individual small banks may not pose systemic risk; in the aggregate, they can. Monitoring a host of weakly governed small banks is a big regulatory challenge.

Yes, we need some things to change in Indian banking. But it would be unwise to push through change for change's sake.

More in EPW article on the subject.

Buddhism and management? Gimme a break...

It had to happen and it has. After the Gita and management and lessons in leadership from Gandhi, Buddhism and management could not have been far off. Schumpeter reports that the Buddhist focus on "mindfulness" is gaining adherents in the management fraternity.

It is not entirely correct to suggest that "mindfulness" is a unique Buddhist contribution. 'Know thyself' is prescribed in the Hindu scriptures and, perhaps, other scriptures as well. The Buddha did emphasise the importance of "awareness"; J Krishnamurthi, the famous Indian guru, spoke of "choiceless awareness". The broad idea is that by simply watching the flow of one's thoughts, by being aware of one's surroundings, one can gain a better understanding of oneself.

What does this have to do with management, especially with producing better results? Self-awareness, no doubt, makes for better relationships. It may also contribute to a certain equanimity which helps one cope with the daily stresses of a managerial position.

The problem arises when one views awareness not as an end in itself but as a means to producing better results or, bluntly, higher profits. Relating religious or spiritual injunctions to commercial performance is a bad idea. It could well be that heightened awareness makes one question what is going inside one's company. It may mean questioning things going in society at large. It may mean having to challenge the assumptions on which business is built. This sort of questioning, which is a whole-hearted questioning that arises from deep awareness, could end up being inimical to business performance. Such performance, you could say, depends at least partly on your being blind to many things that are going on around you.

Business performance may have very little to do with spiritual development. On the contrary, it may call for a degree of ruthlessness and disregard for values that are contrary to the tenets of religion and spirituality. Mixing the two may well cause those in managerial jobs to fall between two stools- they mess up performance and they mess up their inner worlds as well. Schumpeter ends up posing the right questions:

The biggest problem with mindfulness is that it is becoming part of the self-help movement—and hence part of the disease that it is supposed to cure. Gurus talk about “the competitive advantage of meditation”. Pupils come to see it as a way to get ahead in life. And the point of the whole exercise is lost. What has parading around in pricey lululemon outfits got to do with the Buddhist ethic of non-attachment to material goods? And what has staring at a computer-generated dot got to do with the ancient art of meditation?

Monday, December 16, 2013

Larry Summers thinks a strong recovery is unlikely

The Fed is poised to withdraw QE following signs of recovery in the US economy. Larry Summers, writing in FT, thinks a return to full employment and strong growth is difficult without "unconventional policy support".

He gives four reasons:
First, even though financial repair had largely taken place four years ago, recovery has only kept up with population growth and normal productivity growth in the US, and has been worse elsewhere in the industrial world.

Second, manifestly unsustainable bubbles and loosening of credit standards during the middle of the past decade, along with very easy money, were sufficient to drive only moderate economic growth. Third, short-term interest rates are severely constrained by the zero lower bound: real rates may not be able to fall far enough to spur enough investment to lead to full employment.
Fourth, in such situations falling wages and prices or lower-than-expected are likely to worsen performance by encouraging consumers and investors to delay spending, and to redistribute income and wealth from high-spending debtors to low-spending creditors.
The Fed has said that a return to normal interest rates would be contingent on the unemployment rate falling to 6.5%. Summers argues that, at the interest rates that were earlier regarded as the norm, aggregate expenditure will be lower than before. Again, he provides a number of reasons:
Investment demand may have been reduced due to slower growth of the labour force and perhaps slower productivity growth. Consumption may be lower due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital. Risk aversion has risen as a consequence of the crisis and as saving – by both states and consumers – has risen. The crisis increased the costs of financial intermediation and left major debt overhangs. Declines in the cost of durable goods, especially those associated with information technology, mean that the same level of saving purchases more capital every year. Lower inflation means any interest rate translates into a higher after-tax rate than it did when inflation rates were higher;

If Summers is right, it is bad news for emerging markets, including India. Export growth will not be strong given a weak global recovery. At the same time, tapering of QE means capital inflows to finance India's CAD may not be adquate.

Summers does not spell our what "unconventional policy support" he has in mind. Does he think QE should continue? And what measures would he want on the fiscal side given the difficulties President Obama has faced in dealing with the Republicans in Congress? 

Sunday, December 15, 2013

How to spot a dysfunctional CEO

CEOs, many think, are crucial to corporate performance. Get the right CEO and you get results. Equally, as Schumpeter points out, the wrong CEO or a CEO gone wrong can wreak havoc on a company. Think World Com, Enron, RBS and Lehman Brothers. Boards spend a lot of time bringing on board somebody who they think can deliver. Somewhere along the line, however, the CEO loses the plot. Can we pick up signs of dysfunction early on? Schumpeter gives some pointers:

An obvious sign of a boss breaking bad is grandiosity. He attributes the company’s success wholly to himself, indulges in endless self-promotion or demands ever more extravagant rewards.... One study shows that chief executives who appear on the covers of business magazines are more likely to make foolish acquisitions. A second sign is over-control. The boss surrounds himself with yes-men and crushes dissent. He tries to control every detail of corporate life rather than building a strong executive team. A third sign is distorted decision-making. The chief conflates personal and corporate assets, is obsessed with buying other companies, or focuses on bizarre details....A chief executive becomes likelier to succumb to these vanities the longer he stays in the job. He gets used to people fawning over him...... A boss may think himself so brilliant he refuses to plan for his eventual departure or undermines possible successors.

Yes, every one of these is an indicator of trouble ahead. Schumpeter quotes a consulting firm as suggesting that boards should monitor "behavioural risk", perhaps, by talking to senior management from time to time. Schumpeter himself suggests introspection and timely self-correction on the part of CEOs themselves.

Alas, neither will work. Boards are incapable of having frank chats with senior management and senior managers incapable of speaking their minds to the board. Megalomania in CEOs and introspection simply won't go together.

So, are we powerless to prevent implosions of companies at the hands of self-destructive CEOs? It seems to me that part of the answer lies in devaluing the post of CEO itself. It is the concentration of power in the hands of the CEO itself that is the root of the problem. I am constantly reminded of Peter Drucker's characterisation of the CEO: not an individual but a team of three. Only the diffusion of power in a company, the democratisation of organisations can provide a health check on the havoc wrong by dysfunctional CEOs.

Is this another impossible solution I am proposing? It's difficult, given the stranglehold of vested interest but not impossible. Boards will not do this on their own. Institutional investors and regulators must push for reform of the post of the CEO itself, ensuring that top management is truly a team and not one person.


Thursday, December 12, 2013

How do online courses compare with a full time MBA?

MOOCs are in vogue and they are catching on, even if in a small way. One important question is : do they pose a serious challenge to the high-profile, full MBA programs? The answer would determine how the great names in management education need to respond.

Philips Delves- Broughton, himself an MBA from Harvard and author of a best-selling book on his experience there, sat in on some MOOC management courses to check them out. His experiences, he says, were mixed.

What struck me immediately is that the free online MBA is still in its Precambrian stage. What few courses there are range wildly in quality. Open, online learning offers a dif­fer­ent set of opportunities and challenges to classroom teaching. And clearly not all universities or professors know what to do about it. Some are simply dumping their classroom lectures and course materials online. Others are really engaging with the vast new audiences out there.

The more important point is that, to my knowledge, none of the better-known schools is offering the entire suite of MBA courses online. They have a sample or teasers. It would appear that the intent is to market themselves, not to educate people without cost. (Why would they want to do that? It would seriously threaten their business model). What we need is a good quality online that is reasonably priced, say,  a fourth of the price of an IIM MBA or around Rs 3 lakh. Are there any out there?

I would go along with a point the author makes. It's not necessary to match the quality of the top schools. Just offer something that's reasonably good and at a very low price- or completely free. That would not unsettle the top schools but it would provide enough to get people jobs.

Wednesday, December 11, 2013

Modi versus Kejriwal? Not quite.....

AAP is the flavour of the day, having made a terrific showing in Delhi. The party makes no bones about its national aspirations. It plans to contest Lok Sabha seats. There are those who think it has the potential to replicate its success in Delhi at the national level. Sections of the media are euphoric about the outcome and think a new dawn has emerged in Indian politics.

Opinion polls conducted during the Delhi elections suggest other wise. A large number of those who voted for AAP said they would vote for Modi in the general elections. Surjit Bhalla, in his article,provides an even more interesting statistic: only six out of every 100 BJP voters voted for the AAP, but six times as many (36 out of 100) Congress voters did so. If this is replicated elsewhere, it is the Congress vote that will get split and the BJP stands to romp home. (Here, of course, we are ignoring powerful regional players in UP, Bihar, Orissa and elsewhere). Bhalla believes there was a strong Modi wave in both Rajasthan and Madhya Pradesh, otherwise it is hard to explain the margin of victory. 

At the national level, voters are bound to ask whether the AAP has anything more to offer than an anti-corruption plank (which often amounts to no more than saying, "We should have no evil in this world"). The middle class enthusiasm for Kejriwal& Co is understandable, given its moral outrage over corruption. But businessmen rooting for AAP is astonishing. The AAP is, perhaps, to the left of not only the Congress but even the CPI (M) in its last years in West Bengal. Bhalla writes:

Economic policy according to the AAP/ Kejriwal should be as follows (obtained from interviews, manifestos, etc): "GDP growth should be directly related to the lives of the people, but such growth affects very few people.... The AAP opposes privatisation, wants government in oil extraction (and much else), recommends an increase in effective taxes on the middle class and supports increases in fuel and electricity subsidies. The AAP would take measures to ensure basic facilities, for example electricity expense reduction of 50 per cent and 700 litres of free water. Further, the AAP believes in government provision of high-quality education and health, regulation of fee of private schools, implementation of minimum wage, etc." 
The markets don't appear to have taken the AAP seriously so far, otherwise they would have tanked by now. Should the AAP come to power as part of any coalition, the chances of a rating downgrade by the rating agencies must be reckoned to be pretty high.

What of the AAP's prospects in the future? We need to ask whether a crusade against corruption suffices for a party to govern or even to sustain itself. Several anti-corruption movements have erupted from time to time- the Andolan in Gujarat in the time of Chimanbhai Patel, the JP movement, the Hazare campaign- but they tend to fizzle out. For a party to maintain its image in the grime of electoral politics is not easy: in the Delhi polls itself, the party drew serious allegations which voters seem to have overlooked for now.

The AAP faces a huge challenge in building the organisational infrastructure and creating the leaders in order to make a national impact- Kejriwal's call to 'good people' from other parties to join him already points to a measure of desperation. Not least, should  a party become serious about rooting out corruption, the entire weight of important interests- the corporate world, the political class, the bureaucracy- will be brought to bear on suppressing it. That is the grim reality of politics today. 

In sum, AAP looks poised to act as a spoiler for the Congress and thus boost the BJP's chances. The idea that Kejriwal is a challenge to Modi does not appear plausible at the moment.

Friday, December 06, 2013

A somewhat contrarian view on Nelson Mandela

The distinguished British journalist, John Pilger, has a rather different view of the Mandela legacy, whatever the heroism Mandela may have displayed in fighting apartheid.

In an article he wrote for the New Statesman, he suggests that the arrangement that Mandel arrived at with the Afrikaner regime, in effect, allowed the Afrikaner elite to continue their domination of the economy while coopting the black elite into it. For the vast majority of blacks, the transfer of power didn't add up to much:

With democratic elections in 1994, racial apartheid was ended, and economic apartheid had a new face. During the 1980s, the Botha regime had offered black businessmen generous loans, allowing them set up companies outside the Bantustans. A new black bourgeoisie emerged quickly, along with a rampant cronyism. ANC chieftains moved into mansions in "golf and country estates". As disparities between white and black narrowed, they widened between black and black.

The familiar refrain that the new wealth would "trickle down" and "create jobs" was lost in dodgy merger deals and "restructuring" that cost jobs. For foreign companies, a black face on the board often ensured that nothing had changed. In 2001, George Soros told the Davos Economic Forum, "South Africa is in the hands of international capital."
Something to chew over as the world mourns the passing of Mandela. 

Thursday, December 05, 2013

America Inc dominates the world

America in decline? Certainly not true if you look at the world's leading corporations. Nine of the top most valuable corporations in the world today are American, the Economist reports. This is a significant increase from the figure of three in 2009. Post-crisis, it is American firms that have come out smiling. One reason is that the problems in the Eurozone have meant that the challenge from Europe has dimmed. The Economist lists other factors at work in driving the American resurgence:

Two deeper factors are also at play, though. First, America’s mix of resilience and renewal. Three of its nine biggest firms have their roots in a 16-year period in the late 19th century—Exxon, General Electric and Johnson & Johnson. Their durability reflects their powerful corporate cultures. But the country still does creative destruction, too. IBM and Intel have slid down the rankings to be replaced by Apple and Google. Chevron, an energy firm, has gone from a laggard to a world-beater. Success has been anything but parochial. Six of the nine biggest firms sell more abroad than at home.

Second, the old rule that buying shares in state firms is investment suicide has reasserted itself. The world’s ten biggest state firms in 2009 have lost $2.2 trillion of value, or 60%, from their peaks. Lower commodity prices are only partly to blame. Investors now award most state firms stingier valuations than their private peers. Gazprom is worth three times its profits, versus Exxon’s multiple of 11. And although emerging economies have slowed, nimble private firms are doing fine. In 2007 investors gorged on shares in PetroChina when it listed in Shanghai, briefly making it the only firm ever to be worth over $1 trillion. Now China’s hottest corporate property is Alibaba, a private internet firm plotting a huge flotation.

The point about American capitalism being vibrant is well taken. But it would be too early to write off  state-owned firms. The problem with many state-owned firms is not state ownership per se but lack of exposure to competition and lack of stock market discipline. Combine the two and state ownership is seen to do much better. It is useful also to build in incentives for management and workers. State-owned firms can have some advantages: no accounting jugglery, changes in top management from time to time, and a long-term view. Combine all this and you may still not be able to match the best in the private sector. But you can certainly do better than the average.

The Economist takes note of some signs of change:
Petrobras has allowed minority investors to appoint a director to its board. Maria das Gra├žas Foster, its newish boss, has indicated it will be more careful with its investments. Russia’s government has talked about making state firms pay higher dividends, in part to force greater discipline upon them. China’s reformers signal that they would like to confront its mighty industrial lobby. A 2012 semi-official report called “China 2030”, written in conjunction with the World Bank, says that allowing state firms to act in a more commercial manner is a key objective. The hybrid model which makes firms answerable to both investors and politicians may never be satisfactory, but it can be improved.


Friday, November 29, 2013

China flexes its muscles- a new Cold War?

China's creation of an air zone around the disputed Senkaku (Diaoyu) islands (the dispute is with Japan) in the East China sea is undoubtedly a fresh sign of an emerging superpower flexing its muscles. The move provoked the US into sending two B-52 strategic bombers over the air zone by way of poking China in the eye.

China has ignored the poke. That doesn't mean it has lost its case. Far from it. The US may defy the Chinese air zone but China's own neighbours- and their airlines- are unlikely to do so. An article in the FT indicates how the Chinese hope to slowly alter the status quo:

For a start, the US cannot keep flying bombers over the region and say they are part of “long-planned exercises” (as they claimed this week’s flyovers were).
Doing so would quickly lose impact as a statement of principle and evolve into needless provocation, especially in the eyes of the Chinese public, who draw most of their opinions on such matters from tightly controlled state media.

...From now on they will start asking other countries to force their airlines to identify themselves to Chinese authorities when passing through the disputed airspace, thereby implicitly acknowledging that the territory belongs to China.The pressure will be much greater on individual airlines hoping to capitalise on the tens of millions of new Chinese tourists flooding out of the country every year.
When they cave they can always justify their compliance on safety grounds.

 An article in Asia Times blasts the US action as "criminally reckless and phenomenally stupid". It proceeds to explain why:

In contrast to the aging and completely overstretched US armed forces, the Chinese armed forces are catching up and catching up really fast. Yes, in the 1980s the Chinese military did look at lot like the Soviet military of the late 1950s, but the economic boom of China has deeply changed this, and today the Chinese armed forces are gradually acquiring more and more 21st century characteristics; soon, they will easily surpass the capabilities of South Korea and Japan.

Next, and before the folks in the White House fully understand it, the US will be facing a large and technologically equal or even superior Chinese military. China is also being very smart in forging an informal but truly strategic alliance with Russia, which, unlike the US, does every effort possible to show respect and support for its large neighbor.

Should it ever come to a shooting match between the US and China, there is no doubt in my mind whatsoever that Russia will offer its fullest support for China short of actually attacking US targets.

One thing is for sure. For China to have ratcheted up the stakes in the region knowing that it would provoke a strong US reaction points to a certain self-assurance in the Chinese leadership. But the Chinese are dealing here not only with the world's leading power but also with a nationalistic leader in Japan in Abe. Many analysts that the chances of a fracas arising from a small error of judgement are pretty high.

Just when we thought that the US- Iran rapprochement had made the world a little safer.....

Monday, November 18, 2013

Cash transfers- conditional versus unconditional

A recent issue of the Economist has an excellent analysis of cash transfers, based on a range of research on the subject. The bottomline is compelling: unconditional cash transfers (UCTs) - simply handing out cash to the poor without strings attached- seems best suited to alleviating poverty.

When do UCTs work best?

They work when lack of money is the main problem. The people who do best are those with the least to start with (in Uganda, that especially means poor women). In such conditions, the schemes provide better returns than job-training programmes that mainstream aid agencies favour. Remarkably, they even do better than secondary education, which pushes up wages in poor countries by 10-15% for each extra year of schooling. This may be because recipients know what they need better than donors do—a core advantage of no-strings schemes. They also outscore conditional transfers, because some families eligible for these fail to meet the conditions through no fault of their own (if they live too far from a school, for instance).

And what about conditional cash transfers (CCTs)? They are less expensive than UCTs because they typically hand out less cash than UCTs. They have other virtues:

Moreover, CCTs can focus on something which UCTs leave to chance: helping the next generation. Healthier, better educated children earn more throughout their lifetimes, so the requirement to attend school or clinics should cut future poverty. UCTs aim to reduce poverty now. So conditional and unconditional schemes are not always comparable. That said, a lot of effort has gone into making comparisons, and the results are now emerging. CCTs have their drawbacks but—at least where governments are concerned, and if you take a broad definition of poverty reduction to include health and education—they usually do a better job.
The broad conclusion?
In short, UCTs work better than almost anyone would have expected. They dent the stereotype of poor people as inherently feckless and ignorant. But CCTs are usually better still, especially when dealing with the root causes of poverty and, rather than just alleviating it, helping families escape it altogether.
The article does not, however, address the key issue of how the poor are best identified and the related issue of leakages in reaching the cash to the poor. How does one ensure that money reaches the intended beneficiaries? Do the countries surveyed have the equivalent of UID? Or is it done through some other means such as mobile accounts? Simply handing out cash does not seem a sensible thing to in a place like India where the problem of leakages is a real one.

Teaching economics in today's world

FT has an article on how the teaching of economics to today's students can be made useful and relevant. What is taught apparently does not help students to relate to stuff such as the Eurozone crisis. Students want to know about climate change, financial instability and economic disparities- the author says we have the tools to address these in economics.

That's fine. What I would like to know is how these topics can be incorporated in basic courses in Micro or Macro-economics. I look forward to seeing the curriculum the author says her Centre proposes to make available on open access. I have a suggestion: just take the core course outline of any leading institution and tell us what new topics you would like to incorporate - and how you want these taught at the basic level. 

Let me add that I'm also tired of people telling us how B-school curricula need to change to cope with the new world. We are constantly being told that the courses are not relevant,  they don't provide soft skills, they don't deal with the organisation of tomorrow. Alright, so please take the curriculum of IIMA or any other leading B-school and tell us the following: which courses to delete, which courses to add, and how existing courses need to be modified. Please do this session by session and mentioning topics and text books/ references. Now, that would be a serious contribution.

Any takers?

Saturday, November 16, 2013

Two fascinating interviews

FT carries two fascinating interviews. One is with Henry Blodget, the analyst who was disgraced during the dotcom burst of the early 2000s. Blodget now runs a successful business news and analysis website. The other is with scientist Paul Davies about the three fundamental questions in science.

Sunday, November 10, 2013

Banks will benefit from more capital, not less

Banks in the western world have been crying themselves hoarse over the increase in bank capital mandated under Basel 3. They say higher capital will mean costlier lending, it will cause banks to cut back on asset growth or even shrink assets. One way or another, they say, it will end up hurting the economy.

Worse, higher capital risks causing an erosion in investor interest in banks. Who would want to invest in the face of falling return on equity?

Well, the reality is that banks in the US have moved to meet the higher Basel 3 requirements well ahead of the deadline of 2019. And with what result?Their share prices are soaring. Swedish regulators have mandated a tier I capital ratio of 12%, way above the 7% mandated by the regulators. And Sweden's banks are producing a return on equity of 15% compared to 10-12% produced by their better known European counterparts.

How do you end up increasing return on equity with greater capital? Well, you get the benefit of cheaper borrowings. As for share prices, the markets end up giving a higher price to earnings (or book) multiple because they see banks with higher capital as being safer. Here's the bottom line: don't try to keep bank capital down to the regulatory minimum or even lower based on your own risk modelling. Hold capital more than what regulators require. After the financial crisis, the advantage lies squarely with banks with more capital, not less.

Read this excerpt from an article in FT:
Here is the problem: banks have spent a lot of time, energy and money warning of the potential ill-effects of ramping up regulation. But since the crisis, international regulators have kept demanding more capital, including a surcharge for the biggest banks. Lenders have doubled their capital levels as a result, hitting the new Basel III targets six years early in some cases and, yet, where are the ill effects? The best of them continue to set new profit records.

Tuesday, November 05, 2013

J P Morgan hiring in Asia under scrutiny

I read with some astonishment a news item about the US authorities looking into JP Morgan's hiring practices in India, South Korea and Singapore. This follows similar investigations into hiring in China by the anti-bribery unit of the SEC and other federal authorities.

As I understood the report, the allegation seems to be that JP Morgan hires sons and daughters of influential people - and using less rigorous standards than are applicable to other applicants- so that it can win business.

The average person is bound to ask: so what is new? How many companies will the US authorities likewise investigate? And how exactly do you establish a nexus between such hiring and improper winning of business? As the report indicates, JP  Morgan also hires consultants. So do a number of other companies.

I cannot say about  JP Morgan but very often consultants hired by companies are retired government bureaucrats, regulators, ambassadors and others. This practice is rampant in the US itself. And the idea in hiring such people is not just to understand processes in government but to influence outcomes by using the contacts of influential people. The US is notorious for its "revolving door" syndrome- government officials moving into Wall Street and then back into government.

In India, one method used is to give business contracts to children of those in power. The easiest thing to do for politicians' children is to get into the real estate business.The private sector provides the finance; the children provide the clearances through their contacts. It's a terrific arrangement. Nothing unofficial or even illegal about it.

Getting close to influential people- whether by hiring them as consultants or their kith and kin as employees- is an integral part of crony capitalism. How far do the US authorities propose to go in tackling it?

Monday, October 28, 2013

How do developing countries catch up?

'Convergence' is a term that students of economics are familiar with. For several reasons, developing countries are poised to catch up with higher income countries over time, although this could be a long time. How to expedite this is an important policy issue. The conventional wisdom is that you allow markets to function freely and do the trick- produce high growth. Remove the dead hand of the state and- hey presto!- growth materialises. Most "reformers" would ascribe the high growth in India since the 1990s to precisely such a thing having happened.

Alas for them, the reality is rather different. Economist Deepak Nayyar has an article in the Hindu in which he points out that rapid growth flowed from meaningful state intervention rather than state retreat. (He has a book coming out on this theme):
Thus, industrialisation was not so much about getting-prices-right as it was about getting-state-intervention-right. Indeed, it is plausible to suggest that, for a time it might even have been about getting-prices-wrong. It may be argued that state intervention in the form of industrial policy should recognise and exploit potential comparative advantage, but it is just as plausible to argue that instead of climbing the ladder step by step it could be rewarding to jump some steps in defiance of what comparative advantage might be at the time. In either case, state intervention is critical.

Apart from an extensive role for governments, the use of borrowed technologies, an intense process of learning, the creation of managerial capabilities in individuals and technological capabilities in firms, and the nurturing of entrepreneurs and firms in different types of enterprises were important factors underlying the catch-up in industrialisation. The creation of initial conditions was followed by a period of learning to industrialise so that outcomes in industrialisation surfaced with a time lag. This accounts for the acceleration in growth of manufacturing output that became visible in the early 1970s.

Clearly, it was not the magic of markets that produced the sudden spurt in industrialisation. It came from the foundations that were laid in the preceding quarter century. In this context, it is important to note that much the same can be said about the now industrialised countries, where industrial protection and state intervention were just as important at earlier stages of their development when they were latecomers to industrialisation.

So, the acceleration since the 1990s didn't come out of thin air, it wasn't conjured up by markets or private sector firms. The foundations had been laid in terms of an industrial base, technological capability, investment in higher education, a growing middle class, etc. Liberalisation helped get the best out of this investment in capability that had been state-driven. It might have happened a little earlier; the License Raj excesses were clearly unwarranted. But this is different from saying that the private sector produced a magical transformation, starting in the 90s.

Economist on Sachin Tendulkar

The Banyan column in the Economist seeks to unravel the Sachin mystique. It's not just about Sachin being a great cricketer- the column suggests that Gavaskar was, perhaps, a better player and contributed more in a weaker Indian team.

It's about what Sachin represents, the transformation of India from a poor country into a relatively better off country. In the process, many have become richer, including Sachin himself. Now, a new set of players are knocking at the doors of good fortune in cricket. Unlike Sachin, however, they are brash and ostentatious. Sachin, with his low-key persona, good manners and devotion to family represents what India would like to see in the successful.

Well, nothing new here, I guess that's what Indians have always wanted to see in the successful. They would like politicians to sport khadi, they don't much like industrialists who own jets and yachts, and bureaucrats still go around in half-sleeved shirts and sandals. Even in Bollywood, the sober and soft-spoken Amitabh Bachchan is more revered than the flashier types. As the article points out, however, this applies to only to the older India (those above 35); with the younger crowd, ostentation may be going down well.

The column's point about Sachin overstaying in the team is a stronger one. All of us know how difficult it was for the board and the selection committee to ask him to leave. Sachin, the column points out, illustrated the bane of Indian society: the "impunity enjoyed by all India's rich and powerful". In not wanting to leave, again, Sachin, alas, represented something that is all too common in Indian politics, the corporate world, the bureaucracy and the cinema.

Perhaps, it is for politicians to give the lead: I read somewhere that Jairam Ramesh has suggested a retirement age for politicians. There should also be a generally accepted upper limit for people who assume high office, say, the prime ministership. It happens in the UK and the US. It should happen here as well. Once it happens in politics, hopefully the message will go out to other sections of society: for god's sake and ours, quit and find something else to do in life.



Friday, October 25, 2013

My latest book is out

My latest book, Before and After the Global Crisis, is out.  It's a collection of my writings in recent years, broken down into five themes: Indian Economy, Indian Banking, World Economy, Management and Governance, Indian Polity. I reproduce the blurb:


The Indian economy has been through something of a roller-coaster ride since 2004. There was a period of boom in 2004. Then came the global crisis, a sharp deceleration in India’s growth rate and a waning of confidence about India’s economic prospects both at home and abroad. 
This collection of articles, written for The Economic Times and the Economic and Political Weekly, provides an intelligent – and often off-beat- analysis of events in the Indian economy as well as the world economy over the period 2004-2012.     
As the financial sector has been at the heart of the crisis, the Indian banking sector as well as international banking come in for close scrutiny.  The book also takes in its stride developments in the Indian polity, and a range of issues relating to management and governance.  
Written in the readable and hard-hitting style for which the author is well-known, the book is at once a chronicle and a critique of a turbulent period for the Indian economy as well as the global economy.
As I thumbed the pages after receiving my copy, I asked myself whether the writings would stand the test of time. That's obviously for the reader to judge. But I have no difficulty in confessing that I seem to have been somewhat over-optimistic about India's growth prospects. I did not foresee the sort of sharp deceleration in growth we have had in the past three years. Some of it is, of course, the result of non-economic factors that could not have been foreseen: the Supreme Court ban on mining, the delays in environmental and other clearances that have held up projects, including the expansion of coal supply, and, not least, the CAG reports and the anti-corruption crusade which have paralysed both parliament and the bureaucracy.

A deceleration from 9% during the boom years to 6.5-7% would have been understandable. But not the drop to 5%. Still less could one have thought that the drop in the growth rate would have stretch out for so long. It doesn't seem likely that growth will move up to 7% before 2015-16, and, that too, is contingent on global factors. Before we get there, we will need to weather the storm that will be unleashed by the tapering of QE in the US. Looking back on the growth optimism, which I shared, one is reminded that economists need more than a touch of humility in pronouncing on the future.




Thursday, October 17, 2013

US education model should be a warning, not an example

Oxford's vice-chancellor complains that the ceiling of £ 9000 on fee charged by universities it not fair; it makes no allowance for differences in quality. After all, in the US quality universities can charge what they like. An article in FT warns that the US model may not be the right one for other economies.

To me, the interesting point the article makes is that, in exchange for the enormous fees they charge, universities have become generous with grades- or what is called "grade inflation:

Students are getting increasingly lavish accolades for their money. In the early 1980s, fewer than 30 per cent of all grades were As; now the figure is more than 40 per cent. By other measures things have worsened. In one survey, only a quarter of college graduates were deemed able to understand written material to achieve everyday goals.
Few who have taught in America outside the Ivy league will be surprised. Students receive highish marks for semi-literate work, displaying a glimmer of rhetorical power only when they plead for still greater leniency.

At the Ivy League and other reputed universities, education may be of high quality. But, precisely because it is so, universities have come to charge exorbitant fees- tuition costs five times on the average more than what it did 30 years ago. In general, costs bear no link with either cost or the value of education. The impact on students who cannot afford costly loans can well be imagined.

The US model should be a warning to others who wish to develop human capital. It's reassuring that, in India, institutions such as the IITs have desisted from raising fees, even when experts sitting on  committees have wanted them to. Privatisation of education is bad enough because it means the state has forsaken its role in providing education; leaving fees totally unregulated will sound the death knell for access to education for people at large.

Nobel for Economics

FT has two interesting articles on this year's Nobel for Economics, one by John  Kay and the other by Tim Harford (of Undercover Economist fame). They make a point that many others have made, that two of Nobel Laureates, Eugene Fama and Robert Shiller, got the award for holding rather contradictory views. Fama propounded the theory that markets are efficient, that is, securities prices reflect all available information. Shiller contended that markets are prone to bubbles and that volatility in stock prices exceeds what can be ascribed to new information.

Who is right? Well, in a way, I suppose both are. Markets tend towards efficiency; the fact that they deviate from efficiency often or even for long periods does not refute Fama's basic postulate. As Harford points out, one big outcome has to been to discredit stock analysts and stock pickers in general. It's far better in terms of returns and far more cost effective simply to invest in a basket that mimics the market.

The popular view is that the sub-prime crisis arose from the belief in market efficiency and that this belief underlies the crisis. Harford makes an interesting point: true believers in market efficiency would have wondered how safe (AAA securities) could yield such high returns and would have stayed away from these.

I guess the point about the crisis is that the banks ventured into activities that are more the preserve the capital markets; poor regulation allowed them to do so. Capital markets may not be efficient at all times but that does not diminish their role. Banks too have their traditional role but they must be careful not to stray away from it and involve themselves heavily in capital markets.

Saturday, October 12, 2013

The Nobel:how the news is given out and what makes it great

Nobel Laureate Peter Higgs chose to disappear on a holiday without his mobile to evade the media frenzy that follows the announcement. He must have been pretty sure he would win- and, of course, he was heavily tipped to.

How the news is given and how it is received is a story in itself- and it's well told here. Often, people are disbelieving: how could they be sure it's not a hoax? Sometimes, there is a stunned silence. At other times, people just want to be by themselves to digest the enormity of it all. Those tipped to win will be more than a little tense on the given day - if it's a Tuesday, it's Chemistry, Wednesdays are for the Physics prize-and Economics the following Monday. These prizes are announced by the permanent secretary to the Royal Academy of Sciences of Sweden. Peace, medicine, literature- these are left to others.

FT has a good article on why the Nobel remains the most sought after and respected, despite attempts by other endowments to outdo the Nobel in terms of money.

Friday, October 04, 2013

America Inc rules again

American firms have muscled their way back into nine of the top ten slots amongst global firms in terms of market cap. In 2009, only the US had only three firms in the list. Post-crisis, it seemed the US was headed for a decline. For the nth time, the US is to prove the naysayers wrong. The US economy is recovering better than Europe and it's emerging markets that are slipping up of late.

The Economist gives the reasons why America's renewed ascendance in the business world:
A perky stockmarket is partly responsible. The euro crisis has killed off any hope that more firms from the euro zone might scale the rankings: the currency block has just four firms in the top 50 (see article).
Two deeper factors are also at play, though. First, America’s mix of resilience and renewal. Three of its nine biggest firms have their roots in a 16-year period in the late 19th century—Exxon, General Electric and Johnson & Johnson. Their durability reflects their powerful corporate cultures. But the country still does creative destruction, too. IBM and Intel have slid down the rankings to be replaced by Apple and Google. Chevron, an energy firm, has gone from a laggard to a world-beater. Success has been anything but parochial. Six of the nine biggest firms sell more abroad than at home.

Second, the old rule that buying shares in state firms is investment suicide has reasserted itself. The world’s ten biggest state firms in 2009 have lost $2.2 trillion of value, or 60%, from their peaks. Lower commodity prices are only partly to blame. Investors now award most state firms stingier valuations than their private peers. Gazprom is worth three times its profits, versus Exxon’s multiple of 11. And although emerging economies have slowed, nimble private firms are doing fine. In 2007 investors gorged on shares in PetroChina when it listed in Shanghai, briefly making it the only firm ever to be worth over $1 trillion. Now China’s hottest corporate property is Alibaba, a private internet firm plotting a huge flotation.

The Economist may be exulting too soon over the falling fortunes of state firms. Nobody gave these firms the ghost of a chance of being highly valued, say, 10 years ago. But they did become a force to reckon with. With improvements in governance, restructuring and better market orientation, they could well reinvent themselves. The Economist had its ideological basis but it's too early to write off state-owned firms everywhere. 

Why McKinsey will stay at the top

Economist columnist Schumpeter takes a look at McKinsey's future while reviewing two books, one on the firm and another on consulting in general.

The big challenge to the to consulting firms comes from lower-priced competitors, some of whom use consultants who once worked for the big three. I doubt that lower prices will take away the bulk of the top three consultants' business- the companies who hire them are hardly the price-sensitive variety.

As Schumpeter correctly points out, McKinsey's strengths are talent, investment in knowledge creation and a network of alumni who are happy to use its services. In most companies, the people running them are so busy with operational matters that they just don't have the time or the mental space to strategise or even analyse information systematically. The bright minds at consulting firms do just that. Whether this adds value or not is not clear. But it serves a purpose akin that of the psychiatrist counselling patients:

Though lesser firms may be facing disruption, McKinsey dispenses a special sort of consultorial fairy-dust that is hard to replicate, and as much in demand as ever. The global ruling class is seized with a toxic combination of status-obsession and status-insecurity. Decision-makers also fear being swept away by one of Mr Christensen’s disruptive forces. They seek constant reassurance and reaffirmation from prestigious institutions. McKinsey knows better than almost anyone how to exploit this peculiar mindset. That will guarantee the Firm a solid future, even if no one can prove that its advice actually does any good.

Friday, September 27, 2013

Raghuram Rajan's maiden monetary policy

Rajan's maiden monetary policy produced a blizzard of instant commentaries. I thought I would wait and see how things pan out in the markets. The wait was worth it. I am not inclined to buy the contention that the policy is primarily about fighting inflation. I think it is more about maintaining currency stability.

Why do I say so? Well, the policy caused short-term rates to fall by a cut in the MSF rate. However, the hike in the repo rate will cause long-term rates to rise. The net effect should be an increase in banks' cost of funds and hence in lending rates. It cannot be otherwise if the policy is anti-inflationary. You can't have an anti-inflationary stance that causes lending rates to fall!

Rajan's maiden policy is undoubtedly anti-inflationary. But I would think that Subbarao's tightening in July was even more so. There was a rise of nearly 300 bps in short-term rates- and it was only a matter of time before long-term rates followed suit. That would have really slammed the brakes on growth. So Rajan has loosened policy somewhat, albeit at the short end.

If the focus had been primarily on inflation, then such a loosening would not have been warranted. The hike in the repo rate, which is meant to offset the cut in the MSF rate, is intended to maintain a decent differential between yields in India and those in the US ahead of tapering. It is a sort of preparation for the inevitable tapering of QE that lies ahead. Evidently, the RBI takes a rather grim view of what tapering would mean for India.

More in article in the Hindu, RBI focus still on currency stability.

Tuesday, September 17, 2013

Raghuram Rajan's diagnosis

Somebody sent me the link to an article on the Indian economic situation that Raghuram Rajan wrote just before he became RBI governor. It does not seem to have received the attention it deserves.

Rajan does not contend that the present situation is the result of serious economic mismanagement or that it can be rectified only through sweeping reforms, as many critics of the government do. Instead, his thesis - allow me to say that it is one that I have myself been peddling for quite some time- seems to be that the current situation is the result of a combination of adverse factors of a transient variety. They can be addressed through modest initiatives, it is not as if we need to unveil the entire panoply of 'second generation' reforms. I will let Rajan speak for himself:
In part, India’s slowdown paradoxically reflects the substantial fiscal and monetary stimulus that its policymakers, like those in all major emerging markets, injected into its economy in the aftermath of the 2008 financial crisis. The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared. So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption.

Moreover, India’s institutions for allocating natural resources, granting clearances, and acquiring land were overwhelmed during the period of strong growth. India’s investigative agencies, judiciary, and press began examining allegations of large-scale corruption. As bureaucratic decision-making became more risk-averse, many large projects ground to a halt.

Only now, as the government creates new institutions to accelerate decision-making and implement transparent processes, are these projects being cleared to proceed. Once restarted, it will take time for these projects to be completed, at which point output will increase significantly.

Finally, export growth slowed, not primarily because Indian goods suddenly became uncompetitive, but because growth in the country’s traditional export markets decelerated.
 And how do we fix these?
The immediate tasks are more mundane, but they are also more feasible: clearing projects, reducing poorly targeted subsidies, and finding more ways to narrow the current-account deficit and ease its financing. Over the last year, the government has been pursuing this agenda, which is already showing some early results. For example, the external deficit is narrowing sharply on the back of higher exports and lower imports.

Every small step helps, and the combination of small steps adds up to large strides. But, while the government certainly should have acted faster and earlier, the public mood is turning to depression amid a cacophony of criticism and self-doubt that has obscured the forward movement.
There is no suggestion in the above of serious economic mismanagement on the part of UPA II. True, the fiscal deficit increased to an uncomfortable level post the crisis. But that is at least partly because the sharp slowdown in growth in recent years- caused, to  a large extent, by the sputtering of the Eurozone and the rest of the world- just could not have been anticipated. 


IAS/ IPS officers can now get medical treatment abroad!

I haven't seen any news item about the above, and I got to know about it when I read a great piece by Rama Baru in the Hindu:
The Government of India’s Department of Personnel and Training (DoPT) has decided to reimburse approved expenditure on treatment abroad, for a defined range of medical conditions, for officers of the Indian Administrative Service (IAS) and Indian Police Service (IPS). In doing so, it is extending to them a benefit available to Members of Parliament and officers of the Indian Foreign Service (IFS) when posted abroad. In addition, the travel and treatment costs for the officer and an attendant will be borne by the government. The order confers benefits over and above the entitlements under the Central Government Health Scheme (CGHS).
The existing rules, according to Baru, are as follows: 

Existing rules permit civil servants to secure reimbursement for medical treatment abroad or at a private hospital in India based on what it would cost to secure the same treatment in a private ward at the All India Institute of Medical Sciences (AIIMS), New Delhi.

If the government wishes to reimburse treatment of IAS/IPS officers at actual rates at a private hospital in India (and not at the AIIMS rate), it would be understandable. Allowing officers to go abroad for treatment is a different matter. The move, alas, will only reinforce popular perceptions of the collusion between politicians and babus in appropriating the spoils of government. The conclusion that most people will draw is that now that the politicians have done the babus a big favour, they can count on the babus to help them out where required.

I do not know whether MPs have raised this issue in parliament; if they have not, that would not be a surprise. Netas already enjoy the privilege that the babus will now get.

PS: After writing the above post, I checked the news online. It appears that medical treatment abroad will be permitted only for certain complicated ailments, which are mentioned in the order. Presumably, these are ailments for which comparable treatments are not available in India. This point is not properly reflected in the article I have cited. I have had to tone done my criticism somewhat and have modified my original post accordingly. I am hesitant to take my criticism back entirely. Which ailment requires treatment abroad is a matter of judgement and  such judgement, in our scheme of things, may end up being exercised independently of the merits of a given case.

Sunday, September 15, 2013

Modi for PM: why did Advani want to wait until November?

Advani (and, until the last minute, Sushma Swaraj) is said to have asked the BJP top brass to defer Modi's anointment as PM candidate until November. Many people see this as mere pique on the part of the old warhorse or even a mere stalling tactic: put off the decision first, then get it spiked. Veteran columnist Rajinder Puri has a more plausible explanation:


What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes.......

....In November all the BJP units going to the polls are expected to comfortably win with or without Mr. Modi’s support. Except the Delhi assembly election in which the BJP sits in opposition. Delhi therefore will test in November how far Mr. Modi’s perceived charisma can deliver results. That is why perhaps Mr. Advani and Mrs. Swaraj want to delay Mr. Modi’s candidature as next PM till after the November poll. If BJP cannot win Delhi there could be serious rethinking and the party would need a prime ministerial candidate acceptable to potential allies who would be badly needed. 

Puri also suggests that, in the event that neither the BJP nor the Congress is able to form a government, there could be an effort to install Mr Pranab Mukherjee as PM. 
In November all the BJP units going to the polls are expected to comfortably win with or without Mr. Modi’s support. Except the Delhi assembly election in which the BJP sits in opposition. Delhi therefore will test in November how far Mr. Modi’s perceived charisma can deliver results. That is why perhaps Mr. Advani and Mrs. Swaraj want to delay Mr. Modi’s candidature as next PM till after the November poll. If BJP cannot win Delhi there could be serious rethinking and the party would need a prime ministerial candidate acceptable to potential allies who would be badly needed. - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf

What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes. - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf
What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf
What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf
What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf
What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf
What is so important about the November assembly results? Mr. Modi’s candidature as future PM raises some misgivings among potential future allies for a coalition government. That is why it is necessary for the party to obtain an outright or a near clear majority on its own if he is to be the next PM. Going by media reports, the reaction of its party workers, and opinion polls, BJP leaders are convinced there is a nationwide tidal wave in Mr. Modi’s favour that renders single party majority likely. However there is as yet no tangible evidence of this support translating into votes - See more at: http://www.boloji.com/index.cfm?md=Content&sd=Articles&ArticleID=14933#sthash.D1TpHSWh.dpuf