Saturday, June 29, 2013

Should industrial houses be given bank licenses?

Well, not in the first round at least. But not for the reasons that is often cited: the danger of inter-connected lending, that is, banks floated by industrial houses lending to companies within the group. This, critics, say could sink the banks if something goes wrong with the group.

I happen to think otherwise. I doubt that the reputed industrial houses would let banks floated by them sink: they have too much at stake. They will go all out to make a success of their banking ventures. However, while their banks will prosper, this will come at the expense of existing players, mainly public sector banks (PSBs). Does this matter? Yes, because it will create systemic risk in India banking. PSBs are in the forefront of financing infrastructure and agriculture, areas that badly need credit. Private banks, including those set up by industrial houses, will focus on a narrow set of corporates and high net worth individuals. This does little for the cause of financial inclusion.

More in article in Indian Express, Banking on inclusion.

Wednesday, June 26, 2013

Nilekani and Pai too to return to Infosys?

I had to pinch myself in disbelief when I read this report in IE:
The Street has welcomed NRN's return, confident it would boost employee morale, but analysts realise chances of him being able to turn around Infosys aren't very high. For one, NRN is 67 and has been away from an executive position for seven years, during which the environment has turned more competitive and Infosys weaker. With Nilekani and Pai at his side though, it could be a different story.

Modi in Uttarakhand: the bare facts

Gujarat CM Narendra Modi's visit to Uttarakhand predictably degenerated into slugfest between the BJP and the Congress. When Rahul Gandhi followed, the media tended to portray the two visits as  a competition for photo-ops.

Writing in ET, Madhu Kishwar has a different story to tell. It would appear that Modi was quickly able to mobilise a significant rescue effort targeting principally the large numbers of Gujarati pilgrims but not entirely excluding others. Here's a sample:
Modi arrived in Delhi late 17th night for a meeting with the Planning Commission on 18th when news of cloudburst and landslides was telecast on TV. He held an emergency meeting to take stock of the situation since he knew that thousands of Gujaratis are likely to be among the Chardham pilgrims . Right away, a camp office was opened at Gujarat Bhavan and the Resident Commissioner's team in Delhi was made responsible for coordinating with Gujarati pilgrims.
...On the 18th morning, Modi called Dr Pranav Pandya of the All World Gayatri Parivar to provide space and infrastructure in his Shanti Kunj campus for the relief centre proposed to be set up by the Gujarat government . He chose this campus because of his close knowledge of, and rapport with, this Gandhian institution that can house and feed thousands of people at a short notice.
It has a 2,000-strong community of swayamsevaks on the campus, plus 3,000-odd students of the Dev Sanskriti University. The campus also has a well-run hospital.

On the 18th evening itself, a set of computers with internet connections , telephone lines, television sets and all other paraphernalia required for Gujarat government's relief operation were set up. Therefore, when a team of Gujarat government IAS, IPS and IFS officers came, they could get going within minutes of reaching Shanti Kunj.

Team Gujarat had two officers from Uttarakhand - Assistant Director General of Police Bisht and Forest Service officer SC Pant - who had close knowledge of the terrain to guide both the stranded pilgrims as well as rescue teams on the safest possible routes to take. ADG Bisht went straight to Gupta Kashi from where the rescue operations are being launched.

A team of seven doctors trained in handling such emergencies, led by an orthopaedic surgeon, not only put in place an efficient first-aid service but are also attending to those severely injured.

It is open to people to come to their own conclusions on how much of a difference these efforts made, considering the large number of people left stranded in the region.  I do find it surprising, however, that the media did not think it necessary to bring the above facts to the notice of the public. We had swarms of reporters and TV crews in the region but at least I did not find any details of the contribution that Modi was able to make.

Kishwar concludes:
The Congress party is understandably upset because its chief minister has proved a disaster, its party machinery is in disarray, Congress Sewa Dal workers are nowhere in sight, Rahul Gandhi's Youth Brigade is clueless even in routine situations , leave alone know how to face a crisis like the Uttarakhand deluge.

That is the reality of the Uttarakhand relief operation led by Narendra Modi

Tuesday, June 25, 2013

QE reversal: how bad is it for emerging markets?

Quantitative easing, which sent money flooding into emerging markets, is due to be reversed. It will be a slow reversal, nevertheless, the trend is clear enough. How badly will it hit emerging markets. FT lists a number of positives in emerging market economies in today's environment compared to, say, the 1980s or 1990s:

In many respects, the developing world is also strong enough to deal with any fallout from a change in the US monetary regime. During previous crises, many countries had pegged exchange rates, low reserves, rigid economies and big US dollar-denominated debt burdens. These vulnerabilities have mostly been addressed.
The latter factor – what economists call the “original sin” of emerging markets – has in the past proved particularly toxic. Historically a strengthening US dollar has spelt trouble for emerging markets due to currency pegs and foreign liabilities. But classic original sin has now been much reduced.

.....Emerging markets are also far less indebted than developed countries. The overall credit-to-gross domestic product ratio is about 70 per cent against the 145 per cent average for advanced economies, according to the International Monetary Fund.
And although economic growth has disappointed recently, the IMF still estimates that output in developing countries will expand an average of 6 per cent annually between 2013 and 2018. Ample foreign currency reserves will act as insulation against any market chills.

Even if money is less freely available, the distribution of it between developed and emerging markets could change, given better growth prospects for the latter. Leading funds could increase their allocations for emerging markets:
Norways's $700 bn sovereign wealth fundlast year changed its bond index to give emerging markets a bigger weighting. Other big SWFs have followed suit. But many investors have been slower. US pension funds and insurers have an average of 4 per cent of assets allocated to emerging markets but many aim to double that over time. Each additional percentage point increase in portfolio exposure would funnel $485bn into emerging market bonds alone, according to estimates by BlackRock.
What does this bode for India? Our problem is not the wide current account deficit alone; it is faltering growth, given that private investment has dried up. Unless public investment can take its place, growth prospects will not improve and foreigners' willingness to finance our deficit will be not be strong. That said, our strong point is the long-term allure of the Indian market. FII flows will be hesitant but FDI flows should continue- note that the average FDI flows into India post the financial crisis has been higher than in the boom period before the crisis.

Monday, June 24, 2013

Chinese 'incursion' into Daulat Beg Oldie: what's the truth?

There was terrific outcry in the Indian media over the reported Chinese 'incursion' into the Daulat Beg Oldie sector in Ladakh sometime in April this year. Various interpretations were given. China was flexing its muscles, given its new found economic and military might. The move was intended to force India to the negotiating table. China was upset over India's aligning closer with the US. And so on. And there was a large section of the media, particularly TV, that demanded a strong response to the Chinese 'provocation'.

As we know, following negotiations the Chinese dismantled the tent they had set up and the small platoon they had sent in went back. There is no clarity on what assurances the Indian side gave.

In an article in EPW, Neville Maxwell casts serious doubts on the view that the Chinese were upto mischief. Maxwell, a London Times correspondent in India during the India-China war of 1962, is the well known author of a book on the war that squarely laid the blame for the war on Nehru's unilateral attempts to define the border with China, without any regard for Chinese claims.

In his article, Maxwell says that India has been engaged in a substantial build-up in the sector and asks whether the Indiani military is responsible for raising Chinese suspicions:

Since last year there has been a significant Indian build-up at DBO. Indian newspapers have reported reinforcement of the garrison, the induction of heavy artillery, even armour, and a landing strip laid in 1962 has been reactivated to facilitate supply. What is the Indian purpose? A Chinese invasion at that point is inconceivable, so it cannot be defensive. A 1993 treaty bound both governments to reduce force levels on the LAC “to a minimum level compatible with friendly and good neighbourly relations”. From what level or element of the Indian state does the impetus for this force augmentation come? From the military? 

I do not recall any mention in the media of heightened Indian military activity in the area- all I read and heard was that the Chinese had penetrated several kms into Indian territory. Even the latter may not be correct because the Line of Actual Control is undefined and which piece belongs to whom is   a matter of perception.

Maxwell reiterates his well known view of India's handling of the border dispute:

... it all began with the British. In 1914, they attempted to induce China to cede a significant tract of territory to give India a “strategic frontier” in its north-east. They failed. In the mid-1930, they revived that attempt, this time shunning diplomatic niceties and, taking advantage of China’s impotence, simply annexing the target tract, while forging the official diplomatic record to cloak their action with spurious legitimacy. No doubt they expected that in due time China would get over its indignation and acquiesce to the facts on the ground (and they were right there, the PRC was ready to legitimise the situation).

Thus a border dispute with China was congenital to independent India – and Nehru rendered that affliction incurable by sustaining the British falsification and refusing to submit the dispute to negotiation. Then he metastasised it by laying claim to the Aksai Chin area in India’s north- west, a claim without British precedent or any basis in treaty, usage or geography, deluding the Indian public by having new official maps published falsely showing the whole of India’s northern borders as settled and internationally agreed.
 When we can expect more balanced reporting in India, whether in respect of China or Pakistan?

Wednesday, June 19, 2013

TRAI's radical proposal for India's newspaper industry

No government has dared to attempt such a move thus far but TRAI is doing it. According to a report in the Hindu, TRAI plans to introduce measures to separate corporate ownership of newspapers from editorial management. This is meant to insulate editorial operations from commercial interests. Rahul Khullar, chief of TRAI, is quoted as saying:

The idea is to create an institutionalised buffer between the corporate owner and newspaper management to ensure the independence of TV channels and the print media to articulate impartial, free and fair editorial policy,” said Mr. Khullar. He, however, admitted that the process was still “in the works”. The “creative challenge” for TRAI was evolving the precise design. 
One needs to be clear what corporate ownership means- does it mean ownership by industrial houses? In other words, would owners of newspapers, who do not have other corporate interests,be exempt from such a measure? One would think so. It should be possible for somebody to own a paper and express himself editorially, as long as he does not have other business interests that might colour news coverage or editorial opinion in his paper.

Khullar also plans to go ahead with restrictions on cross-ownership of media. The rule being contemplated is two out of three: you can own two out of three media,namely, newspaper, radio and TV but not all. Incidentally, I am not clear as to how the newspaper industry would come under the ambit of TRAI. Can anybody shed light on this?

Friday, June 14, 2013

Government will always call the shots in public sector banks

From time to time, we are fed homilies on how the government here should run public sector banks. Banks should be given 'genuine' autonomy, meaning matters should be left to boards. The finance ministry must not interfere in selection of bank Chairmen. It must stay out of banks' strategic planning. I have always found this unrealistic, however lofty it might sound. As an authority accountable to parliament for the banks under its control, government will always have a say- how much say is desirable can always be debated.

A case in point is the CEO of RBS in the UK being given marching orders. It is generally understood that the Chancellor of the Exchequer, George Osborne wanted him out. The UK government has an 82% equity stake in RBS (greater than the Indian government's stake in SBI0 consequent to the capital infusion it made during the financial crisis.

A commentator, writing in the FT, has strong words on the ouster:
The state, as majority shareholder, clearly has every right to remove the chief executive if it lacks confidence in the strategy, and Mr Osborne had legitimate concerns. From the perspective of a government preoccupied with lending to the UK economy, Mr Hester’s stubborn attachment to the bank’s US arm or its politically toxic trading unit must have seemed puzzling at best.

But what the state must not do is to back-seat drive on day-to-day management issues. It is not the government’s place to intervene directly in questions such as how much employees are paid or to second-guess decisions to invest in specific lines of business. Those are decisions for managers. But Mr Osborne has interfered in both.

Which sounds fine in principle but what is the government to do if the board is ineffective- and the article clearly suggests it was- and if it is obliged to respond to the public on sensitive issues such as managerial pay? The UK government's principal concerns about RBS have been a failure to step up lending and a failure to return to healthy profits. Where a CEO cannot address these concerns, the government has no choice but to intervene, especially given the importance of RBS in the banking sector.

So, you see, it happens not just in India....

Wednesday, June 12, 2013

"Lessons" from the labs for businesses

I write "lessons" within quotes because I am somewhat wary of role models, whether individuals or institutions. Imitation of role models is harmful because it ignores the uniqueness of individuals as well as institutions. Approaches and solutions must always be specific to a given context.

With that caveat, I commend an article Schumpeter wrote in the Economist a few weeks ago about what business can learn from large research projects. He talks about Atlas, the world's largest microscope, whose components were designed by hundreds of scientists from different institutions and whose components were sourced from 400 suppliers on four continents. Atlas was responsible for catching the Higgs boson last year. Such large research projects have some things in common with businesses and they also differ in some respects:

“Big Science” projects differ from companies in important ways. They are publicly financed and do not seek profits. They are also one-off affairs, with no need to maintain supply chains or manage long-term relationships with customers. Yet, like companies, they must innovate furiously, make the most of limited resources and beat rivals to breakthroughs.
The key to success is allowing talented individuals free rein for expressing themselves, which allows every issue to be comprehensively debated, and everybody to understand exactly why a certain idea has won out.

In a Big Science project, teams with rival proposals spar publicly, forcing all the boffins to articulate their assumptions, justify their choices and learn enough about their rivals’ ideas to criticise them at length. ....The sparring takes a while, but the lifetimes of Big Science projects are measured in decades. Besides, a good scientific scrap fosters the exchange of ideas and ensures that advocates of losing proposals understand the winning ones, which they are expected to work on. Battles allow boffins to let off steam, so grudges seldom fester. 
That's the big difference between the corporate world and large scientific projects. Companies are, in general, run autocratically, with "bosses" - and, that too, a few of these at the top -calling the shots, without much challenge from those below. Companies can be far more innovative, nimble and successful if they can operate in a decentralised and democratic way. Why don't they do so? Well, one reason certainly is that those at the top can produce results for a limited period and laugh their way to the bank without having to worry about the company's long-term success.

Monday, June 10, 2013

Succession at BJP

Narendra Modi's appointment as head of the poll committee of the BJP, which could be a prelude to his being projected as candidate for the post of PM, is a tribute to the working of grassroots democracy in India. It is said that the RSS backed his candidature. Maybe, but this in itself would not have been adequate to deal with opposition from the stalwarts of the party, such as Advani (and, if reports are to be believed, Jaswant Singh, Yashwant Sinha and Uma Bharti).

BJP President Rajnath Singh and other senior leaders found it impossible, at the end of the day, to ignore the groundswell of support from the party cadres. It is a tribute to the working of Indian democracy that these voices from below can make themselves heard.

This is not the first time that this has happened in the case of Modi. Following the Gujarat riots in 2002, then PM Vajpayee was under tremendous pressure from various quarters to send Modi packing. His own instincts were in favour of such a move. And yet Vajpayee could not act, again because it would have meant displeasing the rank and file of the party. This is the assertion of inner-party democracy and, whatever reservations people may have about the outcome, it is a phenomenon that deserves respect.

Can Modi bring it off for the BJP? His critics say he is a divisive figure and that he will scare away potential political partners. His track record suggests otherwise. As a boy, he ran away from his family in a village and thereafter proceeded to fend for himself. He comes from a backward caste and lacks the trappings of education as well as family support. In a country where politics is still centred on caste, he has been able to create a coalition of forces that transcends caste barriers and win three consecutive elections. At the national level, he can be expected to similarly make a direct appeal to the masses on the strength of some overriding slogan, say, development or governance. It is more than likely that, as elections approach, other political parties will find it expedient to join hands with the BJP as they see the mood of the people swinging in the BJP's favour.

Note the contrast between the succession process at a political party, such as the BJP, and a reputed corporate such as Infosys. At BJP, the old guard has been brushed aside on grounds of performance and the reins have passed into the hands of a proven achiever. At Infosys, the leading member of the old guard is back in the saddle on the ground that nobody can else is as suited to rescue the company. That is because nothing resembling democracy can be seen in most companies; decision-making is centralised and the wishes of various stakeholders, or even of the majority, go unheard. And politicians are said to be bad at governance; India's companies are said to be models of good governance.

Nature's way is to ruthlessly discard the old and to promote the young. It is ironical that political parties, which are maligned day in and day out for poor governance, are better tuned to the laws of nature than the vaunted heroes of the corporate world

Thursday, June 06, 2013

Guess who's coming to dinner?

Harish Khare has a hard-hitting piece on the attitudes of India's corporate chiefs, as seen in Narayana Murthy's decision to come back to Infosys with son in tow. He narrates an incident involving a dinner invitation that NRN gave PM Manmohan Singh in connection with the Infosys Social Science awards function:

In the first week of 2011, Prime Minister Manmohan Singh allowed himself to be persuaded to accept N.R. Narayana Murthy’s invitation to travel to Mumbai to preside over a function to give away the Infosys Social Science Prizes. The Prime Minister even agreed to attend a dinner that Mr. Murthy wanted to host in his honour after the function at the Taj Mahal Hotel. So far so good. A few days before the event, there was a massive behind-the-scenes dust up between the Prime Minister’s staff and Mr. Murthy. The rub was that Mr. Murthy thought that since he was paying for the dinner, he had a right to dictate not only the guest list but even the seating arrangement. However, there is something called protocol and the dignity of constitutional offices. If the Governor and the Chief Minister of Maharashtra were to be at the dinner, they had to necessarily be seated on either side of the Prime Minister, whereas the host thought he ought to be sitting next to Dr. Singh. Mr. Murthy, however, was not one to be so easily rebuffed. As soon as the first course was served, he sought to convert the evening into a grand intellectual conversation and proceeded to invite his son to open the bowling. And the young son wanted to know from the Prime Minister what the government proposed to do so that young men like him could come back to India.

He refutes the suggestion that NRN is free to do what he likes because Infosys is a private company:
Mr. Murthy is not just a private businessman, minding his own business. He has often sought to inject himself into the public domain, telling a thing or two to the political class about how to behave. He has been serenaded as an “iconic” entrepreneur. During the heyday of civil society triumphalism two years ago, there was even a suggestion that Mr. Murthy be made President of India. That was the time when India’s corporate leaders thought they had the ethical credentials to write open letters to the Prime Minister and preach virtues of good governance.
One might add that NRN is not the sole stakeholder in Infosys- it is a company with widely held share ownership in which the promoters have a small stake. This is very different from industrial houses where businessmen have dominant, if not majority, stakes. 

Tuesday, June 04, 2013

Bringing back a former CEO- pluses and minuses

N R Narayana Murthy's return to the helm of affairs at Infosys is still being debated. FT's management editor and business editor weigh the pluses and minuses of bringing back a former boss in the context of another much heralded return- that of A G Lafley of P&G. (Incidentally, Lafley claimed that one of his biggest contributions in his term had been the succession planning he had put in place, starting almost from day one. Evidently, events proved his choice- and that of the board- wrong).

Monday, June 03, 2013

How much would a new bank license cost?

The RBI will soon receive applications for bank licenses. Industrial houses will be vying with pure financial firms to get a license. The Economist quotes a CEO as saying that the asking price for a license is $75 mn (approx Rs 350 crore).

Such talk may be entirely speculative but it tells you why, in scam-ridden India, it is not sensible to allow industrial houses to get into banking (as the Economist itself argues). There will be attempts to influence the award of licenses and there will be attempts to influence regulation once industrial houses get into banking. Large industrial houses represent a concentration of economic power by themselves; add to these a banking activity and they begin to acquire a degree of clout that is unwholesome.

The Economist indicates the approach that the next RBI governor should use in awarding bank licenses:
  .... he should issue as many licences as possible without compromising standards: to new entrepreneurs who want to use technology to serve the poor; to decent financial firms that are not part of conglomerates; and, perhaps, to industrial firms with diverse ownership. That must be combined with a shake-up of state banks, and a more open attitude to foreign firms and to the mobile banking technologies that have taken Africa by storm. All that would help many millions get their hands on bank accounts, without concentrating even more economic power in the palms of a few.

Sunday, June 02, 2013

The revolving door syndrome and crony capitalism

All economies are notorious for the links between politics and business. It is a symbiotic relationship, and one that cannot be broken. Businessmen will finance politicians and politicians will use their clout to return the favour. In authoritarian countries, politicians- or members of their families- double up as businessmen. This is a growing phenomenon in India too. Crony capitalism is an integral part of the capitalist system.

What about the links between the bureaucracy and business? As Howard Davies points out in the FT, the US is at one extreme, with people from the private sector moving into regulatory bodies or even mainstream bureaucracy for a short period and then reverting to the private sector. This is a revolving door that whirls at the maximum speed.

At the other extreme is France, where civil servants tend to stay as civil servants for the most part; if they choose to move into the private sector, there is a cooling off period of two years. Davies suggests that civil servants in France can afford this luxury because even when they step down from their regulatory roles, they continue to draw some sort of  a salary (and not just pension; I must confess I am not clear what the arrangement is).

The UK comes somewhere in between with civil servants choosing to encash their stay in the public sector towards the end of their careers. They take up advisory roles with consultants, banks, investment banks etc or become lobbyists or join boards as independent directors. Davies suggests that this is appropriate, given the low levels of pay in the public sector. You cannot attract talent into the public sector unless there is the prospect of compensating towards the end with a juicy assignment in the private sector.

In the UK, politicians themselves are not immune to this trend: former British PM Tony Blair collects a cool  2.5 million pounds as advisor to JP Morgan Chase. As John Gapper points out , nobody should be under any illusion that Blair is being paid for his banking expertise. He is paid to open doors and make phone calls as required.

What's wrong with people using their tenure in the public sector to make a little money towards the end, you might ask? The problem, as Gapper mentions, is with the incentives it creates when people are in government or in public sector. The prospect of getting a private sector assignment towards the end cannot but influence decisions taken by public servants. Civil servants would be less than human if they did not favour private companies in the knowledge that doing such favours would have significant pay-offs down the road. To put it bluntly, the revolving door can become a form of corruption.

What can we do about this? In India, civil servants have created a number of post-retirement jobs, including those in regulators, which they can conveniently latch on to once they retire from their jobs. This seems preferable to civil servants moving into the private sector. Except that there is a problem if the civil servants still take up private sector assignments after a stint in regulation. It seems to me that a greater menace is civil servants or other public sector officials ending up on boards as 'independent' directors when everybody knows that the directorship is a deferred reward for favours done while in service.This is a mockery of corporate governance.

I doubt that any society will be able to stop the revolving door syndrome. What is needed is comprehensive audit and scrutiny of decisions taken by government. If somebody in government seeks to favour a private party, then the decision must be caught out in time. Not all favours can be prevented even then but at least the blatant forms of crony capitalism can be checked. For this reason alone, performance audit, which Vinod Rai made common in his tenure as CAG, is necessary and welcome.

Saturday, June 01, 2013

Narayana Murthy's comeback at Infosys

Infosys is, by general reckoning, in bad shape, losing ground-  to both arch-rival TCS and to newcomers such as Cognizant. One should not be surprised that NRN's comeback at Infosys as Executive Chairman has received a positive welcome. However, his return does raise troubling issues of governance.

First, it is an acknowledgement of top management failure- whether this is a failure of the strategy labelled Infosys 3.0, I am not in a position to judge. Good governance requires that those responsible step aside. This would include Chairman K V Kamath, executive co-Chairman K Gopalakrishnan and CEO S D Shibulal. There is no indication that this is happening in the immediate future.

Secondly, what does it say about succession planning if the fortunes of a company hinge principally on its preeminent founder? Both Kamath and Shubulal were appointed following a much-publicised search for the posts of Chairman and CEO. Kamath was credited with being able to take the tough decisions needed at the company, given his track record at ICICI Bank. If things could go wrong so quickly, it hardly reflects well on the succession process and the depth of management that Infosys was reputed to have. Are we to suppose that if something were to happen to NRN tomorrow, there is no hope for the company?

Thirdly, many observers are of the view that NRN was never completely out of the company, whether as non-executive Chairman or as emeritus Chairman. If this is true, he shares responsibility for the strategy, if not the execution. Schumpeter, writing in the Economist, has this to say about the company's strategy:

The firm has two problems, one easier to solve that the other. Its execution has become abysmal, with stop-start investment in new projects and wildly inaccurate financial planning. Mr Murthy, who was known for delivering consistent and smooth performance, will probably sort this out quickly. The firm’s strategic problem is that it has clung to its reputation as a “premium” provider of technology services. Competitors with lower prices and who are prepared to tolerate lower margins have stolen a lot of market share. Whether Mr Murthy can resolve this predicament easily is open to debate.

Lastly, there is the matter of NRN's son being pitchforked into the Chairman's office as executive assistant. This does not appear consistent with the company's stated policy of keeping the founders' family members out of the company.  Schumpeter voices this concern bluntly:
The second concern is that in a bizarre tangent, Mr Murthy’s son will be parachuted into the firm to become his assistant. In its prime Infosys was known for being a fierce meritocracy. Its problems have partly been because it morphed into a stage-managed dictatorship, in which each of the firm’s co-founders got a stint running the firm, even if they were not up to the task, as has been the case since 2011. Mr Murthy junior is a brainy man, with Ivy league credentials. But let’s hope his father does not now try to introduce a form of management which is sadly all too common in India—a dynasty.