James Bond is passe. The spy of the 21st century is more likely to be software secretly smuggled into your computer which enables somebody to know exactly what you are doing with your PC or laptop. Or it could be a drone drifting into a cave harbouring Afghan militia.
The Economist has a fascinating article on how spying has evolved. In the old days, the thing to do was to smuggle in a smart guy- preferably from an elite institution, such as Oxbridge- into the target country with a fake identity, visiting cards and plenty of cash. Today, with biometric identification, this has become difficult. The other form of 'humint' - or human intelligence- is simply paying people on the other side for passing on information. This is, of course, alive and well. But, targeting the right people who will spy for you is becoming more sophisticated- it's no longer a matter of accosting people at clubs or parties.
The thing to do is to get data on a whole lot of people and look for weaknesses- medical problems, financial problems, hints of scandal. That's what the people who hacked the site of America's Office of Personnel Management were looking for. I am surprised people didn't think of hacking Ashley Maddison for this reason.
This gives us an idea of what the focus of spying game will be: electronic communications and materials stored on PCs and laptops. One begins to understand why the NSA and other intelligence agencies are so keen on scrutinising email and related traffic. By combing through this, one can lead a treasure of information. The equivalent of this is listening into phone conversations, including mobile conversations.
One problem for spy agencies, the Economist mentions, is encrypted messages. Since it is the receiver and the sender who hold the keys- and not the channel that allows them- spy agencies want the channels to insist that users give them the keys. But this may not be necessary. You don't have to crack an encrypted message. It's enough if you can track what the sender is typing or what the receiver is typing- and there's plenty of spyware available for this.
The flip side is that spy agencies that store information are themselves vulnerable- as the Snowden episode highlighted in a big way. How to steal somebody's else data while safeguarding your own is the central challenge of modern spying.
All of this seems pretty clear. Still, some doubts remain. Electronic spying may be effective when it comes to spying on official agencies. Will it work with terrorists or criminal groups? Such groups are more likely to rely on passing messages on a slip of paper or by word of mouth. Electronic spying can't help here. Since, James Bonds can no longer be smuggled in to mingle with such groups, it's just possible that spying on terrorists and the like has been weakened in recent years.
Monday, August 31, 2015
Wednesday, August 26, 2015
Making sense of crashing markets
Markets have crashed all over the world, including the US. It's not easy to make sense of this phenomenon. The glib explanation is that it has to do with the inability of Chinese authorities to stem the crash in markets there and the devaluation of the yuan. Both point to clear slowdown in Chinese growth and falling Chinese demand for imports. China is a big source of incremental global growth, so this is bad news for the world economy.
All of which is true. But what's new in that? Why should markets crash instead of declining in an orderly way? How does that explain the panic? One possible explanation is that the slowdown in China will be more severe than thought- growth won't be even 7 per, it would be, say, 6 per cent. But, again, why would markets latch on to this virtually overnight?
The other suspect is the impending Fed rate hike. But this has been long in coming. Also, it's not as if the Fed will press ahead regardless of what's happening to markets worldwide. An article in Business Insider highlights these points very well but does not come up with a plausible alternative. So let me stick my neck out and offer one.
Might worsening geo-politics be a factor? There's been news in recent days that both Russia and Nato have carried out exercises that military analysts see as a clear preparation for war. Then, there's been news that the US is moving some of its most advanced aircraft to its European allies. Oil prices have fallen to close to $40 and there's been another run on the rouble. This adds to Russia's economic woes and puts Russian president Putin under further pressure.
It could well be that the flight of funds from emerging markets is a sign of a full-blown global crisis that is not just economic in nature. I read in the Economist recently that Russia will find it difficult to hold on to Chechnya and other states in the federation the moment it runs out of cash. Any impending turbulence in Russia, with all the uncertainties it carries, would certainly frighten the life out of investors.
Worsening ties between the west and Russia are part of worsening geo-politics in general: think the situation in West Asia, China- Japan, India- Pakistan, etc. Don't get me wrong. I don't see any of these crises playing out in the near future. But worsening geo-politics makes it difficult to get the necessary focus on the economic situation. Indeed, crashing asset prices, notable that of oil, which is crucial to Russia, may just suit the agenda of the western powers.
My sense is that the US and its allies under-estimate Russia, as it has been under-estimated by others in the past. When this becomes clear enough, the geo-political situation should improve and panic should dissipate. However, this learning could be a long and painful process. Until then, however, risk aversion will be high. It's the combination of a weak economy and worsening geopolitics that, perhaps, explain the current panic.
(Updated on August 27, 2105)
All of which is true. But what's new in that? Why should markets crash instead of declining in an orderly way? How does that explain the panic? One possible explanation is that the slowdown in China will be more severe than thought- growth won't be even 7 per, it would be, say, 6 per cent. But, again, why would markets latch on to this virtually overnight?
The other suspect is the impending Fed rate hike. But this has been long in coming. Also, it's not as if the Fed will press ahead regardless of what's happening to markets worldwide. An article in Business Insider highlights these points very well but does not come up with a plausible alternative. So let me stick my neck out and offer one.
Might worsening geo-politics be a factor? There's been news in recent days that both Russia and Nato have carried out exercises that military analysts see as a clear preparation for war. Then, there's been news that the US is moving some of its most advanced aircraft to its European allies. Oil prices have fallen to close to $40 and there's been another run on the rouble. This adds to Russia's economic woes and puts Russian president Putin under further pressure.
It could well be that the flight of funds from emerging markets is a sign of a full-blown global crisis that is not just economic in nature. I read in the Economist recently that Russia will find it difficult to hold on to Chechnya and other states in the federation the moment it runs out of cash. Any impending turbulence in Russia, with all the uncertainties it carries, would certainly frighten the life out of investors.
Worsening ties between the west and Russia are part of worsening geo-politics in general: think the situation in West Asia, China- Japan, India- Pakistan, etc. Don't get me wrong. I don't see any of these crises playing out in the near future. But worsening geo-politics makes it difficult to get the necessary focus on the economic situation. Indeed, crashing asset prices, notable that of oil, which is crucial to Russia, may just suit the agenda of the western powers.
My sense is that the US and its allies under-estimate Russia, as it has been under-estimated by others in the past. When this becomes clear enough, the geo-political situation should improve and panic should dissipate. However, this learning could be a long and painful process. Until then, however, risk aversion will be high. It's the combination of a weak economy and worsening geopolitics that, perhaps, explain the current panic.
(Updated on August 27, 2105)
Tuesday, August 18, 2015
Indradhanush: a fortune for PSBs at the end of the rainbow?
The government has unveiled a plan for revamping PSBs titled Indradhanush. One thing is striking: the government is implementing the recommendations of the P J Nayak committee in form but not in content. The Nayak committee wanted a radical departure in the way PSBs are run. Its model for PSBs was Axis Bank, the former UTI Bank in which the government allowed its stake to fall below 51% and let it be run like a private bank, with a professional board and with private sector scales.
Well, it doesn't look as though any of this is going to happen with PSBs under Indradhanush. The centre-piece is the infusion of Rs 70,000 crore over four years, with Rs 25,000 crore being infused this year itself. This marks a turnabout in the government's position on recapitalisation. In its first budget, the government took the view that capital infusion would be a reward for performance.
The departures from the Nayak committee report are striking:
appointments process has been more rigorous than what we say in UPA-II.
More in article in Quartz, Slow, steady and sensible: Modi's new approach to reviving banks
Well, it doesn't look as though any of this is going to happen with PSBs under Indradhanush. The centre-piece is the infusion of Rs 70,000 crore over four years, with Rs 25,000 crore being infused this year itself. This marks a turnabout in the government's position on recapitalisation. In its first budget, the government took the view that capital infusion would be a reward for performance.
The departures from the Nayak committee report are striking:
- There will be a Bank Board Bureau that will make top appointments in PSBs, including appointments of independent directors. But this is not going to be manned entirely by professionals as the Nayak committee wanted. Some reports say half of the six members will be government appointees. One report quoted the banking secretary as saying he will be the sole representative. Either way, the government will make the final call on appointments. It cannot be otherwise as long as the public sector character of the banks continues. I have always thought that the idea of government distancing itself from control of PSUs and PSBs was hogwash- it just can't happen.
- Two of the five appointments have been from the private sector. But the finance secretary has assured PSBs that hereafter there will be no more appointments from the private sector- EDs at PSBs will be given a chance.
- Performance-linked pay and private sector pay scales: If this happens, it will be in a restricted way. The basic framework of government, defined by the Pay Commission, won't go away.
- Bank Investment company: The Nayak committee wanted government equity to be transferred to a BIC with the BIC dropping its ownership in individual banks below 51%. The BIC won't happen in a hurry. And when it does happen, government will not drop its ownership below 52%. That means, CVC and CAG will stay.
appointments process has been more rigorous than what we say in UPA-II.
More in article in Quartz, Slow, steady and sensible: Modi's new approach to reviving banks
Saturday, August 15, 2015
Land Bill setback could be a blessing in disguise
The Modi government has had to backtrack on the Land Bill. Industry is howling but, on a longer view, this may not be such a bad thing.We need an approach that farmers regard as fair. Perhaps, parliament can now consider a fresh set of options.
It's not enough to say glibly that farmers should not complain as long as they are compensated and that twice the market value in urban areas and four times the market value in rural areas is good enough. The problem very often is that the market value is not easy to determine. Simply looking at recent land sales may not help, as the Economist points out, because these may distress sales made by farmers to other farmers or because the sale price may have been under-reported to dodge stamp duty.
The fact of the matter is that the true value, in acquisition for industrial use, becomes known only after the industries are set up. This means that farmers should have a 'call option' on the property that is sold to industry. The approach taken by AP Chief minister Chandrababu for the construction of a new capital for AP may well be the way to go. Naidu has offered to give back to farmers 30% of the land pool they have together contributed once the city is constructed. This is a way of providing a call option to sellers.
The problem of dealing with holdouts- people who simply refuse- may still be there. The Economist cites a suggestion made by two economists. Ask for bids for plots close to the ones being acquired and offer these as compensation to those unwilling to sell in the acquired area.
Land acquisition is a hugely emotive issue and more so at a time when farmers are in distress. Forced and unfair acquisition is a factor underlying insurgency in many parts of the country. We need to think of new solutions. So the setback to the government on the Land Bill may well be a blessing in disguise.
It's not enough to say glibly that farmers should not complain as long as they are compensated and that twice the market value in urban areas and four times the market value in rural areas is good enough. The problem very often is that the market value is not easy to determine. Simply looking at recent land sales may not help, as the Economist points out, because these may distress sales made by farmers to other farmers or because the sale price may have been under-reported to dodge stamp duty.
The fact of the matter is that the true value, in acquisition for industrial use, becomes known only after the industries are set up. This means that farmers should have a 'call option' on the property that is sold to industry. The approach taken by AP Chief minister Chandrababu for the construction of a new capital for AP may well be the way to go. Naidu has offered to give back to farmers 30% of the land pool they have together contributed once the city is constructed. This is a way of providing a call option to sellers.
The problem of dealing with holdouts- people who simply refuse- may still be there. The Economist cites a suggestion made by two economists. Ask for bids for plots close to the ones being acquired and offer these as compensation to those unwilling to sell in the acquired area.
Land acquisition is a hugely emotive issue and more so at a time when farmers are in distress. Forced and unfair acquisition is a factor underlying insurgency in many parts of the country. We need to think of new solutions. So the setback to the government on the Land Bill may well be a blessing in disguise.
Srikrishna on the RBI and the IFC
You must read this interview Justice Srikrishna has given to the Economic Times.Here's what he has to say about the MPC and separation of public debt from the RBI:
Originally, there was a proposal that there will be a veto with the RBI governor. The government said a veto is not good. Originally, we had said the majority in the Monetary Policy Committee should be outsiders. The RBI objected, saying we should have a majority. So the government, after consulting the RBI, conceded ground and said, 'Let there be three Reserve Bank nominees including the governor, deputy governor and the one nominated by them'. So, the new thing has been accepted.
Srikrishna is also worth quoting on RBI independence about which misconceptions abound:On public debt, the government says right now we don't have the capacity to deal with this issue, the Reserve Bank says, 'no we have to do this'. One by one things are being done. So, what is the controversy being generated? The government has no controversy, the Reserve Bank has no controversy and I see no scope for controversy. You chaps are creating the controversy.
Nobody is independent except the judiciary, for obvious reasons. Under the Constitution, the only independent body is the judiciary. Now, the RBI is merely putting into practice the policy to be pursued by the government in financial matters. It is of course undeniably an experts' advisory body and its advice has great weight. On recapitalisation of banks... the government has neither the time nor is it competent. So, the Reserve Bank looks at all such things as the exchange rate, inflation targeting, etc. The mandate is given to the RBI but the government may still disagree with it, unlike a Supreme Court judgement where it is bound by the decision.
Nobody
is independent except the judiciary, for obvious reasons. Under the
Constitution, the only independent body is the judiciary. Now, the RBI
is merely putting into practice the policy to be pursued by the
government in financial matters. It is of course undeniably an experts'
advisory body and its advice has great weight. On recapitalisation of
banks... the government has neither the time nor is it competent. So,
the Reserve Bank looks at all such things as the exchange rate,
inflation targ ..
Originally,
there was a proposal that there will be a veto with the RBI governor.
The government said a veto is not good. Originally, we had said the
majority in the Monetary Policy Committee should be outsiders. The RBI
objected, saying we should have a majority. So the government, after
consulting the RBI, conceded ground and said, 'Let there be three
Reserve Bank nominees including the governor, deputy governor and the
one nominated by them'. So, the new thing has been accepted. On public
d ..
Originally,
there was a proposal that there will be a veto with the RBI governor.
The government said a veto is not good. Originally, we had said the
majority in the Monetary Policy Committee should be outsiders. The RBI
objected, saying we should have a majority. So the government, after
consulting the RBI, conceded ground and said, 'Let there be three
Reserve Bank nominees including the governor, deputy governor and the
one nominated by them'. So, the new thing has been accepted. On public
d ..
Originally, there was a proposal that there will be a veto with the
RBI governor. The government said a veto is not good. Originally, we had
said the majority in the Monetary Policy Committee should be
outsiders. The RBI objected, saying we should have a majority. So the
government, after consulting the RBI, conceded ground and said, 'Let
there be three Reserve Bank nominees including the governor, deputy
governor and the one nominated by them'. So, the new thing has been
accepted. On public ..
Originally, there was a proposal that there will be a veto with the
RBI governor. The government said a veto is not good. Originally, we had
said the majority in the Monetary Policy Committee should be
outsiders. The RBI objected, saying we should have a majority. So the
government, after consulting the RBI, conceded ground and said, 'Let
there be three Reserve Bank nominees including the governor, deputy
governor and the one nominated by them'. So, the new thing has been
accepted. On public ..
Originally, there was a proposal that there will be a veto with the
RBI governor. The government said a veto is not good. Originally, we had
said the majority in the Monetary Policy Committee should be
outsiders. The RBI objected, saying we should have a majority. So the
government, after consulting the RBI, conceded ground and said, 'Let
there be three Reserve Bank nominees including the governor, deputy
governor and the one nominated by them'. So, the new thing has been
accepted. On public ..
Sunday, August 09, 2015
Maoist policies would not change China's future growth rate
I found this hard to believe when I read it but it appears to be the result of solid research. If China were to revert to Maoist policies, the Chinese economy would grow on the average at 4-5% every year between now and 2050- about one percentage point lower than the growth rate projected for China under the pro-market liberal policies it has had since the 1970s. These projections have been made by four US-based economists, says a report in the FT.
The projections made for the Chinese economy under current policies are interesting:
The interesting question thrown up by the projections on China is whether the focus on continued "reforms" isn't a little overdone in India. Perhaps, the PM's instincts are right: it may be more useful to focus on implementation of existing policies than on bringing about radical policy changes that are, in political terms, a hot potat.
The projections made for the Chinese economy under current policies are interesting:
Assuming a continuation of current policies, the paper predicts the Chinese economy will expand by 7-8 per cent for the next 10 years or so, with growth slowing to 5.2 per cent on average between 2024 and 2036 and then a rate of just 3.6 per cent between 2036 and 2050.India's economic growth should overtake China's this year. India's superior growth rate should persist thereafter until 2050- barring unexpected political shocks.
The interesting question thrown up by the projections on China is whether the focus on continued "reforms" isn't a little overdone in India. Perhaps, the PM's instincts are right: it may be more useful to focus on implementation of existing policies than on bringing about radical policy changes that are, in political terms, a hot potat.
Tuesday, August 04, 2015
More capital for public sector banks
The government has made a welcome about-turn on the question of infusing fresh capital into public sector banks (PSBs). It plans to infuse Rs 70,000 crore in the next four years, starting with Rs 25,000 crore this very year. The government's position in the first year in office was that the government would reward performing banks with capital; non-performers would have to fend for themselves.
This is an untenable position to take because it leaves unaddressed the issue of how non-performers are to fend for themselves. They can raise capital from the markets, if at all, only at throw away prices, which means the government as the owner is giving away equity cheaply. It makes sense to tap capital markets only after valuation improves. Valuations can improve only if revenue and profit grow. Revenue and profit can grow only if banks can lend more. (Options such as selling off non-core assets may not fetch enough capital and they cannot be done in a hurry in the government scheme of things), And banks can lend more only if they have more capital. QED.
The government's hand has, perhaps, been forced by the rise in NPAs in recent months. Provisions against these will reduce profit or increase losses and erode capital. It's not clear what level of capital adequacy the additional infusion of capital is intended to achieve- hopefully it will be at least two percentage points above the regulatory minimum of 9%- only then can PSBs take some risks in lending.
The general perception is that bouts of recapitalisation of PSBs are uncalled for and a colossal drain on the exchequer. Neither is true when one looks at the worldwide experience with bank recapitalisation. There is always a fiscal cost associated with recapitalising banks. If you can keep the cost below, say, 5% of average GDP over a 20 years and prevent a banking crisis, you have achieved something.
In India, we have done just that and we have prevented a full-blown crisis. Contrast that with economies where governments recapitalise banks after a crisis and end up paying a higher fiscal cost, not to speak of the bigger loss of output arising from a banking crisis.
More in my article in the Wire, Three myths about recapitalising public sector banks.
This is an untenable position to take because it leaves unaddressed the issue of how non-performers are to fend for themselves. They can raise capital from the markets, if at all, only at throw away prices, which means the government as the owner is giving away equity cheaply. It makes sense to tap capital markets only after valuation improves. Valuations can improve only if revenue and profit grow. Revenue and profit can grow only if banks can lend more. (Options such as selling off non-core assets may not fetch enough capital and they cannot be done in a hurry in the government scheme of things), And banks can lend more only if they have more capital. QED.
The government's hand has, perhaps, been forced by the rise in NPAs in recent months. Provisions against these will reduce profit or increase losses and erode capital. It's not clear what level of capital adequacy the additional infusion of capital is intended to achieve- hopefully it will be at least two percentage points above the regulatory minimum of 9%- only then can PSBs take some risks in lending.
The general perception is that bouts of recapitalisation of PSBs are uncalled for and a colossal drain on the exchequer. Neither is true when one looks at the worldwide experience with bank recapitalisation. There is always a fiscal cost associated with recapitalising banks. If you can keep the cost below, say, 5% of average GDP over a 20 years and prevent a banking crisis, you have achieved something.
In India, we have done just that and we have prevented a full-blown crisis. Contrast that with economies where governments recapitalise banks after a crisis and end up paying a higher fiscal cost, not to speak of the bigger loss of output arising from a banking crisis.
More in my article in the Wire, Three myths about recapitalising public sector banks.
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