Tuesday, May 16, 2017

Capital is crucial to resolving India's bad loan problem

The government's Ordinance empowering the RBI to take steps to resolve the bad loan problem, it is hoped, will make a difference. It can- provided the government is willing to back it with the necessary capital. Indeed, by not infusing capital into public sector banks for so long the government has caused the bad loan problem to worsen. This is because banks have not been able to write off bad loans and because they haven't been able to expand credit, which, in turn, results in the bad loan to advances ratio looking bad.

Over a two year period, I expect the government will need to put in around Rs 100,000 crore. Mention something like this and you will see another round of public sector bashing. There will be calls to privatise PSBs because putting capital into them is "money down the drain".

Rubbish. You only have to look at the capital that governments in US and Europe have poured into private banks in order to see that this contention doesn't hold water. And here's an astonishing fact: the recapitalisation cost of India's PSBs, even if the government puts in Rs 100,000 crore on top of the Rs 70,000 crore it has committed under Indradhanush would be among the lowest in the world!

More in my column in BS, Don't dither on bank recapitalisation.

Don’t dither on bank recapitalisation
Following the financial crisis of 2007, America’s banks have bounced back faster than those in Europe. There’s little dispute as to how this happened. The authorities in the US moved faster to recapitalise banks than their counterparts in Europe. In the US, the government pumped $245 billion into banks. The banks eventually repaid $275 billion, including interest and dividend. 
 
There had been colossal failures in both management and governance at American banks. Yet, nobody argued that recapitalisation should be held back until these were overhauled. The rule in a financial crisis is simple enough: Recapitalise as quickly as you can. At many banks in the US, CEOs were replaced. There were some changes in the composition of bank boards. But the infusion of capital did not await a sea change in management or governance. 
 
If governments in US and Europe had withheld capital from banks until they had made sure that it would be used wisely, they might have waited for ever. Recovery in those economies would not have happened.  
 
The contrast in the approach pursued in India could not be starker. In 2015 , the requirement of equity capital at public sector banks (PSBs)  was estimated at around ~2,50,000 crore out of which at least ~1,25,000 crore was to have come from the government. Under Indradhanush, the government committed a much smaller amount — ~70,000 crore ($11 billion) — over a four year period, 2016-19.
 
In 2016, following the Asset Quality Review, bad loans, and hence the requirement of capital, soared. The government has, however, stuck to the sum committed under Indradhanush. It also took the position that capital would be given strictly on the basis of performance — weaker banks would have to fend themselves. It was a case of too little, too late. We should not be surprised that banks have sunk deeper into the mire and economic recovery has been tepid. 
 
Those opposed to giving capital to PSBs contend that mismanagement and poor governance are mainly responsible for the bad loan problems at PSBs. Infusing more capital into them would be only “money down the drain”.They should have said this to governments in the US and Europe who poured capital into privately owned banks during the financial crisis. 
 
The crisis of 2007 was only the latest in nearly 150 episodes of banking crises in 115 economies in the past four decades. Private banking systems plunge into crisis time and again. Each crisis makes enormous demands on tax payer money. That does not seem to be “money down the drain”. 
 
It is not true that the bad loan problem in India is mainly on account of mismanagement. The Economic Survey (2016-17) says emphatically, “Without doubt, there are cases where debt repayment problems have been caused by diversion of funds. But the vast bulk of the problem has been caused by unexpected changes in the economic environment: Timetables, exchange rates, and growth rate assumptions going wrong.” Translation: The bad loan problem is the result mostly of factors beyond the control of bank management.
 
If the finance ministry takes its own Chief Economic Advisor seriously, the course for the government should have been clear enough long back: Provide enough capital to PSBs, ensure  the right people are appointed as CEOs and strengthen the boards. None of this happened. The bad loan problem has remained unresolved. Together, these have led to a worsening of the financials of PSBs.

The government seems to have finally come out of its stupor. An Ordinance that empowers the RBI to address the bad loan problem has been issued. CEOs have been appointed at 10 PSBs. But these moves will not suffice unless they are backed with adequate capital. This year’s provision of ~10,000 crore means nothing. If bad loan resolution happens, the amount required this year alone could be up to ~50,000 crore.

Most people will recoil in horror at the sums involved. They will wail that PSBs make unacceptable demands on the exchequer because of inefficiencies inherent in public ownership of banks. This is an absolute myth.

The way banking systems are designed today, they are prone to failure — and these are overwhelmingly private banking systems. Governments everywhere incur recapitalisation costs from time to time. The best we can hope for is that the costs stay below an acceptable threshold. The Vickers Commission in the UK defined the threshold as an annual cost of 3 per cent of GDP. If this seems excessive, a cost of 5 per cent of GDP over, say, two decades would be the absolute minimum.

The cost of recapitalising PSBs over the entire period 1994-2016 amounts to less than 0.5 per cent of India’s average GDP in the period. This is about the lowest recapitalisation cost that any banking system in the world has inflicted on the economy. Enough of dithering. The government should put in whatever it takes to recapitalise PSBs.

Thursday, April 27, 2017

World economy: IMF is upbeat but don't bet on a smart recovery

The IMF sees the world economy emerging from its prolonged post-crisis slump in 2017 and 2018. It appears that expansionary monetary policy and fiscal policy (until it was reversed a couple of years ago) have borne fruit. Or it could just be that the world has been through the eight years or so takes to emerge from a serious financial crisis (Rogoff and Reinhart).

There are, however, too many imponderables in the picture- doubts about the fiscal expansion promised by Trump (given the difficulties he's had in dealing with Congress), Brexit and its likely fallout, China's debt overhang, rising protectionism and anti-globalisation sentiment and major geo-political risks, including all-out war in the Korean peninsula. So I wouldn't want to celebrate right away.

More in my article in the Hindu, The world is still flat.

Monday, April 24, 2017

North Korea flashpoint

The Trump administration has ratcheted up tensions with North Korea to a new high. An American armada has been sent to the Korean seas. The US has put in place a sophisticated missile defence system in South Korea. And Trump has issued several warnings to North Korea. The provocation is said to be North Korea's attempt at testing a missile that could hit California.

But there is a history to North Korea's nuclear missile programme that finds little mention in the western media. The western media paints North Korea's ruler Kim Jong Un as a madman bent on self-destruction and his country as a poor, backward nation that could collapse any time.

An article in RT sets the record straight in respect of the above:

As Bruce Cumings, the leading Western academic expert on the DPRK, puts it:
"North Korea is the only country in the world to have been systematically blackmailed by US nuclear weapons going back to the 1950s, when hundreds of nukes were installed in South Korea… Why on earth would Pyongyang not seek a nuclear deterrent? But this crucial background doesn’t enter mainstream American discourse. 

....An internal CIA study almost grudgingly acknowledged various achievements of this regime: compassionate care for children in general and war orphans in particular; “radical change” in the position of women; genuinely free housing, free health care, and preventive medicine; and infant mortality and life expectancy rates comparable to the most advanced countries.
Life expectancy at birth is 70.4 years. Hospital bed density (number of hospital beds per 1,000 of the population) is 13.2 – quadruple that of the United Kingdom. The entire population has access to improved drinking water. The literacy rate is 100 percent. Think these statistics come from the DPRK’s ministry of propaganda? They’re from the CIA World Factbook. Most developing countries would be very happy to achieve such figures.

North Korea has a no first use policy on nuclear weapons. The US will not reciprocate. The US will not offer a non-aggression pact either. It won't withdraw its troops from South Korea in exchange for a nuclear deal with North Korea. What the US will do is intimidate and bully. North Korea refuses to be bullied.

Let me add what Paul Craig Roberts, a respected journalist and former policy maker has to say on the subject:
The Chinese government has said that the moronic Americans could attack North Korea at any moment. A large US fleet is heading to North Korea. North Korea apparently now has nuclear weapons. One North Korean nuclear weapon can wipe out the entirety of the US fleet. Why is Washington inviting this outcome? The only possible answer is moronic stupidity.
North Korea is not bothering anyone. Why is Washington picking on North Korea? Does Washington want war with China? In which case, is Washinton kissing off the West Coast of the US? Why does the West Coast support policies that imply the demise of the West Coast of the US? Do the morons on the West Coast think that the US can initiate war with China, or North Korea, without any consequesnces to the West Coast? Are even Americans this utterly stupid?
Roberts' indictment of successive US presidents is scathing:

It has become embarrassing to be an American. Our country has had four war criminal presidents in succession. Clinton twice launched military attacks on Serbia, ordering NATO to bomb the former Yugoslavia twice, both in 1995 and in 1999, so that gives Bill two war crimes. George W. Bush invaded Afghanistan and Iraq and attacked provinces of Pakistan and Yemen from the air. That comes to four war crimes for Bush. Obama used NATO to destroy Libya and sent mercenaries to destroy Syria, thereby commiting two war crimes. Trump attacked Syria with US forces, thereby becoming a war criminal early in his regime. 







A tribute to my late father

I lost my father, T T Vijayaraghavan, a veteran journalist, last December. It's turned out to be more shattering than I could have ever imagined.

I grew up with the smell of newspapers and books around me and the goings-on in the world of journalism were the staple of conversations at home. I have spent time in the corporate world and in academics but have never quite managed to get the journalism bug out of my system. I remain at heart a journalist, thanks largely to father's influence.

Here's a little tribute I penned in EPW. A former colleague of father's has responded with a very touching letter to the editor.

PS: As the tribute is behind a pay wall, I reproduce it below:

Other Days, Other  Times 

Remembering T T Vijayaraghavan

T T Vijayaraghavan (TTV), who passed away recently, was a member of the core group of journalists that launched the Economic Times (ET) in 1961. TTV joined the paper as assistant editor and served it with distinction for two decades. The other key members at the inception of the paper were: P S Hariharan (editor), T K Seshadri (news editor), Hannan Ezekiel and A R Rao (both assistant editors).
The idea of producing a financial daily in India was altogether novel at the time. There were serious doubts as to whether there was a large enough market for such a paper. It is to the credit of Shanti Prasad Jain, the then proprietor of Bennett Coleman and Company, that he gave the idea his fullest backing, and supported its losses for several years. Jain was keen that the fledgling daily attract the best talent, so he encouraged the management to offer its recruits terms that were superior to those of the Times of India (ToI), something that caused heartburn at the group’s flagship.
The ET staff were lodged in the third floor of the Times of India building in Mumbai, along with those of ToI. A striking feature was the long corridor with a line of cabins with Belgian glass to the left (on the opposite side was the ToI newsroom and further down the ET newsroom). These cabins, which had a certain aura about them, housed the editors of ToI and ET and the assistant editors.
TTV’s background had prepared him well for the assignment. He had obtained his Master of Arts in economics from the prestigious Presidency College in the then state of Madras. B D Goenka, son of Indian Express founder Ramnath Goenka, was a classmate at the intermediary level and G Kasturi, later to become a legendary editor at the Hindu, at the masters. TTV developed a friendship with Kasturi that lasted a lifetime.
After a brief stint in government, in Shimla, TTV plunged into journalism, joining the Hindu as a reporter before being transferred to the editorial desk. He spent 10 years with the paper, imbibing the basics of news gathering, layout, and analysis from personalities such as Kasturi Srinivasan (its then editor), the formidable editorial writer N Raghunathan and K Balaraman, later to become the paper’s celebrated Washington correspondent. TTV remained unshaken in his conviction that no Indian paper could match the Hindu in thoroughness and credibility.
From the Hindu, TTV moved to the Eastern Economist, a financial weekly published from Delhi and edited by E P W Da Costa (no connection with this journal!). Long before the Economic & Political Weekly made its mark, the Eastern Economist had established itself as a quality publication.
TTV’s five-year stint at the Eastern Economist proved useful to the launch of ET. He was well-tuned to a range of economic events that would require coverage and comment. The core group spent several months in coming out with dummy runs before the paper was formally launched.
One of TTV’s early contributions was to start a page for book reviews. He remained in charge of the page throughout his association with ET. He wrote a column, “Men and Ideas” in which he profiled important personalities in the news. The response he got was heart-warming: a profile of Homi Bhabha fetched a dinner invitation and a folio of Bhabha’s paintings.
Some five years after the paper was set up, Hariharan left and D K Rangnekar took over as editor. Rangnekar, who had a doctorate from the London School of Economics, was that exceptional journalist who combined academic depth with the racy writing that is the hallmark of journalism. The paper gained in stature in his time. ET’s editorials came to be closely followed by the powers-that-be in New Delhi.
One incident that comes to mind is when the Shiv Sena went on a rampage against people from the South, beating up Malayali hawkers in the Flora Fountain area. ET carried an editorial, “Glaring at Noon,” borrowing the title from Arthur Koestler’s famous novel about the Stalinist era. The edit hinted at collusion between the state government and the Shiv Sena. A day or two later, Rangnekar got a call from the chief minister (S B Chavan, as I recall). The chief minister fumed about the editorial; P N Haksar had called and conveyed the Prime Minister’s displeasure. How could ET have painted such a dark picture of the city? Rangnekar told him quietly—so he confided in TTV—“I saw it with my own eyes.”
The ET of that era was a very different paper from what it is today. News was mostly macroeconomic, business or corporate news was secondary. The editorial policy hewed closely to the Nehruvian line. Socialism (and a prominent role for the public sector), secularism and non-alignment were taken as verities.
Mornings at home began with a dissection of ET and other papers. Why had ToI chosen to spread the main story over four columns? Two columns would have been more appropriate; the Indian Express had got it right. Why had another story got buried in page five in the ToI? ET’s choice of page one was correct. The box item in a paper was plain sensationalism. And so on. It was an era in which sobriety, accuracy and a commitment to the public good were the touchstones for news coverage and commentary.
TTV also made his contribution to financial journalism in Tamil. For several years, he wrote a monthly column for the Tamil magazine Deepam founded by the well-known Tamil litterateur, Naa Parthasarathy. A connoisseur of Carnatic music, he wrote reviews of concerts for the Evening News, the afternoon paper run by the Times group and also on the cultural scene for the ToI.
TTV left ET in 1981, just a couple of years before he was due to retire. He briefly edited the management journal of the Bombay Management Association. He revived his association with Eastern Economist, then edited by Swaminathan Aiyar, producing a weekly newsletter that focused on developments in various sectors of the economy. He also wrote for the Indian Post and Business Standard.
I may be permitted to end on a more personal note. I started contributing to ET in 1987 while a student in New York. I was appointed stringer in New York for the paper in 1988. On my return to India, I continued to write for the paper. I began a fortnightly column for ET in 1997 which continued until 2013. It is fair to say that the family association with ET spans most of its history. It is a gratifying thought.
- See more at: http://www.epw.in/journal/2017/12/commentary/other-days-other-times.html#sthash.0HoyPyja.dpuf

The idea of producing a financial daily in India was altogether novel at the time. There were serious doubts as to whether there was a large enough market for such a paper. It is to the credit of Shanti Prasad Jain, the then proprietor of Bennett Coleman and Company, that he gave the idea his fullest backing, and supported its losses for several years. Jain was keen that the fledgling daily attract the best talent, so he encouraged the management to offer its recruits terms that were superior to those of the Times of India (ToI), something that caused heartburn at the group’s flagship.
 
The ET staff were lodged in the third floor of the Times of India building in Mumbai, along with those of ToI. A striking feature was the long corridor with a line of cabins with Belgian glass to the left (on the opposite side was the ToI newsroom and further down the ET newsroom). These cabins, which had a certain aura about them, housed the editors of ToI and ET and the assistant editors.
TTV’s background had prepared him well for the assignment. He had obtained his Master of Arts in economics from the prestigious Presidency College in the then state of Madras. B D Goenka, son of Indian Express founder Ramnath Goenka, was a classmate at the intermediary level and G Kasturi, later to become a legendary editor at the Hindu, at the masters. TTV developed a friendship with Kasturi that lasted a lifetime.

After a brief stint in government, in Shimla, TTV plunged into journalism, joining the Hindu as a reporter before being transferred to the editorial desk. He spent 10 years with the paper, imbibing the basics of news gathering, layout, and analysis from personalities such as Kasturi Srinivasan (its then editor), the formidable editorial writer N Raghunathan and K Balaraman, later to become the paper’s celebrated Washington correspondent. TTV remained unshaken in his conviction that no Indian paper could match the Hindu in thoroughness and credibility.

From the Hindu, TTV moved to the Eastern Economist, a financial weekly published from Delhi and edited by E P W Da Costa (no connection with this journal!). Long before the Economic & Political Weekly made its mark, the Eastern Economist had established itself as a quality publication.

TTV’s five-year stint at the Eastern Economist proved useful to the launch of ET. He was well-tuned to a range of economic events that would require coverage and comment. The core group spent several months in coming out with dummy runs before the paper was formally launched.

One of TTV’s early contributions was to start a page for book reviews. He remained in charge of the page throughout his association with ET. He wrote a column, “Men and Ideas” in which he profiled important personalities in the news. The response he got was heart-warming: a profile of Homi Bhabha fetched a dinner invitation and a folio of Bhabha’s paintings.

Some five years after the paper was set up, Hariharan left and D K Rangnekar took over as editor. Rangnekar, who had a doctorate from the London School of Economics, was that exceptional journalist who combined academic depth with the racy writing that is the hallmark of journalism. The paper gained in stature in his time. ET’s editorials came to be closely followed by the powers-that-be in New Delhi.

One incident that comes to mind is when the Shiv Sena went on a rampage against people from the South, beating up Malayali hawkers in the Flora Fountain area. ET carried an editorial, “Glaring at Noon,” borrowing the title from Arthur Koestler’s famous novel about the Stalinist era. The edit hinted at collusion between the state government and the Shiv Sena. A day or two later, Rangnekar got a call from the chief minister (S B Chavan, as I recall). The chief minister fumed about the editorial; P N Haksar had called and conveyed the Prime Minister’s displeasure. How could ET have painted such a dark picture of the city? Rangnekar told him quietly—so he confided in TTV—“I saw it with my own eyes.”

The ET of that era was a very different paper from what it is today. News was mostly macroeconomic, business or corporate news was secondary. The editorial policy hewed closely to the Nehruvian line. Socialism (and a prominent role for the public sector), secularism and non-alignment were taken as verities.

Mornings at home began with a dissection of ET and other papers. Why had ToI chosen to spread the main story over four columns? Two columns would have been more appropriate; the Indian Express had got it right. Why had another story got buried in page five in the ToI? ET’s choice of page one was correct. The box item in a paper was plain sensationalism. And so on. It was an era in which sobriety, accuracy and a commitment to the public good were the touchstones for news coverage and commentary.

TTV also made his contribution to financial journalism in Tamil. For several years, he wrote a monthly column for the Tamil magazine Deepam founded by the well-known Tamil litterateur, Naa Parthasarathy. A connoisseur of Carnatic music, he wrote reviews of concerts for the Evening News, the afternoon paper run by the Times group and also on the cultural scene for the ToI.

TTV left ET in 1981, just a couple of years before he was due to retire. He briefly edited the management journal of the Bombay Management Association. He revived his association with Eastern Economist, then edited by Swaminathan Aiyar, producing a weekly newsletter that focused on developments in various sectors of the economy. He also wrote for the Indian Post and Business Standard.

I may be permitted to end on a more personal note. I started contributing to ET in 1987 while a student in New York. I was appointed stringer in New York for the paper in 1988. On my return to India, I continued to write for the paper. I began a fortnightly column for ET in 1997 which continued until 2013. It is fair to say that the family association with ET spans most of its history. It is a gratifying thought.



T T Vijayaraghavan (TTV), who passed away recently, was a member of the core group of journalists that launched the Economic Times (ET) in 1961. TTV joined the paper as assistant editor and served it with distinction for two decades. The other key members at the inception of the paper were: P S Hariharan (editor), T K Seshadri (news editor), Hannan Ezekiel and A R Rao (both assistant editors).
The idea of producing a financial daily in India was altogether novel at the time. There were serious doubts as to whether there was a large enough market for such a paper. It is to the credit of Shanti Prasad Jain, the then proprietor of Bennett Coleman and Company, that he gave the idea his fullest backing, and supported its losses for several years. Jain was keen that the fledgling daily attract the best talent, so he encouraged the management to offer its recruits terms that were superior to those of the Times of India (ToI), something that caused heartburn at the group’s flagship.
The ET staff were lodged in the third floor of the Times of India building in Mumbai, along with those of ToI. A striking feature was the long corridor with a line of cabins with Belgian glass to the left (on the opposite side was the ToI newsroom and further down the ET newsroom). These cabins, which had a certain aura about them, housed the editors of ToI and ET and the assistant editors.
TTV’s background had prepared him well for the assignment. He had obtained his Master of Arts in economics from the prestigious Presidency College in the then state of Madras. B D Goenka, son of Indian Express founder Ramnath Goenka, was a classmate at the intermediary level and G Kasturi, later to become a legendary editor at the Hindu, at the masters. TTV developed a friendship with Kasturi that lasted a lifetime.
After a brief stint in government, in Shimla, TTV plunged into journalism, joining the Hindu as a reporter before being transferred to the editorial desk. He spent 10 years with the paper, imbibing the basics of news gathering, layout, and analysis from personalities such as Kasturi Srinivasan (its then editor), the formidable editorial writer N Raghunathan and K Balaraman, later to become the paper’s celebrated Washington correspondent. TTV remained unshaken in his conviction that no Indian paper could match the Hindu in thoroughness and credibility.
From the Hindu, TTV moved to the Eastern Economist, a financial weekly published from Delhi and edited by E P W Da Costa (no connection with this journal!). Long before the Economic & Political Weekly made its mark, the Eastern Economist had established itself as a quality publication.
TTV’s five-year stint at the Eastern Economist proved useful to the launch of ET. He was well-tuned to a range of economic events that would require coverage and comment. The core group spent several months in coming out with dummy runs before the paper was formally launched.
One of TTV’s early contributions was to start a page for book reviews. He remained in charge of the page throughout his association with ET. He wrote a column, “Men and Ideas” in which he profiled important personalities in the news. The response he got was heart-warming: a profile of Homi Bhabha fetched a dinner invitation and a folio of Bhabha’s paintings.
Some five years after the paper was set up, Hariharan left and D K Rangnekar took over as editor. Rangnekar, who had a doctorate from the London School of Economics, was that exceptional journalist who combined academic depth with the racy writing that is the hallmark of journalism. The paper gained in stature in his time. ET’s editorials came to be closely followed by the powers-that-be in New Delhi.
One incident that comes to mind is when the Shiv Sena went on a rampage against people from the South, beating up Malayali hawkers in the Flora Fountain area. ET carried an editorial, “Glaring at Noon,” borrowing the title from Arthur Koestler’s famous novel about the Stalinist era. The edit hinted at collusion between the state government and the Shiv Sena. A day or two later, Rangnekar got a call from the chief minister (S B Chavan, as I recall). The chief minister fumed about the editorial; P N Haksar had called and conveyed the Prime Minister’s displeasure. How could ET have painted such a dark picture of the city? Rangnekar told him quietly—so he confided in TTV—“I saw it with my own eyes.”
The ET of that era was a very different paper from what it is today. News was mostly macroeconomic, business or corporate news was secondary. The editorial policy hewed closely to the Nehruvian line. Socialism (and a prominent role for the public sector), secularism and non-alignment were taken as verities.
Mornings at home began with a dissection of ET and other papers. Why had ToI chosen to spread the main story over four columns? Two columns would have been more appropriate; the Indian Express had got it right. Why had another story got buried in page five in the ToI? ET’s choice of page one was correct. The box item in a paper was plain sensationalism. And so on. It was an era in which sobriety, accuracy and a commitment to the public good were the touchstones for news coverage and commentary.
TTV also made his contribution to financial journalism in Tamil. For several years, he wrote a monthly column for the Tamil magazine Deepam founded by the well-known Tamil litterateur, Naa Parthasarathy. A connoisseur of Carnatic music, he wrote reviews of concerts for the Evening News, the afternoon paper run by the Times group and also on the cultural scene for the ToI.
TTV left ET in 1981, just a couple of years before he was due to retire. He briefly edited the management journal of the Bombay Management Association. He revived his association with Eastern Economist, then edited by Swaminathan Aiyar, producing a weekly newsletter that focused on developments in various sectors of the economy. He also wrote for the Indian Post and Business Standard.
I may be permitted to end on a more personal note. I started contributing to ET in 1987 while a student in New York. I was appointed stringer in New York for the paper in 1988. On my return to India, I continued to write for the paper. I began a fortnightly column for ET in 1997 which continued until 2013. It is fair to say that the family association with ET spans most of its history. It is a gratifying thought.
- See more at: http://www.epw.in/journal/2017/12/commentary/other-days-other-times.html#sthash.0HoyPyja.dpuf

Tuesday, April 18, 2017

Do we need term finance institutions?

We shut down two of three term finance institutions we had in the early 2000s, ICICI and IDBI, getting both converted into banks. IFCI changed into an NBFC later. Now, in a discussion paper, the RBI moots the idea of creating term finance institutions. Many, including former RBI Governor C Rangarajan, have long argued that closing down term finance institutions was a mistake and that we need to revive these in order to facilitate long term financing (given that bond markets have not taken off).

I think there is  case for doing so. But, in today's conditions, only a government-owned institution with access to concessional finance will be viable. More in my BS piece, Back to term finance institutions?

As the BS article is behind a pay wall, I reproduce the article below:

The Reserve Bank of India (RBI) has issued a discussion paper that moots the idea of long-term finance banks. This would amount to seriously turning the clock back to the early 2000s. 
 
We then had three development financial institutions (DFIs) that focused on term finance, namely, IFCI, ICICI and IDBI. Commercial banks confined themselves mainly to providing working capital. 
 
There were reasons for separating the two roles. Banks’ funds are mostly short-term in nature. So their getting into term finance results in long-term assets being financed by short-term funds. This exposes banks to interest rate and liquidity risks.
 
Secondly, providing project finance requires appraisal skills of a different sort from those required for providing working capital. Working capital is backed by assets that are easily liquidated. Not so project finance. You have to depend on cash flows to service the debt. This makes the evaluation of risk far more challenging.  
 
Term-finance institutions have to rely on long-term funds. This means more expensive funding and hence costlier loans. The DFIs could get around this problem because they were given access to low-cost funds  from the RBI and through bonds guaranteed by the government and that qualified as statutory liquidity ratio (SLR) securities. 
 
At their peak in the late 1990s, the three DFIs accounted for nearly a third of gross fixed capital formation in manufacturing. Most of the loans were made to manufacturing. Lending to infrastructure accounted for just 15 per cent of the total. (Deepak Nayyar, <i>Economic and Political Weekly<p>, August 15, 2015).
 
Financial sector reforms in the mid-1990s meant that concessional funding was out. Banks were allowed to venture into long-term funding. DFIs were then reeling under the impact of bad loans of the past. These together undermined the DFI model. 
 
The idea that working capital and long-term finance should happen under one roof took hold. The second Narasimham committee on financial sector reforms (April 1998) and the S H Khan Working Group (May 1998) both recommended that the roles of DFIs and banks be harmonised.
 
The RBI was not entirely convinced. In a discussion paper published in January 1999, the RBI warned, “Drastic changes in their (DFIs’) respective roles at this stage may have serious implications for financing requirements of funds of crucial sectors of the economy.”
 
Nevertheless, the RBI chose to fall in line with the Narasimham committee recommendations — it is often said, under pressure from the international agencies that had provided structural adjustment loans. The RBI advised the three DFIs to convert themselves into banks or non-banking financial companies (NBFCs). ICICI and IDBI opted to merge with their banking subsidiaries. IFCI muddled along and eventually became an NBFC.
 
In Japan and many East Asian economies too, the role of DFIs was curtailed over time. But this happened only after certain conditions had been met: A high savings rate, large foreign direct investment (FDI) flows and considerable growth in domestic capital markets. The Indian economy had not met these conditions in the early 2000s. Doing away with DFIs at that point was thus rather premature.
 
The RBI discussion paper seems to acknowledge as much. It argues that, in recent years, bank lending to the services sector, industry and small and medium-sided enterprises (SMEs) has suffered thanks to the bad loans on their books. It says that banks lack the expertise necessary for term finance. There is a need for term-finance institutions to fill these gaps.    
 
The proposed term-finance institutions would have a minimum capital requirement of ~1,000 crore, higher than the ~500 crore stipulated for commercial banks. They cannot have savings accounts but they can have current accounts and term deposits with a minimum of, say, ~10 crore. They would be exempt from cash reserve ratio (CRR) requirement for funds raised through infrastructure bonds. These funds would also need to be exempted from SLR requirements in line the relaxation given to commercial banks. 
 
The key question, which the paper sidesteps, is: How do we ensure viability?
If the proposed term-finance institutions are to raise finance entirely from the markets, it will make their loans far too expensive. Banks may be leery today of financing projects at the outset. However, once a project is close to completion, they are happy to refinance loans at lower rates. This is happening with power projects, for instance. Term-finance institutions may not be viable as long as they face higher borrowing costs than banks. 
 
To be viable, they will need to access concessional funding through government-guaranteed bonds and low-cost funds from the international agencies. So, yes, there is room for a term finance institution but only one that is promoted by the government and gets subsidised funding — in effect, a new avatar of IDBI. 
 
Will the government have the stomach for an initiative that looks distinctly anti-reformist? Would it want to promote a new financial institution at a time when it wants to shrink the numbers of those that obtain today?



Saturday, April 15, 2017

Corporate scandals- the board is the problem

Companies worldwide face scandals. (In India, we call them scams. I guess the difference between a a scandal abroad and a scam here is that there is retribution in the former and none in the latter).

It's no use exhorting managers to behave better. We must accept that those at the top will have the opportunity to misbehave- and many will use that opportunity.

The answer is for boards to get their acts together. Cliched as it may sound, we go back to corporate governance. I have been arguing for long that the answer lies in board room diversity. This is more than gender diversity (although that is certainly an important part of the answer). It means getting different views and perspectives into the board room. This cannot happen as long as board members are chosen from the same narrow club of retired and serving corporate executives and retired bureaucrats, the people who get to playing cards and billiards in the same elite clubs - when they are not playing games in the board room itself.

British Prime Minister Theresa May seemed to be on to something when she argued for a place for consumers and workers on boards soon after she took over. But British industry has stoutly resisted and we haven't seen much of these proposals. An article in FT writes of how deep the aversion to change runs in the UK:

A ......British government report expressed concerns that worker directors would lead to greater conflict in board discussion, slower decisions and “the risk of decision-making shifting away from the boardroom and into less formal channels”. It was an insight into the kind of boardroom thinking that seeks any excuse to avoid challenge from those with a different perspective. The message was that “we want to continue with things our way and if you make us have these people on our boards, we will simply have the real discussion behind their backs”.

.....The corporate elite was far too quick to shout down the idea of worker directors, just as it has been too slow to welcome women and minority groups. In the UK, employees are accepted on to pension trustee boards, where they are often highly commended for their ability to ask the right question and to identify the very heart of a matter. Boards can learn from that and from the limited experience of adding female directors, who have brought a different point of view into the boardroom.  

And what if boards fail to act? Well, governments everywhere have to use the big stick. In India, the government should moot the idea of having SC/ST quotas on boards- in a way, this would amount to worker representation as well. It would a big blow for governance and a blow for affirmative action as well.







Tuesday, April 04, 2017

America's 'secret' war in Laos

The Americans bombed the hell out of Iraq and helped Nato bomb the hell out of Libya. Earlier, they showed their firepower in Serbia. Now, we are getting a taste of American intervention in Mosul in Iraq and in the Raqqa province of Syria.

The Americans seem to have learnt one big lesson from Vietnam: by all means get involved in savage wars elsewhere but make sure there are not too many of your own body bags. You do this by using mainly air power and forging alliances with locals  who will do the dirty work on the ground.

The Economist has an interesting review of a book the war in Laos which shows that this is an approach the Americans used way back in the 1960s, although it was not particularly effective there. The bombing was savage alright:
Hitting the Pathet Lao in the north and on the Ho Chi Minh trail in the south, the American air force unleashed an average of one attack every eight minutes for nearly ten years. By 1970 tens of thousands of American-backed fighters were involved, at an annual cost of $3.1bn in today’s dollars. By the time the campaign ended in 1973, a tenth of Laos’s population had been killed. Thousands more accidental deaths would follow from unexploded bombs left in the soil.
This was labelled a 'secret war' not because it was a secret but because US officials had perfected the art of denial. One innovation was the use, not of the US army, but that of the CIA as a paramilitary force. When you use the army, it's hard to keep things wrap; it's much easier to do so with the CIA. That way you can also ensure less media coverage.This, the Economist notes, is continuing today in Somalia, Yemen and elsewhere.

You have to grant it to the Russians: when they stepped into Syria in 2016, it was official and legal.






A ray of hope on the NPA problem

It appears that the government will rely on the RBI to resolve the long-festering NPA issue. ET reports that the government may issue an ordinance to empower the RBI suitably. It appears that there is a ray of hope on the NPA problem.

It's not clear, though, how exactly the RBI will be empowered. It cannot be that the RBI proposes loan resolution because that would bring into conflict with its duties as a regulator, in which capacity it will have to examine whether loan settlement has been proper enough.

The ET report suggests that the RBI may operate through Oversight Committees. Presumably these will have professionals from outside the RBI and will act at an arm's length. My own preference would be for a Loan Resolution Authority- comprising former bankers, academics, chartered accountants, lawyers and other professionals of repute- created by an Act of Parliament. Such an Authority would vet loan proposals made by bank management.

Only then we will have any resolution- the paralysis in decision-making at public sector banks today is very real. PSB top brass have told me categorically that they will not sign off on loan resolution without suitable assurances that the investigative agencies will not come after them- say, ten years from now!

The creation of Oversight Committees (the equivalent of my Loan Resolution Authority) under the auspices of RBI should have happened long back. The reason it did not happen was thanks to the general perception that the NPA problem is the result of mala fides on the part of bankers. If you take this view, then resolution is not possible, we can only focus on retribution. Kingfisher Airlines is, perhaps, a case in point.

PSBs were seen as having messed up on credit risk management and many were seen as basket cases. So there was talk of mergers, sale to strategic investors, creation of a "bad bank", etc. It required the Economic Survey to point out that the problem is one of excessive exuberance on the part of firms and investors and hence on the part of bankers and that the NPA problem is a case of business judgement having gone wrong, with various extraneous factors such as the global financial crisis impacting on bank decisions in a big way.

Once you grasp this, you will also grasp that the way forward is not go after bankers but to empower bank management to resolve bad loans even while strengthening mechanisms of governance at PSBs.

More in my article in the Hindu today, Finally, action on bad loans?



Monday, April 03, 2017

Jio or maro?

Mukesh Ambani has bet $25 bn on Jio, his telecom venture. He has disrupted the market hugely, causing tariffs to fall and triggering consolidation amongst existing players. He has bagged 100 million customers. But will he make money out of his venture? Schumpeter, writing in the Economist, is sceptical:
Jio will start charging from April 1st. Yet even assuming it keeps cranking prices up and wins a third of the market, a discounted-cash-flow analysis suggests that it would be worth only two-thirds of the sum that Mr Ambani has spent. To justify that amount Jio would at some point need to earn the same amount of profit that India’s entire telecoms industry made in 2016. In other words, there is no escaping the punishing economics of pouring cash into networks and spectrum. For every customer that Jio might eventually win, it will have invested perhaps $100. Compare that with Facebook or Alibaba, both asset-light internet firms, which have invested about $10 per user.
Schumpeter thinks Ambani might tweak his business model at some point in order to improve the economics of his project but he's unsure about the outcome:
Perhaps he hopes to get his money back by turning Jio into an internet firm that offers payment services and content, not just connectivity. China’s Tencent, which owns WeChat, a messaging service, has successfully diversified into games and banking. Still, no telecoms firm has managed this feat and it is hard to see how RIL’s clannish culture can become a hotbed of innovation.
Or is this one big brand building exercise, one that builds equity not just with ordinary people but with the government as a huge exercise in inclusion?
 

Wednesday, March 22, 2017

New perspective on the Great Calcutta killings of 1946

Calcutta (as the city was then called) descended into an orgy of what has been perceived as communal riots in 1946. The killings were seen as an important factor that made Partition inevitable- it seemed to suggest that Hindus and Muslims would find it difficult to live together in one country.

It was fascinating, therefore, to get a quite different perspective on the killings in a book on the subject reviewed recently in EPW. The author contests the idea that the killings were primarily communal in nature. Rather, he's inclined to give more weight to the famine of 1943 inflicted - that's the right word, as it was entirely avoidable in terms of the supply of and demand for foodgrains- on the city by the British.

The author of the book, the reviewer points out, is of the view that the scorched earth policy pursued by the British following the threatened invasion of Bengal by Japan in World War II was by far the more important factor in fuelling the rights. The British emptied the rural areas of foodgrain stocks to prevent these from falling into Japanese hands. They also destroyed transportation by boats by impounding the boats, again to prevent these from falling into Japanese hands. Both these resulted in an artificial scarcity of foodgrains in the countryside. ( I have read elsewhere that inflated estimates of food output caused the British to export large amounts to support the war in other parts of the world).

Calcutta was treated differently because it was the epicentre of the war effort in the region. Workers had to be fed in order to maintain production for the war, so ration shops were set up to ensure availability of food. The two factors together- scarcity of food in the countryside and relative abundance in Calcutta- caused people to flock to Calcutta putting enormous pressure on those staying in the city for long. It was the battle for territory between those resident in Calcutta for long and the migrants that primarily resulted in riots, the author contends, the riots were not communal in origin.


This communal single-mindedness that Das speaks of in the Great Calcutta Killings, Mukherjee shows, is simply not borne out by the historical record. Instead, the violence was chaotic and driven by a range of factors. First, the fact that British targets came under attack in the bedlam has fallen through the cracks in this rush to prise a communal angle from the violence. On Chowringhee, the Main Street of White Calcutta, several European shops and business were plundered, as was an Enfield motorcycle showroom on Park Street. The Statesman House, which housed the main newspaper of White Calcutta, also came under attack but was saved by prompt police action. In Dharamtolla, a Bata showroom, a Czech company, was similarly saved from the mob by the police.

Does widespread looting—of European and Indian targets—fit the mould of the crowds having a sense of “moral duty”? Again, here the looting has been explained in terms of Hindus looting Muslim shops and vice versa—a theory little backed up by data. In the chaos, very little of who attacked whom was actually recorded. Driven by a concurrent cloth famine, cloth merchants were targeted. And of course, the authorities were wary of food stocks being ransacked, so the civil supplies department was heavily guarded. Given this data, Das’ dismissal of the riot having an economic component falls under heavy strain.

This indeed casts new light not just on the Great Killings but on the Partition that followed. The author also suggests that Bengal PM Suhrawardy has been unfairly maligned. Britian's role in bringing about the Partition of India is far greater than one had thought.

This communal single-mindedness that Das speaks of in the Great Calcutta Killings, Mukherjee shows, is simply not borne out by the historical record. Instead, the violence was chaotic and driven by a range of factors. First, the fact that British targets came under attack in the bedlam has fallen through the cracks in this rush to prise a communal angle from the violence. On Chowringhee, the Main Street of White Calcutta, several European shops and business were plundered, as was an Enfield motorcycle showroom on Park Street. The Statesman House, which housed the main newspaper of White Calcutta, also came under attack but was saved by prompt police action. In Dharamtolla, a Bata showroom, a Czech company, was similarly saved from the mob by the police.
Does widespread looting—of European and Indian targets—fit the mould of the crowds having a sense of “moral duty”? Again, here the looting has been explained in terms of Hindus looting Muslim shops and vice versa—a theory little backed up by data. In the chaos, very little of who attacked whom was actually recorded. Driven by a concurrent cloth famine, cloth merchants were targeted. And of course, the authorities were wary of food stocks being ransacked, so the civil supplies department was heavily guarded. Given this data, Das’ dismissal of the riot having an economic component falls under heavy strain.
- See more at: http://www.epw.in/journal/2017/8/book-reviews/revisiting-our-narratives-great-calcutta-killings.html#sthash.1VAOCo0Y.dpuf

This communal single-mindedness that Das speaks of in the Great Calcutta Killings, Mukherjee shows, is simply not borne out by the historical record. Instead, the violence was chaotic and driven by a range of factors. First, the fact that British targets came under attack in the bedlam has fallen through the cracks in this rush to prise a communal angle from the violence. On Chowringhee, the Main Street of White Calcutta, several European shops and business were plundered, as was an Enfield motorcycle showroom on Park Street. The Statesman House, which housed the main newspaper of White Calcutta, also came under attack but was saved by prompt police action. In Dharamtolla, a Bata showroom, a Czech company, was similarly saved from the mob by the police.
Does widespread looting—of European and Indian targets—fit the mould of the crowds having a sense of “moral duty”? Again, here the looting has been explained in terms of Hindus looting Muslim shops and vice versa—a theory little backed up by data. In the chaos, very little of who attacked whom was actually recorded. Driven by a concurrent cloth famine, cloth merchants were targeted. And of course, the authorities were wary of food stocks being ransacked, so the civil supplies department was heavily guarded. Given this data, Das’ dismissal of the riot having an economic component falls under heavy strain.
- See more at: http://www.epw.in/journal/2017/8/book-reviews/revisiting-our-narratives-great-calcutta-killings.html#sthash.1VAOCo0Y.dpuf

This communal single-mindedness that Das speaks of in the Great Calcutta Killings, Mukherjee shows, is simply not borne out by the historical record. Instead, the violence was chaotic and driven by a range of factors. First, the fact that British targets came under attack in the bedlam has fallen through the cracks in this rush to prise a communal angle from the violence. On Chowringhee, the Main Street of White Calcutta, several European shops and business were plundered, as was an Enfield motorcycle showroom on Park Street. The Statesman House, which housed the main newspaper of White Calcutta, also came under attack but was saved by prompt police action. In Dharamtolla, a Bata showroom, a Czech company, was similarly saved from the mob by the police.
Does widespread looting—of European and Indian targets—fit the mould of the crowds having a sense of “moral duty”? Again, here the looting has been explained in terms of Hindus looting Muslim shops and vice versa—a theory little backed up by data. In the chaos, very little of who attacked whom was actually recorded. Driven by a concurrent cloth famine, cloth merchants were targeted. And of course, the authorities were wary of food stocks being ransacked, so the civil supplies department was heavily guarded. Given this data, Das’ dismissal of the riot having an economic component falls under heavy strain.
- See more at: http://www.epw.in/journal/2017/8/book-reviews/revisiting-our-narratives-great-calcutta-killings.html#sthash.1VAOCo0Y.dpuf


This communal single-mindedness that Das speaks of in the Great Calcutta Killings, Mukherjee shows, is simply not borne out by the historical record. Instead, the violence was chaotic and driven by a range of factors. First, the fact that British targets came under attack in the bedlam has fallen through the cracks in this rush to prise a communal angle from the violence. On Chowringhee, the Main Street of White Calcutta, several European shops and business were plundered, as was an Enfield motorcycle showroom on Park Street. The Statesman House, which housed the main newspaper of White Calcutta, also came under attack but was saved by prompt police action. In Dharamtolla, a Bata showroom, a Czech company, was similarly saved from the mob by the police.
Does widespread looting—of European and Indian targets—fit the mould of the crowds having a sense of “moral duty”? Again, here the looting has been explained in terms of Hindus looting Muslim shops and vice versa—a theory little backed up by data. In the chaos, very little of who attacked whom was actually recorded. Driven by a concurrent cloth famine, cloth merchants were targeted. And of course, the authorities were wary of food stocks being ransacked, so the civil supplies department was heavily guarded. Given this data, Das’ dismissal of the riot having an economic component falls under heavy strain.
- See more at: http://www.epw.in/journal/2017/8/book-reviews/revisiting-our-narratives-great-calcutta-killings.html#sthash.1VAOCo0Y.dpuf

Tuesday, March 21, 2017

Indian army's deployment in Kashmir

About a third of the Indian army - or nearly half a million men- is bogged down in Kashmir. The army sees this as helpful to keeping the forces combat ready. An article in EPW points out, however, that there are significant negatives to the army's deployment in Kashmir.

One, army excesses sully the army's name.

Two, the infantry gains in importance at the expense of other arms- witness the supercession by General Rawat of seniors with a distinguished record in other arms (although this may not be the only reason for the supercession).

Three, the need to contain China, given that a significant chunk of the army is tied up in Kashmir, has necessitated creation of fresh divisions. This, in turn, has led to revenue expenditure eating into capital expenditure and coming in the way of the army being able to implement its Cold Start doctrine- a quick, short war on the Western front- in retaliation for cross-border terrorism practised by Pakistan.

Four, the expansion of the office cadre has been fuelled mainly by recruits from UP, Uttarakhand and Haryana. This has implications for the overall composition of the army. The article also mentions that these are areas in which aggressive nationalism has wide acceptance and those joining the army would not be exempt from these influences. This could have implications for the army' s overall philosophy.

Army deployment in Kashmir, the author argues, has thus had a corrosive act on the army. But the big question which such analysts are not able to address suitably is: can we afford to pull the army out of Kashmir given that we have not been able to make much headway either with the people of Kashmir or with Pakistan?



North Korean flash point

North Korea was flagged among the foreign policy priorities for President Trump. The advice was well-placed. Tensions in the Korean peninsula have been rising, with North Korea testing long-range missiles and the US responding with a sophisticated air defence system for South Korea.

Among the options being considered is all-out war, aimed at taking out North Korea's nuclear armoury. The argument is that North Korean leader Kim Jong Un is crazy. As an article in the FT points out, he's a rational leader focused on survival. It's the war option that is crazy:
The North Korean nuclear and missile programmes are widely dispersed, including underground and underwater. It is unlikely that the whole programme could be destroyed in a single wave of strikes, which would immediately raise the prospect of nuclear retaliation by the North. Even if the US was miraculously able to take out the whole nuclear programme in one swoop, the North Koreans still have formidable conventional artillery. They could launch devastating barrages aimed at Seoul, the South Korean capital, a city of 10m people 35 miles from the North Korean border. Japan would also be vulnerable to missile strikes, as would US bases in the region. 

...  the better route, in the long run, would be to search for a deal that freezes the country’s nuclear programme, in return for economic assistance and a guarantee that the US will not seek to overthrow the regime. 
And what if such a 'grand bargain' can't be struck? Well, it would be best for the US to live with a nuclear North Korea, as it has lived with a nuclear Russia. The alternatives are too horrifying to contemplate. 

Thursday, March 16, 2017

Demonetisation and other forecasts: the pundits got it wrong

Well, it doesn't look as though the Indian economy has collapsed after demonetisation. The impact on GDP growth for 2016-17, as estimated by the CSO and the RBI, is less than 50 basis points. We will, of course, know for sure after the Q4 numbers are out.

Demonetisation is one of many glaring instances of pundits having got things wrong. Some of the others are: the potential impact of Raghuram Rajan now staying on as RBI governor, Brexit and Trump's victory.

More in my BS column, Lean times for pundits.

The article is behind a pay wall, so the full article is reproduced below:

Following the demonetisation move last November, the pundits -- academics, economists, media commentators and others -- were quick to pronounce judgment: Narendra Modi had blundered. 

The withdrawal of high-denomination currency notes, they said, had caused enormous economic hardship. The prime minister should have known better. He should have consulted experts before embarking on such a radical measure. Mr Modi would pay the price in the state elections that were to follow.

It’s now clear that the pundits got it wrong. Demonetisation did not work against the BJP in the recent polls and may have even contributed to its huge victory in UP.
Some pundits argue that it was the political narrative of demonetisation that mattered, not the economic content. Demonetisation did cause hardship to the poor. But they didn’t mind because they could see that the rich would suffer more.   

One can go along with this view if the hardship amounted to putting up with long lines in banks. But not if the hardship meant a sharp slowdown in economic growth and losses in jobs and incomes. When people lose their jobs in an economic slowdown, they don’t go out and celebrate because multi-millionaires have lost even more on the stock exchange! 

The truth is simple enough but the pundits don’t seem to get it. Demonetisation has not derailed growth as much as they had predicted. Two agencies respected for their independence and professionalism, the Central Statistics Office (CSO) and the Reserve Bank of India (RBI), have estimated the impact of demonetisation on the gross domestic product (GDP) growth for 2016-17.  

Using the Gross Value Added (GVA) approach, the RBI estimates the impact on the GDP growth at 33 basis points in its monetary policy statement of February 8. Again, going by GVA, the CSO estimates the impact at 30 basis points in its second advance estimates released on February 28.  
Economists may have difficulty in accepting these numbers but bankers seem to think they reflect the ground reality. Bankers did not see any significant increase in stress in their loan book in respect of large corporates and small and medium enterprises. They say that some stress was evident only in respect of micro-enterprises. Repayments of agricultural and micro-finance loans were surprisingly resilient. 

Many of those who had warned that the third quarter (Q3) numbers for 2016-17 would show up the impact of demonetisation have since changed their tune. Wait for the Q4 numbers, they say.  We’ll know soon. In the meantime, we have the recent election results to go by. Voters don’t seem to have found the short-term costs of demonetisation very steep. And they believe the PM when he says it will deliver long-term gains.

This is not the only glaring instance in recent times of the pundits having got things badly wrong. In June 2016, when Raghuram Rajan announced that he would not seek a second term as RBI governor, the Modi government drew a barrage of negative comment. The pundits warned that India’s image abroad would be badly dented, foreign investors would flee, the combination of Brexit and Rexit could cause a currency crisis, the RBI’s autonomy was in peril… some of us may have been pardoned for supposing that the end of the world was in sight. None of these dire outcomes has materialised.  

Our pundits are in good company. Following the British vote on Brexit, many foreign commentators predicted a sharp slowdown for the British economy and enormous uncertainty for the world economy. Among the doomsayers was Mark Carney, the governor of the Bank of England (BoE).
Ahead of the vote on Brexit, the BoE issued warnings about the potential effects of a vote for Brexit. After the vote, it moved to cut interest rates and boost stimulus measures to contain the adverse impact. Mr Carney has since revised his forecast for 2017 upwards. The world economy is also doing better than was forecast in 2016. Nobody talks about the impact of Brexit any more.

Then, we have the Donald Trump phenomenon. The liberal media in the US did its damndest to stop Mr Trump in his tracks in the run-up to elections. They forecast ruin for the US economy and the world at large given his hostility to some aspects of globalisation. Paul Krugman famously wrote that the stock market would “never” recover from a Trump victory. The Dow Jones Index went on to touch an all-time high after Mr Trump won. 

In all these cases, the pundits got it wrong because many were hopelessly prejudiced. They did not like Mr Modi, so they were quick to fault demonetisation and the exit of Mr Rajan. They did not want to see the European Union unravelling, so they viewed Brexit as a disaster for the UK. They hated Mr Trump as an individual (and favoured Hillary Clinton), so they predicted a setback to the US economy. By forsaking objectivity in assessing policy outcomes, the pundits have ended up undermining their own credibility and standing.