tag:blogger.com,1999:blog-336932452024-03-12T10:22:26.171+05:30The Big PictureTT RAM MOHAN's comments on the Indian economy, banking and current affairsThe Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.comBlogger1351125tag:blogger.com,1999:blog-33693245.post-577175550174335592024-01-05T11:19:00.000+05:302024-01-05T11:19:29.232+05:30Conflict in Gaza: what does Israel want now?<p>It is three months now since the Gaza conflict erupted. The slaughter continues. We have had several developments over the past few days. One, the Israel Defence Forces (IDF) has announced a withdrawal of some of its forces stationed in Gaza. Two, the number two person in the Hamas leadership was assasinated in Beirut- nobody doubts that is the work of Israel. Three, an Israeli strike killed a senior Iranian commander in Syria. Four, the US has announced the withdrawal of its aircraft carrier, USS Gerald Ford, from the Mediterranean.</p><p>What do we make of all this? Well, the Israelis clearly want to scale down their operations in Gaza. They recognise that the complete elimination of Hamas, their stated goal, cannot be realised in quick time. They wish to move on to more focused operations that target the Hamas leadership instead of the all-out war we have seen thus far.</p><p>That much is clear enough. The two assasinations are a provocation. The killing of a Hamas leader in Beirut flouts the warning of Hezbollah chief Nasrallah that assasinations by Israel on Lebanese soil are a red line Israel should not cross. The assasination in Syria shows the red rag to the Iranian bull, the principal backer of Hezbollah. Israel knows it must expect a strong reaction and yet goes ahead- clearly, a strong reaction is what it wants. A strong reaction would mean that the managed conflict between Israel and Hezbollah would move to a higher level and draw in Iran, inevitably drawing in the US as well.</p><p>There are both strategic and political calculations involved in moving towards such a confronation. Israel views Hezbollah as a far bigger threat than Hamas and Iran an even bigger threat. An estimated 75,000 Israelis have been moved out of the border with Lebanon and relocated elsewhere. They refuse to go back until the Hezbollah threat on the border is removed. At the very least, Israel would like Hezbollah to move to the north of the Litani river with a buffer zone that is protected by, say an UN force. Israel cites an old UN resolution in support of that demand.</p><p>Hezbollah has never accepted that interpretation of the UN resolution and it is no mood to oblige. The Americans are using diplomatic channels to pressure Lebanon and Hezbollah into accepting Israel's demand. Israel has said that if diplomacy fails, it will have to do the job of evicting Hezbollah itself.</p><p>That would mean a serious escalation of the conflict in Gaza. But that is precisely what the present leadership in Israel seems to want- a confrontation with Iran that addresses this threat once and for all,of course, with the help of the US. </p><p>There is a cold political calculation underlying all this. Israel's PM Benajmin Netanyahu knows that any end to the war will mean an enquiry into the lapses that resulted in the October 7 attack by Hamas and a demand for his ousted. Once ousted, he faces corruption charges and the prospect of jail. A prolongation of the war helps the PM avoid that unpleasantness. </p><p>Alastair Crooke, a former British diplomat with vast experience in the region, has been making some of these points for quite some time now. He argues that the Gaza quagmire for Israel is not what its leadership had expected- they had thought the mighty IDF would vanquish Hamas in next to no time. Crooke writes, "<span style="line-height: 115%;">One man -- a retired
Maj. General Brik, a highly respected military officer -- warned PM Netanyahu
personally that a quagmire trap in Gaza was a true risk. The military
establishment did not like hearing his warning. Now it is clear; Major
General Brik was right. He said a few days ago that ‘the number of Hamas
casualties on the ground is much lower than what the IDF reports.’ </span></p><p><span style="line-height: 115%;">Crooke quotes
another retired general as saying 'I cannot see any signs of collapse of the
military abilities of Hamas – nor in their political strength with in Gaza'." He goes on to suggest</span> that Israel's getting involved in a prolonged war may have to do something beyond the Iran threat and PM Netanyahu's calculations. </p><p>What has happened in Israel over the years is a pronounced shift towards the right and a progessive embrace of the idea of a Greater Israel. Crooke quotes an Israeli historian, Martin Zimmerman, on what has resulted from that idea:</p><p class="MsoNormal"><span style="font-size: 13.5pt; line-height: 107%;">"Jewish
nationhood in the Land of Israel went through a process of nationalism,
racialism and ethnocentrism. It created a situation of being unable to reach a
modus vivendi with the neighbouring world.......</span><u1:p></u1:p>And that is the problem: Once you have embarked on the path, it's
difficult to leave it without undergoing another catastrophe."<o:p></o:p></p><p class="MsoNormal">What is unfolding in the Middle East now thus has the makings of a Greek tragedy, one that could plunge the world into turmoil through this year. Only one power on earth can prevent it from happening, the US. That helps us to connect the fourth dot mentioned at the outset, the departure of the US strike carrier group from the Mediterranean. The carrier group was sent in to reassure Israel after the Hamas attack of October 7. Can we hope that the removal of the carrier group is meant to convey to Israel: we are with you but don't push us too far? </p><p class="MsoNormal"><br /></p><p class="MsoNormal"><span style="font-size: 13.5pt;"><br /></span></p><p class="MsoNormal"><span style="font-size: 13.5pt;"><br /></span></p><p class="MsoNormal"><o:p></o:p></p><p><br /></p><p><br /></p><p><br /></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-17119475740104066752024-01-05T10:33:00.002+05:302024-01-05T10:33:22.209+05:30My views on the outlook for the Indian economy<p> Financial Express carried an <a href="https://www.financialexpress.com/policy/economy-pessimism-about-indias-public-debt-is-overdone-3353548/">interview</a> with me earlier in the week.</p><p><br /></p><p><br /></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-90545552108881847892023-11-17T14:10:00.003+05:302023-11-17T14:10:47.177+05:30Gaza's plight: is there hope at all?<p>How will Israel's assault on Gaza pan out? Will it lead to the ethnic cleansing of vast portions of Gaza, a repetition of what happened when Israel came to be founded? Or will the world rouse itself to put an end to the suffering of a helpless people?</p><p>Here's a somewhat bleak <a href="https://www.aljazeera.com/opinions/2023/11/13/bombing-gaza-wont-bring-israel-victory">view</a> penned by a former UN official:</p><blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p style="text-align: left;"><span style="background-color: white; font-family: Georgia, Times, "Times New Roman", serif;"><i>To date, only Bolivia has severed diplomatic relations with Israel to protest against the ongoing war crimes perpetrated against the Palestinians. Unless Egypt, Jordan, UAE and Morocco sever their diplomatic relations with Tel Aviv as their people demand; unless countries such as Turkey, South Africa and Brazil, which have denounced Israel’s war crimes, align their diplomacy with their own pronouncements; unless these countries emulate Bolivia’s principled diplomatic move and put pressure on their Western partners; unless Saudi Arabia, UAE, Iran, Qatar, Azerbaijan and other large exporters of oil and natural gas use their economic leverage on Israel’s blinded backers, Gaza and its population will be destroyed, inch by inch, soul by soul. And no one would be able to say: “We didn’t know.”</i></span></p></blockquote><p>The <a href="https://www.aljazeera.com/opinions/2023/11/16/apartheid-south-africa-reached-a-tipping-point-israel-will-too">view</a> from a South African who was witness to the end of the apartheid is more hopeful:</p><blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p style="background-color: white; box-sizing: border-box; font-family: Georgia, Times, "Times New Roman", serif; hyphens: auto; margin: 0.5rem 0px 30px; overflow-wrap: break-word; text-align: left;"><i>They will do well to learn from white South Africans who, after 300 years of minority rule, realised it was an impossible political project to continue to defend so violently, and still maintain any semblance of a moral high ground.There is a tipping point when even for the defenders of such a project, the faint question rings louder and louder in the collective conscience: how far is too far? There can be no going back to the promises of security based on what was before. There can be no going forward in peace if it means more and more blood of children and civilians haunting successive generations who will have to take responsibility for the actions unfolding before our eyes today.</i></p></blockquote><p>The most astonishing thing about the ongong carnage is much of Western Europe (UK, France, Germany) is firmly with Israel with dissenting voices being heard from the smaller countries such as Belgium and Spain. </p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com1tag:blogger.com,1999:blog-33693245.post-18673287016142965802023-11-16T11:40:00.002+05:302023-11-16T14:26:59.243+05:30Gaza conflict unlikely to derail world economy<p> </p><p class="MsoNormal"><span style="font-size: 14pt; line-height: 107%;">When the
Ukraine conflict erupted in February 2022, there were all sorts of apocalyptic
forecasts. The war would escalate in terrible ways, the pundits said. NATO
would increase its involvement until Russia felt obliged to retaliate with
strikes against NATO countries. Russia and US would confront each other
directly. World War III loomed. The world economy, already reeling under
massive interest rate increases effected by central banks, would go into a
tailspin.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-size: 14pt; line-height: 107%;">Nothing of
the sort happened. The world has not ended- yet. The world economy slowed down
in 2022 but it did not collapse- the threatened recession in the US did not
materialise. The reason: NATO and Russia both made sure the conflict did not
escalate beyond a point. The conflict remained largely localised around the
borders of Russia and Ukraine. <o:p></o:p></span></p><p class="MsoNormal"><span style="font-size: 14pt; line-height: 107%;">Today, the
Ukraine conflict hardly figures in the news. We hear the same apocalyptic
forecasts about the Israeli assault on Gaza. The Arab world, angered by the
suffering inflicted on the people of Gaza, would band together in confronting
Israel- and soon the US and Russia would be drawn into the rival sides. <o:p></o:p></span></p><p class="MsoNormal"><span style="font-size: 14pt; line-height: 107%;">The 50
nation summit hosted by Saudi Arabia recently should serve to quell any such
misgivings. The Arab- Muslim world is willing to bark but afraid to bite. The
summit steered clear of measures such as an oil embargo against Israel and the
West and cutting off of diplomatic relations. Instead, we heard words of
condemnation and pious platitudes. Nobody wants a full-blown conflagration. The
World Bank’s Commodities Markets Outlook sees crude oil prices at $84 per
barrel, 16 per cent below the $100 per barrel average of 2022. The world
economy is unlikely to be derailed by the conflict in Gaza.<o:p></o:p></span></p><p>
</p><p class="MsoNormal"><span style="font-size: 14pt; line-height: 107%;">I explore
these themes at greater length in my recent article below.<o:p></o:p></span></p><h4 style="text-align: left;"><span>Geopolitical risk: After Ukraine, it's Gaza</span></h4><p></p><p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="font-family: Georgia, serif;">“Geopolitical
risk” has been a huge buzzword since </span><b style="font-family: Georgia, serif;">the eruption</b><span style="font-family: Georgia, serif;"> of the
Ukraine conflict in February 2022. It connotes </span><b style="font-family: Georgia, serif;"> </b><span style="font-family: Georgia, serif;">the potential
for disruption to the world economy arising from armed conflict. </span><b style="font-family: Georgia, serif;"> </b><span style="font-family: Georgia, serif;"> “Geopolitical risk” sounds more
technical and impressive than “war”. People use it for the same reason
they prefer “mindset” to “attitude”. </span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">In 2022,
the significant geopolitical risk was an escalation in the Ukraine conflict
that would derail the world economy by causing crude oil prices to spiral well
above $100 per barrel. That did not happen. Will it happen now with the
conflict in Gaza? </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Let us
first examine how oil prices came to be contained post-Ukraine. Oil
prices touched a peak of $140 per barrel in March 2022, a month after the
conflict erupted. It is not as if the supply of oil was disrupted. The markets
were merely reacting to the prospect of a major disruption. They feared that
$140 was the price oil would touch if there was an escalation in the
conflict. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The
conflict did escalate. <b>Nato progressively</b> <b>chose</b> to
supply tanks, longer-range missiles and fighter aircraft to Ukraine after
initially ruling out these items. But the significant escalation, one
that <b>would draw</b> Nato into direct confrontation with Russia,
did not happen. Oil prices fell <b>from </b>the peak of March 2022
and averaged $100 per barrel in 2022. In 2023, oil prices declined further to a
low of $72 per barrel. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">One factor
has turned out to be crucial in putting a lid on oil prices: The imposition of</span><span style="color: #00b0f0; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> a</span><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> crude oil price cap by the G7 and
the European Union (EU), referred to as the Coalition. The Coalition was keen
to curtail the flow of oil revenues to Russia so that it lacked funds for its
operations in Ukraine. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The
G7 <b>countries </b>decided to phase out and altogether ban oil
imports for themselves. They then thought of prohibiting other economies from
buying Russian oil through the threat of sanctions. However, they realised that
if Russian oil supplies were removed from the oil market, the price of oil
could shoot up to as high as $150 per barrel. That would have crippled several
economies (including India) and dragged down the world economy. <b> </b>How
was the G-7 to keep Russian oil flowing into the world market while hurting
Russian revenues? </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The answer
was the oil price cap. The G7 insisted that nobody should purchase crude oil
from Russia at above $60 per barrel. They hit upon a mechanism for ensuring
this outcome. All companies in the </span><b><span style="color: #00b0f0; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Coa</span></b><span style="color: #00b0f0; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">l</span><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">ition that provided shipping, insurance
or finance related to oil would have to observe the cap or face punitive
action. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Since the
countries within the coalition provided 90 per cent of all maritime services
related to oil, the price cap turned out to be largely effective. Russia
continued to export oil to countries outside the </span><span style="color: #00b0f0; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Coa</span><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">lition. China and India increased their
imports of oil from Russia. However, the use of Western maritime services meant
that Russia had to sell oil at close to $60 per barrel. The OECD economies had
been procuring roughly a third of their oil imports. They were able to shift to
other sources of oil. The geopolitical risk from Ukraine did not
materialise. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">What does
Gaza now bode for the world economy? The first thing to note is that Opec and
other oil producers announced cuts in production in October 2022. This was
followed by further cuts in production through 2023. Oil prices have risen as a
result.</span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Secondly,
Russia has found ways to circumvent the oil price cap. It has developed its own
“dark fleet” of oil tankers that can operate without Western maritime services
such as insurance. The <i>Financial Times</i> (September 25, 2023)
estimates that as much as three-quarters of </span><span style="color: #00b0f0; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Russian</span><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> oil travelled without Western insurance last August. As a result
of these two developments, oil prices currently hover around $80 per barrel. FT
reports that virtually no Russian crude was sold at below $60 per barrel last
October.</span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Will the
conflict in Gaza make things worse? The World Bank is surprisingly sanguine
about the prospects. After factoring in the Gaza conflict, the Bank’s <i>Commodities
Market Outlook</i> (October 2023) sees oil prices at $84 per barrel in
2023 – or 16 per cent below the level in 2022- in its baseline scenario. It
sees the commodities index as a whole at 24 per cent below the level in 2022.
Oil at $84 per barrel will hurt the world economy, but it is not be</span><span style="color: #00b0f0; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> crippling.</span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Only if
the conflict in Gaza morphs into a regional conflict does the World Bank see
oil prices shooting up to $150 per barrel. Military analysts say that would be
a conflict that draws in the Hezbollah group in Lebanon along with its backer
Iran (and possibly Syria and Turkey). In that event, the US will weigh in on
the side of Israel. Such a prospect looks unlikely at the moment. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">As more
than one commentator has pointed out, Israel’s responses to provocations in the
neighbourhood typically involve a race between the clock and the casualties it
can impose. The US will back Israel to the hilt for a certain length of time.
Then the clock stops. Once it has exacted a certain price, Israel will be told
to call off its offensiv<b>e. </b></span><b><span style="color: #00b0f0; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">B</span></b><span style="color: #00b0f0; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">oth </span><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">sides will claim victory. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">There is
every indication that the same script is being played out this time. The most
recent utterances from the White House and the US Secretary of State suggest
that time is running out for Israel. Other players are also adhering to this
script. For all its belligerent noises, Iran is holding its proxy, the
Hezbollah militia in Lebanon, on a tight leash. Prominent Muslim nations such
as Egypt, Jordan, Turkey, and Saudi Arabia will not go beyond condemnation.
Nobody wants a full-blown conflagration. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="mso-line-height-alt: 16.5pt;"><span style="color: black; font-family: "Georgia",serif; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">That is
what we have seen happen in the Ukraine conflict. <span style="mso-spacerun: yes;"> </span>It is also what happened through much of the
Cold War years that followed World War II. The great achievement of nuclear
deterrence was that the world’s two leading military powers, the US and Russia,
learnt to keep conflicts strictly local. They never got into a direct
shoot-out. World War III was often predicted but it never happened. The world,
it seems, has learnt to live with geopolitical risk. Financial crises and
pandemics pose greater threats to the world economy than geopolitical
risk. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p><br /><p></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-34364386842477514232023-11-14T14:12:00.003+05:302023-11-14T14:12:34.162+05:30IIM Bill 2023- new rules notified<p></p><p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">The
government has <a href="https://www.hindustantimes.com/india-news">notified</a> new rules for the IIMs consequent to the IIM Bill 2023
being passed in Parliament last July, that is, within four months of the Bill
having been passed.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">That is
quite striking. It is not common for bills to be passed or notified so quickly.
In the case of IIMs, any changes to rules would take a fairly long time to
happen. First, there would be consultations with the directors of the leading
IIMs, if not all IIMs. Then a discussion paper would follow with the public
invited to respond. After that changes would be negotiated with the IIMs.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">Not so with
the IIM Bill 2023. It was introduced in Parliament in July 2023. The next week,
the Lok Sabha passed it. The following week the Rajya Sabha passed it. The
changes were duly notified in the government gazette mid- August. No
discussion, no negotiation, no waffling.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">This is
decisiveness of an order not seen in government. What could be the explanation?
I believe the government sensed that a governance emergency had arisen in the IIM
system, one that required a swift response if the IIM brand was not to suffer
lasting damage. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">Ever since
the IIM Act came into force in January 2018, accountability in the IIM system
had flown out of the window. Directors and boards at various places behaved as
though they were accountable to none. At least two leading IIMs, IIMA and IIMC,
witnessed turmoil of a sort not seen during the long years when government had
better control over the IIMs.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">In the new
scheme of things, the government, through the Visitor (the President of India),
can dissolve an IIM board on three grounds- if it was satisfied the board was
not performing its duties, failed to carry out directions given by the Visitor
or in the public interest. It can also remove any director without reference to
the board. It will have the final say in the appointment of Chairmen and
directors of IIMs. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">I believe
the government has grounds to proceed against several of the IIM boards under
the powers it has assumed. The overwhelming majority of the IIM boards have failed
to comply with the requirement under the IIM Act of having an independent
review done within three years of the passing of the IIM Act. The couple of
review reports I have seen are pathetic documents- they sound more like
official brochures than an independent management audit. Many IIMs have been
non-compliant with the Constitutional requirement of reservations for
designated categories in faculty recruitment. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">We have to
wait and see. In the meantime, the ushering in of a modicum of accountability
into the IIM system deserves three cheers.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;"><o:p> </o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;"><o:p> </o:p></span></p><br /><p></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-18484083894633606372023-11-02T11:46:00.001+05:302023-11-02T11:46:27.475+05:30Israel's war on Gaza: assorted links<p> An <a href="https://www.aljazeera.com/features/2023/11/1/inside-benjamin-netanyahus-mind-how-is-israels-pm-plotting-the-war">article</a> in Aljazeera has an interesting take on some of the top people in Israel's government starting with PM Benjamin Netanyahu:</p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><p style="background-color: white; box-sizing: border-box; font-family: Georgia, Times, "Times New Roman", serif; hyphens: auto; margin: 0.5rem 0px 30px; overflow-wrap: break-word;"><i>Kimhi, who teaches at Tel Aviv University, has studied Netanyahu’s mind for almost a quarter of a century. In 1999, the same year that Netanyahu’s first term as premier would end, Kimhi’s behavioural analysis of the leader found a concerning pattern of behaviour. Some of his conclusions: Netanyahu was narcissistic, entitled and paranoid, and he reacted poorly under stress.</i></p><p style="background-color: white; box-sizing: border-box; font-family: Georgia, Times, "Times New Roman", serif; hyphens: auto; margin: 0.5rem 0px 30px; overflow-wrap: break-word;"><i>Kimhi revisited Netanyahu as a subject in 2017 but found not much had changed. As people age, Kimhi said, their behaviours tend to become more extreme. For Netanyahu, his paranoia and narcissism have grown. He trusts no one, except maybe his immediate family, and prioritises his “personal future” over all else, Kimhi’s research found.</i></p></blockquote><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><p> ....<i style="font-family: Georgia, serif;">National Security Minister Itamar Ben-Gvir has been convicted
of incitement to racism, destroying property, and joining a “terror”
organisation when he was 16 years old. Finance Minister Bezalel Smotrich leads
the hardline Religious Zionist Party that not only rejects Palestinian
statehood but denies the existence of the Palestinian people and has condemned
LGBTQ activists. Interior and Health Minister Aryeh Deri is an ultraorthodox
rabbi who was sentenced to three years in jail for taking bribes.</i></p></blockquote><p> A senior official at the UN has <a href="https://www.theguardian.com/world/2023/oct/31/un-official-resigns-israel-hamas-war-palestine-new-york">resigned</a> his post in protest against what he calls Israel's 'genocide' in Gaza:</p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><p class="dcr-1kas69x" style="--source-text-decoration-thickness: 2px; background-color: white; border: 0px; box-sizing: border-box; color: #121212; font-family: GuardianTextEgyptian, "Guardian Text Egyptian Web", Georgia, serif; font-feature-settings: inherit; font-kerning: inherit; font-optical-sizing: inherit; font-size: 1.0625rem; font-stretch: inherit; font-variant-alternates: inherit; font-variant-east-asian: inherit; font-variant-ligatures: common-ligatures; font-variant-numeric: inherit; font-variant-position: inherit; font-variation-settings: inherit; line-height: 1.4; margin: 0px 0px 14px; padding: 0px; vertical-align: baseline; word-break: break-word;"><i>The director of the New York office of the UN high commissioner for human rights <strong style="border: 0px; box-sizing: border-box; font-family: inherit; font-feature-settings: inherit; font-kerning: inherit; font-optical-sizing: inherit; font-size: inherit; font-stretch: inherit; font-variant: inherit; font-variation-settings: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"></strong>has left his post, protesting that the UN is “failing” in its duty to prevent what he categorizes as genocide of Palestinian civilians in Gaza under Israeli bombardment and citing the US, UK and much of Europe as “wholly complicit in the horrific assault”.</i></p><p class="dcr-1kas69x" style="--source-text-decoration-thickness: 2px; background-color: white; border: 0px; box-sizing: border-box; color: #121212; font-family: GuardianTextEgyptian, "Guardian Text Egyptian Web", Georgia, serif; font-feature-settings: inherit; font-kerning: inherit; font-optical-sizing: inherit; font-size: 1.0625rem; font-stretch: inherit; font-variant-alternates: inherit; font-variant-east-asian: inherit; font-variant-ligatures: common-ligatures; font-variant-numeric: inherit; font-variant-position: inherit; font-variation-settings: inherit; line-height: 1.4; margin: 0px 0px 14px; padding: 0px; vertical-align: baseline; word-break: break-word;"><i>Craig Mokhiber wrote on 28 October to the UN high commissioner in Geneva, Volker Turk, saying: “This will be my last communication to you” in his role in New York.</i></p><p class="dcr-1kas69x" style="--source-text-decoration-thickness: 2px; background-color: white; border: 0px; box-sizing: border-box; color: #121212; font-family: GuardianTextEgyptian, "Guardian Text Egyptian Web", Georgia, serif; font-feature-settings: inherit; font-kerning: inherit; font-optical-sizing: inherit; font-size: 1.0625rem; font-stretch: inherit; font-variant-alternates: inherit; font-variant-east-asian: inherit; font-variant-ligatures: common-ligatures; font-variant-numeric: inherit; font-variant-position: inherit; font-variation-settings: inherit; line-height: 1.4; margin: 0px 0px 14px; padding: 0px; vertical-align: baseline; word-break: break-word;"><i>Mokhiber, who was stepping down having reached retirement age, wrote: “Once again we are seeing a genocide unfolding before our eyes and the organization we serve appears powerless to stop it.”</i></p></blockquote><p> Heartening to see there are still a few people in high positions with conscience left in them.</p><p>And finally, South American countries have chosen to express their <a href="https://www.reuters.com/world/americas/bolivia-severs-diplomatic-ties-with-israel-citing-crimes-against-humanity-2023-10-31/">outrage</a> over what is going in in various ways. Bolivia has cut off diplomatic relations, others have recalled their envoys. In the Arab world, only Jordan has reacted in such a fashion, choosing to recall its envoy:</p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><p class="text__text__1FZLe text__dark-grey__3Ml43 text__regular__2N1Xr text__small__1kGq2 body__full_width__ekUdw body__small_body__2vQyf article-body__paragraph__2-BtD" data-testid="paragraph-0" style="-webkit-font-smoothing: antialiased; color: #404040; font-family: var(--tr-font-regular); line-height: 24px; margin: 0px 0px 12px; max-width: 100%; padding: 0px;"><i>Bolivia said on Tuesday it had broken diplomatic ties with Israel because of its attacks on the Gaza Strip, while neighbors Colombia and Chile recalled their ambassadors to the Middle Eastern country for consultations.</i></p><p class="text__text__1FZLe text__dark-grey__3Ml43 text__regular__2N1Xr text__small__1kGq2 body__full_width__ekUdw body__small_body__2vQyf article-body__paragraph__2-BtD" data-testid="paragraph-1" style="-webkit-font-smoothing: antialiased; color: #404040; font-family: var(--tr-font-regular); line-height: 24px; margin: 0px 0px 12px; max-width: 100%; padding: 0px;"><i>The three South American nations lambasted Israel's attacks on Gaza and condemned the deaths of Palestinian citizens.</i></p><p class="text__text__1FZLe text__dark-grey__3Ml43 text__regular__2N1Xr text__small__1kGq2 body__full_width__ekUdw body__small_body__2vQyf article-body__paragraph__2-BtD" data-testid="paragraph-2" style="-webkit-font-smoothing: antialiased; color: #404040; font-family: var(--tr-font-regular); line-height: 24px; margin: 0px 0px 12px; max-width: 100%; padding: 0px;"><i>Bolivia "decided to break diplomatic relations with the Israeli state in repudiation and condemnation of the aggressive and disproportionate Israeli military offensive taking place in the Gaza Strip," Deputy Foreign Minister Freddy Mamani said at a press conference.</i></p><p class="text__text__1FZLe text__dark-grey__3Ml43 text__regular__2N1Xr text__small__1kGq2 body__full_width__ekUdw body__small_body__2vQyf article-body__paragraph__2-BtD" data-testid="paragraph-2" style="-webkit-font-smoothing: antialiased; color: #404040; font-family: var(--tr-font-regular); line-height: 24px; margin: 0px 0px 12px; max-width: 100%; padding: 0px;"><i>.....<span style="font-family: knowledge-regular, Arial, sans-serif; font-size: 16px;">"</span><span style="font-family: knowledge-regular, Arial, sans-serif;"><span style="font-size: x-small;">What we have now is the insanity of Israel's prime minister, who wants to wipe out the Gaza Strip," said Brazilian President Luiz Inacio Lula da Silva on Friday.</span></span></i></p></blockquote><p><br /></p><p><br /></p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><p class="dcr-1kas69x" style="--source-text-decoration-thickness: 2px; background-color: white; border: 0px; box-sizing: border-box; color: #121212; font-family: GuardianTextEgyptian, "Guardian Text Egyptian Web", Georgia, serif; font-feature-settings: inherit; font-kerning: inherit; font-optical-sizing: inherit; font-size: 1.0625rem; font-stretch: inherit; font-variant-alternates: inherit; font-variant-east-asian: inherit; font-variant-ligatures: common-ligatures; font-variant-numeric: inherit; font-variant-position: inherit; font-variation-settings: inherit; line-height: 1.4; margin: 0px 0px 14px; padding: 0px; vertical-align: baseline; word-break: break-word;"><b style="background-color: transparent;"><span lang="EN-US" style="color: black; font-family: "Georgia",serif; font-size: 13.5pt; mso-ansi-language: EN-US; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman";"><o:p><i> </i></o:p></span></b></p></blockquote>
The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-15639020384627493962023-10-26T12:04:00.004+05:302023-10-26T12:04:47.764+05:30Storm over historian article on Israel 's war against Hamas<p> An Israeli professor who resides in the US has kicked off a storm by writing an <a href="https://www.theguardian.com/commentisfree/2023/oct/24/israel-gaza-palestinians-holocaust">article</a> that asks Israel to stop 'weaponising the holocaust' in its conflict with Palestinians. Segal argued, as many including the UN Secretary General have, that we should not be mindful of the background to the Hamas attack on Israel, which is no way to overlook the atrocities that happened. Simply to portray Palestinians or Hamas as barbaric or as animals is not helpful:</p><blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p style="text-align: left;"><span style="background-color: #fef9f5; color: #121212; font-family: GuardianTextEgyptian, "Guardian Text Egyptian Web", Georgia, serif; font-size: 17px; font-variant-ligatures: common-ligatures;"><i>The context of the Hamas attack on Israelis, however, is completely different from the context of the attack on Jews during the Holocaust. And without the historical context of Israeli settler colonialism since the 1948 Nakba, we cannot explain how we got here, nor imagine different futures; Biden offered us, instead, the decontextualized image of “pure, unadulterated evil.”</i></span></p></blockquote><p><span style="background-color: #fef9f5; color: #121212; font-family: GuardianTextEgyptian, "Guardian Text Egyptian Web", Georgia, serif; font-size: 17px; font-variant-ligatures: common-ligatures;">Segal also underlined the issue of accountability in such cases:</span></p><blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p style="text-align: left;"><i><span style="background-color: #fef9f5; color: #121212; font-family: GuardianTextEgyptian, "Guardian Text Egyptian Web", Georgia, serif; font-size: 17px; font-variant-ligatures: common-ligatures;">The history of the Holocaust also points to the importance of accountability, even as post-Holocaust accountability remained limited. In the case of Israel’s assault on </span><a data-component="auto-linked-tag" data-link-name="in body link" href="https://www.theguardian.com/world/gaza" style="background-color: #fef9f5; border-bottom-color: rgb(220, 220, 220); border-bottom-style: solid; border-image: initial; border-left-color: initial; border-left-style: initial; border-right-color: initial; border-right-style: initial; border-top-color: initial; border-top-style: initial; border-width: 0px 0px 1px; box-sizing: border-box; color: #c74600; font-family: GuardianTextEgyptian, "Guardian Text Egyptian Web", Georgia, serif; font-feature-settings: inherit; font-kerning: inherit; font-optical-sizing: inherit; font-size: 17px; font-stretch: inherit; font-variant-alternates: inherit; font-variant-east-asian: inherit; font-variant-ligatures: common-ligatures; font-variant-numeric: inherit; font-variant-position: inherit; font-variation-settings: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration-line: none; vertical-align: baseline;">Gaza</a><span style="background-color: #fef9f5; color: #121212; font-family: GuardianTextEgyptian, "Guardian Text Egyptian Web", Georgia, serif; font-size: 17px; font-variant-ligatures: common-ligatures;">, accountability needs to begin from what is very clear: incitement to genocide, which is punishable under article 3 of the UN genocide convention, even when genocide does not follow. While the debate about genocide in Israel’s current assault on Gaza will undoubtedly continue for years, perhaps also in international courts, Israeli war crimes and violations of international humanitarian law are beyond dispute.</span></i></p></blockquote><p>Understandably, Israeli officials and several Jewish groups have<a href="https://www.thejc.com/news/news/jewish-community-accuses-guardian-of-new-lows-with-crass-israel-holocaust-article-776Sen1cbnBS0fVYRjhlys"> reacted</a> fiercely to Segal's comments. </p><p>The important thing to note, however, is that Segal is an Israeli. There are many voices like him in Israel itself, people who do not hesitate to criticise the policies of the present government. One of the magnificent forums for the expression of dissent is the newspaper, Haaretz, that hosts the famous dissenter, Gideon Levy. It is fair to say that dissent and the tolerance of dissent in Israel is greater than in most other countries and that is an aspect of Israel that is worthy of admiration. As long as such dissent thrives, there is reason for hope. </p><p><br /></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-1195227681096676182023-10-26T11:37:00.004+05:302023-10-26T11:37:59.431+05:30RBI directive to private banks on wholetime directors<p>The RBI has <a href="https://www.business-standard.com/finance/news/rbi-mandates-min-2-wtds-in-private-foreign-banks-to-bolster-governance-123102500855_1.html">directed </a>private banks to have at least two whole-time directors on the board within four months. </p><blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p style="text-align: left;"><span style="color: #282b32; font-family: Merriweather; font-size: 16px;"><i>Establishment of such a team may also facilitate succession planning, especially in the background of the regulatory stipulations in respect of tenure and upper age limit for MD & CEO positions,” the RBI said in its notification</i></span></p></blockquote><p>Of course. But we need to ask: why is it necessary for the regulator to issue such a direction in the first place? Is it not the job of banks boards to have ensure succession planning by having a couple of whole-time directors? The RBI has been nudging private banks to do so. Its directive probably reflects the failure of banks to respond suitably. It is noteworthy that public sector banks do not suffer from the malaise of having none other than the CEO on the board.</p><p>The RBI directive tells us how poor succession planning is in banks. Indeed, succession planning is poor almost anywhere in so-called professionally managed companies. No CEO wants a couple of alternatives to himself or herself around. Most succession planning is about ensuring that no successor emerges. A paper once compared the photograph of the CEO surrounded his top management team with a photo of about ten years earlier. The only constant in the two photos was the CEO! He had ensured that all others in the team had departed.</p><p>That is not unusual. Only when the CEO is about to leave or has left do boards scramble to find a successor. How pathetic! </p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-88288825687435058092023-10-22T15:34:00.009+05:302023-10-22T15:49:54.074+05:30US regulators push for higher bank capital<p style="text-align: left;"> </p><p class="MsoNormal"><span style="font-size: 13pt; line-height: 107%;">The
regulatory direction for banks is clear enough: more capital rather than less.
Bankers have been pushing back for reasons that, to me at least, defy
comprehension.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-size: 13pt; line-height: 107%;">Bankers say
higher capital will mean higher borrowing rates, lower credit growth and
diminished investor interest. They are wrong. We need banks to be better
capitalised in order to protect ourselves against bank failures, banking
crises- loss of economic output that stretches out for several years. <o:p></o:p></span></p><p><span style="font-family: times; font-size: x-large;">
</span></p><p class="MsoNormal"><span style="font-size: 13pt; line-height: 107%;">It’s
heartening to see that American regulators have seen the light and are pushing
for higher capital norms for banks under Basel 3 regulations. <o:p></o:p></span></p><p><span style="font-size: medium;"><span style="font-family: times;">My article in BS, </span><a href="https://www.business-standard.com/login?redirect_uri=/opinion/columns/will-bankers-ever-learn-123101201376_1.html" style="font-family: times;">Will bankers ever learn?</a></span></p><p><br /></p><p><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 107%; mso-ansi-language: EN-IN; mso-bidi-font-family: Latha; mso-bidi-font-weight: bold; mso-bidi-language: GU; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">Will bankers ever learn?</span></p><p><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 107%; mso-ansi-language: EN-IN; mso-bidi-font-family: Latha; mso-bidi-font-weight: bold; mso-bidi-language: GU; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">T T Ram Mohan</span></p><p></p><p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">Jamie Dimon, the chief executive
officer of J P Morgan Chase, is that rare banker who doesn’t hesitate to take
on regulators and lawmakers. He was severe in his criticism of the Dodd-Frank
Act that led to <span style="mso-bidi-font-weight: bold;">stricter </span>regulation
of banks in the US after the global financial crisis (GFC). <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">Now, Mr Dimon has trained his
guns on the Basel III “end game” rules for banks planned by American
regulators. These are the final rules related to the implementation of <span style="mso-bidi-font-weight: bold;">the</span> norms widely agreed upon after the
GFC. The new rules will mean higher capital requirements for banks. <span style="mso-bidi-font-weight: bold;">While </span>Mr Dimon may be gutsy in taking
on regulators, it doesn’t <b style="mso-bidi-font-weight: normal;"><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></b>mean
he’s right.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">US regulators <span style="mso-bidi-font-weight: bold;">are proposing</span> several changes in the
way capital requirements are determined under Basel III. They want all banks
with assets <span style="mso-bidi-font-weight: bold;">exceeding</span> $100
billion to use standardised models, instead of internal models, for providing
capital for credit risk and operational risk. For market risk, <span style="mso-bidi-font-weight: bold;">these</span> banks will have to calculate
risk-weighted assets using both standardised <b style="mso-bidi-font-weight: normal;"><s>approach</s></b> and model-based approaches and use the higher of
the two. In addition, banks will have to reflect unrealised losses or gains on <b style="mso-bidi-font-weight: normal;">available-for-sale </b>securities. These
and other proposals will cause bank capital to increase, and that’s what we need.
<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">Requiring the use of standardised
models <b style="mso-bidi-font-weight: normal;">for risk assessment</b> is a huge
shift. In standardised models, risk is assessed based on the average risk
experience. Under Basel II rules, w<b style="mso-bidi-font-weight: normal;">hich </b>were
in place until Basel III came into force, the focus was on capturing risks
specific to a bank using Internal Risk-Based (IRB) models. Banks that <b style="mso-bidi-font-weight: normal;">effectively </b>managed risk would end up having
a capital requirement lower than that required under standardised models, <b style="mso-bidi-font-weight: normal;">resulting in a</b> higher return on equity.
<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">Only banks that could demonstrate
the robustness of their risk models would qualify for use of the IRB approach.
The very fact that a bank had been approved for the use of the IRB approach
signalled to the markets its superior prowess in managing risk.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">Regulators are now having second
thoughts <b style="mso-bidi-font-weight: normal;">on the use of</b> IRB models. <b style="mso-bidi-font-weight: normal;">During</b> GFC, it turned out that many of
the banks that used IRB models just did not have the necessary capital to cope
with losses. In drawing up the Basel III norms, regulators judged that placing
too much reliance on IRB models was unwise. They decided to supplement the
earlier capital requirements with a simple leverage ratio, defined as Tier I
capital to total assets, of 3 per cent. This translates into a debt-to-equity
ratio of 33:1. If this seems an absurdly high level of leverage, remember that
banks were <span style="mso-bidi-font-weight: bold;">even more leveraged</span>
earlier. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">With the latest Basel III proposals,
American regulators are changing tack. They would rather not rely on banks’
internal models at all. <span style="mso-bidi-font-weight: bold;">They aim to</span>
do away with internal models for credit risk and operational risk <span style="mso-bidi-font-weight: bold;">and play</span> safe with models for market
risk. <span style="mso-bidi-font-weight: bold;">The Reserve Bank of India (RBI)</span>
has been moving towards estimating credit loss based on IRB models. It may now want
to revisit the proposition.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">The <span style="mso-bidi-font-weight: bold;">underlying </span>principle driving the new US proposals is simple
enough: For banks, more equity capital is better than less. Mr Dimon opposes
the move based on arguments we have been hearing from bankers for years now. Two
American academics, Anat Admati and Martin Hellwig, have devoted a whole book
to showing up the fallacies in these arguments (<i>TheBankers’ New Clothes).<o:p></o:p></i></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">Mr Dimon says more equity capital
will translate into higher lending rates for borrowers. This is based on the
premise that equity is costlier than debt, <span style="mso-bidi-font-weight: bold;">especially </span>when we take the tax shield <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>for
debt into account. In banking, that is true only because bank debt is hugely
under-priced. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">Lenders to banks know that a
large bank will not be allowed to fail (“too big to fail”) and are willing to
lend at a lower rate than would be dictated by the level of debt. There is thus
an implicit subsidy <span style="mso-bidi-font-weight: bold;">received by</span>
banks <span style="mso-bidi-font-weight: bold;">considered</span> “too big to
fail”. <span style="mso-spacerun: yes;"> </span><span style="mso-bidi-font-weight: bold;">This is</span> a cost that is borne by the taxpayer. It is only when we
ignore <span style="mso-bidi-font-weight: bold;">this</span><b style="mso-bidi-font-weight: normal;"> </b>implicit subsidy in bank debt that it appears as cheap as it does
today. To ignore this is to pave the way for more bank failures and bailouts by
taxpayers.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">Mr Dimon also contends that investors
find bank stocks unappetising if capital requirements go up and return on
equity falls. That is not true either. The share price of a bank is a multiple
of the price/earnings ratio (P/E) and earnings per share (EPS). Higher equity
requirements tend to cause the EPS to fall but they result in a higher (P/E)
ratio as investors <span style="mso-bidi-font-weight: bold;">perceive banks with
higher equity as safer</span> and re-rate<b style="mso-bidi-font-weight: normal;">
</b><span style="mso-bidi-font-weight: bold;">bank stocks with higher equity
capital. <o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">Which of the two effects above
will dominate? Bankers seem to think it is the (P/E) effect that will dominate
and result in higher valuations. What else can explain the fact that the
capital adequacy ratios at the best-performing banks have raced far ahead of the
regulatory minimum? <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">In the US, capital adequacy at an
<span style="mso-bidi-font-weight: bold;">International Monetary Fund (IMF) s</span>ample
of banks averages over 16 percent, <span style="mso-bidi-font-weight: bold;">while
t</span>he requirement stands at around 11 per cent for most banks and slightly
higher at 16-17 per cent for very few large banks. The averages in the UK,
Switzerland and Sweden are 22, 20, and 23 per cent, <span style="mso-bidi-font-weight: bold;">respectively</span><b style="mso-bidi-font-weight: normal;">.</b> In India,
private banks operate at a capital adequacy of 19 per cent, <span style="mso-bidi-font-weight: bold;">even though the</span> regulatory requirement
is just 12 per cent. If higher capital is going to cheese off investors, how do
we explain the fact that <span style="mso-bidi-font-weight: bold;">banks with higher</span>
capital than average also command the highest valuations? <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">Bankers must be <span style="mso-bidi-font-weight: bold;">aware of this, so</span> why do they set up a
howl every time the regulatory requirement goes up? One explanation put forward
is that bankers are paid bonuses based on return on equity. The solution, then,
is for boards to change the metric for performance awards from return on equity
to return on risk-adjusted capital. <span style="color: #00b050;"><span style="mso-spacerun: yes;"> </span></span>Allowing a high level of debt so as to
show higher return on equity is certainly not the solution <span style="color: #00b050;"><o:p></o:p></span></span></p>
<p class="MsoNormal" style="line-height: 150%;"><span style="font-family: "Georgia",serif; font-size: 18pt; line-height: 150%;">The <span style="mso-bidi-font-weight: bold;">regulatory trend</span> is in the direction of increasing capital
requirements for banks. That is good for <span style="mso-bidi-font-weight: bold;">both banks and the economy. The question is:</span><b style="mso-bidi-font-weight: normal;"> </b>Will bankers ever gracefully accept this reality?<o:p></o:p></span></p><br /><p></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-12919595725879424462023-07-15T17:07:00.004+05:302023-07-15T17:07:33.051+05:30Central bank autonomy<p>This is now an old debate. But it's worth getting the <a href="https://www.theindiaforum.in/being-governor-rbi-autonomy-and-independence-central-bank">perspective</a> of Y V Reddy on the subject in India Forum. </p><p>Reddy begins by noting that the RBI is a full service bank. It appears that bank regulation was added to RBI's mandate down the road along with various functions:</p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><p style="text-align: left;"><span style="background-color: white; color: #3c3d3b; font-family: Merriweather, serif;"><span style="font-size: medium;"><i>The important functions of the RBI include issue of currency, monetary management, banker to banks and the government, management of public debt, and management of foreign exchange reserves. Over a period, it has subsumed and assumed powers to regulate money, securities and foreign exchange markets, regulation of banks and non-banks and payment and settlement systems. In serving the public good, the RBI has traversed a long distance and faced many challenges. In the process, it has evolved into a full-service institution encompassing regulatory and developmental roles in the financial system, besides partnering with union and state Governments as their fiscal advisor in domestic and external sector policies.</i></span></span></p></blockquote><p>Reddy gives the arguments for and against central bank autonomy. For autonomy:</p><blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p style="text-align: left;"><span style="font-size: medium;"><i><span style="background-color: white; color: #3c3d3b; font-family: Merriweather, serif;">The first is what is called time inconsistency. Essentially, it means that the time horizon of democratically elected government is short-term and hence they may favour growth over price stability. However, on matters relating to money, actions have to be taken keeping a long-term view. The central bank is expected to take a longer-term view......</span><span style="background-color: white; color: #3c3d3b; font-family: Merriweather, serif;">There is a second reason: that there are political cycles and there are business cycles, which do not coincide. For instance, elections will encourage politicians to have expansionary policies at that time...</span> <span style="background-color: white; color: #3c3d3b; font-family: Merriweather, serif;">The third reason is that governments have a tendency to spend more money than appropriate and some limits have to be put on the spending. These can be put in the Constitution. This can also be enforced by independent central banks.</span></i></span></p></blockquote><p>Against autonomy:</p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><p><span style="font-size: medium;"><i><span style="background-color: white; color: #3c3d3b; font-family: Merriweather, serif;">There is no democratic legitimacy for a technocratic body to decide on the important matter of money...</span><span style="background-color: white; color: #3c3d3b; font-family: Merriweather, serif;">Second, the independence of central bank may result in friction between fiscal and monetary authorities. </span><span style="background-color: white; color: #3c3d3b; font-family: Merriweather, serif;">Third, a central bank may 'impose' its outlook and preferences on the people, contrary to democratic preferences.</span></i></span></p></blockquote><p>The tricky question is how to enforce accountability. Reddy gives some suggestions:</p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><p><span style="font-size: medium;"><i><span style="background-color: white; color: #3c3d3b; font-family: Merriweather, serif;">They should provide regular reports on their policy decisions and the economic outlook and be subject to external audits. Transparency helps build credibility and public trust in the central bank's actions.</span> </i></span></p></blockquote><p>I have advocated external audits for all autonomous government institutions, including RBI. But hardly any of it happening. It happens rarely and when it does happen, it is perfunctory.</p><p>Moreover, central bank autonomy can be largely in respect of the conduct of monetary policy. On various other matters that the RBI handles, such as bank regulation, foreign exchange and management of public debt, there has to be close consultation with the government. Autonomy cannot be sought across the entire range of a full-scope central bank's activities because ultimately the government is accountable for outcomes in a way in which the central bank is not.</p><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px; text-align: left;"><p><span style="font-size: medium;"><i> </i></span></p></blockquote><p><br /></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-73710522044218400932023-07-13T12:00:00.003+05:302023-07-13T12:00:35.574+05:30NATO will give Ukraine arms but no membership<p></p><p class="MsoNormal"><span style="font-size: 14.0pt; line-height: 107%;">The NATO
meeting at Vilnius in Lithuania failed to produce the outcome that Ukrainian
President Zelensky was looking for. Zelensky is desperate for NATO membership
because that would automatically confer on Ukraine the defence cover that NATO
nations are entitled to.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 14.0pt; line-height: 107%;">The US and
others are in no mood to oblige. They refused also to commit to a time-frame
for Ukraine to get NATO membership. There was only a vague promise to consider
NATO membership once Ukraine had met “conditions” that were left delightfully
unspecified. What NATO Secretary General Jens Stoltenberg spelt out would be of
no comfort to Ukraine:<o:p></o:p></span></p>
<p class="MsoNormal" style="margin-left: 36.0pt;"><span style="font-size: 14.0pt; line-height: 107%;"><b>We will provide support to Ukraine for as long as it takes.
Because unless Ukraine wins this war, there's no membership issue to be
discussed at all.</b><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 14.0pt; line-height: 107%;">NATO clearly
does not want to be drawn into a direct conflict with Russia because it knows
very well that that could lead on to a nuclear exchange. What NATO is happy to
do is to continue to arm Ukraine as much as it can. Ukrainians will perish in
large numbers in a war that Ukraine cannot win. But Ukrainian lives will help
bleed Russia militarily and economically. There is a fond hope in Western
capitals that a prolonged war may create enough discontent in Russia to dislodge
President Putin. That hope has been belied in the past eighteen months.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 14.0pt; line-height: 107%;">It looks as
though the stalemate in the conflict will continue. The Ukrainian forces will
hurl themselves at Russia in a counter-offensive that produced little thus far.
The Ukrainian army has not been able to cross the buffer zone and reach the
Russian defense lines. Fresh supplies of arms are unlikely to materially change
the situation. More Ukrainian and Russian lives will be lost while NATO cheers
from the sidelines. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 14.0pt; line-height: 107%;">The problem
is that matters may not end there. There is always the risk of a serious
provocation from the Ukrainian side. That will draw a severe response from
Russia. We cannot be sure that the escalation will not then draw NATO into
direct conflict with Russia – with perilous consequences for the world at
large. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></p><br /><p></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-61779559917721440402023-07-05T12:06:00.003+05:302023-07-05T12:06:22.978+05:30C Rangarajan and India's economic reforms<p> <span style="font-size: 14pt;">C Rangarajan
was one of the principal figures in the making of India’s economic policies
from the 1980s onwards. His memoir, </span><b style="font-size: 14pt;">Forks in the Road</b><span style="font-size: 14pt;">, should be
compulsory reading for those who want a deeper understanding of the reform
process.</span></p>
<p class="MsoNormal"><span style="font-size: 14.0pt; line-height: 107%;">It will
interest IIMA students and alumni to know that Dr Rangarajan was a professor at
the Institute for more than a decade and a half. He was at New York University School
of Business (now Stern School) when Ravi Matthai, the then director, offered
him a job at IIMA. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 14.0pt; line-height: 107%;">Dr
Rangarajan’s course in Macroeconomics was hugely popular with students. He was entrusted
with the task of launching IIMA’s doctoral program. In 1981, he was appointed
Deputy Governor of RBI. Thereafter, there was no looking back. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 14.0pt; line-height: 107%;">Dr
Rangarajan went on to don several hats: Member, Planning Commission; RBI
Governor; Chairman, 12<sup>th</sup> Finance Commission; Chairman, PM’s Economic
Advisory Council. He was also Governor of two states and member, Rajya Sabha. A
life of rich accomplishment!<o:p></o:p></span></p><div><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;"><br /></span></div><div><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif;"><span style="font-size: medium;">My review <a href="https://www.business-standard.com/opinion/columns/the-ideas-of-economists-123070400972_1.html">article</a> on the book in BS today.</span></span></div><div><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif;"><span style="font-size: medium;"><br /></span></span></div><div><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif;"><span style="font-size: medium;">It's behind a pay well, so here is the full text:</span></span></div><div><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;"><br /></span></div><div><p class="MsoNormal"><b><span style="font-family: Georgia, serif; font-size: 18pt;">FINGER ON THE PULSE</span></b><o:p></o:p></p>
<p class="MsoNormal"><b><span style="font-family: Georgia, serif; font-size: 18pt;"> The ideas of economists</span></b><o:p></o:p></p>
<p class="MsoNormal"><b><span style="font-family: Georgia, serif; font-size: 18pt;"> </span></b><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Former RBI governor C Rangarajan’s memoir is a
testament to the crucial role economists can play in shaping policies and
people’s lives</span><o:p></o:p></p>
<p class="MsoNormal"><b><span style="font-family: Georgia, serif; font-size: 18pt;">T T Ram Mohan</span></b><o:p></o:p></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Do economists matter?
Can they make a big difference to public policy? Economists will find answers
that are gratifying in Forks in the Road, the memoir of C Rangarajan ( ‘Ranga’
to old-timers at IIM Ahmedabad, with which he had a long association in its formative
years). Yes, they do. And, yes, they can make a big difference to public
policy, provided they can get political masters to align with their
thinking. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Dr Rangarajan’s memoir
is about the economic events and decisions in which he was an active participant
for nearly three decades, starting in the early 1980s. He wore several hats:
Deputy governor and governor of the Reserve Bank of India (RBI); member of
the Planning Commission; chairman of the Twelfth Finance Commission; and
chairman of the Prime Minister’s Economic Advisory Council (with Cabinet rank).
Somewhere in between were stints as governor of two states and member of the
Rajya Sabha.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Unlike most memoirs,
Dr Rangarajan’s is less about himself and more about issues. It is replete with
tables and statistics. But it doesn’t just tell us what transpired. It examines
the alternatives that were open to policymakers and explains why a particular
course was chosen and what outcomes followed. The result is a fascinating piece
of economic history. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Dr Rangarajan joined
the RBI in 1981. As deputy governor and governor (with a break in between), he
dealt with two of India’s biggest balance of payments (BoP) crises,
the overhaul of monetary policy and banking reform. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The first BoP crisis,
in 1981, was handled largely within the then economic paradigm. Yet, operating within the paradigm, Dr Rangarajan and his
colleagues at the RBI managed a steady depreciation of the rupee in
both nominal and real terms. They were very clear that it would be difficult to
manage the current account deficit without boosting exports and curtailing
imports. The economists at RBI seem to have had a free hand in managing
the exchange rate even before the reforms of 1991. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Another significant
reform in the 1980s arose from the Sukhamoy Chakravarty report of 1985.
Following the report, monetary targeting or setting a money supply target
consistent with output growth and prices came into vogue. This was the first
attempt to tackle “fiscal dominance” over monetary policy. Here again, the
political authority went along with the recommendations of the
economists. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The BoP crisis of 1991
required far more drastic measures. An immediate step was the raising of a
foreign currency loan by pledging some of our gold reserves. The Chandra
Shekhar government gave the go-ahead, and the Narasimha government that
followed raised no objection. Again, a steep depreciation in the exchange rate
of the rupee was required. This was done in two stages with the approval of the
government. Yet another win for economists.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The achievement of the
time, as is well known, was the radical break with the past that finance
minister Manmohan Singh pushed through. Dr Rangarajan highlights the three
significant breaks that are now part of economic lore: The dismantling of
licenses, the reduction in public ownership of business enterprises, and the
move away from the inward-looking trade policy of the past. All of this was
possible only because of the backing of the political authority. Dr Rangarajan
notes wryly that Narasimha Rao was able to rally his party behind him by
talking of “continuation” in economic policy when there was really a break. At
the time, Dr Rangarajan was at the Planning Commission.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Returning
to the RBI in the early 1990s, Dr Rangarajan set in motion reforms in
monetary policy and banking at a breath-taking pace. The phasing out of ad hoc
Treasury bills; market-determined rates for government borrowing; the
dismantling of the administered structure of interest rates in banking; the
reduction in the Statutory liquidity ratio and cash
reserve ratio; licensing of new private banks; and a great deal more was done.
The chapter is titled “The beginnings of autonomy” but but the
freedom given to the professional economists at RBI was not
inconsiderable.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">In the management of
the external sector, the RBI worked closely with the finance ministry.
Far-reaching reforms happened: Foreign institutional investors were allowed
into the Indian stock market; foreign direct investment (FDI) norms were
liberalised; and the exchange rate became largely market-determined.
The framework for management of external capital flows was put in place. There
was clarity that long-term equity flows should be preferred to short-term debt
flows. These and other measures taken at the time have since become pillars of
Indian economic policy. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">On all these, the
political authority had no difficulty in heeding solid professional advice.
There must have been occasions when the economists couldn’t quite have their way.
Perhaps those occasions were not so consequential. At any rate, there is little
indication in the memoir of any serious confrontation between economists and
the government. On the major issues of policy, once the politicians had decided
on a fundamental change of course, they didn’t interfere with the work of
economists. On lesser, more technical matters, they always left it to the
professionals to do what was required.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The big area of
failure for economists has been the fiscal deficit or the savings-investment
balance. Dr Rangarajan highlights the point in his concluding chapter,
“Ruminations”, where he ponders the long-term outlook for the economy. Over the
past three decades, it is an issue that has not proved amenable to the
persuasions of economists, no matter what the complexion of government. We have
since arrived at times when the global consensus on keeping public debt
relatively low has been undermined. Economists themselves seem resigned to
greater levels of public debt than they have been comfortable with in the past.<o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Not pushing through
“big-bang” reforms— such as aggressive privatisation, including bank
privatisation, land acquisition, and the freedom to hire and fire
labour — is seen as a big political failure. Dr Rangarajan doesn’t seem to
think so. He makes little mention of these. “The reform regime,” he
writes, “will be incremental in character. It has to be”. That is also the
political consensus on reforms. <o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Working quietly within
the system, Dr Rangarajan was able to make a difference. His place as one of
the principal architects of economic policy from the 1980s onwards is secure.
For his compelling chronicle of the economic history of the period as much for
his many contributions, he deserves a bouquet of the choicest roses.<o:p></o:p></span></p></div><div><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;"><br /></span></div>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-12778148991061214892023-05-24T19:08:00.007+05:302023-05-25T09:41:57.444+05:30Rethinking fiscal rules<p></p><p class="MsoNormal"><span style="font-size: 13pt; line-height: 107%;">Public debt
ratios have risen since the Covid shock as governments sought to cushion the impact
of the shock. Global debt to gdp averaged 96 per cent in 2021. The average for
advanced economies was 120 per cent. In 2008, after the Global Financial
Crisis, the numbers were 64 per cent and 79 per cent.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13pt; line-height: 107%;">The general
view, articulated by the IMF, is that the rise in public debt was inevitable
and desirable. But… it needs to be brought down quickly. That is, of course,
the received wisdom taught in all Macroeconomics courses, namely, the
lower the public debt, the better.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13pt; line-height: 107%;">It is
refreshing to hear a different <a href="https://www.ft.com/content/d57567c3-cd97-4cbe-be00-6cf50886b308">view</a> from Andy Haldane, former Chief Economist
of the Bank of England. Haldane makes two interesting points. One, over
centuries, global debt to gdp has tended to rise as governments respond to the
need to create more and more public goods. Two- and this is very interesting-
even as public debt has risen, the interest costs have fallen. Not quite what
you the Macro course would tell you.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13pt; line-height: 107%;">How do you
explain these? Well, public debt is used often to create assets. These assets
generate streams of income over time that can service the debt. So lenders to
government look, not just at the debt, but at the assets that the debt creates.
What matters thus is not public debt per se but net worth of government, that
is, assets minus debt. <o:p></o:p></span></p>
<blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p class="MsoNormal" style="text-align: left;"><span style="font-size: 13pt; line-height: 107%;"><i>Recognising
those assets would give us a measure of the true net worth of the government.
Just as a company or household would look at their net worth when making
investment choices, so too should government. Countries with high net assets
have been found to have lower borrowing costs. Bond market vigilantes target
poor ancestors, not borrowers.</i></span></p></blockquote>
<p class="MsoNormal"><span style="font-size: 13pt; line-height: 107%;">Moral of the
story? The need to create important public goods remains, perhaps, including those
relate to climate change. No need to panic over rising debt levels- focus on debt
sustainability. As long as debt creates productive assets, physical or human,
chances are debt will be sustainable. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13pt; line-height: 107%;"><o:p> </o:p></span></p><br /><p></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-53574649330067927902023-05-19T12:03:00.005+05:302023-05-19T12:03:58.340+05:30India's growth prospects in FY 2023-24<p> </p><p class="MsoNormal">Growth projections for India for FY 24 show wide divergence.</p><p class="MsoNormal"><span style="font-family: Symbol; text-indent: -18pt;"><span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variation-settings: normal; line-height: normal;"><br /></span></span></p><p class="MsoNormal"></p><ul style="text-align: left;"><li><span style="font-family: Symbol; text-indent: -18pt;"><span style="font-family: "Times New Roman"; font-feature-settings: normal; font-kerning: auto; font-optical-sizing: auto; font-size: 7pt; font-stretch: normal; font-variant-alternates: normal; font-variant-east-asian: normal; font-variant-numeric: normal; font-variation-settings: normal; line-height: normal;"> </span></span><span style="text-indent: -18pt;">The RBI Governor recently threw his weight
behind the RBI forecast of 6.5 per cent</span></li><li>The Chief Economic Advisor estimates growth at
6-6.8 per cent with downside risks being greater, meaning growth will be closer
to 6 than to 6.8 per cent</li><li><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"><span style="font: 7.0pt "Times New Roman";"> </span></span></span><!--[endif]-->The IMF has scaled down its growth forecast for India to 5.9 per
cent</li><li>Dr C Rangarajan, former Chairman, PM’s Economic
Advisory Council, thinks we will end up with 6 per cent</li><li>Many private sector forecasters see growth below 6
per cent, some peg it close to 5 per cent </li></ul><p></p><p class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-indent: -18.0pt;"><!--[if !supportLists]--><o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -18.0pt;"><o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -18.0pt;"><o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -18.0pt;"><o:p></o:p></p>
<p class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo1; text-indent: -18.0pt;"><o:p></o:p></p>
<p class="MsoNormal">What do we make of these forecasts? I guess much depends on
whether or not the downside risks materialise. A big one is an escalation in
the conflict in Ukraine. Another is further bouts of banking instability in the
US and elsewhere. The IMF mentions several other downside risks: higher than
expected real interests at a time when debt levels are high; stickier
inflation; sovereign debt distress in emerging and developing economies
(already seen in Sri Lanka and Pakistan); faltering growth in China; greater
retreat from global integration.<o:p></o:p></p>
<p class="MsoNormal">The IMF estimates that the probability of global growth
going below 2 per cent in 2023 is 25 per cent- this has happened only five
times since 1970. (The IMF’s baseline forecast is for 2.8 per cent). That will happen if many of the downside risks materialise. <o:p></o:p></p>
<p class="MsoNormal">My guess is that we will be lucky if India’s growth rate
exceeds 6 per cent in FY 24. <span style="mso-spacerun: yes;"> </span><o:p></o:p></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-59292948738788762812023-05-14T12:05:00.001+05:302023-05-14T12:05:22.567+05:30Interpreting Karnataka poll results<p> </p><p class="MsoNormal"><span style="font-size: 17.3333px;"><b> </b></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">We are
seeing all commentaries about the decisive victory score by the Congress in the
Karnataka Assembly polls. We need to be careful in interpreting the results. Going
by the seats secured by parties in elections, we know, can be deceptive. Small
swings in votes can result in disproportionate changes in seats won.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">A better
gauge of a party’s popularity is vote share. The BJP vote share in Karnataka
remains what it was in 2018- 37 per cent-, going by this <a href="https://www.outlookindia.com/national/bjp-retains-its-vote-share-in-karnataka-but-its-downfall-is-worthy-of-analysis-news-286072">article</a>. It appears that the BJP lost marginally in some areas, gained
massively in Bengaluru and held on to its vote share in the coastal regions.
The marginal losses in some places sufficed to change the outcome in terms of
seats. What brought about the small change in votes in areas where the BJP lost
needs to be analysed.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">It does seem
that the theories for the outcome that are being put forward- polarisation gone
wrong, developmental story winning, leftist orientation of Congress going down
well, etc- are premature. We need a rigorous analysis of the outcomes in
various regions to tell a convincing narrative. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;"><o:p> </o:p></span></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-66261867401619918142023-05-13T18:07:00.006+05:302023-05-13T18:07:46.612+05:30FRB review of the failure of Silicon Valley Bank<p><span color="rgba(0, 0, 0, 0.9)" face="-apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif" style="background-color: white; font-size: 14px;">The US Federal Reserve Board has published a review of the failure at SVB. The lessons are pretty straightforward. Regulation and supervision have to get tighter. Boards have to do a better job. Managerial incentives need to be aligned to risk-adjusted returns, not nominal returns. With respect to boards, I would add: we need an overhaul of the mechanism of independent directors- we can’t leave it to promoters and CEOs to decide who the ‘independent’ directors should be.</span></p><span color="rgba(0, 0, 0, 0.9)" face="-apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif" style="background-color: white; font-size: 14px;">The RBI may want to commission a similar review of the failures at IL&FS and Yes Bank. Regulators unilaterally subjecting themselves to public scrutiny is good for good for the regulator’s credibility and standing- and good for bank stability in the long run.</span><div><span color="rgba(0, 0, 0, 0.9)" face="-apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif" style="background-color: white; font-size: 14px;"><br /></span></div><div><span color="rgba(0, 0, 0, 0.9)" face="-apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif" style="background-color: white; font-size: 14px;">My article in BS, <a href="https://www.business-standard.com/opinion/columns/anatomy-of-a-bank-failure-123051101246_1.html">Anatomy of a bank failure</a></span></div><div><br /></div><div><p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><b><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Anatomy of a bank failure</span></b></p><p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><o:p></o:p></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16.0pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">A radical change is
necessary in the appointment of independent directors in India in light of the
extensive failures in oversight and management of banks in the US</span><o:p></o:p></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><b><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span></b><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><b><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">T T RAM MOHAN</span></b><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Silicon
Valley Bank (SVB) and its holding company, Silicon Valley Bank Financial Group
(SVBFG), failed last March. This resulted in the immediate failure of
Signature Bank and, with a lag, of First Republic Bank. More mid-sized banks
may follow.</span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The
US Federal Reserve Board (FRB) has been quick to commission and publish a
review of the failure of SVB. Even more creditable, the review pulls no punches
in apportioning blame. The bank’s management failed. The board of directors
failed. The supervisor failed. Regulations turned out to be inadequate.
Everything that could go wrong went wrong.</span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The
Fed review should be compulsory reading for bankers, bank boards, regulators
and supervisors. The report will help drive home an important point: It is
futile to expect “market discipline” by itself to take care of banking
stability.</span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Let
us begin with management and board failures. SVBFG’s assets tripled in size
between 2019 and 2021. Deposits flowed in. The technology sector was booming,
so lending expanded rapidly. Any growth in loans that is way above
average loan growth in the sector is a recipe for trouble, a point often lost
on managements as well as boards. Management does not have the bandwidth to
assess risk properly. Internal controls and systems cannot keep pace with
runaway growth. Reliance on volatile wholesale deposits tends to
increase. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Managerial
incentives are often linked to profits without adjusting for risk. For CEOs,
the temptation to quickly grow the loan book is irresistible. The onus is on the board
of directors to apply the brakes. Rarely does this happen. Boards tend to
be mesmerised by CEOs who show dazzling performance for a few years. They find
it hard to tell a performing CEO, “Sorry, this is not on.” </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">At
SVBFG, the board was not even responsive to supervisory warnings. The FRB
report remarks acidly, “Moreover, the board put short-run profits above
effective risk management and often treated resolution of supervisory issues as
a compliance exercise rather than a critical risk-management issue.” That could
be said of many boards. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Starting
in July 2022, SVBFG failed its liquidity stress tests repeatedly. Management
moved to increase funding capacity but the necessary actions were not executed
until March 2023 when it was too late. Management chose to mask
liquidity risks by changing the stress test assumptions. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Interest
rate risk too was poorly managed. The bank had breached its interest rate risk
limits on and off since 2017. Instead of reducing dependence on short-term
deposits, management fiddled with assumptions about the duration of deposits.
Hedges on interest rate risk were removed in the interest of boosting
short-term profits. Management was massaging earnings by hiding the underlying
risks. The Risk Management Committee of the board should have picked up these
lapses. It failed to do so, again not a huge surprise. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The
supervisors did not cover themselves with glory either. For governance, SVBFG
got a “Satisfactory” rating, despite repeated supervisory observations about
inadequate oversight. The bank had large, uninsured deposits that were volatile,
yet managed a “Strong” rating on liquidity. Despite breaching interest rate
risk limits repeatedly, it got a ‘Satisfactory’ rating on the item.
Clearly, supervisors in the FRB set-up were hard to displease. Banks in India
must pine for such a supervisor; they find the Reserve Bank of India (RBI) almost
impossible to please. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">What
accounts for these supervisory failures? The report says joint oversight by the
FRB and the 12 Federal Reserve Banks is a factor. The Board delegates authority
to the Reserve Banks, but Bank supervisors look to the FRB for
approval before making a rating change. Getting a consensus is
time-consuming. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">But
that was not the only reason. In 2018, heightened supervisory standards were
made applicable only to banks with assets of more than $100 billion. Moreover,
supervisors were under pressure to reduce the burden on banks and to exercise
greater care before reaching conclusions or taking action</span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Finally,
there were the failures of regulation. The Dodd-Frank Act, passed after the
Global Financial Crisis (GFC), provided for stiffer prudential standards for
banks above a threshold of $50 billion. In 2018, the Act was amended to
raise the threshold to $250 billion. For banks in the range of $100-$250
billion in assets, the Fed was given the discretion as to what standards to
apply. When SVBFG reached the threshold of $100 billion, it was subjected
to less stringent regulations than would have applied before 2019. Had the
dilution in regulations not happened, SVBFG would have been compelled to
enhance liquidity and capital before it was too late. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The
problem is fundamental. The philosophy of “light touch” regulation and
supervision hasn’t quite lost its hold on the US system. Multiple regulators
and supervisors are another problem. There is also the “revolving door”
syndrome -- regulators join private banks, then jump back to the regulator in a
senior capacity. The relationship between regulator and banks is too cosy for
comfort, which may explain the kindness shown to SVB. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The
RBI, as your columnist argued last month, is well ahead of the regulatory and
supervisory curve in the West. Its intrusive approach is a better safeguard for
banking stability than the light touch elsewhere. However, supervision can only
be a third layer of defence against bank instability. Regulations are the
primary layer, followed by the board. The RBI must find ways to get bank boards
to do a far better job. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">A
radical change would be to alter the way independent directors are
appointed at banks. At present, the promoter or CEO has the dominant say in the
appointment of independent directors (at both private and public sector banks).
The RBI may want to insist that, for instance, one independent director be
chosen by institutional investors and another by retail shareholders
(from a list of names proposed by the Financial Services Institutions
Bureau). Until we have independent directors who are distanced from the
promoter and management, it’s unrealistic to expect board oversight to
improve. </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The
RBI is hosting a conference for bank directors later this month. Here are two
suggestions. <span style="mso-spacerun: yes;"> </span>One, in the interests of
transparency and accountability, the RBI may want to commission a review of the
failures at IL&FS and Yes Bank. Two, it may prescribe the FRB’s review of
SVB’s failure as one of the “readings” for the conference. It may
also include the report of the UK's Financial Services Authority on the failure
of Royal Bank of Scotland during the GFC. At least, bank directors can’t say
they weren’t warned.</span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN; mso-hansi-font-family: Calibri;"><o:p></o:p></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 0cm;"><span style="font-family: Georgia, serif;"><span style="font-size: 21.3333px;"> </span></span></p>
<p class="MsoNormal" style="line-height: 16.5pt; margin-bottom: 12pt;"><span style="font-family: "Georgia",serif; font-size: 16pt; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><br />
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<p class="MsoNormal" style="line-height: normal; margin-bottom: 0cm;"><span style="font-family: "Times New Roman",serif; font-size: 12pt; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p> </o:p></span></p>
<p class="MsoNormal"><o:p> </o:p></p><br /></div>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-17648621408569284882023-04-02T12:24:00.000+05:302023-04-02T12:24:21.796+05:30Whom does the current bout of inflation the West hurt?<p>The rise in inflation in Western economies has caused a massive transfer of wealth from savers to investors, contends Adam Tooze in an <a href="https://www.ft.com/content/4d519cc7-5959-4749-a892-dc8bd5cf1014">article</a> in the FT. </p><p>Higher inflation means the nominal debt to nominal gdp ratio goes down as the denominator rises on account of inflation. The denominator has risen also because of the rebound in real output post Covid.</p><p>Borrowers, namely government and corporates gain, but savers lose. The poor face higher inflation and a loss of jobs. Tooze thinks this can lead to explosive discontent. </p><p>I am not so sure. The only net debt in an economy is government debt (corporate and household borrowings are from other household savers, so the net borrowing on these two counts is zero). So whoever has invested in government debt is a loser. The rich are losers and also the middle class. But the poor are not investors in government debt. They are net borrowers, hence stand to gain from the real value of their debt getting eroded. If inflation can be quickly reined in, they could emerge as beneficiaries from the current bout of inflation. </p><p>The notion that inflation hurts the poor is common. Higher prices mean a higher cost of living. True. But this effect could be overwhelmed by the erosion the value of debt that the poor carry. </p><p> </p><p><br /></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-78639200998374304242023-04-02T11:41:00.005+05:302023-04-02T11:41:45.468+05:30Crisis? What crisis?<p> <span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;">Last November, there was talk of a serious external accounts crisis staring in India in the face. Maybe, not as bad as the one in 2013 but still pretty bad.</span></p><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" /><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;">The current account deficit, analysts said, could exceed 3.5 per cent of gdp for FY 23. The rupee would be above Rs 85 to the dollar, could even touch Rs 90. It was futile for the RBI to expend dollars to support the rupee- better to simply let the rupee fall and exports do the trick.</span><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" /><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" /><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;">Well, less than six months on, little of that has come true. The current account deficit has narrowed and may end up at under 2.5 per cent of gdp, a comfortable position for us. The rupee is trading in the range of Rs 82-82.7. Foreign exchange reserves are at an eight month high of $579 bn.</span><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" /><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" /><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;">Lower commodity prices are a factor. Another is that world economic growth has turned out to be better than forecast, with the US escaping a recession in 2023, again contrary to many forecasts. India's gdp growth for FY 2023 is projected to be slightly below 7 per cent</span><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" /><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" /><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;">No sign of any crisis, eh?</span><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" />The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-75641916382806552952023-04-02T11:40:00.003+05:302023-04-02T11:40:33.248+05:30Recent bank failures<p> <span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;">The question pops up again: what was the board of directors doing at the spectacular bank failures we have seen recently?</span></p><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" /><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;">An <a href="https://www.ft.com/content/17fb5f84-0931-4c65-bca8-b8e1aa982df3">article</a> in FT is informative. Only one of SVB's directors had banking expertise and he didn't sit it on the Risk Management Committee (RMC). The bank's RMC included a director with considerable experience in the premium wine industry. SVB did not have a Chief Risk Officer (CRO) for months and when the CEO appointed one, it was considered a big enough achievement to be a factor in his outsized bonus. At Silvergate Bank, the CRO happened to be the son-in-law of the CEO.</span><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" /><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" /><span style="background-color: white; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px;">Questions need to be asked also about governance at Credit Suisse as it hurtled from one scandal to another over several years. Even if they are, we are unlikely to get lasting answers. It does seem that the board of directors of a company is amongst the most unreformable institutions in the world.</span><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 14px; line-height: inherit !important;" />The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-30978663079576588282023-02-13T15:34:00.005+05:302023-02-13T15:34:54.553+05:30Consulting as the Big 'Con'<p> </p><p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">Mariana
Mazzucato made a huge splash with her book, The Entrepreneurial State. She
argued that there are high-risk, breakthrough ideas such as the Internet that
could never have happened with massive funding of the initial creative work. In
an <a href="interview">interview</a> with FT, she takes on consulting firms, the McKinseys, BCGs and
the rest. <o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">Her point is
not the usual one about consulting firms not adding much value: as the old
chestnut goes, a consultant is somebody who looks at your watch and tells you
the time. No, her point is more nuanced. She says that governments are becoming
too dependent on consulting firms for ideas. As a result, governments are taking
enough responsibility and doing worthwhile work. In the process, the civil
services are not attracting the brightest. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-size: 13.0pt; line-height: 107%;">I don’t
think that’s true of the IAS. The beauty of India’s competitive exams is that
the talent pool is so incredibly large that when you are looking to fill, say,
150 slots out of half a million applicants, you are bound to get incredibly
good talent. The IAS, in my view, still gets some of the best talent in the
country. But that could also be because our government hasn’t developed the UK
sort of dependence on consulting firms! Or, there is so much of work to be done
in government that if even if you farmed out work to consultants, there would
be a great deal left for government to do. <o:p></o:p></span></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-21895447918490467792023-02-10T09:03:00.000+05:302023-02-10T09:03:10.987+05:30Four trends that will impact the Indian economy<p> </p><p class="MsoNormal"><span style="line-height: 107%;"><span style="font-size: medium;">I identify four broad economic trends from which there is no escape for the Indian
economy:<o:p></o:p></span></span></p><p class="MsoNormal"><span style="font-size: large; text-indent: -18pt;">1. Government capital expenditure will drive
the economy in the medium-term.</span></p><p class="MsoListParagraphCxSpFirst" style="text-align: left; text-indent: -18pt;"><span style="text-indent: -18pt;"><span style="font-size: medium;">2. 2. High fiscal deficits are here to
stay.</span></span></p><p class="MsoListParagraphCxSpFirst" style="text-align: left; text-indent: -18pt;"><span style="font-size: medium;"><span style="line-height: 107%; text-indent: -18pt;"><span style="font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">3. </span><span style="font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">3. </span></span><span style="line-height: 107%; text-indent: -18pt;">Inflation will be higher than before</span></span></p>
<p class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo1; text-indent: -18.0pt;"><!--[if !supportLists]--><span style="font-size: medium;"><span style="line-height: 107%;">4.<span style="font-family: "Times New Roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span><span style="font-family: "Times New Roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;">4.</span><span style="font-family: "Times New Roman"; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span><!--[endif]--><span style="line-height: 107%;">Self-reliance and import-substitution
are a reality<o:p></o:p></span></span></p>
<p class="MsoNormal"><span style="line-height: 107%;"><span style="font-size: medium;">The macroeconomic
outcomes that we can realise will be constrained by these four trends.<o:p></o:p></span></span></p><p class="MsoNormal"><span style="font-size: medium;">More in my BS article, <a href="https://www.business-standard.com/article/opinion/four-economic-trends-that-will-impact-india-123020901654_1.html">Four economic trends that will impact India.</a></span></p><p class="MsoNormal"><br /></p><p class="MsoNormal"></p><p class="MsoNormal" style="background: white; line-height: 16.5pt;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Four economic
trends that will impact India<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt;"><span style="font-size: 14pt;">There are
four broad trends that will impact the Indian economy in the years to come. The
Budget for 2023-24 affirms these trends.</span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; vertical-align: baseline;"><b><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">1. Government
capital expenditure will drive the economy</span></b><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> in the
medium-term: The latest Economic Survey underlines the fact that government
capital expenditure has risen from a long-term average of 1.7 per cent of gross
domestic product (GDP)in the period FY09 to FY20 to an estimated 2.9 per
cent of GDP in FY23. The latest central Budget expects capex to rise to 3.3 per
cent of GDP in FY24.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">This points
to an inconvenient fact: Private investment has remained sluggish and the government
has had to compensate. The behaviour of private investment is not unique to
India. It is part of a trend that is seen in emerging and developing economies
(EMDEs). As the World Bank’s <i>Global Economic Prospects</i> (2023) points
out, investment growth in EMDEs in 2022 remained about 5 percentage point below
the 2000-21 average, and nearly 0.5 percentage point below in EMDEs excluding
China. <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The World
Bank does not see private investment returning to the level suggested by the
pre-pandemic trend through 2024. It lists several factors responsible for the
slowdown in investment growth in EMDEs: Slower output growth in 2010-19; lower
commodity prices; lower and more volatile capital inflows to EMDEs; higher
economic and geopolitical uncertainty; and a substantial build-up of public and
private debt. Many of these factors apply to India. <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The
government sees a sharp rise in capex in FY24 as boosting output
growth. This overlooks the fact that the fiscal deficit is projected to decline
by 0.5 per cent of GDP in FY24. We have a withdrawal of stimulus, something
that is contractionary in nature. <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">True, the
composition of expenditure has shifted even more towards capex, and this is
expansionary. But this effect can overwhelm the contractionary effect of a
fiscal deficit decline only if the rise in capex is greater than the decline in
the fiscal deficit. <span style="mso-spacerun: yes;"> </span>In <span style="mso-spacerun: yes;"> </span>the budgetary projections, the rise in capex
is 40 basis points whereas the decline in the fiscal deficit is 50 basis
points. The net effect will, therefore, be contractionary<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><b><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">2. High
fiscal deficits are here to stay</span></b><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">: Analysts cheered
the finance minister for sticking to the fiscal deficit of 6.4 per cent for
2022-23, and projecting a fiscal deficit of 5.9 per cent for 2023-24. The
figure for 2023-24 is a budget estimate. If the Ukraine conflict escalates and
the global situation worsens, government subsidies (which have been pruned in
FY 2023-24) will rise and we could be back to square one. We must also expect
sops to be rolled out in the run-up to elections in 2024. <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">The fiscal
situation can be turned around in a fundamental way only if the tax-to-GDP
ratio goes up significantly (say, above 12 per cent of GDP) or if capital
receipts from disinvestment rise significantly or both. On either count, the
outlook is not promising. The tax-to-GDP ratio <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>is
estimated at 11.1 per cent for 2023-24. The peak in the past decade has
been 11.4 per cent. <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">As for the
proceeds from disinvestment, the Economic Survey notes that total proceeds from
sale of equity in public sector units (PSUs) amounted to ~4 trillion
in the eight-year period from 2015 to January 2023, or an average of ~50,000
crore in a year. Strategic sales have yielded a mere ~69,412 crore in the
entire period. It does look as though the Fiscal Responsibility and Budget
Management target of 3 per cent will remain a distant dream. <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">After the
global financial crisis and then the pandemic, we are seeing a rise in
government deficits and public debt everywhere. India is no exception. If
anything, the rise in debt to GDP ratio from 81 to 85 per cent between 2005 and
2021 looks modest in comparison with the increases elsewhere-- 66 to 128 per
cent in the US; 39 to 95 per cent in the UK; 26 to 72 per cent in China; and 69
t 93 per cent in Brazil. India’s public debt position looks even better when we
take into account the fact that 95 per cent of the liabilities are domestic,
and we have the growth-interest differential working in our favour.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p> </o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 7.1pt; margin-right: 0cm; margin-top: 0cm;"><b><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">3.Inflation
will be higher than before:</span></b><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> High fiscal deficits can be expected to
translate into high inflation. That apart, de-globalisation will happen in a greater
or lesser degree. The movement may be gradual, but the direction is clear
enough. <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-left: 7.1pt;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Globalisation
was about procuring goods and services at the lowest cost from almost anywhere
in the world. Princeton historian Harold James noted recently that there is a
historical pattern of globalisation driving disinflation. Alas, it appears the
trend towards globalisation is now being disrupted.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-left: 7.1pt;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">Post-Covid
and post-Ukraine, every country is reassessing its extent of dependence on
outside suppliers from a range of goods and services. The US and its allies are
determined to reduce dependence on China to the maximum extent possible as the
containment of China has become the West’s strategic priority. <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-left: 7.1pt;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">There has
been serious academic discussion in the US about revising upwards the inflation
target of 2 per cent so that monetary policy has more room for
manoeuvre in the downward direction. In India, the inflation target of 4 per
cent threatens to become largely notional. We would be thankful now
if inflation falls below 6 per cent. <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; vertical-align: baseline;"><b><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">4. Self-reliance and import-substitution are a reality: </span></b><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">For the
reasons cited in (3) above, “make at home” will gain in importance. This will
be especially important for leading economic and military powers. As India
moves towards becoming the third largest economy in the world with matching
military clout, a lurch towards greater self-reliance is inevitable. We need
not be unduly apologetic about this trend: We are only falling in line with a
worldwide trend. The adjustments in tariffs in the recent Budget, analysts have
noted, are aimed at helping domestic industry.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-left: 7.1pt;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;">It’s no use
bemoaning the trend towards protectionism in various economies, including
India. It makes <b><s>no </s></b>more sense instead to make a
success of schemes such as Production-Linked Incentives. We must find ways to
limit abuse of discretion in industrial policy. We need to monitor the
effectiveness of the PLI scheme using appropriate metrics. Industrial policy
will be integral to economic policy in the years to come.<o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> </span><span style="font-size: 14pt;">Macroeconomic
outcomes in the coming years will be governed by the four trends outlined
above. </span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt; margin-bottom: .0001pt; margin-bottom: 0cm;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"> <o:p></o:p></span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt;"><span style="font-size: 18.6667px;"> </span></p>
<p class="MsoNormal" style="background: white; line-height: 16.5pt;"><span style="font-size: 14.0pt; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-IN;"><o:p> </o:p></span></p>
<p class="MsoNormal"><span style="font-size: 14.0pt; line-height: 107%; mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><o:p> </o:p></span></p><br /><p></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-70897975558721842682023-02-04T16:04:00.012+05:302023-02-10T09:04:48.062+05:30Don't believe the experts!<p> <span style="font-size: 13pt;">Arvind
Subramanian, former Chief Economic Advisor in the Finance Ministry, has a
cheeky take in today's BS on the judgements on experts on sundry matters:</span></p><p class="MsoNormal"></p><ul style="text-align: left;"><li><span style="font-size: 13pt; text-indent: -18pt;">China’s
zero- Covid policy was hailed as a success until the recent spurt in Covid
infections threaten to trigger an insurrection of sorts.</span></li><li><span style="font-size: 13pt; line-height: 107%;">The
US was said to have fared badly in its handling of Covid because it’s a
polarised society in contrast to the egalitarian Sweden- “until Sweden became a
cautionary tale”.</span></li><li><span style="font-size: medium;">In
the US, the doves ruled on monetary policy until a few months ago. With the
persistence of inflation, the hawks took over. Now with signs of inflation abating,
the doves “are flying again</span>”·<span style="font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></li><li><span style="font-size: 13pt; line-height: 107%; text-indent: -18pt;">Economists
warned that the confluence of the conflict in Ukraine, soaring inflation and
rivalry between US and China would plunge the world into recession. The clouds
are receding in recent weeks and it appears, well, we may not end up with a
recession, after all.</span></li><li><span style="font-size: medium;">Anybody
remembers how many times the Chinese credit bubble was supposed to collapse and
wreck the Chinese economy</span>?</li></ul><p></p>
<p class="MsoListParagraphCxSpMiddle"><span style="font-size: 13pt;">Subramanian thinks the problem is the media: they are looking for snappy comments
all the time and experts are happy to give them quotes for their two minutes of
fame.</span></p>
<p class="MsoListParagraphCxSpMiddle"><span style="font-size: 13pt; line-height: 107%;"><o:p> </o:p></span><span style="font-size: 13pt;">The problem runs deeper, methinks. Experts simply lack an awareness of
grassroots realities. They are mostly armchair pundits who prefer to operate
from the comforts of their air-conditioned offices. How else do we explain the
high rate of failure of economic forecasts? It is said that economists can’t
even forecast the past correctly. Then, there are the stock price and stock
market forecasts, earnings forecasts.</span></p>
<p class="MsoListParagraphCxSpMiddle"><span style="font-size: 13pt; line-height: 107%;"><o:p> </o:p></span><span style="font-size: 13pt;">Political forecasts are worse- I have lost count of the number of times
President Putin has been pronounced as seriously or terminally ill- seems fit
enough to preside over the conflict in Ukraine. We were told that the Mr Putin
would be deposed in a coup, the people of Russia would rise in revolt against
the suffering inflicted on them, Russian economy would collapse…. </span><span style="font-size: 13pt;">and Ukraine was poised to triumphantly retake
the Crimea from Russia. So much hot air.</span></p>
<p class="MsoListParagraphCxSpMiddle"><span style="font-size: 13pt; line-height: 107%;"><o:p> </o:p></span><span style="font-size: medium;">Mr Subramanian says experts should stick to their area of domain
expertise. Alas, they don’t seem to do wonderfully even in that area. No better
example that Mr Subramanian warning that a 5 per cent fiscal stimulus was
needed to save the Indian economy from the impact of the pandemic- we seem to
have managed quite well with a stimulus of under 2 per cent</span>.</p>
<p class="MsoListParagraphCxSpLast"><span style="line-height: 107%;"><o:p> </o:p></span></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-34786553309594449972022-11-21T09:04:00.004+05:302022-11-21T10:26:29.567+05:30Forex reserves and RBI intervention<p>I pinched myself in disbelief when I saw a news item that said the RBI may have BOUGHT $8 bn dollars in the market in the past month. </p><p>So the RBI is causing the dollar to strengthen vis-a-vis the rupee, meaning it wants the rupee to depreciate In the previous months, the RBI had been doing quite the opposite- it had dipped into its forex reserves to SELL dollars in order to contain the depreciation in the rupee. As a result, India's forex reserves fell by about $ 85 bn in the period April-September 2022. </p><p>But that was not entirely because of sale of dollars by RBI. Dollar sales are said to account for about a third of the decline in reserves. The rest of the decline was because of revaluation of reserves. The RBI holds large amounts of bonds in foreign currency, especially US Treasury bonds. These holdings have been falling in value thanks to rising interest rats.</p><p>As you know, we've had people howling about RBI's market intervention. Many were worried about the fall in our forex reserves. They said: why intervene? Let the rupee fall. It would be good for exports. </p><p>The RBI Governor gave a fitting response recently. About the fall in reserves, he said that is what the reserves are meant for- for a rainy day. They are not, he said, meant to be a 'showpiece'. As for export growth, I doubt that rupee depreciation will do much to help in the current situation. The export markets are down, so it's unrealistic to expect a big boost to exports. Our major imports, such as oil, as price inelastic, so imports will shoot up with rupee depreciation. Chances are BoP will worsen, not improve, with rupee depreciation. </p><p>That apart, it makes no sense to let the market dictate the exchange rate entirely. It may dictate the direction of the exchange rate but not the magnitude. The RBI is committed to containing rupee volatility. It has an unstated objective, namely, containing the Real Effective Exchange Rate (REER) of the rupee within a band of plus or minus 5 per cent. Excess volatility in the exchange rate makes investors jittery. </p><p>Net portfolio investment flow into India turned hugely positive in August reversing the trend of the previous months. It turned negative in September and October but has turned positive thus far in November. If portfolio investors sense that the rupee is in a free fall, they will head massively for the exit, causing the rupee to plunge. Rupee volatility must always be managed.</p><p>I wonder what is going to happen to the forecasts of the forex pundits who saw the exchange rate headed towards Rs 85 to the dollar or even above that. The rupee is now less than Rs 82 having touched Rs 83 on October 19. The trend has reversed in recent weeks. Inflation in the US has begun to respond to earlier rounds of tightening. There is a sense now that the Fed may not have to tighten as much as thought until now. </p><p>Overshooting of exchange rates is a well-established phenomenon. There are periods when the rate goes above or below the equilibrium value before returning to equilibrium. Some of the depreciation we have seen in recent months falls in the category. The necessary correction may be happening, helped by perceptions about future rate moves in the US. As interest rates in the US correct downwards, the value of US Treasuries will rise and with that India's FX reserves.</p><p>I wouldn't be surprised if the exchange rate at the end of FY 22-23 is closer to Rs 80 than to Rs 85.( Caveat: I'm assuming no serious escalation in the Ukraine conflict). I won't be apologetic if I'm proved wrong: the tribe of economists has long claimed a divine right to be wrong in its forecasts. </p><p><br /></p><p><br /></p><p> </p><p><br /></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-25641832399916750912022-11-18T15:30:00.004+05:302022-11-18T15:30:16.952+05:30Central banker jokes<span style="font-size: medium;">RBI Deputy Governor Michael Patra's recent <a href="https://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/DGMDSP15112022F4DFE5355CA40429BB456490633DAE3EF.PDF">speech</a> on monetary policy transmission will be of interest to many. The part I liked best was where he cracked a couple of jokes at the expense of central bankers.</span><div><span style="font-size: medium;"><br /></span></div><blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><div style="text-align: left;"><i><span style="font-size: medium;">These are not the best
times for central bankers to wax eloquent. From being knights in shining
armour during the pandemic, they have become much maligned and are
held responsible for the darkening outlook globally. The story is told of a
man stuck in a traffic jam in the capital of a major economy. He asks a
policeman about what is going on, and is told that the Governor of the
central bank of the country is so depressed about the economy that he
wants to douse himself with gasoline and set himself on fire. So, in
sympathy, the crowd has decided to take out a collection for him. “How
much has been collected?” asked the man. The answer: “40 gallons”.</span></i></div></blockquote><p><span style="font-size: medium;">Here's another one:</span></p><blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p style="text-align: left;"><span style="font-size: medium;"><i>A man needs a heart transplant. The doctor offers the
heart of a five-year old boy. “Too young!” says the man. “How about the
heart of a 40-year old treasury head?” “He doesn’t have a heart”. Then
how about the heart of a 75-year old central banker?” “I will take it!” “But
why?” “It’s never been used!” </i></span></p></blockquote><p><span style="font-size: medium;"> If a central banker can laugh at himself, there is still hope for the breed.</span></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0tag:blogger.com,1999:blog-33693245.post-48800975153159671232022-11-17T12:16:00.002+05:302022-11-17T12:16:27.386+05:30Missile attack on Poland : no takers for Ukraine story<p> A missile landed in a village in Poland yesterday killing two persons. Ukraine was quick to denounce it as a Russian missile attack on a NATO country. If true, it could lead to the invocation of Article 5 under which the attack would be deemed to have happened against all of NATO and could provoke a suitable retaliation.</p><p>Well, that's not happening in this case. Poland says the missile is not Russian. NATO boss Jens Stoltenberg thinks the missile probably emanated from Ukraine. Biden has said it is unlikely the missile was fired from Russia. So, at the moment there is no prospect of NATO getting dragged in. </p><p>Former CIA analyst Larry Johnson provides an interesting <a href="https://sonar21.com/ukraines-epic-fail-at-manufacturing-a-false-flag/">analysis</a>. He contends that it was probably a 'false flag' operation by Ukraine intended to get NATO involved</p><ul style="background-color: white; box-sizing: border-box; color: #333333; font-family: "Source Sans Pro", sans-serif; font-size: 18px; margin: 0px 0px 30px; padding: 0px 0px 0px 40px;"><li style="box-sizing: inherit; list-style-type: disc;"><a href="https://inews.co.uk/news/poland-missile-kills-ukraine-nato-crisis-talks-1974280" style="background-color: transparent; box-sizing: inherit; color: #174616; transition: color 0.2s ease-in-out 0s, background-color 0.2s ease-in-out 0s;">The missile landed</a> in the <a href="https://inews.co.uk/news/world/blackouts-across-ukraine-as-russian-missiles-target-energy-system-1973722?ico=in-line_link" style="background-color: transparent; box-sizing: inherit; color: #174616; transition: color 0.2s ease-in-out 0s, background-color 0.2s ease-in-out 0s;">Polish village of Przewodów </a>in the east of the country, about four miles from the Ukrainian border. ....</li><li style="box-sizing: inherit; list-style-type: disc;">The closest Russian ground forces, who in theory could have launched this missile, are located east of Kherson. The distance from Przewodow to Kherson is 613 miles. That distance exceeds the capability of the S-300 by a factor of 3.5.</li><p style="box-sizing: inherit; line-height: 1.6em; margin: 0px 0px 20px; padding: 0px;">The S-300 was fired by Ukrainian forces located somewhere to the west of Kiev. It is highly likely that U.S. and Russian satellites recorded this launch. In other words, both sides know where the S-300 originated.</p><p style="box-sizing: inherit; line-height: 1.6em; margin: 0px 0px 20px; padding: 0px;">It is highly unlikely — hell, impossible — that this was an “errant” missile that Ukraine fired in a moment of desperation trying to take down an in bound Russian missile. Why? The Russian missiles are flying from the south to the north or from the east to the west. That means if Ukraine is firing an anti-missile defense system at those inbound missiles the Ukrainian missile would travel from west to east.</p><p style="box-sizing: inherit; line-height: 1.6em; margin: 0px 0px 20px; padding: 0px;">But that is not what happened here. The S-300 traveled east to west. Unless the Ukrainian operator who launched the S-300 was drunk on his ass, it is impossible to “accidentally” fire this air defense missile in the wrong direction.</p></ul><p>Johnson provides a possible motivation for Ukraine's misadventure:</p><p><span style="background-color: white; color: #333333; font-family: "Source Sans Pro", sans-serif; font-size: 18px;">I believe this is another indicator of Zelensky’s growing desperation. Think about it for a moment. If Ukraine really had Russia on its heels, why fabricate an easily disproved claim that Russia attacked Poland with a missile? This was sloppy trade-craft. If Ukraine had used another Russian missile capable of flying the distance from current Russian lines to that farm in Poland, then the circumstantial evidence might have ignited the desired fire among the NATO members.</span></p><p>Johnson is among the analysts who believe that Russia is poised for a major offensive and that the end game in Ukraine is probably not very far off.</p><p><br /></p>The Big Picturehttp://www.blogger.com/profile/06018983225756352176noreply@blogger.com0