Helsinki Diary- I

As I await the Air Finland flight to Helsinki at the boarding gate in Delhi, I am in for a big surprise. The flight is full - and most of the passengers are Indian, mostly middle-class people on a group tour. 

The flight departs half an hour late (and lands half an hour late), so India's airlines take heart. The economy section is cramped and uncomfortable and it's warm inside as the plane readies to depart. The airline doesn't provide a bottle of mineral water. You are supposed to trudge up to the flight crew's section and help yourself to a cup of water. Since this means having to disturb the person next to you, it's not pleasant at all. Lunch is frugal and nothing to write home about. There are announcements in Hindi and English, the airline mindful of the large complement of Indians on the flight.

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Helsinki airport is quite small and the immigration counter courteous and quick to clear. I am out in about half an hour or so. It's cold and drizzling outside,14 degrees- and this is supposed to be summer in the Arctic region. I'm glad I have my jacket on and have brought along a sweater. I get into a large-sized cab. It turns out to be a BMW (and yet the fare is no different from that for other cabs). The driver is from Somalia. He landed decades ago and hasn't thought it necessary to ever go back. "It's rather tough out there", he says. It's hard to disagree.

The sights alone the drive from the airport to downtown Helsinki, where my hotel is located, remind me of London, with lots of brickwork-like buildings along the route and plenty of greenery. It's a Sunday, so traffic is scanty. We do the 20 km distance in about 20 minutes. The cab fare is around 50 Euro. As I arrive at the hotel, a seafront and several large liners loom into view. Helsinki has five ports and this one comes right into the city. There are plenty of cruises from here to Stockholm, St Petersburg and elsewhere.

Scandic Grand Marina is a four-star hotel. It wouldn't compare with Taj Vivanta although the tariff is comparable to that at Taj Colaba. There is a flight of steps to climb from the road into the hotel. No attendant comes rushing nor is there a doorman. I have to lug my bag up the stairs up myself. There is a smallish lobby leading to the only restaurant. Just two people at the counter to do the check-in and check-out. You understand what it is to be in a high-wage country (Finland has a per capita income of around $30,000).

I had asked for a sea-facing room. What I get is a room facing the conference centre. Standing at the window and viewing the outside from a sharp angle, I get a glimpse of the sea. The room itself is quite utilitarian. Surprisingly, there's no indoor heating. I'm told a room heater can be available on request. I had seen the menu card put up at reception and my heart sank. There is a very limited number of items on offer (quite unlike the multi-page menu you get at an upmarket hotel in India) and, except for one item of salad, no vegetarian food.

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The next morning, I head for Aalto business school where the conference is to kick off. I'm there for the European Workshop on Efficiency and Productivity Analysis. Helsinki has free wi-fi in most places in the city. I look up Google Maps and know which tram to take and where.

I step out of the hotel and make way to the tram stop. The narrow road from the hotel gives way to a broader one about 100 metres away. I walk pass Market Square where fresh vegetable, fruit and other foods are on offer. This is a typical downtown location of an European city. Broad avenues with parks and other greenery at regular intervals at the centre. Cafes and other restaurants on either side, along with upmarket shops selling clothes, jewellery, hand bags and what have you.

I have to stop and ask for directions every now and then. I am to find over the next few days that people are uniformly courteous helpful. This is probably the friendliest country I've ever been to.
Finland has a population of just five million. It was ruled for nearly 150 years by Sweden and then by Russia, becoming free, I am told, in 1917. It is part of the Nordic states and its economy conforms to the Nordic model- high taxes (43% at its highest in Finland) and free provision of education at all levels and high-quality medical care. It also has an excellent public transport system, comprising buses, trams and a metro, and cycling paths all over the city.

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I board the tram. Most drivers, I notice over the stay, are female. There's no conductor, you pay the driver as you enter. (Doubt that this would work in India). I know from Google Maps that the ride is about 20 minutes long. I keep glancing at my watch. It turns out that there is a lady next to me who is also headed for the conference. Twenty minutes later, we ask somebody if we are close to Aalto. We learn we are and hop off. It's a good ten minutes from the tram stop to the business school.

There's not much of a formal inauguration. The first day is spent on workshops for students. I head for the finance department. Some of the offices are open. I knock on a door titled, 'Director of finance'- I guess it must be the head of the department. A professor with his back turned to me and bent over a PC wheels around on his chair and looks up. I ask,"Do you have few minutes"? He breaks into a grin. "Of course".

I walk in and take a chair. I introduce myself. I tell him I want to know something about the school. He chats with me for a while and then puts me on to a colleague. Aalto is Finland's leading business school. Both students and faculty are overwhelmingly from Finland but that's changing of late.There is a huge effort to recruit faculty from outside by offering competitive pay. A business school degree is not part of the mainstream university courses, so Aalto charges a fee for its undergrad and MBA programmes. I am surprised to learn that placement- which is really the whole point about a business school- is not very active at Aalto. Not many companies come to the campus  to recruit. Students have to apply on their own. If this happened in India, b-schools would lose their clientele.

I ask about Finland's high school education model of which I have heard so much. Kids go to school only when they are seven.There are no exams until the final stage. The teacher to student ratio is amongst the best. School teachers are well paid, well-educated and highly respected in society. The prof remarks, "This system is good for bringing everybody up to a certain level but it's not good enough to achieve excellence". I guess that could pass for a comment on socialism in general. What he omits to mention is that it may be difficult to achieve excellence until society as a whole first reaches a certain level. Ask the Russians and the Chinese.

Aalto b-school is part of Aalto university. The university itself is split across three campuses, one of which is close to my hotel. The b-school has another building, called the main building, which houses mostly the administrative staff. I am put in touch with the international exchange coordinator. I'm pleasantly surprised to learn that IIMA has an exchange arrangement with the b-school and a couple of students on either side have been going over for the past several years.

Not far from the B-school is one of the best-known sights of Helsinki, the Rock Church, a whole church burrowed into a natural rock formation. I enter the cavernous structure and am amazed to see a beautifully lit church inside swarming with tourists. There's a lady playing the piano. I sit on the one of the benches and take in the mellifluous notes.
 

The Great Reversal: developing countries no longer the growth engine

After the financial crisis, there was much talk of "decoupling". This meant that growth in the developing world would  be de-linked from that in the developed world which was weighed down by the financial sector. The developed world might suffer slow growth but, for a variety of reasons, the developing world would grow rapidly so that "convergence" - the catching up of the developing with the developed world- would happen sooner than thought. So it was for about three or four years after the crisis.

Alas, like most economic forecasts, this one has met a sorry fate. The World Bank now says that it is the developed world that will be the growth engine of the world. Developing countries will see growth slowing down- with India and China being notable exceptions. What explains the slowdown in the developing world? One can point to a range of factors, some of which are specific to a few economies:

• China's economy is slowing down, in part inevitable following the high growth rates of several years
• A slump in commodity prices (to which China's slowdown has contributed) is affecting several leading developing economies, notably Brazil and Rusia
• Much of the boom in production and trade in the Asian countries was China-centred and these economies are feeling the effects of the Chinese slowdown
• The impending reversal of interest rates in the US is a big factor. Already, emerging markets have seen huge outflows and this is likely to intensify once the Fed decides to hike interest rates. 

In short, the two great themes of the past decade- China's rapid growth and cheap credit- are now diminishing in importance.

India looks good in relation to a range of developing countries- a growth rate of around 7.5%  and a current account deficit of around 1-1.5% this year makes it a bright spot. But the global slowdown is bound to have its effect- export growth will be muted. A return to 9% growth looks very unlikely in the medium-term- we will be lucky to touch 8%.

India's big problem is that low employment elasticity of income in recent years means that 8% growth just cannot generate the jobs it needs. The signs in recent weeks of Modi emphasising equity rather than pushing for growth suggest that the PM has seen the straws in the wind.

Who needs labour reforms?

There is a continuous clamour in India for labour "reforms" which, shorn of euphemism, is really about the employer's right to hire and fire workers. Without this, proponents of such "reforms" say, you can't expect manufacturing to take off in India. How valid is this contention? A paper in EPW explores this question and comes up with answers that will confound advocates of labour "reforms":

• When we argue against onerous regulations that govern labour markets, the first question to ask is whether the labour market needs regulation at all- why not leave it to market forces? Well, the question is answered even in the developed markets where there are regulations governing the minimum and even the maximum number of working hours per week (as in parts of Europe). Nobody seriously believes that the labour market should be a "free" market. - just as nobody believes that credit should be left to the "free" market.
• How stringent are dismissal laws in India?  The authors show, using an index, that France's laws are more stringent- and that hasn't stopped the French from prospering over the past century. More significantly, China  made its labour laws more stringent in 2007- and are comparable now to those in India (although there might be special zones that are exempt from the operation of these laws).  
• The authors also note that the literature on employment protection laws shows that such laws are seen to be correlated with increases in productivity. Why would this happen? Because giving workers a measure of protection encourages them to invest in firm-specific skills. 
•  Dismissal laws, along with a greater voice for workers at work and collective bargaining for wages, are seen to lead to more egalitarian outcomes. I would add: it's important that workers perceive the system as fair if we are to have a measure of industrial harmony. You can't have hire-and-fire for workers when promoter-management faces no consequences for bad decisions by being ousted from management. It cannot be that losses lead to workers being sacked while management stays put.
•  It's true that Gujarat has experimented with a measure of deregulation in labour laws. However, it would be incorrect to say that it is this factor that is responsible for Gujarat's success in industry. Gujarat has a number of other favourable factors- a tradition of entrepreneurship and ports, to name only two. Moreover, Maharashtra has matched Gujarat's industrial record without labour law deregulation.

RETHINC, my latest book, is out

My latest book is out- Rethinc: what's broke at today's corporations and how to fix it, published by Random House. Here's the blurb:

Corporations are crucial to society’s well-being. Yet, not many have chosen to adapt themselves to the expectations of employees and society at large in the times in which we live. In RETHINC, Prof Ram Mohan identifies three main problems that ail companies and proposes ways in which these can be combated. Most companies are still run from the top and make very little attempt to involve employees at lower levels in decision-making.  Executive compensation has spiralled up steeply in recent years because the process of setting it is seriously flawed. Boards of directors are ineffective and have abetted the cult of the charismatic CEO who is expected to work wonders. 

RETHINC contends that the solution lies in the near-total dismantling of hierarchy or the ‘boss-less’ organisation. In such an organisation, the structure is flat, employees operate through self-driven teams, there is peer review, freedom to express oneself, power rests on one’s contribution and not one’s title and the organisational purpose goes beyond the making of profit. There are limits on variable pay linked to performance and pay is more egalitarian. Board effectiveness is ensured through a very different process of selection of independent directors. The office of CEO is demystified and it is the system that is the star, not any individual. Once all this is done, we will have an achieving organisation that is also a humane organisation- an organisation in which employees are raring to get to work every day.  

I do hope the book gets managers and students at B-schools thinking seriously about running corporations very differently from the way they are run today. 

Praise for the book:

A compelling read for corporate chieftains and observers alike. This book is certain to make both participants in the corporate world and students of management sit up and take notice.

- M Damodaran, former chairman, SEBI

It takes courage to take on Holy Cows, and conviction to state a contrarian view. Prof. Ram Mohan lacks neither.

R Seshasayee, Executive vice chairman, Hinduja Group India  

Provocative and engaging, the book should be read by all who are groping for a better society through more humane corporations

 -Prof P N Khandwalla, former director, IIM Ahmedabad 

Here are some excerpts:


Google Books: https://books.google.co.in/books/about/Rethinc.html?id=2VFDCQAAQBAJ&hl=en 

Here are some useful links to the book:

Amazon: http://www.amazon.in/Rethinc-Whats-Broke-Todays-Corporations/dp/8184006810

Flipkart: http://www.flipkart.com/rethinc-whats-broke-todays-corporations-fix-english/p/itme6whmfacexujq?pid=9788184006810

 

Want the best jobs? Get into a top school and game the recruitment system

How does one land the best- paid jobs (and not necessarily the best jobs) which happen to be in investment banking, consulting and law (and, to some extent, technology companies)?

Well, for starters, you have to get into a top school. But, once there, don't spend all your time on studies. Make sure you have a great extra-curricular record. Many of us know this but there's weighty confirmation in a book that's just come out- Pedigree; How Elite Students Get Elite Jobs, written by Lauren Rivera, a US sociologist. Gillian Tett covers it in FT and Schumpeter writes about it in the Economist, each looking at the book from different angles.

As the title of the book suggests, recruiters are looking for 'pedigree' or class, which is evidenced in social behaviour. And such pedigree is best had by either belonging to the elite class or by picking it up through a variety of extra-curricular activities- at least recruiters seem to think so. So, it makes sense to be good at music or sports or debating or whatever.

The key question is: apart from having the right CV (including ECA), how do you impress the recruiter as having the right pedigree? Schumpeter gleans invaluable tips from the book:

Be vivacious. Hang on their every word. And flatter their (the recruiters') self-image as “the best of the best” and the most jet-lagged of the jet-lagged.....It is easier to give the impression you will fit in if you have swotted up on the firm in question. Speak to any friend-of-a-friend you can find on the inside, to learn about its internal culture and its inside gossip... you must at all costs avoid appearing nerdy or eccentric: there are plenty of jobs with tech companies for those types. 

...The final key to success is to turn your interviewer into a champion: someone who is willing to go to bat for you when the hiring committee meets to whittle down the list. Emphasise any similarities that you can find between the two of you.

Clearly, the top firms appear to value style over substance, once a certain minimum IQ level is assured. More depressingly, they seem to value sameness over diversity. That raises the question: if the top firms have people who think and behave alike, how do they get to performing well? I thought diversity was the essence of team performance.

Is it wise to allow a tax deduction on interest?

The Economist thinks it's not. It calls tax deduction allowed to interest payments "the great distortion". It estimates tax revenue forgone on this at 3% of GDP in Euope and 5% of GDP in the US. But this is not the only damage it causes, the journal says. The bigger problem is that it gets individuals and companies to build up leverage, and this renders economies fragile- as happened in the sub-prime crisis.

What do we make of these arguments? Well, the Economist's arguments haven't really been couched in precise terms. There are two components to the question. The first is: should interest be tax deductible? The answer is, yes, for the simple reason that interest is an expense- and there's no reason why it should be treated differently from other expenses. Besides, as economist Tyler Cowen points out, if companies did not have incentives to take on debt, they would use cash for all expenditure. They wouldn't have cash hoards as a result and would go bankrupt more easily. Thirdly, tax deduction of interest expense and tax paid on interest earned are two sides of the same coin- what you save by tax deduction, you pay as tax on your savings, subject to inefficiencies in the system.

It's the second part of the question that is more important: should debt be taxed differently from equity? The higher tax shield on debt gets companies to use more debt than they would otherwise. It is this that renders them more vulnerable. The Modigliani-Miller proposition 1 says that, in the absence of taxes, it doesn't matter whether a company uses debt or equity. Once you introduce differential tax rates for debt and equity (with debt treated getting a higher tax shield), debt is advantaged over equity. This is where the distortion arises.

When we look at the real world, however, we finds lots of 100% equity companies but no 100% debt companies. The best performing companies, such as Apple and Microsoft or, for that matter, Infosys in India, don't bother to avail of the tax shield on debt. Why? Because they are run so efficiently - in terms of their market cap- that they couldn't be bothered with the tiny addition to market cap that debt would confer.

For companies that aren't run as well, however, the addition to market cap provided by the debt tax shield does matter. If we made the companies fully reliant on equity, there would be a cost to shareholders. Either shareholders must accept a lower return- which would limit companies' access to equity- or consumers must pay a higher price. The economy suffers as a result.

The really big distortion is in banking.There, leverage is 33:1 or even higher because of the implicit safety net given to banking. But the answer to this problem is not eliminating the tax shield on debt but finding ways to limit the safe net for banks!

Shining shoes can be more satisfying than being a banker

Read Lucy Kellaway's caustic piece in FT.

A shoeshine boy in London tells her why his job is better than a banker's:

• “I don’t have to be clever,” he said. “I can be as dumb as I like. I’m not trying to impress anyone".
• The next good thing about the work, he said, was the satisfaction in the job itself. You take a pair of dull shoes and eight minutes later they are sparkling.
• Third, and possibly most important of all, is that shoe shining, in marked contrast to banking, gives its customers pleasure.  
• Fourth, the chat is nice. According to Marc most people in the City are starved of decent conversation, and longing to tell their shoe shine man all sorts of interesting — and sometimes scurrilous — things. 
• Finally, he chooses his own hours. So he shines shoes at lunchtime when trade is brisk, and works as a translator the rest of the time. There is no management, no politics. 

Piku

I saw a movie at a theatre after a long, long time. And it turned out to be worthwhile. Piku is a thoroughly enjoyable movie.

A whole movie centred on an aged man's bowel movements? Sounds incredible but Piku pulls it off. Amitabh Bachchan's constipation problem is only a means for exploring relationships- between an old man and his only daughter, the daughter and the people who make up her daily life, and the Bachhan-Deepika duo and their extended family.

Deepika is thoroughly modern in every way but, when it comes to her widower father, she cannot shake off her deep-rooted sense of responsibility. Not just her work but her personal life comes to be subordinated to what she perceives as her duty to minister to her father.

It takes a taxi ride all the while from Delhi to Kolkata- the taxi  ride happens because the father won't think of travelling by air or rail- to lay bare the father-daughter relationship. And it requires the taxi owner-driver Irfan to tell Deepika that her father is being thoroughly selfish and that if she carries on the way she is doing, she will be 50 before she can think of her own life- and then, of course, it will be too late. Irfan and Deepika get close towards the end but we are spared the banal tying of the knot....there is just a telling shot at the end of their playing a game of badminton in front of Deepika's house.

I don't want to read to too much into the movie but it does seem that, amidst much that is modern in India today, the heavy hand of tradition is very much in evidence. There isn't much of a story line but the dialogues and the acting ensure that the movie unfolds smoothly. And the absence of blood and gore and the usual dance routines are a relief. The point about a good movie is that it takes up a simple theme and keeps you absorbed for a couple of hours. It's refreshing to see a Bollywood movie at least once in a while that measures up to the better standards of Hollywood.

Land Acquisition Bill amendment:NDA's folly

The Modi government has headed off a confrontation over the Land Ordinance by referring to a select committee. That's timely and appropriate. The amendments should not have been a priority for the government at all. By making land acquisition a prestige issue, the government has come across as anti-farmer and anti-poor, as more than one opinion survey carried out on the government's first anniversary shows.

There's no truth to the contention that delays in acquisition are a big factor in projects being stalled. The Economic Survey has highlighted this. It's strange that the media has not highlighted the point adequately and it required Nitin Desai to point this out in his column in BS:

This year's Economic Survey has a full chapter on what is holding back the revival of investment. As part of this, after a careful analysis of stalled projects, it concludes that, "over-exuberance and a credit bubble as the primary reasons (rather than lack of regulatory clearances) for stalled projects in the private sector." In Table 4.3, which lists reasons for project hold-ups, land acquisition does not even figure as a reason for the stalled projects in the private sector but does for the public sector projects. The other bugbear of the corporate sector, environmental clearances, does not figure in the list, though non-environmental clearances do.
An RTI activist, Venkatesh Nayak, obtained more granular information from the ministry of finance for the 804 stalled projects that were the basis for the Economic Survey chapter. This detailed information showed that of the 804 projects only 66 were stalled because of land acquisition problems. Incidentally, these 66 include 10 projects for hotels, resorts, malls and airports.

Desai cites a study which makes an interesting point. There was acquisition of land by government before 1991 and after 1991. Land acquisition before 1991 did not stir up any major controversy. Why? Because it was patently for public purposes. Post-1991, acquisition became a looting game for corporates abetted by the political class. The UPA government had a big role in the misuse of land acquisition in the name of SEZs.


It's hard to disagree with Desai's bottomline on the subject:

The role of the state in land acquisition for commercial market-oriented private or public projects should be as a facilitator and overseer of transactions involving large-scale purchase to ensure compliance with the law made for this purpose, running a localised Torrens system for providing absolute titles for the acquired land, and promoting the use of land adjustment schemes where feasible. Compulsory acquisition should be restricted to very precisely defined non-commercial public purposes.

CEO pay: who will bell the cat?

What has done the most damage to the reputation of business and the free market in recent years? It hasn’t been the G20 protests or the Occupy tent cities. It has been the greed of those who demand and secure rewards for failure in far too many of our large corporations.

That's a quote from the head of UK's Institute of Directors in an article in the FT. Do people at the top need variable pay? Does variable pay have to be in the form of shares or stock options or can CEOs be paid simply in cash? Can peformance be linked to measures such as productivity and not to share price increases which can happen for reasons independent of a CEO's efforts or even the company's performance?

These questions are being asked often in the UK, US and elsewhere. Nothing has happened so far thanks to powerful interests in the corporate world (and that includes top management of institutional investors who are supposed to hold corporate CEOs to account- it turns out they are paid the same way as CEOs, as the article points out).

Here in India, these questions are not even being asked. Instead, the media celebrates massive pay packets in the corporate world ('The club of million dollar CEOs') without regard to the implications for harmony in a very poor and unequal society.  Okay, the politicians don't want to bell the cat. But how about the regulators, such as RBI and SEBI?

Ten commandments for errant bankers

The world's five top banks agreed last week to cough up $6 bn to settle allegations of manipulation in the forex markets. Is any banker going to jail? Nope. Is any banker or board member losing his job? Nope. The shareholder pays- and life goes on.

It can't go on like this, warns an article in the FT. The author lists ten commandments that bankers must take note if they are to stay higher in the public esteem than, say, bank robbers.

Is higher education worth the expense?

The world over, more and more people want higher education. Is it worth it? The Economist attempts to answer this question.

It's certainly worth it for students-a bachelor's degree earns a return of 15% on the average in the US, despite escalating costs of higher education.  But does society benefit?  This is not as clear. Why? Because- incredible as it may sound- the best universities may not be adding value to their students. How do we know this? Through poor student scores on tests and the testimony of employers.

We have this state of affairs because leading universities focus on research and neglect teaching. Top professors don't want to 'waste' time on teaching when their professional rewards are linked to publishing papers. The work is delegated to adjunct faculty and research assistants who deliver indifferent material to overcrowded classrooms (since universities want to maximise fee earnings).

If so, why do employers hire the products of higher education? Well, not for what they learn but for their innate talent. Education is valued for its signalling value- if a student has made it to a good schools through a selective process, he or she must be good. Not because it makes the student more productive. In other words, the enormous amounts that students and universities spend on a degree is money down the drain.

Those of us who are at B-schools will not be shocked by these propositions. Employers have been hiring from, say, the IIMs not because they see the IIMs as adding much value but because the IIMs are highly selective. (I mention IIMs only by way of illustration- the same is true of the top B-schools elsewhere). Students coast through the two years, focusing more on placement and networking, perhaps because they believe that there's nothing much to be learnt anyway. Mind you, it's not that B-schools don't add any value- if so, employers should hire from the admissions lists, they should not wait for those who have been admitted to go through two years. But neither students nor employers think that the value addition is substantial.

What can we do about this? How do we ensure that higher education adds value. The Economist has useful suggestions:

More information would make the higher-education market work better. Common tests, which students would sit alongside their final exams, could provide a comparable measure of universities’ educational performance. Students would have a better idea of what was taught well where, and employers of how much job candidates had learned. Resources would flow towards universities that were providing value for money and away from those that were not. Institutions would have an incentive to improve teaching and use technology to cut costs. Online courses, which have so far failed to realise their promise of revolutionising higher education, would begin to make a bigger impact. The government would have a better idea of whether society should be investing more or less in higher education.

I would go further. Schools should track a sample of their products through their careers for, say, five years after graduation. They should seek to ascertain from employers whether they perceive value addition from these products, whether employers see students as having benefited from having gone through a graduate programme. This feedback can be used to modify school curricula. We also need to find ways to incentivise better teaching, say, by linking rewards to ratings of faculty by students.

Harvard, take this!

Quote of the day:

You have to admire Niall Ferguson. There aren't many people who are willing to write lengthy diatribes on topics on which they seem to know next to nothing, but some would say that is the definition of a Harvard professor.

The quote is from Dean Baker blogging at the Centre for Economic and Policy Research.  Fergusson, the historian now at Harvard, has lashed out at Nobel Laureate Paul Krugman for his criticism of austerity policies in Europe and elsewhere.

I had referred in an earlier post to the record of the Cameron government in the UK and its impact on the recent British polls. Baker rebuts the view that the Cameron economic record is anything to write about. 

Revamping public sector banks

The government has a blueprint for revamping public sector banks even if it has not made it explicit. Broadly, it appears the government is set on the course chalked out by the RBI-constituted PJ Nayak committee on governance which came out with its report in May 2014. I have commented on the report in my blog. Just to mention some key recommendations and what the government has done so far:

• Separate the roles of chairman and managing director: Announced. Committee to select a chairman constituted, which will be headed by the RBI governor. The Nayak committee wanted the separation to be effected at the end of Phase III (mentioned below), the government has done so right away.
• Improve compensation at PSBs so as to attract a wider pool of talent: The finance ministry has advertised the position  of CEO at five PSBs and indicated that it is flexible on the compensation package.
• Phase I: Set up a Bank Boards Bureau: This will comprise eminent bankers, other professionals and one representative of the finance ministry. The  BBB will select CEOs, independent directors and (in future) chairmen of banks. It will also advise banks on raising capital and restructuring strategies. This was announced in the last budget but the BBB is yet to be constituted.
• Phase II: Set up a Bank Investment Committee to which the government's shareholding will be transferred. The BIC will take over the role and functions of the BBB. The BIC's stake in PSBs to fall below 51% so that PSBs are exempted from CVC, CAG and other requirements.
• Phase III: Devolve all powers to independent boards of banks. Government may consider reducing its stake in the BIC itself to below 51%.

I am not sure that the political economy of the country will allow PSBs to get out of grip of the government in the near future. That apart, we need some quick decisions on PSBs. We really can't wait for the BBB to be set up before PSBs can move ahead. We need bank lending and private investment to revive quickly.

How do we achieve this? I explain my article in the Hindu, Get real with public sector banks.

Bihar as poster boy for PDS?

I had a post recently on plugging leakages in the public distribution system (PDS). I cited an article which argued that making the PDS more universal results in lesser leakage.Why? Because there is less incentive to divert from those qualifying to those not qualifying for PDS.

The evidence from Bihar appears to support this, as Jean Dreze argues in a recent article. The application of the National Food Security Act (along with other PDS reforms)- with its emphasis on more universality- appears to be resulting in lesser leakage in Bihar. The state had leakages of the order of 90 per cent. By 2011-12, it was down to around 24%. More recent surveys corroborate this piece of data.

Apart from universality, the manner in which allottees are assigned for ration cards is helping. Earlier, allottees were based on their being identified as being in the BPL category- and this was highly arbitrary. Now, allocation of ration cards is linked to the Socio-Economic and Caste Census. This is more transparent and more inclusive than the BPL identification.

Dreze says that the turnaround in PDS in Bihar is also because the NFSA and PDS are politically charged issues- politicians now have to deliver to appease the electorate.

This reinforces the point made in the earlier post: if PDS is showing such improvement, what would be the case for moving to cash transfers? We would be moving from something that is tried and tested to something that is not. And if we can't plug leakages in PDS, there's more than a fair chance we won't be able to plug leakages in cash transfers either.