Economists who left a lasting impact- and who didn't

There's a terrific article by John Kay in the Financial Times on the two economists who last a lasting impact on their times- Keynes and Friedman, others- Schumpeter, Galbraith- who didn't and yet others- Sen and Stiglitz- who won't. No student of economics should miss it.

In a nutshell, Kay argues that academic leadership is not just about scholarly ability, it requires sustained effort in creating a school of thought and the ability to draw followers- in other words,
perseverance as well as human qualities. Otherwise, you remain a renowned scholar, not the founder of a school of thought.

Here's Kay's take on Schumpeter and Keynes.

Schumpeter rivalled Keynes in range of experience and subtlety of thought, and surpassed him in breadth of scholarship. But his impact on intellectual life and practical affairs was slight compared with that of his English rival......

Schumpeter knew that his rival’s work had far greater influence. His critical essay on Keynes in History of Economic Analysis both displays his bitterness and identifies the reasons for Keynes’s greater success. Schumpeter expresses genuine admiration for the courageous publication of The Economic Consequences of the Peace. Keynes was, Schumpeter recognises, a natural leader who gave others confidence and inspiration.

Schumpeter would observe of himself: “I singularly lack the quality of leadership – with a fraction of my ideas a new economics could have been founded.” That new economics did not happen. There would be a Keynesian school, a Keynesian economics, but no Schumpeterian school, and really no Schumpeterian economists.

As for the contest between Friedman and Galbraith, in terms of lasting impact, there was no contest- Friedman has won hands down.

In the generation that followed Keynes and Schumpeter, John Kenneth Galbraith (born 1908) and Milton Friedman (born 1912), were the two most prominent public intellectuals among economists. If Schumpeter is more admired than read, Galbraith is more read than admired.....

Like Schumpeter, Galbraith never had time or inclination for the university and the gift for dry, academic observation which was his stock in trade was best deployed in perpetual opposition. If Schumpeter lacked qualities of leadership, Galbraith chose not to exercise them.

The method of dissemination of the Chicago school (led by Friedman) was similar to that of the Keynesians: a relatively simple ideological message for communication to the world outside; a new, difficult, yet extensive theoretical framework; and a dedicated band of supporters who would entrench the doctrine in other economics departments.

What about Amartya Sen, Joseph Stiglitz and Paul Krugman, today's reigning gurus?

Sen is, in a natural sense, the Schumpeter of our times. He shows a breadth of erudition and subtlety of mind unparalleled among other economists. But, like Schumpeter, Sen is an isolated figure. There will be no Sen school. Nor, it would seem, will there be a school of Stiglitz: a generation of students looks for a counterweight to Chicago, but the school’s potential leader has not found the application to develop a coherent and comprehensive critique that such a leadership role would today require, or the aptitude or inclination for academic
politics. And the dissonance between Paul Krugman as polemical columnist at The
New York Times, and his professional work at Princeton, seems too great.

"Solutions" to the market crisis

You may not guess it from the buoyant state of the Sensex but international markets are still gripped by fear and uncertainty. There are some who believe that the most obvious solution- interest rate cuts effected by central banks- will not suffice, although central banks, and especially the Fed, have been careful in using this instrument.



I see two other solutions being tossed around:

• Fiscal intervention, that is, government bail-outs of distressed institutions, not just banks. This is based on the premise that interest rate cuts will not be adequate. In the US, the government-backed agencies such as Fannie Mae have been asked to step in to save mortgage institutions.


• A rescue of distressed institutions by private banks and investments a la the rescue of the hedge fund LTCM in 1998. An article in FT proposes the creation of something akin to an asset reconstruction corporation for various credit instruments for which there is no market at present.

What do we make of these solutions? First, I don't believe that the situation is so bad that fiscal intervention will be widely required. As for private institutions doing a rescue act, don't forget that LTCM was rescued under "moral suasion" exercised by the Fed, it wasn't entirely voluntary. For banks to do so now, they would have to be convinced that this is a profitable exercise. As the FT article makes clear, there is a problem in making this determination: it's very hard to put a fair price on many of the distressed credit assets.

I don't see private banks, accountable to shareholders, undertaking this task. The first order of business, really, is for all concerned parties, to come clean on their distressed exposures. Only then can central banks get a fix on the magnitude of the problem. Central banks must make liquidity available. Some banks may have to be bailed out.

That's about it. For the rest, we should wait for some of the panic to subside- and like grief, it will over time. Then, private parties will swoop on attractively valued distressed assets and the clean-up will begin. There is enough capital sloshing around to do this job. Governments are not required to do this. And private firms need not be mandated to do so.

As you can see, I'm rather more optimistic about the resolution of the present uncertainty than many others.

Analysts back in favour !

Analysts were in the doghouse after the American stock market bust of 2001. There were sweeping changes in the leading investment banks relating to research (including the much-trumpeted separation of analysts from investment bankers). Now, the Economist reports, analysts are back in demand. For various reasons:

• In bad times, analyst calls and research in general are more valued than in good times- in good times, everybody is just focused on piling on to the usual stocks.
• Analysts performance is better monitored and rewarded at investment banks with bold (and correct) calls earning high bonuses.
• Quantitative models have performed badly of late leading to a revival of "fundamental analysis".

The Economist contrasts the improved performance of analysts with the miserable performance of the rating agencies.

The audacity of some analysts stands in contrast to the spinelessness of Moody's and Standard & Poor's, which showered complex structured products with top-notch ratings and then twiddled their thumbs until they could no longer avoid downgrading them. By growing too cosy with their paymasters in structured products—the banks that package them—the rating agencies have ended up hopelessly in knots. A bit like equity analysts during the dotcom boom, in fact.

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Chinese firms vault to the top!

The dizzying rise of the Chinese stock market has propelled Chinese firms to the top in terms of market capitalization, according to the Economist.

China has three companies now in the world's top ten- Industrial and Commercial Bank of China, Petrochina and China mobile. All but two of the rest are American. ICBC has overtaken Citigroup as the world's largest bank.

The Economist, however, sounds a warning:

In 1989, just before its bubble bust, six of the world's ten biggest banks were Japanese. Look at what happened to them.

Defining the 'basic structure' of the Constitution

'Judicial overreach' has become a vexed issue for the political class and even those outside it will agree that the judiciary sometimes goes overboard in its activism. More than anything else, the Supreme court's ruling in 2007 ( IR Coelho vs state of Tamil Nadu) has the potential to create big waves on this subject.

In that case, the SC ruled that the power of judicial review extends to the Ninth Schedule of the Indian constitution. Under the Constitution, as amended in 1951, legislations inserted into the Ninth Schedule cannot be challenged on the ground that they violate the fundamental rights of the Constitution. In the 2007 ruling, however, the SC pronounced that it had the power to review legislations in the Ninth Schedule if they violated the 'basic structure' of the Constitution. The doctrine of 'basic structure' was propounded by the SC in the now famous Kesavananda Bharati case in 1973.

In the EPW (August 4-10), Madhav Khosla notes that following the ruling in the Coelho case in 2007, it is now open to the SC subject all legislations incorporated into the Ninth Schedule post April 24, 1973 to judicial review. One immediate implication, as others have pointed out, that the provision of quotas upto 69% in Tamil Nadu can now be challenged.

Khosla believes that, given the record of judicial activism in the recent past, such 'unbridled power of judicial review' is not desirable. He suggests that the SC clearly define what it means by 'basic structure' instead of preferring to apply the test of 'basic structure' on a case by case basis.

I am no legal expert but I doubt that it is possible or desirable for the SC to define the 'basic structure' to encompass all possibilities. Situations could arise that are incompatible with the spirit of 'basic structure' but that had not been taken into account in any definition. It is far more preferable for the courts to exercise judicial restraint and, of course, to push ahead with proposals to usher in greater accountability in the judiciary in general.

Was Jinnah secular?

I suppose this is one of those questions that will be never settled like the one about partition being inevitable. People will keep coming up with answers based on whatever new information is unearthed.

In EPW (August 11-17), Pervez Hoodbhoy tries to answer the question: was Jinnah only in favour of a Muslim majority state (where non-Muslims would have equal rights) or did he want an Islamic state?

Much is made of two speeches where Jinnah is seen as expressing himself against a theocratic state. However, sifting through Jinnah's various pronouncements at other times, the charitable conclusion that Hoodbhoy comes to is that Jinnah preferred to maintain ambiguity on the subject. He was not beyond declaring that Pakistan would be governed by the fundamental principles of the Shari'ah when it suited him.

Hoodbhoy contends that Jinnah's ambiguity was aimed at retaining leadership in Pakistan- had he been entirely forthright in his views, he may not have been able to do so. More interestingly, Hoodbhoy argues that even if Jinnah favoured an Islamic state, that would not be saying much given that the true nature of the Islamic state has been highly contentious in history.

I am surprised that Hoodbhoy does not state the obvious. Having propagated the two-nation theory, it would have been difficult for Jinnah to argue wholeheartedly in favour of a secular state. If such a secular state was possible, why create a separate nation in the first place?

Hoodbhoy concludes:

He (Jinnah) certainly did not want a theocracy or a Taliban state, nor
one in which the non-Muslim minorities would be persecuted and harassed (as they are today). But Jinnah's statements at different times and circumstances are far too widely spread out to conclude anything substantial beyond these
truths.

An exit tax for IIT/IIM products?

I wouldn't have thought brain drain would be a big issue today, seeing that we are seeing a modest return of highly qualified NRIs. Apparently, it is.

Outlook magazine has a story on the parliamentary standing committee of the HRD ministry considering an "exit tax" or IIT/IIM graduates leaving the country:

The panel's report, submitted to Parliament last week, has sparked off a heated debate within government and academic circles. Some feel students who enjoy the benefits of a highly subsidised education should serve the country—or be penalised. Others find the proposed tax impractical, impacting only poorer students who may be unable to pay up even though they get lucrative job offers or scholarships from abroad.

............ an IIT graduate pays Rs 40,000 per annum as fees while the state spends nearly Rs 1.50 lakh on him for the period. The state subsidy for an IIM student is higher at Rs 3.5 lakh per annum. Interestingly, almost a year before passing out, students from these premier institutions are wooed by companies with annual salaries of at least Rs 6 lakh—it's higher for those going abroad. So, isn't the state fair in asking for its share, runs the argument.

These arguments are not new. But the implementation issues have been formidable. At what point is the tax to be collected? Is a candidate expected to make a declaration to the Income tax department that he or she is an IIT/IIM product and leaving the country and, therefore, wishes to have a clearance certificate? What if the compensation is understated? Is the passport supposed to carry a stamp saying the candidate is from IIT/IIM? In the case of fresh graduates leaving immediately after graduation, they may not have the resources to pay the tax. So, are they expected to raise a loan? Will banks provide loans to departing individuals? And what about graduates who return after a few years' experience? Are they eligible for a tax refund? And why only IIT/IIM products?

Get the idea? The more you think about it, the more you realise the problems in implementing such a scheme. And what would the total collection amount to? Would it serve any purpose other than satisfying some people that a 'penalty' has been imposed on those betraying their 'lack of patriotism'?

I must mention here that there is already a means available to the IIMs to recover some of the subsidy incurred on their products. There is a fee that is levied on recruiters and the fee has risen steeply for foreign recruiters. Perhaps, this can be jacked up even further. The graduate does not pay out of his or her pocket but the institution does recover some of the subsidy. The calculation of the subsidy itself is a vexed issue and there is reason to believe that the figures tend to be inflated.

Some of those interviewed by Outlook think the answer is to phase out the subsidy through higher fees. That is clearly not the way to go, in my view. The IIMs accepted this when they agreed to take care of a portion of the costs of those coming from families with an income of less than Rs 2 lakh. Any increase in fees at the IITs and IIMs will mean an increase in fees in all other institutions and this will undoubtedly go against the idea of greater inclusion in higher education. It will not just not fly with the political class- so forget about higher increase in fees.

I also think that we can afford to be a little more relaxed about the issue of 'brain drain'. Indian professionals who go abroad contribute in various ways: they send remittances, they create networks between foreign firms and Indian firms, they play a role in getting foreign firms to invest in India and, over time, there is diffusion of the intellectual wealth they create abroad. So the "loss" on account of brain drain, it turns out, is not as high as was previously supposed.

Not least, the departure of these brains has not come in the way of India touching a growth rate of 9%- so what are we fretting about? Let me put it this way. When India was trapped in a growth rate of 3.5%, we didn't do anything about the emigration of highly qualified professionals. It does seem a little odd to think of an 'exit tax' at at time when the Indian economy is doing much better and professionals are also thinking twice about leaving.

I say: tax the recruiters through stiff fees at the campuses- and leave it at that.

India is hot for investment banks

I have been flagging India's growing importance to the international investment banks adn I've said that the decision of the big ones- Morgan Stanley, Merrill and Goldman Sachs- to go it alone or as the dominant partner reflects this.

Today's FT story on how important India is to Merrill Lynch underlines this. Two factors have been particularly important in making India important to the world majors: rising share issuance and M&A volumes.

India has for the first time become the biggest revenue contributor among Asia’s emerging economies for Merrill Lynch, highlighting the country’s increasing importance for global investment banks.

The trend was driven by a record flow of share offerings and large mergers and acquisitions in India this year, coupled with increasing principal investment by the bank, said Patricia McLaughlin, vice-chairman and managing director, investment banking and M&A at DSP Merrill Lynch. “India has become relevant to Merrill Lynch in revenue terms; not only regionally but globally,” Ms McLaughlin told the Financial Times.

.......Merrill Lynch did not provide figures for its Indian revenues but said they were larger than those for other markets in Asia excluding Japan and Australia.

This year's share issuance undewriting by the top 10 underwritersis $23. 3 bn to date, double that in the same period last year; and M&A volumes are $63.9 bn, again twice as last year. That would explain why Bear Stearns is planning to enter India soon.

The China factor in Indo-US nuclear deal

I have repeatedly argued that the Indo-US strategic relationship, centring for the moment on the Indo-US nuclear deal, is intended mainly to counter China's growing influence in Asia. Strategic affairs expert K Subrahmanyam once again expatiates on this theme in an article in TOI today.

He argues, as US academic John Garver did in his book Protracted Contest (the authoritative work on Sino-Indian relations), that China has tried hard to keep India as a South Asian power by building Pakistan as a nuclear counterweight to India. That would mean India cannot really challenge China in the overall Asian sphere. The US and also major European powers want India to balance China in Asia; they now want India to break out of the India-Pakistan equation. That is part of the rationale for the nuclear deal.

The Chinese strategy of dominating Asia, which all other major powers view with concern, needs India to be kept tied down perpetually by a nuclear-armed Pakistan. The reason why liberating India from technology apartheid sponsored by the US is popular with Russia, France, UK, France and Japan is their desire to see a balance of power in Asia. In the 21st century it is not envisaged there will be wars among major powers. But there would be a constant balancing of power. China when fully developed can only be balanced by a billion-strong India if it develops itself. The other major powers of the world have a vital interest in this. Hence, the US nuclear agreement, India-specific IAEA safeguards and NSG waiver.

There is another angle to the deal which Bodhisatva Ganguli touches upon in the lead article in ET today. The nuclear deal is an enabling device for transfer of sensitive defence and advanced technologies to India. It is odd that this argument has not been made strongly enough in defence of the deal. Is it because it is not something that can be sold in the US in the face of strong opposition from proliferation hawks?

The forthcoming debate in parliament should illuminate these issues and also elicit a better understanding of the limitations to which India will be subject. The final decision on the Indo-US nuclear deal can then be taken by the political class as a whole in full knowledge of the trade-offs implied.

Should central banks save markets?

Central banks have been pumping funds into the markets in order to stabilise conditions. This troubles many people. Should central banks being bailing out failed institutions such as hedge funds that had taken foolish risks?

Well, no. Central banks may have to save banks because bank failure can pose systemic risk. The others can go to the wall. The difficulty is telling whether the problem at non-bank institutions is a liquidity problem or a solvency problem. It makes sense to make liquidity available to institutions at a time when market sources of liquidity dry up. If banks don't want to give money or to each other or to hedge funds because of panic conditions, central banks should.

But when prices are unstable, how on earth does the central bank determine whether institutions are insolvent or merely illiquid? Many of the institutions themselves don't know what their asset prices are- Bear Stearns kept telling investors in its hedge funds for a long time that it did not have a correct valuation.

So, there is a practical problem here. But there is broad acceptability now as to the conditions under which central banks should intervene. I dwell on this in my ET column, Central banks on a tightrope.

Some clarity at last on the nuclear deal

Many people just can't figure out the opposition to the Indo-US nuclear deal from across the political spectrum (and not just the left). The general impression among the intellegentsia is that the deal will propel India into the big league with US help and that we should just go for it.

I guess part of the problem is that US and Indian spokesmen have been putting a very different spins on the deal. India says there is no real bar on nuclear testing. A spokesman in the US promptly clarifies that if India should ever test, the deal is off. India claims that the deal will not encumber India's strategic weapons programme; US spokesmen assure Congress that the deal will cap and roll back India's nuclear capabilities and so on. In other words, the interpretation of the deal seems to be quite different in the two countries. While it is conceivable that some of it is meant for domestic lobbies, there is always the danger that the difference in interpretation is very real as well.

There's a timely story in Rediff.com that makes exactly this point and also warns that the nuclear deal could end up straining ties between India and the US instead of strengthening these.

"The governments of Manmohan Singh [Images] and George W Bush [Images] appear to be interpreting key provisions of the agreement very differently, which can only cause more headaches in future," said Michael Krepon and Alex Stolar of the Washington DC-based Stimson Centre.

One area of the potential dispute relates to the consequences of the resumption of nuclear testing by India, they said.

"The US public law is clear in this regard, but the India finds solace in pledges that the Bush administration has given to cushion the potential blow. One provision in the 123 Agreement pledges to provide India, one way or another, with an ample fuel bank to guard against disruption caused by nuclear testing," they said. However, the legislative intent of the Hyde Act "places clear constraints on fuel supplies", the scholars said.

The scholars said that using the nuclear deal to break the decades of mistrust between the two countries was an odd and unfortunate choice.

................If India decided to operationalise the deal, they said, the next stage would be to negotiate a safeguards agreement with the International Atomic Energy Agency.

"New Delhi has insisted that the agreement be India-specific, implying that if fuel is disrupted, safeguards can be dispensed with. In this regard, the 123 Agreement makes reference to India's right to corrective measures if fuel supplies are interrupted," they said.

"It also includes a clause that the US will assist India in its dealings with the IAEA," they said.

However, they contend that that it is very likely, that the IAEA will insist on safeguards in perpetuity, without conditions or reference to disrupted fuel supply.

"These and other implementation provisions are bound to cause greater difficulties in India and further fray relations with the US once it becomes evident that the 123 Agreement has papered over differences in interpretation, while disregarding congressional intent to reduce the deal's negative proliferation consequences," they said

These comments make a lot of sense. It would be unwise to paper over the implications of the deal for India. It is also important for both India and the US to realise that the potential for a strong relationship exists without the nuclear deal. The suggestion that if the deal is not clinched here and now, India and the US lose the chances of upgrading their relationship must be rejected in the most emphatic terms. The opposition to the deal from the Left does give all concerned a chance to reflect more carefully on the deal.

Away for a few days

I'm travelling over the next few days and hope to resume blogging on August 23.

ECB binge

The limits on ECBs imposed by the government have been generally welcomed. As Shankar Acharya points out in Business Standard, of the increase in the capital account surplus of $23 bn in 2006-07, ECBs accounted for $13 bn or nearly 60%. Unchecked ECB inflows have rendered exchange rate management that much more difficult.

It was another item in Acharya's article that took my breath away. The top 10 borrowers accounted for 30% of total approvals in 2006-07; around 20 corporates accounted for nearly half the borrowings. The two Reliance groups (of Mukesh and Anil Ambani) lead the field.

Can central banks stem the market crisis?

The world's central banks have been furiously pumping funds into the financial system to contain the panic in financial markets. (A notable exception is the Bank of England). Will they succeed?

I believe so. Markets tend to overreact. A sharp fall in asset prices will easily plunge highly leveraged institutions such as hedge funds into bankruptcy. But this is temporary in many cases and many funds can move back into solvency once overshooting of asset prices reverses. In the meantime, they need access to funds to tide over redemption calls. As long as central banks provide these, there should not be a problem. Besides, private buyers of distressed funds will also be available. In the case of commercial banks, central banks or the government may even effect a rescue.

The difficulty for central banks is providing liquidity but stopping well short of a bailout. This is necessary to avoid moral hazard in financial markets. Crises such as the one we are seeing today are the result of excesses. Those guilty of these must pay the price. Bailouts mean they will not pay the price. This may solve today's problem but it will create fresh problems down the road. Market players will take huge risks in the knowledge that central banks will save them. Many say that today's problems are precisely the result of Greenspan's willingness to cut interest rates to save falling markets.

In today's turbulent conditions, central banks may not be able to get the balance right. They may go overboard in calming markets. That is bad for financial market discipline. But it will certain prevent the crisis from snowballing. So, yes, central banks have it in them to stem the crisis but they may let it play out for a while to ensure that institutions that got carried away are weeded out.

A housing bubble burst?

I wrote in an earlier post that the central banks would manage to contain the crisis in the international financial markets and that it was unlikely the world economy would tip into a recession.

In the TOI last Sunday, Swaminathan Aiyar agreed with my contention that the health of the underlying economy was not necessarily determined by the health of the stock market. Nevertheless, he argued, the subprime mortgage problem in the US had the potential to create a worldwide economic crisis because it signalled a housing bubble burst in the US. This would drag down the US economy and housing bubbles elsewhere, including India, too would burst.

I am not convinced. A sharp deceleration in housing had already been factored into the IMF's forecast of a slowdown in the US economy, the subprime crisis does not change that. I don't see the US or global economic outlook changing because of the subprime crisis.

As for the prospect of a housing bubble burst in India, we have to remember that housing prices have been driven by very basic supply-demand imbalances. There is a supply shortage for various reasons and demand comes, not from speculators, but to a large extent from buyers of homes.

In the US, housing purchases are driven by borrowing against assets, including an existing house. So a decline in asset prices has a huge adverse impact on the housing market. In India, people are buying against future income - and rising incomes at that. Movements in asset prices such as those of stocks have little impact on this demand. If housing prices fall, that will translate into greater demand.

Again, since people are not consuming by borrowing against housing or other assets, the wealth effect on consumption will be very small. Yes, we could see a correction in housing prices but its economic impact will be negligible.

Stock market gloom and doom

Stock markets plunged worldwide last week (although some like India's have bounced back this week). Many were quick to pronounce that the underlying problems at financial institutions were grave enough to undermine economic growth.

I must beg to disagree. Stock market declines do not necessarily translate into setbacks for economies. Depends. Various factors are relevant: the soundness of banks, the policy response to a a stock market crash, companies dependence on stock market for finance for projects (pretty low in the US- nearly 98% of funds come from internal generation and the debt market and in some recent years, funding from stock market has been negative because of buybacks of stocks) and the wealth effect on consumption (also low in the US and lower still in markets such as India).

The killer is bank exposure to the stock market. Once banks fail, the economy is dragged down quickly. That's what happened in the Great Crash of 1929. It also happened in East Asia. The worst sufferer was Indonesia where the IMF mandated closure of bankrupt banks caused the a huge fall in GDP.

In India, the RBI's prudence has been a great life-saver. Stringent restrictions on bank exposure to stock markets (and also real estate) are one big reason why the vagaries of the stock market have not meant banks going under (except when banks, especially cooperative banks, sought to flout regulations).

In the present situation, many financial institutions have been hit by the problems in the subprime mortgages market but not commercial banks. Institutions have been trying to sell their holdings of securities linked to such mortgages and have otherwise taken huge hits. The liquidity problems at hedge funds and investment banks spells dog days for international financial markets. But commercial banks are relatively unsinged, so the US economy will not face a crisis. The world economy is not affected by US-specific factors and hence global economic growth will continue to be strong.

I have more comments in my ET column , Market, not economic, crisis.

Capital for public sector banks

The government has been unable to amend the Banking Act to permit government shareholding to fall below 51% in public sector banks (PSBs)- the Left and the unions are dead set against it. But PSBs need fresh capital in order to grow. SBI management has been making desperate representations to government on this subject. It appears there is relief in sight.

Government shareholding in SBI is around 59%. The minimum government shareholding required under the SBI Act is 55%. That leaves room for raising around Rs 6000 crore of fresh equity. On top of it, ET reports, the government plans to infuse Rs 10,000 crore. I would have thought this would be unthinkable on account of the FRBM restrictions. But, ET reports some interesting calculations being done in government:

Assuming that the government infuses Rs 10,000 crore and if this is leveraged to build a portfolio by an additional Rs 1,00,000 crore, the resulting dividends and the tax on increased profits will make up for the government’s capital costs. Even at a 1% return on assets, the government could recover a significant amount from the bank, sources said.

And the move could set a precedent. The government’s stake in more than a dozen state-run banks is close to the minimum 51%. It is understood that it is open to infuse funds into these banks, should they require more capital.

As if this weren't enough, along comes a suggestion from C Rangarajan, chairman of the PM's Council of Economic Advisors. Rangarajan has mooted the idea of quasi-government entities such as LIC putting capital into banks.

Quasi-Government entities like LIC could be roped in to fund additional capital needs of public sector banks as they move to meet Basel II standards, Chairman of the Economic Advisory Council to the Prime Minister C Rangarajan said.

In case of Government's inability to bring in additional capital or reducing its share from 51 per cent, Rangarajan suggested funding from quasi-government entities such as the Life Insurance Corporation through an amendment in the statute.

"Government will have to bring in additional capital or reduce its share in public sector banks from 51 per cent through appropriate statutory changes," Rangarajan said, adding adoption of Basel II norms will enhance the required capital.

Well, well. I must say it is nice to see new ideas on the subject of capital for PSBs just when we thought they were up a blind alley.

Discordant voices on Indo US nuclear deal

The Indian and US governments have each their own spin on the Indo-US deal.The question is: who is closer to the truth? Is the Indian government right in claiming that the strategic weapons program is unencumbered? Are the pronouncements of US spokesmen meant only to preempt opposition from the non-proliferation hawks in the US? Hard to say, really.

M J Akbar is among the sceptical voices in the media. In his column in Asian Age, he writes:

The 123 Agreement was announced on Friday 27 July. On 2 August, just six days later, Nicholas Burns, undersecretary of state and chief American negotiator was asked by a journalist, Robert McMahon, in a recorded interview, "Some say that under the deal, if India holds a nuclear weapons test, the US would delay its own nuclear fuel supplies to India but the US would help India find other sources of fuel, which violates the spirit of the Hyde Act. What do you say to those concerns?"

Burns replied: "That’s absolutely false. I negotiated the agreement and we preserved intact the responsibility of the President (of the United States) under the Atomic Energy Act of 1954 that if India or any other country conducts a nuclear test, the President — he or she at that time in the future — will have the right to ask for the return of the nuclear fuel or nuclear technologies that have been transferred by American firms. We’re releasing the agreement on our website on Friday afternoon (3 August 2007) and people will see that when they cite the text."

The answer could not be more categorical: "absolutely false". That is the American position, and it is being enunciated for the record, without any ambiguity. The message is clear, and it is loud. America will demand fuel and technology back, and probably not return the still-uncounted billions of dollars we paid for it either

I haven't gone through the text myself but I read in newspaper reports that the 123 agreement does provide for the US president to take into account the circumstances surrounding a particular test. It is also said to mention compensation to India for return of US materials and fuel. So, I am not sure that Akbar's doubts on this score are justified.

Another discordant voice is that of former PM VP Singh. Asian Age reports:

Mr Singh said the draft agreement to operationalise the deal does not grant India reprocessing, enrichment and heavy water technologies and allows the US to terminate the pact with a year’s notice. He said the deal does not grant India the status of a nuclear weapons state and binds it to the national laws of the US, such as the Hyde Act. "It is ironical that a similar agreement with China grants supremacy to international laws while we are bound by the Hyde Act," Mr Singh said.

He demanded that Prime Minister Manmohan Singh explain to the nation the agreement in detail and seek Parliament’s approval before signing it. "Friendship with the US is okay, but we should not accept slavery," Mr Singh said, adding that he will go to the states and meet people to make them aware of the nuclear deal that India is about to sign.

The UPA government has thus far taken the position that it is under no obligation to consult parliament in the matter of signing the deal with the US. That may be the constitutional position but PM Manmohan Singh would be wise to have a thorough discussion in parliament or in one of the parliamentary committees.

Murdoch wins Dow Jones

Yes, Murdoch will be the new owner of Wall Street Journal. The Bancroft family has decided to back his offer. FT reports:

Rupert Murdoch on Wednesday clinched victory in his battle to acquire Dow Jones after securing support from enough Bancroft family members to secure majority backing for his $5bn cash offer for the owner of The Wall Street Journal.

The breakthrough came after nearly four months of often torturous negotiations between the media mogul and the fractious clan of heirs to a family which has controlled the leading US financial newspaper for more than a century.

Will this mean that New York Times will also be up for grabs? No says, FT's Lex column. Part of the problem with the Bancroft holdings was that it is fragmented. At NYT, Arthur Sulzberger calls all the shots.

More on sovereign wealth funds

I had a post on sovereign wealth funds yesterday. Today Swaminathan Aiyar weighs in with an article in ET. Aiyar seems to think that large purchases of equity by emerging market sovereign funds could raise the spectre of a takeover of western firms by Asian governments.

Well, as long as the acquisitions are small and sovereign funds are passive investors, western governments will keep quiet. I doubt that foreign governments will be mute spectators if the funds want to run companies. Sovereign funds will be expected to play the role that FIIs do in India- voting with their purchases and sales and not attempting in any way to directly influence management.

Moreover, large acquisitions by sovereign funds will fuel demands for a reciprocal opening up of markets in developing countries and this in itself will put the brakes on such acquisitions. Lastly, the performance of the funds is also an issue. Can governments manage large equity positions to their benefit? Remains to be seen.