Crisis fails to dent Indian banks' financials

Many experts have talked about stability in Indian banking in the recent crisis. Several factors have been cited as underpinning stability: caution on capital account convertibility, public sector dominance, Indian banks' low exposure to international assets, strong regulation including counter-cyclical capital requirements imposed by RBI.

There is something else to Indian banks' performance in the crisis: they have done as well on efficiency indicators as in the boom period. There has been a slowdown in economic growth and in credit growth, so one would expect to see some impact on banks coming through interest income and provisions. This hasn't happened. The end result? Indian banks have posted a return of 1% on assets in the midst of the worst financial crisis of the last century! You have to pinch yourself in disbelief. Now, somebody tell me why we should be making any material change in Indian banking.

I explore this topic in my ET column, A crisis-proof banking sector.

Fall-out of failed plane bombing

The Nigerian who attempted to blow up a plane over Detroit recently by carrying chemicals in his underwear was successfully foiled ( thanks to heroism shown by some of the passengers who fought and overpowered him after seeing him emit smoke). Al Jazeera carries an article by Mark LeVine, Visting Professor at Lund University, Sweden, on what the security fall-out is going to cost- the author estimates it would be billions in tighter security.

The author also has a telling point to make about the immediate impact. Because the Nigerian managed to sneak in inflammable materials using a specially tailored underwear, the frisking at US airports has become too intrusive for comfort:

As I stood in the security line at JFK airport waiting to be frisked before boarding a New Year's day flight home, another goal, or at least consequence, of the most recent attack became apparent, one deeply tied to the obsession with physical and sexual honour in radical Islamist ideology: With this one failed action, the movement will succeed in routinising the systematic physical violation of airline travellers by our own security personnel as a part of the price of air travel.

Invasive frisking of the most intimate areas of the human body and revealing full body scans represent from a hardcore Salafi perspective an almost unbearable indignity -one they will surely relish seeing millions of the enemy routinely suffer, especially when such violations mirror the daily indignities and sexual humiliation infamously suffered by inmates in Guantanamo and other US-run prisons.

Call it a politics or strategy of shame - another weapon in the al-Qaeda arsenal that the West will have a hard time finding an answer for and which will erode support for the 'war on terror' from within even as Western governments strengthen their ties to oppressive front line states.

Osama bin Laden could not have planned it better if he tried.

3 idiots controversy

I am rather well placed to comment on the 3 idiots controversy. I have seen the movie and read the book (and I read it after it came out, not after the recent controversy). But, first, let us get the factual position sorted out. The only clear statement of the factual position I have seen appeared in TOI today. I am unable to access the soft version of this story, so here is the gist.

Going by the TOI report, Vidhu Vinod Chopra bought the film rights to the book. This gave him the freedom to adapt the book as he liked and it was also agreed that Bhagat would be mentioned in the credits towards the end. Chopra says Bhagat has been paid the bonus promised. Chopra took the book as a starting point and got his people to produce something that would be film material.

So, it's not clear what Bhagat is upset about. There is a legal contract between him and Chopra and if there is a breach of contract, Bhagat has recourse. An excellent analysis of the legal issues and also the similarities between the movie and the book may be found here.

Now, for my two cents on this controversy. I was reluctant to watch the movie after having read the book because I didn't think the book had material for a lively movie. My wife persuaded me to watch the movie saying that it had only used the book as a starting point.

While watching the movie, I got the feeling this was indeed true. The basic idea may have come from the book but Bollywood has adapted it as only Bollywood can and added it to the masala that makes for a successful movie. One telling example is that the professor in the book is turned into the college's director and the character in the movie looms much larger than in the book. It's a huge difference. Again, the hero in the movie (Aamir Khan) is a far more interesting character than the hero of the book.

One final point: I found the movie absorbing but I can't say that of the book.

Attack on CIA post in Afghanistan

Do we have any answer to the phenomenon of the suicide bomber? It would appear not, judging by the deadly attack on a CIA outpost on the Afghan-Pak border, which claimed the lives of seven CIA agents, including the lady head of the base.

The Taliban has claimed that the attacker was a sympathiser on the Afghan army. He had been brought into the CIA outpost for the purpose of 'debriefing'. Whatever his identity, the attack demonstrates the Taliban's capacity to hit back in the face of mounting US pressure. Obama is hoping that the troop surge of 30,000 he announced recently will help pacify Afghanistan. But Russian military experts don't give the Americans much of a chance. The Russians should know: they tried the same thing in Afghanistan and failed.

The insurgents' strategy is simple: melt away in the face of a military onslaught, regroup and return when the foreign army withdraws- as it has to some day. Obama will have to pull out troops ahead of the next Presidential election as nothing is more fatal to an incumbent that the spectacle of US soliders bogged down in far away lands in an unwinnable war.

To return to my question, the Israelis have had some success in countering suicide attacks. But that is when the terrorists try to attack inside Israel. The Israelis have managed to fend off such attacks by building a wall alongside their borders, tight monitoring of all entry and exit points in Gaza and the West Bank and savage reprisals for attacks on Israel. These tactics are not replicable everywhere, least of all when you are battling insurgents on their home ground.

A Lebanese perspective on terrorism

Asia Times carried an interesting interview with a Lebanese ideologue, Yousuf Baadarani, on what terrorism is all about today.

Baadarani repudiates the idea of Islamic terrorism:

Under Islamic law, warfare may be waged between states, or a state may use violence to suppress a rebellion, or defend against an invading army. Islam stipulates that all acts of punishment of civilians are strictly a judicial duty and responsibility.

According to Islamic tenets, no incompetent person or group of people are allowed to take the implementation of these tenets into their own hands. Such an undertaking is considered illegitimate in Islamic sharia unless in certain cases where the individual needs to protect his life.

Baadarani believes that terrorism is not entirely spontaneous but is the result of conflict among the world's major powers:

...no militant group can be formed without being noticed and monitored by the intelligence service of one or all of these countries. It is widely suspected that these countries use terrorist groups for their own purposes.

The greatest source of terrorism in the world is the behind-the-scene political conflict between the major powers to dominate the world. When the political means of one major power faces a deadlock, it resorts to local groups, which it supplies with material resources to terrorize the people in its drive to destabilize a local regime. There is no independent source of terrorism as there is no independent group of terrorists.

Forecasts for 2010.

FT's reporters and commentators put out their key forecasts for 2010. Here is an edited version:

Will the UK suffer a double-dip recession?
No.

Will the UK government sell any of their stakes in the banking sector?
No.

Where will oil finish the year?

....oil is most likely to end the year within its present trading range of about $70-$80 a barrel.

Should investors put their money into the stock market?
Yes. ...Next year’s stock market gains will be less spectacular than 2009’s.

Will there be a trade war in 2010?
Conflict, yes. Full-blown war, no.

Will the eurozone experience a sovereign default in 2010?
No. ...Since a clean default is impossible, governments will have no choice but to retrench, however painful the consequences.

Who should I bet on in the British general election?
Forget David Cameron’s Conservatives; pity Gordon Brown’s Labour. Put your money instead on Nick Clegg’s Liberal Democrats. No, I don’t think Mr Clegg is about to sweep into Downing Street as the leader of the first Liberal government for a century. The firm prospect – to my mind as near a certainty as you can get in politics – is that Mr Cameron will be the next prime minister. But those who fancy a wager should look at the odds on the third party.

Will Putin declare his candidacy for Russia’s presidency?
Mr Putin will not formally declare his candidacy until closer to the election date but it seems likely that over the next 12 months he will send ever-stronger signals that he intends to run for the presidency in 2012.

Will the world make progress on nuclear disarmament?
Yes.

Will this be the year that Israel bombs Iran’s nuclear installations?
No.

Will Afghanistan turn into Obama’s Vietnam?
No.

Will bonuses in Wall Street and the City of London be cut?
No.

Upbeat on the Indian economy

I am upbeat on the Indian economy as the year end and for reasons I spell out in my ET column,, Economy's stronger than we think. I find I am in good company- several other commentators have since come out with optimistic assessments.

My reasons are:

• This year's growth forecast of 7% plus shows India is not a bubble economy whose growth of 8-9% earlier was linked to the global economic bubble
• The fiscal problem will come under control as growth gets back to the normal trajectory.
• The polity will not be a drag and fears about the country coming apart because of the demand for newer states is misplaced.

On the demand for newer states, I note:

As for the demand for new states, concerns on this account carried greater force when states were first organised along linguistic lines. Then, the greatest fear was that language would rend the country as religion had during Partition. In the early sixties, an American analyst, Selig Harrison, wrote a book, India: The most dangerous decades, in which he warned that linguistic and caste divisions — ‘centrifugal pressures’ — could tear the country apart.

Our experience has been refreshingly different. The creation of new states in the fifties and thereafter has strengthened democracy by creating a better sense of participation among people. As many commentators have pointed out, this has also been our experience in more recent times with the creation of states such as Chhattisgarh, Jharkhand and Uttaranchal.

The division of states being demanded today is not even along linguistic lines. People speaking the same language want to go their separate ways because they want better representation, because administration is too remote in many of the larger states. We have no reason to fear these demands. The movement towards the creation of newer and newer states shows that the Indian state is responsive to aspirations for self-governance. The economy will benefit as it has in the past.

Surjit Bhalla, writing in BS, echoes my optimism and goes further. He thinks India will grow faster than China in the coming years:

China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level.

This scenario will have predicted effects — China’s GDP growth should moderate to a less polluting 8.5 per cent in 2010 and then proceed on a declining trend for the rest of the decade. This will mean jobs for the rest of the world. The other side-effect of the China growth rate decline will be on carbon emissions. They too will decline, and allow China to reduce its carbon intensity of output to at least the world average. In stark contrast, India does not have pressure from the world community to mind its currency or emissions. The productivity growth advantage of 2 per cent a year that China currently enjoys will soon disappear, leaving India with a GDP growth rate in excess of China, and in excess on a sustained basis.

Family member to succeed Narayana Murthy?

There has some speculation as to who might succeed N R Narayana Murthy as chairman when he retires in two years' time. Murthy has in the past indicated that it could be somebody from outside the company. For the first time, an ET report hints at the possibility of somebody from his family taking over. This will come as a surprise as the Infosys founders have thus far been at pains to distance their families from the company:

I would not like to rule out bringing talent from outside...(but) we have to first assess the talent within the company so that we reward smart, loyal people and then look outside," Murthy told a news channel when asked about his succession plans for the company.

However, he did not rule out the possibility of someone younger from his family to take over the charge of the company either.

"We have not ruled out anyone from younger generation in joining (the company) but whatever will be done will be done purely on the basis of merit, suitability and competence," he said responding to a question on the possibility of someone from his family running the company in future.

A sympathetic portrait of Goldman's boss

FT carries a sympathetic portrait of Goldman boss Lloyd Blankfein, not something that he has been getting over the past year. The paper has been fair to him despite the fact that he declined to be interviewed for the article. But Blankfein does have a long-standing relationship with the FT: he sits on their jury for the Business Book of the Year. ( I am not going to pronounce this a conflict of interest).

Blankfein's background is interesting. He was the son of a postal clerk and grew up in a public housing project in the New York's downmarket burrough, Bronx. Now, as CEO of Goldman, he has a $26 mn apartment in the Central Park area. (That's over Rs 100 crore- you could probably acquire an apartment building in Cuffe Parade, Mumbai, at that price). Along the way, he went to Harvard thanks to a scholarship. That's called meritocracy- the US is what it is because it has more of it than any other country.

Fiscal consolidation and Keynesian economics

In India, there is a clamour for swift return to fiscal consolidation. So also in the UK, despite the fact that the British economy has to still to recover from the crisis. Why fiscal consolidation? To prevent interest rates from rising and crowding out investment; and to prevent exchange rate appreciation and boost exports. In both ways, consolidation is seen as coming the way of growth.

Robert Skidelsky, the famed biographer of Keynes, questions these contentions:

If its borrowing is not rapidly reduced there will be a “gilt strike” – investors will demand higher and higher prices for holding government paper. Faced with the evidence that, despite increased government borrowing, gilt yields have been at a historic low, the critics say that this is only because the gilts are being bought by the Bank of England. Once the Bank stops buying government debt, interest rates will shoot up.

A parallel argument is that the expansion of the fiscal deficit is preventing a natural fall in the exchange rate sufficient to boost exports. The tortuous logic seems to be that “fiscal consolidation” will cause the rate of interest to fall and the fall in interest rates will cause the exchange rate to fall, thus increasing the demand for British exports......

Empirical evidence supporting the view that cutting the deficit causes the exchange rate to fall is very thin. A 1997 study by the International Monetary Fund showed that in only 14 out of 74 studied instances did fiscal consolidation promote a recovery via a fall in the exchange rate. In all the other cases fiscal policy either had no discernible exchange rate effect or it was the expansion of the deficit that caused the exchange rate to fall.

At the best of times, the arguments made for fiscal consolidation have sounded hollow; in crisis times, they sound ridiculous.

BJP's new president and competitive politics

Nitin Gadkari, the new president of BJP, has been portrayed in much of the media as somebody hand-picked by the RSS and, therefore, intended to give the RSS a better hold over the BJP. It may well be that he is the RSS's choice. But, what is ignored is that he has a great deal going for him. It was left to ET to carry a story that highlighted his strengths and accomplishments. I could not find the story in the online edition and hence am unable to provide a link.

In brief, Gadkari is credited with a great deal of modernisation that has happened in Nagpur, he was instrumental in getting the Mumbai-Pune expressway done and he was also in charge of Vajpayee's Golden Quadrilateral. The story also spoke of his performance as PWD minister when he got the state's infrastructure arm to bag projects in the face of competition from private investors and despite political pressures to favour industrial groups. The projects were executed at a much lower cost than quoted by private parties.

The media has highlighted his skills as an organiser. The ET story also mentioned that media persons found it a pleasure to meet him - and not just because he's a foodie who can serve terrific meals to his guests but because he is a man full of ideas and loves to get into intellectual exchanges.

If all this is true, then you cannot but be amazed at what has happened. The BJP has reached out beyond the Delhi coterie and brought in somebody relatively young (he's 52) and with the potential to shake up and revamp the party. This is quite an achievement when you consider how difficult it is to break into any entrenched set-up, whether the bureacracy or the corporate world or even academic institutions. It has happened in the BJP because Indian politics is extremely competitive and party workers expect to see results. If a given leadership cannot produce results, then the party dynamics contrives to bring in an outsider who can change things. The rise of Rahul in the Congress also owes to the imperative to project a new face and to come up with new ideas.

How Gadkari will perform is anybody's guess. But his rise to the top job in the BJP underlines that Indian democracy is alive and kicking.

PS: Thanks to Vishal for providing the link. Here is the relevant excerpt:

Maharashtra is strewn with Nitin Gadkari’s signature projects, almost all of them are testimony to his drive. As a former PWD minister, Mr Gadkari has shown the guts to overrule his party boss Pramod Mahajan and Shiv Sena supremo Bal Thackeray, who were keen on awarding Mumbai-Pune expressway project to a certain corporate house. Fiercely committed to the state’s cause, Mr Gadkari even offered to quit the post, but refused to give theproject to the said industrial house.

In the end, he won. The private company had quoted the project cost Rs 3,100 crore. The state-run Maharashtra State Road Development Corporation (MSRDC) — Mr Gadkari’s brainchild — completed it in just over Rs 1,600 crore. Even the currently inaugurated — though incomplete — Bandra-Worli sea link was Mr Gadkari’s idea, which he launched but could not complete because Sena-BJP failed in the 1999 state polls.

The test of his innovative skills came during 1996 when the newly formed MSRDC tried to tap the market for its various infrastructure projects. The regulator refused the state corporation permission to issue bonds since it didn’t have its own assets.

As a PWD minister, Mr Gadkari wasted no time and just in a day transferred all PWD assets in Mumbai to MSRDC. Thus came into existence a body that went on to build some 55 flyovers in Mumbai and the country’s first auto-bahn Mumai-Pune Expressway, all completed in the promised time-frame.

Subramaniam Swamy on Paul Samuelson

The best tribute to Paul Samuelson I have seen comes from Subramaniam Swamy. It is what tributes ideally should be- a combination of personal memoir and assessment of the individual. (Not that Swamy is able to do full justice to Samuleson's varied contributions). An interesting aside is on how the establishment at Delhi School of Economics prevented Swamy from getting in (and he had to settle for IIT Delhi instead):

Amartya Sen invited me to join the Delhi School of Economics as a full Professor in early 1968 stating in a hand-written letter that my 'gaddi was being dusted.' I therefore spent three months in the summer of 1968 at the Delhi School of Economics as Visiting Professor, before returning to Harvard with the intention of winding up and joining as Professor of Economics at the Delhi School.

But I did not realise then that the Left triumvirate of Sen, K N Raj and S Chakravarty had in the three months discovered that I was not only not ideologically neutral or soft like Jagdish Bhagwati, but hard anti-Left and wanted to dismantle the Soviet planning system in India besides producing the atom bomb.

So when I arrived in India in late 1969 this triumvirate scuttled my ascending the dusted gaddi. Sen was at his hypocritical best in explaining to me his volte face.

Samuelson was enraged when heard this and perhaps felt empathy because of his own experience in the late thirties at Harvard, and urged me to return. When I returned to Harvard to teach in the summer of 1971, Samuelson told me, "Stay here and write a treatise on Index Numbers and you will be worthy of a prize." But I was in a fighting mood and told him I would return.

Fortunately there was a professorship open at IIT-Delhi. Dr Manmohan Singh was the chairman of the selection committee. Samuelson with Kuznets, the 1971 Nobel Laureate in economics, wrote the committee strong letters of recommendation. Armed with it, Dr Singh did not wilt under the huge pressure mounted by the triumvirate and I was appointed a Professor of Economics in October 1971. But it did not last long.

The triumvirate then persuaded Indira Gandhi that I was a closet member of the RSS with chauvinist views, and a danger to her. With the KGB favourite Nurul Hasan as education minister, I was easily sacked in December 1972, but re-instated by court in 1991.

Remembering Peter Drucker

If you are at a loose end and would like to spent time productively, here is a suggestion: pick up an book of Peter Drucker's, open it anywhere and start reading. Chances are you will have gained. I remember listening to him at a seminar at Stern School. Along with him were an official of the World Bank and somebody from the corporate world. He spoke briefly and succinctly. It was thought-provoking. When the others followed, it sounded pretty flat. I guess Drucker's cosmic mind had a way of making everybody else look mediocre.

Drucker would have turned 100 last month. The event was widely celebrated. I dipped into some of his writings at random and emerged refreshed as always. Drucker laid down the key principles of management some fifty years ago. They remain relevant because nobody bothers to practise them. And they are not practised because they do require an element of idealism, a commitment to a bigger something. That, alas, is not something you associate with business managers.

I highlight some striking ideas of Drucker's in my ET column, Peter Drucker lives on. One of them really hit me. It was about the board of directors being the Supreme Court, somebody to whom people down below could appeal. Do you know of any board that accepts such a role? Boards are so thoroughly captured by top management that if some middle manager wrote a complaint to them, they would dismiss it, saying, "We can't look at individual cases". Somebody should ask these fellows, "Is there anything you look at other than the cheque for your sitting fee?"

IIT Gandhinagar attracts quality faculty

IIT Gandhinagar has received nearly 700 applicants for faculty positions, half of whom are NRIs from quality institutions abroad, ET reports :

Director of IIT-Gandhinagar Sudhir Kumar Jain said at least three NRIs teaching in prestigious universities in the US and Singapore will join them by the end of December. ....

"This is a great development as we would get Indians who are involved in cutting-edge research and academics and are finding opportunities in India attractive. More so for us as the faculty would get to prove academic excellence given that we are a new institute compared to other IITs and hence more open to ideas," says Jain. ...

"To attract more talent from abroad, we are also offering them option to go abroad twice a year to pursue research and academics," says Jain.

So much for the supposed faculty crunch and the problems new IITs would have. I feel vindicated because I have always held that the newer IITs and IIMs would be able to attract faculty by offering suitable terms (not higher salaries but the flexibility indicated above).

In some ways, they may have a better chance of getting good faculty because in the existing institutions, entrenched interests are often the biggest obstacle to getting faculty- they simply won't let very talented or reputed academics in. Agreed, it is not easy to entice academics based abroad, so there are supply-side problems. But the artificial problems on the demand side are also a factor - and this is generally overlooked. Besides, NRIs would prefer to get back to their home town or to some place close to it and may want to steer clear of the larger metros where the older IITs and IIMs are located.

Somehow, IITs and IIMs have not used the mechanism of well-endowed chairs in order to attract talent. This is again primarily because the academics who are already in think they have first rights to any chair that is created and, often, they can't agree amongst themselves as to who deserves it. As a result, chairs are not created and, when created, go untenanted.

The IIT Gandhinagar experience is very promising indeed and augurs well for the government's decision to set up new IITs and IIMs. We need competition for the four or five IITs and IIMs that dominate the field today. So, all power to the new institutions.

Banking bonuses can't be left to market

Both Martin Wolf of the FT and the Economist have joined the chorus for containing bank bonuses in today's conditions. Wolf wants a 'windfall tax'. The Economist asks that a 'funding premium' be recovered from banks before bonsuses are calculated- this would compensate the tax payer for government support to banks.

I think the problem goes beyond the present crisis. We need to view executive pay in banks as a potential source of systemic risk. I cannot see the market responding suitably to this problem. We will soon require regulators to approve top management pay in banks. This is not as novel as it sounds- the RBI has been doing it for long. The challenge for regulators is to put in place norms for executive pay at banks and apply these to the entire sector. We need regulators in different countries to agree on this as otherwise we are bound to see 'regulatory arbitrage'.

More on this in my ET column, Reining in rogue bonuses

Corporate architecture

One of the things about post-reform India is that companies have spruced up their looks and environs. Go to the Bandra-Kurla complex in Mumbai and you get at least a faint whiff of Manhattan, with ICICI's headquarters standing out. Among campuses, Infosys must be one of the stars, each one meticulously designed and spectacularly well-maintained. But those who are more sensitive to architectural style than I am have a different view, and this is the subject of an Outlook feature, which is interesting read.

The main point is that many of our organisations seem to want grandeur in their buildings but are not very concerned about whether it is rooted in Indian sensibilities or the Indian environment. For instance, there is a readiness to go in for glass buildings regardless of whether these energy efficient or even aesthetically pleasing. ( In passing, Outlook must be among the very few in the media willing to take pot-shots at Infosys):

This September, two supposed marvels of institutional architecture were unveiled before the public. The first, in honour of the fast-approaching Commonwealth Games, was a Lutyens-style makeover—large white pillars and incongruous purple-black glass—for the Ajmeri Gate side of New Delhi railway station. The second was the spanking-new addition to the Infosys Mysore campus: the classical Greek architecture-inspired Global Education Centre-2 (GEC-2). Inaugurated by a radiant, admiring Sonia Gandhi who said she wouldn’t mind “bunking party politics” to study there, it was hyperbolically proclaimed by Infosys chief mentor Narayana Murthy to be “the largest monolith classical building of post-independent India”.

The GEC-2 might win the awe of its young executive trainees, and the New Delhi railway station the glancing attention (or dismay) of those hurrying through it, but these two buildings nevertheless throw up a few questions about the practice of institutional architecture in India. Is imitating the architecture of the past—including colonial styles intended to intimidate and subjugate us—really the way to engage a contemporary public? Why does institutional architecture in India invariably entail ransacking the past and reducing it to a bunch of carefully traced out columns and pediments? Is it possible to adapt historic references to modern uses in a responsible, low-impact manner?

Here is what one of the critics has to say about Infosys' latest wonder:

The GEC-2, to Burte, is a missed opportunity for Infosys to provide a counterpoint to the wasteful, power-guzzling, glass-faced cut-rate copies of Singaporean skyscrapers that have now become synonymous with IT sector buildings. “This overblown rhetoric is a letdown considering what we know to be Infosys’s progressive work culture, and their emphasis on a knowledge economy,” says Burte. “A low-impact, climate-sensitive, energy-efficient, sensible building; a vision of sustainable corporate living and working, would be commensurate with the image we have of them.”

Another critic concludes that our latest buildings are a comment on national character:

“Right now, we see ourselves as second-rate; our approach is just to play catch-up to other cultures—the Chinese, the Europeans, or Lutyens. It’s about time we followed our own instincts.”

Rating agencies and Indian debt

India has always received a raw deal from rating agencies. This carries a cost to the country. India's present sovereign rating of BBB implies that Indian companies will rate lower and hence pay highs spreads over the risk free rates. Taking into account outstanding ECBs and NRI deposits and assuming that they cost 2 percentage points more than they should, Jaimini Bhagwati estimates that the additional forex outflow to India on this account is $2 bn annually.

Of the rating of BBB for India, Bhagwati writes:

Is it really credible that as of November 2009, the Government of India (GoI) has a higher probability of defaulting, over a five-year horizon, on its external debt obligations as compared to Enron four days before it went bankrupt or Lehman in the second week of September 2008? Currently, the GoI’s BBB– rating is the same as that of Iceland and the UK is rated triple A while China is placed at A+. Are countries rated higher if they impose fewer controls on their capital accounts? Clearly, the answer is that CRAs do not have the answers. One way forward could be for India to push for discussions about perceived anomalies in sovereign ratings in FSB and BCBS forums. Since rating agencies serve a quasi-regulatory function, we could seek the setting up of a multilateral CRA.

More flak for Goldman

Goldman Sachs is set to pay out record bonuses. Its employees should be thrilled and not thrilled. The latter because the bonus payment is likely to comes as a climac to a period that has turned out to be a PR disaster for the once-admired financial giant.

Goldman's soaring profits are today perceived as unfair- the result of implicit taxpayer guarantees and the demise of competitors such as Lehman and Bear Stearns. They are somehow not seen as legitimate reward for success. In the US, a rash of agitations has broken out against the firm. Goldman CEO, Lloyd Blankfein, did not help matters by claiming that he and his firm were doing 'God's work. This remark added various sections of the clergy to the firm's critics.

Blankfein said his remark was meant to be a joke. This points not just to a poor sense of humour but to poor judgement- the public is in no mood today to listen to jokes from Goldman top brass. Blankfein also apologised for the firm's role in the present crisis and the firm promised a commitment of $500 mn towards financing small businesses. But these moves have done little to assuage popular anger.

FT has an article that analyses the principal reasons for the firm's success for so many years now:

Goldman’s stellar performance has been built on two main strengths: a long-standing commitment to making money as a firm rather than a collection of individuals; and a daring boldness in trading and regulatory matters.

....The theory is simple: unlike other banks, where star traders routinely overrule lowly compliance officers, at Goldman the two roles have equal status. “The risk management side is just as powerful as the risk-taking side,” says a former executive. “If a trading desk makes $35m in a week, the attitude at other firms is to let these guys do whatever they want. At Goldman it is: ‘What am I missing?’ ”.

......By cultivating trading and advisory relationships with thousands of companies and investors, Goldman gains knowledge it uses to inform its own trading.

Banks are banned from “front-running” – using specific information provided by clients to trade on their own account before they act on behalf of customers. But they can, and do, use aggregate information, “market colour” gleaned from their interactions with investors, hedge funds and companies. By virtue of being the world’s largest and best-connected trader, Goldman has turned this into an art that has raised rivals’ eyebrows but not sparked regulators’ attention.

So, what does it add up to? Good people and risk management, of course, but also superior information and networking. In the present environment, add implicit government backing and weaker competition. The short point: profits at Goldmanare not driven exclusively by superior skills. Hence the widespread public hostility.

Goldman may look invincible for now. But a basic truth can't be wished away: business cannot succeed in the face of hostility. Just one false step somewhere and the regulators, politicians, media and the social sector will come down on Goldman like a ton of bricks. The biggest challenge for the firm is softening popular anger. It's doubtful that a deep-rooted culture can change sufficiently for the purpose.

HRD panel for PSBs

This is the best news PSBs have, perhaps, had in a long time. The government has constituted a panel headed by BoB ex-CMD A K Khandelwal to look into various HRD issues at PSBs. It is a timely move because PSB unions are planning a march to parliament next month and a strike in support of various demands, including strengthening PSBs.

Apart from a status report, the committee’s mandate include preparing an action plan on how to professionalise 27 public sector banks. Besides, the government wants to work out a system of succession plan at these banks, which often have to do without a chairman for months altogether.

In addition, the committee has been asked to recommend how the banks should go about preparing their recruitment plans and whether it was desirable to follow common hiring and HR practices across all these banks, accounting for nearly 75 per cent of the business carried out in India.

I am pleased because I have made the argument for constituting an HRD panel for PSBs more than once in my ET column and I have been shouting that HRD should be the no 1 priority for PSBs, not consolidation or overseas branches or getting into new areas such as insurance. My argument is simple: until you have strengthened HRD at PSBs, don't even think of other things. What has galvanised the government into action is the prospect of nearly three fourths of senior management at PSBs retiring by 2012. I only hope this is not a case of too little, too late.

I hope the committee doesn't get sidetracked into issues like performance-linked pay. I am extremely sceptical - as many academics are- about the merits of variable pay even in the private sector. In the public sector, it could be a disaster. Those at the helm need to realise one thing: you don't compete through imitation.

Fresh bout of disinvestment

Hopefully, we should soon see a fresh bout of disinvestment, with several unlisted PSUs being brought to the market. That's very good news. Not because it will help contain the fiscal deficit, as some commentators have rushed to point out. The fiscal impact of disinvestment tends to be exaggerated. Its real value lies in its potential to bring about greater commercial discipline through listing on the stock exchange.

Disinvestment helps improve performance when combined with competition and better board room governance. Liberalisation has taken care of competition. More needs to be done on board-room governance in PSUs. Unlike in the private sector, there is scope for doing a great deal more, as I argue in my ET column, Disinvest for better governance.