Unanswered questions on Mehta's exit from Ashoka University

Pratap Bhanu Mehta, professor at Ashoka University, resigned a week ago. He wrote in his letter that it had become "abundantly clear" to him after a meeting with the founders of the University that his continued association with it would become a "political liability". 

A storm of criticism ensued. Eminent academics from all over the world condemned what they believed was pressure brought on Mehta to exit because of his forthright writings. Two days later, economist Arvind Subramanian resigned as Director of a centre at the university by way of expressing solidarity with Mehta. Students called for a two day strike starting March 22. They demanded the reinstatement of Mehta.

The Vice Chancellor, Malabika Sarkar, denied there had been external pressure on the university. However, the university's administration chose to issue a joint statement with Mehta and Subramanian which said there had been "lapses in institutional processes":

We acknowledge that there have been some lapses in institutional processes which we will work to rectify in consultation with all stakeholders. This will reaffirm our commitment to academic autonomy and freedom which have always been at the core of the Ashoka University ideals

The university also ensured that Mehta and Subramanian joined the administration in sounding a positive note:

 Pratap and Arvind would like to emphasize that Ashoka University is one of the most important projects in Indian higher education. They are sad to be leaving Ashoka, especially its outstanding students and faculty,” the statement said, adding that the two professors will remain “available for advice and consultation to the University in the future.

The Chancellor, Rudrangshu Mukherjee, then wrote a letter saying the founders had "never interfered with academic freedom". The Chairman of the board of trustees, Ashish Dhawan, wrote to students saying the founders "have always had the best interests of Ashoka at heart". Mehta, for his part, urged the students not to insist on his return:

The underlying circumstances that led to the resignation will not change for the foreseeable future, in my case, at any rate. So I must close this chapter. I urge you not to press on this matter. I know you will be disappointed. But if I may exercise one last bit of professorial discretion: your mission is larger than the fate of two Professors

Clearly, what is on is an exercise in damage limitation, with Mehta and Subramanian trying to help out.

One can understand the anxiety to protect the university's brand. However, it is important that the questions related to the episode are answered.

First, who were the founders who met Mehta and what exactly transpired at the meeting? It is important that Mehta shed light on this. I am also a little puzzled about the meeting. In his capacity as professor, Mehta reports to the Vice Chancellor and, perhaps, the Chancellor. If there were any concerns about his functioning, it should have been conveyed by the Vice Chancellor. It is not for the the founders or board members to interact directly with faculty in such matters.

Secondly, the statements by Sarkar and Mukherjee contradict what Mehta said in his resignation letter. If there was no external pressure and if founders had never interfered with academic freedom, then what led up to Mehta's resignation? All statements cannot be true.

Thirdly, Mehta stepped down as Vice Chancellor two years ago. There was speculation at the time that his stepping down from an administrative role had to do with his trenchant writings. Mehta needs to clarify whether this is true and, if so, why he chose to continue as a faculty member.

Lastly, one wonders what prompted Mehta and Subramanian to agree to a joint statement. Was any assurance given that the founders who had spoken to Mehta would not continue in an active role? What precisely were the "lapses in institutional processes" that are now sought to be rectified?

Both faculty and students must demand answers to these questions so that academic freedom at Ashoka University is insulated hereafter from the interference from the founders or the board.

Not easy to privatise India's public sector banks

The government announced in its last budget its intention to privatise two public sector banks (PSBs) in the coming financial year.

This is more easily said than done. I argue in my column in BS today, Bank privatisation as an experiment, that the task involves huge challenges. If privatisation doesn't work out, it will pose serious risks to financial stability. So, the government must proceed cautiously. Let it treat the privatisation of two banks as an experiment and watch the outcomes over three or four years. Only if things work out, should we think of privatising more PSBs- this should not be turned into an ideological issue. The government must hope that privatisation doesn't mean more Yes Banks that will have to be thrown into the lap of SBI for rehabilitation.

As the BS article is behind a pay wall, here is the full text:

 

Bank privatisation as an experiment 

The government must test the efficacy of privatising two banks first before going the whole hog

 

Say this for the proposed move to privatise two public sector banks (PSBs) in the coming financial year: It’s preferable to the course proposed by the P J Nayak Committee on bank governance (2014). 

 The committee had proposed a bank holding company, run by professionals, to which shares of PSBs would be transferred. The proposal was always a non-starter. Handing over 60 per cent of the banking system to a group of “independent” professionals, however eminent, is unthinkable. If the government wishes to give autonomy to PSBs, it can do so today. And if it doesn’t, creating a bank holding company run by professionals won’t make any difference.

 Getting PSBs to match private sector compensation by letting the government’s shareholding drop below 50 per cent is also fanciful. No government enterprise can have the sort of inegalitarian pay structure that one finds in the private sector. The public sector could certainly do with better incentives. But these can never match those of the private sector. 

 The public sector and the private sector are two distinct business models. One offers high pay, the prospect of rapid promotion and considerable work pressure. The other offers job security, enormous challenges, quality housing and a lower cash component. It’s a choice of two different lifestyles. Picking elements from the two models and combining them will take us nowhere. 

 You want fewer PSBs? Better to go the whole hog and privatise the ones you think you don’t need. Then, the government is no longer accountable to parliament for the performance of the bank.  Starting off with a couple of banks is a good idea. Provided it’s understood that this is strictly an experiment. We have to carefully watch governance and performance at privatised banks over at least three or four years before we think of privatising any more PSBs. 

Even privatising just two PSBs is a huge challenge. The big question is: Whom can the government sell the PSBs to? The larger private banks in India have a significant pan-Indian presence. They are unlikely to want to take over a large PSB with a very different culture and legacy issues. Handing over PSBs to Indian corporations is inadvisable and politically contentious. 

 Foreign banks have been retrenching their Indian operations in recent years, especially in respect of retail operations. Assuming there are some with an appetite for the Indian market, how many will be keen to set up a subsidiary subject to the Reserve Bank of India’s (RBI’s) stringent norms for the same? That leaves foreign institutional investors. The Nayak Committee had held up Axis Bank as a role model for dropping government shareholding below 50 per cent. But the case is by no means self-evident.

 Let us ignore the issues Axis Bank faces today. Whatever success the bank has had did not arise simply from the government’s shareholding dropping below 50 per cent. Axis Bank started off as UTI Bank, a government entity.  Even after the government’s shareholding dropped below 50 per cent, LIC and other government entities held significant stakes in it and they still do. It wasn’t that the government decided to hand over matters overnight to dispersed institutional shareholders. 

Moreover, UTI Bank was quite small in size when the government opted to privatise it. Almost any PSB that the government wishes to privatise today would be bigger in size than UTI Bank at the time of privatisation. 

 We need investors who will actively monitor the privatised bank. Private equity firms fit the bill. The RBI’s Internal Working Group to review bank ownership had recommended that non-promoter shareholding be enhanced to 15 per cent. This was, no doubt, intended to facilitate a significant stake for investors such as private equity firms. It must be seen as part of the prelude to bank privatisation.

 A couple of other measures must be seen in the same light. The decision to set up an Asset Reconstruction Company (ARC), sponsored by PSBs and private banks, is one such. The proposal had not taken off earlier because it wasn’t clear why a government-owned ARC that aggregates good loans would do a better job of restructuring them than a consortium of banks. Nor is that any clearer now. The principal motivation for an ARC at this point appears to be to get some bad loans off the books of banks that are to be privatised. That way, they will be more attractive to private suitors. So will allowing private banks to do government business, another measure recently announced. 

 Nevertheless, several challenges remain. The impact on depositors of a drop in government shareholding below 50 per cent is one. Dealing with the large tracts of land PSBs sit on is another.  These include a bank’s headquarters, regional offices, training centres and accommodation for employees. Private investors may not want to pay for all of these, they will be interested mainly in the branch network. As in the case of Air India, it may make sense to move some of the land and building to a Special Purpose Vehicle. 

 Private investors will want to rationalise branches and reduce employee strength. According to media reports, moves are afoot to transfer some of the employees of PSBs to be privatised to other banks. With a chunk of bad loans off the books, a reduced employee strength and land transferred to an SPV, valuation of a bank may become easier. But it does not ensure that it will be free from controversy. Most PSBs are trading way below their book values today. Getting a reasonable valuation will require a competitive auction process with a large number of bidders. Yet, for the reasons mentioned above, the set of potential bidders is quite small. 

 Overcoming resistance from bank unions is another challenge. Bank unions have already called for a two-day strike. The government must take steps to avoid the sort of confrontation it is facing with farmers. One, it must convince bank unions that the government wishes to strengthen the PSBs that are not privatised, not dismantle the public sector. It may like to assure unions that PSBs’ share will not fall below, say, 50 per cent in the next three years. Two, it must assure unions that that employee interests in privatised banks will be safeguarded.  

Three, the government must offer to use the capital raised from the sale of two PSBs to bolster capital at some of the remaining PSBs. Increasing capital in some PSBs will improve their valuations and boost lending as well. Re-investing privatisation proceeds in the remaining PSBs will help the government produce positive outcomes in quick time. It is the surest way to win hearts and minds on bank privatisation. 

 

(ttrammohan28@gmail.com)

 

Blame it on B schools!

McKinsey, the iconic consulting firm, has got embroiled in several controversies in recent years. The latest is the opioid scandal in which it advised a pharma company to offer "rebates' to pharmacies based on the number of people who died or became addicted to its opioid. The firm has had to pay nearly $600 million to settle charges brought against it by law enforcement agencies in the US.

Tom Peters, an ex McKinsey consultant and management guru, tells us who is to blame: B-schools. They focus too much on the hard issues-  finance, marketing, quant- and too little on culture and people. Businesses, he says, need to focus on the "moral responsibility of enterprise", not just on maximising shareholder profit, as Milton Friedman had urged businesses to do.

So the fault is that of B- schools or of businesses? Is there a market for the  idea of the "moral responsibility of enterprise"? Can B- schools change businesses by drilling moral responsibility into their wards? 

They certainly can't be faulted for not trying. Most top schools offer at least one course in Ethics. There are plenty of courses on leadership, including those that expatiate on the "lessons" in leadership to be learnt from Mahatma Gandhi, the classics of literature, the Gita and  the rest. I recall asking a student about the course in Ethics at IIMA. She gave me a memorably reply, "We haven't come here to take lessons in moral science".

Now 78, Tom Peters can afford the luxury of selling the 'moral responsibility to enterprise' to the credulous. Not so those trying to make it up the corporate ladder. Try preaching the 'moral responsibility of enterprise' to your boss who is looking to meet his quarterly sales or profit target. You may find you have to switch from being a manager to being a preacher. Ensuring compliance with law and regulation itself is a huge challenge in the world in which live. A manager has to be very brave to attempt anything beyond that. 

Peters talks of the good old days at McKinsey but is honest enough to mention two friends of his from those days, Jeff Skiing of Enron fame and  Rajat Gupta, ex MD of McKinsey, both of whom ended up in jail. Peters also mentions how he nearly lost his job. And it wasn’t for preaching high-minded stuff. Peters’ crime was that he had written a best-selling book that focused on organisational culture and people rather than on strategy, which was McKinsey's staple. This infuriated one of his bosses. 

Peters is right on one point. McKinsey's problem today could be its sheer size: $10 bn in revenue and 30,000 staff worldwide. Having to grow revenues on such a base would be a challenge for its bosses- and cutting corners becomes inevitable. Not much room for the ‘moral responsibility of enterprise’.

Privatisation myths and realities

There is no economic topic, perhaps, on which misconceptions are as pervasive as privatisation.

Let me address a few:

i. Private firms are always more efficient that state-owned enterprises (SOEs): Not really. Comparative performance depends on a number of things- regulated versus competitive industries, developed countries versus less developed countries, 100 per cent SOEs versus listed SOEs. In regulated industries, many studies show no difference in performance. In advanced countries with developed capital markets and good governance structures, private firms do better but not  so much in less developed countries. Again, many of the comparisons where SOEs fare poorly relate to 100 per cent government-owned entities. Where the government exposes SOEs to competition and subjects them to market discipline through listing on exchanges, SOEs fare much better. In India, many SOEs showed an improvement in performance consequent to listing.

ii. Under-performing SOEs should be sold off to private parties, then performance will improve: Not true. A change in ownership by itself may not translate into improvement in performance. The valuation of the SOE has a bearing on the outcome. Let us say a listed SOE is sold below its correct value at a time when stock market prices are generally depressed. The new owner has merely to wait for the market to recover to meet his return threshold. He does not have to exert in order to improve firm efficiency. The method of sale or the design of privatisation is thus critical to the outcomes that follow.

iii. Improved performance of SOEs post privatisation shows private ownership is superior: Wrong. SOE  performance often suffers for want of capital- governments facing fiscal constraints are unable to provide the capital needed for modernisation and growth. When the firm is transferred to a private owner, capital comes in and performance improves. Managerial competence is not the factor. Then, privatisation of SOEs is often a long drawn-out process. During the period, managers have little incentive to perform. Once sold, managerial focus returns and performance improves. It is not the change of ownership per se that has contributed. Many SOEs shed flab and streamline operations in order to make themselves attractive to private owners. The results show up over time - and are incorrectly ascribed to a change in ownership.

iv. Auctions automatically result in the sale to the highest bidder and hence ensure improvement in performance post privatisation: Well, no. Much depends on whether the auction is efficient. This requires numerous conditions to be satisfied: multiple bidders, the absence of collusion, opening up to domestic as well as international bidders, etc. In practice, these conditions are rarely satisfied. The auction is not efficient and the firm does not necessarily past into the hands of the most deserving private party. As a result, improvement in firm efficiency may not happen nor will the government have succeeded in maximising revenues through privatisation.

v. What applies to non-financial firms applies to banks as well: Wrong. One of the important considerations in selling off SOEs is that they will then cease to make demands on government capital. In banking, however, the government remains responsible for rescuing all but the smallest of banks. The considerations that apply to privatisation of non-financial firms do not, therefore, apply to banks. Bank privatisation requires to be handled with a great deal more caution.

More in an essay on privatisation I have penned for The India Forum. 

Financing the deficit through privatisation is a high-risk approach

'We are a fiscally prudent government'. That's the line one heard from the government during the pandemic. This was in response to the clamour for a larger discretionary fiscal stimulus. The budget for FY 22 discards this line. What might have prompted the government to do so? Three considerations have been cited by officials and commentators:

i. The higher deficit is okay because it's for a good cause, more capital expenditure

ii. Larger deficits will mean higher growth so we don't have to worry about the deterioration in public debt in the near future

iii. Asset sales will finance a higher proportion of the deficit than before. Sale of PSUs is a major reform that will again deliver higher growth.

I argue that none of these arguments is entirely convincing. Nevertheless, it's good if the fetish about the 3 per cent fiscal deficit to gdp ratio is discarded. We can live with higher deficits. If the government as well as market analysts recognise that, it's a welcome change.

More  in my BS column, What explains the Budget's fiscal stance?

FINGER ON THE PULSE

T T RAM MOHAN

 

Headline: What explains the Budget's fiscal stance?

 

Athough the budgetary exercise has made a virtue out of necessity, the policy change could end up having a happy outcome

 

The deficit numbers in the Budget for 2021-22 are way above what analysts had expected. Hardly anybody had expected the fiscal deficit to end up at 9.5 per cent of gross domestic product (GDP) in 2020-21 and 6.8 per cent in 2021-22.

 

Through the pandemic, few would have thought that the government would discard the Fiscal Responsibility and Budget Management (FRBM) Act for the foreseeable future. The decision to limit the discretionary fiscal stimulus to around 2 per cent of GDP had indicated that the government was limiting the stimulus in order to return quickly to the path of fiscal consolidation once the pandemic had subsided.  It turns out now that, instead of limiting the stimulus, the government has merely chosen to spread it over two or more years. 

 

Clearly, the government decided on a change in fiscal stance somewhere along the line. What might have prompted it to do so? The shortfall in revenues in FY21 seems to have been the decisive factor. The shortfall was a staggering Rs 4.65 trillion. On the base of revenues for FY21, containing the deficit for FY22 at lower than 6.8 per cent would have required an increase in taxes and a cut in expenditure that would have derailed the ongoing economic recovery.

 

Far better to forget about the FRBM Act and live with a higher fiscal deficit up to 2025-26.  Fair enough. The challenge for the government was to make a virtue of necessity. From the finance minister’s Budget speech and the statements made by various officials, it appears that the government is making three arguments in favour of the change in fiscal stance.

 

First, there is a shift in expenditure in favour of capital expenditure —it’s not the old story of borrowing to finance revenue deficits. Capital expenditure rises by 31 per cent in FY21 revised estimates relative to actuals in FY20 and 26 per cent in the budget estimates of FY22 relative to revised estimates for FY21.

 

There is reason to be sceptical about both estimates. Former economic affairs secretary Subhash Garg calls the increase in capex in FY21 an “optical illusion”.  One item that contributes Rs 79, 398 crore is a special loan intended to provide liquidity support to the railways. This qualifies as revenue expenditure. Another item of Rs 12,000 crore is a loan to states. Take these two items away and capital expenditure in FY20-21 rises by a mere 3.6 per cent.

 

As for FY22, the increase in capital expenditure is on account of several infrastructure projects. Infrastructure projects in government take time to materialise, so spending the budgeted amount in a given year is difficult. On past showing, the increase in capex will likely be considerably less than 26 per cent.  

 

A second argument for the shift in fiscal stance is that growth fuelled by higher capital expenditure will take care of the fiscal deficit. The latest Economic Survey devotes a chapter to this argument. It argues that, in high growth economies such as India, the usual arguments about sustainability of public debt do not apply. Especially during an economic downturn, it makes sense for the government to borrow and spend because growth will ensure that public debt does not spiral out of control. We also need not worry about the crowding out of private investment, especially if public investment is directed at high multiplier areas such as infrastructure.

 

None of this was unknown to successive Finance Commissions. Nevertheless, Finance Commissions have insisted on adherence to conservative targets of fiscal deficit and public debt. They had reasons for doing so.  The central and state governments have large contingent liabilities. Large external shocks — oil shocks, a global financial crisis and, now, the pandemic — can derail growth for long periods, so having a fiscal buffer is prudent. The rating agencies do treat advanced and emerging markets differently in respect of public debt. The Economic Survey thinks, as an earlier Survey did, that this is unfair. Well, it is an unfair world that we live in.   

 

It has been recognised that, if GDP growth in India is above 7 per cent, debt sustainability ceases to be an issue. The Economic Survey contends that India does not face a debt sustainability issue even if real growth is a mere 4 per cent in the next 10 years. If that is indeed so, one wonders if we need an FRBM Act at all.   

 

A third argument is that the old fiscal limits are not valid in the brave new world of reforms. A rising tax/ GDP ratio has long been thought the key to fiscal sustainability. Earlier budgets used to project a rise in the ratio, whatever the setbacks from time to time. There are no such projections in the latest Budget. In FY19, the centre’s tax/GDP ratio was 11.9 per cent. It fell to 10.6 per cent in FY20 and is estimated at 9.8 and 9.9 per cent in FY21 and FY22, respectively.

 

With the tax/GDP ratio falling, the government has to look to non-tax revenues to finance expenditure. The government will privatise and not disinvest. In all but four strategic sectors, public sector units (PSUs) will be up for sale. The government will also privatise two public sector banks and one insurance company in the coming year. It will use resources raised from privatisation to create infrastructure assets. These assets, in turn, will be monetised through sale to private parties.

 

Privatisation is intended to earn revenues for the government and to improve efficiency of assets. The distress sale of assets to finance budgetary deficits is bound to affect government finances adversely in the long term. It also has implications for efficiency. We know from the literature that privatisation that is not designed properly — as will happen if assets are sold in a rush — may not result  in more efficient utilisation of assets.

 

That apart, one wonders whether large-scale privatisation is feasible at all in our fractious democracy. If disinvestment targets cannot be met year after year, how does large-scale privatisation become feasible? The strategic sales of PSUs of many years ago drew adverse comments from the Comptroller and Auditor General of India. One sale of 2002 has resulted in a Central Bureau of Investigation court asking for charges to be filed against the then minister for disinvestment, Arun Shourie, and four others. Political parties and unions will oppose the moves vigorously and, indeed, a federation of bank unions has already called for a two-day strike in March.

 

The strategy of financing higher government capital expenditure through asset sales is thus likely to have only limited success. We will have to find ways soon to raise the tax/GDP ratio. There could, nevertheless, be a happy outcome from this year’s budgetary exercise. Both the government and market analysts may have come to realise that India can relax somewhat the deficit targets set out in the FRBM Act without derailing debt sustainability or attracting a rating downgrade.

 

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Government advertising poses threat to newspaper independence in Britain

The biggest advertiser in Britain is not Amazon, Apple or Nike - it's the government, writes Chris Sweeney in RT. How independent can newspapers be if they are so dependent on the government?

On the day of writing (February 10), across six national titles – Daily Express, Daily Mail, Daily Mirror, Daily Star, the Daily Telegraph and the Guardian – there were a staggering 15 pages of government advertising, not counting any supplements. Compare that to the next biggest advertiser on that day in the same titles.

It was the nation’s biggest supermarket chain, Tesco, who reported a 29 percent rise in profits, with four pages. The next biggest was supermarket Asda, bought recently for £6.8 billion, with one and half pages. Budget supermarket chain Aldi and telecommunications firm TalkTalk followed with a single page.

Sweeney argues that this has taken a toll on the reporting on the pandemic:

The newspaper industry has been asleep at the wheel during the pandemic. No hard questions or investigative reporting was done....

But there was a real cost to the newspaper industry's soft soaping: the UK has the highest number of deaths in Europe, with over 113,500. There were embarrassing gaffes, due to an initial lack of scrutiny. 50 million face masks were ordered that couldn't be used, part of a £156 million contract. That was topped by a Royal Air Force plane flying to Turkey to collect gowns. After a ridiculous standoff, the plane finally flew home, but all of the 400,000 didn’t meet standards and were useless.

The British public have been let down by their news-gatherers. There are routine calls for reporters to hold Boris and his ministers to account, along with the leaders of the devolved parliaments – Nicola Sturgeon (Scotland), Mark Drakeford (Wales), and Arlene Foster (Northern Ireland). But the bad news is that when the hard questions needed to be asked, the government’s advertising honeypot kicked in. Now the newspapers are hooked and need the money, so are they really digging as deep as they can?

The FRBM Act is dead

The budget for 2021-22 formally buries the FRBM Act. It has been buried informally over the past decade and a half through the 'pause' button on consolidation, invoking of the 'escape 'clause', etc. If something can't be achieved over 18 long years, it is unlikely to be achieved in the next five. The budget finally recognises this reality.

Good. But why the belated realisation after years of pretence? And how is that commentators and the markets seem to applaud the change after years of chastising the government for not practising fiscal prudence? The about-turn is mystifying. 

Commentators who had made a living out of preaching fiscal prudence now see virtue in spending to finance growth. The markets are supposed to be able to peer into the distant future. But the stock market's euphoric reaction suggests it can only look at the immediate year or so. The fiscal deficit will stay well above the FRBM target of 3 per cent until 2025-26 at the very least. The markets couldn't care less. Am I the only one who is baffled?

There's  a buzz in the air about reforms. The government has finally announced big bang privatisation. The markets sees this as a decisive break from our socialist past and a shift in favour of the market. I am at a loss to comprehend how large-scale privatisation can be accomplished in a country that has found it difficult even to pursue disinvestment. 

It is more likely that asset sales will fall below expectations. So will capital expenditure that is premised on non-tax revenues. Fiscal consolidation will become inevitable but we can think of higher fiscal deficit targets than the ones enshrined in the FRBM Act. Post the pandemic, the markets and rating agencies seem to be willing to live with higher deficits and public debt.

My article in the Hindu, A goodbye to fiscal orthodoxy..  

 

A goodbye to fiscal orthodoxy

Budget 2021 is a departure from a key tenet of the Washington Consensus — macroeconomic stability

T.T. Ram Mohan

Enough of fiscal orthodoxy. Spend like there is no tomorrow. That is what the Narendra Modi government’s Budget for 2021-22 seems to signal with its fiscal deficit at 9.5% of GDP for FY21 and 6.8% in FY22.

A mix

The change in fiscal stance is part of a selective departure from market orthodoxy that has marked the government’s economic policy in the last few years. The government has increased duties on some imports in order to protect and foster domestic industry. It has introduced performance-linked incentives for designated sectors, something that goes counter to market economics. The government is, however, happy to adhere to other elements of market orthodoxy, such as privatisation and a greater role for foreign direct investment (FDI).

To comprehend the shift in fiscal thinking, you only need to compare one document in the Budget with that of previous years. This is the document titled Medium Term Fiscal Policy cum Fiscal Strategy Statement (https://bit.ly/3aFM0pJ). The document begins with a table on various fiscal indicators.

In previous years, the document would give the indicators for the past two years as well as the projections for the next two years. The idea was to show that the economy was moving along a fiscal consolidation path, with a fiscal deficit of 3% of GDP as the eventual target. In this year’s Budget, the yearly projections are missing. All we have is a commitment in the Finance Minister’s speech to lower the fiscal deficit to 4.5% of GDP by 2025-26.

For well over a decade-and-a-half, we have kept up the pretence of attaining the deficit targets set out in the Fiscal Responsibility and Budget Management (FRBM) Act (2003). In this Budget, the pretence goes out of the window. The Finance Minister has promised to introduce an amendment to the FRBM Act to formalise the new targets.

Moving away from framework

The Budget thus marks an important departure from one of the key tenets of the Washington Consensus, the framework for market-oriented economics which has dominated policy making in most parts of the world. ‘Macroeconomic stability’ is central to the Consensus. ‘Macroeconomic stability’ means that government budgets need to be broadly in balance so that borrowings to finance the deficit are kept to the minimum. ‘Austerity’ became something of a mantra. It has been bitterly contested in recent years, especially in Europe, but austerity won the day until the COVID-19 crisis struck.

The Economic Survey that preceded the Budget laid the groundwork for a departure from a rigid adherence to fiscal consolidation. It has a quote from economist Olivier Blanchard, “If the interest rate paid by the government is less than the growth rate, then the intertemporal budget constraint facing the government no longer binds.”

The “intertemporal budget constraint” means that any debt outstanding today must be offset by future primary surpluses. Blanchard was saying that this is not true if the Interest Rate-Growth Differential (IRGD), the difference between the interest rate and growth rate, becomes negative. In the advanced economies, as interest rates have turned negative, Blanchard’s condition has been met. So governments there do not have to worry that deficits will render public debt unsustainable.

‘Spend more’

The International Monetary Fund (IMF) and the World Bank, both flag-bearers of the Washington Consensus, have been urging a departure from fiscal orthodoxy in the wake of the pandemic. Both these institutions used to be wary of any increase in the public debt to GDP ratio beyond 100%. Today, they are urging the advanced economies to spend more by running up deficits even when the debt to GDP ratio is poised to rise to 125% by the end of 2021.

The Survey argues that in India, the growth rate is higher than the interest rate most of the time. So the conventional restraints on fiscal policy need to be questioned, especially when there is a serious contraction of the sort the Indian economy faced in 2020-21. It says that, in the current situation, expansionary fiscal policy will boost growth and cause debt to GDP ratios to be lower, not higher. Given India’s growth potential, we do not have to worry about debt sustainability until 2030.

These points are by no means novel; the conditions for debt sustainability are well known. However, the Survey’s line was not accepted in the past. Indian fiscal policy has adhered to orthodoxy even during a downturn, such as the one we faced in the years preceding the pandemic. An important consideration was the fear that the rating agencies would downgrade India if total public debt crossed, say, 10%-11% of GDP. That is a risk that cannot be wished away unless the rating agencies have decided to toe the IMF-World Bank line on fiscal deficits.

Key concerns

Another concern is that a large fiscal deficit can fuel a rise in inflation. It is more than likely that a change in the fiscal consolidation targets will require a change in the inflation target of 4% set for the Reserve Bank of India. The Budget makes no mention of such a possibility. Perhaps the Finance Minister did not want to administer too many surprises at one go.

A third concern is that, with the tax to GDP ratio not rising as expected, the sale of public assets has become crucial to reduction in fiscal deficits in the years ahead. This is a high-risk strategy. For years now, revenues from disinvestment have fallen short of targets. The sale of Air India, which was begun in 2018, is still dragging on.

We need to face up to an important reality: large-scale privatisation is not easily accomplished in India. Selling public assets cheap is politically contentious. There will be allegations of favouring certain industrial houses. Public sector unions are a vital political constituency. Privatisation of banks raises concerns about financial stability. Job losses from privatisation are bound to evoke a backlash.

Privatisation means FDI

Moreover, large-scale privatisation almost always involves substantial FDI. In South East Asia and Eastern Europe, privatisation of banks meant a large rise in foreign presence in the domestic economies. Atmanirbhar Bharat connotes greater self-reliance and stronger Indian companies. How does the government reconcile a rise in FDI with Atmanirbhar Bharat?

If the nation’s political economy came in the way of our meeting the FRBM targets, it is also likely to pose an obstacle to large-scale privatisation. A departure from fiscal orthodoxy is welcome. But the government needs to think of ways to make it more sustainable.

 

 

The MBA is alive and well, post covid

The world has not fallen apart after Covid-19. Greed is not dead and capitalism is not buried. And the MBA, contrary to forecasts, is alive and well, says an article in the Economist. Although the article is about US B-schools, much of it would apply elsewhere.

During the pandemic, B-schools saw online programmes posing a major threat. They saw applications falling as students felt that an MBA minus the social interaction may not be worthwhile. And foreign applicants to US schools fell following travel restrictions and reports of American universities getting foreign students to leave the campus, which also meant having to leave the country. European,  Chinese and Hong Kong schools benefited as a result.

But the American MBA is now back. The trend towards falling applications has been reversed this year. There is a rise in interest among the usual recruiters. How come? The article explains how US B-schools adapted and learnt:

MBA applications typically rise in recessions, when a weaker job market means lower forgone salaries. But business schools deserve credit for adapting their business models—as their professors preach others to do. Many delayed the start of semesters, offered generous scholarships, waived exam requirements and liberalised policies on deferrals. Harvard Business School allowed students it admitted to postpone studies for one or two years. GMAC reckons that deferrals globally have shot up from about 3% to 7%.

Schools also boosted online and flexible degrees, which are surging, and integrated digital teaching into core MBA courses.

The biggest learning, perhaps, is that online is not the threat it seemed to be. By intelligently combining classroom learning with digital teaching, B-schools can enhance their appeal. Their experience is akin to that of mainstream banks that at one point seemed threatened by online alternatives. By embracing online technology and combining it with brick and mortar branches, the leading commercial banks have strengthened and broadened their appeal. Ditto for B-schools. 

On a slightly different note, an article in the FT suggests that while B-schools may be booming, their appeal to women may be waning. It appears that women are more concerned about the rising cost of MBA education than men are. The move to online also seems to have cheesed off women but, as suggested above, that should not be a factor hereafter.

Indian banking poised for revival in 2021

Indian banking has weathered the pandemic storm of 2020 and is poised for a revival in 2021. The improved outlook is reflected in the rally in banking stocks. All right, the stock market may be experiencing a bit of a bubble. But the fundamentals tell the same story. The bad loan problem has been largely dealt with- through aggressive provisioning and through recapitalisation of banks.

The RBI's Financial Stability Report of January 2021 has some gloomy projections based on stress tests it has carried out. The RBI's stress tests show that, in a baseline scenario, bad loans could rise from 7.5 per cent in September 2020 to 13.5 per cent in September 2021. In an adverse scenario, bad loans could rise to 14.8 per cent for scheduled commercial banks as a whole. For public sector banks (PSBs), the scenario could be worse.

The RBI qualifies these estimates with caveats:

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.” The RBI also introduced a caveat in its stress test for ban

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
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 By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions. It is emphasised that model outcomes do not amount to forecasts.

....considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a nonlinear fashion.

In other words, with loan restructuring and other forms of forbearance, the  bad loan ratios may not be that bad. 

I am willing to bet they won't be. I have seen the estimates of market analysts. Some of them estimate bad loans at about half the level of 13.5 per cent indicated by the RBI's base line scenario. Many bankers felt at the height of the pandemic that bad loans could rise by up to 50 per cent over the previous year. A 50 per cent rise over 7.5 per cent amounts to around 11 per cent. That was before we learnt that the Indian economy is recovering faster than thought and that very firms have opted for loan restructuring.

I notice that KV Kamath is also inclined to an optimistic view: 

Kamath said one should overreact and talk about bank capitalisation and cleanup, which he believes has already been done.

Hand-holding might be required, but that is completely different from cleanup. Recapitalisation of banks (by the government) has been done, and nothing has been broken, because banks have been prudent and continue to make provisions. Having said that, had a large number of corporate restructuring happened, there would have been noise in the market. There is no noise in the market.

In a recent article in BS, I set forth the reasons I think 2021 will be a year of recovery for Indian banking:

• GDP growth of 10 per centin 2021-22 will translate into credit growth of 15 per cent. This will boost bank bottom lines
• Thanks to increased provisioning, NPAs were down to 2.8 per cent in March 2020. 
• We will be about ten years into the banking crisis in 2020-21. That's a long enough time to emerge from the crisis given that the typical banking crisis, according to Reinhart and Rogoff, lasts eight years

I also argue that the impending improvement in banking, including at PSBs, means that the recipes for banking revival given so far - a bad bank, a Bank Investment Company, wholesale privatisation- are not meaningful. 

It makes more sense to recapitalise PSBs, wait for an improvement in valuations and attempt strategic sales in two or three PSBs as an experiment. Wholesale privatisation and a fall in government shareholding below 50 per cent will jolt depositor and investor confidence in Indian banking at a time when the outlook appears promising.

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
Copyright © BloombergQuint

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.” The RBI also introduced a caveat in its stress test for ban

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
Copyright © BloombergQuint

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
Copyright © BloombergQuint

 

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
Copyright © BloombergQuint

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
Copyright © BloombergQuint

Management "lessons" from Brisbane test

 This may sound cliched but cliches are often true and worth repeating. So, here are some management "lessons" from India's great win at Brisbane.

It is said that India won the Brisbane test despite the absence of  many stalwarts- Kohli, Shami, Jadeja, Ashwin, Bumrah, Yadav, Rahul. A badly depleted side managed to pull off a fantastic victory. It's worth asking: was it despite their absence or because of it?

Stars don't have to go all out. They don't have that much to lose if they don't play well. Not so with debutants or novices such as Siraj, Natarajan, Sundar. They have to go all out, make the most of an opportunity. They have so much at stake. 

Stars don't easily make good team players- and this is not with reference to our senior cricketers, it's  a general statement. And yet performance is more  about team performance than about stars.Team performance is more than the aggregation of solo effort- cooperation, collaboration, mutual support, give and take, all these matter.

Above all, nobody is indispensable. It may appear that, sans the stars, an organisation will be nowhere. However, there is always talent that can be found and the collective team effort can compensate for lack of individual greatness. Indeed, the test of an organisation is whether it can perform once a star or stars have departed.

In light of the above, I see merit in the suggestion, gathering steam, that Ajinkya Rahane should be retained as captain for tests:

Rahane collected the Border-Gavaskar Trophy, held it aloft, called his team-mates, handed over the trophy to T Natarajan and left the scene. On ABC Grandstand radio commentary, legendary former Australia captain Ian Chappell was impressed.

“That’s Rahane for you. When the BCCI will hang a picture of this at its office, the captain will be missing from the group photo. His team mates love him and respect him. They are playing for him,” Chappell said.

I think I would have really considered keeping @ajinkyarahane88 as Captain for @BCCI !!! Allowing @imVkohli to be the Batsman only would make India even more dangerous & Rahane has an incredible presence & tactical nous about him,” former England captain Michael Vaughan wrote on Twitter.

The team leader does not have to be the best player in the team. He has to be a competent player who can get the best out of his team- by motivating them, by involving them in decision-making, maintaining good relationships. Rahane appears to meet these requirements in ample measure. Besides, Kohli may be able to focus more on his batting, as Vaughan points out.

It's interesting that while many people warm to the idea, they seem to think the selectors will find it difficult to put it to it Kohli, given that he's a superstar. There, you have the familiar Board of directors syndrome- the board not wanting to annoy a star CEO. Let the selectors make bold to try. They must know that the principles of managing for the long run are behind them.

Trump baiters need to chill

 I wasn't impressed at all by the coverage of the events in Washington last week.

The mobs storming into Capitol Hill last week were a disturbing sight. But this was hardly an armed insurrection or a coup d'etat. President Trump believes the election was stolen- and he has made no secret of it. His followers and admirers think likewise. A large number of them decided to vent their feelings last week. 

Sorry, but that doesn't amount to an insurrection nor was it President Trump inciting violence. And the calls to restrain Trump from using the nuclear option were really over the top. What's happening is that the liberal media and the Washington establishment are desperate to see Trump off. They have wanted badly that he should concede defeat. They are miffed at the legal challenges he has mounted. Never mind that all that President Trump has do so far falls within the ambit of the law.

So when a large mob- estimated at anywhere upwards of 200,000- showed its support to Trump, the anti- Trump brigade seem to lose perspective and we had shrill hysteria from politicians and the mainstream media, with social media such as Twitter jumping into the fray.

It was refreshing to read this article in Russia Today that asked Trump-baiters to tone down the rhetoric:

A coup attempt, an insurrection, sedition – whatever wonderfully evocative term you care to reach for – is not some strange-looking dude with a painted face and horns on his head posing for the cameras inside the Capitol's hallowed halls.

It's not an incredibly dim, grey-haired bloke sitting in the House leader's office chair and scrawling notes. It's not a bunch of not-very-bright people tearing through the corridors of power with Confederate flags and MAGA hats stealing a laptop or two.

That's not a coup d'etat, it's a much smaller thing – it's called ‘crap security’.

An armed insurrection is a leader pointing his army at the Capitol, and tanks driving up the steps and smashing through the doors. Rifle-wielding troops following up in its wake. 

A coup d'etat would be Donald Trump pulling on his military fatigues and taking to the airwaves, sitting at the Resolute Desk and solemnly declaring he had taken absolute control for the good of the nation.

If the president was imposing martial law, then all these screaming people would have a point.

But he isn't. And that's not what happened. It simply is not what's happening now, nor is it going to happen in the final ten days of Trump's term.

.....There was no American coup. It's hyperbole and four years of pent-up fury and score settling. The folk shouting the loudest simply despise The Donald the most, and they don't much like his supporters either. They do fear them, though, because there are loads of them and these people – for some reason – adore their president. Biden, Pelosi et al will simply never get their heads around “why?” 

It doesn't matter. Trump is over.

How big a setback is the new UK covid strain?

The new UK strain of  Covid -19 is not to be lightly dismissed- that's the message from the nationwide lockdown imposed in the UK. 

The UK strain is said to be 50-70% more transmissible than the earlier one. It's not more lethal or less amenable to treatment but the sheer rise in numbers also means a potential rise in hospital cases and fatalities.

The new strain and the rising incidence of cases- often, 50,000 a day in the UK- will derail the hoped for recovery in 2021. We don't yet know how much. Since fiscal and monetary policies were stretched quite a bit in response to the earlier outbreak, it's not clear what policy options will be available to deal with the new threat. 

The British response shows that a stringent lockdown is still considered the best way to limit the spread despite numerous assertions to the contrary. FT's Science Writer Anjana Ahuja writes:

If 2020 taught us anything it is that countries can never act too early and that postponing the inevitable leads to protracted agony. A recent Imperial College London analysis suggests that locking down one week earlier in the first spring wave would have cut UK deaths from around 37,000 to about 16,000.

Taiwan, Vietnam and New Zealand demonstrate that early, aggressive intervention delivers a healthy population able to participate in a healthy economy. Treading a middle way between public health and the economy, as the UK has tried to do since March, is a half-measure that protected neither. It is like trying to keep a motorway open after a pile-up and hoping drivers can swerve to avoid the debris, rather than shutting the road and clearing it so traffic can flow normally. Further collisions simply produce more debris and casualties.

That is a fitting answer to those who claim that India's lockdown in March last year was too harsh.

In another article, fund manager Mohamed El Erian spells out the implications for the global economy of the new strain:

Inevitably the new strain will amplify the dispersion in economic performance around the world. Europe is experiencing further disruptions to the movement of people and goods and accelerating the fall into a double-dip recession. So it is probable that we will see previously unthinkable differences in the growth rates of big economies. This may well include as much as a 20 percentage point annualised difference between the most stressed G7 economies and China according to my calculations. Even within the G7, growth dispersion will be at exceptionally high levels. 

Once again, an already excessive level of inequality in many countries will worsen. The burden of the mutated virus environment is suffered disproportionately by the disadvantaged segments of society. 

Once again, the wealthy are likely to benefit if central banks feel compelled yet again to inject liquidity into markets. Once again, large companies with access to capital markets will benefit at the expense of smaller ones who rely on banks and local lenders.