Now that the UPA government has survived, there is the usual babble about "pushing ahead with reforms". What reforms are people talking about? Can you imagine any government cutting subsidies or changing labour laws in the run-up to elections?
Many reforms require legislative approval and are time consuming. Unless the market rally continues, disinvestment may not be attractive. Not least, the government cannot move an inch if any measure offends one of the numerous small groups whose support it garnered in order to survive.
Even the survival of the government for long cannot be taken for granted. So, talk of a burst of reforms that will lift the stock markets is just hot air. What will lift the markets is the decline in oil prices (which I had predicted) and a return of net FII flows later in the year.
More on the prospect for reforms in ET's debate last Tuesday.
Wednesday, July 23, 2008
Mayawati gains in stature
One unintended consequence of the PM's insistence on seeing through the nuclear deal is the emergence of Mayawati as the head of a Third Front and contender for the PM's job sooner than most people had thought.
It's fair to say that opposition to the deal came mainly from the Left and Mayawati. The BJP and many of its allies would gladly opt for the deal with some minor changes- or that's the impression they have created. The BJP's lack of determination to topple the UPA also registered- witness Advani's statement in the course of his speech in parliament that the NDA wanted to defeat the government, not destabilise it.
Mayawati made two important points about the nuclear deal: one, it increased the chances of a US attack on Iran with all its implications for India; two, an attack on Iran would see oil prices shooting up further and worsening the suffering of the poor. It does appear that she is carving out a distinctive position for herself. The constituency she is targeting- dalits, upper castes,muslims, the economically backward- is the one that kept the Congress in power for decades after independence. Both the UPA and the NDA have cause for worry.
It's fair to say that opposition to the deal came mainly from the Left and Mayawati. The BJP and many of its allies would gladly opt for the deal with some minor changes- or that's the impression they have created. The BJP's lack of determination to topple the UPA also registered- witness Advani's statement in the course of his speech in parliament that the NDA wanted to defeat the government, not destabilise it.
Mayawati made two important points about the nuclear deal: one, it increased the chances of a US attack on Iran with all its implications for India; two, an attack on Iran would see oil prices shooting up further and worsening the suffering of the poor. It does appear that she is carving out a distinctive position for herself. The constituency she is targeting- dalits, upper castes,muslims, the economically backward- is the one that kept the Congress in power for decades after independence. Both the UPA and the NDA have cause for worry.
Monday, July 21, 2008
Why did UPA want a "Confidence" vote?
Tomorrow is D-day. We will know whether the UPA government stays or goes.
I am little puzzled, though, as to the rationale for a "confidence" vote in parliament. As far as my understanding goes, a party or a coalition is required to prove its majority only when it stakes its claim to government and there are doubts that it has the necessary numbers. Then, the president may ask the leader of the coalition to demonstrate its majority on the floor of parliament.
At any other time, it is for the opposition to move a "no confidence" motion. In the present instance, after the Left parties withdrew support, the onus was on them or the other Opposition parties to move a no-confidence motion. At least in constitutional terms, it is not obvious that Congress and the UPA needed to seek a vote of "confidence".
The PM assured parliament that he would seek its approval for the nuclear deal. The right course for the UPA would have been to table a motion on the nuclear deal and seek parliament's approval. The UPA should have done this before approaching the IAEA with the safeguards agreement. Even if the motion had been defeated, the government could have carried on- only a defeat on a no-confidence motion requires the government to quit. The Left would not have had a problem with the UPA government even if the motion was defeated- after all, its opposition to UPA centres on the nuclear deal.
So, why did the PM and the UPA not do the obvious thing? Why seeek a vote of confidence? Was it because they feared that a motion on the nuclear deal itself may not have a great chance of going through? If so, the only way to ensure the success of the deal would have been to stake the survival of the government itself. Then, all members of the UPA and others as well would have had to choose - between the survival of the government and, perhaps, the present parliament and fresh elections. Confronted with such a stark choice, there was a better chance they would back the government- and the nuclear deal.
If the UPA government survives and goes ahead with the nuclear deal, all this may seem clever politics. But it carries with it a heavy price: a fall in standards in politics to new lows and a badly divided nation. The nation would have been better served had the government done what it had promised- come to parliament solely for its approval of the nuclear deal.
I am little puzzled, though, as to the rationale for a "confidence" vote in parliament. As far as my understanding goes, a party or a coalition is required to prove its majority only when it stakes its claim to government and there are doubts that it has the necessary numbers. Then, the president may ask the leader of the coalition to demonstrate its majority on the floor of parliament.
At any other time, it is for the opposition to move a "no confidence" motion. In the present instance, after the Left parties withdrew support, the onus was on them or the other Opposition parties to move a no-confidence motion. At least in constitutional terms, it is not obvious that Congress and the UPA needed to seek a vote of "confidence".
The PM assured parliament that he would seek its approval for the nuclear deal. The right course for the UPA would have been to table a motion on the nuclear deal and seek parliament's approval. The UPA should have done this before approaching the IAEA with the safeguards agreement. Even if the motion had been defeated, the government could have carried on- only a defeat on a no-confidence motion requires the government to quit. The Left would not have had a problem with the UPA government even if the motion was defeated- after all, its opposition to UPA centres on the nuclear deal.
So, why did the PM and the UPA not do the obvious thing? Why seeek a vote of confidence? Was it because they feared that a motion on the nuclear deal itself may not have a great chance of going through? If so, the only way to ensure the success of the deal would have been to stake the survival of the government itself. Then, all members of the UPA and others as well would have had to choose - between the survival of the government and, perhaps, the present parliament and fresh elections. Confronted with such a stark choice, there was a better chance they would back the government- and the nuclear deal.
If the UPA government survives and goes ahead with the nuclear deal, all this may seem clever politics. But it carries with it a heavy price: a fall in standards in politics to new lows and a badly divided nation. The nation would have been better served had the government done what it had promised- come to parliament solely for its approval of the nuclear deal.
Monday, July 14, 2008
What were bank boards doing?
What were bank boards doing as the sub-prime crisis built up? What penalties do they face in banks that has suffered huge losses. Many CEOs have lost their jobs; not many directors have. One fact that took away my breath was mentioned in an FT report: nearly two thirds of bank boards were bereft of banking expertise.
So, who typically sat on these boards? Well, the mighty and the respectable, ex-CEOs of manufacturing firms, faces and names that have wide recognition. Is that good enough? I don't think so. I think it makes sense to have a minimum of finance and banking expertise on board boards. Here, India's Banking Regulation Act gets it absolutely right: at least 51% of board members must have expertise in specified areas: banking, economics, agricultural, small enterprises, etc.
The RBI also has norms for bank governance over and above the norms applicable to listed companies under clause 49. This is entirely appropriate: in many other countries too, governance for banks tend to be stiffer than for other firms or there are separate norms for governance for banks and for other companies.
Is having expertise on boards an insurance against failure? Not at all. Boards are limited by the information that management presents to them and the form in which these are presented. So, the best-intentioned boards may proved ineffective. But there is a more fundamental reason why boards are not as ineffective as one might like.
Most boards are clubby affairs. Those invited to serve as "independent" directors are pals of the CEO, they brush shoulders in the same watering holes and they are often retired people who value the handsome fees that many companies pay these days.
The atmosphere in boards is that of a mutual admiration society. CEOs pay ritualistic obeisance to the "sage guidance and wisdom" of boards in their annual statements- one retired CEO, whom I respect, told me there was not an iota of truth in this. Boards compliment management on their stewardship. Over sumptuous lunches and equally sumptuous snackes, top management and directors share jokes and anecdotes, there is a general air of conviviality. I mention this because, in this atmosphere, it is not done for an independent director to probe or to question. Bad form, old chap.
So, having expertise on bank boards is not enough. We need to ensure that there are enough directors who are independent of management, that is, they are not beholden to the management for their positions. This can happen only if financial institutions with equity stakes in the company and minority shareholders can directly elect a certain number of directors. The present concept of "independent" director, whereby management invites outsiders on to boards, is something of a farce. Alas, I don't see such a revolution happening in the near future.
More on this in my ET column, Banking's governance disaster.
So, who typically sat on these boards? Well, the mighty and the respectable, ex-CEOs of manufacturing firms, faces and names that have wide recognition. Is that good enough? I don't think so. I think it makes sense to have a minimum of finance and banking expertise on board boards. Here, India's Banking Regulation Act gets it absolutely right: at least 51% of board members must have expertise in specified areas: banking, economics, agricultural, small enterprises, etc.
The RBI also has norms for bank governance over and above the norms applicable to listed companies under clause 49. This is entirely appropriate: in many other countries too, governance for banks tend to be stiffer than for other firms or there are separate norms for governance for banks and for other companies.
Is having expertise on boards an insurance against failure? Not at all. Boards are limited by the information that management presents to them and the form in which these are presented. So, the best-intentioned boards may proved ineffective. But there is a more fundamental reason why boards are not as ineffective as one might like.
Most boards are clubby affairs. Those invited to serve as "independent" directors are pals of the CEO, they brush shoulders in the same watering holes and they are often retired people who value the handsome fees that many companies pay these days.
The atmosphere in boards is that of a mutual admiration society. CEOs pay ritualistic obeisance to the "sage guidance and wisdom" of boards in their annual statements- one retired CEO, whom I respect, told me there was not an iota of truth in this. Boards compliment management on their stewardship. Over sumptuous lunches and equally sumptuous snackes, top management and directors share jokes and anecdotes, there is a general air of conviviality. I mention this because, in this atmosphere, it is not done for an independent director to probe or to question. Bad form, old chap.
So, having expertise on bank boards is not enough. We need to ensure that there are enough directors who are independent of management, that is, they are not beholden to the management for their positions. This can happen only if financial institutions with equity stakes in the company and minority shareholders can directly elect a certain number of directors. The present concept of "independent" director, whereby management invites outsiders on to boards, is something of a farce. Alas, I don't see such a revolution happening in the near future.
More on this in my ET column, Banking's governance disaster.
Monday, July 07, 2008
Rating agencies - only a light rap?
Moody's confession of a botched $1 bn securities rating, thanks to a computer bug, is only latest in a series of woes for the ratings industry. Let's face it- rating agencies are not the most popular species in the financial sector today. They had eggs on their face after the East Asian crisis; they seem to have gone and blown it again in the sub-prime crisis.
But it appears the agencies will get away with a mild rap or two. The Economist reported last month that despite half a dozen agencies looking into their role in the recent crisis, the outcomes will be inconsequential: a commitment not permit 'ratings shopping' among clients; more transparency; more disclosure of the collateral; and the like. No fines, no crippling prohibitions.
I guess part of the reason is that it's hard to find an alternative- an independent rating agency promoted by government and funded by investors through the exchanges is a non-starter because governments getting into financial markets is the last thing people want.
The role of rating agencies is poised to get bigger with the implementation of Basel II because, for starters, most banks will rely on the ratings approach- this requires capital to set aside based on ratings assigned to borrowers by rating agencies. Basel II itself is under discussion now. I think there is a case for allowing the better banks to go with their own internal ratings instead of requiring them to go by rating agencies' ratings.
In India, I can't see that the better banks' rating of borrowers is likely to be of lower quality than that of the agencies- most banks, in any case, use the rating models supplied by the agencies and superimpose their own judgement. This probably makes more sense than banks relying entirely on the rating agencies.
But it appears the agencies will get away with a mild rap or two. The Economist reported last month that despite half a dozen agencies looking into their role in the recent crisis, the outcomes will be inconsequential: a commitment not permit 'ratings shopping' among clients; more transparency; more disclosure of the collateral; and the like. No fines, no crippling prohibitions.
I guess part of the reason is that it's hard to find an alternative- an independent rating agency promoted by government and funded by investors through the exchanges is a non-starter because governments getting into financial markets is the last thing people want.
The role of rating agencies is poised to get bigger with the implementation of Basel II because, for starters, most banks will rely on the ratings approach- this requires capital to set aside based on ratings assigned to borrowers by rating agencies. Basel II itself is under discussion now. I think there is a case for allowing the better banks to go with their own internal ratings instead of requiring them to go by rating agencies' ratings.
In India, I can't see that the better banks' rating of borrowers is likely to be of lower quality than that of the agencies- most banks, in any case, use the rating models supplied by the agencies and superimpose their own judgement. This probably makes more sense than banks relying entirely on the rating agencies.
Friday, July 04, 2008
Contrarian views on the nuclear deal
The debate on the Indo-US nuclear deal has been reduced to a test of patriotism. Those who who favour the deal want India to be a great economic power with the help of the US and are patriots. Those opposed to it have hang-ups about the US and are not averse to India falling behind China; their patriotism is questionable.
I have found this characterisation utterly puerile given the many nuances to this issue. Remember three top nuclear scientists in the country have come out with a statement expressing their reservations even now.
How refereshing, then, to come across two contrarian views on the deal on the same day. In an interview to Rediff, former diplomat M K Bhadrakumar makes a number of points:
The key question is: do we want the strategic alliance at the cost of surrendering some of our freedom of action in foreign policy and in the nuclear field? I do think there is a case for an open national debate and that there is no compulsion to be bound by some artificial time-table.
I have found this characterisation utterly puerile given the many nuances to this issue. Remember three top nuclear scientists in the country have come out with a statement expressing their reservations even now.
How refereshing, then, to come across two contrarian views on the deal on the same day. In an interview to Rediff, former diplomat M K Bhadrakumar makes a number of points:
- The UPA government is guilty of breach of trust in pursuing the matter of IAEA safeguards without the concurrence of the Left. When the Left gave the go-ahead to the UPA government to negotiate safeguards with the IAEA last November, it was on the understanding that the agreement itself would later be discussed and approved by the joint UPA-Left committee on the subject. The Congress has gone back on this assurance.
- There is lack of transparency on the safeguards agreed with IAEA- the government has not disclosed what these are.
- The IAEA agreement, once signed, will be 'in perpetuity'; once this agreement is signed, the further course of the nuclear deal is out of India's hands. Even if the form of the NSG waiver is unpalatable to India, it is out of our hands.
In another article, Brahma Chellaney questions the current line that the deal is about reducing dependence on oil and opening up prospects for nuclear power. He points out that India's dependence on oil for electricity purposes is negligible- just 4% of all our needs. Oil is primarily required for transportation purposes whereas nuclear power plants are all about generating electricity! He goes on to blast the case for nuclear energy as a substitute for oil:
If global oil demand is threatening to outstrip supply, so is the case with uranium. Current concerns associated with oil’s price volatility, supply security and geopolitical risks are no different than uranium’s. And if global oil reserves are finite, so are uranium resources, with proven uranium reserves likely to last barely 85 years, according to the Red Book published jointly by the OECD and IAEA.
In fact, in the past five years, the international spot price of uranium has risen faster than that of crude oil, with uranium today trading six times above its $10 a pound historical average. Oil and uranium prices are likely to stay volatile, but the long-term trend for both is surely up. Just as cheap oil now seems fanciful, cheap nuclear power for long has been a mirage.
Chellaney is right. This deal is about a strategic alliance with the US to counter the rise of China, it is merely being presented as an energy proposition for political and diplomatic reasons. The real worth of the strategic alliance lies in the transfer of a whole range of advanced dual-use technologies- these technologies cannot be transferred unless India's status as a nuclear power changes.
The key question is: do we want the strategic alliance at the cost of surrendering some of our freedom of action in foreign policy and in the nuclear field? I do think there is a case for an open national debate and that there is no compulsion to be bound by some artificial time-table.
Sunday, June 29, 2008
Governance issue at Ranbaxy?
In today's TOI, Gurcharan Das has this to say about the sale of the promoters' equity in Ranbaxy to Daiichi of Japan:
This is not a case of any investor selling off his stake. The dominant investor is also top management. The decision of the promoter to sell his stake thus implies a decision by top management to let another company acquire Ranbaxy. Can such a decision be taken without the concurrence of the board? It does look as though there is something here for Ranbaxy's shareholders as well as Sebi to ponder.
For some years now I have been on the board of Ranbaxy and have watched with admiration as the company transformed itself into India's first real multinational. I have seen it inspire a dozen other companies and helped create a world-class generic drugs industry that is feared by western giants for aggressively challenging their patents and admired for lowering the cost of medicines around the world. How, then, was I to respond to the announcement by Ranbaxy's CEO, Malvinder Singh, that he wanted to sell his family's stake for Rs 10,000 crore to a Japanese company, Daiichi Sankyo? The family was equally shocked. A CEO's ability to keep months of negotiations secret in a country afflicted by verbal diarrhoea speaks of the company's character.Das' comments suggest that, as a board member, he had little inkling of the deal until it was announced in public. Are we to conclude, then, that the deal was not approved by the board? If yes, is this appropriate?
This is not a case of any investor selling off his stake. The dominant investor is also top management. The decision of the promoter to sell his stake thus implies a decision by top management to let another company acquire Ranbaxy. Can such a decision be taken without the concurrence of the board? It does look as though there is something here for Ranbaxy's shareholders as well as Sebi to ponder.
Thursday, June 26, 2008
Media hype is a threat to growth outlook
Seeing the coverage of the rise in inflation and the reactions to it, you might think the Indian economy is in the midst of a crisis or headed towards one. Relax. Take a few deep breaths, pinch yourself nicely and chant thrice: this economy is growing at 8%. Done? Now, read my latest ET column, Inflation threat is exaggerated. Let me elaborate on why I am fairly optimistic.
A top CEO told me a couple of days ago that most firms are "investing like there is no tomorrow". Existing projects will be not be delayed or cancelled. Any hesitation will relate to future projects and fresh fund raising. This means investment will continue to drive growth this year. That is one reason for optimism.
Another is corporate profitability- PAT growth of 40-50%! In most economies, this would be regarded as a fantasy. That gives enough scope for absorption of price increases. The consumer will not face much higher prices, so consumer demand, while being moderated, will not be undermined.
Thirdly, extremely low leverage, thanks to strong profit growth in the recent past. With such low leverage, interest rate increases can be shrugged off by corporates.
Fourthly, the runaway increases in salaries- these make it possible for the real spenders to keep spending. The distributive implications of inflation are another matter. Inflation will not affect growth but will demolish the UPA's chances especially if it relates to food inflation.
Most analysts take the view that cost-push inflation is a threat and the RBI needs to clamp down even if it means putting the brakes on growth. I disagree. The impact of supply shocks on the price level is not clear enough, although we can say with some assurance that large supply shocks tend to raise the inflation rate.
I go with the view that inflation is primarily a demand-side problem. This is true of our present situation as well. Aggregate demand is much too strong for comfort. If the Indian economy accelerates in the second half of the year as global problems recede, we may find growth in the region of 9% plus, which I would regard as the 'overheating zone'. So, in my view, it is the prospect of too rapid a growth rate for the sixth year running that provides the rationale for a rise in interest rates, not cost-push factors.
It is not interest rate increases that pose a threat to growth. The biggest threat to growth is posed by media hype on inflation, the global outlook, etc- the continuous blast from news channels may come to be taken seriously at some point by investors and consumers, which is when the problems will begin.
A top CEO told me a couple of days ago that most firms are "investing like there is no tomorrow". Existing projects will be not be delayed or cancelled. Any hesitation will relate to future projects and fresh fund raising. This means investment will continue to drive growth this year. That is one reason for optimism.
Another is corporate profitability- PAT growth of 40-50%! In most economies, this would be regarded as a fantasy. That gives enough scope for absorption of price increases. The consumer will not face much higher prices, so consumer demand, while being moderated, will not be undermined.
Thirdly, extremely low leverage, thanks to strong profit growth in the recent past. With such low leverage, interest rate increases can be shrugged off by corporates.
Fourthly, the runaway increases in salaries- these make it possible for the real spenders to keep spending. The distributive implications of inflation are another matter. Inflation will not affect growth but will demolish the UPA's chances especially if it relates to food inflation.
Most analysts take the view that cost-push inflation is a threat and the RBI needs to clamp down even if it means putting the brakes on growth. I disagree. The impact of supply shocks on the price level is not clear enough, although we can say with some assurance that large supply shocks tend to raise the inflation rate.
I go with the view that inflation is primarily a demand-side problem. This is true of our present situation as well. Aggregate demand is much too strong for comfort. If the Indian economy accelerates in the second half of the year as global problems recede, we may find growth in the region of 9% plus, which I would regard as the 'overheating zone'. So, in my view, it is the prospect of too rapid a growth rate for the sixth year running that provides the rationale for a rise in interest rates, not cost-push factors.
It is not interest rate increases that pose a threat to growth. The biggest threat to growth is posed by media hype on inflation, the global outlook, etc- the continuous blast from news channels may come to be taken seriously at some point by investors and consumers, which is when the problems will begin.
Sunday, June 22, 2008
Soaring cost of living- yuppies feel the pinch!
The Indian Express on Sunday had a story about this IT professional, Srijesh Nair, who's struggling to make both ends meet because of the home loan burden he is carrying.
Nair's annual income is Rs 14 lakh. His home loan monthly payment is Rs 17,000. The increase in interest rates in recent months meant an additional Rs 2000. Nair says that he found it difficult to maintain his standard of living in consequence. Nair disposed of stock options and other assets to shrink the home loan outstanding.
I read the story in some amazement. Nair's annual pay translates into a monthly income of around Rs 1 lakh (assuming that Rs 14 lakh includes company contribution to PF). Take away income tax of Rs 34,000. That would leave Nair with Rs 66,000. The home loan at the increased rate of interest would mean a deduction of Rs 19,000. So, Nair would have had Rs 47,000 to cover his monthly expenses. Evidently, this was just adequate, giving Nair's standards of living, so Nair has no savings to dip into.
I do not for a moment wish to question any of this- I accept that Nair's predicament is for real. The question that troubles me is: if this is the situation with somebody making over a lakh of rupees a month, what about millions of others, including salaried employees, who make a lot less? The Arjun Sengupta committee on the unorganised sector showed that the majority of workers were making barely Rs 20 a day or Rs 600 a month.
The question is particularly troubling at a time when the inflation rate is rising. For millions, even a small rise in prices, especially of food, is the difference between subsistence and starvation. When you read stories like Nair's, you begin to understand why a rising inflation rate spells doom for the government of the day.
Nair's annual income is Rs 14 lakh. His home loan monthly payment is Rs 17,000. The increase in interest rates in recent months meant an additional Rs 2000. Nair says that he found it difficult to maintain his standard of living in consequence. Nair disposed of stock options and other assets to shrink the home loan outstanding.
I read the story in some amazement. Nair's annual pay translates into a monthly income of around Rs 1 lakh (assuming that Rs 14 lakh includes company contribution to PF). Take away income tax of Rs 34,000. That would leave Nair with Rs 66,000. The home loan at the increased rate of interest would mean a deduction of Rs 19,000. So, Nair would have had Rs 47,000 to cover his monthly expenses. Evidently, this was just adequate, giving Nair's standards of living, so Nair has no savings to dip into.
I do not for a moment wish to question any of this- I accept that Nair's predicament is for real. The question that troubles me is: if this is the situation with somebody making over a lakh of rupees a month, what about millions of others, including salaried employees, who make a lot less? The Arjun Sengupta committee on the unorganised sector showed that the majority of workers were making barely Rs 20 a day or Rs 600 a month.
The question is particularly troubling at a time when the inflation rate is rising. For millions, even a small rise in prices, especially of food, is the difference between subsistence and starvation. When you read stories like Nair's, you begin to understand why a rising inflation rate spells doom for the government of the day.
Business media boom
This is boom time for the business media and business journalists. A business journalist recently filled me in on what is going on:
Mint, the HT publication, is said to have crossed the 2 lakh mark in circulation. Financial Chronicle of the Deccan Chronicle group is also said to be doing well.
The buzz now is about the entry of Financial Times into the Indian market. This should be cause for worry for its present partner, Business Standard, which has positioned itself in the quality segment. Another foreign entrant that can be expected to pose a threat to Indian journals is Forbes magazine of the US.
TV channels for business news are also proliferating. UTV has launched UTVi, its business channel. The Economic Times is said to be readying to launch a TV channel. The Sahara group has plans for a business paper in Hindi.
All this is great news for business journalists. Salaries have spiralled. Journalism in general and business journalism is no longer an underpaid profession- it has become highly lucrative.
Mint, the HT publication, is said to have crossed the 2 lakh mark in circulation. Financial Chronicle of the Deccan Chronicle group is also said to be doing well.
The buzz now is about the entry of Financial Times into the Indian market. This should be cause for worry for its present partner, Business Standard, which has positioned itself in the quality segment. Another foreign entrant that can be expected to pose a threat to Indian journals is Forbes magazine of the US.
TV channels for business news are also proliferating. UTV has launched UTVi, its business channel. The Economic Times is said to be readying to launch a TV channel. The Sahara group has plans for a business paper in Hindi.
All this is great news for business journalists. Salaries have spiralled. Journalism in general and business journalism is no longer an underpaid profession- it has become highly lucrative.
Thursday, June 19, 2008
CMIE growth forecast is 9.5% !
As readers of this blog and my column, I remain upbeat about growth prospects in the current year (2008-09) despite the combination of financial market shocks and oil shocks. But the CMIE forecast for this year takes the cake- they see growth at 9.5%! This is driven by a huge investment boom.
I agree that investment will be a big driver but my own assessment was that growth would be moderated by interest rate rises and would settle at 8-8.5%. If the CMIE's forecast is borne out, Indian growth would be an astonishing achievement. It would demolish once and for all the thesis that the recent growth boom was a cylical phenomenon, driven by foreign inflows, cheap credit and global demand. It would confirm the view that many of us hold that growth is structural in character.
Secondly, if underlying growth is as strong as CMIE believes, that gives the RBI so much more elbow room to tackle inflation. The inference that would follow is that there are strong demand pressures in the economy and monetary policy needs further tightening.
I agree that investment will be a big driver but my own assessment was that growth would be moderated by interest rate rises and would settle at 8-8.5%. If the CMIE's forecast is borne out, Indian growth would be an astonishing achievement. It would demolish once and for all the thesis that the recent growth boom was a cylical phenomenon, driven by foreign inflows, cheap credit and global demand. It would confirm the view that many of us hold that growth is structural in character.
Secondly, if underlying growth is as strong as CMIE believes, that gives the RBI so much more elbow room to tackle inflation. The inference that would follow is that there are strong demand pressures in the economy and monetary policy needs further tightening.
Thursday, June 12, 2008
Bank consolidation not a priority in India
Some people get a terrible complex when they look at the size of Indian banks. Too small, they say, compared to even banks in China. We have to do something about this. Indian banks must consolidate.
I have long been sceptical about this proposition and have written about it at length. My scepticism was reinforced when I had a chance recently to compare the market caps of Indian banks with those of the world's top banks. The comparison is quite revealing.
India's top two, SBI and ICICI Bank, are not very far from the world's top banks in market cap. Both are valued at over $20 bn today. This is not bad compared with $110 bn of Citigroup or about $53 bn each of Barclays Bank and Deutsche Bank. Only HSBC with a market cap of $200 bn looks distant.
Two factors are responsible for Indian banks drawing closer to the world's top banks in market cap. The proximate factor is the sharp decline in share prices of international banks consequent to the sub-prime crisis. Indian banks too have seen sharp declines in prices. But the effect has been to narrow the absolute difference in market cap. Citigroup is down from over $250 bn to $110 bn. SBI is down from nearly $50 bn- which was one fifth of Citigroup's market a year or so ago- to $23 bn, which is close to a quarter of Citigroup's market cap today.
The longer term factor is the wide difference in earnings growth. Indian banks are growing earnings at 20-25%; the world's top banks consider themselves lucky if they touch 10%. This is bound to draw the top Indian banks closer to the world's majors.
Can Indian banks then hope to make international acquisitions? Unlikely, I am afraid. Financial muscle is not the only thing that counts, you need solid managerial capabilities. Most banks lack this. ICICI Bank may just bring it off but not public sector banks.
More on this in my ET column, Banks' asset size is not the issue.
I have long been sceptical about this proposition and have written about it at length. My scepticism was reinforced when I had a chance recently to compare the market caps of Indian banks with those of the world's top banks. The comparison is quite revealing.
India's top two, SBI and ICICI Bank, are not very far from the world's top banks in market cap. Both are valued at over $20 bn today. This is not bad compared with $110 bn of Citigroup or about $53 bn each of Barclays Bank and Deutsche Bank. Only HSBC with a market cap of $200 bn looks distant.
Two factors are responsible for Indian banks drawing closer to the world's top banks in market cap. The proximate factor is the sharp decline in share prices of international banks consequent to the sub-prime crisis. Indian banks too have seen sharp declines in prices. But the effect has been to narrow the absolute difference in market cap. Citigroup is down from over $250 bn to $110 bn. SBI is down from nearly $50 bn- which was one fifth of Citigroup's market a year or so ago- to $23 bn, which is close to a quarter of Citigroup's market cap today.
The longer term factor is the wide difference in earnings growth. Indian banks are growing earnings at 20-25%; the world's top banks consider themselves lucky if they touch 10%. This is bound to draw the top Indian banks closer to the world's majors.
Can Indian banks then hope to make international acquisitions? Unlikely, I am afraid. Financial muscle is not the only thing that counts, you need solid managerial capabilities. Most banks lack this. ICICI Bank may just bring it off but not public sector banks.
More on this in my ET column, Banks' asset size is not the issue.
Wednesday, June 11, 2008
Six new IITs- will 'merit' be a casualty?
Today TOI carries an article by Swagato Ganguly on the proposal to set up 6 new IITs. Ganguly finds fault with the idea of starting IITs without campuses. Later in the piece, he indicates they may not have the requisite faculty either given the huge shortage of faculty.
What is the government to do? Should it wait until full-fledged campuses are set up and the country starts generating enough faculty? IIMA started off in a small building and with a small complement of faculty. So have the newer IIMs such as IIM (Indore). Over time, these problems came to be addressed. The point is: you get started, you muddle through for a while and then things start happening. I am optimistic about the new IITs and the contribution they can make.
Let me add: you can have spanking infrastructure, you can pay faculty very well and yet you may not have a good institution. In many private business schools, neither of these is a problem but the institutions don't count for much in academic terms.
The concerns about faculty and infrastructure may be valid but from there Ganguly wanders off into reservations and their potentially malign impact on IITs. He seems to suggest that the new IITs are all about pandering to caste politics:
Ganguly warns: "If IITs are made to jettison merit they, too, will be forced to their knees."
As an ex-IITian, he should know that IITs have long had SC/ST reservation. Over 50 years of such reservation, the IITs have built up a formidable brand. I rest my case.
What is the government to do? Should it wait until full-fledged campuses are set up and the country starts generating enough faculty? IIMA started off in a small building and with a small complement of faculty. So have the newer IIMs such as IIM (Indore). Over time, these problems came to be addressed. The point is: you get started, you muddle through for a while and then things start happening. I am optimistic about the new IITs and the contribution they can make.
Let me add: you can have spanking infrastructure, you can pay faculty very well and yet you may not have a good institution. In many private business schools, neither of these is a problem but the institutions don't count for much in academic terms.
The concerns about faculty and infrastructure may be valid but from there Ganguly wanders off into reservations and their potentially malign impact on IITs. He seems to suggest that the new IITs are all about pandering to caste politics:
The human resources minister, in particular, has turned the IITs and IIMsSorry, I don't get the connection. You can have OBC quotas by expanding seats at existing IITs by 54%- the government was under no obligation to set up new IITs. Having new IITs expands the availability of seats for the general category as well, so I can't see what the complaint is.
into a tool of his political ambitions. A 27 per cent OBC quota is being rammed
down their throats, yet the number of open, non-quota seats has to be preserved.
It was decreed, after doing the math, that the total number of IIT seats
have to be expanded by 54 per cent, with next year's Lok Sabha elections setting
the general deadline. Therefore, the phenomenon of building- and facility-less
IITs, in one case even a homeless IIT which doesn't know where it will be
eventually plonked down.
Ganguly warns: "If IITs are made to jettison merit they, too, will be forced to their knees."
As an ex-IITian, he should know that IITs have long had SC/ST reservation. Over 50 years of such reservation, the IITs have built up a formidable brand. I rest my case.
Tuesday, June 10, 2008
Oil prices in India
Two notions about oil prices in India need to be debunked.
One, the notion that the consumer is being subsidised. True, the consumer is being charged a price less than what the price would be tax is added to oil companies' selling price. But this is only because the duties are stiff. The consumer today does not bear all of the duty but he is still paying a price above the oil companies' selling price. This means he is being taxed, not subsidised.
Two, the notion that oil in India is still very cheap. The Economist compares petrol prices at the retail level in several countries. India ranks seven in a list of 15 countries- China, the US, Malaysia, Indonesia all have lower prices than we do.
One, the notion that the consumer is being subsidised. True, the consumer is being charged a price less than what the price would be tax is added to oil companies' selling price. But this is only because the duties are stiff. The consumer today does not bear all of the duty but he is still paying a price above the oil companies' selling price. This means he is being taxed, not subsidised.
Two, the notion that oil in India is still very cheap. The Economist compares petrol prices at the retail level in several countries. India ranks seven in a list of 15 countries- China, the US, Malaysia, Indonesia all have lower prices than we do.
Monday, June 09, 2008
Secession of the Indian elite
Gated housing enclaves, private guards, exclusive clubs, private aircraft.... the Indian elite has known how to insulate itself from the masses. But when industrial barons decide to hope from their helipads to private airports they propose to build for themselves, they have taken a truly gigantic leap.
Ronald deSousa, director of the Indian Institute of Advanced Studies, Shimla, has interesting thoughts on the subject in an article in ET:
There is more to private airports than elitism or snobbery. At a time of soaring oil prices, we would like to encourage public transport as a substitute for private cars. Private aircraft as a substitute for public ones seems the ultimate obscenity. Finally, as always, there is always the issue of land, as deSousa points out:
Ronald deSousa, director of the Indian Institute of Advanced Studies, Shimla, has interesting thoughts on the subject in an article in ET:
Three basic arguments have been forwarded for private airports. The first concerns simple pragmatics. It will reduce congestion at a time when our airports are getting overcrowded and since private planes take longer to land, by moving them out we will save landing time of the other aircraft. The second relates to safety. The aviation authorities will ensure that these airports will maintain the highest safety standards and so, for the flying public, there is no cause for anxiety. The third is a version of ‘he who pays the piper calls the tune’. As long as they pay for it they can have it.
......When seen from a host of other perspectives the policy seems perverse. Take the secessionist argument which holds that the policy encourages the super-elite to live life in a bubble. From the helipad at the top of the corporate headquarters, to another helipad in the factory complex, to perhaps a private airport for a journey to Delhi, the captains of industry can journey across the country without having to meet, or rub shoulders with, or even see the ordinary Indian, let alone experience the minimal existential reflections on the lives of those who live in the slums they have to drive through on their way to the airport
Those people, in many cases, might be their own workers. They will thus never know the possible causes that have reduced to a life of indignity those who beg at red-light crossings, or the conditions of the villagers who have to walk for miles for water, or the anxieties of our rural youth as they search for a space between the rural and urban
There is more to private airports than elitism or snobbery. At a time of soaring oil prices, we would like to encourage public transport as a substitute for private cars. Private aircraft as a substitute for public ones seems the ultimate obscenity. Finally, as always, there is always the issue of land, as deSousa points out:
There is another important concern. Private airports will require a lot of land. The country has just witnessed political movements on the SEZ policy requiring the government to take corrective measures and in some cases reverse its decisions. Again the poor farmer will have to give up prime land with the Land Acquisition Act being used to get (let me get it right) private land for a public purpose for a private airport.
Thursday, June 05, 2008
Managing versus teaching management
"Those can, do; those who can't, teach." There is profound truth in the old crack. But we need not be ashamed of it. Teaching management and managing require very different skills and temperament- and rarely shall the twain meet.
Accepting this fact would save us all unncessary vexation. The question is frequently asked: if management professors know so much about management, why can't they do a good job of managing- starting with their own institutions? For instance, B-schools have renowned professors of strategy who go out and advise corporations on how to win. Why can't they apply more of their expertise indoors?
The story is told of a finance professor who was asked by a senior executive in a training programme, "If you are smart, why aren't you rich?" To which the prof retorted," If you are rich, how come you are dumb?"
I argued in my last ET column, Can management gurus manage?, that this is a pointless debate. Knowing something in the sense of being able to conceptualise something is very different from translating it into practice- the translation requires implementation skills, people skills, high energy levels, commercial acumen, etc all of which management gurus are liable to lack.
By the same token, we cannot expect managers to come into the classroom and excel. They may have done a great job of managing but putting things in a conceptual framework is a discipline in which professional teachers excel, not managers. My own experience with inviting senior executives to offer sessions has been less than exhilarating. Many can't do better than recount anecdotes. ("I was having lunch the other day with the prime minister of Singapore...). The ultra-bright types at the B-schools can recognise bullshitting when they hear it and quickly switch off.
How can managers contribute to improving the quality of teaching at B-schools? My column offers a couple of suggestions.
Accepting this fact would save us all unncessary vexation. The question is frequently asked: if management professors know so much about management, why can't they do a good job of managing- starting with their own institutions? For instance, B-schools have renowned professors of strategy who go out and advise corporations on how to win. Why can't they apply more of their expertise indoors?
The story is told of a finance professor who was asked by a senior executive in a training programme, "If you are smart, why aren't you rich?" To which the prof retorted," If you are rich, how come you are dumb?"
I argued in my last ET column, Can management gurus manage?, that this is a pointless debate. Knowing something in the sense of being able to conceptualise something is very different from translating it into practice- the translation requires implementation skills, people skills, high energy levels, commercial acumen, etc all of which management gurus are liable to lack.
By the same token, we cannot expect managers to come into the classroom and excel. They may have done a great job of managing but putting things in a conceptual framework is a discipline in which professional teachers excel, not managers. My own experience with inviting senior executives to offer sessions has been less than exhilarating. Many can't do better than recount anecdotes. ("I was having lunch the other day with the prime minister of Singapore...). The ultra-bright types at the B-schools can recognise bullshitting when they hear it and quickly switch off.
How can managers contribute to improving the quality of teaching at B-schools? My column offers a couple of suggestions.
Thursday, May 29, 2008
World Bank wisdom- or lack of it?- on growth
This is the hottest new thing on how to achieve growth and it has been driven by the World Bank, among others.
A high-powered 21- member Commission on Growth and Development headed by Nobel Laureate Michael Spence has published a report, “Growth Report: Strategies for Sustained Growth and Inclusive Development.” (India is represented by Montek Ahluwalia, Dy Chairman, Planning Commission).The Commission is an independent body supported by Australia, Sweden, the Netherlands, United Kingdom, William and Flora Hewlett Foundation and the World Bank Group.
I haven't had a chance to read the report but I did read the overview at the World Bank website. The report identifies 13 economies that sustained growth of ovr 7% for 25 years. It says they had the following in common. Each economy:
The report will fuel much comment, not necessarily favourable. William Easterly, himself formerly of the World Bank, has a scathing piece in the FT- he calls the report a "debacle":
A high-powered 21- member Commission on Growth and Development headed by Nobel Laureate Michael Spence has published a report, “Growth Report: Strategies for Sustained Growth and Inclusive Development.” (India is represented by Montek Ahluwalia, Dy Chairman, Planning Commission).The Commission is an independent body supported by Australia, Sweden, the Netherlands, United Kingdom, William and Flora Hewlett Foundation and the World Bank Group.
I haven't had a chance to read the report but I did read the overview at the World Bank website. The report identifies 13 economies that sustained growth of ovr 7% for 25 years. It says they had the following in common. Each economy:
- Fully exploited the world economy
- Maintained macroeconomic stability
- Mustered high rates of saving and investment
- Let markets allocate resources
- Had committed, credible and capable governments
The report will fuel much comment, not necessarily favourable. William Easterly, himself formerly of the World Bank, has a scathing piece in the FT- he calls the report a "debacle":
After two years of work by the commission of 21 world leaders and experts, an 11- member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out.
... Why should we care about the debacle of a World Bank report? Because this report represents the final collapse of the “development expert” paradigm that has governed the west’s approach to poor countries since the second world war. All this time, we have hoped a small group of elite thinkers can figure out how to raise the growth rate of a whole economy. If there was something for “development experts” to say about attaining high growth, this talented group would have said it.What went wrong? Experts help as long as there are useful general principles, such as could be established by comparing low-growth and high-growth countries. The Growth Commission correctly pointed out that such an attempt to find secrets to growth has failed. The Growth Commission concluded that “answers” had to be country specific and even period specific. But if each moment in each country is unique, then experts cannot learn from any other experience – so on what basis do they become an “expert”?
Wednesday, May 28, 2008
China's turn to lecture the West !
A fallout of the sub-prime crisis is that financial regulation in the US and other industrial economies has been shown in poor light. In contrast, regulators in China and India are patting themselves on their backs for their measured approach to financial sector liberalisation, which, they say, has helped insulate their systems from the financial market crisis.
The acting of the China Banking Regulatory Commission did not mince words in an interview to FT:
The acting of the China Banking Regulatory Commission did not mince words in an interview to FT:
“I feel the western consensus on the relation between the market and the government should be reviewed,” said Liao Min, director-general and acting head of the general office of the China Banking Regulatory Commission.Not everybody buys the argument that the diminished frequency of crises is an argument for hastening slowly with financial liberalisation. Alan Greenspan argued recently that occasional financial turmoil may be the price to be paid for rapid innovation and growth. The answer, Greenspan urges, is to ensure that banks have enough capital to withstand shocks:
“In practice, they tend to overestimate the power of the market and overlook the regulatory role of the government and this warped conception is at the root of the subprime crisis.”When asked what other countries could learn from China’s regulatory system, he pointed out that Chinese financial institutions needed CBRC approval to launch individual product types, making it nearly impossible for exotic financial instruments, such as the ones blamed for the subprime crisis, to exist in China.
The majority of China’s financial sector is still owned by the state, and the government retains tight control over many aspects of the industry, including senior personnel decisions at the country’s largest banks, insurers and brokerages.
Thanks to China’s lack of integration with global financial markets as well as the cautious regulatory approach of the CBRC, Chinese banks have emerged relatively unscathed from the global credit crisis, which so far has caused nearly $380bn of losses at western financial institutions.
“If we want rapid growth in productivity, innovation, standards of living, we may have to accept that there will be periods of turmoil,” the former chairman of the US Federal Reserve told the Financial Times.
Rather than try to suppress bubbles, he said, policymakers should ensure that financial institutions were well enough capitalised to withstand the hit from bursting bubbles as well as other shocks.Mr Greenspan backed efforts to develop counter-cyclical capital rules that would force banks to hold more capital in good times than bad.
Such rules might make it less likely that asset price and credit booms would feed each other, as they did during the housing upturn.
But he said this would be difficult to implement in practice because “we are never certain where we are in the cycle”.
Tuesday, May 27, 2008
New spin to dynastic politics
PA Sangma was among those who walked out of the Congress along with Sharad Pawar to form the Nationalist Congress Party. At the time, they said they could not stomach the Congress' brand of dynastic politics any more.
Now, Pawar has now qualms about being part of a Congress-led coalition. As for Sangma, he is busy inducting his kids into politics, whether at the state or national level. His justification: he is not grooming any kid in particular, there will be equal opportunities for all, so he can't be said to be guilty of practising dynastic politics.
Sangma even distinguishes his brand of dynastic politics from Sonia's: Sonia has clearly identified one successor, Rahul! Even by the standards of Indian politics, this qualifies as a new low.
ET has some acerbic comments:
Now, Pawar has now qualms about being part of a Congress-led coalition. As for Sangma, he is busy inducting his kids into politics, whether at the state or national level. His justification: he is not grooming any kid in particular, there will be equal opportunities for all, so he can't be said to be guilty of practising dynastic politics.
Sangma even distinguishes his brand of dynastic politics from Sonia's: Sonia has clearly identified one successor, Rahul! Even by the standards of Indian politics, this qualifies as a new low.
ET has some acerbic comments:
His (Sangma's) daughter Agatha has just been elected India’s youngest MP. His elder son Conrad is Meghalaya’s Cabinet minister for finance and power.
His younger son James is the parliamentary secretary for home. The position of Meghalaya Planning Board chairman is itself defined as equivalent to that of the CM who is expected to step down after two-and-a-half years so that Sangma can take over for the next 30 months.
And yet Sangma maintains he is not trying to encourage any dynasty. His children, he says, are foreign-educated and it is their duty to pay the state back. Earlier this year, when he resigned as MP from Tura to contest the assembly elections and his daughter was chosen as the NCP candidate for the Lok Sabha by-election, he was quoted as saying that the “people of Garo Hills did not have any other choice as Agatha K Sangma is the only available right choice”.
....Maybe it is just as well Sangma left the Congress exactly nine years ago. In the latest Karnataka polls, the Congress insisted that the kith and kin of party office-bearers should not be allowed to contest. All of which upset some senior leaders who wondered why the same principle did not apply to the Nehru-Gandhi family
UBS
UBS has had the second biggest write-downs in the sub-prime crisis after Citigroup. This once highly regarded bank is now the butt of jokes. The Economist has a crack in its recent survey of international banking about what the acronom stands: Used to be Smart.
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