Of awards and encomiums

Trying to work out which banks are the world's best is a bit like awarding the prize for the prettiest war-torn village. It is a title that carries little kudos. It is also likey to prompt further shelling. Winners of industry awards in the past three years include Ken Lewis, the chief executive of Bank of America for banker of the year (2008); Societe Generale for its risk management; and Angelo Mozilo of Countrywide, a failed mortage lender, for a "life-time of achievement"

- The Economist (May 23)

I am reminded of a terrific quote from Martin Wolf, FT''s economic pundit, "Those whom the gods wish to destroy, they first put on the covers of business magazines".

But why blame business chambers and the media alone for idolising the wrong guys? Remember the best-selling book by McKinsey gurus, Peters and Waterman, In search of Excellence, that identified companies that had got it all right? Within a few years of the book's coming out, many of the famous names in the book that had been held up as role models were in trouble.

Alan Greenspan was hailed as the ultimate central banker and was the subject of more than one gushing biography. Today, he's among those held primarily responsible for the global crisis.

Moral: Be careful whom you lavish praise on, be it a company or an individual.

Slavery- fresh links

Rothschild, the British investment bank, and Freshfields, a top law firm in the UK, are the latest prominent names to be linked to slavery through archival research, FT reports.

Determining Britain's links to slavery is important because it's not entirely true that innovation and the industrial revolution drove British and western growth and caused them to surge ahead of the rest of the world, including China and India. Slavery, with all its underlying brutality, was a factor although how much of a factor it was is contentious.

FT quotes a Britsh academic as saying, "“We need to fill the gaps between those who deny slavery’s role and those who believe Britain was built entirely on the blood of slaves. "

A book based on updated research is required methinks.

Conflicts of interest in academia

I wrote earlier about b-schools and their alleged role in the crisis. One complaint about b-schools is that they don't inculcate the right values in their wards- I have made it clear this is not something I take seriously. Another is that the ideas that came out b-schools are flawed- the glamourisation of financial innovation, the myth of market efficiency and so on. But these ideas didn't emanate from b-schools alone, you might fault the economics profession at large, including the famous Chicago school.

Devesh Kapur, writing in FT, has a more interesting view. He says that academics have developed a vested interest in pushing certain ideas- and suppressing others- because they stand to gain financially in the process. In other words, academic research is susceptible to considerations of pecuniary gain, just as doctors' prescriptions in the US and elsewhere are driven by gifts of various kinds, including stock options in pharma companies.

Many academics, particularly those from institutions that enjoy high prestige and reputation, now have serious business interests and an array of financial ties to the very institutions that their studies address. These interests range from lucrative speaking fees, advisory roles at financial institutions, managerial roles and stakes in private equity and hedge funds to corporate non-executive directorships.

.....There would be little chance of being invited to give a lucrative talk at Citicorp if one were in favour of sovereign debt forgiveness in the 1980s, against capital account liberalisation in the 1990s or against stock options in the 2000s..

...In recent years, the biological sciences have moved considerably to ensure greater transparency where there are potential conflicts of interest between research and financial remuneration, providing mechanisms for whistle-blowers to report conflicts of interest. Regrettably, these requirements are extremely weak in the social sciences and business schools.

There is something to what Kapur is saying. I am not sure, though, that industry and other links influence academic research in economics and business but they certainly seem to influence academics' positions on various issues of public policy, especially in so far as they impact on business.

For instance, there has been much comment about the huge fees earned from financial institutions by Larry Summers, an influential figure in the present Obama administration, and whether these are impacting on the administration's approach to solving the crisis. Academics who take positions that threaten the interests of corporates certainly stand to lose out on consulting and other sources of income and may even be denied visibility in TV and other media.

There is a more serious problem with academics sitting on boards and this has to do with governance more than research. As we saw in the Satyam episode, academics are not above using their board positions to earn consulting fees. There are other instances where academics sitting on boards have wheedled training programs out of the companies. This introduces serious conflicts of interest. Sebi must impose a ban on independent board members earning any kind of consulting income from companies with which they are associated.

Addressing the too big to fail problem

In my last post, I highlighted that central banks and regulators have begun to focus on this issue with renewed interest.

In its Financial Stability Report, the Swiss National Bank suggests three ways in which this problem can be addressed:

There are three basic strategies for resolving, or at least alleviating, the ‘too big to fail’ problem. First, one can impose very strict capital and liquidity regulations on systemically important financial institutions. This can reduce both the likelihood of government assistance being required and the cost of such an intervention. Moreover, strict capital requirements reduce moral hazard, by forcing banks to themselves bear more of the risk of losses, and also reduce the banks’ incentive to inflate their balance sheets. ...

Second, one can adapt the legal framework and the financial market infrastructure to simplify, or make possible,an orderly wind-down of large financial institutions during periods of severe crisis.
......
Third, one can directly tackle the cause of the ‘toobig to fail’ problem by limiting the size of financial institutions. One could consider direct size restrictions, forinstance by imposing a maximum market share or balancesheet-to-GDP ratio, or indirect incentives – as mentioned
above – such as increasingly strict capital requirements for big banks.

Banks- too big to manage?

Governments the world over have rescued banks that are too big to fail- Citibank and Bank of America in the US, RBS and Lloyd's in UK. One fall out is that regulators and central banks are actively contemplating measures to prevent banks from growing beyond a certain size, FT reports.

This is what the incoming head of the Swiss National Bank has to say:

“A size restriction would of course be a major intervention in an institution’s corporate strategy,” Hildebrand, the central bank’s current vice-chairman, observed with masterful understatement. “Naturally the SNB is aware that there are advantages to size. [But] in the case of the large international banks, the empirical evidence would seem to suggest that these institutions have long exceeded the size needed to make full use of these advantages.”

But what would be that size? How do you operrationalise this concept? I haven't seen any concrete ideas on this. I guess one parameter could be the recapitalisation cost as a percentage of GDP in the event the bank fails. But this only leads on to another question: what percentage of GDP? There cannot be an absolute limit across all countries. Much would depend on an economy's fiscal situation. An economy where the fiscal situation is good could afford a failure that costs, say, 15% of GDP. Another- like India's- may not be able to afford even 5% of GDP.

But this creates a piquant situation. Larger economies can afford bigger banks. So can well managed economies. In other words, the size of the economy and the fiscal situation become determinants of competitive advantage based on size.

Should we worry? I don't think so. Because beyond a point, size ceases to confer any big advantage and, in fact, becomes a problem. In India, I would say that any bank with a balance sheet of around Rs 150-200,000 crore has the requisite size to take on competition. For the regulator, the problem is: too big to fail. For bank managers, the focus should be: too big to manage.

That's why I am not enthused by talk of SBI merging with all its associate banks. Is SBI getting the most out of its current size? Does it have the necessary depth and breadth of management at its current size? If not, HRD and systems should be focus, not simply getting bigger.

B schools and the global crisis

This may seem a bit surprising but B-schools have emerged, in popular perception, as among the culprits in the present economic crisis. People think managers are to blame. Some of the high-profile managers in the crisis- Hank Paulson, former US Treasury Secretary, Christopher Cox, former Chairman of the SEC, John Thain and Stan O'Neal- are all HBS products. The conclusion drawn is that B-schools bear some responsibility for the crisis. Whether this is true and what needs to be done is the subject of my ET column, Crisis:are B-schools to blame?

Surprisingly, this view finds acceptance among b-school academics themselves. FT is running a debate on the subject and so is the Harvard Business Review. I must confess I find much of the discussion lacking in substance.

Let us grant that irresponsible managers have had a role to play in the crisis. Partly, this was a matter of bad judgement; partly, it was greed or lack of regard for the stakeholders in a business. Where do B-schools come in? You could say B-school research failed to pick up the warning signs of the crisis. But so did economic research outside B-schools. As for the greed factor, it is not confined to managers but is rampant in every walk of life- law, medicine, accounting, etc. Amongst greedy or corrupt managers, managers with MBAs are a tiny subset.

So, what can B-schools do in terms of revising their curricula? Well, there is a huge debate going on about the relative roles of state and market and, no doubt, B-school research will focus on this and weave findings from this research into revamped curricula. This is fine. The thing that disturbs me is the suggestion that B-schools also have a role in inculcating superior attitudes or ethical values in their students. HBS's contribution is to get their graduating MBAs to take a pledge or oath of ethics!

B-schools have responded to talk of their role in the present economic crisis with courses on ethics and leadership. No problem with that. But, one has to be sceptical about what to expect. To those who wish to create the New Man, I wish luck. I doubt that B-schools can contribute much. There are primary and secondary schools that were set up by saintly figures and began with similar, lofty goals but whose products are indistinguishable from those produced by ordinary schools.

Don't get me wrong.There is a hell of lot that B-schools need to do by way of updating their curricula and make it more relevant. But improving the ethics of their wards is not something that falls within B-schools' core competence. At the risk of offending people, I would suggest that there is a certain presumptousness involved in setting such goals. I mean, who's going to impart ethics to B-school faculty?

TN medical college expose

A TV channel catches the Deputy Registrar of a medical college in Tamil Nadu asking for capitation fee on camera. The HRD ministry, duly outraged, sets up an enquiry. The UGC also jumps in with its own probe. The minister, who is said to be chairman of the board of trustees of the college, dissociates himself from the medical college.

I don't know how one is supposed to react. It's good to have this sort of thing exposed but is it news to anybody? Two facts have been public knowledge for quite some time- and thousands of families who have paid through their nose can testify to these.

i. Hundreds of private engineering and medical colleges in TN, Karnataka, Maharashtra and other places offer admission on the basis of large capitation fees.
ii. Many of these institutions have been promoted by politicians.

I recall a secretary at our Institute telling me how her husband had to fly down to Chennai with around Rs 3 lakh in a suitcase in order to secure admission for her child in an engineering college there. I wondered how the suitcase had passed scrutiny at the airport- didn't the security people ask about such a large amount of currency being transported around?

Capitation fee flourishes despite the Supreme Court ban on it. The government and the quasi-regulatory bodies in education have been mute spectators thus far. (It was interesting to read in the papers that a court actually described the Medical Council of India as "den of thieves". Former minister Anbumani Ramadoss confessed that he had failed to clean up the MCI inspite of trying).
The new UPA government has education reforms high on its agenda. Tackling the menace of capitation fee and donations in various forms must be a priority in education. They render education inaccessible, of course, but they also breed corruption, with doctors and engineers coming out of these places focused on getting the quickest return on the huge investment they have made.

Downgrade in Indo US relations

President Obama's unequivocal endorsement of the two-state solution of the Palestinian problem and his criticism of continued Israeli settlements in the occupied region were undoubtedly high points of his speech and they have rightly attracted attention. For us in India, another point is equally compelling: his suggestion that Israel must be drawn into the NPT before long. If the US is unwilling to make an exception in the case of its staunchest ally, we must wonder where that leaves the Indo-US nuclear deal and the special dispensation it creates for India.

Expect Obama to focus on the NPT as well as the fissile material cut-off treaty. The signs are clear enough: the Obama administration does not attach quite the same importance to India as a 'strategic partner' as President Bush did. Chances are we will be pushed back into sub-continental status with a possible re-hyphenation with Pakistan. Earlier, Hilary Clinton's visit to China signalled that the US sees China as its principal partner in the conduct of international affairs, a view that appears to be getting reinforced with Treasury secretary Tim Geithner's recent visit to China.

The signals coming out from US moves in Pakistan reinforce this view. Relative silence on the release of Saeez Hafeez; a massive aid package for Pakistan in order to reinforce its war against the Taliban; Pakistan upping the ante on Kashmir. The unkindest cut of all: the US state department advisory to American nationals against travelling to India.

In his election speeches, Obama had made references to Kashmir that were not exactly music to our ears. It does appear that he sees the resolution of the Kashmir issue as an important item in his agenda, next only to the Palestinian problem, although he chose to omit any reference to Kashmir in his Cairo speech. The signs are that the US is willing to allow Pakistan to bring Kashmir to the top of the table in return on Pakistani cooperation on Afghanistan and the Taliban.

This must inevitably mean more firing across the LOC and greater infiltration into Kashmir and into India generally in the coming months. This may sound terribly grim but the US advisory does seem to point to an increase in terrorist activity in India in the months ahead. We have been patting ourselves on the back on the improved domestic outlook with the installation of the a stable government at the centre. Not to spoil the party, but it appears the domestic pluses may come to be outweighed by the minuses on the external front.

Anniversary of Tiananmen

The twentieth anniversary of the Tiananmen massacre- and massacre it was, of that there is little doubt- has been marked by ritual on both the western and Chinese sides. Western commentators want Beijing to allow more democracy and they also want the communist regime to come clean on what happened. China has responded with a clampdown- on BBC yesterday, I saw their Beijing correspondent being politely but firmly being shooed away from the Square by Chinese cops.

What has been the outcome of Tiananmen? China is incomparably stronger and more powerful today than it was 20 years ago. But has the communist party maintained its brutal ways and refused to learn? Not really, suggests the newly started Banyan column in the Economist (which is devoted to matters Asian). It responded to the movement in appropriate ways:

It is a commonplace that the party’s legitimacy is built on economic growth. Yet China’s leaders have long considered that to be merely the (simplistic) half of it. After the massacre, the Communist Party set about transforming itself. It launched a vast historical investigation into how political parties fall, and how they stay in power. Everyone was scrutinised, from Saddam Hussein to Scandinavian social democrats. The conclusion: adapt or die.

The outcome is a wholesale reinvention of the party, a process accelerated after Mr Hu stepped up as paramount leader in 2004. Shortcomings that were identified included corruption (a chief complaint of the Tiananmen students), lack of accountability in decision-making, no convincing ideology, and an ossified structure.

..Bright technocrats and entrepreneurs have been recruited. Retirement rules have been revamped (the Soviet Union’s gerontocracy was noted). Party members have gone back to school: three weeks a year and three months for every three years of mid-career training. More appointments are open to peer scrutiny before they are filled. The Communist Party is vastly more able to govern

......This is little comfort to Westerners projecting their hopes for democratic change on to China. Nor is there any sign that Chinese intellectuals identify with the myriad grievances of their poor countrymen, as they did during the Tiananmen protests. And the growing middle class appears more fearful of the great unwashed than of the depredations of a party that once was at war with the bourgeoisie.

FT's China expert, James Kynge provides a slightly different perspective. He questions the very characterisation of the Tiananmen protests as being "pro-democracy". The reality, as always, was more nuanced, more complicated, he suggests:

Almost everything fell within its (the movement's) scope: campaigns against corruption, nepotism, inflation, police brutality, bureaucracy, official privilege, media censorship, human rights abuses, cramped student dormitories and the smothering of democratic urges. But to say the demonstrations were to “demand democracy” is an oversimplification.

The truth is that the students in the square had only the haziest understanding of western-style democracy. To the extent that the protests were directed at abuses of an existing system by an emerging elite, they were motivated more by outrage at the betrayal of socialist ideals than by aspirations for a new system.

In other words, the protesters were asking for reform, better governance, an improvement in the quality of their lives. They were not necessarily asking for more democracy. It appears from the Economist's interpretation that the communist party got the message and responded appropriately.

When the western world pushes for democracy, what it means is the right to vote in a multi-party system. But, if a monolithic party can make itself responsive to people's needs, it can contain disaffection. It appears the communist party has managed this. The world's understanding of Tiananmen and what followed, its continued focus on "human rights" in China and prognostications about the inevitable collapse of communism there, may thus be badly flawed

Agony of Afghanistan

Khaled Hosseini's novel, A thousand splendid suns, richly deserves the accolades it has received. Hosseini is an Afghan, now settled in the US. He gives us a glimpse of the grim struggle for existence that is the stuff of daily life in Afghanistan - or was at the time when the mujahideen were trying to drive out the Russians, when the mujahideen fought amonst themselves for control and, later, when the country came under the control of the Taliban.

The novel' s special contribution is its focus on the plight of women. It deals with the lives of two women, Miriam and Laila, thrown together by reason of having got married to an ageing (in Miriam's case) and aged (in Laila's case) tailor, Rasheed. Miriam is the illegitimate child of a wealthy businessman in the city of Herat. Her father keeps her mother, a cook, and Miriam at a distance. When Miriam's mother dies, her stepmothers get her married off to Rasheed who is from Kabul. Miriam is in her teens and Rasheed in his forties.

Laila's misfortune is even worse. Her family is killed in the shelling of Kabul and she's badly wounded herself. She's nursed back to health by Rasheed and Miriam until Miriam understands the motivation behind Rasheed's concern- he wants to acquire Laila as a second wife. Rasheed is in his sixties then and Laila in her teens.

The novel deals with the humdrum existence of the trio and the two children they have (one is Laila's through her teenaged lover before her life fell apart). It's a grim struggle for existence, unrelieved by anything joyful (except the two children). There is nothing the two women can expect by way of caring from Rasheed. The only reason they have to stay with him- and endure his taunts and his endless beatings- is that there is no way they can survive otherwise. What awaits them outside Rasheed's humble house is even worse. It is a tribute to Hosseini's craftsmanship that he's able to sustain the reader's interest in this colourless existence.

As you read through the novel, you begin to wonder whether there is anything left but despair and wretchedness, whether there is any salvation at all for these two helpless, yet cheerful women, whether such a life is worth living at all. Finally, salvation arrives in the only way it possibly could......the reader is left at once happy and saddened at the outcomes.

Hosseini gives us an idea of what life under the Taliban is like- no music, no TV, no education or jobs for women, women can't even go out unescorted, nothing to life other than what purports to be the pure Islamic way of life. Taliban rule is a return to some barbaric past, except that even in that past, one would like to believe, things were not as bad.

You may have your reservations about America's posture towards Islam in general, its attitude towards Palestinians and Iran, about the so-called clash of civilisations. But, when it comes to the Taliban, there is no room for doubt as to the rationale for the US and its allies waging war against them. A Taliban take over of Pakistan is the ultimate nightmare for that unfortunate country, for India and for the rest of the world.

Indian bashing in Australia

Is the Indian media overdoing the incidence of racial attacks in Australia? There is something about the sheer power of repetition on TV, the same visuals being played by different channels throughout the day and for days together. I tell you, the effect can be inflammatory.

I have no means of knowing what the situation on the ground is. Most cities, including New York and London, have their share of lumpen elements who will bash up or rob anybody who looks vulnerable. Indians must appear as soft targets because of their build but that doesn't quite explain why the Chinese are not similar targets. Colour must be a factor.

The question is how big is the racial issue in Australia. I was there in 2007, visiting Sydney and Canberra. I came back and declared that if there was one white country that was not hostile to brownies, it was Australia. It was friendliness all the way. Of course, these fleeting impressions can be deceptive and it's only when you live somewhere that you get a feel for the place.

But, I have found that the acid test is the immigration counter. There you can sense the hostility or the lack of it. For the first time in my visit to a white country, I encountered a very warm welcome. Very different from what you would experience in, say, New York where, at immigration, every South Asian is presumed to be a terrorist unless proved otherwise.

Another test is the country's airlines. Both on Quantas and the domestic airlines, I experienced a total lack of hostility. Again, these could be misleading. Or it may be well be that the changed economic environment has caused a certain souring of moods.

Budget and reforms

Another budget will be upon us in a month or so. One of my secret fantasies is to flee town and head for some place that lacks TV around budget day. Then, I will be spared the cacophony that erupts at budget time.

Budget time is big money for the media. They create the hoopla around the budget and profit immensely from it. Live budgetary analysis is not terribly educative. You can't react to any of the numbers put out by the FM until you have had a chance to put them on a spread sheet and compare like with like in the previous year. But before people have had a chance to do that, instant wisdom will have been delivered on TV. So heavy is the overkill that informed analysis that comes a few days later in newspapers or journals is lost on the public.

Well, anyway, now that another budget is on its way, the clamour for "reforms" has begun. The argument is that the government could not push ahead with "reforms" the last time thanks to the benighted Left but now there are "no more excuses". Sorry to play spoilsport, but it appears those who clamour thus haven't read the Congress manifesto. It is reformist to my mind but the reforms it talks about are not the ones that pro-market enthusiasts have in mind- cuts in subsidies, labour market reforms, privatisation, financial sector reforms, FDI etc.

The Congress appears to have learnt from the defeat of the BJP and the lesson will have been reinforced by its own performance this time- "reforms" that the media and the business community clamour for are not vote-catching propositions. My guess is that those who are talking up the stock markets in anticipation of "big bang" reforms are in for a disappointment.

More on this in my last column, Redefining the reform agenda.

Winds of change in US board rooms

Whatever else governance reform may mean, I have always been clear about one thing it should mean: independent directors cannot be selected by management; to begin with, at least some independent directors on the board must be chosen by institutional shareholders.

I am not aware of any country where this happens. It certainly does not happen in the cradle of the governance movement, the US. In the US, the majority of companies have provisions that allow shareholders only to vote for directors proposed by management or withhold their vote. This has created a situation where directors get elected even when they do not command a majority of shareholder votes.

As the head of governance Calpers, the California pension fund, notes in a recent FT article, this is set to change. Legislation has just been introduced in the US Congress that allows shareholders to say 'no' to a director proposed by management and to propose their own directors subject to certain clauses intended to keep out frivolous proposals. The legislation also seeks to separate the chairman and CEO rules, another reform I have myself long urged. The SEC, under its new head, is introducing proposals of its own that are consistent with such legislation.

Governance reform is on the agenda of Sebi as well. This is the time for Sebi as well as the government to take the lead to usher in governance reform along these lines in India as well. After the Satyam and Nimesh Kampani affairs, there is concern about the need to protect independent directors from legal actions in matters for which they can hardly been held responsible. Two independent directors are said to have quit every day since Satyam erupted- resignations to date total over 400.

A certain measure of protection for independent directors is fine. But this must go hand in hand with measures to strengthen the mechanism of independent directors. Independent directors who collect huge fees in return for nodding their heads to whatever management wants done is clearly not on.

UK's financial sector

UK has long prided itself on its competitive financial sector and its comparative advantage in that sector. How did this advantage come about? Because of light regulation. In other words, the UK benefited from regulatory arbitrage. To put it more accurately in light of the ongoing crisis, UK bankers benefited from such arbitrage. So, what's to be done about it?

Martin Wolf reviews an astonishing report prepared by a committee that included UK's chancellor of the exchequer, Alistair Darling. The report recommends “ the financial sector be allowed to recalibrate its activities according to the sentiments and demands of the market”. They must be nuts to recommend this after seeing how the market has worked.

Wolf makes a set of eminently sensible suggestions:

First, the UK needs to make global regulation work. It should discourage regulatory arbitrage even if it expects to gain in the short run.

Second, it must, in particular, help ensure that owners and managers of financial institutions internalise most of the costs of their actions.

Third, it must reject egregious special pleading from the industry. The sector argues that moving derivatives trading on to exchangesmight damage innovation. So what? Maximising innovation is a crazy objective. As in pharmaceuticals, a trade-off exists between innovation and safety. If institutions threaten to take trading activities offshore, banking licences should be revoked.

Fourth, while trying to create a stable and favourable environment for business activities, the UK should try to diversify the economy away from finance, not reinforce its overly strong comparative advantage within it.

Fifth, UK authorities need to ensure that the risks run by institutions they guarantee fall within the financial and regulatory capacity of the British state. They should not let the country be exposed to the risks created by inadequately supported and under-regulated foreign institutions. At the very least, they should not undermine other governments’ efforts to regulate their own institutions.

Since "reforms" are the flavour of the day in India today, let me add that some of the above principles should guide banking sector policy in India as well.

A cohesive and stable government?

Those amongst the chatteratti who were euphoric about the mandate for the UPA government must be having to think again, seeing the birth pangs of the new government. The DMK leadership has retreated to Chennai and into a big sulk. Even if compromise is reached on the number of berths, it appears unlikely that the Congress can dictate who the DMK's ministers should or should not be: I doubt that any self-respecting party can concede the point that two of their earlier nominees were inefficient and corrupt.

As for the markets' relief over a patchwork of parties from the Third or Fourth Fronts forming the government and the Left being kept out, it's worth remembering that, in Mamata Banerjee, the Congress has to contend with somebody who was to the left of the ruling coalition in West Bengal. Banking reforms, labour reforms, SEZs- it won't be easy to breeze past Mamata on these issues.

Lastly, I do hope good sense prevails in the Congress and the finance portfolio stays with a politician and doesn't go to a technochrat. It wasn't the pro-reform brigade that helped the Congress do well in the 2009 elections, it was the solid political instincts of the Gandhi family, much of which goes against the spirit of "reforms".

Understanding the results of the 2009 elections

I don't know in which case instant wisdom is worse: the Union budget or the elections. In both instances, it is the idiot box that plays havoc with sober judgement. Even as the news is happening, pundits are ready to shoot their mouths. Whereas in both cases, a careful dissection of data is required in order to arrive at an informed judgement.

Let us consider some of the conclusions that abound in post-election punditry:

1. Regional parties have been shown their place, national parties have regained their dominance: We need always to distinguish between number of seats won and share of the vote. It is possible for a ruling party to become unpopular and see its share of the vote fall. Still, it may win more seats because the opposition vote happened to be more splintered.

In the present election, Yogesh Yadav estimates that the combined vote share of the Congress and the BJP climbed from 48.7% in 2004 to 48.9% in 2009- hardly any change. This translated into a disproportionate increase in total seats of the two parties from 283 to 321, with the Congress gaining 61 seats and the BJP losing 23 seats.

So, the regional parties have retained their importance. It is just that the relative shares of the Congress and the BJP in the national party pie changed so as to place one party in a stronger position than before.

2. The results are a vote for stability and good governance: This implies that regional parties are an unstable factor and the national parties alone can provide stability and good governance. The figure for the vote share of regional parties has hardly changed. Besides, the BJP, which has provided stability and good governance in Gujarat, is a big loser. The Congress benefited from the electoral arithmetic in many ways: for instance, it made big gains in AP because the Chiranjivi factor ate into the votes of the TDP and in Maharasthra, the MNS ate into the votes of the Sena-BJP. A slight change in the electoral arithmetic could once again create instability at the centre.

3. The results are a vote for "reforms" and the Congress-led UPA should, therefore, fast forward "reforms": The Congress benefited from a rise in rural incomes and prosperity driven by growth in agriculture, an area that is least touched by reforms. It also benefited from measures that "reformers" relentlessly fought: NREGA, the farm debt waiver, the Sixth Pay Commission award, an increase in subsidies and OBC quotas.

The one formation that lost heavily from its attempt to push through "reforms" was the Left in West Bengal which tried to usurp farm land in order to push ahead with industrialisation. (SEZs are an important item on the "reforms" agenda). It is fair to say that the UPA benefited from measures associated with the Left while the Left lost because of measures associated with the "reformers'!

4. The nation has rejected the "communalist" BJP: It is said that it was the BJP's attempts to project Narendra Modi as a future national leader and the vitriolic outbursts of Varun Gandhi that cost the BJP dearly. Really? Then, how come Varun himself won handsomely in Pilibhit and the BJP did well in Karnataka which is considered progressive and was out of the BJP orbit until recently?

I'm afraid none of the explanations put forward, such as the ones above, are free from infirmity. There are only three things one can say we can with a degree of certitude. One, regional parties remain a force. Two, the electoral arithmetic can cause the outcome in terms of seats won to diverge significantly from the outcome in terms of vote shares. Three, the only way to combat the anti-incumbency factor is to focus on measures that have a pro-poor and rural orientation.

The rise and rise of regional parties

The great game of searching for alliance partners is on and regional parties are being wooed arduously by the Congress and BJP alike. I hear much tut-tutting over the rise of regional parties. Somehow, there is a perception that regional parties' support or dominance leads to instability and weak governance and only the two national parties, Congress and BJP, can provide stability and good governance. So, take your pick- the secular guy or the commual guy.

Alas, life is much too complex and messy to conform to the preconceptions of the Indian elite. There is no stopping the rise of regional parties, as I note in my ET column, Fear not the regional parties, and, more importantly, there is no reason to get jittery over this phenomenon.

Regional parties have shown themselves more responsive to caste and regional aspirations and this has inevitably eaten into the vote share of the national parties. This will continue until a more homogenised and prosperous nation emerges with the middle-class being truly middle, meaning accounting for, say, more than 5% of the population, as is the case today (depending on what income level you want to take as a cut-off).

As political scientist, CP Bhambhri, writes in a companion piece in ET, regional parties have found it necessary to capture power at the centre in order to better cater even to regional aspirations because, in the Indian federation, the centre still calls the shots. In the process, regional parties are compelled to develop a national perspective. That is the beauty of democracy: it causes political actors to modify their behaviour in ways that generate wider support and hence leads to more acceptable behaviour.

There is much condescension when it comes to regional leaders- they are not as savvy or well dressed as their national counterparts and so the inference drawn is that they may not have the skills to run the nation. Nonsense. If you have run UP or Tamil Nadu and done so more than once, believe me, you have what it takes to run the nation. I quote a distinguished bureaucrat in my column as saying nice things about Deve Gowda. TSR Subramaniam, former cabinet secretary, expresses the same sentiments about Gowda. Outlook editor Vinod Mehta wrote recently that the most impressive performer from the Indian delegation at a Davos conference he attended was Gowda, not one of our high-profile businessmen.

So, let us not deride regional parties and regional leaders. Instead, let us welcome gracefully the changes being ushered in by our marvellous democracy.

Gujarat a star in agriculture

Gujarat has always been a star in industrial performance. It was news to me that Gujarat is a star i in agriculture. Gulati and Shreedhar analyse the phenomenon in an ET article. Agriculture has grown in Gujarat at an astonishing 9.6% in 2000-01, more than the thrice the all-India figure.

One key driver has been the Sardar Sarovar project and the increased availability of water in a state in which irrigation cover is only 36%. One can understand why the project arouses strong emotions in the state. Another driver is technology, especially new varieties of cotton with the private sector taking the lead. Then, good roads, better regulation of electricity for agricultural use and a thrust on extension services have helped.

The authors conclude, "Strong political commitment to promote rural development, a long term vision, and the capacity to implement this are perhaps the key ingredients of Gujarat’s success story".

That must explain Modi's success- there's a lot more to development in Gujarat than the Nano project.

Indian firms in world's 'most reputed' list

Rediff has a story on a list of the world's most reputed firms listed by the Reputation Institute of the US. (I must confess I have no clue who they are). The following are some of the Indian firms that figure (world rank in brackets):

1. Tata group (11)
2.SBI (29)
3. Infosys (39)
4.L&T (47)
5. Maruti (49)
6.HLL (69)
7. ITC (95)
8. Canara Bank (102)
9. Hindustan Petroleum (111)
10. Indian Oil (112)

Interesting omissions are the Ambanis and the Birlas. It's also interesting that Infosys, which has invested so much in building an international brand and HLL, which is a well known brand, rank below Tata and SBI. The top 10 includes four public sector firms.

Shantaram

I finally finished reading Shantaram. I say 'finally' because I am a slow reader and the novel runs into over 900 pages.

Shantaram, which came out in 2004, is penned by Gregory David Roberts, an Australian who was serving a jail sentence for armed robbery in his country. He escaped from jail, landed in Mumbai, spent several years there as part of the local underworld, was recaptured in Germany and, after serving the remaining sentence, got his novel published. He needed to write it thrice because his captors destroyed the first two versions when they found out. Roberts has since made Mumbai his home.

The novel is an epic, along the lines of,say, Gone With the Wind. And it's more than a novel, it's a soul-stirring experience. To think that a man could go through all that, retain his humanity and find the reserves to write a splendid novel! Roberts' mother taught him to appreciate literature and he spent his time in the Australian jail devouring first-rate fiction. It shows in his own writing.

It's impossible to capture the splendours of the novel in one short post. Roberts has said in interviews that the events are real, only the narrative is fictional. There is a charming account of Roberts' six month stay in a village in Maharashtra's interior where he is given his Indian name, Shantaram; a moving description of life in the slum near Cuffe Parade where the locals adopted him as one of their own; great encounters with Abdel Kader Khan, the underworld don, who combines a fine command of the English language with a fondness for philosophical speculation (every week, he and his comarades meet for lofty discussions); Roberts' embroilment in the war in Afghanistan when he accompanies Khan and others on a journey through Pakistan to arm the Taliban in their war against the Russians; and Roberts' falling in love with Karla Saaranen, a mysterious, beautiful and thoughtful American lady of European extraction... (you have to read the novel to know what the mystery is about).

Some of the scenes in the novel will stay with me for a lifetime. On one occasion, Roberts and a small boy (Khan's nephew entrusted to Roberts in order to experience slum life) find themselves attacked by a whole horde of dogs in the slum at night time. They try to fend off the pack with bamboo sticks but it's a losing battle. Then, Kader Khan's bodyguard materialises out nowhere, iron rod in hand. He's a trained martial arts specialist. He leaps into the air in true martial art fashion, swirls and strikes. Two dogs have their brains shattered. The entire pack, stunned at somebody taking the attack to them where Roberts was merely defending, flees.... Roberts is saved.

Then, there is the Colaba police station where Roberts is held for a few weeks. The lucky ones are those behind bars. The others are herded into a small corner leading to a toilet where shit is overflowing.... the weakest have to stand for days in a heap of shit until they drop dead....

One day, the detainees are led out and taken to Arthur Road jail (home to Sanjay Dutt for a while). Roberts is motioned to a corridor. There, the convict warders are waiting with lathis.... Roberts has to run the gauntlet but choses to walk in a gesture of defiance as the blows rain on him. He lands in his cell bloodied. The jail itself is hell with the warders showering blows on inmates at will. It makes your blood boil to think this is what the Indian system has been reduced to. One gets a sense of the daily brutality visited on the weak and the defenceless by the Indian law enforcement system.

What, one wonders, is the IPS brass doing? The only thing you could say in extenuation is that things are not much better in jails elsewhere. In his jail in Melbourne, Roberts was subject to the same kinds of senseless beating and cruelty. Recently, during the G-20 meet, the cops in UK, considered to be more civilised than the rest, were flailing their batons at harmless protesters. I guess it goes with the uniform, the sense of power it gives you. The power to ill-treat and also the power to extort huge sums of money.

The Afghan expedition is a story in itself. It takes weeks of trekking through the mountains to get there, with a maniac as escort. This man has only one mission in life and that is to catch hold of Russian soldiers and torture the life out of them. The return journey is a horror, with Roberts and a few survivors holed up in a snowy cave with no food or water for several days. Roberts makes it to a hospital in Pakistan and then finds his way back to Mumbai. With his heroic role in the Afghan expedition, he becomes a privileged member of the gang, specialising in counterfeit passports. He makes good money out of it.....

I won't narrate more. I will leave you to find out for yourself. Shantaram is being made into a film by Mara Nair. I can't wait to see it (I understand work on the film has stalled because of some problems in Hollywood). Let me just say that the book leaves you shaken and stirrred, to use a famous James Bond line.

I had a post some time back on another book on Mumbai, Suketu Mehta's Maximum City. That is also about the seamy side of Mumbai. But the philosophical approaches of the two books are very different. Mehta is appalled and outraged at the violence and corruption that lie beneath the surface in Mumbai.

Roberts writes with empathy and affection for those on the seamy side. There is understanding and love, an underlying humanity that comes from having experienced the worst of it. Roberts is now off smoking, drinks and drugs and leads the life of a celebrity in Mumbai. I doff my hat in humble salute to the man.