War in Ukraine takes a dangerous turn

With Russian President Putin asking his nuclear forces to go on high alert, the war in Ukraine has taken a dangerous turn. Putin's decision is not about threatening the West with nuclear weapons, as the Western media makes out. It is about keeping Russia in a state of readiness for any threat from NATO, given the belligerence shown by the US and NATO since the war erupted.

Various NATO members, including Germany, have made it clear that they will supply weapons to Ukraine. Significant sanctions against Russia have been announced. Turkey, a NATO member, has restricted Russia's access to the Black Sea. Russia sees itself as under serious threat. In putting nuclear forces on alert, Putin wants to prepare the country for the worst case scenario.

It is a pity that Western media propaganda is being bought wholesale by much of the Indian media. There is talk of invasion of Ukraine, Russia wanting to re-create the USSR, stories about death and destruction and the heroic resistance of the people of Ukraine. The suffering of Indian students stranded there has lent a desi dimension to the story. Ukraine is, regrettably, a war zone. War is suffering, it is destruction. It is important to ask: what led up to this situation? 

As I have been trying to highlight in my posts, Putin has made it clear time and again that he is not interested in absorbing Ukraine into Russia. His main demand is that Ukraine should not become a member of NATO and hence a base for nuclear missiles. The West and Ukraine have refused to concede this demand, which several sober politicians and analysts in the West think is eminently reasonable. Ukraine's President went further and declared that Ukraine retained its right to acquire nuclear weapons! 

Putin sees the continued expansion of NATO into its backyard as an existential threat. He will do what it takes to prevent that from happening. That is why Russia's  military operation in Ukraine has happened. The operation will not end until Putin's twin objectives are achieved: de-militarisation and de-Nazification of Ukraine. No sanctions, no UN resolution, no Western media propaganda can stop Putin from doing what he thinks is absolutely essential for the security of his nation.

I cannot do better than quote from an article veteran diplomat M K Bhadrakumar has written in Rediff.com:

Russia is not at war with Ukraine, but is locked in an existential struggle to avoid the fate of Yugoslavia. Period. The spectre that is haunting Putin is NATO membership for Ukraine, which the Americans have been orchestrating.

Following the CIA-sponsored coup in Ukraine in 2014, an anti-Russian power calculus emerged in Ukraine. The US's point man for Ukraine in the Obama administration was none other than Biden himself. He made countless trips to Kyiv during 2014-2016 to fine tune that transition.....

The core issue today is not 'Russian invasion'. Putin has spelt out unambiguously that Russia does not intend to occupy Ukraine and that its objective is two-fold: 'Demilitarisation' and 'denazification' of Ukraine

The first one means dismantling the military infrastructure that NATO and has installed on Ukrainian soil right on Russia's doorstep. Ukraine's defence apparatus, including its command centres, are already hooked to the NATO system.

Putin has repeatedly warned that if the US instals missiles in Ukraine, Moscow would be within 5 minutes's striking distance. It is 'like a knife at our throat', he said on Thursday...

....Under no circumstances will Russia give up until the twin objectives are realised -- dismantling the offensive weapon systems installed by NATO in Ukraine and, secondly, scattering the Neo-Nazi forces that act as the US's cat's paw.

The Modi government has shown courage in abstaining from the Security Council decrying the Russian intervention in Ukraine. But many of our intellectuals and the Indian newspaper reading audience seem sadly disconnected from the tragedy unfolding in Ukraine. 

Ukraine: Putin wrongfoots the West

Putin has announced a military operation in the two breakaway republics of Donetsk and Luhansk. The Western media calls this an invasion. As Putin was careful to point out in his last address, the Russian intervention is in keeping with the US charter. Donetsk and Luhansk have announced their independence and Russia has recognised them. Russia has a mutual defence treaty with both. Thus, the Russian intervention is comparable to its intervention in Syria.

The West thought that Putin would respond to Ukraine's provocations in the Donbass region through a direct assault on Ukraine. Putin has not done so. His troops have moved into the two breakaway republics. If Ukraine attacks Russian troops, Putin will retaliate.

The West has responded with sanctions that even the Western media finds trifling. Harsher sanctions may follow. The West must understand that sovereign states will be willing to put up with sanctions of any order where they believe national security is threatened. North Korea has done that. So has Iran. The West has been unable to cripple them militarily whatever the economic price they have paid. With Russia, the West has an even lesser chance.

What we are seeing is a Russian attempt to redefine international relations. No longer is Russia willing to allow the US to lay down the law- at least where Russia's immediate periphery is concerned. The US and NATO will not be allowed to station missiles in Russia's periphery and threaten Russian security. Period. If any nation in the Russian periphery does not accept this position and plays along with the West, it will pay the price. That is what Ukraine is learning the hard way. Putin has made it clear that Russia has no interest in re-absorbing Ukraine or any  the other erstwhile republics into itself as long as Russian security is not threatened.

The West refused to buy this. It has sought to portray Putin as an aggressor who wants to recrate the Soviet empire. Just three days ago, economist Jeffrey Sachs made an impassioned plea for the West not to mis-represent Putin's position and to guarantee that NATO enlargement would not include Ukraine or other states in Russia's periphery:

Many insist that Nato enlargement is not the real issue for Putin and that he wants to recreate the Russian empire, pure and simple. Everything else, including Nato enlargement, they claim, is a mere distraction. 

This is utterly mistaken. Russia has adamantly opposed Nato expansion towards the east for 30 years, first under Boris Yeltsin and now Putin. Before that, the Soviet Union largely opposed Nato expansion, too. 

It is easy to understand why. The US would not be very happy were Mexico to join a China-led military alliance, nor was it content when Fidel Castro’s Cuba aligned with the USSR 60 years ago. 

Neither the US nor Russia wants the other’s military on their doorstep. Pledging no Nato enlargement is not appeasement. It does not cede Ukrainian territory. It does not undermine Ukraine’s sovereignty. It would in fact help to secure it. Ukraine should aspire to resemble the non-Nato members of the EU: Austria, Cyprus, Finland, Ireland, Malta and Sweden.

The West refused to give the necessary guarantees. It was willing for more talks of the sort that have led nowhere for the past eight years. It underestimated Putin's resolve.

Will there be a full-blown conflict? Not if the West concedes Putin's point and lays off. If the West chooses to interfere in Ukraine and provoke further conflict, all bets are off. 

NSE affair: hold board members and regulators accountable

 

My article on the NSE affair in the Hindu. I say that board members and regulators must be held accountable in a way that is not happening today.

 

NSE affair: board lapses

In an earlier post, I had referred to the lapses on the part of the board of NSE. What precisely were these lapses? 

One, the Board was alerted to the irregularities in the appointment of the Anand Subramanian as Chief Strategic Adviser  and, subsequently, as Group Operating Officer. The matter was discussed by the Board and a decision was to taken to remove the person but the discussions were not minuted, citing confidentiality and sensitivity of the matter. This was a shabby attempt at a cover-up.

Two, the board had earlier delegated substantial powers to Subramanian when he was designated consultant and without looking into his suitability for being delegated substantial powers.

Three, the Board came to know that Chitra Ramkrishna, the MD, had shared confidential information with an outsider. They, nevertheless, allowed Ramkrishna to resign citing personal reasons, gave her a generous severance package and recorded a glowing appreciation of her services. 

Four, the Board failed to respond quickly enough to various queries sent by SEBI. 

In short, the Board seemed interested more in protecting Ramkrishna than in protecting the institution.

M Damodaran, former SEBI Chief, documents    some of these lapses. So does Hemindra Hazari  who also provides a list of the board members at the time these decisions were taken.

The NSE board was as distinguished as a board might be. How did such a distinguished board allow such an appalling state of affairs to continue for so long? 

Well, I have long contended that the effectiveness of a board has little to do with the presence of luminaries. Quite the contrary: the effectiveness of a board is inversely proportional to the luminaries present on it. That is because most luminaries think that, having lent their names to the board, they have done their jobs. They cannot be troubled with the nitty-gritty of things, such as going through the agenda papers, raising tough questions and getting matters rigorously minuted.

Better to have competent persons  with the right credentials who fall short of being luminaries. There is a better chance, then, that governance will happen.

Ukraine: what exactly is going on?

Western governments and the Western media have been screaming for over a week that a Russian attack on Ukraine is imminent. Russia denies any plans to invade Ukraine. The President of Ukraine has asked Western governments to tone down hysteria over a Russian invasion: he doesn't think one is imminent. 

So, what exactly is going on?

Well, it is fair to say that Russia has no interest in absorbing Ukraine. It was interested in maintaining its access to the Black Sea. That objective was achieved when the Crimea was absorbed into Russia. Putin insists that Russia's interest in Ukraine is limited to ensuring it does not become a base for NATO missiles by becoming part of NATO.

Ukraine and some Western governments have indicated that there is little chance of Ukraine becoming a member of NATO. That requires the unanimous approval of all NATO countries. There is no way that such unanimity will be achieved in the foreseeable future. No European country, other than the UK, would like to incur the wrath of Russia in the cause of making Ukraine  a member of NATO- it's just not worth the trouble. What Ukraine and the West are reluctant to do is to concede Putin's demand for iron-clad guarantees that Ukraine will never become a member of NATO. 

If Ukraine becoming a member of NATO is a non-issue for now, why has Russia massed troops on the border with Ukraine? A plausible reason could be that it fears Ukraine will allow itself to be used by the West to launch a major assault on Donbas whose Russian population has been facing attacks from Ukraine for quite some time. Russia cannot be passive spectator to such an assault. It is, therefore, keeping its troops in readiness.

Why would the West want Ukraine to provoke Russia? Well, the speculation is that the US wants an excuse to get the West to impose sanctions that would include a ban on the Nord Stream 2 project that involves the supply of Russian gas to Germany. The US does not want Europe to be depend on Russia for its energy. Germany has been reluctant to buy the US line because it can use Russian gas supplies. Creating a ruckus over any Russian action against Ukraine would provide the basis for sanctions that cover Nord Stream 2. 

Another American objective could be tying down Russia in its immediate vicinity so that it does not attempt far away adventures such as the one in Syria. 

Putin has made it clear that he will not allow the countries in its periphery to be used a base for missiles that threaten Russia. He has declared that he has no interest in re-creating the erstwhile Soviet Union. If the West cannot accept this position, the world is in for serious trouble.

NSE affair: question marks over the role of board and SEBI

Corporate shenanigans have failed to surprise. But the National Stock Exchange (NSE) story is in an India-class of its own. Former NSE MD Chitra Ramkrishna, according to a SEBI order, shared confidential information about the exchange and took instructions or guidance from an anonymous email id whom she ascribed to a Himalayan yogi. 

The guru syndrome is all too common in India. As long as this is about one's personal issues, nobody can have a serious quarrel. But the notion that NSE board papers, financial data, performance appraisals and appointments could be shared with a yogi has people shaking their heads in disbelief.

NSE MD Vikram Limaye is set to have met Finance Ministry officials in connection with the SEBI order against NSE, Chitra Ramkrishna and others. This is the surest indication that the Ministry is not convinced that matters can be left to SEBI and the board any more.

The board was made aware of the blatant nepotism implicit in Ramkrishna's appointment of Anand Subramanian as Chief Strategic Officer and, later, as Group Operating Officer, on a stratospheric salary. It was also made aware of her sharing confidential information with somebody who, she claimed, was a Himalayan yogi. Yet, instead of acting against Ramkrishna, the Board allowed Ramkrishna to resign and, that too, with generous payments. This is certainly a serious lapse on the part of the board.

Even earlier, there must have been plenty of talk within NSE about Subramanian's role. It is hard to believe that the board did not pick it up. And if it did, why was there no response? NSE is a public institution. Using NSE to confer pecuniary rewards on an individual, without adequate basis, is abuse of office and misuse of public resources. I am not competent to say so but, perhaps, it could attract the provisions of the Prevention of Corruption Act.

Within NSE staff itself, did anybody protest? Did any of the top officers, including the HR head, raise questions? Unlikely. In the authoritarian world of corporates, serious dissent is unthinkable. 

SEBI's role has also left much to be desired. According to media reports, SEBI was alerted to Subramanian's appointment by whistle-blowers. It should have investigated the matter and taken action. It did not. Besides, imposing fines and barring people from the market is just not enough in this situation. 

As many have pointed out, after the emails with the yogi became known, SEBI should have made every effort, through the cyber police, to track down the identity of the yogi. Since confidential information involving a public institution was shared with an unauthorised individual, it should have filed a complaint with the police. It should have hauled up the then board members for the lapses pointed out above. There is a case for naming and shaming individuals in such instances and there is also a case for barring individuals from holding board positions. Today, board members can fail to  discharge their fiduciary responsibilities and just get away with it. SEBI needed out to send out a message that this can't go on.

At the time of writing, there are reports of an Income Tax raid on Ramakrishna and Subramaniam. This does suggest that the government does not intend to let matters rest with the SEBI order. Sadly, the government has to intervene because neither the board nor SEBI is seen to have done the needful. This highlights a basic fact of governance: Governments are subject to a modicum of democratic accountability in a way in which boards and regulators are not.

Government soft pedals privatisation

The government's target for privatisation in its Fy 22-23 budget is exceedingly modest- Rs 65,000 crore. This has disappointed many. They see this as timidity on the part of the government after the repeal of the farm laws. Well, it's not timidity, it is plain good sense. Privatisation on a large scale is hard to bring off and, if bungled, can prove politically costly.

For most of the two decades or so that disinvestment or privatisation has been attempted, the government has failed to meet targets. It has come close in some years through the ruse of getting one public sector undertaking to acquire stakes in another. This is not because of opposition from vested interests, whether amongst politicians or in the bureaucracy. The process of privatising a PSU is inherently time-consuming if you wish to get it right- in terms of getting multiple bidders, setting a proper reserve price, strengthening the PSU before offering it for sale and, most importantly, getting the valuation right.

If the government sells an important PSU or a public sector bank on the cheap and to the wrong buyer, hell will break loose. Job losses consequent to privatisation are certainly an issue. The first thing a private buyer will do is to cut the work force and cut benefits. This benefits shareholders but it leaves a large number of workers jobless. The private buyer benefits but there are costs to the government of the day. The government antagonises PSU employees and PSB employees. Central government employees, state government employees, railways' employees all feel a certain kinship towards public sector employees. So, there is significant chunk of the electorate that the government runs the risk of alienating. The benefits, whether in terms of revenues from privatisation or improved efficiency, are relatively negligible.

It makes sense to get rid of basket cases such as enterprises with long-running losses. But handing over a well-run PSU to a private entity- such as BHEL, Concor or BEML- is a different cup of tea altogether. In deciding to go slow on privatisation, the present government realises the political (and, perhaps, economic) costs outweigh the claimed benefits. The political leadership has chosen to listen to its instincts, instead of being guided- or misguided- by "experts".

More in my BS column, A change of course on privatisation.

FINGER ON THE PULSE

T T RAM MOHAN

A change of course on privatisation

 The modest targets reflect a welcome embrace of pragmatism in the govt’s economic policy

India’s Budget for FY 22-23 has signalled that the government will proceed cautiously on privatisation. Would-be reformers will denounce the change of course as a huge setback to reforms. It is, in fact, a move that acknowledges the realities of India’s political economy.

The Budget sets a modest target for privatisation of Rs 65,000 crore. This is way below the target of Rs 1.75 trillion for FY 21-22. Receipts for FY 21-22 are expected to be Rs 78,000 crore, much of which will be accounted for by disinvestment in LIC. It will not come from privatisation or the transfer of ownership and control, which the budget for FY 21-22 had emphasised and for which it was lustily cheered. There is no mention in this year’s Budget of the privatisation of two banks or one insurance company, which were talked about last year.

Privatisation enthusiasts will see this as a serious let-down after the successful privatisation of Air India this year. They overlook the fact that Air India’s privatisation was initiated in 2018 and took four years to conclude.

In privatising Air India, the government moved the airline’s land and building to a special purpose vehicle. It took the unusual step of taking over nearly 75 per cent of Air India’s debt of Rs 61,000 crore. Employees were guaranteed their jobs for one year and no more. The airline was sold to a respected business group, Tata. Replicating this level of attention to detail to numerous other public sector undertakings (PSUs) would not only be time-consuming, it may be virtually impossible to accomplish.

The government’s decision to de-emphasise privatisation reflects three realities. One, the Indian state lacks the capacity to execute privatisation on a large scale. Two, botching the sale of public assets can prove costly in both political and economic terms. Three, it is not helpful to turn privatisation into a benchmark of overall economic performance. 

Executing privatisation correctly is a challenge that not even advanced economies have managed well enough. Privatisation is intended to bring about more efficient utilisation of assets. It is also intended to fetch the government appropriate revenues. For these twin objectives to be met, the government must get the valuation right. 

That is not easy. The timing of the sale must be right— in a depressed market, the chances of the asset being under-valued are higher. Often, the firm needs to undergo a certain amount of restructuring before it is offered for sale so that it attracts the right suitors. There must be multiple bidders. Ensuring these and other conditions for an efficient auction are satisfied is not a simple matter —and few governments the world over have got it right. 

The worst thing a government can do is to rush the process by setting stiff targets. When that happens, privatisation is likely to be botched and controversy is inevitable.

It has been nearly two decades since Hindustan Zinc Limited was sold. The sale has come back to haunt its authors, with the Supreme Court asking the Central Bureau of Investigation to conduct an enquiry into the transaction. HZL was not a very significant PSU and yet its strategic sale is mired in controversy. Think of the furore that would erupt when large, well-run PSUs are perceived to have been sold cheaply or to the wrong buyer. 

If the sale of large, profitable PSUs can prove contentious, the sale of public sector banks (PSBs) presents challenges of a different order altogether. We need to clear as to who the potential buyers might be. The larger private banks in India have created formidable branch networks and are unlikely to have any appetite for the legacy issues that go with a PSB. Foreign banks have been conserving capital for their home markets since the global crisis. They are also not keen to come into India by setting up a wholly-owned subsidiary, as the Reserve Bank of India (RBI) wants, given the onerous governance conditions stipulated by the RBI.  

Selling to a dispersed group of foreign institutional investors risks creating a governance vacuum at a PSB. Citing the case of Axis Bank is not helpful at all.  Public sector entities had a significant stake in the erstwhile UTI Bank when a large stake was sold to FIIs and they continue to hold a significant stake in Axis Bank. It is not as if Axis Bank was handed over on a platter to institutional investors. 

The economic and political consequences of a privatised bank going the way of Yes Bank are terrifying to contemplate. A bank failure that imperils the savings of millions of ordinary depositors would be labelled “the scam of the century”. It would set in motion the depressing sequence of events that one associates with scams— disruptions in Parliament, a paralysis of the administrative machinery and negative media coverage. 

According to reports in the media, the government has decided to hasten slowly (make haste slowly?) on bank privatisation. It is said to be thinking of keeping a 26 per cent controlling stake for itself.  It will consult the RBI on “fit and proper” criteria for potential buyers. This is not a lack of reformist ardour; it is desirable prudence. 

It also does not help the government to let privatisation become a benchmark for economic performance.  In the weeks preceding the Budget, the media runs stories about how the privatisation target is likely to be missed. After the Budget, this theme is again played up. Failure on privatisation tends to overshadow all other reforms and initiatives of the government. Pundits and investors are quick to pronounce judgement, “This government too lacks the appetite for big bang reforms”. Setting a modest target for privatisation is sensible. It would be even better not to set any target at all and to use disinvestment and privatisation receipts as a balancing item in the budget. 

The government showed courage in not heeding calls for massive fiscal spending in the wake of the pandemic and focusing instead on liquidity support. It showed courage again in deciding to repeal the farm laws in the face of determined opposition from a disaffected group of farmers. Likewise, its retreat on privatisation is a welcome embrace of pragmatism in economic policy.

Resurrecting Netaji Bose

A hologram of Netaji Bose has been created at India Gate. A granite statue will replace it. The intention is to bring Bose into the mainstream narrative of the freedom struggle where he has thus far been a secondary figure. It is also in keeping with the attempt, under the present government, to convey that there was a great deal more to the freedom struggle than the Congress, Gandhi and Nehru.

Bose was president of the Indian National Congress for two terms. He resigned during his second term in 1939 when it became clear to him that Gandhi and other Congress leaders would not let him function as president. Gandhi had called the defeat of his candidate Pattabhi  Sitaramayya at Bose's hands "my defeat'. Thereafter, Gandhi's acolytes kept sniping at him and undermining him until his position became untenable. Gandhi and Bose differed on many issues, including the issue of how to deal with the British following the onset of WW2. Gandhi was initially inclined to provide support to the British; Bose was resolutely opposed to it. But, more fundamentally, Gandhi perceived in Bose a certain sympathy towards the revolutionary movement in India and did not take kindly to it.

Bose decided that it was in India's interest to align with the Fascist powers in order to oust the British- the underlying principle was 'enemy of my enemy is my friend'. He seemed to have overlooked the fact that, whatever the failings of the British, the Fascist powers could not be expected to create a better world. He also seemed to think he could persuade the Fascist powers to keep out of India after assisting him to get rid of the British by military means. In this, of course, he was being hopelessly naive. Those who believe that it is wrong to exalt Bose argue that his reading of history was flawed. 

Bose quit the Congress and founded the Forward Bloc. He was arrested by the British government in India. He escaped and made his way to Germany via Afghanistan and the Soviet Union. The Hitler regime put him up in an exclusive quarter of Berlin and gave him a generous allowance to run his activities. At one point in his stay, he got to meeting Adolf Hitler. The meeting did not go off well. Hitler made it clear to Bose that Germany was in no position to intervene militarily in India until it was done with the war in the East. Hitler had made some negative references to Indians- and he was of the view that British rule was good for India- in his book, Mein Kampf. Bose suggested he delete those references as the British would use these to drum sentiment against him. Hitler was not willing to oblige. 

Hitler seems to have decided he had little use for Bose's Indian National Army, at that time made up of Indian prisoners captured in North Africa. He decided to pass Bose on to the Japanese. Bose made his way to Japan in a German U-boat, transferring in mid-ocean to a Japanese submarine. The INA was strengthened after he landed in Japan with Indian soldiers captured in Singapore, Malaysia and elsewhere by the Japanese. The Japanese did not think highly of the INA as a military force and were not willing to give it a lead role in their campaign in Burma.

After the war, the INA soldiers were tried for treason. The trials did not proceed very far as Congress and the general public hailed them as heroes and independence was at hand. Following independence, the Indian army refused to take back the INA soldiers. Nehru had pleaded for their rehabilitation before independence but did not press the issue after he became PM. 

The INA did not make much of an impact militarily. But its creation did not give rise to fears in the British government of an insurrection on the part of armed forces in India. The naval mutiny of 1946 especially reinforced these fears and it was a contributory factor in expediting Britain's exit from India. This was, perhaps, an unintended consequence of the formation of the INA.

Bose was a charismatic leader with a terrific connect with the masses. He was above communal sentiment and his appeal was universal. He was courageous, selfless and utterly devoted to the cause of national regeneration. He had about him a certain nobility that one associates with blue blood at its best. Giving Bose a place of prominence in the story of Indian independence is well-merited, whatever the reservations about the particular means he used to further his cause.

It is also true that the mainstream narrative has been overly dominated by Congress, Gandhi and Nehru. It is good to have alternative figures and narratives emerge. There was the Congress and the non-violent struggle. There were also Congress rebels such as Bose, there was Ambedkar, the revolutionary movement and liberals, such as Gokhale and Srinivasa Sastri who believed that negotiation and constitutional methods would better serve India's interest. 

Let the story be told in full without glorifying any one side - and if that means raising new monuments to personalities such as Bose,  it is welcome. 

How to salvage stalled housing projects

 My latest column in BS. It is behind a pay wall. I reproduce it below.

FINGER ON THE PULSE

T T RAM MOHAN

Propping up the property market

A credit guarantee can give housing a boost

India’s housing landscape is littered with thousands of stalled housing projects.  Stalled or delayed projects spell loss of output and jobs. They also spell grief for homebuyers.  Getting these projects through to completion must rank high on the agenda of economic revival. 

Stalled housing projects are not strictly a post-Covid phenomenon. These had happened even before Covid struck in early 2020.  The problem is not affordability, but a fear psychosis among buyers. Customer confidence has fled in the wake of bad experience with stalled projects, including some high-profile ones. 

Residential housing projects are financed through a mix of equity, debt and advances from customers. Builders need advances in order to earn a decent return on their own investment. However, customers today are reluctant to make advances because they are not sure that the project will go through to completion. 

Customers are willing to pay only for projects that are completed or near completion. In many cities, the price of an apartment appreciates the moment the builder produces an Occupancy Certificate, which is proof that the building is ready for occupation. We have a chicken-and-egg situation facing the residential housing sector. The builder needs advances to complete launched projects but the customer won’t pay till the project is completed. The problem needs to be addressed.

In September 2019, the government announced a scheme to address this issue at affordable and mid-income housing projects. (Special Window for Affordable and Mid-Income Housing, or SWAMIH). 

Under SWAMIH, the government committed to set up a fund with a corpus of Rs 25,000 crore to invest in stalled projects. The government would contribute Rs 10,000 crore and the rest would come from LIC, SBI and private insurers. The fund achieved its first closure in December, 2019, with investors committing a total of Rs 10,037 crore. Until October 2021, SWAMIH had provided final approval for 95 projects with sanctions worth Rs 95,000 crore which covered 57,700 homes.

SWAMIH is a helpful initiative but it is limited in its size. Moreover, the problem of stalled or delayed projects has worsened consequent to the two waves of Covid. A survey in August 2021 by a property consultant — and reported in the papers — showed that 1,73,740 housing units were stalled across six cities (excluding Mumbai). The value locked up in these projects was Rs 140, 613 crore. In addition, housing units that had been delayed numbered 4,54,890 with an estimated value of Rs 3,64,802 crore. SWAMIH covers less than 10 per cent of stalled and delayed housing units.

Customer demand for housing has revived but customers remain reluctant to pay up significant advances. They are willing to make an exception in favour of builders with strong financial backing (for instance, corporate entities such as L&T, Godrej and Adani). Buyers are confident that, even without significant customer advances, these entities have the financial muscle to complete their projects.

Bank finance is essential to breathe life into stalled or delayed projects.  However, banks are wary of taking exposures to developers at the best of times. They will lend to stalled or delayed projects only if there is some mitigation of risk.

There is a case for a credit guarantee scheme for residential Housing similar to the Emergency Credit Line Guarantee Scheme (ECLGS) extended to small and medium enterprises (SMEs) last year. The ECLGS was a bold and timely initiative and it has saved firms and jobs. The ECLGS was subject to stringent eligibility criteria. The same should apply to any credit guarantee scheme for residential housing. It is possible to indicate a few. 

First, the project must involve a certain minimum number of buyers, say, 100. Secondly, it may apply to projects that have been delayed by over 12 months. Thirdly, the project must be for affordable and mid-income housing.

Fourthly, the project must be solvent, which means assets must exceed liabilities. The assets of a housing project would comprise value of receivables and value of unsold inventory. The liabilities would be the cost to completion of the project plus project liabilities. 

Fifthly, the bank must satisfy itself that there has been no diversion of funds.  Again, the computation involved is simple. Total expenditure incurred minus (customer money received plus construction debt) should be positive.  

Bank finance for projects that meet the above criteria should be guaranteed by the government. There could be a system of graded guarantees, say, 100 per cent guarantee for projects that are 90 per cent complete, 90 per cent guarantee for projects that are 80 per cent complete and so on. These criteria may be refined through discussions with bankers and real estate professionals.

A credit guarantee scheme along the above lines will give a boost to the construction sector. The sector is employment-intensive. Migrants who lost their jobs and have gone back to their villages and enrolled for the Mahatma Gandhi National Rural Employment Guarantee Act scheme can get their jobs back.  Not only will the economy benefit but the government will be able to assuage the grievances of a large community of disaffected people. 

The coming Budget will not have much to offer on the macro-economic picture. It is through sector-specific proposals, such as one to boost housing, that it can expect to make an impact.

Ukraine crisis: the price of honesty

The Chief of Germany's Navy, Vice Admiral Kay-Achim Schönbach, has resigned after a controversy erupted over remarks he made during a recent visit to India.

The Chief was commenting on the crisis in Ukraine. Russia has made it clear that Ukraine cannot become a part of NATO nor can NATO or the US place nuclear missiles there because these pose a fundamental threat to Russian security. It is not a position that reasonable people can quarrel with. When the former Soviet Union wanted to place missiles in Cuba, President Kennedy was ready to risk a nuclear exchange. The Americans have made it clear that they will not tolerate Russian missiles in Latin America. But the West has a different set of standards when it comes to threatening Russia.

Schönbach said that talk of Russia wanting to invade Ukraine was "nonsense" and that Russia and Putin deserved respect. He also said that Ukraine could never hope to win back Crimea which Russia had annexed. 

These are nothing but statements of fact- you could say that plain truth. Alas, truth is not what authority wants to hear. Within any system- whether it is government or a company- you are expected to toe the official line, not speak the truth.  Schönbach's remarks evoked such fury in Germany and its allies that he had to quit.

Former CIA chief and former defence Secretary Robert Gates lays down the official line in an article:

Since becoming president in 1999, Putin’s objectives have been straightforward: to restore and expand central government authority (not to mention enhancing his personal dominance and wealth), and to return Russia to its historical role as a major power. 

Anything wrong with those objectives? Are the objectives of any other major country, including the US and China, very different?

Gates quotes John Kerry, former US Secretary of State:

 After Russia’s invasion of Crimea in 2014, then US secretary of state John Kerry complained: “You just don’t in the 21st century behave in the 19th-century fashion by invading another country on a completely trumped-up pretext.”  

That's more than a little rich. Anybody remember the US invasion of Iraq? 

Ashoka University woes

 I return to my blog after a long lay-off caused by my having to relocate. It's taken me longer than I thought to settle. I hope to regular with my posts hereafter- fingers crossed!- TTR

Ashoka University was in the news recently- and, not for the first time, for quite the wrong reasons. Two co-founders and trustees of the University have been charged in a case filed by the CBI and have since stepped down from their posts at the University. Ashoka had made news only a few months ago when one of its faculty members, Pratap Bhanu Mehta, resigned. Mr Mehta, who has been critical of the government, had indicated that some of the top brass had conveyed to him their discomfort with his writings.

Ashoka University’s problems highlight a fundamental problem with setting up quality educational  institutions in the private sector. Such universities require support from those with deep pockets, which mostly means businessmen.

When businessmen are associated with a university, there are two issues. One, you never know when a business donor will get into trouble with the law. Two, it is not  easy for businessmen to allow the sort of freedom of expression that goes with the best of academia- there will always be pressure from those  in authority. For these reasons, quality academics will be reluctant to associate themselves with private institutions. There is no great University in the west that is associated with a corporate. The great Universities of the US are non-profit, private universities or government universities. 

The US has outstanding private universities that attract huge endowments. But these endowments typically come without strings attached from a large number of alumni, not from a few corporates. Donors do not, in general, ask to be associated with the university to which they contribute. Wealthy individuals, who have made their money from business contribute - and, often, after their association with a corporate has ended. Even if the corporate gets into  trouble later, it is not a problem for the University or School. The culture of large philanthropic contributions to academia  is almost unique to the US. It certainly does not obtain in India.

The IITs and IIMs have built their reputations overwhelmingly through government funding. While they have received large donations in recent years from alumni, they have, with rare exceptions, been wary of any association with Indian business. They have sometimes attracted funds from alumni who became successful entrepreneurs  in Silicon Valley and elsewhere but have been hesitant to tap Indian corporates for funds. Rightly so, judging by the troubles at Ashoka.

Question mark over IBC process

I return to my blog after a long lay-off caused by various discloations. Somme recent resolutions under the IBC process have triggered a huge controversy, thanks to poor recoveries on bank loans. 

 It does appear that trying to mimic America's Ch 11 bankruptcy process in India has its shortcomings. Many decisions of the NCLT are challenged in courts. The process of resolution stretches out, causing an erosion in the value of assets. Also, we need deep pools of debt capital that can finance biddders so that the auction process is competitive enough Finally, bench strength at the NCLT needs to be increased to expedite hearings. 

Lacking these elements, banks cannnot hope to recover much. Banks must first try to resolve defaults through negotiation and restructuring. Only then should they approach the NCLT. Given the fear of investigative agencies, the IBC has become the default option.

 https://www.business-standard.com/article/opinion/bankruptcy-process-needs-a-re-look-

121070801514_1.html 

 FINGER ON THE PULSE T T RAM MOHAN 

 Bankruptcy process needs a re-look 

A mechanism is needed to ensure bank-led resolution— not the NCLT— is the first resort for lenders Bankers are finding out that the National Company Law Tribunal (NCLT) is an expensive saloon to visit. 

The hair-cut on the sale of Videocon to the Vedanta group is 95.85 per cent, that is, banks will recover only 4.15 per cent of their total admitted claims of Rs64,838 crore. Videocon companies will be sold for a price of Rs 2,962 crore. The fair value was assessed at Rs 4,069 crore. Talk of a terrific bargain. 

The Videocon, offer, the NCLT bench noted, is close to the estimated liquidation value of Rs 2,568 crore. The liquidation value is to be kept confidential and disclosed to the banks’ committee of creditors only at the time of finalisation of bids. The bench seems to be hinting at a possible leak of the liquidation value. 

The danger in such a leak should be obvious. If a bidder believes there will not be any serious bidder in the fray, he can take his chances by quoting a price close to the liquidation value. Further, if a bidder acquires a company at the liquidation value, he may not have any great incentive to run it. He may choose to liquidate if he judges that he can realise, say, 15 per cent more than the estimated liquidation value. The point about selling a company to a bidder is to keep the concern going, to preserve jobs and incomes. Where it is sold at close to the liquidation value, this objective may be defeated. There is nothing in the statutes that prevents a bidder from liquidating a company after having submitted a resolution plan.

 

In another case, Siva Industries, the banks sought approval from the NCLT for a settlement with the promoter at a hair-cut of 93 per cent on outstanding debt of Rs 4,863 crore. The NCLT bench has sought an explanation and reserved its order. This is the sort of hair-cut that banks would find it difficult to take on their own. They must reckon that doing so under the auspices of NCLT gives them cover—“We followed due process.” 

One of the primary motivations for creating the IBC route was to improve recovery for banks. They weren’t recovering enough through restructuring, one-time settlements and sale to Asset Reconstruction Companies (ARCs). With ARCs, very little reconstruction was happening. They were just a means for banks to hand over the liquidation process to a third party. Recoveries were poor as a result. The hope with the newly constituted National Asset Reconstruction Company Limited is that we will see serious asset reconstruction. 

 

Is recovery any better at NCLT? According to Macquarie Securities, recovery under NCLT has averaged 24 per cent if we leave out the top nine accounts referred to the NCLT by the Reserve Bank of India. We should not be surprised. Only 8 per cent of cases have been resolved. Thirty per cent of cases have undergone liquidation. Banks need to see if recoveries in bank-led resolution in the recent years are better. 

Bank-led resolution, not the NCLT, should be the first resort for banks. They should be able to keep enterprises going through restructuring wherever possible. This doesn’t happen as much as it should because, in the public sector, bankers fear the law enforcement agencies may come after them—even years down the road. They need a mechanism that gives them protection for hair-cuts they take. It is the absence of such a mechanism that has made the NCLT the first resort ever since it came into being. 

Auction of assets will not automatically lead to the discovery and realisation of the best price. The auction has to be efficient. And the conditions for an efficient auction, such as multiplicity of bidders, correct reserve price, etc are so onerous that these are rarely met even in advanced economies. Besides, resolution under NCLT has been plagued by delays caused by litigation and the sheer volume of cases. Macquarie estimates that cases take more than 400 days, whether for liquidation or resolution, against the stipulated time limit of 270 days. Bidders will know that acquiring an asset would stretch out in time and assets will shed value in consequence. They will tailor their bids accordingly. 

It’s not clear how well assets for sale are advertised in NCLT cases. In some cases at least, investment bankers should be entrusted with a mandate to find suitors on a global basis. Private equity funds must be sought out. Banks are, perhaps, better equipped to do this. 

There is also a case for revisiting the exclusion of promoters from bidding where promoters are not wilful defaulters. An NCLT bench had recently suggested that the promoters be given a chance to bid in the DHFL case. Banks were outraged at the suggestion and have taken the case to NCLAT. Bankers are right in thinking that allowing promoters to bid for assets after they have defaulted creates moral hazard. But there are many cases where default occurs for reasons beyond the control of the promoter. By all means, penalise wilful defaulters. But don’t treat every default as a moral issue and rob banks of decent recovery on their loans. 

Here’s a thought. Let promoters, who are not wilful defaulters, be allowed to bid at NCLT. Where bankers feel that a promoter’s track record does not inspire confidence, they should have the right to reject promoters who have won the bid and opt for the next bid after placing their reasons on record. Some will say that giving discretion to bankers will result in abuse. But the absence of such discretion results in a bigger abuse, namely, poor recovery on loans. The bankruptcy process needs a re-look if Videocon and Siva Industries are not to become the norm. 

 

Air of optimism on banking 

 The dog did not bark. Non-performing assets (NPAs) did not rise as much as feared. That’s the interesting thing about Indian banking in the time of the pandemic. There’s no mistaking the optimism in the RBI’s latest Financial Stability Report (FSR). The FSR of January 2021 had said that NPAs in the baseline case— which is the best case— would be 13.5 per cent of advances by September 2021. Now it estimates the baseline NPA at 9.80 per cent in March 2022, just a tad higher than the figure of 9.5 per cent in March 2021. “RBI sees NPAs at 14.8 per cent,” some headlines had screamed last January. That was the estimate for the worst case scenario in September 2021. Now, the RBI says that, in the worst case, NPAs would be 11.22 per cent in March 2022. What do the RBI’s revised numbers mean? First, that the second wave of the pandemic has left the Indian banking sector largely unscathed. This would be a truly astonishing outcome if the RBI’s estimates for the coming year are proved right. It would show how much stronger the banking system is today after the crisis years of the past decade. It would also be proof that the macroeconomic impact of the second wave is nowhere as bad as the doomsayers had predicted. Your columnist stands vindicated.

Re-visiting the Economic Survey on India's handling of the pandemic

The first chapter of the Economic Survey of 2020-21 is devoted to India's handling of the pandemic. The note of exuberance is unmistakable. The Survey claims that the early and stringent lockdown reduced the loss of lives and, at the same time, paved the way for a V-shaped economic recovery:

India’s policy response to the pandemic stemmed fundamentally from the humane principle advocated eloquently in the Mahabharata that “Saving a life that is in jeopardy is the origin of dharma.” Therefore, the “price” paid for temporary economic restrictions in the form of temporary GDP decline is dwarfed by the “value” placed on human life. As the Survey demonstrates clearly, using a plethora of evidence, India’s policy response valuing human life, even while paying the price of temporary GDP decline, has initiated the process of transformation where the short-term trade-off between lives and livelihoods is converted into a win-win in the medium to long-term that saves both lives and livelihoods.

One stringent lockdown and we were done with the problem- so the Survey suggests. India's experience was unlike that of many other countries that did not impose as stringent lockdowns and had to face second and third waves:

The analysis in the chapter makes it evident that India was successful in flattening the pandemic curve, pushing the peak to September. India managed to save millions of ‘lives’ and outperform pessimistic expectations in terms of cases and deaths. It is the only country other than Argentina that has not experienced a second wave. It has among the lowest fatality rates despite having the second largest number of confirmed cases. The recovery rate has been almost 96 per cent. India, therefore, seems to have managed the health aspect of COVID-19 well.

.....India, in fact, has been an outlier in its experience with COVID-19. It reached its first peak in mid-September, after which rising mobility has been accompanied with lower daily new cases .. Globally, many European countries and US have been facing deadly second and third waves around this time with easing of lockdowns and increasing mobility. Most countries had to re-impose intermittent lockdowns while India has been increasingly unlocking. These trends reinforce that India has been effective in combating the COVID-19 pandemic.

The message is clear: India had won the war on covid. The Survey went on to almost rule out any further wave of covid:

 Also, most countries experienced their subsequent waves within a period of 2-3 months of crossing their first peak. These second waves have been more lethal in terms of number of cases. (Figure 23). The fatalities in US were 2.9 times higher during second wave. The prospect of India facing a strong second wave is receding with the start of the vaccination this year.

 The authors of the Survey must be regretting those words!

Clearly, the severe lockdown last March was not the last word in the war. Did the analysis above lead policy-makers on to relax restrictions a trifle too hastily? It may appear so. 

But that raises another question: if lockdowns cannot be relaxed quickly enough, what does that bode for economic recovery? What is the correct severity of a lockdown at any given point in time? 

Alas, a year into the pandemic we are left with more questions than answers.