Workplace culture: Regulation is unavoidable

Like so many others, I was shocked by the demise of Anna Sebastian, a young chartered accountant who worked for a Big Four accounting firm, repotedly because she could not cope with the pressures at work. I wrote up an article and sent it in to the Hindu late September. They carried it a few days ago. I reproduce it below:

We need to address India’s workplace culture

 

If we are to address the worst excesses of India’s corporate culture, some form of regulation seems unavoidable

 

T.T. Ram Mohan

 

In September, the mother of Anna Sebastian, the young chartered accountant who passed away in July allegedly due to work stress, said, “They say we have received freedom in 1947, but our children are still working like slaves.” Her anguished cry goes to the heart of the issue of workplace culture in India’s corporate world.

The inquiry report of the Ministry of Labour, promised within 10 days, is still awaited. The corporate world has chosen to remain largely silent on the tragedy. What corporate leader would dare to point fingers at others when the position at his own firm is not very different?  

Toxic work culture

The issue is not just long hours or having to put in extra effort to meet a deadline. Employees will gladly slog it out if they are shown respect, appreciated, and feel they are treated fairly.   From all accounts, much of corporate India fails on every count. Toxic work culture is pervasive in India’s private sector.

 

Long hours flow directly from a focus on the bottom line that comes at the expense of employees’ well-being. The management employs two people where four are required. It seeks to motivate the two employees by giving them the wages of three, thus saving on one employee. Impressive jargon hasbeen created to justify exploitation of employees and inhuman work hours. Meeting stiff targets against heavy odds is ‘organisational stretch’. There is ‘variable pay’ to promote a ‘performance culture’ that translates into a higher stock price — great for top management that corners most of the stock options. There is a ‘bell curve’ that identifies super-performers as well as under-performers. There are ‘stress management’ workshops to deal with the burn-out that ensues.  Management does not stop to ask itself why it is creating so much stress in the first place.

 

Long hours and employee burnout are typical of the corporate culture of the U.S. but not of Europe. France has a 35-hour work week. In the rest of Europe, the norm is about 40 hours. European firms lack competitiveness, did you say? Well, European standards of living are nothing to scoff at.

 

It is unrealistic to try to import the American culture into a setting that could not be more different. The per capita income in the U.S. is $85,000. In India, it is $2,700. The typical U.S. employee operates at a level of comfort — in terms of housing, commuting, health, diet, and leisure — that is way above that of the Indian employee. In India’s big cities, simply going to office and getting back can be an ordeal. So are getting school admissions for children (and then getting them into coaching classes), looking after an elderly parent, and generally ensuring that the household is ticking along.

 

Long hours are only part of the problem. Bosses often use language that can range from being unprofessional to abusive. During the tenure of Prime Minister Rishi Sunak, his deputy, Dominic Raab, faced charges of ‘bullying’ from officials he had worked with in his previous stints as minister. An enquiry found that he had been “aggressive” and “intimidating” but not “abusive”. Mr. Raab, nevertheless, had to resign. Such was the fate of the U.K. Deputy Prime Minister, no less, for having breached norms of civilised behaviour.

 

One wonders what would happen if these standards were applied to India’s corporate world. In the U.S. and in Europe, employees can sue the firm for a range of objectionable behaviours including those that cause them mental stress. They often win huge settlements. No such recourse is available in India.

 

Employees also feel they are not treated fairly. The performance evaluation system is often suspect and the ruthlessness with which so-called under-performance is dealt with will make one squirm.  Top management will talk of “weeding out dead wood”, an expression that shows  scant regard for the worth of human beings. Variable pay is heavily skewed in favour of a handful of individuals at the top. When those below seethe with resentment at what they perceive as unfair, a toxic culture is inevitable.

 

Many public sector firms have a much better work culture. Employees may not get huge rewards but they have job security. Unions act as a check on the arbitrary ways of top management. Inequality in pay is nowhere as glaring as in the private sector. Officers at the middle and senior levels put in long hours. People have their grievances. But complaints about a toxic work culture are rarer.

 

Time to remedy matters

How do we remedy matters? Corporates can be expected to be respond along predictable lines: there will be affirmations of “core values”, a new “code of conduct” for management, programmes to address the “work-life balance”, more “town hall meetings” with employees. If these could make a difference, we shouldn’t be having a problem in the first instance. The board of directors should be paying attention to the company’s work culture, providing recourse and initiating corrective measures. Alas, boards  tend to be even more disconnected from reality than the management. Moreover, they lack the incentives or the motivation to challenge   management.

 

If we are to address the worst excesses of India’s corporate culture, some form of regulation seems unavoidable. Regulation may get boards to assume responsibility for the work culture, engage with employees at lower levels, and get a sense of what’s going on.  The Nirbhaya episode caused a paradigm shift on the issue of women’s safety. One hopes that Sebastian’s untimely demise will likewise turn out to be a defining moment for India’s workplace culture.

 

 

Central banks have won the battle against inflation

 

As inflation soared to levels unknown in decades in two years ago, central banks came in for severe criticism for not reining in demand earlier.  Bring inflation down to target would mean a huge sacrifice of growth, critics said.

They have been proved wrong. Inflation has been brought down over the past two years with a modest sacrifice of growth. One has lost count of the number of analysts who said last year that the US economy was sure to slip into recession, if that had not already happened.

Central banks have improved their tool-kit over time. However, as I argue in my recent article in BS, Central banks have the last laugh,  their success in the recent bout of inflation owes to several factors beyond their control.

Central banks have the last laugh

The world economy will grow at 3.2 per cent in 2024 and 2025, says the International Monetary Fund’s (IMF’s) latest Economic Outlook. That is below the 3.6 per cent growth rate seen during 2006-15. Yet, the relief over the growth projections is almost palpable. 

There is relief because  the battle against record levels of global inflation has been won- or so the IMF declares- without as much loss of growth as was feared. Inflation rates are trending down without the global economy going into recession. Commentators who had been critical of central banks’ responses to post-Covid inflation have been proved wrong.  

Global inflation peaked at 9.4 per cent year-over-year in the third quarter of 2022. In the US, the inflation rate rose to 9.1 per cent in June 2022. Since then, inflation rates have been dropping. Global headline inflation rates is now projected to reach 3.5 per cent by the end of 2025,   below the average level of 3.6 per cent between 2000 and 2019. 

As inflation started surging after the Covid-19 pandemic, central banks were roundly criticised for tightening too little and too late. Since central banks were slow to react, critics said, monetary tightening would have to be extremely aggressive. A soft landing was almost impossible.  

Central banks have also been faulted for being slow to loosen monetary policy when the inflation rate began to decline, and growth was seen to be faltering. Might they have done anything differently? Since the actions of central banks were broadly synchronised, let us focus on the actions of the US Federal Reserve.

The pandemic was correctly seen as giving rise to a supply shock as well as a demand shock.  Monetary (and fiscal) policies to boost demand were entirely appropriate.   Expansionary policy caused the inflation rate in the US to rise above the target rate of 2 per cent in March 2021. 

Once the pandemic-induced restrictions were progressively removed through the second half of 2021, producers found it difficult to ramp up output due to supply chain disruptions. Demand ran ahead of supply, the US inflation rate surged.  There was an expectation that as supply bottlenecks eased, inflation would come under control. In any case, the Fed could not have been expected to tighten policy when the pandemic was still raging.

By December 2021, the inflation rate in the US had touched 7 per cent.  Just as central banks were preparing to tighten policy in early 2022, there came another shock-- the onset of conflict in Ukraine in February that year. Oil prices rose sharply amid expectations that the oil market would be severely disrupted. Inflation in the US shot up to 7.9 per cent in February. By mid-2022, global inflation had tripled relative to its pre-pandemic level. 

The Fed commenced tightening from mid-March 2022, with a 25 basis points (bps) increase in the policy rate. By June 2022, the policy rate in the US had jumped by 150 bps. By July 2023, the rate had gone up by more than five percentage points. Should the Fed and other central banks have tightened even more and even earlier in response to the Ukraine conflict? 

The short answer is that central banks’ responses to such events can only be tentative.  Could anybody have imagined that the conflict in Ukraine would go on for over two years? And that, two years into the conflict, oil prices would be contained at below $80 a barrel, thanks in part to the EU/NATO-imposed price cap on oil imports from Russia?  How much to tighten monetary policy and at what pace in response to such events can only remain in the realm of guesswork.

Suppose the Fed had indeed tightened earlier. What might have happened? The IMF’s Outlook uses a model to examine the outcomes had the Fed tightened three quarters earlier than observed. It finds that peak inflation would have been 2 percentage points lower than what was observed. However, real gross domestic product (GDP) would have been 0.2 percentage points lower. The model suggests that the Fed got the timing right.

 Inflation in the US stayed above 5 per cent until March 2023. Even last September, it was above the target rate of 2 per cent. The conventional wisdom is that when inflation stays high for so long, it is very difficult to get the inflation rate to fall without a substantial sacrifice of growth. Yet the sacrifice of growth has been minimal. 

There are several explanations for this seeming miracle. 

First, as the IMF points out, inflation expectations stayed “anchored”, that is, people did not change their long-term expectations. One can only speculate as to why this happened. It may well be that the credibility of central banks has gone up in recent years.  Economic agents may have seen the pandemic and the deviations from the inflation target that happened as a black swan event.    They may have believed that central banks had the competence to bring inflation to heel sooner rather than later.

Secondly, the Phillips curve appears to have steepened during the high inflation period. This implies that any monetary tightening and the economic slack it creates would result in a greater reduction in inflation than when the Phillips curve is flatter. Central banks end up producing better results than in normal times.   But then how on earth are central banks to anticipate the steepening of the Phillips curve in such times?

Thirdly, high inflation rates did not trigger a wage-price spiral that would have rendered the inflation rate stubborn. One reason certainly is that the power of trade unions in the advanced economies has declined  and workers have less bargaining power. 

Fourthly, the increase in commodity prices was less than, say, during the oil shock of the 1970s, and the energy-intensity of economies itself has declined. Inflation caused by commodity shocks is intrinsically less of a problem today, and a lighter hand is needed to deal with it. It is fair to say central banks have been helped by a combination of favourable factors.

One issue remains. Should central banks have started cutting rates even earlier? Well, with the geopolitical risks that we face, central banks have to tread warily. The conflicts in Ukraine and West Asia have escalated. Either could have spun out of control –and still can. The American presidential elections have posed their own uncertainties. No central bank wants to loosen policy only to tighten soon thereafter.

 Getting policy right in the face of so many imponderables will always be a challenge. In the present round, central banks have had the last laugh. Whether their success is due to tactical genius or pure serendipity is anybody’s guess. 

 

Lebanon and Iran: the fog of war and some unusual voices on the conflict

Does anybody know what exactly is the military situation in Lebanon? It is impossible to tell because there is very little coverage in the mainstream media and what we have is mostly the Israeli point of view as told by embedded journalists.

Israel's ground invasion of Lebanon has been on for more than four weeks now. Reports of the progress made by Israel vary widely. Israel wants to push the Lebanese militia, Hezbollah, beyond the Litani river. It would like to clear an area of about five kilometres into Lebanon from the border of bunkers, tunnels and Hezbollah fighters so that Hezbollah cannot fire artillery rounds into Northern Israel. (It would still be able to fire rockets). 

How far have these objectives been achieved? The Institute for the Study of War, a US based think-tank, contends that Israel has had considerable success. Other military analysts dispute this claim. They say the IDF is heavily bogged down,it has not penetrated more than three kms into Lebanon and it withdraws after making incursions. In other words, the IDF is loath to stay deep inside Lebanese territory for fear of inviting fierce reprisals from Hezbollah. The IDF top brass says it has substantially achieved its objectives in Lebanon and the time is ripe for a political settlement. That is not quite the same as what PM Netanyahu wants to achieve, which is to change the strategic situation in Lebanon drastically, with the elimination of any political role for Hezbollah.

Now, let's turn to Iran. About a week ago, the long promised Israeli attack on Iran materialised. The Israeli version is summarised by the Economist:

How effective were the Israeli strikes? So far there is too little evidence to be sure. Israeli officers claim they destroyed most of Iran’s advanced air-defence capabilities and that, as a result, their air-force can operate freely in Iranian airspace. If true, it means a future Israeli strike could be much more extensive.

According to Israeli security sources, most of the targets this time were hit by air-launched ballistic missiles (ALBM) fired from aircraft well out of the range of Iran’s defences. Israel’s stock of ALBMs is limited and a more intensive air-strike campaign against Iran would call for a large number of jets using munitions at a shorter range. If Israel’s claims about this strike are true, this is now possible. It will take many months for Iran to rebuild its air-defences, especially when its Russian suppliers need their own batteries for their war with Ukraine.

Other reports say that important sites that produced material for ballistic missiles were hit. Iran's ability to produce long-range ballistic missiles is thus seriously impaired and Iran's military capability compromised. It will not be in a position to mount any more attacks on Israel in the near future. 

However, several media reports suggets that a strong Iranian response is pretty much on the cards. One military analysts, Alastair Crooke, says that the IDF had planned several waves of attacks but it had to stop after the first wave because Iran displayed an air-defence mechanism that the IDF was not aware of.  If these stories are correct, the Economist version becomes suspect. 

It is impossible to go by what appears in the mainstream media. The media merely cite Israeli and Western sources but have no means of independently verifying what is told to them. I have been reading and listening to several independent military analysts. I do not know how right they are but what they say is certainly interesting. Let me list a few prominent ones:

i. Elijah Magnier: He's a veteran war correspondent who tweets regularly on X. His tweets are free. He has more detailed analyses. A basic part is free but the rest is available only through subscription. I have access to the full versions. Magnier is emphatic that the ground invasion has turned out to be unsatisfactory, if not disastrous, for IDF and that Israel will sue for peace before long.

ii. Colonel Douglas Macgregor: A former US army officer who has also served in the Defense department. Macgregor is among the analysts who predicted long back that Ukraine and Nato would face defeat in the fight with Russia. He has been proved right although the conflict has stretched out much longer than he had forecast. Macgregor does not see the conflict in Lebanon going well for Israel.

iii. Scott Ritter: He's a former US marine and weapons inspector in Iraq. He has had the same views on Ukraine and the Middle East conflict as Macgregor.

iv. Alastair Crooke: He's a former UK diplomat who served extensively in the Middle East and developed contacts with Palestinian groups, Hezbollah and officials in the government of Israel. Only recently, I have been hearing that he was, in fact, an MI6 agent- I don't know if that is true. Crooke sees Israel's plans unravelling swiftly. He has also forecast certain doom for Ukraine.

iv. Andreas Krieg: He's a faculty member at King's College, London. He too tweets on X and provides extensive background to the Middle East conflict and views on the unfolding situation.

v. Rania Khalek: She's an American journalist of Lebanese origin. She gives expression to the outrage amongst people of Middle East origin in the US over the destruction of Gaza and Lebanon.

vi. War Monitor: This is again on X. I don't know who the author is. But this is a source that provides frequent updates on the war front in Gaza as well as Lebanon.

For the official Israeli and Western version, there is the website of the Institure for the Study of War.

One thing is for sure. The social media has become an indispendable to getting a complete picture of events. The mainstream media can at best give only  a partial account and often a distorted account. 

Middle East conflict and the global economy

It hasn't happened since the Ukraine conflict erupted in February 2022. It hasn't happened since the Gaza conflict erupted in October 2023?  Will events in the Middle East now derail the global economy? One obvious way they could is by causing oil prices to shoot past the $100 barrel a mark.

Let us see if we can list a few facts:

i. Israel is not interested in a cease-fire in Gaza, much less in a two state solution

ii. Israel thinks it has a good chance of eliminating Hezbollah, the Lebanon-based militia or at least reducing it to a point where it cannot interfere with events in Gaza

iii. Israel also thinks that in order to degrade Hezbollah, it has to deliver damaging blows to Iran

iv. Israel thinks it has the US behind it, wintess the latest US decision to deliver the THAD anti-missile system to Israel and have it manned by American technicians.

The four above mean an escalation in the conflict and a prolonged conflict. Will the oil market remain unscathed in such a scenario? It's not just a matter of enough oil supply being available outside Iran. If Iran's supplies are disrupted, Iran is not going to allow other oil supplies to go through. When Israel attacks Iran, it has to deliver a blow powerful enough to deter Iran from any sort of retaliation. I leave it to military experts to judge if that is possible.

The prospect of an escalation in the Middle East and higher oil prices has obvious implication for the Indian economy. That is the subject of my article in BS, India's economic growth faces two risks and two key challenges.

FINGER ON THE PULSE
T T RAM MOHAN

The finance ministry’s latest Review of the economy, which came out on September 26, exuded confidence about the Indian economy being able to meet the Economic Survey’s growth forecast of 6.5-7 per cent in FY 25. Some two weeks later, the prospect of the forecast being upended by global events is very real. 

Oil prices are hovering around $80 a barrel for Brent crude, an increase of 16 per cent from the September low.  The Indian economy can take the increase in its stride. However, if events in the world at large were to push the price of oil beyond $100, we will have to start worrying.

“Nothing new there,” optimists would argue. “The world has shrugged off worries about oil prices for over 30 months since February 2022, when Russia commenced its military operations in Ukraine.” In June 2022, the price of oil went up to around $120 a barrel. From July 2022 onwards, oil prices have stayed below $100, with prices staying below $80 for the most part.  

Two factors contributed to this remarkable outcome. One, the North Atlantic Treaty Organization (Nato) and the European Union (EU) imposed a price cap of $60 on oil purchased from Russia while also  reducing dependence on oil supplies from Russia. The cap turned out to be quite effective. 

Two, the doctrine of “managed escalation” has played out well. According to this doctrine, Nato would progressively equip Ukraine to effectively fight Russia. Each step on the escalatory ladder would be managed so that Nato itself was not drawn into a direct conflict with Russia. Escalation has been managed,   the war in Ukraine has not derailed the world economy.

The same doctrine has been applied to the conflict between Israel and the Axis of Resistance (comprising Iran and its proxies, such as Hezbollah, Hamas and the Houthis). For over a year now, Israel has been trading fire with Hezbollah on its northern border with Lebanon. These exchanges have been confined to a narrow strip on either side of the border, with casualties on both sides staying within limits. Iran and Israel have engaged in tit-for-tat missile exchanges, inflicting damage that both sides find acceptable. 

“Managed escalation” always carries the risk of miscalculation or error- at some point, one party or both parties can cross tolerable limits. The issue now – and this is where optimists would be mistaken- is not so much miscalculation as cold calculation on Israel’s part. With the successes Israel has had against Hezbollah in recent weeks, Prime Minister Benjamin  Netanyahu believes the time has come to “change the Middle East.” There is the  (prospect?- ok) not only of escalation but of a prolonged campaign.  

A probable Trump victory in November heightens the implied risk. Following Iran’s missile attack on Israel, Mr Trump wants Israel to go after Iran’s nuclear facilities.  While Mr Trump may well be posturing in the run-up to the polls in early November, his known hawkishness on Iran poses clear risks for West Asia and the world economy.

There is another risk that a Trump victory poses, one about which there seems to be less ambiguity. Mr Trump promises sweeping cuts in taxes for corporations as well as individuals, higher tariffs and substantial deregulation. He sees the tax cuts as paying for themselves by boosting growth, but many economists are sceptical. They think the tax cuts will result in wider deficits, an increase in public debt, and slower US growth down the road.  

Mr Trump has promised a tariff of 20 per cent on all imports and a tariff of 60 per cent on Chinese goods. Mr Trump sees higher tariffs not just as protecting US manufacturing but as paying for the tax cuts he has in mind. Economists have raised a howl but many American business leaders think Mr Trump has got it right. Whatever the long-term impact, there is little doubt that Mr Trump’s policies will be disruptive for the world economy in the short term. 

The two risks apply to the world economy as a whole. Apart from these, there are two challenges that are specific to India.

One relates to foreign direct investment (FDI). Net FDI (item 1 in the accompanying table), which is the FDI inflows minus FDI outflows, fell by over $28 billion in 2023-24 compared to 2021-22. The Review says that this is because repatriation of profits (item 4) surged considerably in 2023-24. It says this is not a bad thing because it assures foreign investors of an exit route for profits made in the country. 

However, repatriation of profits is not the only factor dragging down net FDI flows. Gross inflows of FDI (item 3) have fallen steeply from $85 billion in 2021-22 to $71 billion in 2023-24.  The Review argues that FDI flows to emerging markets as a whole have fallen by 15 per cent in 2023 and India is likewise affected. But if India is positioning itself as an alternative to China for FDI, this should not be happening. 

Some analysts contend that the fall in gross FDI has to do with India’s scrapping of bilateral investment treaties that allowed for third-party arbitration of disputes. The change, they say, has made foreign investors nervous. Maybe. Or it may well be that FDI has fallen for the same reasons that private domestic investment has not picked up in recent years. If gross FDI does not rebound strongly in FY25, we would need to be concerned.   

The second challenge, which is relatively short-term in nature, is with respect to foreign institutional investment (FII) flows. FIIs invested $44 billion in India in 2023-24. FII inflows in the April- July quarter of FY25 have fallen to $6.3 billion, from $20.5 billion in the same period of FY24.  Analysts say this is to be expected as Indian stocks are overvalued. There has also been a huge switch of funds to Chinese stocks, given the low valuations in that market. This shift is said to have increased in recent weeks following the stimulus to the Chinese economy. 

A fall in capital flows, combined with oil prices exceeding over $100, is not the best place for the Indian economy to be in. Happily, India’s external position today is strong enough to cope with such a scenario. However, higher oil prices and disruptions in the world economy could   undermine growth projections.  

India has had considerable success over the years in dealing with the sources of instability within the economy. The threats to growth and stability now emanate from outside- geopolitical risks, rising protectionism, and banking instability in the West. 

Michael Spence has great hopes for AI

Nobel Laureate Michael Spence sees  AI as offsetting two big trends that are working against global growth.

One negative trend is that efficiency or cost has ceased to be the primary consideration in determining the source of supply:

The first is shocks, including war, pandemic, climate change, geopolitical tensions, resurgent nationalism, and growing focus on national security in the conduct of international economic policy. These increasingly severe and frequent disruptions are shifting global supply networks toward greater diversification and resilience. But that is an expensive pressure and a contributor to inflationary pressures.

Another is the fall in productivity growth:

Productivity deserves special attention. US productivity growth averaged 1.68 percent from 1998 to 2007, a period during which many Americans got internet access and, later, mobile phones. Productivity growth then slowed to 0.38 percent from 2010 to 2019.....In Europe, lagging growth and productivity are attributable in part to less rapid and effective adoption and deployment of digital technologies, and to underdeveloped tech sectors relative to the US and China.

These two forces are impacting economies in a number of ways:

The combined effect of these two sets of forces is a relatively rapid shift from demand-constrained to supply-constrained growth. Growth is subdued. Inflation endures. Real interest rates remain elevated. Many economists, including me, believe that the structural conditions I’ve described mean borrowing costs are likely to remain elevated, and certainly higher than during the decade following the global financial crisis.

Spence sees AI as counteracting these two negative forces and leading to a surge in productivity although this will take a long time to happen- he sees the impact no earlier than the towards the end of the present decade:

Of course it will take time. Roy Amara’s law applies here as in past episodes of technological transformation: we tend to overestimate the short-run impacts and underestimate the longer-term ones. My best guess (and it is just a guess, based on current patterns of investment) is that we may start to see meaningful impacts in labor productivity by the end of this decade.

Spence's views are worth noting because economists, in general, remain sceptical as to whether AI will cause productivity to accelerate- they see it as maintaining historical rates of productivity at best.

Who will regulate the regulators?

Regulators set standards for others. What about the standards at the  Statutory Regulatory Authorities (SRAs) themselves? 

This is one issue that has come to the fore following the current controversy involving the Chairman of SEBI. What are the disclosure standards for the SEBI Chairman? How well are potential conflicts of interest handled? We had news today that SEBI refused to provide the Chairman's list of recusals in response to an RTI query- the news occasioned much outrage in the social media.

K P Krishnan, a former secretary in the finance ministry, has raised the issue of accountability of SRA such as RBI and SEBI in a recent article. 

The legislative actions of the SRAs are supposed to be subject to legislative scrutiny. The record on this point is disappointing:

Over a 23-year period, between 1999 and 2022, the Lok Sabha parliamentary committee reviewed 13 regulations issued by all SRAs, and the Rajya Sabha parliamentary committee reviewed four such regulations. Sebi alone has issued more than 650 regulations since it came into being. There are more than 20 SRAs at the level of the Union of India, and most of their legislative activity is not being subject to parliamentary scrutiny

There are limits to what parliament can scrutinise. Much responsibility must devolve on the boards of directors of these institutions. Here again, the record is pathetic:

The composition and functioning of the governing boards of all SRAs in India leave much to be desired. They are almost entirely composed of internal persons and serving government functionaries. In practice, the board delegates most of the powers to the chairperson and provides very little oversight. There is a striking gap between the governance standards that Sebi demands of listed companies or the Reserve Bank of India (RBI) demands of banks and  how Sebi and  the RBI themselves are governed.

Krishnan makes two excellent suggestions. One, there must be a separate parliamentary committee to monitor SRAs. Two, the Comptroller and Auditor General (CAG) must undertake performance audits of the SRAs instead of confining itself to financial audits. 

These reforms are necessary. What is missing in SRAs today is democratic accountability, an imperative for any public institution. 

Fed rate cut : are geopolitical risks irrelevant?

The US Fed's decision to cut the policy rate by 50 basis points is seen as a bold move to head off any incipient tendency towards recession in the US economy. 

I find it bold for a quite different reason. The Fed seems indifferent- or blind- to geopolitical risks. After the pager/walkie-talkie bombing in Lebanon, it appears the Middle East is closer to a full-blown regional war. With NATO inching towards letting Ukraine use longer-range missiles against targets in Russian territory, we seem poised for an escalation in that part of the world too.

So, two major escalations looming with potential repercussions or global inflation and growth.

And yet.... neither the Fed nor the financial markets are taking note!! It is true that we have heard dire warnings about the Ukraine front since February 2022 and the Middle East since October 2023. These warnings haven't come true. It appears all parties to the conflict know how to pull back from the brink. 

That is excellent news but.... can we be sure? The Fed seems more sure than many others.

India's growth prospects: RBI Governor's upbeat assessment

 

The RBI Governor has given a pretty upbeat assessment of India's growth prospects:

India can achieve sustainable economic growth of up to 8% over the medium term, according to the country’s central bank governor.

His comments come shortly after data showed India’s gross domestic product slowed to 6.7% in the second quarter, down from 8.2% when compared to the same period last year. The figures have  ratcheted up pressure on the central bank to launch its own rate-cutting cycle sooner rather than later.

Speaking to CNBC’s Tanvir Gill Friday in an exclusive interview, Reserve Bank of India (RBI) Governor Shaktikanta Das said he expects a growth rate over the next few years of 7.5% for India, “with upside possibilities.”

The Chief Economic Advisor has indicated that a medium-term growth rate of 6.5-7 per cent. Most people make a higher growth rate than that conditional on a slew of reforms. 

If, however, the Indian economy can grow at 7.5 per cent in the coming years on present steam, that would be most reassuring to the government. It certainly changes the fiscal outlook quite a bit. 

Indian banks do have a deposit problem

The RBI has expressed concern about deposit growth lagging credit growth and acting as a constraint on faster growth of credit. One reason, it says, this has happened is because savers, especially young savers, are today more attracted towards alternatives to deposits such as mutual funds and insurance.

Some commentators have said there is no such problem because, first,  invetments in mutual funds and insurance also come back eventually to the banking system as deposits and, secondly, because loans create deposits anyway. They say that if deposits are growing slowly it is because money supply is not growing fast enough.Let the RBI cut interest rates and that will turn on the deposit tap.

I examine these propositions and the fallacies therein in my BS article, RBI's push for deposit growth. 

Deposits can be retail or wholesale, they can be current account, saving or fixed deposits. Which of these a bank uses for funding loans has implications for its stability. The RBI's exhortations, I argued, are about growing granual retail deposits as distinct from lumpy, wholesale deposits. Not having enough retail deposits to back loans can create serious issues for banks.

FINGER ON THE PULSE

T T Ram Mohan

RBI’s concerns on deposit growth are valid

The RBI governor has urged banks to increase deposit growth. The governor’s exhortations have been met with criticism and even ridicule from some commentators. 

Some analysts contend that the deposit problem is entirely imaginary and that banks do not face any deposit constraint in the matter of making loans. They are wrong. The RBI governor’s concerns are well-founded, as a hard look at the critics’ propositions will make clear. 

                            i.Savers, especially young savers, are turning to alternatives to deposits such as mutual fund and insurance products. That should not worry banks because what is parked with mutual funds and insurance companies returns to the banking system as deposits.

It is true that money invested in mutual funds and insurance products must come back to the banking system. However, when savers invest in banks, they choose saving or fixed deposits with relatively long maturity.  The amounts they invest in mutual funds and insurance companies return to the banking system as current account deposits or fixed deposits of very short maturity. The latter are less stable than saving  deposits. As a result, banks are constrained in the loans they can finance with current account or short-term fixed deposits. More on the importance of the type of deposit later.

              ii.     Loans create deposits, not vice versa. So the idea that deposits can constrain loan growth is plain wrong. 

That loans create deposits is one of the more famous propositions of Modern Monetary Theory (MMT). Its meaning must not be misconstrued. 

A bank can make a loan through an entry in the ledger. The bank then makes a matching entry for deposits on the liability side of its balance sheet. So, yes, the bank can conjure up loans and deposits out of thin air.

However, when the borrower issues a cheque against the loan in order to make a payment, the deposit will need to be backed by funds. For its immediate needs, the bank can borrow funds from the central bank or in the inter-bank market.  

There are limits, regulatory and prudential, to such borrowings. To safeguard its stability, the bank will have to go to the ultimate savers and garner deposits, instead of accessing funds from intermediaries. Again, how loans are funded is material. 

            iii.     Deposit growth is linked to the creation of money by the central bank. It is no use blaming banks for the slow growth of deposits if the central bank is not creating enough money in the first place. 

Money supply is equal to base money (bank reserves plus currency) times the money multiplier. If the central bank wishes to increase the money supply, it can buy bonds from banks through open market operations (OMO), so that bank reserves rise. 

Money supply is also equal to currency plus deposits. When the money supply goes up, deposits on the other side of the equation rise correspondingly. Combining the two equations above, if deposits are not rising fast enough, it is contended, is because the central bank is not creating enough money. 

There are two fallacies in this line of argument. First, central banks cannot be doing OMO and increasing bank reserves just to increase deposits- OMO is done to meet the interest rate target at any point in time.  

Second, we need to be clear about how exactly an increase in reserves contributes to an increase in deposits. When banks have excess reserves, loans can grow faster than otherwise. Incremental loans will be matched by entries of incremental deposits in banks’ balance sheets. So, yes, we will see deposits rise as  money supply expands. 

However, if liquidity and interest rate risks are to be properly managed, incremental deposit entries will have to be backed by stable funds in the form of deposits. 

So much for the criticisms of the RBI governor’s remarks. 

Now to the point about the importance of the type of deposit a bank sources for funding loans..  Deposits can happen through current accounts, saving  accounts, and fixed (or term) deposits (FDs). 

Current accounts carry zero interest and hence are free from interest rate risk. However, as mentioned earlier, current account deposits pose high liquidity risks for banks.  Saving deposits, unlike current accounts, carry an interest cost. The interest rate on saving  deposits is supposed to be considerably lower than on FDs and it fluctuates in a narrow range, so the interest rate risk is also low. If saving  deposits are retail in nature, they are considered highly stable, that is, they pose low liquidity risk.

FDs carry a higher interest rate than both current and savings deposits, but retail FDs are relatively stable compared to corporate FDs (which are typically of shorter maturity). From the point of view of managing liquidity risk, deposits below ~2 crore are considered a preferable form of retail deposits, followed by those below ~5 crore. The exhortations to banks to grow deposits, it must be understood, are about growing retail deposits as distinct from large value wholesale deposits.

That is turning out to be a challenge for many banks. Banks lulled themselves into thinking that they could access retail deposits at a lower cost through online banking and under-invested in their branch networks. They have since woken up to the centrality of the branch network when it comes to accessing deposits. Public sector banks have the legacy of a large network of branches. But they need to rejig their branches, given the rise of new deposit growth centres in the country.

Many private banks offer interest rates close to those of FDs on all savings deposits above a certain minimum. This is a travesty of the concept of saving deposits. Saving  deposits are supposed to offer a low interest rate as banks provide a payment service against them. Because depositors are okay with a low interest rate, saving  deposits will not flee with interest rate changes. 

These features cease to apply if depositors are offered FD-like interest rates on savings deposits. The RBI must mandate that only deposits with an interest rate of up to, say, 150 basis points above the SBI’s savings deposit rate can be categorised as a “saving” deposit. 

Banks have also shot themselves in the foot by over-selling mutual fund and insurance products in order to boost fee income. Little did they realise that this would exact a cost in terms of excessive dependence on bulk deposits to drive loan growth. 

Banks need to remind themselves that loans also bring valuable fee income. They must think through the role of fee-based products such as mutual funds and insurance in the overall scheme of things. The mantra for banking stability remains unchanged: A bank’s focus must be on the core business of getting retail deposits and making loans. 

 

Silicon Valley CEO's high praise for IIT Madras

 Vivek Wadhwa, a successful Silicon Valley entrepreneur, has high praise for IIT Madras in this article:

When I visited IIT Madras earlier this year, I was blown away by the talent, world-class facilities, and their ability to connect with top scientists across India. I was so impressed that I decided to outsource the development of breakthrough technologies for my company, Vionix Biosciences, to them. Frankly, I told my friends and VCs in Silicon Valley where I live, that IIT Madras puts MIT, Duke, Stanford - and the Valley itself - to shame in terms of intellectual capacity, scale, ambition and  readiness to collaborate.

I've been more than amazed by the progress IIT Madras has already made in building technologies that could never be built in the West. The last company that tried to develop what we're doing was Theranos, which burned through $1.4 bn on medical diagnostics that are nowhere near the advanced solutions IIT has already created - at a tiny fraction of the cost.

Wadhwa goes on to make suggestions about the sort of research that Indian educational institutions must focus on:

India must avoid the pitfalls of the US research system, which, despite vast investments in basic research, is often disconnected from real-world applications. The US spends over $130 bn annually on academic research. Yet, much of it remains locked in the 'Valley of Death', where promising research never transitions into marketable solutions. As former dean of engineering at Duke University, Tom Katsouleas had told me, based on his work with the US National Academy of Engineering, 'Only about 1% of university patents are ever commercialised.'

I do not know how IIT Madras evaluates faculty. Do commercial applications carry as much weight in tenure and promotion decisions as publications in journals? If they do, then IIT Madras will find it difficult to improve its ranking in international ratings of institutions of higher education.

But then if research publications alone matter, institutions such as IIT Madras may lose out on applications. Wherein lies the balance between pure research and impact on practice? The answer has implications not just for IITs but also the IIMs and other places. 

Should the IIMs be trying to influence  practice through executive training, consulting and participation in policy-making by using the available research? Or should they try to catch up on research with the top institutions of the world, an objective that will remain elusive in the foreseeable future?