Saturday, June 30, 2007

Mounting hostility towards Pratibha Patil

Nobody can say that Pratibha Patil is coming in for flak only from the rival camp. In the media, the criticism is mounting. Today, Business Standard editor TN Ninan has asked the Congress to change its candidate even if at the last minute (today is the last day for filing of nominations). Ninan argues that the roster of charges against Patil is too formidable to be shrugged off in somebody who is the contender for the president's job.

Doing this (withdrawing Patil's name) will mean eating humble pie, but that is better than presenting the country with a five-year embarrassment; even the generally intransigent Left will presumably be willing to go in for a compromise candidate.

What would be least desirable is any attempt to defend Ms Patil’s record. From the revelations that have tumbled out of her cupboard, it is clear that she misused and mismanaged a cooperative bank that she founded, named after herself and led both formally and informally, mostly to benefit her close relatives. After warnings on the bank’s performance, the Reserve Bank was forced to take the extreme step of canceling its licence. The bank had to be liquidated as a consequence, and depositors must have lost a lot of money. It is hard to argue that Ms Patil is not to blame or that she did not know, and the Prime Minister’s explanation about the ups and downs of the sugar industry being responsible for the bad loans is laughable.

Then there are the allegations, as yet unproven, of Ms Patil’s relatives being linked to a murder and a suicide. On top of which there is the record of Ms Patil having spoken during the Emergency in favour of compulsory sterilization of selected categories of people. Finally, there are her more recent comments on the woman’s veil, Mughal rule, and communing with spirits—all of which presage other embarrassing comments that will come if she is President. The question the UPA must ask itself is whether, if it had known all this earlier in the month, Ms Patil would have been chosen as its presidential candidate. If not, the logical action that must now follow is also clear.

Shekhar Gupta echoes the criticism in the Indian Express although he is less hopeful of a change of heart on the part of the Congress.

ULTIMATELY, in politics, the logic of numbers prevails, so there is no doubt that Pratibha Patil will be our next president. But when was the last time a prime minister had to defend his presidential candidate by arguing that all sugar industry was suffering from a slump. Does that imply that it is okay if all sugar mill owners default on their loans? And, if so, why not announce a loan waiver for the sugar sector? Or, will we then institute a policy of loan write-offs for any sector of the industry that faces a slump?

Since the Congress now seems determined to brazen it out, there seems no doubt that Pratibha Patil will be our next president. At the same time, let there be no doubt that her tenure as president will be the most controversy-ridden in the history of Rashtrapati Bhavan. Nobody can predict the fall-out of some of these controversies, particularly those that happen to be under judicial scrutiny. It is one thing to have someone holding a conventional political position, a minister, a chief minister, exposed to those risks. But the president of the Republic?

Rupert Murdoch as owner of WSJ

Today's TOI has a piece by Paul Krugman on why Rupert Murdoch's bid for the Wall Street Journal should not be allowed to go through.

Noting that the Murdoch-owned Fox news channel was substantially responsible for flawed perceptions about Iraq and its links with Al-Qaeda, Krugman writes:

The problem with Murdoch isn't that he's a right-wing ideologue. If that were all he was, he'd be much less dangerous. What he is, rather, is an opportunist who exploits a rule-free media environment - one created, in part, by conservative political power - by slanting news coverage to favour whoever he thinks will serve his business interests.

In the US, that strategy has mainly meant blatant bias in favour of the Bush administration and the Republican Party - but last year Murdoch covered his bases by hosting a fundraiser for Hillary Clinton's Senate re-election campaign.

In Britain, Murdoch endorsed Tony Blair in 1997 and gave his government favourable coverage, “ensuring”, reports The New York Times , “that the new government would allow him to keep intact his British holdings”.

And in China, Murdoch's organisations have taken care not to offend the dictatorship. Now, Murdoch's people rarely make flatly false claims.

Instead, they usually convey misinformation through innuendo. During the early months of the Iraq occupation, for example, Fox gave breathless coverage to each report of possible WMDs, with little or no coverage of the subsequent discovery that it was a false alarm.

No wonder, then, that many Fox viewers got the impression that WMDs had been found. When all else fails, Murdoch's news organisations simply stop covering inconvenient subjects.

.....................If Murdoch does acquire The Journal, it will be a dark day for America's news media - and American democracy.

But the deal appears to be going through although the WSJ is working out safeguards to preserve its editorial independence. FT reports that key editors are to be retained.

The centrepiece of those efforts is an editorial board that would include a five-member committee with the power to approve the hiring and firing of key editors. Initially, these would be appointed by the mutual agreement of Dow Jones and News Corp. Thereafter, the committee would name its own replacements.

Well, these can at best be temporary safeguards. Eventually, Murdoch is bound to tighten his grip on the paper. Whether he will then proceed to blatantly interfere with WSJ's editorial policy is anybody's guess. Murdoch is too shrewd a businessman to do something that can ultimate undermine a paper's reputation and following. Besides, some would say that Murdoch would have no quarrel with the WSJ's decidedly right-wing leanings.

Thursday, June 28, 2007

Ravi Mathai on academic governance

Ravi Mathai, the legendary founder-director of IIMA, is widely credited with having created proceses and mechanisms that enabled IIMA to attain a position of eminence very quickly. One of the things for which he is remembered is the egalitarian culture he created at IIMA where the director was no more than the first among equals and initiatives and decisions emanated from the faculty body (although some people would say this has changed since). For instance, at IIMA, a professor's house does not change when the professor becomes director . This could mean that the director occupies a smaller house than some of the senior professors.

But Mathai seems to have had second thoughts about the efficacy of some of the things he did. I came across this priceless gem in an article published in Business Line in 2004:

Then, (Verghese) Kurien went on to build IRMA, the Institute of Rural Management Anand, with inputs from his cousin Ravi Mathai, who was the Director in IIM, Ahmedabad.

Avoid mistakes that happened in IIM, Mathai instructed: "So cousin, when you build IRMA, please build a bigger house for the director than for the professors so that they will know that there is a boss."

Next, don't give too much powers to professors; this is not Harvard. For this, Kurien recounts Mathai told him: "I told a professor whom I had appointed, `You are free to go ahead and fill all the lower posts in your department.' That person went to his village, brought all his relations and appointed them. That was a terrible mistake which I made."

And, there's one more: "The third point cousin, is that you should cut down on the number of people you employ. We have so many people, and therefore, labour union problems, courts, and so on. I am tired of it all. You are a dictator, so run it as a dictator. If anyone steps out of line, sack him. I can't do that; I am not made that way.'"

Now, this is Kurienspeak: "I said, `Ravi Mathai, neither you nor any of your professors have ever managed anything."

Single term for Indian presidents

In an article on today's Asian Age, P C Alexander, MP and former governor of Maharashtra, has an interesting insight into how the convention of a single term for the president of India came about.

Alexander himself was a candidate for the job in the last round but got edged out in favour of Kalam because he was perceived to have moved close to the BJP and the NDA. The Congress considered this an act of betrayal on the part of the former bureaucrat, who had been principal secretary to Indira Gandhi. The story is narrated at length in the very first chapter of Alexander's memoirs.

Here is what Alexander has to say about limiting the president to one term:

The convention about the President not being given a second term after Dr Rajendra Prasad’s second term, was not on the ground of suitability or otherwise of the incumbent concerned, but was based on certain principles and practical considerations. The most important among them was that if a second term was available, some incumbent Presidents might misuse their office and its enormous influence over the party in power to secure a second term and this would have diluted the independence and impartiality of the office of President. Unfortunately, in the absence of a Constitutional ban against a second term for the President, political parties have shown no inhibitions in using the prospects of a second term for the incumbent President whenever it suited their interests.

In 2002, the Congress was keen on President Narayanan getting a second term as it suited its interests then, but it had strong objection to Dr Kalam getting a second term in 2007 as it did not find it to be in its interests. Similarly, the NDA had serious objection to K.R. Narayanan getting a second term but it was quite willing to offer support to Dr Kalam for a second term now. The contradictory stands taken by the political parties show that they do not attach much importance to the principle behind denial of second term for incumbent Presidents, but they go by what they consider most suitable to their party interests.

Wednesday, June 27, 2007

Executive pay in Europe

Shareholder rights in respect of executive pay varies across Europe, according to a recent story in the Economist.

British law has required a non-binding vote on company remuneration reports since 2003. In France shareholders have a non-binding vote on attendance fees of members of the supervisory board. The Dutch and the Swedish governments went furthest by introducing binding shareholder votes on remuneration reports. But none of this is enough for Mr Minder. “We want shareholders to vote on three specific sums (pay for members of a firm's management board, supervisory board and advisory board),” he (Minder) says.

The problem of outsized pay for executives is less pervasive in Europe than in the US. In Germany especially, pay is still modest by standards elsewhere.

Mr Minder's pet target is Daniel Vasella, the boss of Novartis, a pharmaceuticals giant. Mr Minder claims that Mr Vasella is the highest-paid boss of a listed company in Europe. At the annual shareholders' meeting of Novartis in early March, Mr Minder pointed out that with an annual pay package of SFr44m ($35.6m), Mr Vasella is today paid 30 times more than when he was appointed in 1996. Novartis says Mr Vasella was paid SFr21m last year—Mr Minder puts a far higher value on share options and restricted shares—so that his salary increase has not been so great. But bosses of other big European firms are paid less. J├╝rgen Strube of BASF, a German chemicals giant, gets a base salary of €150,000; Wolfgang Mayrhuber of Lufthansa, Germany's national airline, receives €700,000 as base salary.

Larry Summers on rising inequality

Larry Summers weighs in on the subject of rising inequality in an article in FT (June 24).

Indeed, in a recent paper on tax policy prepared for the Hamilton project, my collaborators and I concluded from Congressional Budget Office data that, since 1979, changes in income distribution had raised the pre-tax incomes of the top 1 per cent of the population by $664bn or $600,000 per family – an increase of 43 per cent.

By definition what one group gains from changes in the distribution of income another group must lose. The lower 80 per cent of families are $664bn poorer than they would be with a static income distribution, which works out to $7,000 less in income per family or a 14 per cent loss. To put this in some perspective, the total gain in median family incomes adjusted for inflation between 1979 and 2004 was only 14 per cent. If middle income families had shared fully in the economy’s income growth over the past generation their incomes would have risen twice as rapidly!

While the most recent data available for performing these calculations come from 2004, it appears that the trend towards increased inequality is continuing and may even be accelerating, and will continue even in years when the price of stocks and other assets does not rise abnormally. It also appears that these trends reflect far more than increases in the financial return from education, as the top 1 per cent of the population has pulled away from the rest of the top 10 per cent and the top 0.1 per cent has pulled away from the rest of the top 1 per cent.

.......Given what has not happened to the pay cheques of average workers over the period of the information technology-induced acceleration in productivity and cyclical expansion, it is not plausible to suppose that policies that focus only on aggregate economic growth are sufficient to meet current challenges.

So, inequality is rising and growth cannot solve the problem. What do we do then? Greater regulation and curbing globalisation are not the answer, Summer avers. Okay, so what is the solution? Alas, Summers throws the problem onto the laps of politicians:

The challenge for those running for president of the US in 2008 – a challenge very different from that faced by presidential candidates until very recently – will be to develop a mandate for policy approaches that can ensure prosperity is more fully shared without threatening its fundamental basis.

Quote on British Raj

The Economist, reviewing a couple of books on India, has this quote on the British Raj:

“You British believe in fair play,” said a Punjabi official to a young British social worker in 1947. “You have left India in the same condition of chaos as you found it.”

Tuesday, June 26, 2007

Government directors on public sector banks

Unusual guts from the CMD of a public sector bank. Punjab and Sind bank CMD R P Singh has written to the finance ministry seeking the removal of five non-official directors on the board of the bank, reports ET.

The five directors have written to the PM making allegations of favouritism in the sanction of loans against Singh. Singh, in turn, says the directors have been trying to shield defaulters.

The larger issue is appointments of politicians or professionally unqualified people getting on to public sector bank (PSB) boards courtesy of their political connnections. I have nothing against politicians being on bank boards. There are politicians and politicians- and some are bright enough and capable enough to make a better contribution than the retired managers one sees on private and public corporation boards.

The issue here is one of politicians who lack the equipment to make a contribution. This is just not on. Given that almost every government appointment on the board is said to be personally cleared by the finance minister, this does not speak highly of the FM's commitment to the banks under his watch. The FM is constantly exhorting PSBs to do better. He meets bank chiefs and reviews their performance. He knows that PSBs have their job cut out competing with private and foreign banks. And yet he puts the wrong guys on their boards!

The government is free to appoint whoever it likes- provided they need strict eligibility criteria. The RBI has laid down such criteria. The Ashok Ganguly committee on corporate governance in PSBs also has something to say on the subject. But what do we do if the government chooses to ignore these? PSB top brass can't do much about this but I believe this is a fit matter for bank unions to raise. The Left, which swears by PSBs, should back the unions to the fullest on this.

Incidentally, Harman had a posted a query in response to one my posts on governance at IITs/ IIMs wherein I had said that a dominant shareholder is best placed to ensure governance. He asks: how does this not happen where government is the dominant shareholder in PSUs?

Well, one is presuming here that government is fully focused on commercial objectives; sadly, this does not happen all the time. But, also, think of what would happen if government were not doing some kind of monitoring. Who would PSU managers be accountable to? Their boards, you will say. And who would pick their boards? PSU managers! That is why I say: governance by the government may be bad, but getting government out without other players to monitor managers is worse.

Monday, June 25, 2007

Three new PSU 'navratnas'

One small item in the papers seems to have gone unnoticed- not surprisingly, because it is about successful PSUs. Three PSUs- Bharat Electronics, Hindustan Aeronautics and Power Finance Corporation- have been granted 'navratna' status. Originally, this status was granted to nine high performing PSUs but, with more PSUs doing well, the list has been expanded. Navratnas tend to enjoy greater operational autonomy than others.

BEL's stock has been going up and up along with its profit. In the period 1996-97 to 2005-06, profit after tax has risen from Rs 511 mn to Rs 5830 mn. BEL is into electronics and it caters to defence as well as non-defence applications. Its line of business requires substantial investment in R &D, which, in turn, requires highly trained people.

Who would have thought that a PSU could be successful in such a line?- they are not supposed to attract bright people, aren't they, with the kind of salaries they offer. They are supposed to lack the drive and innovation to succeed in such a business. Yet, BEL has done it. PFC had a highly successful IPO a few months ago. HAL made a profit of R 7.7 bn. in 2005-06.

The sharp improvement in performance of these PSUs is part of a larger story of broad improvement in the performance of the Indian public sector. And yet, when the reform process started, most people didn't believe this would happen. They urged the government to cut its losses by privatising its PSUs, whether in industry or in banking. India did not go down this route traversed by other developing countries. It opted for disinvestment- the sale of minority equity stakes to retail and institutional shareholders.

Listing on the exchanges subjected PSUs to market discipline and provided a measure of insulation of undue political interference. The opening up of the Indian economy subjected PSUs to competition. Greater autonomy gave them a chance to compete. The result? The government has seen a huge rise in the market value of its investment in PSUs- more than enough to wipe out its fiscal deficit.

This is a story that I have chronicled in my book, Privatisation in India:challenging economic orthodoxy (Routledge). In the early years of reform, when I said that disinvestment was preferable to privatisation (the transfer of control to private parties), it was not popular among academics and the financial press. The popular view was that the government would only keep losing money.

But disinvestment was indeed the route the political class took if only because it was less contentious. Things have worked out for the PSUs and the political class. I must say I feel vindicated.

Saturday, June 23, 2007

More on 'overheating' of Indian economy

Raj had asked in his comment on my earlier post what the basis for my optimism about the Indian economy was. Well, there are at least three elements that I (and others) have highlighted:

  • The rise in the savings rate from 23% in 2002 to over 32.4% in 2005-06. The investment rate has risen as a result to 33.8%. The increase in higher investment rate translates into an increment in the growth rate.
  • The turnaround in the manufacturing sector and its improved competitiveness, as a result of which we are seeing rapid growth in manufacturing and not just in services
  • Improved export competitiveness which has given us export growth of 20%.
Looking ahead, we can expect savings and investment to rise further. As income levels rise, so do household savings; corporate profitability translates into better corporate savings; better management of public finances improves government savings. Domestic savings will be complemented by foreign inflows in the form of FDI and FII.

You must also factor in higher productivity growth. Increased investment in infrastructure, telecom and IT will also mean higher productivity growth. So will the spread of education. The upside to the Indian growth story is enormous.

But the fact that we are moving towards a distinctly higher growth trajectory- say, around 8.5-9%- does not mean that the economy will not show occasional signs of overheating. In his column in today's BS, Surjit Bhalla dismisses most signs of overheating- the trade deficit, the inflation rate , a boom in credit. He points out that there is no one to one correlation between trade deficit and overheating- the US has a huge trade deficit and a low inflation rate. The average rate inflation rate in 2006, he says, was the same as in 2005- 4.7%. As for the boom in credit, that is only a facet of monetary deepening.

Bhalla then makes the point I made above, namely, that an increase in the investment rate adds to the growth rate- his estimate is of 2.8% being added to the previous trend rate of 5.6%, giving us a minimum growth of 8.4%. Add productivity growth of 1% and you have a growth rate of 9.4%.

Fair enough, but this computation ignores one element. Investment tends to generate output with a lag. The increase in demand takes place first; the increase in output comes later. As a result, we can still have inflationary pressures while we are on our way to a growth rate of 9%. Chairman of the PM's Council of economic advisors, C Rangarajan, makes this point in an interview to BS.

Incidentally, Rangarajan is upbeat about the growth outlook for the current year. He says it won't be less than 8.5% and, more likely, will be 9%. I am happy that, in my own optimism about the growth outlook, I am in exalted company.

Friday, June 22, 2007

Sparring with China over Arunachal Pradesh

China has shown a disconcerting tendency to resurrect its claims over the Indian state of Arunachal Pradesh every now and then. A few weeks ago, the Indian governement decided to call off a study trip to China by IAS probationers because the Chinese government refused a visa to a probationer who happened to be from Arunachal Pradesh. China's rationale: AP is part of China, hence the question of issuing a visa to somebody from there does not arise.

In his most recent meeting with his Chinese counterpart on the sidelines of a G-8 meet in Germany, PM Manmohan Singh sought to soft pedal the dispute over Arunachal. However, B Raman notes in an article in Rediff that India has finally chosen to do some plain-speaking on the subject, even if the plain talk does not emanate from the PM.

Raman writes:

While our prime minister has not openly articulated any sense of unease over the Chinese determination to get Tawang and over the strengthening of China's military-related capabilities in Tibet right up to its border with India, other senior ministers such as External Affairs Minister Pranab Mukherjee and Defence Minister A K Antony have shown a refreshingly new readiness to call a spade a spade in public.

Talking to journalists in Shillong on June 16, Mukherjee said 'he had made it clear to his new Chinese counterpart that any elected Government of India is not permitted by the provisions of the Constitution to part with any part of our land that sends representatives to the Indian Parliament.'

The minister added: 'The days of Hitler are over. After the Second World War, no country captures land of another country in the present global context. That is why there is a civilised mechanism of discussions and dialogue to sort out border disputes. We sit around the table and discuss disputes to resolve them.'

The international community has recognised that the days of coveting the territory of another country in the name of historic legitimacy are over, but unfortunately, not China and Al Qaeda.

Antony told journalists in New Delhi on June 18, 'China has been building infrastructure (near the Line of Actual Control). We are also building infrastructure. Nobody can prevent both sides. There is nothing wrong in that. They have the right to build infrastructure on their territory. We have the right to do that on ours. We are also trying to hasten the development of our infrastructure. They have their perception (about Arunachal Pradesh). On our part, we are very categorical that Arunachal Pradesh is part of India.'

This tough talk is appropriate but one wonders how much it changes the ground realities. There are two areas of dispute: Aksai Chin in the west and Arunachal in the east. Aksai Chin then was more crucial to China than Arunachal because through Aksai Chin ran the road linking Sinkiang with Tibet. China believed the road vital to maintaining its grip on Tibet. As a result, it was willing to forgo its claims in Arunachal in return for Indian concessions in Aksai China. Nehru rebuffed the offer. After the war, China tightened its grip on Aksai China and withdrew to pre- war positions in Arunachal.

In recent years, China's approach has been to treat Aksai Chin as history and to re-assert its claims on Arunachal. At the very least, it would like the Tawang region there to be handed back to it. As Raman notes, China now believes that it needs Tawang to seal its hold over Tibet once and for all.

Raman also notes a point I have made earlier. The Indo-US alliance is not so much about India (and the US) wanting to encircle China as about India reacting finally to China's determined attempts to encircle India ini collaboration with Pakistan, Sri Lanka, Myanmar and, possibly, Nepal. India has thus far not been able to respond effectively for two reasons. One, its historical estrangement from the US. And, two, the relative weakness of its economy (which has duly reflected on its defence capability).

Both these factors have changed dramatically in recent years. The Indian economy's fortunes have changed for the better. And the US, while recognising India's economic strength, also recognises India's usefulness as a counter to a rising China. The Indo-US nuclear deal is really about this strategic alliance between India and the US. The nuclear part is a sideshow but a necessary one. The US cannot transfer sophisticated defence and other technologies to India unless it is seen to have brought India broadly within the non-proliferation regime.

There you have the answer to a question that many critics of the Indo-US nuclear deal have raised: why can't we have a closer relationship with the US minus the nuclear deal? You can't because, without some understanding being reached on India's nuclear status, the rest of it can't happen.

Thursday, June 21, 2007

Second term for Kalam?

President Kalam is not making fresh admirers with his latest stance on his being a candidate for a second term. Here is what a Left leader is quoted as saying in Rediff:

A senior leader of the party questioned Kalam's morality and said that the President had changed his stand. "Earlier, he said that there should be consensus and now he is saying certainty. There is a wide difference between the two terms," the leader who did not wish to be identified said.

Railway minister Lalu Yadav has suggested that President Kalam step down "gracefully". I am more afraid we can expect more unkind utterances if Kalam chooses to prolong the uncertainty over his candidature.

There is an element of hypocrisy in the BJP's suggesting that it was willing to settle for Kalam for a second term. In the case of former president K R Narayanan, the party had taken the stand that it would abide by the convention of one term for the president.

Kalam would have risen in stature had he declared his own adherence to a salutary principle which has been observed for several decades now.

Wednesday, June 20, 2007

Mumbai as international financial centre

Mumbai as an international financial centre rivalling London and New York? Most people would regard this as a fantasy. But not a high-powered expert committee (HPEC) constituted by the finance ministry. The HPEC submitted its report sometime ago and I had a chance to critique it in the Economic and Political Weekly.

I must confess I read through the 200 page report with a sense of disbelief. 'Radical' is too mild an expression to describe the recommendations. These are sweeping in their scope: financial sector reforms, macroeconomic reforms, urban governance, the legal framework- all is grist to the HPEC's mill.

Some of the reforms are happening and the trend will continue. But others are unlikely to happen in a hurry. To give just one example: the HPEC recommends that 'City managers' run Mumbai so that it is freed from the stranglehold of the political class and the bureaucracy. Those who know anything about the formation of the state of Maharashtra would know that it was impossible for the centre to keep Mumbai out of Maharashtra even then. To imagine that control over the city can be wrested from politicians now is the height of absurdity.

My main problem with the report is that the effort just doesn't seem to be worth it. As I state in my critique, if we did everything that the HPEC wanted, we would add produce financial services exports amounting to 10% of total exports down the road. A case of a mountain of labour producing a mouse!

There are parts of the financial system where major changes and innovations are necessary and desirable. The bond, currency and derivatives markets need to be quickly developed and the HPEC makes out a good case for it. Alas, this good bit is likely to lost with the vast portion that will be seen as impossible to implement.

Another missed opportunity, I'm afraid.

Sunday, June 17, 2007

Economist resurrects 'India overheating' hypothesis

The Economist created a bit of a flutter in February this year when it weighed in in favour of the 'India overheating' hypothesis. In a nutshell, the magazine contended that there was no way that the recent growth rate (average of 8.5% over the past four years) could be sustained and that the rise in the inflation rate was an indication of this.

In its last issue (June 7), the Economist resurrects this hypothesis. It presents four arguments to support its contention:
  • Inflation has been caused not just by supply shocks- in the form of shortages of agricultural products- but by a rise in manufactured product prices; the latter points to excess demand
  • Supply-side measures taken by the government, such as cutting duties on imported products, can only be a palliative, they can't cure the problem
  • The rise in investment will augment capacity soon enough
  • Interest rate rises effected by the central bank should serve to curb demand

What do we make of the Economist's stance?

First, let me say that I have no difficulty accepting all of the above points, especially points one and two, namely, inflation is the result, not just of supply shocks, but of excess demand. Hence, augmenting supply alone won't do. Indeed, the case for a slowing down of the economy has been accepted by India's central bank.

We are seeing a slowdown in bank credit growth and money supply due the many rounds of interest rate increases effected in the last year. Growth in home loans as well automobile loans is lower than in the previous year. So, there is every indication that higher interest rates are beginning to impact on retail loans. But, corporate demand for credit is rising thanks to ambitious investment plans.

There are two policy issues that need to be addressed. First, how much of a slowdown do we need? On present showing, GDP growth for this year is projected at around 8-8.5% compared to last year's 9.4%. If the trend in the reduction in the inflation rate seen in recent weeks ( the rise in the WPI has slipped below 5% in the last week) is sustained, then this may constitute enough of a slowdown.

Second, the answer to excess demand does not lie in further central bank tightening- or such tightening alone. Money supply increases arise from foreign inflows. The central bank cannot allow the rupee to appreciate beyond a point because such appreciation undermines export competitiveness- and it also exposes the economy to serious risks if capital inflows should reverse or dry up. The central bank buys up foreign inflows - and this causes domestic money supply to expand.

So, we need to contain foreign inflows. The government has taken several steps for this purpose, including imposing tighter norms for external commercial borrowings. Some of the FDI is in the form of private equity and this is more in the nature of portfolio flows- we may need to impose controls on these as well. Nearly 50% of FII flows is in the form of Participatory Notes- we may need to substitute these with direct investment in the stock market. It's a tough job but containing foreign flows is the key at the moment.

Greater monetary tightening, which the Economist urges, can have the perverse effect of stimulating greater foreign flows at a time when rupee appreciating. It will also dampen capital spending that will augment supply down the road. So further tightening is not the answer.

Agreed, managing a higher growth rate poses major challenges for the Indian authorities. But I detect a hint of a suggestion in the Economist's tone that a growth of 8% plus is somehow excessive for India- and the same journal, I am sure, does not have a problem accepting that 10% is okay for China. Part of the problem is that the Economist, like many domestic advocates of further reforms simply did not believe that India could reach 8% without sweeping reforms- privatisation, labour reforms, financial sector reforms, subsidy cuts, the works. But 8% has happened. So they are conjuring up reasons as to why it can't last.

Sorry, folks, India is going to disappoint you- we will keep growing at 8% plus.

Saturday, June 16, 2007

How Wipro hired Premji's son

I commented in an earlier post about Aziz Premji's son, Rishad's, getting hired at Wipro. I wasn't ready to buy the story that Rishad was just another applicant who went through the normal screening process.

As if to rebut this perception, ET today has a story about how rigorous the process was.

So far, his father Azim Premji, one of India’s richest men, had resisted all attempts at bringing his family into the company. Wipro was a professionally managed company and Mr Premji did not want any talk of nepotism tarring that reputation.

Rishad had to face up to three industry stalwarts: Ashok Ganguly, a former chairman of HLL, N Vaghul, non-executive chairman of ICICI Bank and PM Sinha, a former CEO of Pepsico’s South Asia operations. As independent directors on the board of Wipro, one of the India’s best-known software firms, the three gentlemen had an onerous duty to perform. They had to see if Rishad, the son of the man who controlled more than 80% stake in the company, was fit enough to join his dad’s company

And, apparently, Rishad withstood the grilling and made it to Wipr0. As I said earlier, Rishad has impeccable credentials (Harvard MBA, consultant at Bain, etc) and, no doubt, he is in every way suited for a position at Wipro. But my question is: can you really expect directors who sit on Wipro courtesy of Premji to turn down his son for a position?

Given Rishad's credentials, Premji might have straight away inducted him into his firm without fuss. Everybody would have understood. Neither Dhirubhai Ambani nor Aditya Birla put their sons through an interview before bringing them into the company (Mukesh has an MBA from Stanford and Kumar Birla from LBS).

Only about a year ago, Aziz was saying he had no plans to bring Rishad on board. Now, we hear the same kind of talk about his succeeding Aziz.

Wipro continues to play down the importance of Rishad joining the company. Says a senior Wipro manager, “Someday he is going to inherit his father’s wealth, but for now there is no succession plan.”

Is Rishad going to succeed Aziz? You bet! Of course, this will happen after the board has satisfied itself that Rishad is the best person for the job.

Friday, June 15, 2007

Corporate governance vs public governance

I have always been sceptical about the claims made on behalf of corporate governance. Yes, the rise of activist shareholders poses more demands on the board and the board, in turn, has become more demanding. But the power-centre in a corporation remains an all-powerful CEO. The CEO's accountability to the board is nowhere near what it should be.

Part of the reason is that directors are not appointed by shareholders. They are selected by the CEO with shareholders having very little say in the matter. 'Independent' directors is a term that is used too loosely. It is interpreted to mean any director who has no operating responsibility with or pecuniary interest in the company. A more rigorous interpretation would be 'independent of operating management'. The latter kind of independence is possible only if directors are elected by shareholders. But this is next to impossible today, as is the removal of directors.

This is one area in which corporate governance has much to learn from public governance where we have competitive elections and clear voting rights and voting rules. A recent paper points out out there are other areas as well. I comment on the paper in my latest ET column.

There is one other point I didn't get a chance to mention. In public governance, there is recourse for employees. In India, we have Tribunals to whom civil servants can go if they feel they have been wronged. In the corporate world, there is none. What obtains is a form of monarchy where the CEO's writ goes unchallenged.

I find it strange that the absence of democratic mores in corporations does not provoke outrage. I reckon this is because people see corporations are creating wealth and opportunity and are unwilling to put any spoke in the wealth-creating machine. But, going by the same criterion, we should judge dictatorships only on economic growth and forget about human rights. In the democracy versus growth argument, my sense is that democracy has won out. If this holds for public governance, why not for corporate governance?

Lady candidate for President

Make no mistake about it, there is a certain buzz about the UPA selecting a lady, Pratibha Patil, as its candidate for India's presidential polls. Last round, the NDA had created a similar buzz by opting for a non-politician and technocrat, Abdul Kalam.

Yes, having a lady as president is great- and we will be having our first lady president before the US has its. I know, the two jobs are not equivalent (in India, the job is largely, but not entirely, ceremonial). But, we don't have to be apologetic about that- we had a lady PM long ago, as did Pakistan and Sri Lanka. Whatever the record of South Asia in women's empowerment, it hasn't kept women away from the top jobs.

There is one other fact about Patil's nomination that struck me. At no point did the name figure in the various lists of probables put out by the media. It cannot be that the UPA president, Sonia Gandhi, pulled the name out of her hat at the last minute. It must have been there in the background but the media could not lay its hands on it.

Says something about reporters having the inside track and the ability of the political system to keep secrets, doesn't it?

Tuesday, June 12, 2007

Powell on Guantanamo Bay

Former secretary of state Coliln Powell's call to close down Guantanamo Bay keeps up the pressure on the Bush administration to rethink its stance on the prison camp.

Last week, military judges at the camp ruled that Congress had no authorised the Bush administration to try 'enemy combatants' through military commissions. This week, a Court of Appeals rejected the administration's efforts to detail a Qatari citizen in the US, suspected of involvement in 9/11, as an 'enemy combatant'. That would mean that the Qatari cannot be held indefinitely without charges- the favoured tool of the Bush administration in its war on terror- and would have to be tried as a civilian.

Private equity riches

Everybody knew that the founders of Blackstone, the private equity group, were wealthy people. But the information revealed in the SEC filing ahead of the firm's $7 bn plus IPO has even the millionaires on Wall Street salivating. The figures are revealed in an FT story.

  • Co-founder Steve Schwarzman made $400 mn last year and can expect to make upto $677 mn from the sale of a 5% stake in the coming IPO. His remaining 23% stake would be worth $7 bn.
  • The other co-founder Pete Peterson stands to rake in $1.88 bn by selling his 60% stake in the IPO.
Figures such as these bound to fuel controversy over executive pay. Critics will condemn managerial greed. Votaries of big pay packets will say that this is the sort of incentive that fetches performance, so public companies should match private equity pay!

Rupee appreciation and inflation

C Rangarajan, chairman of the PM's Council of economic advisors, was quoted as saying that rupee appreciation has helped contain the inflation rate- the rate is down to around 5% now.

In his column in Business Standard, Surjit Bhalla contests this. He writes:

The channel of influence for the “strong rupee is good for inflation” crowd is straightforward. Exchange rate affects traded goods, and if the rupee appreciates, prices in rupees go down, and lower inflation is observed. No one can argue against this simple, perhaps too simple, logic. A first test should be the observation of the opposite: when a currency depreciates then inflation should go up. While intuitive, it is not even obvious that an appreciation of the exchange rate will lead to lower inflation (or vice-versa). Consider the fact that until just a few years ago, currency depreciation and lower inflation were the norm for India. A year after the Asian crisis, inflation fell in the East Asian economies, despite a nominal, and real, depreciation of over 30 per cent.

Bhalla is right on the second part: there is no one-to-one correlation between rupee appreciation and the inflation rate. But he is right because the first part of his argument is flawed. The 'simple logic' that he mentions just doesn't hold.

True, rupee appreciation does bring down the prices of imports. But, this only affects the relative price of imports with respect to non-tradeables. To put it differently, imports would become relatively cheaper (so you would expect the inflation rate to go down) but other goods would be relatively costlier ( so you would expect the inflation rate to rise!).

The inflation rate has to do with the overall price level, not with relative prices. And the overall price level, as Milton Friedman pointed out long back, is a function of money supply. Rupee appreciation will not by itself impact on inflation. But it would do so through its impact on money supply.

When the RBI allows the rupee to appreciate, it does not intervene in the currency market. Such intervention tends to cause money supply to rise. By not intervening, the RBI reins in money supply. This reining in impacts on inflation.

So, yes, allowing the rupee to appreciate does impact on inflation. But not on account of "cost-push" factors- that is, cheaper imports. It does so on account of "demand pull" factors- the impact on money supply.

Friday, June 08, 2007

Acquisitions by emerging market state entities

Asian governments now sit on enormous reserves- $3300 bn. Middle eastern state-run funds are said to have $2000 bn. In Russia and China, state-run companies can raise huge amounts for acquisitions. That does put state-run emerging market entities in a position to own big chunks of equity in western markets. China's investment of $3 bn in private equity fund Blackstone is a harbinger of things to come.

How do western governments cope with this? Gerard Lyons, chief economist of Standard Chartered Bank, has an article on this in FT.Some of the attempted acquisitions have run into huge controversies.

Not all countries on the receiving end of these flows are receptive to the idea. The Thai authorities reacted badly to Temasek of Singapore’s purchase of a telecommunications stake in their country. Dubai Ports World had to abandon its attempt to buy P&O’s US ports after it prompted a national security debate in the US Congress. The bid by China’s CNOOC for Unocal was also blocked in the US. There is no reason to expect this hostility to change with the 2008 US presidential elections.

One controversial area is the use of state funds to buy strategic energy assets. The clearest example is China’s courting of commodity producers, especially in Africa. There has been a backlash to this in some African countries, but their concerns may not last long given the need to attract foreign direct investment.

Strategic assets will always remain an area of controversy but for the rest the way out, Lyons contends, is to have the WTO frame the ground rules. This would mean that emerging markets must open their own markets if they want free access to others'.

I doubt that the WTO will be able to make much headway in this area. Foreign acquisitions will be more contentious in the emerging makets themselves than in the west- in India, moves are already under way to ensure that FDI is consistent with security requirements. I can't see India
giving Chinese companies the nod to acquire domestic energy or telecom companies. The same goes for China. Will China allow SBI or ICICI Bank to take over any of its banks?

Greenfield investments are possible. So are small, minority stakes and partnerships with local ventures. But acquisitions, especially of state-owned entities, will remain a no-no amongst emerging markets.

At best, emerging markets may open their economies a little more to firms from the industrial economies. But, in the near future, the targets available will be largely in the private sector.

PM's remarks on executive pay- links

The PM's remarks on executive pay during his address to the Confederation of Indian Industry (CII) last month has drawn more comment than almost anything else he has said during his tenure. Here are links to some of these:

Can markets decide salaries of CEOs? Satish Kumar T N, Economic Times

Stop passing the buck PR Ramesh, Economic Times

Course correction Arun Maira, Times of India

The medium and the message, Business Standard edit

Private sector shining, government tarnished Swaminathan Aiyar, Times of India

But what do the have-nots want? Rama Bijapurkar, Economic Times

India Inc must heed PM's call T T Ram Mohan, Economic Times

The Prime Minister's right, A V Rajwade, Business Standard

Whose court? TN Ninan, Business Standard

The Prime Minister has a point Kanika Datta Business Standard

Thursday, June 07, 2007

Tony Blair's farewell essay

British PM Tony Blair has an essay in the Economist (May 31). He outlines lessons he learnt as PM. It's a well crafted piece (the work of a good staff writer?), with Blair's earnestness writ all over it, but I wasn't bowled over by the substance.

Let me take up a couple of samples for dissection.

It is said that by removing Saddam or the Taliban—regimes that were authoritarian but also kept a form of order—the plight of Iraqis and Afghans has worsened and terrorism has been allowed to grow. This is a seductive but dangerous argument. Work out what it really means. It means that because these reactionary and evil forces will fight hard, through terrorism, to prevent those countries and their people getting on their feet after the dictatorships are removed, we should leave the people under the dictatorship.

Who has given the Blairs of the world the right to determine that regimes are evil and dictatorial and must be overthrown? Since when have western governments decided that dictatorships cannot be allowed to continue? Do they regard Pakistan and several of the Middle Eastern pro-western regimes as models of democracy?

There is also the problem of selectivity. The US and the UK will remove dicatatorships that are not convenient to them. A dictatorship in an oil-rich country such as Iraq that is not pliable must be overthrown. A dictatorship in Pakistan must be supported at all costs. It is the utter lack of principle that people everywhere- and not just Muslims- resent.

In the Middle East right now, it (global terrorism) stops progress in Iraq. It defies the attempts at peace between Israel and Palestine. It is making Lebanese democracy teeter on the brink. That is significant in itself. But far more significant is the way in which the terrorists have successfully warped our sense of what is happening and why. They have made us blame ourselves.

We can debate and re-debate the rights or wrongs of removing Saddam. But the reality is that if you took al-Qaeda (in Iraq before Saddam's fall) out of the conflict in or around Baghdad, without the car bombs aimed at civilians and the destruction of monuments like the Samarra Shrine, it would be possible to calm the situation.

It is the perceived injustices perpetrated by the US, the UK and other allied governments that have bred terrorism in different parts of the world or fuelled it. Blair shows no recognition of this; he seems surprised that the well-intentioned, do-gooder governments should be blamed at all for the insurgencies in many parts of the Muslim world.

There was no al-Qaeda in Iraq in Saddam Hussein's time. It was the chaos unleashed by the toppling of his regime that allowed al-Qaeda to take root and flourish. These points have been made ad nauseam but they just don't seem to register with those convinced that they have a mandate to carry out a crusade against 'evil' regimes.

Blair is more convincing when he talks about the domestic agenda- reform of the public sector, welfare and politics. The perception that his domestic successes were unfortunately outweighed
by his foreign policy failures is unlikely to fade soon.

Parekh committee on infrastructure finance for India

I was on CNBC TV yesterday along with Ajit Gulabchand, Chairman of Hindustan Construction. The topic was the recommendations of the Deepak Parekh committee to liberalise capital inflows into infrastructure. Gulabchand was all for these. I have my doubts.

But, first, some of the key recommendations:

  • Equity flows: allow holding companies to have automatic FDI; remove capital gains of 10% on investment in unlisted companies; provide tax incentives to those investing in IPOs of infrastructure companies or mutual funds investing in the sector.
  • Debt flows: Allow refinance of rupee loans through external commercial borrowings (ECBs)- at present ECBs allowed only for specified end-uses; remove cap on interest rates (recently imposed) on ECB borrowings.

Is there a case for liberalising capital flows into infrastructure? We must first answer this question because managing the present level of capital flows itself is posing a headache for the central bank today- 'how' to liberalise flows comes next. The Parekh committee appears to think that we need to open up further because the requirement of infrastructure in the period 2007-12 is greater than thought: $475 bn, compared to the Planning Commission's estimate of $320 bn.

I haven't seen the report, so I do not know the basis for doing so. Let me just say this: there has been a tendency in the past to exaggerate the requirement of infrastructure finance. The Rakesh Mohan committee on infrastructure constituted had in 1996 projected an FDI requirement of $150 bn over a ten year period- or $15 bn every year. Well, total FDI flows in the past ten years haven't amounted to that much but that hasn't kept the economy from accelerating from 6% to 8.5%.

Suppose we accept the Parekh committee's projections. Going by the norm that 20% of infrastructure finance in developing countries is met by the private sector, that would mean a private sector contribution of $115 bn over five years. Let us say that 20% of all private sector flows is from FDI. That puts the FDI requirement at $23 bn or around $4.5 bn each year. At today's FDI level of $13 bn (adjusted for exceptional items), this is hardly a tall order. Where, then, is the need to open the tap further?

I also don't see the need to give sops for investors in infrastructure- several infrastructure IPOs have gone through without any difficulty. Same for removing capital gains in unlisted ventures: we do want companies to be listed in the interests of better governance.

I have even bigger concerns about the recommendations on ECBs. The recommendations come into conflict with the present policy position which is to rein in ECB flows into the country, a big chunk of which has gone into real estate.

I don't believe that finance is really a constraint on infrastructure development in India today. The money is available. The policy issues (except, perhaps, in power) have also been sorted out. Mindless liberalisation can add to the central bank's headaches. In short, the broad thrust of the Parekh committee recommendations is neither necessary nor desirable.

Wednesday, June 06, 2007

Palestine: 40 years after the 1967 war

Forty years ago, Israel's armed forces launched what was believed to be a pre-emptive attack on its neighbouring Arab states- an air attack first wiped out the Egyptian air force on the ground. (There were indications that the Arab states were readying for an assault on Israel). The six day war ended in a complete victory for Israel. It seized the Sinai peninusala from Egypt, the Golan Heights from Syria and also the West Bank, Gaza and east Jerusalem.

Israel returned Sinai to Egypt as part of a peace accord in 1982. It made peace with Jordan in 1994. In 2000, it came close to a settlement with Syria that would have entailed withdrawal from the Golan Heights. It has withdrawn from Gaza. But, the West Bank and east Jerusalem are a different proposition as FT notes in an editorial:

The West Bank is different. In the biblically resonant hills of Judea and Samaria, and in and around east Jerusalem, through war and in peace, Israeli colonisation of the occupied territories has never ceased. The settlements, the roads connecting them and now the “security barrier” deep inside the West Bank have left the Palestinians unviable reservations of land amounting to 44 per cent of the West Bank, or barely 10 per cent of colonial Palestine. That is not the basis for a historic compromise but a contract for permanent conflict.

Note the figure for Israeli encroachment into West Bank- 56%. No Israeli leader, hawk or dove, has been able to halt the impetus towards settlement. The new generation of settlers are a hardened, militant lot and fiercely resistant to any compromise that would require their departure.

The Economist (May 16- June 1) has a feature that chronicles the story of the last 40 years. the 1967 war, it argues, provided an opportunity for lasting peace. It drove home to the Arabs the futility of seeking to exterminate Israel. It put the Israelis in a position to trade land for peace. But the opportunity has been squandered.

The monumental tragedy of the Palestinians is apparent. In 2002, the Arab League recognised the ground reality with 22 countries offering to recognise Israel in exchange for full withdrawal from occupied territories. Yet, despite the Oslo Peace accord, despite negotiations brokered by President Clinton, such a deal seems far away. Israel does not appear to be in a mood to do such a deal and the Americans, egged on a by a powerful Jewish lobby in the US, have done little to moderate Israel's intansigence.

Why? Several possible explanations suggest themselves:

  • Israel believes it needs the territory to cope with future population increases and also because it has a stranglehold on vital water resources in the occupied territories. It also thinks it has the military might to hang on.
  • Both Israel and its western allies believe that the emergence of Palestine and the shrinking of Israel to its original size pose long term threats to Israel's security. The west would like to maintain a strong Israel state in a region that is proximate to the world's principal oil resources.
  • The 'moderate' Arab states and also the US believe that Arab regimes allied to the US will be rendered unstable by a Palestine state, whether secular or radical.
  • The radicalisation of Muslims, in response to the unresolved issue of Palestine, provides the basis for an aggressive American military posture in the guise of a 'war on terror'

I remember telling people in the nineties that the world seemed headed for the new millenium with two surviving pieces of injustice: apartheid and Palestine. I was happily proved wrong on the first count. Palestine remains.

Tuesday, June 05, 2007

Wipro finds a heir apparent

Rishad Premji, Aziz Premji' elder son, will join Wipro shortly, TOI reports. The paper quotes Pratik Kumar, executive VP (human resources) at Wipro, as saying that for now Rishad will join "only as an employee" and not as a board member.

It was the Exec VP's elaboration on how exactly Rishad's recruitment took place that got my goat.

He was on the lookout for an opportunity in keeping with his experience and academic background and also very keen to come aboard Wipr. And so, like everyone else, he sent in his resume to us and we were able to find a suitable opening for him

Hmm... so if there had been no 'suitable opening', the HR department would have sent a polite rejection letter?

There can be little doubt that Rishad is being groomed for the top job. No big surprise here- happens in family managed businesses all the time and Wipro is a business where the promoter's equity holding is higher than usual (almost 80%). Rishad also has solid professional credentials. He's an MBA from Harvard and is currently with the top consulting firm of Bain.

So why this pretence about Rishad's going through a screening process and so on? Surely, there are other ways in which Wipro can demonstrate its professionalism?

Boom times for Indian newspapers

TOI reports:

Newspaper circulations worldwide rose 2.3% in 2006 with Indian sales increasing most with 12.93%, the World Association of Newspapers (WAN) said here on Monday. ....China, Japan and India account for 60% of the world's 100 best-selling dailies, while the five largest markets for newspapers are China, India, Japan, the US and Germany.

The trend is defying the rise of the Internet. "As the digital tide gathers strength, it is remarkable that the press in print continues to be the media of preference for the majority of readers," Balding added.

Yes, these are great times for newspapers and the media in general in this country. Look at the pink press. We had four pink dailies until last year and I thought that was one too many (the US and the UK which have more developed financial markets make do with one each, so does France). Now, we have six! Mind you, the world's leading financial dailies are not doing well. Wall Street Journal has been an underperformer and is the object of a takeover bid by media baron Rupert Murdoch. The UK's Financial Times is incurring losses.

There is a boom in TV channels as well. Outlook reports that 24 - yes, 24- new news channels are in the offing. Evidently, people have time for so much viewing.

Monday, June 04, 2007

Governance of IITs and IIMs-II

Juno, NYC, has a detailed comment on my earlier post on Governance of IITs and IIMs. Let me quote a key section of his comment:

Your extrapolation from corporate governance literature is far-fetched and misleading - the best institutes of higher education the world over (and certainly those dealing with management/business education) are not run by government-shareholders - Harvard, Wharton, Stanford, INSEAD, etc. are all run by independent boards/societies. Wharton is part of the Univ of Pennsylvania (a state university) but is independently governed. How about looking at the record of our government at our vaunted public sector undertakings where it is the "dominant shareholder" - I am sure you know that their performance on tangible growth metrics (e.g., revenue growth), or efficiency metrics (e.g., return on capital employed) is dismal.

..........There are some rumblings about the Sterlite group or the Ambanis or Naresh Trehan Medicity establishing a big corpus for a private university in the American mould (e.g., Carngie Mellon Univ) or a teaching hospital (e.g., Johns Hopkins) - if this were to really happen i.e. a private university established with a corpus / trust funds, and not a for-profit entity disguised as a trust in order to launder money and evade taxes (which is what most of our "private colleges" are today), 15-20 years after that, you would be justified in pointing fingers if those universities did not measure up to the IITs or AIIMS.

Let me now respond to two substantive questions arising from Juno's comments.

1. Why not substitute private, non-profit institutions in education for government-run ones?

Juno is right, the private, non-profit model in higher education has been a great success in the US. Please note, however, that the US has great successes among government-run institutions as well- eg Univ of California and UT, Austin.

Indeed if, as Juno says, the private, non-profit model were to emerge in Indian education, that would be an experiment worth watching. But, this model is widespread only in the US and it is sustained by a tradition of private (including anonymous) philanthropy that is unique to that country.

Individuals and corporations in the US make huge endowments to universities without asking for any say in how it is used- they are happy to leave this to the board of trustees. That is because they have confidence in the governance model at the universities in the US, a model that has evolved over years and is not easily emualated elsewhere.

In India, however, the private donor is also the management. Most of the time, as Juno notes, the donor is in the game for profit. Some institutions may be registered as non-profit and they may conform to the technical requirement for tax-exempt status, namely, that the surplus must not exceed 20% of revenue. But the fee structure and other elements are geared towards producing surplus.This model has not produced outcomes superior to those produced by the better government institutions.

If the Ambanis and Sterlite aim to produce world-class universities, good luck to them. But we need to see whether they will remain in control or will hand over management to independent trustees. It is rare for a corporate-run university or school to have been an outstanding success in academic terms.

2. Why not move the IITs and IIMs towards the governance model of non-profits in the US?

The American private, non-profit university governed by independent boards operates in a milieu where market forces are strong. There are several top quality universities and schools and competition is fierce. Universities and schools are systematically rated, so are individual departments at schools. Declines in ratings provoke strong responses from management- departments and faculty can be severely penalised for slipping in rankings. There is a tenure system for faculty that is rigorous and peer pressure ensures that even tenured faculty do not take their jobs lightly.

India does not have an academic market that is as competitive. The market has been closed to foreign universities and the non-profit, private model is yet to emerge as a strong competitor. The IITs and IIMs have substantial first mover advantages and the advantages of huge infrastructure and subsidies provided by government. Faculty accountability is nowhere near what you have in the US.

It is unrealistic to expect that the entire system of market discipline can be replicated overnight. It will take decades to evolve towards the American system. What do we in the interregnum? There are only two instruments of discipline known to man: the market and the state. Where market discipline is not strong enough, what choice do we have other than to fall back on regulation by the state?

Government withdrawal can only be a gradual affair and for it to happen the IITs and IIMs must propose credible mechanisms of accountability and governance. The key issue that is unanswered by those who want the govt out of IITs and IIMs is: who holds management accountable? The answer that I seem to hear is: just leave it to faculty. In governance terms, this is most unsatisfactory. There must be somebody who delivers performance and somebody else who monitors. A governance vacuum created by government's precipitate withdrawal is the worst of all outcomes.

I believe that in higher education, there is room for different models: state-un, private non-profit and private, for profit. The intention must not be to convert the IITs and IIMs into something else. We must try to improve governance at IITs and IIMs within the framework of government control (not impossible in light of the improvements in governance in listed PSUs in recent years) . At the same, we must allow competing models to emerge freely. It is important to have not just competing institutions but competing models. May the best model win!

Saturday, June 02, 2007

Kingfisher acquires Deccan

Kingfisher Airlines has acquired a 26% equity stake in Air Deccan, India's low cost, no frills airline. Although C R Gopinath of Air Deccan will be Chairman and Vijay Mallya of Kingfisher Vice chairman, nobody should have any illusions as to who will call the shots. It will be Mallya who has the deep pockets.

Air Deccan is the second low-cost airline to be acquired. The first was Sahara which was acquired by Jet Airways. I read that Air Deccan gave away 1.2 mn tickets free last year. No surprise that it has made huge losses and its share is languishing below its issue price. India's private airlines have gained market share but are losing billions. So much so that the Civil Aviation ministry had to call a meeting to knock some commercial sense into them. The government-owned Indian Airlines (to be merged with international carrries Air India) turns a profit. Reminds you that of the basic principle that cutting costs to gain market share can only be a temporary expedient; you need a strategy for the long term.

Observers expect that flow of free tickets from the low cost airlines to slow down to a trickle hereafter. Understandably as the two acquirers would like to see the colour of money.

Indo-US nuclear deal: Prasad speaks out again

Dr A N Prasad, a former director of the Bhabha Atomic Research Centre in Mumbai, has been among the retired scientists sceptical about the proposed Indo-US nuclear deal. Now that Indian and the US seem to be moving forward to clinch, Prasad voices his concerns again in an interview with Rediff.

Prasad highlights the areas of concern:

The right of testing in the highly volatile terrorist environment in which we live; the right to reprocess; unrestricted uranium supplies; full civil nuclear cooperation without exceptions of certain parts of the fuel cycle; lifting of embargoes on civil nuclear activity; and safeguards in perpetuity to be made contingent on continuing bilateral cooperation so as to avoid any Tarapur-like situation -- these are some of the most crucial issues that should not be compromised in any eventuality.

Friday, June 01, 2007

Boom, boom.... Indian economy powering ahead

The Indian economy grew at 9.4% in 2006-07, bettering the earlier projection of 9.2%. China grew at 10.6%, so the gap is narrowing.

Growth in the second half was slower,8.9%, compared to 9.9% in the first half. The services sector, including finance, real estate and transport, slowed down.That is good news because it means that the central bank's tightening is beginning to bite and the economy may be spared further increases in interest rates. For the coming year, forecasts are in the range of 8-8.5%.

FDI for the financial year (adjusted for one-off items) was $14.1 bn. The commerce ministry has set its sights on FDI of $30 bn for 2007-08. As a percentage of GDP, FDI of 1.4% is below the 3% in other developing countries. China received $69.5bn, Russia $28bn and Brazil $16bn in FDI in 2006, according to Morgan Stanley.

So, we are slowly catching up on FDI but the quality of flows is an issue as I have pointed out earlir. FDI figures include private equity and venture capital. FDI in manufacturing in the 12 months ended January 2007 was a mere $1.5 bn, down from $1.8 bn the previous year. More FDI is going into real estate than into manufacturing.

Returns in investment banking

Investment banks' returns on equity have always been the envy of other industries. The Economist Survey on international banking (May 19- 25 ) gives us an idea of why Wall Street firms make their peers salivate. Current return on equity: 25%. Long run returns (since 1985): 16%. Goldman Sachs, the bluest of them all, had a return last year of 33%.

People have agonised over these kinds of returns. Is it lack of competition? Sheer innovation? Superior information?

One thing is clear- these firms are extremely nimble-footed. When brokerage income declined, they fell back on underwriting income and properietary trading.Then, they focused on advisory services, including mergers and acquisitions. When that field became crowded, they turned to private equity. These firms are well run, they hire some of the smartest people and their incentive systems are hard to beat.

The trouble, as the survey points out, is that it is hard for regulators and industry watchers to tell whether risks in the system are under control.

RBI to private banks: don't act smart

This is a follow up to earlier post, UTI Bank: running circles around RBI. I had mentioned that the RBI had decline to approve P J Nayak's appointment as Chairman and Managing Director, saying nobody could combine the two roles. UTI Bank's board responded by designting Nayak as Executive Chairman. Going by a BS report, it looks as though the RBI is not buying.

The Reserve Bank of India (RBI) has directed all large sized private sector banks to appoint a part-time chairman and a separate chief executive officer and managing director to conduct day-to-day affairs.

The communication, sent on May 24, comes in the wake of UTI Bank seeking the central bank’s approval to retain chairman and managing director P J Nayak at the helm by appointing him as executive chairman

The RBI's circular makes sense. The regulator is saying: the governance and operating functions in a bank are different, please don't combine the two. Having an executive chairman may seem like a smart move but it doesn't really meet the RBI's stipulation.

Now what? Is UTI Bank going to have an MD in addition to an executive chairman?