Wednesday, April 21, 2010

C K Prahalad

The business community in India was effusive in its praise for C K Prahalad. So were some commentators in the media. That Prof Prahalad, an alumnus and former faculty member of IIMA achieved fame and recognition, is something we should all be proud of. But what one missed was a serious and critical evaluation of his contribution.

Today's Business Standard editorial makes up for what was missing elsewhere. The edit makes three important points:
  • Prahalad was good at articulating existing practices rather than predicting future trends. 'Core competence' had come into being at many MNCs long before Prahalad wrote about it. This stands to reason. That is what the case method that Prahalad was raised on at IIMA and HBS is all about.
  • Co-opetition, taking the customer into account in designing products, is elementary marketing
  • Bottom of the pyramid, his most famous theory, is not about making money from the poor, it is more about designing products for the lower middle class in the rural areas.
Let me add: BoP has little to do with poverty alleviation. Companies do little to alleviate poverty when they address the mass market, they only take care of their own shareholders. You alleviate poverty not by viewing the poor as customers but viewing them as producers and giving them purchasing power, a point that Aneel Karnani, Prahalad's colleague at Michigan, made in his devastating critique of the BoP thesis a few years ago.

The idea that we can leave it to companies to alleviate poverty can be dangerous because it provides another argument for government to vacate the space, something that neo-liberals would pounce on. Thank God, we are thinking in terms of right to education and right to food instead of embracing the BoP thesis.

The BS edit has a scathing finale:
Perhaps the best commentary on its (BoP's ) efficacy came from Praja, the BOP company Prahalad co-founded to provide a platform for common people to personalise their own experiences on the Internet. In 2002, the company was sold having made a $55 million loss and laid off one-third of its staff!
Must people abandon their critical sense in paying tributes to the departed? Whatever Prahalad's gifts of exposition, comparing him with Peter Drucker was quite a stretch.

Thursday, April 15, 2010

Foreign universities' bill to bar for-profits

The foreign universities' bill to be introduced in parliament soon will bar non-profits, TOI reports.

This fine-print is the third restrictive clause the Union Human Resources Development (HRD) ministry has introduced in the Foreign Education Providers’ Bill, which aims to allow international universities to set up campuses in the country. The other two conditions include forbidding foreign universities from repatriating funds to their home country and setting up a minimum corpus of US $11 million.

I am not very sure that this is desirable. Agreed, one associates quality in education with non-profits. But, in India, we have a huge number of for-profits in various fields, notably engineering, management and medicine, which are non-profit on paper- these are the ones that charge exorbitant sums as capitation fee. Would it not be better to have a system where for-profits from abroad, with a transparent fee system, take on the covert for-profits in India?

Again, there are many institutions that generate substantial profit through hefty fees but plough them back into the institution. They are non-profits on paper since they are registered as Charitable Trusts. No point claiming the high moral ground when it comes to for-profit institutions from abroad.

Air India's woes

To many, Air India (which now encompasses the erstwhile Air India as well as Indian Airlines) sums up all that is bad about commercial enterprises run by government. It has made huge losses and people would say that is very typical of the public sector.

I argue in my ET column, Why Air India is in trouble, that this explanation does not hold nor is it true that Air India's losses are the result of the troubled merger between Air India and Indian Airlines.

The two basic reasons for Air India's mounting losses are huge investment in fleet expansion and high leverage arising from the failure to strengthen the two airlines' equity base before exposing them to greater competition. Needless to say, in government there are huge incentives for signing contracts for the purchase of aircraft.

There was talk of bringing on board some luminary from the private sector who would wave away Air India's problems. Now, the government has settled for high-profile businessmen and a foreign COO. Neither can make a big difference- N Vaghul, formerly of ICICI, was on the board of Air India for many years until it ran into its present crisis.

Wednesday, April 14, 2010

Tackling the Naxal problem

Congress General Secretary Divijay Singh has written the most insightful piece on the Naxal problem that I have come across so far. He is critical of home minister Chidambaram's approach and doesn't mince words saying as much.Which makes me wonder whether this is an attempt on the part of the party to rein in Chidambaram when he seems to have the overt support of the PM.

Singh's main points are:
  • The Naxals cannot truly claim to espouse the cause of the tribals. They have had no difficulty making peace with businessmen and politicians- for a price. Even the mining interests, which are said to disrupt tribal life, have continued unhindered in Naxal areas
  • Chidambaram is wrong in treating the Naxal problem entirely as a law and order problem- tribal issues need to be addressed
  • We need to learn from the AP model of tackling Naxalism: development plus police action
Singh is spot on. Chidambaram has created a massive problem where none existed by setting an artificial deadline for solving the Naxal problem: two or three years. Setting such a deadline spells trouble because it means use of massive force with all its consequences- such as the recent killing of 76 CRPR jawans.

Why do we need to solve the Naxal problem in two or three years? There is nothing to suggest that the problem is of alarming proportions or is disruptive in any way. If that were so, it would have been reflected in national or regional economic growth. It hasn't.

In the urban areas, the mafia coexists with the forces of law and order. An equilibrium is established in which the mafia flourishes without in any way impinging on economic activity or even orderly life. The Naxals are a form of mafia in the tribal areas. We have put up with insurgency in the North-East for over 50 years. Where is the urgency to end the Naxal problem? Patience and perseverance are required, not trigger-happy solutions.

Chidambaram may be right in refusing to talk to the Naxals. But why is the government not talking to the tribals? We need to enter into a dialogue with them as to how they can participate in decisions that afffect their lives, whether it is mining or timber, and what is required by way of development assistance.

The use of massive force is misguided and it is bound to be counter-productive. Sending the CRPF or the army will only bring recruits from the tribals to the Naxals. The answer to insurgency within the country (as distinct from insurgency in border areas) is sustained police action. That is the lesson from AP. It was AP' s success that drove the Naxal leaders into Chhattisgarh and other parts of the country.

Some of these states are new and the police force may be underdeveloped. We need to enhance their capabilities. In AP, police officials were given huge war chests for developing informers. Intelligence was used to target the Naxal leaders. This method produced dramatic results. The Indian state has developed its own recipe for dealing with internal terrorism: encounter killings.

It defies imagination as to how an outside force, such as the CRPF, can tackle the Naxals. You need local contacts, you need to know the local language and you need to understand the terrain.

Chidambaram's technocratic approach is seriously flawed. Development and police action are the best answer to the Naxal problem, not overwhelming use of force. Patience is required. We must be willing to put in ten years of low key effort. This won't make for sound bytes on TV but it will produce results.

Finally, thank God, the suggestion to use the army and the air force has been shot down. Had it been accepted, that would have ended all our hopes of winning over the tribals and brought the Naxal problem into the cities.

Monday, April 12, 2010

Basel talks on bank capital

The one thing that is certain about international bank regulation is that capital requirements for banks will go up. The uncertainties are two: how much and over what time? We should have some idea by the end of this week when the Basel committee on banking superivsion meets representatives of banks to discuss possibilities.

One key item is the core capital requirement, currently pegged at 8%. In the wake of the financial crisis, one proposal was that tier I (which is half of core capital) should itself be 8%. This looks unlikely now given the resistance from banks.

Another item relates to liquidity. On this item, FT reports:

The liquidity proposals come in two parts: one, known as the Bear Stearns rule, requires banks to have enough liquid assets on hand to survive a 30-day crisis, while the other, nicknamed the Northern Rock rule, requires banks to have stable long-term funding, favouring deposits and heavily disfavouring wholesale sources. It is the latter rule that has attracted most criticism.
Good banks today operate with capital of 12-13%. We should expect this to rise to 15-16%. By what date? The earlier deadline for introduction of higher capital norms was end 2012. This may be pushed back or the introduction of new norms may be calibrated over time.

Sonia's tough line on RTI amendments

Sonia Gandhi has indicated her opposition to some of the amendments to RTI that the government is contemplating, TOI reports.

"It is important, therefore, that we adhere strictly to its original aims and refrain from accepting or introducing changes in the legislation or the way it is implemented that would dilute its purpose. In my opinion, there is no need for changes or amendments. The only exceptions permitted, such as national security, are already well taken care of in the legislation," she said.

Sonia Gandhi said the problem with the RTI Act is about "public lack of awareness of the RTI and the harassment of applicants" and "these problems need to be addressed."
Mrs Gandhi is right. One amendment that has been causing concern is giving the public information office the right not to respond to what he regards as "frivolous" applications. Another relates to keeping the higher judiciary out of the purview of the Act. The RTI Act is also in danger of being undermined by rising delays in disposal of appeals to the CIC. This needs to be addressed because information delayed is often information denied.

The RTI Act is revolutionary in its thinking and scope and will go down as one of the great achievements of UPA-I. The right to education and the right to food, now under consideration, will further bolster UPA's claim to standing up for the aam admi. In defending the RTI Act and in pushing for rights in other areas, Mrs Gandhi has displayed uncanny political instinct.

Thursday, April 01, 2010

Foreign Universities: mentoring a better entry route

I said in an earlier post that I was sceptical about quality, foreign universities setting up full-fledged campuses in India. that is because the economics of higher education militates against their entry.

Quality comes from putting together the best faculty, infrastructure and students. If foreign universities are to maintain their standards in India, they will have to send some of their faculty to India. That would mean huge faculty costs. Quality infrastructure would also be expensive.

Put the two together and you have a high fee. If an MBA costs Rs 45 lakh in the US, it would cost around Rs 25-30 lakh here. If you spend Rs 45 lakh in the US, you can hope to recoup it in reasonable time because you will be earning in dollars. Recouping Rs 25-30 lakh in India is not as easy. So, a fee of this order will shut out the mass market and the best students. Schools charging such fees will be rich kids' schools. Then, you don't get a high quality of output.

It makes more sense for foreign universities to go down the mentoring route. I read that this is proposed for Yale's association with the 14 innovation universities planned. There are precedents for this- the setting up of IITs and IIMs.

IIMA benefited from a collaboration with HBS, the expenses being underwritten by the Ford Foundation. HBS faculty came in batches of about three at a time for about five years. The big gain was IIMA faculty being sent in batches of about six to the International Teachers' Programme at HBS for a nine-month stint. It got faculty who had joined from diverse backgrounds to get quickly acquainted with the course contents and pedagogy of a top b-school and it also made for a certain common approach and camaraderie amongst the early faculty. This is one reason why IIMA made a quick mark as an institution of excellence.

Faculty exchanges, help with the curriculum, governance structures and norms- these are areas where mentoring would make differenc. Foreign universities can earn fees and they have an opportunity to carry out India-related research. This makes more sense than foreign universities coming in.

More in my ET column, Foreign varsities as mentors.