Friday, February 18, 2011

'Small ticket' reform is key to India's success

There is a continuous clamour for 'big ticket' reform. This will be heightened in the week of the coming budget. I never ceased to be surprised about this. The success of the Indian economy, I argue in my ET column, is all about 'small ticket' reform.

'Big ticket' reform in a democracy can spell popular unrest. One example of such reform that has remained in abeyance is 'reform' of labour laws ( a euphemism for hire-and-fire in the organised sector.) 'Small ticket' reform is all about gradualism, of waiting and judging the results before proceeding further.

The best example of 'small ticket' reform is disinvestment of PSUs. Thanks to phased disinvestment, the government is sitting on a gold mine in listed PSUs and PSBs. Had they been sold off at one go, the exchequer would have lost heavily. The 'presumptive losses' from 'strategic sale' of PSUs, which Arun Shourie attempted, would have been far higher than in the sale of 2G spectrum.

Had this gone through, Shourie would today be facing the CBI not just for his actions as minister of telecom but as minister of disinvestment as well!

Saturday, February 05, 2011

Western dean for Chinese B-school

John Quelch, a former dean of the London Business School, is set to take over as dean of the China Europe International Business School (CEIBS), the Economist reports. Quelch is a former faculty of HBS, where he was a 'star professor' of marketing. CEIBS is said to be a partnership between the European Commission and the Shanghai Jiao Tong University.

The news is interesting for several reasons. For one thing, China appears to have opened its higher education doors to foreigners, even if it requires a partnership with a local entity. Secondly, it is willing to import a dean for one of its top institutions. This is not just a matter of paying top dollar. It is a matter of being open to a foreigner as a leader. Is there a single institution in India that has a foreigner as dean or director? For that matter, is it possible even for an NRI to become the director of any of the IIMs?

The IIMs preach the virtues of an open economy and globalisation to their students but they operate a closed shop when it comes to manning leadership positions. For the older IIMs, it is inconceivable that there can be a director from outside the IIM system. At IIMA, it is inconceivable that the director can be anybody from outside IIMA itself!

Until recently, IIM directors were chosen by their boards and through a process of nomination by eminent persons, a process that restricted the pool of talent to choose from. Lately, the ministry has required the positions to be advertised but even the top IIMs do not advertise internationally.

Education in China, like other spheres, is still controlled. Business schools are still in their infancy. Yet, when it comes to getting talent for leadership positions, China seems capable of greater boldness than an open society such as India. Makes you wonder whether democracy necessarily scores on every count. You can have a democratic society with some of the most closed minds.

Friday, February 04, 2011

No fee hike for IITs

The decision of the IIT Council to reject the Anil Kakodkar committee's recommendation for a fee hike has not received the attention it deserves. The Kakodkar committee wanted the IITs to raise the annual fee from Rs 50,000 to Rs 2.5 lakh so that they could generate more funds on their own. The IIT Council, headed by HRD minister, Kapil Sibal, has shot down the proposal, India Today reports:

HRD minister Kapil Sibal, who chaired the IIT council meeting to discuss the report on Friday, said: "This fee hike would act as a deterrent to IIT aspirants." The IIT council also left the decision on increasing hostel fees to the respective board of governors in each institute. An HRD ministry official said: "The mathematical model proposed by the committee has to be reworked. The committee will now take a month to submit its report after considering the feedback and the response of the IIT council, which comprises the directors of all IITs."

The IIT Council's stand is commendable. It clearly does not accept the position that because IIT students can get loans and they can get jobs that can enable them to service those loans, students must pay a higher fee. A high fee and large loans are a deterrent to aspiring students. But how come this logic has not be applied to the IIMs and the IIMs have raise their fee at will in recent years? The HRD ministry needs to be consistent in its approach to commercialisation of education.

More on Malegam committee

I commented yesterday on the Malegam report on microfinance. A couple of other observations.
The RBI needs to bestow greater thought to the composition of its committees. The Malegam committee, with due respect to the eminence of some of its members, does not have much expertise either on the rural economy or on banking. True, the RBI committees have the benefit of RBI's expertise but simply having people of eminence on such committees does not suffice.

A more serious problem is the presence of two members of the RBI Board, Y H Malegam and Kumaramangalam Birla. It is not a good idea for Board members to take on operational roles. It cannot be that, as members of a committee, they make recommendations and, then, as members of the Board, they sit in judgement on those very recommendations or the actions taken based on these. There is a clear conflict of interest. Surely, this country has enough expertise for committees outside the Board of RBI.

Thursday, February 03, 2011

Malegam committee on microfinance

The Malegam committee's report on MFIs came out a while ago. The intention is good: they want to rein in MFIs and subject micro-credit to norms and disciplines. But micro-management of the microcredit by the RBI, which is what the recommendations amount to, is not the right approach. It will be difficult for the regulator to ensure that not more than two MFIs lend to one borrower, that the total sum borrowed does not exceed Rs 25,000 or that the cap on interest rate is always observed.

My solution: put the onus of credit discipline by banks. The way to do this is to subject all lending by banks to MFIs to a consortium. Then, it will be up to the banks to see what limits they want to impose on borrowers, what the interest rate caps should be, etc. The banks will also be obliged to monitor the end-use of funds and they will be able to ensure that runaway lending by MFIs does not happen. More on this in my ET column, MFIs: Malegam misses the point.

Incidentally, on the very day the Malegam report came out, the RBI decided to allow banks to restructure loans made to MFIs. This display of regulatory forbearance was uncalled for. Clearly, the attempt is to sweep under the carpet the losses to banks on account of loans to MFIs. But does the RBI believe that, after restructuring loans made to MFIs, banks will be in a mood to resume lending in a big way? There is not the ghost of a chance.