Sunday, December 30, 2012

Narayana Murthy on CEO pay

How do we determine CEO pay? Narayana Murthy, writing in ET, suggests that the ration of the  highest to the lowest pay in a company should be of the order of 20-25. This is rather more liberal than what Peter Drucker, the management guru, had proposed many years ago: 5: 1. But even NRN's prescription is way below what obtains in the corporate world today. In India, I would imagine the ratio is as high as 300: 1 or even 500:1 in many companies. If we factor in perquisites and stock options, the differential escalates even more. It is only in the much-derided public sector that NRN's prescription comes close to being true- and, that too, when you exclude the market value of perquisites such as housing provided by the company.

NRN's argument that companies are bound to benchmark pay with global practices is not persuasive for the simple reason that overseas companies do not have very clear norms for setting CEO pay. Nor is one persuaded by the point about independent directors setting pay- all of us know how independent these directors and how generous they can be when they are looked after well by the company.

The way CEO pay is set is just another manifestation of the fundamentally inequitous nature of modern society- those at the top will simply get away with doing whatever suits them. The best we can ask for more comprehensive disclosure not just of the total pay packages at the top but of the norms used for setting pay. The latter is seldom made available to shareholders or the general public.

More broadly, the answer to reining in private sector pay is to have a public sector alternative that offers a different lifestyle- more security, more job satisfaction, linked to more modest pay. When people have that sort of a choice and many spurn private sector salaries, however attractive, in favour of something that is inherently more satisfying, that might contribute to limiting pay in the private sector. 

Thursday, December 20, 2012

Global economy more crucial to growth than reforms

India's growth prospects, it is generally agreed, should improve in the next year. That is because the global outlook has improved. One indication is the return of FII flows into India in a big way- net FII inflows this calendar year are over $20 bn, the same as in 2010. FII money fled India last year following the Eurozone crisis. The relatively stability in the Eurozone this year has prompted a return.

Note that FII flows did not return because of the burst of reforms. The bulk of the FII flows , $12 bn out of $20 bn, came into the country by August whereas the reform burst happened in September. This underlines an important point: what happens to the economy in the near future will be governed more by global conditions that any reform initiatives.

This proposition is borne out by the fact that India grew at 8-9% in 2004-08 without any serious reforms. Similarly, growth plummeted to 6.8% in 2008-09 at the peak of the global crisis. India's economy is far more integrated with the world economy than before through both trade and capital flows. Another reason the global economy matters is more is that private investment in infrastructure, which drove growth earlier, is hampered now by regulatory and legal issues and high leverage in infrastructure companies. We can't really expect domestic investment to drive growth in a big, given the difficulties in the big growth area, infrastructure.

As for reforms, the potential impact of these is constrained by two factors. One, the persistence of high inflation- this won't change in the next two to three years as domestic prices are gradually aligned with international prices. Two, the fiscal deficit will remain high upto 2014 if only for electoral reasons. Both these will mean a low rate of savings. High inflation will keep financial savings low as households prefer to park their savings in gold. A high fiscal deficit implies lower net savings. The fiscal deficit will decline substantially only when growth revives strongly on the back of a revival in global demand. It is unrealistic to expect that we can compress fiscal deficit to a level where interest rates fall, investment revives and growth accelerates.

Whichever way you look at it, the global outlook holds the key to India's return to the growth path of 8%. The Eurozone crisis will stretch out until at least 2014-15. That implies that India will have to wait at least until then before it gets to seeing growth of 8%.

More in my ET column, Slow return to 8% growth.

Reservation in promotions

The reservation in promotions for SC/STs Bill has been passed in the Rajya Sabha. Its passage in the Lok Sabha is awaited. Many of those who favour reservation for SC/STs at the point of entry are opposed to extending the principle to promotions. The merits of the Bill can be debated but the crucial thing to note is that the Bill will have to withstand any challenge in the  Supreme Court. The Hindu today carries an article that brings out the constitutional aspects very well.

There are two criteria of the Supreme Court that are relevant to any provision for reservation in promotions for SC/STs. One, such reservation must not come into conflict with requirements of efficiency. Two, the government must demonstrate lack of representation of the SC/STs by providing appropriate data. The article points that as part of the negotiation with the BJP, the UPA government agreed to drop an earlier provision in the Bill that would have allowed it to ignore concerns about efficiency. However, the present draft contends that the government need not demonstrate under-representation. The author writes:

The draft of the 117th Constitution Amendment Bill has a rather short-sighted response to the Supreme Court’s demand that the inadequacy of representation of the SCs/STs must be demonstrated on the basis of each cadre. In essence, the Supreme Court’s position is that if the state wants to provide quotas in promotions for clerks, it should demonstrate inadequate representation of the SCs/STs among clerks . The response of the 117th Constitution Amendment Bill is to remove any reference to the requirement of demonstrating inadequacy of representation. The Supreme Court’s demand that the cadre must be the basis for demonstrating inadequacy of representation is far from ideal. A cadre-based determination of inadequacy of representation of the SC/STs would not result in an accurate picture of representation of the SC/STs in public employment as a whole. The 117th Constitution Amendment Bill should have clarified that a cadre-based determination of inadequacy of representation was not required by the Constitution and that it would be sufficient for the State to demonstrate inadequacy of representation in public employment as a whole. Instead, the Bill that has been passed in the Rajya Sabha goes to the other extreme and no longer requires the state to demonstrate any sort of inadequacy of representation. 

I am not clear as to how quotas on promotions will work. Are we to suppose that there will be 22.5% reservation for SC/STs at each level- joint secretary, additional secretary, secretary- in the government? Or will governments settle for, say, representation in the office cadres as a whole? If SC/STs are adequately represented at the joint secretary and additional secretary level and in the services a whole but there are not enough of them at the secretary level, would this call for government intervention?

The implications of having 22.5% quota at every level should be evident. Promotion would become virtually independent of performance or any comparative evaluation of merit. However, if we don't have enough SC/STs at the senior levels, that could be construed as violative of the intent of the amendment proposed. A compromise would be settle for some rough indicators- at least 5-10% of SC/STs for all posts at senior levels in the aggregate. But, then, an argument could erupt about the numbers; some would say that anything short of 22.5% is discrimination.

I'm sympathetic to the idea of quotas in promotions but I'm afraid I can't see how quotas in promotions will operate or can be operated. Any suggestions?

Friday, December 14, 2012

Basel III complacency

Basel III is supposed to be a tough answer to Basel II- better quality capital and more capital for banks. Banks have resisted the higher requirements saying it they will affect loan growth. It is sobering to be reminded, therefore, that equity to total capital at banks, following Basel III, will be a mere 3%- that is, a leverage of 33! The reminder comes from the Vice Chairman of America's Federal Deposit Insurance Corporation:
Despite the promise of higher capital levels and better quality capital, Basel’s new minimum leverage ratio requirement is only 3 per cent, about the same as that of the largest US banks when the global crisis erupted. Basel III offers more complexity and, therefore, new opportunities to circumvent the system. But it does not offer any more certainty that banks will be well capitalised when the next crisis hits.

What is the answer? Go for a simple leverage ratio that is reasonably high:
We can establish a simple but stronger capital base by replacing the unmanageably complex Basel risk-weighted standards with a tangible equity capital ratio of around 10 per cent, and use a simplified risk-weighted measure as a check against excessive off-balance sheet assets or other factors that might influence banks’ safety. If the financial industry had had tangible equity capital approaching this level in 2008, we might still have had a crisis. But it would have been far less severe and far less costly to the public.

Thursday, December 13, 2012

Interview on Narendra Modi

I found's interview with Gunvant Shah perceptive. The interview is about Modi- his strengths and weaknesses. Shah makes no bones about either. He condemns the Gujarat riots as a blot on the state but does not hold Modi personally responsible:
So you think he should not apologise.
Not at all! You are talking nonsense. When there is rioting and provocation of this dimension, do you think there won't be any reaction from the majority community? You conveniently forget that in 1984, Sikhs were killed by Hindu Congressmen. Not a single non-Sikh was killed. You can call it a pogrom. Here in Modi's Gujarat, 218 Hindus were killed in police firing... And do you know even Congressmen came to fight Muslims on that day?
It is good to see the media talking to people on the ground in  Gujarat. Rediff's coverage of the elections has been excellent.

Tuesday, December 11, 2012

Financial Times and Economist up for sale?

Well, there is certainly speculation on this account. FT is said to be losing money. The report does not say anything about the finances of the Economist. As somebody who is addicted to both periodicals, I sincerely hope that they don't lose their character if they are acquired. I wonder why Rupert Murdoch is not interested- could it be because of the troubles he has had to face in the UK? Whatever his failings, Murdoch will be gratefully remembered by journalists as the man who has helped preserve two of the greatest titles in journalism, The Times of London and the Wall Street Journal.

I have only one other thought. The FT and the Economist do not lack commentators who advise policy-makers and businessmen on how to get their policies and strategies right. FT has a whole section on Management. The redoubtable Schumpeter of Economist dissects corporate strategies all the time. Are we to believe that the pundits at these journals do not merit attention within their own publishing house? I do remember that some years back, the Economist flew Michael Porter in for a strategy session.  The cynical could say that that doesn't mean much: after all, Porter's own consulting firm, Monitor, is in the doldrums.

Economic growth can't be left to the market

After the financial crisis, the case for regulation of the financial sector has grown stronger; most people believe that leaving things too much to the market was part of the reason for the crisis. Still, not many would argue for a role of the state in promoting economic growth. The wider view is that the state should take care of law and order, infrastructure and efficient financial markets and leave the rest to entrepreneurs.

Chinese economist and former World Bank chief economist, Justin Lin argues otherwise in his recent book, The Quest for Prosperity. He makes the point that nations have seen sustained and strong growth all owe it to strong support from the state- very often, support for particular sectors. The proposition is not new. Robert Wade and others have pointed out that the East Asian miracle was pretty much state-led. But, the earlier thesis was that the state should generally support firms that were in competitive businesses, especially those that were trying to win in export markets. Lin goes further. He wants the state to target particular sectors and guide private investment into those areas.

This is really a strong form of what used to be called 'industrial policy'. Lin shows that this sort of thing is not unique to East Asia. It happened to all the advanced economies of the west earlier. What is more, the advanced economies practise this even today, although sometimes in not so obvious ways.

More in my ET column, How the state can boost growth.

J S Verma on SC judgement on Vodafone

I return to my blog after a fairly long time- preoccupied on many fronts in recent weeks.

I wanted to flag Justice JS Verma's comments on the Supreme Court verdict on Vodafone. There has been much criticism of the government's attempt at changing the tax law retrospectively in the Vodafone case. Many have differed, however, with the SC's views in this particular case and it is interesting that Justice Verma is one of them.

Justice Verma gives two reasons for his difference of opinion with the SC judgement. One, he believes that "the three-judge judgment in Vodafone bypasses a five-judge constitution bench judgment in the McDowell matter in 1985. The McDowell judgment in substance said that in this context what you have to see is the substance of the transaction to determine the tax liability and not merely the form of the transaction." Justice Verma points out that a three-judge bench cannot bypass the view of the larger five-judge bench in the McDowell case.

The bigger reason, according to Justice Verma, is as follows (all quotes here are from the report in the Indian Express):
Judges need to be committed to constitutional philosophy and not the philosophy of the ruling party. The constitutional philosophy in this case as laid out in Articles 38 and 39. The effect of benefiting a corporate is to cast a higher tax burden on the common man and when you uphold an illegal tax avoidance, then you cast a higher tax burden on the honest tax payer. According to me the Vodafone judgment has all these implications.

Justice Verma believes the Vodafone judgement is to be clubbed with two other SC judgements- those in the habeas corpus case during the emergency and the JMM bribery case as judgements “which are best forgotten or allowed to pass”. In the habeas corpus case, the SC had ruled that the right to habeas corpus stands suspended during an Emergency- this was subsequently changed by parliament through a constitutional amendment. In the JMM bribery case, the SC ruling was that the MPs who were accused of taking a bribe to vote in a particular way had committed no crime that the legal system could act on as they enjoyed immunity granted to members of parliament.

Friday, November 23, 2012

Long-term growth forecasts

Making forecasts for some fifty years is a dicey business but it's useful for building possible scenarios. The OECD has come out with forecasts up to 2060. The good news is that the OECD think the world economy will regain the average growth rate of the past decade and a half over the period 2011-30. The forecasts for India don't look good. India overtakes the US in GDP in PPP terms only in 2060; China does this in the middle of this decade itself.

I found this strange. Goldman Sachs, in its BRICS report of 2007, saw India overtaking the US in GDP at the market exchange rate of 2006 in 2050 itself. This implies that catch up in PPP terms should happen sooner since India's GDP gets inflated by a factor of about 3 when you use PPP. Arvind Virmani, writing in 2006, thought India would overtake the US in GDP in PPP terms by 2037, which would broadly accord with the Goldman forecast.

How come the OECD is so pessimistic? The answer is to be found in the implied growth rate. The OECD sees India growing at just 6.7% in 2011-30. Goldman had thought the growth rate would be 8.4% in 2007-20. If you accept that the world economy will get back to its pre-crisis decadal average growth, then India should be able to bounce back to growth rate of 7-8% over the next 20 years. So, the catch up with US would happen faster than OECD thinks.

More in my ET column, Post-Crisis, Is India a loser?

Thursday, November 08, 2012

Anti-corruption crusade

Robert Vadra, Salman Khurshid, Nitin Gadkari. Who's next? That's what politicians must be wondering and it's also what ordinary people are asking. The Anna Hazare movement having run out of steam, it appeared for a while that corruption had ceased to be an issue. But Arvind Kejriwal and company had other ideas and have brought corruption back on the agenda with a bang, no doubt in the hope of creating a niche for the political party they have launched.

Is this a new dawn? Is the country about to finally cleaned up? Are we on the brink of a new phase in the life of the polity? At the risk of sounding cynical, methinks not. Kejriwal's is not the first anti-corruption movement to be launched in the country. One can easily recollect two movements that had corruption as one of their main planks: the JP movement in 1975 and the V P Singh campaign against the Bofors deal in 1989. Both movements brought down governments but the impact on corruption in public life has been zilch.

True, Kejriwal has the benefit of 24-hour TV coverage- and the TV channels are all for fighting corruption because it gets them tonnes of eyeballs. Still, it's only a matter of time before the public tires of Kejriwal's hit-and-run tactics. Their defence that they do not have the investigation machinery to probe deeper will not wash; they have recourse to the law enforcement agencies and the judiciary, and they are free to file charges before the relevant authorities. To say that the system has broken down and it's not easy approaching the relevant authorities cannot justify hurling charges against all and sundry. Then, we are reduced to mob justice, and people simply hurling allegations against each other. If you do not subscribe to the current process, you are free to contest collections and institute a new process.

There is a more fundamental problem with Kejriwal and Co are saying. They perpetuate a rather naive view of corruption, as one of taking bribes for favours, the sort of corruption one associates with traffic cops or income-tax officials. The more potent and intractable forms of corruption do not involve taking bribes. They are about deals done, very often within the framework of the law, but which involve abuse of power in one form or another. That is how big money is made. A cabinet minister's son getting contracts from large companies; a senior bureaucrat getting a lucrative independent directorship post-retirement; a regulator being hired as a consultant for a large sum after he relinquishes his post. In such cases, quid pro quo is almost impossible to establish because of the lag between a favour done and the return obtained for the same.

Then, there is corporate corruption, again not necessarily involving bribes all the time. Corruption rests on a nexus of relationships among the privileged in society. And the nexus, in turn, arises from a particular economic structure in which a privileged few corner the spoils at the expense of the vast majority. Thus, the serious corruption in society has to do with the economic structure in society and especially with the inequalities on which society rests. This form of corruption is almost next to impossible to tackle unlike petty corruption, which can be checked through simple means (such as online reservations for railway tickets).

Once this basic truth is grasped, it will also be apparent that crusades against corruption cannot achieve much. In the present situation, they have ended up paralysing the government and affecting growth, which can only hurt the under-privileged. In the long run, crusades against corruption have a way of throwing up dictatorships, which represent the worst form of corruption.

Is there no answer then? Well, the answers are the unglamorous ones: more transparency, e-governance, explicit rules for decisions. These won't make TV news and they taking time to happen but they are the ones that will produce results.

More in my ET column, Plain truths about graft.

Wednesday, November 07, 2012

US is no paragon of justice or fairness

Following the sentencing of Rajat Gupta, many commentators went to town about the fairness of the US system, which does not hesitate to bring the high and mighty to book. Rubbish, says Shankar Sharma in an interesting two-part article in BS. (part 1 and part 2).

Sharma contends that Gupta was nailed precisely because he was an outsider and interloper in a system that protects its own zealously. He lists other offenders who got away: Hank Paulson, former Goldman Sachs CEO and US Treasury Secretary; Hank Greenberg; Warrent Buffett; Steve Jobs.

Sharma contends that Paulson disclosed to a group of fund managers information that the government intended to place Freddie Mac and Fannie Mae under conservatorship, a move that would wipe out the firms' equity. The fund managers proceeded to short the firms' equity if they were not already holding short positions. Sharma writes:

If this is not giving out material, non-public information, then what is? If Rajat Gupta is guilty, why isn’t Paulson? If Gupta had given Raj Rajaratnam information that Goldman Sachs was going to get an investment from Warren Buffett (and suppose, if Rajaratnam had not sold an already long position in Goldman stock based on this material, non-public information), would this have amounted to a criminal offence on Gupta’s part?
Of the many things I don’t like about this Rajat Gupta affair, one is the Indian media’s sickeningly fawning portrayal of the American justice system as one that “doesn’t spare the rich and powerful, unlike ours where the well-connected get away”, and “how justice is dispensed speedily in the US”, and so on.
Nothing could be farther from the truth. The US protects its own rich and powerful better than we can ever do. Paulson got away clean. Not even an investigation. No investigation by the Securities and Exchange Commission into the trading by these attendee hedge funds. Nothing. Just a conspiracy of silence.
About Buffett, Sharma has this nugget:
Then, we have the strange case of David Sokol. He was Buffett’s No. 2, and was widely tipped to take over from the old man. Sokol bought shares of Lubrizol, prior to getting Buffett to buy the company outright. After the deal was done, Sokol told Buffett of this purchase. Buffett waved it aside, saying it was no problem. No problem? Sokol traded on inside knowledge of material, non-public information, and Buffett joined him in keeping this a secret.
When the problem came out, Sokol resigned, Buffett shrugged. And, that was it. The cover up had happened. Because any serious investigation would have led to Buffett himself becoming a party to any offence, since he chose not to report this to the authorities. Consideration for his old age? Well...

Sunday, October 28, 2012

SC judgement on RTI Act

The Supreme Court judgement in the Namit Sharma case involving the RTI Act has rightly caused concern in various quarters. The SC ruled that the Information Commission was "judicial tribunal" and hence all benches of the Commission must work with two members each, with one member having a judicial background and the other as an expert.

Former Chief Justice of the Delhi High Court A P Shah highlights the issues raised by the judgement of the honourable court:

First, equating the information commissions with a "judicial tribunal" is clearly erroneous. The only issue to be decided before the commission is whether information, which is already available with the autho-rities, should be disclosed or not. The commission does not therefore dispense justice (like a court), it merely deals with disclosure of information.

Second, the Act already provides certain qualifications for appointments to the post of information commissioners ("persons of eminence" and "knowledge and experience" in particular fields). However, the court has completely rewritten the provisions of the Act by insisting on qualifications that go beyond what has been prescribed by the Act, and further, by specifically laying down the requirement of two-person benches, having at least one judicial member. This is a clear case of judicial overreach where the court has virtually legislated provisions of law.

More importantly, there are important practical concerns that flow from this judgment, and which the court has unfortunately glossed over. A huge fallout by way of immediate effect of this judgment would be the cessation of the activities of all the information commissions until members with judicial background are appointed. The position of the current incumbents to the post of CICs becomes precarious as they cannot continue to work as per the SC decision. It is completely unclear whether they would resign or be removed — and if so, under what provision?

The RTI Act is one of the biggest triumphs of Indian democracy, an instrument of empowerment that does more for accountability of government than most other measures in that direction. It is, perhaps, a more valuable tool for fighting corruption than the proposed Lok Pal. It is important that nothing comes in the way of the working of this majestic Act. The government has been quick to move a review petition before the SC and one hopes that the SC will provide suitable redress. 

Friday, October 26, 2012

CEO pay and risk-taking

Aligning CEO pay with risk is one of the challenges of governance today; the failure to do so has been cited as one of the reasons for the financial crisis of 2007. How do we bring about this alignment? An article in HBR (The life cycle of CEO compensation, October, 2012) has some interesting ideas.

The article suggests that using an appropriate mix of stocks and stock options (instead of a pre-determined or set mix) might help. Options lead to an increase in prospective wealth and hence encourage risk-taking; stocks, which are current wealth, discourage risk-taking; the greater the stocks, the greater the aversion to risk because CEOs don't want to lose what they have.

It follows that CEOs will take big risks at the beginning of their careers when their option holdings are high and wealth holdings low; their appetite for risk will fall with time. If you want the firm to take risks and the CEO is at the end of his term, it would be best to expedite his departure and bring in a newcomer. If the firm is being too conservative and you want to encourage risk-taking, give lots of options to the CEO. In general, it's a good idea to set a ratio for holdings of stocks and options so that the appetite for risk is optimal.

In a post below, I pointed to research which suggests that leaders from outside are more likely to take gambles. If you want to encourage this further, give outsiders stock options; if you want a check on it, give the outsider lots of stocks.

Rajat Gupta sentence

The two year jail sentence and $5 m dollar fine imposed on Rajat Gupta will be debated for a long time. We need to be clear: the punishment is not for insider trading, although news headlines focus on the 'insider trading' case. Judge Rakoff's sentencing order makes it clear that, in the opinion of the learned judge, Gupta's offence was breach of trust. It also casts doubts on whether insider trading trading is as big an offence as it is made out to be:

The heart of Mr. Gupta’s offenses here, it bears repeating, is his egregious breach of trust. Mr. Rajaratnam’s gain, though a product of that breach, is not even part of the legal theory under which the Government here proceeded, which would have held Gupta guilty even if Rajaratnam had not made a cent. While insider trading may work a huge unfairness on innocent investors, Congress has never treated it as a fraud on investors, the Securities Exchange Commission has explicitly opposed any such legislation, and the Supreme Court has rejected any attempt to extend coverage of the securities fraud laws on such a theory........In the eye of the law, Gupta’s crime was to breach his fiduciary duty of confidentiality to Goldman Sachs; or to put it another way, Goldman Sachs, not the marketplace, was the victim of Gupta’s crimes as charged. Yet the Guidelines assess his punishment almost exclusively on the basis of how much money his accomplice gained by trading on the information.At best, this is a very rough surrogate for the harm to Goldman Sachs. 

So Goldman was the victim and it is not at all clear that it suffered any loss on account of Gupta's actions. To put it differently, Gupta's actions were not worthy of a man of his stature but they caused no harm, at any rate no great harm, to anybody. His actions pale beside various acts of skulduggery in the corporate world, such as the fiddling of accounts, payment of bribes, misuse of corporate funds for personal gain etc. And yet, in the eyes of American law, Gupta merits a two year jail term.

It does appear that the sentence is more a reflection on the harshness of the American system, which has a tendency to hand out long sentences in the name of deterrence, than on the nature of the offence that Gupta is said to be guilty of. In making this suggestion, one is not even taking into account the many contributions and accomplishments of Gupta.

Thursday, October 25, 2012

Outsiders are the best and worst leaders

One critical choice in selecting a leader is: do we opt for an insider or outsider? Gautam Mukunda, HBS professor, suggests that outsiders make the best and worst leaders- they succeed or fail dramatically. An insider can only produce modest outcomes. Either we take a risk with an outsider or we stay with an insider in the knowledge that no great outcomes are possible.

When an organisation is in dire crisis, it is relatively easy to plump for an outsider: after all, you have little to lose and a great deal to gain. But what do you do when the organisation is cruising along but wants to go the next level? We are truly stumped. It doesn't surprise me that most organisations simply prefer business as usual.

There are a couple of other options that suggest themselves to me. How about selecting an outsider in
advance and making him an insider? Then, we bring in the ability to view things differently and marry it to familiarity with the existing situation. Or, how about choosing an insider who has a reputation of being something of a contrarian, a de facto outsider?

More in my ET column.

Wednesday, October 24, 2012

Glass Steagall is not the answer to systemic risk

There has been talk everywhere of limiting the scope of banks. It is argued that the "utility" part of banking, the provision of basic banking services, must be separated from the "casino" part, which includes investment banking and proprietary trading. The mechanism proposed in the UK is the Vickers Commission proposal for ring-fencing; in the US, the preferred mechanism is the Volcker Rule. There is growing clamour in some circles for a return to the Glass-Steagall Act which would give a straight separation of investment banking from commercial banking.

I believe the focus on scope is not the way to address systemic risk. We need better risk management that addresses a whole set of issues other than scope. Here is my EPW article, How do we resolve the too-big-to-fail problem?

Foreign flows are not the key reform issue

We had a burst of reforms in September. The media gushed ecstatic about it and was quick to pronounce it a success.Why? Because, it is said, foreign inflows shot up and the rupee appreciated after its steep fall, as foreign investors responded positively to reforms.

So, here we have a fairy-tale story. There is a loss of confidence in the economy and the rupee plummets. Finance minister P Chidambaram comes galloping in. Bang! There is burst of reforms. Whoosh! Foreign capital comes flooding in. All ye, dance in joy!

Sorry to be a party-pooper but the story just doesn't wash when you take a close look at the numbers. Foreign inflows were not much larger in January and February this year, long before reforms in sight. And neither the sharp depreciation in the rupee this year nor the more recent appreciation means much because, in real terms, the rupee has largely stayed within the 5% band for the real effective exchange rate.

Once you see this, you realise that the focus on FDI in the current bout of reforms is misplaced. FDI flows have never been a cause of concern in recent years. The problem is with domestic investment. With the infrastructure sectors ridden with regulatory and policy uncertainties, private investment is unlikely to pick, so public investment must step in. This must be the focus of reforms, not FDI.

More in my last ET column, Reform focus is misplaced. I should have linked it long back but have not be able to post for a long while thanks to several pre-occupations.

Thursday, October 04, 2012

Spotting disaster-prone CEOs

Many  a famous company has gone under because of some disastrous act or decision of some CEO. Instances of this in the financial crisis are legion- RBS, Bear Stearns, Lehman Brothers. Is it possible to identify and remove CEOs headed for disaster? Lucy Kellaway, FT columnist, thinks there is. She suggests the equivalent of a test of roadworthiness for cars.

She posits that hubris is the reason for the downfall of companies and CEOs. Ergo, the challenge is to spot signs of hubris. She thinks this can be done by using a questionnaire on board members, the CEO's personal assistant and the CEO himself:

The test could be arranged around a small number of simple questions such as: how would you rate his arrogance on a score of one to five? Has it increased recently? Has he changed his mind on anything in the past year? Has he done anything even slightly dodgy? In answering these questions, spineless non-executive directors would be discouraged from fudging answers by the promise of a prison sentence should they fail to be candid. 
I'm afraid the columnist is being rather simplistic. Assuming that we can get people to answer the above questions honestly, does it provide a basis for removing a CEO? I doubt very much. First, almost anybody at  that level would be given to a certain amount of arrogance: without it, perhaps, they wouldn't be there, and they would have to be less than human if the pay and power they commanded didn't go to their heads.
Secondly, it is the same arrogance that often produces results. When it succeeds, it is called aggressiveness, drive or focus. When it fails, people give it other names: overconfidence, recklessness, hubris. That is why, there is no dearth of arrogant CEOs who don't quite end up as disasters. And there are some modest CEOs who have much to be modest about.
The answer to disastrous CEOs has to be found elsewhere: in stronger systems, processes and dispersion of power at the top. The problem is not arrogance but the job description of the CEO itself. So long as you have so much power concentrated in one person, there is always the potential for trouble. Drucker once wrote that the CEO is not a person but a team, say, a team of three persons. Companies have found it impossible to embrace this principle or any worthwhile degree of decentralisation or diffusion of power. Until that happens, fasten your seat belts. 


The SC's order on a PIL related to the CAG has not received the attention it deserves in the media. Here is a TOI report.

The petitioner contended, as many government spokesmen have in recent days, that it was not for the CAG to comment on matters of economic policy. The SC had a sharp response:

CAG is not the traditional Munimji to prepare only balance sheets. It is constitutionally mandated to examine the efficiency, effectiveness and economy of the decisions of the government in using resources. If the CAG will not do this, then who will?
This does repudiate the government contention, in the wake of the recent SC bench observations on the presidential reference, that it was not for the CAG to suggest auctions or estimate the losses incurred by not following the auction route.

How does one reconcile the SC bench ruling on the presidential reference with the SC observations on the PIL? Well, I can only attempt an answer. It is true that auction need not be the only method for the allocation of natural resources. The government need not adopt the method in every instance of sale of natural resources. However, if the government has adopted a different method, it is open to the CAG to comment on whether it was appropriate in that instance or not. And, of course, the SC has every right to examine whether any method adopted was mala fide or smacked of arbitrariness.

I have defended the allocation method adopted by government in the case of coal blocks. However, the CAG, it would appear, was within its rights to question the correctness of this approach and give its comments. As the SC has pointed out, it is for parliament to accept or reject the CAG's views. The procedure is for CAG reports to be examined by the Parliamentary Accounts Committee. The fact that CAG reports on the 2 G spectrum sale and on coal blocks have touched off a political furore and rendered the functioning of a parliament difficult cannot be reasons to ask the CAG to refrain from commenting on such matters. It is for political parties to get their acts together, observe discipline and ensure the smooth functioning of parliament.

It does seem to me that, between the two judgements, a fine balance has been struck. It is the prerogative of government to decide on matters of economic policy. Equally, it is the prerogative of the CAG to comment on the government's decisions.

Wednesday, October 03, 2012

Mafia is alive and kicking

The Mafia in Italy is alive and kicking. The Economist reports that it has extended its tentacles from its traditional base in the south to the northern region.

The fact that the ‘Ndrangheta, a crime syndicate born in the toe of the Italian boot, should be found in cahoots with local politicians in a town 60km (38 miles) from the French border is striking evidence of something that is gradually becoming clear: the mafia is no longer a southern phenomenon in Italy, but a national one.
Of the 22 local authorities disbanded last year because of alleged infiltration by organised crime, four were outside the south. What is happening along the coast near Rome is unclear. Some investigators fear a turf war may have started between local hoodlums and Camorra mobsters intent on expanding their influence.
The report mentions how the Mafia has infiltrated various local councils and at least one instance where it helped a politician get elected to the European parliament. No point in fretting about the nexus between politicians and criminals in India; like inflation, it is a global phenomenon. Think of the notorious links between politicians and criminal groups in Japan.

To take this further, it is a mistake to think of politics and crime as two distinct vocations. There are politicians in all countries (including the US) who are known to have engaged in criminality. And criminals do find it expedient to become politicians themselves. So, you have two sets of criminals: one operates within the framework of the law and the other operates outside it. Both profit by breaking the law. 

Brajesh Mishra

Former National Security Advisor Brajesh Mishra, who passed away a few days ago, has been widely mourned. The tributes cut across party lines. This is an acknowledgement of his contribution in ensuring a certain acceptability for India's going nuclear in 1998 and, more so, in using the event to b build a strategic partnership with the US.

The leak of the letter from PM Vajpayee to president Clinton saying that it was the Chinese threat that forced India to go nuclear may have been a PR disaster. However, one would imagine that this is precisely the point Mishra emphasised in private to the American side: look, we are on your side and we will help you contain China; now that we have the bomb, we can help you better. It seems to have worked.

Mishra was conferred the Padma Vibhushan by the UPA government despite the fact that he happened to be a confidante of Vajpayee, a rare instance of such honours transcending the political divide. It's a different matter that the UPA government has not been able to bring itself to confer the Bharat Ratna on Vajpayee. That may entail a political cost and, of course, it would trigger demands for a similar award for Karunanidhi, Karpoori Thakur, Kanshi Ram and others, past or present, in various political parties.

Thursday, September 27, 2012

Reform blitz- will it help?

The government's newly found determination to push ahead with reforms has drawn ecstatic reviews from the media and businessmen. 'From fasting to feasting' is how one businessman is said to have reacted. Is the euphoria merited?

Well, neither S&P nor Moody's, two agencies the government must have had in mind when it chose to go on a reform offensive, are impressed. S&P has downgraded its growth forecast from 6.5% to 5.5%. Moody's says its rating will remain unchanged for now. So do the reforms make sense?

From a long term point of view, many of them do. You can't quarrel with a gradual alignment of petroleum prices with international prices. FDI in aviation should be ok. I am not very sure about FDI in retail, not having researched this matter well enough. But, I guess one can make out a case for a modern retail sector to exist with the traditional one.

Trouble is, these measures will not make a difference to short-term growth prospects. Whether you cut fuel subsidies are not, you are going to end up with a fiscal deficit for 2012-13 close to last year's figure of 5.9%. It is not just that subsidies are high or growing; tax revenues will not grow fast enough at the current GDP growth rate.

From the short-term point of view, we need to expedite ongoing projects. That should suffice to match last year's 6.5%. As for the medium term objective of growth of 8%, I am sceptical about achieving fiscal consolidation as a means to raising the growth rate. This did not happen earlier; it's difficult to see it happening now.

We had fiscal consolidation in 2004-08 because of a growth boom that was linked to the global boom. The challenge, therefore, is how do we raise the growth rate in the absence of a similar global boom. There has to be an indigenous growth impulse. This can only be enhanced public investment. I would say: disinvest in a big way and use much of it for public investment. That will boost growth, cause the fiscal deficit to fall and lead to a decline in interest rates.

More in my ET column, Reform push may not deliver. 

Friday, September 14, 2012

Flawed propositions in Coalgate

I have had a chance to go through the CAG report on Coalgate. I believe that there are several flawed propositions in the ongoing controversy:

1. Coal blocks had to be allocated to the private sector because Coal India Limited (CIL) was inefficient.

Not true. CIL couldn't make progress with its exploration or mining because of environment and land acquisitions problems, lack of rail connectivity from mines, etc. For these very reasons, private operators have not been able to go ahead with the blocks allotted to them. CIL's track record over the years has been pretty good in relation to its internal targets.

2. Auction is the best route for selling natural resources.

The CAG has asked for competitive bidding in the case of coal. Private parties, however, would find it difficult to bid because of various uncertainties- you don't know about extractable reserves, coal quality, the cost of mining etc. That is why bidding for such resources involves royalty related to the resource extracted rather than a lump sump upfront payment. Perhaps, private players could have been asked to bid for a bundle of mines. But what if the projections are belied after allotment? The player may simply walk away from the mines instead of wasting more money.

Secondly, competitive bidding would tend to push  domestic prices of coal up to the international price. This would wreak havoc on the power industry and end-users of power. (For this reason, scrapping the coal mine nationalisation is undesirable in today's situation). In principle, one could set the coal price as the bid parameter and seek the lowest bid. Again, what if the allottee found that the coal price to which he has committed is uneconomical? Or, if the low price caused operators to compromise on safety or resort to stripping coal in the shortest time? It may be better, therefore, to seek the highest bid price for a mine and expect to tax profits in the hands of end-users.

3.  The government has lost Rs 185,000 crore in the allotment to private sector.

This estimate is based on several assumptions, notably the sale price and extraction cost of CIL (which latter may not apply to new players), and not discounting the stream of benefit. If you discount the flows, you arrive at a figure of Rs 58,000 crore, which too represents an upper limit.

4. The government should cancel all allotments made so far

This doesn't make sense if you accept that competitive bidding was not desirable and allocation was, therefore, inevitable. Allocations based on transparent criteria and where the allottees have made acceptable progress do not need to cancelled. Where allotments were clearly mala fide and allottees have been sitting on their allotments, cancellation is in order- and I imagine that is just what the government is doing.

More in ET column, Coalgate uproar is overdone

Wednesday, September 05, 2012

EU quotas for women on boards

The EU is planning legislation that will make it obligatory for member countries to ensure that, by 2020, 40% of directors on corporate boards are women, FT reports. As I have argued in earlier posts, I am all for gender diversity and, indeed, for diversity of every kind on boards.

Opposition is building up in the UK and the argument is a predictable one: it is better to find ways for women to move naturally up the ladder. But this won't happen any more than we will have better representation for SCs/STs through a natural process (of superior education, economic betterment etc). For these things to happen naturally would take another 100 years or so and, that too, with a lot of luck. There are entrenched prejudices. Equally important, women's need for motherhood could come in the way of their corporate careers. Also, their preference for soft skills, such as HR, instead of marketing and finance could prove something of an obstacle in the rat race. This preference, in turn, arises from women realising that being in areas such as HR can given them more flexibility in their careers and work schedules.

Schumpeter makes these points well in a recent article in the Economist:

Several factors hold women back at work. Too few study science, engineering, computing or maths. Too few push hard for promotion. Some old-fashioned sexism persists, even in hip, liberal industries. But the biggest obstacle (at least in most rich countries) is children. However organised you are, it is hard to combine family responsibilities with the ultra-long working hours and the “anytime, anywhere” culture of senior corporate jobs. A McKinsey study in 2010 found that both women and men agreed: it is tough for women to climb the corporate ladder with teeth clamped around their ankles. Another McKinsey study in 2007 revealed that 54% of the senior women executives surveyed were childless compared with 29% of the men (and a third were single, nearly double the proportion of partnerless men).

Many talented, highly educated women respond by moving into less demanding fields where the hours are more flexible, such as human resources or public relations. Some go part-time or drop out of the workforce entirely. Relatively few stay in the most hard-driving jobs, such as strategy, finance, sales and operations, that provide the best path to the top.

Thus, quotas are the only way to ensure greater gender diversity on boards.The contention that this will dilute 'merit' or 'quality' on boards is utterly laughable. The performance of boards everywhere is so pathetic that almost any change or innovation would be an improvement. One of the things about quota for women is that it will necessarily bring in people from outside the closed club in which boards now operate.

Perhaps the most important reason boards do badly is that there is not enough diversity of views or perspectives. Bringing in women will make some difference in this respect. To improve boards, bring in women and also bring in workers, minority shareholders and institutional shareholders- in short, anybody who is a stranger to today's charmed circle whose members think they need only to nod their heads and slap each other's backs.

Friday, August 31, 2012

How to find a B-school dean?

Well, I wish I knew but it's useful to know that two French B-schools have brought in heads from the university system. FT reports:

ESCP Europe has become the latest French business school to look to the university system for its next dean. History professor Edouard Husson, who for the past two years has been the Vice-Chancellor of the Universities of Paris, has been appointed dean of ESCP from September 1. ESCP, like HEC Paris, comes under the auspices of the Chamber of Commerce and Industry of Paris.
......In March 2013 another French business school, EMLyon, announced the appointment of meteorologist Philippe Courtier, director of the Ecole Nationale des Ponts et Chaussées (ENPC), the engineering school in Paris, as its next president (dean). He took up the position in July.
A history professor and a meteorologist as b-school deans- that's serious out-of-the-box thinking! European B-schools have also not hesitated to look outside academia: they have brought in people from industry. So did ISB in India when it appointed Ajit Rangnekar as dean. There's no need to be fixated with the idea that the head of a B-school has to be an academic and, of course, still less with the idea that it has to be an insider.

A good start is to advertise the position and advertise widely. The ad must mention that people of eminence are free to make nominations: the worst thing any search committee can do is to expect highly talented people to put in applications, complete with covering letters and CVs. ('I am a professor of Marketing with a creditable record of publications and exposure to consulting and I write to ask that I be considered for the post of Dean at......'.)

Thursday, August 30, 2012

Tackling the growth slowdown

Some people think the global environment is mostly responsible for the slowdown; others think it is 'policy  paralysis' or high interest rates or some combination of domestic factors. The RBI's latest annual report quantifies the impact of interest rates and global factors. Surprisingly, a large chunk of the industrial slowdown is not explained by other.

So what is it? It could be just supply bottlenecks, such as coal, natural gas etc. If that is so, I argue in my ET column (Don't blame slowdown on RBI), then we should simply focus on these. Not worry about grand things such as FDI in retail or insurance or pension reform or even cutting the fiscal deficit.

Yes, the deficit needs to be reined in and fuel subsidies need to be tackled at some point. But the priority right now is boosting public investment in infrastructure. If you can't cut subsidies to find funds for these, you have the forthcoming 2G auction revenues and you might try some quick disinvestment. We need some different thinking for a change, public discourse of late betrays mental paralysis!

N J Nanporia

N J Nanporia, the legendary former editor of the Times of India and the Statesman, passed away recently. I did not see any mention of his passing in any  paper and got to know about it after seeing a tribute in BS by Sunanda K Datta-Ray, himself a former editor of the Statesman. Datta-Ray says he got to know from friends who had seen an insertion for the sale of Nanporia's art collection.

If I am not mistaken, Nanporia, better known to TOI readers as NJN (his column was titled, ''One point of view"), succeeded Frank Moraes and preceded Sham Lal, both legends in their own right. He was half-Japanese (Datta-Ray says he was born in Kobe). How he came to India one does not know but he brought to journalism an excellent grasp of foreign affairs and a command over the language and a style that would have flattered the Times of London.

NJN's finest hour was the Chinese attack on India in 1962. The Chinese army overran Indian positions in the North-East as well as in Ladakh and came within shooting distance of Assam. Nehru made a pathetic broadcast to the people of Assam about his inability to defend them. There was a huge evacuation at Tezpur along with the destruction of official papers and currency notes. NJN, who had forecast China's troop movements with uncanny accuracy until that moment, made bold to say that China would not enter Assam. He argued that China's intention in attacking India was not acquisition or expansion but the humiliation of India in the eyes of the world and especially of the non-aligned movement. It wanted to send out a message that it was numero uno in Asia. That objective had been achieved with the rout of the Indian army and, therefore, the Chinese would now withdraw.

Lo and behold! China announced a unilateral withdrawal in the eastern front to positions it had held before the war. Assam remained safe. Nehru and the rest of India heaved a sigh of relief. The TOI was so proud of its editor's analyses that it brought out the entire lot in a collection after the war. I have heard that the government was so perplexed by NJN's accurate analysis of the course of the war that it had kept him under surveillance for a while, thinking he must be a Chinese agent!

The immediate outcome was that Nehru developed great regard and affection for the TOI editor and NJN became a confidante and advisor of sorts. This close relationship had an unfortunate fall-out. Nehru had always been wary of what he called the "jute press" and its influence on public opinion ( TOI was owned by Dalmia and Jain and Indian Express by Goenka) and he kept tabs on TOI through NJN.

Now, for some reason, a certain friction developed in the relationship between Shanti Prasad Jain and NJN. In a fit of pique, NJN dashed off a letter to Nehru expressing concern over the state of affairs in Bennett, Coleman and Co, which published TOI and other publications. This gave Nehru just the opportunity he was looking for to oust the Jains from management control of the company and appoint government directors to run it. (This was done under the aegis of the Company Law Board).

Later, NJN was to express contrition for his action and he admitted that his apprehensions about SP Jain and suggestion of interference in editorial matters had been without foundation. (He did so in articles he wrote for the now defunct Indian Post,  published by the Singhanias from Mumbai).  He even wrote that Jain had great affection for his stable of publications - it was a different world from the one he had inhabited- and he rather enjoyed the company of his journalists and editors.

This could, of course, not compensate the Jain for the loss of control over the Times group. A few years later, it became known that control would shortly be restored to the Jains.  NJN's position was clearly untenable and he chose to leave the TOI and join the Statesman. (The Economic Times' first editor, PS Hariharan, was also seen to be aligned with the government; he too left to become PRO at the Asian Development Bank). 

Much later, when NJN was out of a job, the proprietors of Bennett, Coleman and Co chose to be magnanimous. He was allowed to write a weekly column for the TOI's Sunday supplement, then edited by Fatma Zakaria (mother of Fareed Zakaria). The column was a great hit. Later, NJN wrote for Outlook magazine.

As editor, NJN had the reputation of being something of a snob and somebody who confined his interactions largely to the assistant editors who wrote for the edit page. One famous story is that at a party in Mumbai, he was accosted by somebody who complimented him on a piece he had written recently. NJN thanked him and said, "And what do you do?" Said the other, "I am your Chief Reporter!"

It doesn't surprise me to learn from Datta-Ray that there was not much of a market for NJN's column in recent years. NJN's sophisticated prose and turns of phrase would be beyond the current crop of readers. I did not think much of NJN's political analysis-at times he gave the impression of having mastered the art of writing 2000 words without saying anything in particular- but as a prose writer, he had few peers in journalism in his time

Monday, August 20, 2012

Maruti's Manesar plant

Maruti Udyog Ltd has announced that it will reopen its Manesar plant but only after dismissing about 500 workers allegedly involved in the recent disturbances leading to the tragic killing of one of its managers. I have been reading the news stories in the media to get a coherent account of what led up to the explosion of worker fury at the plant. I wasn't able to. A commentary in EPW has helped me gain some sort of perspective.

We cannot take seriously the insinuation that the problems are the work of 'Naxalites' who have infiltrated the workers at the plant. Nor can we subscribe to the notion that it was the result of vaulting  aspirations of a new generation of workers, who are keen to have the good things of life without regard for issues of affordability or productivity. It takes a lot for workers to rebel seriously in a situation such as Maruti's because the odds are stacked against them.

There is a fundamental asymmetry in management-worker relationships: the management has financial muscle and staying power, backed by support from the government which includes the police force and the labour department of the state. Workers eke out a precarious living and cannot do without their wages for long. To risk disruption and jobs and to incur the wrath of the law enforcement authorities would require serious provocation.

The EPW article tells us something about the immediate provocation:

A handful of workers we managed to speak to were unanimous in the view that the death of the Maruti Suzuki ­executive Awanish Kumar Dev “should not have happened”. According to a worker, Awanish Dev had agreed to take back Jiya Lal, the suspended worker, who had protested caste abuse by a supervisor during the A-shift on 18 July, but then Awanish Dev got a call from a senior, instructing him otherwise. Naresh Narwal, additional labour com­mis­sioner, and Gurgaon district administration officials told a joint trade union delegation that they too had received word that Maruti Suzuki management had agreed to take back the suspended worker the next day on 19 July and that the matter was almost resolved. Some B-shift workers we spoke to report hearing the same.What happened in the matter of a couple of minutes that changed the course of events that evening? 
But this episode only provided the spark to an explosive situation. The following factors seem to have been at work:

  • Management's refusal to recognise the workers' union  until the workers first agreed to form grievance and welfare committees
  • Management's unwillingess to implement the long-term wage settlement for casual workers and not just for for permanent workers. (There is huge gulf in wages between the two and casualisation has become the norm for many companies)
  • Worker discontent over harsh working conditions including the limited breaks available for meals and toilet visits.
How the Manesar affairs pans out will have important implications for industrial relations. If management is allowed to ride roughshod over workers' sentiments and legitimate demands with the connivance of the state government and if it is emulated by other companies,  there is risk of a dangerous backlash in the years to come.

We are revisiting land acquisition and envrionment policies that have worked to the disadvantage of the poor for decades. It would be tragic if industrial relations were reworked to suit management and came to militate against the interests of workers.

Friday, August 17, 2012

Leadership training and research

Leadership is a big deal in management. Open any issue of the Harvard Business Review and you are bound to find something on the subject- the latest issue has three articles. Books on leadership are truly legion. Training programmes in leadership are amongst those widely subscribed to. I sometimes regret I didn't get into this business. It seems easy to do- you can get away with almost anything as long as you present it plausibly- and it is enormously lucrative.

Leadership material falls into several categories: great men ('Leadership lessons from Gandhi'), books ('Leadership lessons from the Gita'), business ('Leadership in the services industry'), etc. Then, you have things that are fairly eclectic: eg. Climb the leadership ladder in eight easy steps.

Interesting, then, that we should have a book now by somebody who has spent a lifetime in training and research in leadership that suggests that much of the stuff is bunkum. Barbara Kellerman of the Kennedy School of Government has done just that with her recent book, The End of Leadership.

Her basic thesis is hard to dispute. The days when people at the top dictated things and people down below just followed are over, whether in politics or in the corporate world. People no longer look up to leaders as they used to and followership is as important as leadership. (The latter includes things like standing up and saying 'no' to your boss). Leadership training has, however, failed to make the necessary adaptation.

I would go further. It is not just leadership training that needs to change. The basic business model is broken and it needs to be replaced with something more egalitarian and decentralised. But those in the business of teaching leadership won't say so because the ones at the top will not pay them for saying such things.

More in my ET column, Leadership industry in crisis.

Jagdish Bhagwati on plagiarism

Jagdish Bhagwati comments on the Fareed Zakaria plagiarism episode in the FT and then goes to say that it has become a big problem in academia as well. He suggests ways in which institutions of higher education can deal with it:

Universities have become victims of plagiarism by students in an age when there is free access to information and assignments can be written by simply copying huge chunks of text, even entire essays, from the internet.
Once difficult to perpetrate, plagiarism is now so easy that a university such as Columbia will explicitly warn incoming students of the dire consequences, such as expulsion, if a student is caught...a remedy that I find useful is to ensure that a fraction of the grade depends on multiple-choice examinations where one cannot steal or copy.... 
...Universities should also ensure that big fish such as Mr Zakaria who are caught plagiarising are firmly dealt with: letting them off with a soft rap on the knuckles can only breed cynicism among students who are exhorted not to plagiarise. Withdrawal of honorary degrees and expulsion from boards of trustees are among the punishments that should be automatic once plagiarism has been acknowledged.
Much of the plagiarism is, I guess, wilful but, in a PC and Internet world, there is a heightened probability of oversight. You are writing up an article for a newspaper or magazine, you find something you can use, you cut and paste and then carry on with the rest of the piece, hoping to cite the reference later... in the rush to meet the deadline, you forget to reference the quote.... You attach the article and press the 'Send' button, heaving a sigh of relief..... until all hell breaks loose.

This must be every writer's nightmare, particularly columnists who are under pressure to regularly churn out pieces. Every columnist must hope and pray he doesn't get tripped up. This is, of course, not to justify the failure to cite sources.

Thursday, August 16, 2012

Finance crunch in US universities

It should be no news that American universities are facing a financial crunch. In today's economic scenario, one would expect state funding to be cut and donations not easy to come by. One would also expect universities to cushion the impact through higher fees. All three are happening, as an article in the Economist points out.

The details are interesting (and both these are quotes from the journal):

  • The average cost of college per student has risen by three times the rate of inflation since 1983. The cost of tuition alone has soared from 23% of median annual earnings in 2001 to 38% in 2010."
  •  Federal support for higher education remains at historically high levels, but states have cut back
The article contains an interesting nugget: for-profit universities (which are doing well) also get subsidies from the government. Apart from raising fees, universities are responding by trying to prune administration costs and merging colleges across various campuses.

But raising fees forever cannot be an option. How are universities to restore their finances? One answer may be to eliminate extravagant expenditure on libraries, hospitals and the like (they need some of these but can make these facilities more utilitarian). A more radical option may be to make research focused on specific goals or to reduce the size of tenured faculty. In other words, a new balance between teaching and research may have to be found. US universities will balk at such solutions on the ground that they would lose their pre-eminence. But then they may find that a full-blown financial crisis forces even more unpleasant solutions.

Wednesday, August 15, 2012

Ambedkar - greatest Indian since Gandhi

I am not a fan of polls that decide an individual's greatness but I find it very satisfying all the same that a CNN IBN- Outlook poll ended up with B R Ambedkar getting the highest votes for the title of the 'greatest Indian after Gandhi'.

I don't know whether the title refers merely to chronology or whether it is meant to signify rank, that is, that Gandhi is number one and Ambedkar is next. If so, the ranking is bound to be bitterly disputed. I guess it will come down to how you measure greatness- in terms of the impact somebody had on the people of India or the worldview that somebody espoused.

If the latter is the criterion, then Ambedkar has few competitors, not only in India, but anywhere in the world. His is a liberating, egalitarian view in which all men (and women)  get an opportunity to realise their potential. There is fundamental fairness and decency to Ambedkar's vision of India, as also a progressive or forward-looking dimension. If India is to realise its potential, not just in terms of growth or military power, but in terms of uplifting all sections of India, then the Ambedkar view is one that commends itself.

The Outlook issue on the subject is a collector's item; I have read several of the pieces in it already. S Anand's article deserves special mention. Anand asks how it is that Ambedkar ending up at the top of this ranking when this did not happen in earlier rankings. He explains:

Sceptic that I am, this “victory” for Ambedkar is most likely a result of the presence of a burgeoning internet-savvy, mobile-wielding, dedicated Dalit middle class that is almost invisibly making its presence felt. Still largely kept away from mainstream media, the private sector and our universities—which have undisguised disdain for Ambedkar’s greatest weapon, reservation—the Dalits, in India and abroad, have fashioned their own websites, mailing lists and blogs such as Round Table Conference, Dalit & Adivasi Students’ Portal and Savari, a YouTube channel called Dalit Camera, besides scores of Facebook groups.

Anand mentions the heart-rending story of Ambedkar's attempt to get his terrific work on the Buddha (The Buddha and his Dhamma) published:

The greatest exponent of Buddhism after Asoka had ruthlessly been kept out of this Buddha Jayanti committee presided over by S. Radhakrishnan, then vice-president and a man who embarrassingly believed that Buddhism was an “offshoot of Hinduism”, and “only a restatement of the thought of the Upanishads from a new standpoint”. Worse, when Nehru replied to Ambedkar the next day, he said that the sum set aside for publications related to Buddha Jayanti had been exhausted, and that he should approach Radhakrishnan, chairman of the commemorative committee. Nehru also offered some business advice, gratuitously: “I might suggest that your books might be on sale in Delhi and elsewhere at the time of Buddha Jayanti celebrations when many people may come from abroad. It might find a good sale then.” Radhakrishnan is said to have informed Ambedkar on phone about his inability to help him.

Today, thanks to a website (or several websites) dedicated to his memory, we have access to all of Ambedkar's works. That's how I discovered him myself - about six or seven years ago- and was shocked that I had remained unaware of his greatness all these years. Anand quotes a historian as saying that Ambedkar was "intellectually head and shoulders" above Gandhi, Nehru and other Congress leaders.

This is entirely true. He had a PhD from Columbia, a DSc from LSE and had also qualified as a barrister. Reading his works, one is struck, first, by the depth of his scholarship. This was a man who was steeped in public life and the world of action, who tirelessly fought for causes and laboured on the Indian Constitution, and yet found time to produce several works, at least a dozen of which could qualify as doctoral theses. One is also struck by his forensic mind and his dispassionate tone. Ambedkar had much to be angry and bitter about and yet very little of it intrudes into his scholarly analysis. He lays out the evidence and then proceeds to derive conclusions in a clinical way.

It is natural that the dalits should have claimed him as their icon but it is also unfortunate in a way because Ambedkar deserves to be  presented as a figure with universal appeal, somebody to whom all Indians, irrespective of caste, class and religion, can look up to as an authentic icon for the twenty first century.

Sunday, August 05, 2012

Anna's flop show

Anna and his team have called off their fast and have indicated that they would like to enter politics. Both items have been hotly discussed in the media.

Why did they call off the fast? Because it was evident that support for the anti-corruption movement was negligible. Many reasons have been given as to why support has dwindled since last year: corruption fatigue, the unreasonableness of Team Anna's positions, the fact that parliament is now processing the Lokpal Bill etc. The one I find most plausible was given by a friend who happens to be a businessman.

My friend says that the numbers last year were swollen overwhelmingly on account of support from the RSS- and the RSS would have its reasons for throwing its weight behind an anti-Congress movement. Members of Team Anna thereafter made disparaging remarks about the Sangh Parivar, causing the RSS to distance itself from the agitation this time.

If this interpretation is correct, it suggests that the Anna movement lacked popular support even last time and was primarily the creation of the media. Past anti-corruption movements, such as the JP movement in the 1970s, have also been made possible by political parties throwing their weight behind a charismatic or clean figure. The Anna movement petering out on account of lack of any political support thus makes sense.

Many have pointed out that converting the movement into a political party or backing one of the political formations would further erode Anna's standing. Creating a new political party to fight the elections would be an uphill task and would again involve serious compromises.

All this is correct. But the problem is more fundamental. Corruption is not about some individuals being bad guys, the decent guys being those who don't take cash bribes. It is the more sophisticated forms of corruption, such as a politician' next of kin getting contracts for a legitimate business in exchange for favours done to a business group, that are significant in scale and truly dangerous. These are next to impossible to root out. You can stamp out small-time corruption- and this will make life easier for the ordinary man- but stamping out big-time corruption is a tall order.

Corruption is not about individuals, it is about the basic economic and political structures. When a whole system is weighted in favour of a few haves- politicians, businessmen, bureaucrats, professionals or, broadly, the upper middle class - what you have is an exploitative structure in which the beneficiaries are all accomplices in corruption. The middle class manager who looks the other way when his company indulges in dubious practices; the academic who lends respectability to a company or to the government; members of the police force who collude with those in power; media persons who turn a blind eye to rapacity on the part of the powerful; all these are party to corruption in one form or another, regardless of whether there is acceptance of cash bribes or not.

If you have moved up the corporate or bureaucratic or academic or media ladder by not raising your voice against what is questionable, you are party to corruption. I find it amusing that some former members of the establishment are shouting themselves hoarse over corruption after having retired from service. Friends, what were you doing when you were in power?

The font of all corruption is the corporate world. Politicians are merely lesser partners in corruption as the bigger portion of the spoils goes to businessmen, with bureaucrats, managers, policemen and others getting their share in way or another. And  yet we heard very little from Team Anna about corporate corruption.

The idea that a corrupt economic structure can be combated by the creation of a new institution, peopled by the very same members of the existing power structure, is sheer nonsense. We need to strengthen democracy in many ways and that means strengthening the existing institutions, not creating some new institution will sweep aside all ills. We may well end up with a Frankenstein monster, the mother of all corrupt institutions.

Are you corrupt? Here is a simple test. Did you have the courage, in the environment in which you are located, to speak up when you were supposed to? Or did you choose to look the other way?

Friday, August 03, 2012

A return to Glass Steagall?

Sandy Weill, the architect of Citibank's transformation into a huge universal bank, has triggered a huge debate by suggesting a separation of commercial banking from investment banking alone the lines of Glass-Steagall. Like many others, he seems to think that banks have become too big to manage and that it is not correct to have depositors money funding trading activities.

In an article in FT, Luigi Zingales of Chicago university, throws his weight behind G-S. He  thinks  a straight separation would be superior to the restrictions on trading proposed under the Volcker rule. He also argues that separation would lead to more numerous and smaller investment banks and this would make for greater liquidity. Further, today's universal banks wield too much clout and this must be curbed.

I am not persuaded by these arguments. For one thing, Zingales mixes up bigness with scope of operations; even if investment banking were hived off, many commercial banks would still be too big for comfort. Secondly, there are benefits to banks as well as customers from combining commercial and investment banking activities. Independent investment banks would have to access funds at a higher cost, for instance. Banks can offer loans at a lower price if they can make up through fee income from investment banking. Indeed, it is the perceived benefits from combining operations that brought about the combination in the first place.

We must contain risk not through separation but simply through superior risk management that is driven by regulation. One element in this approach could involve shrinking the size of banks, although the mechanics of this would need to be worked out. (For instance, who will buy the assets in today's conditions?). Another element would be public ownership of a few large banks; this would reduce incentives for big gambles that apply under private ownership. The thrust has to be on improved regulatory norms for risk that go well beyond Basel 3 norms.

More in my ET column, How not to break up banks

Thursday, August 02, 2012

Media hysteria over power blackout

The breakdown in power supply in the north over two days was terrible. But does it warrant the sort of media hysteria we have seen? I am not conversant with the technical aspects of the situation. But, yes, if technology can spot and cut off excessive demands on the grid from any state, certainly we should go for it. And I take EAS Sarma's point in today's TOI article that we should be investing in maintenance of existing facilities and not just in additions to capacity. These points apart, are there indeed "lessons" to be drawn from the episode, as the media has been making out? I am not at all sure.

Does the power breakdown say anything about our economic growth prospects, as Ramachandra Guha seems to suggest in the FT? Not at all. Is it anybody's contention that if you wish to be seen as a credible economic power, you should not be having breakdowns at all? Well, as the new minister of power has pointed out, the US has had a power breakdown a few years ago and it took longer to restore supply. And don't forget the blackout in New York city a few decades ago and the riots that followed. Are to conclude this renders Sushil Kumar Shinde unsuitable for the Home ministry or for the power ministry itself? Do we judge a minister on the basis of a single episode or do we look at his broader record? Just to clarify, I hold no brief for Mr Shinde either as Home minister or Power minister, I am just posing questions that would apply to any minister.

These kinds of disruptions cause enormous inconvenience and suffering to people and we should do our best to avoid them. But to regard these as proof of national incompetence or a reflection on our future prospects is, to put it mildly, to be getting carried away. The lesson, if any, is one that the media needs to reflect on: every murder does not become a national crisis, every report on corruption does not mean scams are the norm, and every ministerial lapse does not mean the political system has failed.

Incidentally, I have become an ardent fan of Doordarshan news in recent months. You get the news of the day, national and international, without any varnish, and with very few commercial interruptions, and news time is not the usual suspects bashing each other in some discussion on current affairs. The current affairs discussion has a separate slot, and the one in Hindi at 7:30 pm is of pretty high quality, with a whole range of uncommon faces presenting their views- and doing a great job too. Ditto for the discussions on Lok Sabha TV and Rajya  Sabha TV.

Try the national channels sometime, you will find these a refreshing change.

Friday, July 20, 2012

How do we tame international banking?

I return to a theme I have flagged several times in the past. Banking in the west is in the doldrums. How do we revive it?  One of the most thorough expositions comes from former RBI governor YV Reddy. For those who came in late, Reddy is widely recognised for his contribution in inulating the Indian banking sector from the financial crisis. He was profiled in the New York Times, perhaps a first for a central banker from India. His views are heard with respect in international banking circles.

Reddy outlines his views on the present problems in banking in his Per Jacobsson lecture delivered in Basel. We need a multi-pronged approach, he says, that covers regulation, the size of the financial sector in the economy, global governance and the ownership structure in banking.

I covered the lecture in my ET column, How do we restore trust in banks?

Thursday, July 05, 2012

Western banking model is flawed

It took two phone calls to the outgoing Chairman of Barclays to oust Bob Diamond, the CEO of the embattled British bank. One was from the governor of the Bank of England. The other was from the Chairman of the Financial Services Authority. The calls followed what has come to be called the rate-rigging scandal in which Barclays (and, supposedly, other banks) tried  to manipulate the Libor to suit their ends.

This is not the only brush Barclays has had with regulators in recent years: it has faced charges of tax evasion and mis-selling of products. It invited strong criticism when its CEO was awarded a large pay packet last year despite the bank's poor performance.

For bankers, this is the second big blow in recent months. Earlier, we had JP Morgan Chase's huge trading loss, now estimated to be in the range of $5-9 bn. The blow is especially hard because Diamond and Dimon- the phonetic similarity in the names of the two CEOs is striking- were in the forefront of bankers'  counterattack on regulators who had been leaning hard on bankers ever since the sub-prime crisis. Diamond famously said after he took over as CEO about 18  months ago that it was time for bankers to stop apologising and to get on with making money.

Banking reform has focused so far on higher capital requirements and some separation between investment banking and commercial banking activities. There are also 'living wills' for large banks, an early version of which has just been put out.  Alas, it is becoming clear that these will not tackle the problems that beset banking today. Concentration has increased and large banks are proving unmanageable; employee pay as a proportion of income refuses to come down even when returns on equity do not meet the cost of capital; banks are in a deleveraging mode which makes it even more difficult to produce returns; they are exposed to the Eurozone debt crisis; and their orientation towards retail customers especially is appalling.

What is required is a broom that will sweep clean and sweep aside a culture that has come into vogue since the Big Bang in London and in which investment banks dominate the commercial banking side. I am inclined to believe that the ownership structure in western banks has to change. I do not advocate 100% public ownership- that creates inefficiency. But nor do I favour 100% private ownership- that creates instability because bankers face the wrong incentives in a situation of high leverage. What is required a mix of ownership in the banking sector where listed public sector banks compete with private banks. Then you have competition and efficiency, and you also have stability because public ownership, with its innate conservatism, acts as the sheet anchor of the system.

In other words, the time is ripe to export the Indian banking model to the west (or at least to Europe since the US will find it difficult to stomach public ownership of banks). More in my ET column,
West needs Indian bank model.

Thursday, June 28, 2012

Why did Rajat Gupta do it?

Umm... I realise I am walking into something of a minefield here. And I really don't want to indulge in psychobabble- I never set much store by it anyway. However, since the question has been asked and answered in ways that I do not find persuasive, I thought it was worth a brief comment.

To say that Rajat Gupta was greedy is a non-statement- the rest of us are not angels anyway. If we accept that living is, for the most part, one big ego trip, then it's impossible to keep greed out of the equation.

Some would argue that the issue is not greed per se. It is greed that goes beyond reasonable bounds, whatever these are. This is the line that most critics of Gupta have taken. He was alright during his McKinsey days, his downfall began when, in the company of fund managers  and other Wall Street types, he began to entertain visions of moving from being a multi-millionaire to a billionaire. That is when things began to wrong. He would have been okay had he stuck to his multi-millionaire status, his mansion and three apartments. All of us need to survive, you know.

The inference, of course, is that people at the top who don't fall into this trap are people who have "managed" their greed- I teach at a b-school, so I guess I should be using the right expressions. That is how they end up as decent, law-abiding, tax-paying, non-insider trading citizens.

It was left to John Gapper of the FT to prick this delusion in an incisive article:

Like politicians, executives who reach the top are not saints – they must build alliances, defeat rivals and be highly ambitious. They may behave with nobility once in the job but that is not how they got there.

Studies have found that many executives share qualities with psychopaths. One study of British managers identified similar traits in both – superficial charm, grandiosity, lack of empathy, manipulativeness. These flaws, far from holding them back, had helped them rise.

There you have it. Being at the top in the corporate world is not about higher values or concern for mankind, much less about being a balanced guy with lots of inner harmony. It is the ruthless pursuit of self-interest, the indulgence of greed in every way, that takes people to the top. In the process, some transgress the law in obvious ways, some in not-so-obvious ways, and a great many are blind to any moral code but cannot be said to have violated laws. Again, some get caught, others don't.

Viewed thus, what happened in Gupta's case represents a continuum, not an abrupt discontinuity. His misfortune was that he happened to get caught. There must be many like him whom people still queue up to listen to, shake hands with, are eager to write about.

I will leave you to ponder Gapper's unsettling punchline:
The nastiest conclusion is that the “norms and expectations” of the corporate elite are corrupt – that at such heights, illegal information-sharing is no big deal.

Thursday, June 21, 2012

S&P warning

The rating agencies have never been kind to India. Through the nineties when we were growing at more than 6%, we were regarded as below investment grade. It took several years of growth of 8-9% for S&P to upgrade us to investment grade in 2007. Today, we are BBB-, just one notch above below-investment grade, the same as Iceland (which went through a frightful financial crisis recently). We are two notches below Ireland (yet to recover from a banking crisis) and Spain, which has just received a bailout. Beats me.

Now, S&P has warned India of  a possible downgrade further ahead unless it gets its act together. India's external debt to GDP of 3.4% is among the lowest in the world. We have not defaulted on our foreign obligations all these years and are unlikely to do so even if growth slows to 6% in the next year or two years. We are among the few nations whose debt to GDP ratio has declined in recent years. What, then, is the basis for S&P's warning?

I visited the S&P website to understand their rating methodology for sovereigns. They use a combination of political, economic, external, fiscal and monetary scores. Even if one parameter, the external score, looks good,your rating can go down if the other scores worsen. Let's say that an unwieldy coalition looks likely to assume power in Delhi. The political score would worsen and you could get a downgrade- so I understand their methodology.

In India's case, this approach looks suspect because the link between a worsening of various scores and default probability is weak. Politics could get more contentious; reforms may grind to a halt; the monetary authorities may not have room to lower interest rates. But this does not increase the probability of default on foreign obligations because external debt is so low.

This is not the only argument I would make. I do not believe that the link between political regimes or even economic regimes and growth in India is all that strong. If the global situation improves, the present set of reforms could easily give us 7.5-8% growth; if the global situation remains bad, some of the reforms people are talking about will not make a big difference. 

More in my ET column, S&P, India Inc overdoing gloom.