Friday, April 26, 2013

Jet-Etihad deal at Air India's expense?

Etihad's acquiring a stake in Jet Airways is intended to improve the balance sheet of Jet, which, like most airlines in India, has been incurring losses. For a variety of reasons, the Indian aviation sector is in the doldrums.  It is understood that infusion of cash is a condition for recovery. In the case of Air India, the government is footing the bill. For private carriers, there seems little alternative to FDI.

Fair enough. However, as former ED of Air India Jitender Bhargava argues in a hard-hitting article in BS, the Jet- Etihad deal appears to have come at the expense of Air India:
Though there was unanimity that the two airlines would stand to benefit enormously, the bitterness came owing to the sweetener added by the ministry of civil aviation by way of granting over 40,000 additional seats per week on the India-Abu Dhabi sector over a three-year period. These seats were given away at a time when India was witnessing negative growth. Where was the need for additional capacity?
This has led to a question: was the grant of additional seats factored in for Jet Airways to obtain a higher valuation compared to what was being discussed in January 2013? Given that the two announcements - stake sale and grant of additional seats - came within hours of each other, was an assurance on additional seats demanded by the airlines and given by the government before the pronouncement of stake sale? These are serious questions because, if the link can be established, it is not only akin to insider trading but also demonstrates how decisions can be forced out of the government by powerful individuals.
These are very serious questions. Perhaps, we need the CAG to look into this while auditing the ministry of civil aviation? While Jet gains from the largesse, Air India is the loser. Bhargava adds with biting sarcasm:

With the survival of Air India made still more difficult, let us welcome Jet Airways as the national carrier because it enjoys the patronage of the Government of India and has been given a head start!

Wednesday, April 24, 2013

More on the Reinhart- Rogoff paper

Martin Wolf, writing in the FT, has an interesting take on the public debt- growth thesis. He contends that high public debt is often the consequence of an explosion in private debt, He cites RR's book in support:

Indeed, in their masterpiece, This Time is Different, professors Reinhart and Rogoff explained how soaring private debt can lead to financial crises that generate deep recessions, weak recoveries and rising public debt. This work is seminal. Its conclusion is clearly that rising public debt is the consequence of the low growth, itself explained by the crisis. This is not to rule out two-way causality. But the impulse goes from private financial excesses to crisis, slow growth and high public debt, not the other way round. Just ask the Irish or Spanish about their experience. 
Wolf makes the point that what caused public debt to rise, in the first place, is important. Following a financial bust, a rise in public  debt is inevitable and necessary because otherwise the economy will plunge into a recession.

Wolf also points to an interesting historical fact. The UK had debt to GDP ratio of 240% in 1816.  The "economic disaster" that followed was the industrial revolution! Thereafter growth accelerated and the ratio declined to below 90% by 1860s. The colossal debt that UK had run was not even for productive activities, it was to finance a war! So much for the correlation between public debt and growth.

Database on graduate schools

I have received a link to a most useful database b-schools. It provides a wealth of information on MBA as well as Ph D programs. Here it is:

Indian judiciary's finest hour

More than one newspaper has thought fit to recall, on its fortieth anniversary, the historic Kesavananda Bharati judgement delivered by the honourable Supreme Court. An article in the Hindu gives the background:

The Kesavananda Bharati case was the culmination of a serious conflict between the judiciary and the government, then headed by Mrs Indira Gandhi. In 1967, the Supreme Court took an extreme view, in the Golak Nath case, that Parliament could not amend or alter any fundamental right. Two years later, Indira Gandhi nationalised 14 major banks and the paltry compensation was made payable in bonds that matured after 10 years! This was struck down by the Supreme Court, although it upheld the right of Parliament to nationalise banks and other industries. A year later, in 1970, Mrs Gandhi abolished the Privy Purses. This was a constitutional betrayal of the solemn assurance given by Sardar Patel to all the erstwhile rulers. This was also struck down by the Supreme Court. Ironically, the abolition of the Privy Purses was challenged by the late Madhavrao Scindia, who later joined the Congress Party.

Smarting under three successive adverse rulings, which had all been argued by N.A. Palkhivala, Indira Gandhi was determined to cut the Supreme Court and the High Courts to size and she introduced a series of constitutional amendments that nullified the Golak Nath, Bank Nationalisation and Privy Purses judgments. In a nutshell, these amendments gave Parliament uncontrolled power to alter or even abolish any fundamental right.

The judgement in the Kesavananda Bharati case put the brakes on the amendment spree that parliament had embarked on . The Court ruled, by a narrow 7-5 verdict,  that parliament's amending power was limited by the "basic structure" the constitution. Different judges articulated what they meant by the "basic structure". However, in the very nature of things, this cannot be exhaustively defined. It is left to the Supreme Court to judge whether, in a given instance, the "basic structure" is disturbed.

As several legal experts have noted, there is, in the Constitution, no explicit bar on parliament's amending power: Article 368, which deals with parliaments' powers on this subject, does not impose any limitation. What, then, is the rationale for imposing a limitation? As I recall, the essence of the argument is that parliament itself is a creature of the Constitution and hence subordinate to it. Parliament cannot, therefore, act in ways that erode or undermine the "basic structure" of the Constitution.

Despite this judgement, the Supreme Court, during the emergency, did not strike down the suspension of the right to habeas corpus, which many would regard as fundamental to basic liberties of the citizen. It required a Constitutional amendment by parliament later to ensure that this right is not taken away during an emergency. One shudders to think of what might have been had the "basic structure" doctrine not been propounded by the Supreme Court. The author of the Hindu article is right in saying that this judgement saved Indian democracy.

Tuesday, April 23, 2013

Economists' fads and fashions

I had a post yesterday on the controversy over the Reinhart-Rogoff paper. Such controversies wouldn't be troubling if they remained strictly in the academic realm. The difficulty arises when some findings or prescriptions of economists are accepted and acted upon by policy-makers. These prescriptions, mind you, are often over-simplified versions of theory When the findings come to be questioned later, as has  happened with the RR paper, the costs of wrong policy fall on the hapless citizens of economies where these policies have been practised.

There is little doubt that austerity in the Eurozone has hurt millions badly. This would have been acceptable had there been light at the end of the tunnel. It does appear, however, that economic recovery is going to stretch out as austerity causes economies to contract. You can't blame RR alone for this.

The IMF, which has pushed for austerity in the bailout packages for Greece and others, disclosed last October that its estimate of the fiscal multiplier (of around 0.5) was an under-estimate. The multiplier may be higher than 1. This means that cuts in government spending will cause a reduction in gdp that is greater than the cut, so that debt to gdp rises, it doesn't fall! Now, who is going to pay for the IMF's turnabout? The people of the Eurozone, of course.

One can think of other prescriptions that have turned out to be dubious- capital account convertibility, opening up to foreign banks, privatisation, efficient markets and 'light-touch' regulation.... it's a long list. Policy makers must be careful not to fall for passing fads and fashion amongst economists. They must allow policy always to be mediated by the democratic process, so that they have a better understanding of how policy impacts on the lives and aspirations of people.

More in Hindu article, Beware the nostrums of economists.

Monday, April 22, 2013

Public debt and growth

Many readers will be aware of the first class controversy that is raging in the economist fraternity over a paper written by Reinhart and Rogoff  (RR)on the relationship between public debt and growth. In a nutshell, the paper purported to show that growth falls off a cliff once the public debt to gdp ration crosses 90%. Three economists at Massachussets, Amherst have shown that the calculations underlying the paper were flawed: the impact on growth at that level of debt is far less lethal than RR made it out to be.

FT has several interesting posts on the subject. Here is a sample: One, two and three

Students of economists should know, from first principles, that there was more than an element of exaggeration in the RR thesis. Think of why higher debt should hurt growth. As governments raise borrowings, there is crowding out of private investment through higher interest rates. But in an open economy where savings from outside the economy can be tapped, this effect will be far less severe than in a closed economy.

Secondly, much depends on what your borrow for. If higher government borrowing goes into infrastructure or even human capital, it could "crowd in " private investment.

Lastly, when the economy is way below full employment, government borrowing helps move output towards the equilibrium level; it is when an economy close to full employment that the deleterious effects of government borrowing are felt. When governments cut back on borrowings by cutting government spending at a time when economies are mired in recession, you get what we are seeing in the Eurozone today.

Women at work

How women can advance at the workplace is one of the recurrent themes in discussions on gender equality and management. Sheryl Sandberg, COO of Facebook, weighed into this debate with  a book that advised women to "lean in"- be more vocal and demanding at the workplace. The Economist reviews a clutch of three books that shed more light on this subject.

One point the review highlights is the differences in how men and women respond to situations at the workplace:

Women ask more questions, gather more people’s opinions and seek collaboration with co-workers more frequently than men. Men view these preferences as signs of weakness, and women, in turn, grow annoyed by how competitively men work, and how quickly and unilaterally they arrive at conclusions.

But this doesn't explain why women do not rise as much in the corporate world as men do. To put it all down to gender discrimination is a lazy explanation. Women opting out to look after children or opting for a certain career path in order to balance work and family are part of the explanation; it could also be that not enough women opt for professional degrees (such as engineering) that are required for rapid progression.

What we can say with a measure of confidence is that firms lose our when they do not have adequate gender diversity at various levels. And it may well be that to achieve a certain diversity along the line, you need to begin at the very top: representation for women on boards. European countries that have mandated minimum seats for women on boards seem to have got it right. The improvement in the lot of particular groups just does not happen in society unless there is a measure of affirmative action.

Friday, April 12, 2013

Modi's biographer on Narendra Modi

Nilanjan Mukopadhyay, author of a biography of Narendra Modi, interviewed by

Thursday, April 11, 2013

Analytics and recruitment of employees

Analytics- or crunching of data on a large scale-is being widely used for a variety of purposes. The Economist has an interesting report on the use of analytics for hiring employees.

Some of the findings on employee performance, which helps in taking decisions on recruitment, are interesting:
  • ....people who fill out online job applications using browsers that did not come with the computer (such as Microsoft’s Internet Explorer on a Windows PC) but had to be deliberately installed (like Firefox or Google’s Chrome) perform better and change jobs less often.
  • of the best predictors that a customer-service employee will stick with a job is that he lives nearby and can get to work easily. These and other findings helped Xerox cut attrition by a fifth in a pilot programme that has since been extended. It also found that workers who had joined one or two social networks tended to stay in a job for longer. Those who belonged to four or more social networks did not.
  • A study of 20,000 workers showed that more honest people tend to perform better and stay at the job longer. For some reason, however, they make less effective salespeople.

I don't suppose such findings can be a substitute for going through applications and interviewing candidates. But they can be an aid to good hiring, especially when backed by firm-specific data. 

Wednesday, April 10, 2013

And now China gets rating downgrade

China may be growing at 8% but that hasn't stopped Fitch from downgrading it from AA- to A+, FT reports.:
Fitch downgraded China’s long-term local currency rating from AA- to A+, citing a number of “underlying structural weaknesses” in the Chinese economy including low average incomes, lagging standards of governance, and a rapid expansion of credit. 

The agency also warned of the growing risks from the rise of shadow banking, and said that total credit in China may have reached 198 per cent of gross domestic product by the end of last year, up from 125 per cent in 2008. 

“Ultimately we think China’s debt problem is going to require sovereign resources to resolve and debt will migrate onto China’s sovereign balance sheet. We don’t yet know what form this will take – central bailouts of local governments or of banks, perhaps”, said Andrew Colquhoun, head of Asia sovereign ratings at Fitch.  

The downgrade does not come entirely a surprise. There has long been a perception that China's public debt is understated, partly because debt raised by provincial and other agencies are not included, but mainly because China uses state-owned banks to lend in a big way to state-owned enterprises and public projects. In effect, this buries public debt in banks' balance sheets. When balance sheets are growing rapidly, the NPA/ asset  ratio stays low, again disguising the underlying problem.

The rapid expansion in credit as a percentage of GDP, however, is unlikely to leave Chinese banks unsinged. As Fitch points out correctly, this will ultimately require sovereign bail-outs and an increase in public debt.

China's high leverage coincides with signs that the chances of growth slowing down sharply are rising. Martin Wolf quotes a Chinese agency as forecasting a slowing down of growth to 6.5% between 2018 and 2022, compared to growth of 10% from 2000 to 2010.This again points to a rise in NPAs in banks. The big question is whether the transition to slower growth will be smooth or disorderly.

Tuesday, April 09, 2013

British banks under fire

Two British banks have come under renewed fire this week. A UK parliamentary had a scathing report on HBOS and an independent report on Barclays Bank targeted the flawed culture at the bank.

HBOS, which went to ruin in the financial crisis, was a case of colossal mismanagement: bad lending, excessive dependence on short-term funds, poor controls. Just to give one statistic, the bank's loan to deposit ratio at one point was 198%- here in India, we get nervous even if the figure approaches 100%.

All this was made possible by poor regulatory oversight. It is hard to believe that a bank can be so badly managed right under the nose of regulators. To add insult to injury, its CEO sat for two years on the board of the Financial Services Authority.

The whole problem is that bankers can get away with their behaviour without any cost to themselves. One interesting recommendation is that, in future, bankers should face sanctions for the costs they impose on their firms and on society:

Margaret Thatcher and Chandraswami

The Hindu carries a fascinating piece by K Natwar Singh on an encounter between the late Margaret Thatcher, former British PM, and godman Chandra Swami.

Apparently, the Godman predicted that Thatcher would go on to become PM and that she might remain PM for 9, 11 or 13 years. The circumstances in which this forecast was made are interesting. At the first meeting that Singh set up between the two of them in London, the godman floored Thatcher with his extra-sensory powers:

He gave Mrs. Thatcher five strips of paper and requested her to write a question on each. She obliged, but with scarcely camouflaged irritation. Chandraswamy asked her to open the first paper ball. She did. He gave the text of the question in Hindi. I translated. Correct. I watched Mrs Thatcher. The irritation gave way to curiosity. Next question. Again bull’s eye. Curiosity replaced by interest. By the fourth question the future iron lady’s demeanour changed. She began to look at Chandraswamy not as a fraud, but as a holy man indeed. My body language too altered. Last question. No problem. I heaved a sigh of relief. Mrs Thatcher was now perched on the edge of the sofa. Like Oliver Twist, she asked for more. Chandraswamy was like a triumphant Guru. He took off his chappals and sat on the sofa in the lotus pose. I was appalled. Mrs Thatcher seemed to approve.

Mrs Thatcher then requested a second meeting with Swami at which he made his prophesies about her becoming PM.