Wednesday, December 10, 2014

Satyam case judgement and independent directors

I had a post yesterday on the judgement in the Satyam case in a trial court in Hyderabad. I said it was not clear from media reports what the independent directors were fined for and why Krishna Palepu of HBS was fined Rs 2.66 crore while the other independent directors were fined Rs 20,000 each.

I am still waiting to get my hands on the court judgement. In the meantime, we have a report in BS that sheds some light on the matter:
The court on Monday imposed a fine of Rs 2.6 crore on Palepu for conflict of interest in providing professional services to the company and  remaining on the board of Satyam as an independent director and for failing to get the government's nod for providing professional services. Palepu has to pay the fine within two months.....Palepu was fined by the court as he had received Rs 87 lakh from Satyam towards consultancy fees, while each individual director was paid around Rs 13 lakh for the year 2007, according to Satyam’s annual report.

If the report is correct and the reason for Palepu's attracting a heavier fine is that he helped himself to a consulting fee as independent director, I must say the judgement is very interesting indeed. What the court is saying is that when you get paid by a company for something other than your work as independent director on the board, it creates a conflict of interest. It compromises your independence. And if that is what the court is implying, it has hit the nail on the head.

An independent director is defined as somebody who has not had a pecuniary relationship with the company for a certain number of years before he gets on to the board. Given this definition, it beats me how you can have a pecuniary relationship with the company after you get on to the board. You can collect your fee and commission but not anything else. And yet here we have Palepu, who is said to be a expert on corporate governance, providing consultancy services to Satyam and making a tidy pile. In my view, it was incumbent on other independent directors to have objected to this arrangement if they were aware of it. And the markets regulator, SEBI, should have been alert to such goings-on in companies (as I mention further on, I did raise an alarm at SEBI).

This is a matter that has troubled me for years. How can a so-called independent director earn consulting fee from a company whose board he is sitting on? I happened to be a member of the Primary Markets Advisory Committee of SEBI a few years ago. Deepak Parekh was the Chairman. When we were discussing the issue of corporate governance, I brought up this matter. I argued that we could not allow independent directors to compromise themselves in this way. I asked that SEBI write to listed companies and ask for details of consultancy fee paid to independent directors. Such companies and their directors, I said, needed to be named and shamed.

To my astonishment, my point was brushed aside. It was not even considered fit for further discussion. I heard people say that the sums involved were small, so what was the fuss about? Well, if the sums involved are small, then the independent directors should not been charging them in the first place!

I guess the Satyam judgement- again, going by the BS report- is another instance of the court having to step in where there is an executive or regulatory failure. I hope SEBI wakes up now and does what I asked them to do- collect details of consultancy fee paid to independent directors. After that, it should do two things. One, pass strictures against or issue warnings to the companies and directors concerned. Two, amend clause 49 to make it abundantly clear that independent directors are not supposed to milking the companies whose boards they sit on for personal gain.

Tuesday, December 09, 2014

Satyam case judgement

The judgement in the Satyam case has been poorly reported in the media. Two things are noteworthy.

First, the judgement in a trial court in Hyderabad relates to six relatively minor offences for which charges had been brought by the Serious Fraud Investigation Office. The  main trial is going on in a CBI court and the judgement in that trial is expected towards the end of the month. The fact that B Ramalinga Raju got six months in jail in the trial court should not give the impression yet that he's getting off lightly in the case.

Secondly, the independent directors haven't been let off . HBS prof Krishna Palepu has been fined Rs 2.66 crore. The other independent directors have all been fined Rs 20,000. Unfortunately, the papers don't tell us what the fine is for and why Palepu has attracted such a big fine.

The BS report suggests that Palepu was paid professional charges without obtaining the opinion from the central government. Does this pertain to the consulting fee that was paid to him? It's not clear.

But the message for independent directors is an ominous one. It has often been contended that the independent directors on the Satyam board could not have possibly known about the accounting fraud. Nevertheless, the court has imposed a fine. 

Friday, December 05, 2014

Shareholder activism in India- a new dawn?

Finally, finally, is something changing in the realm of corporate governance in India? I'm seeming a glimmer of hope.

Three things seem to have made a difference. One, allowing shareholders to vote electronically. This has empowered shareholders who could not be troubled to attend the AGM especially if it happened to be in another city.

Secondly, the recent amendments to clause 49 requiring that related party transactions be approved by 75% of minority shareholders.

Thirdly, domestic institutional investors beginning to flex their muscles.

Shareholder activism has produced some interesting results in recent months:
  • The rejection of the compensation hike proposed for top management of Tata Motors despite the company making a loss
  • United Spirits management proposal to sell and distribute spirits of its parent Diageo was rejected 
  • Maruti Suzuki is having to bring to vote its proposal to set up a manufacturing plant in Gujarat under the auspices of its parent 
Note that RPTs also need to be screened and approved by the Audit Committee. That may not make a big difference given that independent directors are chosen by the promoters. Indeed, not much can be expected of the board in India, given that independent directors are beholden for their appointment to management or the promoter. It is inconceivable that the board can ask for the removal of the chairman or the CEO as these posts are filled by the promoter or they are appointees of the promoter.

But shareholder activism, abetted by the three advisory services that have come into being, could make up for lapses of the board. This seems to run counter to the trend in the US and elsewhere. In those places, shareholders have been stymied by various regulatory hurdles. It is boards that have begun to be more active compared to the best.

We must be careful, however, not to overdo the celebration. Shareholder activism in India can prevent expropriation of minority shareholders.  However, it is not still not in a position to discipline non-performing management.

See this story in the FT.

Friday, November 28, 2014

Wanna boost the economy? Go for infrastructure spend

The IMF is now telling us that public spending on infrastructure can provide a great stimulus to the economy- and in the developed world as much as the developing world.

 Larry Summers comments on the IMF findings:
Consider a hypothetical investment in a new highway financed entirely with debt. Assume – counterfactually and conservatively – that the process of building the highway provides no stimulative benefit. Further assume that the investment earns only a 6 per cent real return, also a very conservative assumption given widely accepted estimates of the benefits of public investment. Then, annual tax collections adjusted for inflation would increase by 1.5 per cent of the amount invested, since the government claims about 25 cents out of every additional dollar of income. Real interest costs, that is interest costs less inflation, are below 1 per cent in the US and much of the industrialised world over horizons of up to 30 years. So infrastructure investment actually makes it possible to reduce burdens on future generations.

In fact, this calculation understates the positive budgetary impact of well-designed infrastructure investment, as the IMF recognised. It neglects the tax revenue that comes from the stimulative benefit of putting people to work constructing infrastructure, as well as the possible long-run benefits that come from combating recession. It neglects the reality that deferring infrastructure renewal places a burden on future generations just as surely as does government borrowing.

It ignores the fact that by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt. Critically, it takes no account of the fact that in many cases government can catalyse a dollar of infrastructure investment at a cost of much less than a dollar by providing a tranche of equity financing, a tax subsidy or a loan guarantee.
Spending on infrastructure thus involves an increase in government spending and an increase in the ratio of public debt to gdp at the beginning of the period but translates into a reduced debt to gdp ratio at the end of the period.

When this is so obvious, it has never been clear to me why in India the government has been leery of a sharp increase in infrastructure spending- and I am not referring to the recent period where concerns about inflation have come to dominate the debate.

Thursday, November 27, 2014

How should companies and their bosses deal with social media?

Microsoft boss Satya Nadella learnt recentlythat just one faux pas can cause serious damage. His comment on women counting on karma to take care of their pay raise raised an enormous storm on the social media that only just settled after he apologised.

Of course, it's important for companies and their bosses to be careful. But slip-ups on the part of bosses is just one hazard that companies face in the social media. They have to face damaging disclosures, strong criticism and lethal photographs. Schumpeter points out that while anti-corporate types have made the most of social media, companies have been slow to adapt. He cites two reasons from a recent book on the subject:
The first is the nature of the internet. It is a beast that feeds on scandal and particularly delights in the flesh of the powerful and privileged. The media world used to be policed by editors who demanded proof in the form of two sources. Now amateurs can post anything they want online (though they may eventually face prosecution) and editors are subject to the tyranny of the click: the more the stories they publish are clicked on by readers, the longer they are likely to survive in their jobs.

......The second is the nature of companies. They are designed to stay in business rather than to be good at defending their bosses from scandal. No matter what PR resources they throw at killing a story, NGOs and prosecutors will always have more stamina. In America no sensible firm will risk gambling on a jury trial when a negative verdict could bar them from doing business with the government.....No sensible company will go to the mat to protect an embattled boss when there are plenty of replacements waiting in the wings. 
The book has useful tips:
 He tells CEOs to restrict the view into their glass houses: to cover the cameras on their phones and computers with masking tape; avoid the “reply all” function on their e-mail; think twice before sending any strongly worded message. He dismisses the idea that corporate social responsibility (CSR) bestows on firms the PR equivalent of a stock of political capital: digital vigilantes will always assume businesses are guilty and can add the charge of hypocrisy to CSR-obsessed ones, as they did to BP after its spill. He warns against one-size-fits-all approaches to crises: the common prescription to come clean quickly and fully sometimes stokes the fire, he notes.
Both the author and Schumpeter are, in my view, mistaken in seeing the social media entirely as some ugly ogre against whom companies must erect defences. Leaving aside scandals, keeping taps on the social media can help companies in several ways. They can identify typical customer complaints, they can get an idea of how they are viewed by ordinary people, they can see how they stack up against competition, they can identify unmet customer needs and they can get useful ideas for re-designing products or coming up with new ones.They can also the social media to convey the company's viewpoint on particular issues or to respond to negative perceptions.

Service-oriented businesses such as banks have been quick to latch on to the potential of scouring the media. Other businesses can learn too. It would be a good idea to pick somebody who understands the company's key businesses well and appoint him or her Head of Social Media. Getting such a person to interact with top management, the PR dept and the marketing heads could turn to be a good investment for companies.

Monday, November 10, 2014

B-schools: the dethroning of the financial sector

Financial firms, such as banks and investment banks, are out; consulting dominates and high-tech firms are in. This trend, which started post the financial crisis of 2007, now stands confirmed, going by two reports, one in the Economist and another in the FT. 
Mr Lewis charted the ascent into investment banking of the most talented graduates in the 1980s, a situation that still held true as the financial crisis struck in 2007. Then, 44% of Harvard’s MBAs landed a job in finance; 12% became investment bankers. Yet in the class of 2013 only 27% chose finance and a meagre 5% became members of Mr Lewis’s master race.
The trend is the same at other elite business schools. In 2007, 46% of London Business School’s MBA graduates got a job in financial services; in 2013 just 28% did, with investment banking taking a lower share even of that diminished figure. At the University of Chicago’s Booth School of Business, the percentage of students going for jobs in investment banking has fallen from 30% in 2007 to 16% this year.
What are the reasons for these trends? One, of course, is that pay in banking is no longer as attractive as before. Earlier, you put in long hours in the hope that you could quickly cash out and enjoy life. Now, this seems less possible. But there are other reasons.

Investment banks expect long-term loyalty. Consultants are happy to see people leave after five years or so- and give them business from the other side of the table. Moreover, consulting opens up a variety of opportunities whereas in banking, you are stuck in one sector.

Thirdly, there is an odour of disrepute about banks now. What young graduates hear about these places and the adverse publicity they attract because of their tangles with regulators does little for their reputation.

Fourthly, consulting firms and tech firms are seen as good training grounds for those wanting to become entrepreneurs. The tech firms' casual culture is appealing. And they too promise big bucks:
Tech firms and consultants both appeal to the growing number of students who want to gain the right experience to start their own business. A survey by the Graduate Management Admission Council, an association of business schools, found that although only 4% of MBAs have entrepreneurial experience when they enter their course, 26% say they want to start companies after they graduate.
How are banks responding? In several ways. By targeting undergrads instead of grads, by using social media and competition games to attract candidates, encouraging a better work-life balance, etc. Some are even heroically attempting an image make over:
Some are running campaigns urging graduates not to believe media stories portraying them as greedy or evil. Others are trying to lure recruits by persuading them they will help make the world a better place. Goldman Sachs’s job portal advertises opportunities to work on community projects alongside positions for analysts: “That’s why you come and work at Goldman Sachs, because you can make a difference in the world,” trills its recruitment video.
A few banks are trying to change their culture, taking a tougher line on sexual harassment of female staff and advocating a healthier work-life balance, perhaps even allowing the odd work-free Saturday. For the business schools’ brightest and best, though, all this may not be enough.

Friday, November 07, 2014

A contrarian view on Sachin Tendular

An Australian commentator launches a scathing attack on Sachin Tendular following the publication of his memoirs recently. (I must thank for the pointer). He writes:
With a sweet, handsome face and smile that would melt a concrete slab, he always looked more lamb than lion as a man despite his great batting feats.

Align that to his boyish, high-pitched voice that always sounded so inoffensive and the fact that he barely expressed a strong opinion about any cricket matter in his 25-year career you might have Sachin neatly categorised as the choir boy who wandered on to a cricket field and decided to stay.

But when his autobiography was released worldwide on Thursday the choir boy ripped open his robes and pulled a loaded gun from a holster.
I am not in any way endorsing the commentator's views- my interest in cricket is pretty mild these days. Just highlighting a different viewpoint. 

Wednesday, November 05, 2014

MNREGA must be reformed, not scrapped.

The government wants to limit MNREGA to the 200 most backward districts; Bhagwati and Panagariya suggest that, perhaps, such schemes are best scrapped. The more sensible view, which Mihir Shah puts forward, is that MNREGA needs to be reformed and made more effective.

Bhagwati and Panagariya bring up the familiar argument about leakages and corruption in government schemes. They suggest that Rs 50 reaches the worker in wages out of an estimated Rs 250 of expenditure incurred by the government. Are we not better off, they say, in simply giving Rs 50 to the poor by way of cash transfers?

There are several flaws in this argument. Let me mention two. The first is their contention that, in opting for work under MNREGA, the worker forgoes alternative income. The economists assume this income forgone is Rs 80. They assume MNREGA wages to be Rs 130 (not always the case). Hence, a net transfer of Rs 50. Now, this is simply not true. The data suggests that most MNREGA employment is of the off-season variety, that is, people queue up for MNREGA work only when they do not have other avenues of work and income.

The other flaw in the argument is that the amount spent (which the authors estimate at Rs 250 after factoring in leakages of 25%) is current expenditure because no assets are created anywhere. This, again, is not true. The experience varies across states. In some places, empirical research shows assets of good quality have been created.

The answer, therefore, is not scrapping MNREGA and replacing it with cash transfer. It is making it more efficient- that is, reducing leakages and ensuring that asset creation happens everywhere and not just in select areas. How do we do this? One starting point surely is studying the success stories and the factors that make for success. Mihir Shah writes:
The best way to do so is to study where the programme has been able to deliver. I have in mind the thousands of villages where water harvesting structures have been created, agriculture has improved, nearly 100 days of work has been provided, distress migration has reduced and women have been empowered. MGNREGA is one programme where all this has been rigorously documented by scholars from all over the world. This research also throws up insights on the features that characterise locations where success has become possible: one, availability of strong technical support to the main implementing agency, the gram panchayat; two, capacities to undertake decentralised planning exercises and creation of a robust shelf of works; three, awareness among MGNREGA work-seekers of their entitlements and procedures under the programme; four, active and vibrant gram sabhas, which debate and decide the works to be undertaken and all procedures related to the programme; five, open and effective social audits that check corruption; six, accountable gram panchayats, where the leadership responds to the legitimate demands and grievances of the people; and seven, a system that ensures timely payment of wages.
Shah supports the NDA government's plan to focus on 2500 most backward sub-districts but warns that this should not be mean denying work to those seeking employment elsewhere. That, he points out, undermines the basic principle of MNREGA which is to guarantee work to all.

And, of course, we need flexibility - in respect of what schemes to finance and also the ratio of 60:40 for wages to materials. Perhaps, the ratio need not apply to every single scheme but may be applied at a district or block level. Perhaps in some areas, a different ratio needs to be worked, depending on whether more materials are needed or more labour is needed.

Replacing MNREGA with cash transfers is quite the wrong way to go. First, there remains the problem of identifying the needy (whereas MNREGA's great strength is self-selection by those in need). Then, we need to wait for bank accounts to spread and be seeded with Aadhar, a process that will take time and that must be tested before we start using it.

Moreover, cash transfers will perpetuate precisely what the Modi government is against, namely, a dole culture. Even the poor like gainful work, the respect that goes with it and the satisfaction of having created something worthwhile. Bhagwati and Pangariya forget that MNREGA was passed by parliament and has the support of all political parties. If they thought that Modi was pro-market and would be impressed by their proposal, they may well be proved to have been sorely mistaken.

Sunday, November 02, 2014

Are limits on free ATM transactions justified?

Banks will be free from today onwards to charge Rs 20 per ATM transaction once the number of transactions exceeds five per month. They will also be allowed to charge for more than three non-home transactions (that is, transactions through ATMs other than those of the bank of which one is a customer). See this news report.

Mind you, the norms don't make it mandatory for banks to charge for excess ATM use. They are free not to charge for over five transactions and they can set a higher free limit as well.

The rationale for levying charges on home and non-home transactions is that there is a cost involved for banks. If banks do not recover the cost of ATM transactions, they will recover it elsewhere. When charges are related to ATM use, then the more frequent users and people with more use for cash are penalised. When a general fee is imposed on all customers, the less frequent users of ATMs end up subsidising more frequent (and, possibly, richer) users.

The argument sounds plausible but it is somewhat flawed. First, ATMs are a means to move customers away from branches into a less expensive channel. The cost per transaction in a branch is much higher than in an ATM. So, banks save on costs by getting customers to use ATMs. This saving is large enough to cover frequent use of ATMs. Hence, the question of recovering the cost of ATM use should not arise. Indeed, banks may find that charging for ATM use is not in their interest as it may drive customers bank into branches.

Secondly, it is important to ascertain which are banks are complaining about the cost of ATM use. Are public sector banks complaining or are the complaints coming mostly from private sector banks? If the latter, the chances are that charging for ATM use is simply another way to augment revenues through fee charges which is a favourite ploy of private sector banks. (Indiscriminate and often hidden charges for various services are one reason for higher fee income at private banks and hence for higher profitability. By their very orientation, public sector banks do not follow this practice- and we criticise them for not matching private sector performance!). If it is the case that it is mostly private banks that want to levy charges for ATM transactions, then it is best that the RBI withdraws its guideline. Private banks make sufficient profit without having to levy an extra charge for ATM use.

Thirdly, charging for ATM use may come in the way of financial inclusion unless ATM use is made completely free for financial inclusion customers. If inclusion is to be pursued using technology and by avoiding costly branches, then it is important that transactions through channels other than branches not invite penal charges.

Friday, October 24, 2014

Is China's political system an obstacle to its rise?

There is one refrain that is comment to forecasts on China: the Chinese political system is incompatible with growing standards of living. There is a corollary to this: as soon as China's growth rate slows perceptibly, the strains on the political system will begin to show. Turbulence will set in. Some even forecast that the Chinese system will implode.

One thing that strikes me is that this hasn't happened in the last two decades of China's rise. Okay, you could say, that's because the Chinese people were bought off with goodies. However, that's only part of the story. What's missed, as an article in FT points out, is that the Chinese state has shown itself highly competent, able to adapt and responsive to popular aspirations. In short, it does everything that a democratic government is expected to do- except that many democracies, including the US, are showing themselves to be increasingly dysfunctional.The author writes:
There is a tendency to see Chinese government as unchanging. This is because in the west the only reforms that we really count are those that appear to move the country towards the western model. In fact, government has been through huge and constant reform since 1978, far greater than anything that has taken place in the US or the UK. It is inconceivable that the Chinese state could have masterminded such a huge economic transformation if it too had not been the subject of profound reform. This process will continue, probably even more dramatically.
The Chinese communist party is seen as monolithic and intolerant. In fact, it contains within itself diversity of views and there is no reason to suppose that tolerance of dissent is a great deal less than in western democracies (where views outside a certain mainstream can be filtered out quickly or even actively suppressed). Voters in the US may have a theoretical choice between two parties but, on a wide range of issues, you have to think very hard to tell the difference between George Bush and Barrack Obama. This applies to the UK and many other democracies as well. The choices open to voters are within a rather narrow bandwidth.

The odds are that, instead of China going into decline because of its one-party system, it is the west that may suffer decline the years to come:
The west is in decline, Europe rampantly so. Some estimates suggest that by 2030 China could account for a third of global output and be twice the size of the US economy. American power would then be a pale shadow of what it is today. This is bound to affect how the American people regard their political elite and political system. Furthermore, with strong evidence that living standards have been static for many people in the US and western Europe, the outlook is uncertain.
Gloomy views of China go hand in hand with western attempts to undermine the Chinese system in many ways, as an article in Atimes points out. These attempts take various forms: support for separatist groups, talk of the high level of corruption in China, criticism of crackdown on dissidents and a constant glorification of western cultural and political values:
The hierarchy of China experts is this: At the top we find the philosophers and statesmen who set the stage and agenda for the universal ideology - exclusively serving Western interests. They always reside in the West, know little or nothing about China, and discuss China solely on Western terms......Next we have the journalists and editors, most of them white or accessory white, in key positions at the New York Times, Wall Street Journal, Economist, and so on. Thanks to the Western planetary media monopoly, they have become the new global fascist elite.....They also prominently decide who - Chinese or foreigner- gets praised and who gets defamed, and - most importantly- what gets omitted in their China reports. Their own corrupt ways get omitted. Ask yourself, when was the last time you read a piece by a prominent Chinese (other than a dissident) in your nation's newspaper? You haven't. It is a tight Orwellian grip. 
It's not just China that is at the receiving end of western propaganda. Today, even greater venom is directed at Russia. 

Friday, October 17, 2014

RBI autonomy

What exactly is RBI autonomy in monetary policy? Does it set the policy objective (say, primary focus on inflation), the inflation target as well as the means to achieve the target? Are all these the province of the RBI? Or does the government have a say in these matters?

I would think that the government has the right to decide the primary objective and also the inflation target. When it comes to the means of achieving the objective, the decision is primarily that of the RBI but the government should be involved in decision-making.

That is how RBI governors have viewed matters all these years. They have ensured that the government is duly consulted on monetary policy matters and then taken the final call on interest rates. Over the past year, however, the RBI has sought to change the situation somewhat. The Urjit Patel committee recommended that inflation targeting would be the primary objective and it also set the inflation targets to be met. The interest rate policy to meet the targets has also been decided by the RBI. It does seem that there is over-reach on the part of RBI.

Now, moves are afoot in  government to get the balance right between itself and the RBI. The government wants to set the inflation target. Monetary policy will be decided by a committee dominated by outsiders. This amounts to a dilution of the RBI's autonomy as it takes away the RBI governor's right to be the final authority on interest rates. I guess the government's moves were inevitable given the attempt on the part of the RBI to be the sole decision-maker in monetary policy matters.

More in my article in the Hindu, The limits to autonomy.

Thursday, October 16, 2014

Travails of entrepreneurship

The business media tends to romanticise entrepreneurship by focusing on the success stories, says Schumpeter in the Economist. I would add that it also tends to portray entrepreneurs as people who know how to balance work, leisure and family, have great EQ and, of course, they glorify the millions that entrepreneurs make.

The reality is that entrepreneurship is enormously challenging mentally and physically. Schumpeter writes:

Business professors celebrate the geniuses who break the rules and change the world. Politicians praise them as wealth creators. Glossy magazines drool over Richard Branson’s villa on Lake Como. But the reality can be as romantic as chewing glass: first-time founders have the job security of zero-hour contract workers, the money worries of chronic gamblers and the social life of hermits.

Failure rates are frighteningly high:
Over half of American startups are gone within five years. Most of the survivors barely stumble along. Shikhar Ghosh of Harvard Business School (HBS) found that three-quarters of startups backed by venture capital—the crème de la crème—failed to return the capital invested in them, let alone generate a positive return. In 2000 Barton Hamilton of Washington University in St Louis compared the income distributions of American employees and entrepreneurs, and concluded that the latter earned 35% less over a ten-year period than those in paid jobs.
As for their being balanced personalities, forget it:
John Gartner, who teaches psychiatry at Johns Hopkins University medical school, suggests that a disproportionate number of entrepreneurs may suffer from hypomania, a psychological state characterised by energy and self-confidence but also restlessness and risk-taking. Numerous studies confirm, at the least, that they are prone to over-optimism.
Schumpeter quotes one ex-entrepreneur as urging would be entrepreneurs to have more healthy lifestyles. Somebody else urges them to get support networks and mentors.

I doubt that these can help. Entrepreneurship is a passion. Like great works or art, music or even writing, they are born of enormous sacrifice. Sometimes there are rewards at the end of the tunnel, very often there are none. Entrepreneurship is a form of madness. Entrepreneurs will pursue their dreams regardless. To ask them to do so in a balanced way or with help or guidance is rob them of the special quality that makes for success in some cases.

You cannot ask an entrepreneur to be balanced any more than you can ask a genius or a prodigy to be normal.

Wednesday, October 08, 2014

Is optimism about India's growth prospects justified?

Analysts see an acceleration in growth to 5.5%. 6.5% and 7% starting this year and then in the next two years. Is this feasible? I think yes. But the RBI needs to help out by cutting the interest rate.

My analysis appears in today's Asian Age, Growing Pains.

Tuesday, October 07, 2014

When management gurus dissect politics....

How can we tell whether a political leader such as Narendra Modi will succeed? Three management experts, including Ram Charan, attempt an answer in a business journal. I can't say I was bowled over by their analysis.

The authors say we should look for five signals, on all of which Modi scores. Let me take up two in detail

i. How deep is the politician's insight into public interest? Modi's interest is very deep, the authors say, because of his own background of poverty. Well, Manmohan Singh too came from a poor family in a very backward village. He could, perhaps, claim that he understood the poor as well as the elite and was thus well placed to negotiate his way through the elite on behalf of the poor.In India (unlike in the US), we have hordes of politicians who have come up from the grassroots. Lalu Yadav and Mayawati, for instance. But they have not proved to be transformative leaders in the sense of bringing about an improvement in the lives of the class of people they once belonged to.

ii. Can the leader get things done? Modi has a record as a doer in Gujarat, the authors point out. But Gujarat was one of the best performing states even before Modi became Chief Minister (although, to his credit, Modi was able to maintain that record). India's growth rate has improved since the nineties and through the noughties under a succession of governments and leaders. Not all were headed by doers. However, starting with Narasimha Rao, we managed to put in place policies that paid off. So, yes, it helps to be good at execution but the role of policy must not be understated.

The authors mention other factors that favour Modi: his business mind-set, his ability to engage senior government officials, the broad support he enjoys. It's hard to disagree on these. But none of these by themselves or even put together ensure results.  Both Indira Gandhi and Rajiv Gandhi had broad support but both saw how quickly this could dissipate. A "businesss mind-set" can be a negative if it means being pro-business at the expense of welfarist considerations.

Modi's strengths are his ability to connect with the masses, formidable administrative experience, a a capacity to think out of the box. deep study and reflection, boundless energy and a genuine passion to make a difference at the national level. This combination bodes well for any leader. We don't need management experts to tell us that.

Indian inflation: don't blame it on support prices for foodgrains

Minimum support prices (MSP) for foodgrains have been rising over the years (although the new government has kept increases under control). This is said to be a driver of inflation in recent years.

Amartya Lahiri, writing in IE, thinks the explanation facile. Why? Because MSP increases themselves result from a rise in past inflation! 
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation.
Using the CPI (industrial workers) and a weighted MSP index for the period of 1976-2014, I did precisely that exercise. The bottom-line of the results is that, using the part of the MSP due to past inflation to predict inflation does almost as good a job
as using the overall MSP. Moreover, when both components of MSP changes are used to predict inflation, the effect of inflation-induced MSP is three times as high as that of non-inflation MSP. The main implication of this is that the biggest predictor of inflation is past inflation. It is clear that past MSP changes due to inflation account for a much larger part of overall CPI inflation than does non-inflation MSP.
- See more at:

Using the CPI (industrial workers) and a weighted MSP index for the period of 1976-2014, I did precisely that exercise. The bottom-line of the results is that, using the part of the MSP due to past inflation to predict inflation does almost as good a job as using the overall MSP. Moreover, when both components of MSP changes are used to predict inflation, the effect of inflation-induced MSP is three times as high as that of non-inflation MSP. The main implication of this is that the biggest predictor of inflation is past inflation. It is clear that past MSP changes due to inflation account for a much larger part of overall CPI inflation than does non-inflation MSP.

In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at:
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at:
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at:
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at:
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at:

Wednesday, September 24, 2014

The brains in a company are at the bottom of the pyramid

The higher you go up the corporate ladder, the duller you become. And yet decision-making is concentrated at the top. FT columnist Lucy Kellaway quotes a graduate trainee on the subject:
The main thing that had struck him so far was that people seemed to get dimmer the higher they went in the organisation. His fellow trainees were almost all brilliant, he said, and people at the next level up were also pretty smart. But those 10 years older were pedestrian by comparison, while some of the partners seemed borderline moronic.

I asked if he had any explanation for this. He looked at me as if I were a moron too and said the reason was self-selection. Really smart people don’t stay at the institutions they have fought so hard to get into. The best leave within two or three years; the slightly less good stay a bit longer, and only the also-rans and the terminally unimaginative are in for the long haul. 
Kellaway rightly points out that success in a company has little to do with brilliance. A company values other things in people:
Rather than reward brilliance it prefers skills that graduates can’t see: good judgment, a nice way with clients, and an instinct for when to bite your lip. Even if today’s partners weren’t boring to start off with, they quickly learn to seem that way. 
So, there are strengths that people at the top bring to the table. The challenge is how to marry the analytical brilliance at the bottom with the sound judgement and rounded view that obtains at the top of a company. One thing that Kellaway highlights is that the two levels need to talk to each - and understand what the other is saying. The other thing, which I believe is important, is that decision-making must be truly participative. Don't leave decision making only to sound judgement; bring in the creative, disruptive types at the bottom as well. 

US takes aim at ISIS- or is the target Assad?

The US, supported by Australia and soon to be joined by the UK, has put together a coalition of an estimate 40 nations to take on ISIS. Initially, the US will launch air strikes and provide advisors on the ground. However, it could only be a matter of time before the US puts boots on the ground.

The coalition is truly bizarre. It includes nations such as Turkey, Saudi Arabia and the GCC who, amongst others, are the very nations that created and propped up ISIS in many ways. The Saudis and GCC provided financial support, if not directly then through private donors. Turkey has kept its borders open for jihadists to go through and for ISIS to sell oil. And yet they have now made a U-turn exactly as Pakistan did with respect to the Taliban post- 9/11.Equally bizarre is the exclusion of the two nations that have steadfastly opposed ISIS, Iran and Syria (although John Kerry, the US secretary of state, has said that Iran may be free to join).

To aid the US involvement in Iraq and Syria, we have seen the figures of ISIS fighters swelling by the week. The earlier 15,000 fighters now number over 30,000. US officials gravely inform the world that the IS is beyond anything they have seen before. What's going on?

The ISIS, intelligence sources have indicated, poses no immediate threat to the west. America's return to the Iraq theatre and, by extension, to the Syria theatre appears to be aimed at Syria's Assad rather than ISIS. In taking care of the ISIS threat, the US hopes to give a decisive push to the efforts to topple Assad and undermine Iran's position in the region, given that Iran has been a supporter of Syria. This despite several foreign policy veterans, including former UK former secretary and currently MP Malcolm Rifikind, saying that an alliance with Assad is vital to the defeat of ISIS.

Listen to Atimes columnist Pepe Escobar:
There is no "Free Syrian Army" - that Qatari myth - anymore. There are no "moderate" jihadis left in Syria. They are all fighting for The Caliph or for al-Zawahiri. And still the Obama administration extracted a Congressional OK to train and weaponize "moderate rebels".

US ambassador to the UN
Samantha Power - Undisputed Queen of Batshit Craziness - at least got one thing right. Their "training" will "service these troops in the same struggle that they've been in since the beginning of this conflict against the Assad regime." So yes - this "sustained campaign" is the back door to "Assad must go" remixed.

People who are really capable of defeating The Caliph's goons don't tomahawk. They are the Syrian Arab Army (roughly 35,000 dead so far killed in action against ISIS/ISIL/IS and/or al-Qaeda); Hezbollah; Iranian Revolutionary Guards advisers/operatives; and Kurdish militias. It won't happen. This season's blockbuster is the Empire of Chaos bombing The Caliph and the ghost in the GWOT (Global War on Terror) machine. 

Monday, September 22, 2014

Will McKinsey be around 50 years from now?

Lucy Kellaway, FT's management writer, suggests somewhat cheekly that the big daddy of strategic consulting may not be around 50 years from now. She comes to this conclusion after looking at a special issue of the McKinsey Quarterly meant to commemorate the journal's golden jubilee. The issue carries a piece of research that purports to look at broad trends that will shape the future:
The first is technology. Its growth will be exponential and there will be “turbocharging advances in connectivity”. Second, growth in emerging markets will continue and a lot more big cities will spring up in places we’ve hardly heard of. Finally, all over the world everyone is going to go on getting older.
If this is all that McKinsey can come up with, based on its research, Kellaway fears for its future:
Fifty years hence, McKinsey won’t exist. This is based on three trends similar to those the firm spotted. If economic activity moves to new cities in far-flung places, these are the very parts of the world where western strategy consultants tend not to flourish. The next trend is that as executives get smarter in dealing with this complex world, they will be more able to solve their own problems......

....Most important is the effect of technology. All the grunt stuff consultants do analysing markets can be done by anyone with an internet connection. The two things that people will always be better at than machines are motivating others and coming up with original ideas. Yet on neither score does the consultant look good. Strategy firms don’t do much in the way of motivation. And as for originality, if the best McKinsey can do after years of study is say that technology, globalisation and ageing will feature in the next 50 years – a robot could have come up with that in a jiffy.

Sunday, September 21, 2014

Hindi Chini Bye Bye?

The Chinese president came, saw but could not conquer. Much of the bonhomie that PM Modi exuded in Ahmedabad seemed to evaporate once the hard reality of the standoff on the borders began to sink in- and for the PM the timing must have been particularly galling.

Xi Jinping was, no doubt, hoping that he would get India to open up to Chinese investment in a big way, providing China with a useful means of diversifying away from Japan and East Asia, without having to address the border issue. It didn't quite work out. There is talk of $20 bn of Chinese investment happening but there is reason to be sceptical.

One should not be surprised at the outcome. Negotiations can yield a fair outcome only if it happens between equals or between a powerful entity and a less powerful one who is seen as a partner. Neither condition is fulfilled in India's case. China and India remain rivals on the Asia stage so far as India is concerned. China sees the rivalry as settled in its favour given that the Chinese economy is today five times India's and China is far more powerful militarily.

The only meaningful resolution that is possible on the border issue is that India accepts China's claims on the western border (Aksai Chin) while China concedes India's claims in the east (Arunachal Pradesh). This was the deal that Chou-en-Lai offered Nehru but it was rejected by the latter. Today, China is perhaps even warier about Tibet and hence about the status of Arunachal Pradesh which borders it. (Mao had famously said that the issue in the 1962 war was not so much the border as Tibet- he thought India was upto mischief under American instigation).

So, the "talks" on the border are bound to drag on until the gap between India and China is narrowed. This means India's growth rate must overtake China's and it must stay that way for, say, five years. India's economy is bound to accelerate and China's is bound to slow down. The cross-over point is probably three to four years away, which would place it at 2017/18. Five years from then would be 2022/23. It is in the decade 2020-30 that we can expect a resolution of the border issue- provided things don't blow up in our face before that. Going by most projections, this is the decade in which India finally begins to come into its own. The rivalry between India and China will intensify in the coming years no matter that the economic relationship deepens.

The military issue for India is how to counter a vastly more powerful neighbour which has the advantage of geography in the North (since China is positioned at a higher level in Tibet)? The Economist has an interesting article on how India's strategic thinkers see the Andaman islands as a useful counter:
Hawks in Delhi who are suspicious of Chinese long-term aims say bluntly that India and its friends will acquire some sway over China only once the Andamans are treated as a “chokepoint”, a place to disrupt Chinese trade in the event of any future confrontation. Four-fifths of Chinese oil imports go through the strait. Chinese naval strategists warn of Indian designs to drop an “iron curtain” there.

Accordingly, there has been a steady build-up of naval and other capabilities centred on the islands:
An air base that opened two years ago in Campbell Bay, Great Nicobar, has taken Indian military aircraft 300km closer than before to the Malacca Strait. Other airstrips are reportedly being built or lengthened to handle big aircraft, including the Hercules transport plane. Airfields for helicopters will follow. The navy wants to deploy drones to track passing ships. New coastguard stations serve a similar purpose. Regular naval exercises with neighbours are interspersed with big international training manoeuvres hosted in the Andamans and named “Millan”. The most recent involved 17 navies in a disaster-relief exercise meant to mark a decade after the 2004 Asian tsunami.
This makes sense because among the three arms of the defence forces, the navy is the one arm in respect of which India comes close to Chinese capability especially in respect of capability to operate in the Indian Ocean.India's build-up in the Indian Ocean will be welcomed by Japan and others in East Asia. Go round the Malacca Straits and you enter the South China Sea. A book review in the Economist highlights the extent of Chinese assertiveness in the South China Sea: China is laying claim to a stretch of rock and coral 1500 kms away from China's coast and just 107 kms from Malaysia's:
The Chinese nine-dash line is claimed also by Taiwan, as the descendant of the “Republic of China” whose mapmakers produced it. It sweeps through the “exclusive economic zones” asserted under UNCLOS by Brunei, Indonesia, Malaysia, the Philippines and Vietnam. The Philippines is challenging its legal validity. But even if it wins, UNCLOS cannot adjudicate on sovereignty over islands, rocks or shoals. And China will ignore it anyway.
America's famed 'pivot' towards Asia is dictated by this display of Chinese assertiveness and the need to counter it. Japan and East Asia are not quite equal to the task. The US may be stretched in undertaking this exercise alone. That's where India and Indian naval strength come in. The US has an interest in bolstering India so that it can be a more useful partner to itself. PM Modi must see this more clearly after the Chinese president's visit. The strategic partnership between India and the US, started by Vajpayee and continued by Manmohan Singh, will be carried forward by Modi although the last years of the Obama regime may not see the proper fructification of it. 

Thursday, September 18, 2014

National Airlines: Air India has plenty of company

Air India is not the only national airline being kept afloat by government money. There are plenty of others around the world, the Economist reports- and the ill-fated Malaysian Airlines is not the only one. Poland's national airline received $200 mn from the government. Italy's carrier, Alitalia, was bailed out by recently Etihad, the Gulf airline, taking a 49% stake. Indeed, national airlines that are doing well are exceptions:
The thriving airlines of Singapore and Ethiopia, and the Gulf carriers, Etihad, Emirates and Qatar Airways, all benefited from government money but have been allowed to operate as commercial enterprises with minimal interference. Such entrepreneurial thrust is rare. Elsewhere, inexperienced cronies often dominate management. State employees frequently travel free. Many carriers are obliged to maintain loss-making domestic routes to please politicians. Olympic Airlines was forced to deliver newspapers for a pittance to keep the country’s press barons happy. The Greek national carrier went to the wall in 2009.

The reasons for national airlines doing badly are common: overstaffing, poor management and strong unions. Air India, I would imagine, is in a slightly different category. Its financial problems are because of excess debt incurred by an aircraft-buying binge during the tenure of Praful Patel as civil aviation minister. The problem is not overstaffing or operational inefficiency. 

Saturday, September 13, 2014

Grade inflation in Ivy League colleges

Grades and grade point averages at Ivy League colleges mean less than they did before, the Economist reports :

In 1950, Mr Rojstaczer estimates, Harvard’s average grade was a C-plus. An article from 2013 in the Harvard Crimson, a student newspaper, revealed that the median grade had soared to A-minus: the most commonly awarded grade is an A........Universities pump up grades because many students like it. Administrators claim that tough grading leads to rivalry and stress for students. But if that is true, why have grades at all? Brilliant students complain that, thanks to grade inflation, little distinguishes them from their so-so classmates. Employers agree. When so many students get As, it is hard to figure out who is clever and who is not.
An earlier piece in the journal takes a rigorous look at whether grade inflation is 'inflation' at all:

.... “inflation” in grades ought to mean that work of a given standard would be awarded an ever higher grade, year by year. The highest permissible grade would therefore have to keep rising: A this year, A-star the next, A-double-star and so forth thereafter, in a ceaseless procession of non-improvement. Because in reality the top grade is fixed, the process is not so much grade inflation as grade compression. This is worse: a distortion in relative prices is more confusing than a uniform upward drift. Grade compression squeezes information out of the system. At the limit, when all Harvard's students get As all the time, the university's grades will yield no information whatsoever. 

Faculty settle for higher grades for students because it makes their job easier, it flatters students and students may return the flattery by giving faculty good grades in their feedback. But grade inflation does interfere the 'signalling' that university education is supposed to be provide employers. One answer could be that employers will find their own ways to distinguish amongst students by using group discussions, case analyses, interviews - and recommendation letters from professors. But the last, as the Economist points out, could mean more work for profs. Better that they devote more energy to having a suitable distribution of grades.