Monday, June 23, 2014

The mind of Ajit Doval

Much has been said about the exploits of Ajit Doval, the new National Security Advisor, as a spook. He's said to be the only Intelligence Bureau chief to have been awarded the Kirti  Chakra for bravery. One has read that he penetrated the Golden Temple posing as an ISI officer, managed to get into a dargah in Pakistan disguised as a Muslim, negotiated the surrender of Naga militants and also negotiated the release of the hostages on board the Indian Airlines plane in Kandahar.

No doubt about the man's prowess as a spook. The interesting question now is: what are his views on major issues of national security? An article in the Hindu provides a fascinating glimpse into the mind of Mr Doval. Here are some interesting snippets:

“I consider infiltration of Bangladeshis the biggest internal security problem. Bangladesh supports the demographic invasion of India.”

In his view, “the most effective way of dealing with terrorism would be to identify boys who have got the courage of conviction to match that of the fidayeens and who are capable of taking risks. Identify them and put them in action".

Mr. Doval does not trust the United States — as is typical in officers of his generation. He warns that the U.S. “will seek to outsource their counter-terrorism to Pakistan” as they withdraw from Afghanistan. He was scathing of the U.S.-India nuclear deal, bitterly warning in 2006 that “it will stunt India’s emergence as a genuine nuclear weapon state, cripple its strategic deterrence, and reduce it to a US satrapy.” 

I found Mr Doval's views on the Indo-US nuclear deal striking. On the face of it, Mr Doval appears to be have missed an important fact: the deal is not about nuclear energy or even nuclear weapons alone. It is about getting access to advanced US technologies that can help propel economic growth. Or does Mr Doval think that even the latter is not crucial to India?

Monday, June 16, 2014

Health care fraud in America

Guess what's the leakage in American health care paid for by the tax payer? $272 billion of  1.7% of GDP! That's nearly as large as the total subsidy budget in India. The Economist reports that a lot of ingenuity goes into perpetrating the fraud:

Patients claim benefits to which they are not entitled; suppliers charge Medicaid for non-existent services. One doctor was recently accused of fraudulently billing for 1,000 powered wheelchairs, for example. Fancier schemes involve syndicates of health workers and patients. Scammers scour nursing homes for old people willing, for a few hundred dollars, to let pharmacists supply their pills but bill Medicare for much costlier ones. Criminal gangs are switching from cocaine to prescription drugs—the rewards are as juicy, but with less risk of being shot or arrested. One clinic in New York allegedly wrote bogus prescriptions for more than 5m painkillers, which were then sold on the street for $30-90 each. Identity thieves have realised that medical records are more valuable than credit-card numbers. Steal a credit card and the victim quickly notices; photocopy a Medicare card and you can bill Uncle Sam for ages, undetected.

The Economist says that the way to tackle healthcare fraud is to simplify it and to cut out unnecessary treatment. It says the NHS in UK does a better job. Perhaps the journal has got it wrong. The problem could well be that healthcare is private sector dominated. It may be easier to control leakages if the state has a larger role in direct provision of healthcare.

What lessons might the US experience hold for our welfare programs? One obvious lesson is that we can't close down our welfare programs because of leakages- America is not shutting down healthcare because of the scale of the fraud. Another is that getting the private sector to provide a service and reimbursing the costs could prove most wasteful than the state providing the same services. Switching to private healthcare and trying to provide insurance for the same is quite the wrong way for us to go. It's difficult, it's challenging but we need to do more to make state institutions efficient.

Sunday, June 15, 2014

I return to IIMC

I was over at IIMC for a conference a couple of days ago. I was returning to the campus long years after I had graduated. It was, as you might expect, an emotional moment, if not exactly in the same league as General Douglas McArthur's triumphant return to the Philippines in World War II.

Kolkata has changed although not as much as you would have thought. The airport is thoroughly modern and pleasing. From the airport to Joka (where IIMC is located), there is now a road that bypasses the city initially and  joins at Park Street. The  ride for the first thirty minutes or so via Rajarhat is exhilarating. It's a two-lane road dotted with greenery on the divider and a pleasing mix of empty spaces and buildings on both sides. There are the exquisite buildings one would associate with the IT sector and even a Finance Centre along the route. Open spaces are making way for mutli-storied apartment complexes. Hmmm, you tell yourself, Kolkata has changed for the better.

Park Street pulls you up short. The buildings and eating joints, rickety and worn, might belong to the time I spent in the city as a student. Alipore, the locality of the old aristocracy, retains its majesty with plenty of greenery, imposing mansions and the National Library. Further down at Behala, you return to the past. There are more buildings and the odd attractive one but the locality as a whole remains as rundown as it used to be. Next come Behala Chowrasta, Shakar Bazar and Thakurpukur. Again, the years seem to have largely passed them by. I pass buses with see people hanging to the straps. I recall my days on these crowded buses (mostly, 12 C) but, in those days, one thought it fun.

Finally, the IIMC campus. Near the main entrance is an unsettling sight, an open sewer on either side of the pathway leading into the campus. I experience a thrill as I cross the arched entrance with the Institute's name inscribed on it. Once you enter the campus, the transformation is real and substantial. In my student days, you had  a set of four hostels separated from the main building by a lake, barracks that served as a library and a some staff quarters in the distance. Otherwise, the entire campus was open and wild.

Now, you are first greeted by an executive complex called Tata Hall. Then comes our set of hostels, now called Ramanujam Hostel. H1 and H2 are entirely for girls (in our time, it was just the top floor of H1). Further on, more hostels (including a Tagore Hall) and a cafeteria. You keep going past wild shrubbery and then you begin to see the real development. A whole set of spanking new hostels and another executive complex (where I stayed), all overlooking the lake. The executive building is still under construction and the mess is yet to come up.

I check in and head for Tata Hall for lunch. Then, I make my way to the main building via the narrow road that skirts the lake. The lake itself is ringed by trees now, which is a pleasing sight but you no longer have an unobstructed view of the lake. I cross an imposing white-coloured building, the new library building and am soon face to face with a multi-storied building. Our 'main building' is no longer that. Classes are held in the new building, which also has faculty rooms.

I search for our 'main building'. I have difficulty in getting my bearings. On the road from the hostel, you turned right, as I recall. I think I have located the 'main building' of our time- it's now called L1, L2, L3 (somebody please correct me if I got it wrong). There is also a Computer Science Center. Behind the office buildings are a complex for the PGP Executive programme and faculty and staff housing quarters. I feel  a surge of pride. Unlike much of the city I just passed through, IIMC shows visible and substantial change.

After the conference, I retrace my steps. Tata Hall is not up to scratch. It's run down, the dining room is dingy and depressing, there are signs of peeling plaster, the building is standard PWD stuff, not something one associates with a top business school. The food was mediocre (and I say this as somebody who is hardly a foodie).

One thing is striking. The employees look emaciated and are poorly dressed. They are helpful, almost eager to please. Suffering is writ large on their faces. That is the impression I carried away from my student days. I'm distressed that this too has not changed. How come? Are these contract employees who are under-paid? They should do a lot better on current government pay scales.

I head for my old hostel. It's exactly as it was. The low entrance, the hostel office to the left, the dining room right ahead, the common room to the right. There are a couple of changes. To the left as you enter is a table with a watchman sitting behind it. The common room has shrunk and has only the table-tennis and billiards tables. The sofas with papers and magazines- they don't seem to be around. At the mess itself, time has stood still. Two rows of tables, about 14 or so in all. The cafeteria outside, run in the old days by the reliable Keshavan, has changed but very slightly. More beverages than before. I ask for a bottle of rose milk. "Shaab, change ho ga?". I cough up most of the coins I have.

I wind my way through the corridors to H-4. I climb up the staircase (I recall I used to scamper up and down at least half a dozen times every day, now it's a measured tread). At the landing of H-4, I turn left and head towards the end. Ah,there's my room. It used to be 207, now it's labelled 309.

I lean against the railing and survey the floor. Right ahead to the right were Mohan Krishnan and Talwar. At the landing itself, Sanjiv Vaidya. At the opposite end was H K Patel. I let the memories surge for a while, take a few snaps and head for the staircase. Almost reflexively, I look straight ahead at the top floor of H1, where the girls had their rooms. Sure enough, a young thing in shorts steps out. She sees me and seems faintly startled. Clearly, an unfamiliar face.

I introduce myself to the watchman. He, in turn, introduces me to a fresh entrant, a boy from IIT Chennai. The PGP-I batch has just started coming in. Several vehicles drive up unloading their passengers. Even the boys seem to be accompanied by one or both parents. I guess that was a luxury in our time.

I park myself in the seating space around a tree outside the hostel and take in the buildings slowly. I recall the innumerable hours had we spent there. Stepping out with a cup of tea was almost mandatory after breakfast and at tea-time. After dinner, there was the post-prandial walk, followed by a session in those seating places. Boy, am I glad I went to IIMC, which gave you the time and the space for these indulgences. At IIMA, life in the first year is a grim struggle for survival. After the torture I went through at IIT Bombay, that's the thing I liked most about IIMC: it was a place for gentlemen. They didn't believe in silly things like compulsory attendance.

I allow the memories to float by and feel a sharp pang. There was a lightness to living then, which is the quality of youth itself. As time goes by, life begins to seem more and more of a burden with endless chores, rigid time-tables and nameless worries. I leave, heavy at heart.

Wednesday, June 11, 2014

State subsidies to banks

States guarantee bank deposits (upto a staggering $250,000) in the US. (In India, the amount guaranteed is piffling in comparison, Rs 100,000 or around $15,500). As a result, banks can borrow money at a lower interest rate than without the government backstop. This amounts to a state subsidy to banks. The value of the subsidy, according to an article in the Economist, is $100 bn in the UK and Japan, $300 bn in the Euro area and a total of $630 bn for the rich world. One obvious way to prune these would be to reduce the value of bank deposits guaranteed. Raising equity capital requirement for banks (and correspondingly reducing debt) would also serve to reduce the subsidy.

One other thought comes to mind. In reporting their profits, banks must reduce the value of the subsidy they get. Executive bonuses must be linked to profits, adjusted for subsidies. That would help rein in executive pay in banking, which is itself a source of systemic risk.

Tuesday, June 10, 2014

Private banks are at odds with the law and ethics

There is no let up in the fines being imposed on banks. Banks are now waiting to see whether the reported $10 bn fine on BNP for violating US trade sanctions will materialise. We have the Libor rigging scandal earlier, the fine on Standard Chartered for busting Iran sanctions, the fine on HSBC on money-laundering charges in its Mexican operation.... one wonders when it will all end.

The problem in banking is that the combination of incentives linked to return on equity and persistent high leverage almost makes it inevitable that bank executives will look out for the sharp opportunity and the risky gamble. A modest increase in leverage does not solve the problem. Nor, as an article in the FT argues, will refining executive incentives and slapping fines on banks. The problems are fundamental and they require radical solutions:
As long as incentives are at odds with ethical requirements, common decency will be a minority pursuit. Scandals are inevitable. And as the gap between bankers’ pay and that of executives outside the financial system grows ever wider, business leaders lose moral authority, and the case for enlightened capitalism is devalued. There are honest people in banking. But it has become a less comfortable place for those with a strong moral conscience. 
What are the answers? The article suggests two. One is two go after bankers and prosecute them instead of merely slapping fines on bankers (which means you penalise shareholders rather than executives). The other is to treat banking as a utility, which would mean stringent regulation on what products they can offer, what returns they can make, what they can their executives etc.

The point is that private banks, as they are run today, pose major risks to society. Neither today's level of regulation nor the level of corporate governance diminishes this fact. It is astonishing that the P J Nayak committee on bank governance does not recognise this and argues for a diminished government presence in public sector banks and an aping of the ways of private sector banks, with boards being the key to good governance. It hasn't worked in the west and it won't work here.

Monday, June 09, 2014

How bad is the global downturn- and what can be done?

There is talk of recovery and growth in the western world and in the global economy. In the US, there is celebration because there are more jobs today than at the high point of 2008. We need to hold the celebration, though. We need to compare where output and jobs are today with where we might have been, had the crisis not occurred. An article in the FT sums up some of the findings on this subject.

While several economies have now returned to their previous peak levels of output, very few have approached the previous long term trendlines which had been established for decades before that. For the developed economies as a whole, output remains about 12 per cent below these trendlines.

The trillion dollar question is: can the developed world return to the growth level indicated by the trendlines- and how soon? Now, output can depart from the trendline for two reasons: a permanent loss of capacity and an output gap (that is, output does not fully come up to the output capacity). The article cites a paper that shows that the overwhelming proportion of the departure from trendline is on account of loss of capacity- 7.2%. Only 2.6% of the departure is explained by the output gap.

Now, we can speculate about why the loss of capacity has turned out to be permanent. When you have a protracted recession, labour participation goes down because of a loss of skills, investment spending is crippled, innovation gets a severe setback. Whatever the reason, the fact that only a small portion of the loss of output is on account of an output gap means that fiscal or monetary stimulus can only do so much to restore the developed world to their growth path.

As the article points out, there could be a role for a broader range of fiscal instruments, such as tax cuts, incentives for investment and for work, infrastructure spending etc. But these instruments operate not just on the demand side but also on the supply side. In other words, given the damage that has occurred to economic capacity, there is only so much that demand management can accomplish. Perhaps, that would explain why both the fiscal and monetary stimulus that followed the crisis have yielded so little.

Friday, June 06, 2014

Is your boss a loony?

We tend to think of corporate bosses, including CEOs, as supremely well-adjusted beings, people with a high EQ who have, over the years, smoothed out their edges, perfected the art of dealing with people and- lest I forget- with a terrific sense of values.

The truth is often to the contrary - and it can be rather unsettling. Insead professor Manfred Kets de Vries points out in a recent HBR article that a surprisingly large number of senior executives have a serious personality disorder. As a result, the environment of the company in which the leader operates becomes toxic. People find it hard to function.

Vries identifies four main disorders; pathological narcissists, who are selfish and entitled, have grandiose fantasies, and pursue power at all costs; manic-depressives, who can leave a trail of emotional blazes behind them; passive-aggressives, who shy away from confrontation but are obstructive and underhanded; and the emotionally disconnected—literal-minded people who cannot describe or even recognize their feelings.

I am sure this is something many of us will have no difficulty relating to. We have all encountered bosses who are tyrannical, unreasonable, deceitful and full of themselves. The question is: how common or uncommon is this syndrome? Perhaps the more acute or psycopathic manifestations are somewhat rare. However, it appears almost inevitable that, in clawing their way to the top, executives require and develop qualities that renders them toxic by the time they get there. Among these qualities are: ruthlessness, disregard for scruple, a certain low cunning, an ability to manipulate people, and a degree of megalomania that gets confirmed with each round of "success" achieved.

These are the very qualities that contribute to their success- and, of course, they enhance shareholder value. It is important to understand, however, that the very drive, ambition and focus on achievement that propels them to the top enhances their toxicity and that of the companies to which they belong. As one reader writes in response:

If "a surprising number of senior executives do have a personality disorder of some kind", isn't there something inherently wrong in the way we select leaders in business as well as the kind of behaviors we encourage in order to make it to the top?

Vries believes that by identifying these pathologies, one can "coach" leaders back into normal behaviour. I am inclined to be sceptical. Once a person is high enough up the ladder, who are the people who would dare to tell him that he's bonkers? And which leader would want to acknowledge a serious disorder and would want to deal with it.

The unpleasant reality is that, in the competitive world in which we operate and the single-minded focus on results, defined entirely in terms of profit, such behaviours are almost inevitable. We will need to question the basic purpose of the corporation and its culture if "toxic" leaders are to be checked. It is not that you create a situation that requires leaders to be "toxic" if they are to succeed - and then proceed to treat them once you notice the fall-out.

Tuesday, June 03, 2014

Air India's losses? Look at private airlines

The media has been going to town about Air India's losses. With their penchant for trivialising issues, they have been carrying stories about freebies offered by Air India to its staff and its politicians- as though that is why the airline is running up losses. (Do they private owners of companies do not milk them at shareholders' expense?).

Anyway, Air India's losses for 2013-14 of Rs 2012 crore and projected loss of around Rs 1000 crore for 2014-15 look modest compared to those at Jet Airways, as today's edit in BS makes clear. Jet's losses for the first three months of calender year 2014 are a staggering Rs 2153 crore! Spice Jet and Jet Lite both made losses of over Rs 300 crore in the same period. The problems have to do with traffic and revenues not measuring up to expectations in a highly capital-intensive business. Air India's problem is the large burden of debt accumulated because of a large fleet order placed at a time when there was irrational exuberance about the growth of air traffic. Operational efficiency at Air India is not the issue. Nor is public ownership.

If ownership is the issue, then should we consider nationalising Jet because of the losses it is running up?

Monday, June 02, 2014

Academic research in India and top-ranked journal publications

Indian universities, the IITs and the IIMs rank low in international rankings. Everybody knows why: inadequate faculty publications in top-ranked international journals. The solution that many institutions have adopted is to incentivise publications in these journals by making these a condition for confirmation and promotion.

Pulapre Balakrishnan, writing in the Hindu, questions this approach and proposes an alternative:

In July 2013, a group of scientists and publishers issued a statement called the San Francisco Declaration on Research Assessment (DORA). While identifying peer-reviewed papers as central to an evaluation of research output, they argued for eliminating the use of journal-based metrics, such as the Journal Impact Factor (JIF) in funding, appointment and promotion considerations. It was recommended that research ought to be assessed on its own merits rather than on the basis of the journal in which it was published. It is significant that among the original signatories of DORA was the American Association for the Advancement of Science. 

We need to heed this call. Quantitative scoring based on JIF may wear the garb of objectivity, and cardinality may even bring with it the comfort of transparency to some, but it cannot be a substitute for assessing knowledge creation. The long-standing practice in India had been to have research peer-reviewed and these reports considered by a committee of experts. There should be a return to this practice as it is superior to the points-based system which prejudges content and quality. Finally, in issuing a guideline for assessing research, the UGC must focus exclusively on the researcher’s contribution to knowledge and cease privileging “foreign” publications over “Indian” ones and “international” conferences over “national” ones. 
Balakrishnan does not spell out why precisely we should not insist on publications in top-ranked journals. One important reason that I would venture to put forward is that, at least in the social sciences, it is difficult for Indian researchers, working on Indian problems, to get published in the top journals which are overwhelmingly in the West (mostly, the US). These topics may not be of interest to those journals. Also, publication in a journal requires knowing what topics and approaches are the flavour of the day, networking with journal editors and referees, having the opportunity to have one's working paper critiqued in seminars at leading colleges. Bereft of these advantages, Indian academics face heavy odds. Insisting on A-grade journal publications, in these circumstances, could lead to demoralisation- and faculty not producing anything at all. A classic case of the best becoming the enemy of the good.

That said, what do we make of Balakrishnan's alternative? "Peer-review" within one's own institution can become a farce, an exercise in mutual back-scratching (or back-stabbing). A committee of outside experts is a better idea but, again, these experts must not be constituted by the head of the institution whose faculty is being evaluated. We need an independent body constituted by the government for this purpose. This body must consist of academics with impeccable research credentials. MHRD had proposed setting up a collegium of scholars for making appointments to central universities, IITs and IIMs. Such a body could also be entrusted with the task of reviewing research.

However, we need to be clear about one thing. If we turn our backs on international publications, we must forget about moving up in international rankings as well.