Friday, August 29, 2014

Modi's Great Leap Forward

It's a big bang reform alright but not quite what the reforms brigade has been clamouring for. The government's Jan Dhan Yojana, an ambitious plan for financial inclusion, has the potential to be a game-changer for the banking sector and the economy. It calls to mind Indira Gandhi's much-maligned bank nationalisation move which helped transform India's economic prospects over the decade of the seventies.

Bank nationalisation helped sweep small savings into the financial system and push up the savings rate from 10 per cent at the end of the seventies to over 20 per cent by the beginning of the eighties. That, in turn, caused the investment rate to double and helped lift India's trend rate of economic growth from 3.5 per cent to 5.5 per cent in the eighties. Bank nationalisation had its problems. The achievement on the lending side has not been as impressive as that on the liabilities side: small and marginal farmers and also small firms do not get the credit they need. The expansion of branches and balance sheets undermined viability in the banking system. But these problems could be dealt with over time as the basis for economic growth had been laid.

Jan Dhan Yojana holds out the promise of carrying forward the unfinished agenda of bank nationalisation. Sceptics again say it will add to the existing stresses in the banking system. The banking system will have crores of accounts that are inoperative.The overdraft of Rs5000 per accoun promised, if extended to the 10 crore accounts targeted, will create NPAs of Rs 50,000 crore.Banks may garner deposits but lending will remain an issue.And so on.

Yes, in the short run, there will be issues. Over the long run, however, the potential for transformation is enormous. The new accounts will not be idle for long. Large amounts of cash will flow in through the Direct Benefits Transfer. These could lead to large amounts of floats in the public sector (which is bearing the brunt of the initiative). Overdrafts will not be given overnight to all. Banks will watch the accounts for six months before doing so. Even if we assume that half the accounts get the overdraft and half of the overdrafts turn into NPAs, we are talking of  losses of Rs 12,500 crore over two or three years. That is bearable.

Once large numbers of people are brought into the financial system, banks will find opportunities and ways to lend. What has been the province of micro-finance institutions and Regional Rural Banks will move in a large way into the commercial banks. Banks already have made some headway with banking correspondents. Alliances with mobile operators should enable to them to leverage mobile banking as well. It is conceivable that Jan Dhan Yojana could just the shot in the arm that the public sector banks needed. Let me qualify this by saying that much depends on whether the moves under way in the finance ministry to strengthen both boards and management in the public sector bear fruit.

The goverrnment's initiative does undercut the RBI's attempts to pursue inclusion through new players such as payments banks and small banks. The RBI had taken the view that not much could be expected of the public sector and that private entrepreneurs were needed to infuse life into inclusion.The Modi government clearly has a different view. In a way, the entire locus of financial inclusion as well as bank governance has shifted from the RBI to the finance ministry. That could well be a comment on the present state of relations between the ministry and the RBI.

Above all, by unveiling an initiative that is quite different from what economists have pressed for urgently, Modi has shown his capacity for out-of-the box thinking- and his willingness to be guided by his grassroots understanding of what is required rather than the wisdom of experts.

Tuesday, August 26, 2014

US, ISIS and the "war on terror"

The gruesome killing of US journalist James Foley by ISIS, the Islamic group which has gained control of big swathes of Iraq and Syria, has given impetus to a rethink of what the US should be doing about the outfit. The US has already bombed ISIS targets in Iraq and has commenced surveillance of Isis positions in Syria. Both US and British special forces are said to have commenced the hunt for the killer of Foley, now believed to be a Briton. The US government has commenced a steady drumbeat of propaganda on the threats posed by ISIS, which is now touted as 'beyond anything we have seen so far', with the US media following suit.

This is beginning to seem like a horrible re-run of America's dealings with the Taliban. The US funded the Taliban and various Islamic forces in its proxy war against Soviet occupation of Afghanistan. After 9/11, the US turned on the Taliban and its ally, Al Qaeda. The US has since been fighting the Taliban (both the Afghan and Pak varieties) in Afghanistan as well as the Afghan-Pak border.

So it is with ISIS. The US, at the very least, turned a blind eye to ISIS which first gained importance in the battle to overthrow President Assad of Syria. Other American allies, such as Saudi Arabia, Turkey and Qatar are known to be active supporters and funders of ISIS. Once ISIS crossed into Iraq and threatened the government of Iraq, the US seems to have had a change of heart. However, while attacking the ISIS in Iraq, it has been reluctant to attack it in Syria because that would mean strengthening Assad. (The Syrian government itself is open to support from any country, including the US, in its bitter war against ISIS).

This is changing fast as ISIS looms begin to larger in Iraq and begins to pose a threat to Kurds. The US, which has portrayed the "war on terror" as primarily one against, Al Qaeda, is now well on its way to creating a new demon to take its place, ISIS. A new front is to be opened on the "war on terror". One head of the hydra has been replaced by another. How has this come about?

Patrick Cockburn offers a compelling explanation:
The "war on terror" has failed because it did not target the jihadi movement as a whole and, above all, was not aimed at Saudi Arabia and Pakistan, the two countries that fostered jihadism as a creed and a movement. The US did not do so because these countries were important American allies whom it did not want to offend.

Saudi Arabia is an enormous market for American arms, and the Saudis have cultivated, and on occasion purchased, influential members of the American political establishment. Pakistan is a nuclear power with a population of 180 million and a military with close links to the Pentagon.

Tuesday, August 19, 2014

RBI's restructuring plan

I was on Bloomberg TV India this morning for a discussion on the RBI's restructuring plan, including the proposal to create an office of COO with the rank of Deputy Governor.

The restructuring plan is facing resistance from employee unions. It is the COO proposal, however, that has attracted the most flak in the media and drawn a frosty response from the government of India. Media reports indicate that the proposal was put up to the board of directors of RBI around the time of the budget. The board of directors of RBI does not have the same monitoring authority as a corporate board; the key entity, when it comes to monitoring, is the finance ministry. It is strange that the RBI did not take the ministry into confidence in the matter before listing the item at the board meeting.

At the board meeting, the finance ministry asked that the matter be deferred since their representatives would not be able to attend. At the next board meeting, the finance ministry made it clear that an appointment of the rank of Deputy Governor would require an amendment to the RBI Act and that somebody of that rank could not be appointed by the RBI governor; the appointment would have to go to the Cabinet Committee on Appointments.

That is not the only problem with the COO post. As media reports have pointed out, it signals that the person occupying the post is no 2 in the hierarchy, so that you have on Deputy Governor who is superior in rank to the others. That is not the tradition  at RBI. Moreover, the perception has gained ground that the post is being created into order to accommodate one particular individual. The perception may not be well-founded. But the very fact that it has gained currency is damaging to the RBI.

There is also controversy over the proposal to facilitate lateral entry into RBI. Nothing wrong with lateral entry. But the case must first be made as to what specialist skills are required and at what level. The RBI spends lavishly on training so that people are ready to take up positions that require special skills. If this is not adequate, there would be room for a specialist from outside. But, as I said, this has to be justified.

The RBI has acquired a certain stature and reputation over the years, in part because it is seen to be a meritocratic organisation. It has steered clear of the sort of controversies over appointments that have bedevilled other public institutions. The RBI must be careful to safeguard this hard-won reputation.

Saturday, August 16, 2014

Raghuram Rajan's father was a spy

I have heard RBI governor Raghuram Rajan's father being described as a 'diplomat' and I have found it rather intriguing because it has never been said that his father was an IFS officer or ambassador. Well, the mystery, at least for me, is now cleared up with Rajan confirming, in an interview with FT,  that his father was an officer in India's intelligence service. ( It appears to be RAW). Rajan is quick to clarify that his father was no James Bond:
It is a topic Rajan discusses rarely, so I decide to be blunt. While growing up, did he know that his father was a spy? He didn’t, he replies, finding out only later. “He used to tell me that John le CarrĂ© got it largely right,” he says of his father’s profession. “You’re just like another bureaucrat, except you’re doing things that other people would find very, very interesting. But it’s not that you’re walking around with a Walther PPK and lovely women . . .  My mother would not have appreciated that.
For the record, Rajan denied any ambition to occupy political office, saying that he plans to get back to academics and focus on India-related research:
My intent has been, and is, to go back to academia,” he says, sketching out a future research agenda on the interplay of markets and democracy, with a particular focus on India itself. The question of what type of country India will become interests him in particular, especially given its socialist heritage and often-ambivalent relationship to the free market. “In India, we say one thing, and we do something else,” he says as we finish our coffee, and place our napkins to one side. “So what are we trying to do as a country? Figuring that out, I think, would also be fun.”

Friday, August 15, 2014

Raghuram Rajan on venal politicians

RBI Governor Raghuram Rajan's Lalit Doshi memorial lecture last week created a bit of a stir. Rajan chose to lash out against crony capitalism and the venal Indian politician:

Even as our democracy and our economy have become more vibrant, an important issue in the recent election was whether we had substituted the crony socialism of the past with crony capitalism, where the rich and the influential are alleged to have received land, natural resources and spectrum in return for payoffs to venal politicians. By killing transparency and competition, crony capitalism is harmful to free enterprise, opportunity, and economic growth. And by substituting special interests for the public interest, it is harmful to democratic expression. If there is some truth to these perceptions of crony capitalism, a natural question is why people tolerate it. Why do they vote for the venal politician who perpetuates it?
Rajan then proceeds to answer his question:
Our provision of public goods is unfortunately biased against access by the poor. In a number of states, ration shops do not supply what is due, even if one has a ration card – and too many amongst the poor do not have a ration card or a BPL card; Teachers do not show up at schools to teach; The police do not register crimes, or encroachments, especially if committed by the rich and powerful; Public hospitals are not adequately staffed and ostensibly free medicines are not available at the dispensary; …I can go on, but you know the all-too-familiar picture.

This is where the crooked but savvy politician fits in. While the poor do not have the money to “purchase” public services that are their right, they have a vote that the politician wants. The politician does a little bit to make life a little more tolerable for his poor constituents – a government job here, an FIR registered there, a land right honoured somewhere else. For this, he gets the gratitude of his voters, and more important, their vote.
What Rajan says is, of course, true. Go to the office of any municipal corporator, MLA and MP and you will see people queuing up for all sorts of favours. The politician dispenses these to win their goodwill. But this is not the only reason that the venal politician gets the vote. The venal politician delivers in other ways as well, by ensuring that various development measures happen in his constituency, whether new investment by the government or private sector, new schools, hospitals etc. The politician is often drawn from the oppressed classes and so the politician has a natural empathy with his constituents. Of course, he enriches himself but, in the process, he does his bit for his people as well. In other words, the venal politician is not as bad as Rajan makes him out to be.

Moreover, the politician is not the only venal character in the system. Businessmen, corporate professionals, lawyers, doctors, accountants- virtually all groups that constitute the upper classes- are venal in their own way. The voter sees the politician at least as being responsive to their needs- and that's because of the greatness of parliamentary democracy- in a way in which other groups are not. The rest can only look after themselves.

Rajan goes on to argue that the voter's dependence on the politician for favours is what keeps the politician from reforming the system, from ensuring better delivery of services: he has a vested interest in poor delivery so that he can then play saviour. That is why, Rajan argues, that direct benefit transfer linked to financial inclusion is so important.Then, the poor have the cash with which they can buy services from the private sector, they do not have to depend entirely on the public sector and the venal politician.

This is true only up to a point: there is only so much cash that the poor can get. There will still be a need to access public sector services, such as healthcare (the private provision of which cannot be bought with the cash given to the poor). It is also worth making another point: the focus on cash transfer and financial inclusion is being driven by the very venal politician on whom Rajan takes aim.

There are many ills in our polity and we need to address crony capitalism. It's a bad idea, however, to start off by condemning the political class.

Modi's independence day speech

Modi's maiden independence day speech as PM was a winner. The PM spoke without a prepared text, he was eloquent, he was passionate and he connected superbly.

The  PM started off on just the right note: he had come, not as PM, but as the prime servant of the  people. He was an outsider to the Delhi durbar. In two months, however, he had had a chance to develop an "insider's view" of Delhi. And what he had seen had given him a jolt. For, there was not one sarkar in Delhi but multiple sarkars within one sarkar. Departments were warring with each other, working at cross-purposes. It made news when he reminded public servants that they should show up on time. The spirit of public service was missing: the right question to ask was not 'what is in it for me' but 'what is in it for the nation'.

There was a lot on character building and serious shortcomings in Indian society. And there were some significant announcements: a plan for financial inclusion, the scrapping of the Planning Commission, a plan to create model villages etc.

The Republic Day is about a grand coming together of the nation. The event achieves this beautifully. The PM's Independence Day has, over the years, should be about the PM reaching out to the nation and sharing his perspective. It hasn't quite met this objective for a while now because that require oratory of a high order. It does appear that this is poised to change with PM Modi.

Wednesday, August 13, 2014

The Economist on Reliance Industries

The Economist had Mukesh Ambani on its cover in a recent issue. It carried an edit as well as a feature on the Reliance group with the edit titled, "An unloved billionaire".

The magazine is generous is handing out bouquets to the group. Reliance invests massively in India unlike other groups which have said they find the Indian environment uncongenial. It accounts for 15% of India's exports. It ventures into areas where other fear to tread and is hugely profitable.

However, the Economist thinks the group needs a major overhaul of governance. For two reasons. One, India is now exposed to MNCs with much better governance standards. Two, the country is "turning against its tycoons." The magazine has a number of suggestions:
There is plenty that Mr Ambani could do to reform his firm. He could adopt global accounting rules, reveal and simplify its ownership and appoint as directors global heavyweights with reputations to lose who can subject Reliance to scrutiny. The company’s shares—like those of many Asian firms—could be listed in America, which has the world’s toughest disclosure regime. To avoid conflicts of interest Mr Ambani could merge his private businesses into Reliance, on terms that are fair to minority shareholders. He could publish details of Reliance executives’ meetings with politicians and officials. He could sell its media assets. He would lose something in personal and political power but gain more through the opportunity to build a more global and more admired business.
One suggestion took my breath away, namely, that the company "could disclose its executives' meeting with politicians and officials." Is there any large company anywhere in the world that does this? If so, the Economist should publish a list of such companies. Also, how many other industrial groups in India have chosen to appoint global heavyweights on their boards who subject these groups to scrutiny?

I am all for improved corporate governance. However, I would like the Economist to enlighten me on which of the major companies in the world, it thinks, are models of governance.

Sunday, August 10, 2014

Fighting inflation: the RBI and the Fed

The RBI and the Fed both enjoy a degree of independence or autonomy as central banks. At the moment, however, the two central banks seem to want to use their independence in quite different ways. The RBI would like to focus on inflation- it would like to bring the inflation rate down to 8% by January 2015 and 6% a year later. The finance ministry would like the RBI to give a little more weight to growth than the above policy would suggest. The RBI's present course run the risk of a collision with the finance ministry, as this report warns.

In the US, the situation today is rather different. The US Fed is taking a quite different approach at the moment. It would like to stick to its broad mandate of addressing both price stability and growth. However, the US Congress would like a sharper focus on price stability, as this article by Martin Feldstein points out. The US Fed is independent of the executive but not completely independent of Congress. The Congress is now pushing legislation that would commit the Fed to a monetary policy rule, namely, the well known Taylor rule. The Fed is resistant to such a rule for obvious reasons. Given an inflation target of 2 per cent, the Taylor rule would determine the fed funds rate which would end up much higher than today's rate:
It (the Taylor rule) states that the federal funds rate should be two per cent plus the current inflation rate plus one-half of the difference between current and target inflation and one-half of the percentage difference between current and full-employment gross domestic product (GDP). ....f the GDP gap is four per cent, as a recent Congressional Budget Office estimate implied, the Taylor rule would indicate an optimal federal funds rate of about 1.25 per cent (2 + 1.5 - 0.25 - 2), compared to the current rate of only 0.1 per cent.
While the federal funds rate may be heading to one per cent over the next 12 or 18 months, by then the narrowing GDP gap will imply an even higher Taylor-rule interest rate. And, complicating things further, given United States banks' vast holdings of excess reserves as a result of the Fed's bond-buying policies (quantitative easing), the federal funds rate is no longer the key policy rate that it once was. Instead, the Fed will be focusing on the interest rate on excess reserves.
Western central banks tend to be more hawkish on inflation than those in developing countries. Today, it would seem that the roles are getting reversed where the US and India are concerned.The US is willing to trade-off a little inflation with growth but not the RBI at the present level of inflation in India.

Thursday, August 07, 2014

Reforms- who's right, Modi or his critics?

Some three months into Modi's government, the reforms brigade is getting worked up. What, no "big bang" reforms, they ask. Why isn't Modi privatising? Why isn't he pruning subsidies? And what about labour market reforms?

I argued in a post a few weeks ago that there are good reasons why the Indian polity is allergic to such reforms. But commentators are loath to accept these. In recent days, we have had an orgy of lamenting. The FT, which is normally sober, headlines a commentary piece as "Modi's transition from dictator to ditherer". There is little justification for the hysterical headline apart from the fact that it is alluringly alliterative. Victor Mallet writes:
Some of Mr Modi’s supporters, on the other hand, are nonplussed. They are disappointed by his near-silence on domestic matters, his obsession with foreign affairs and the absence of “big-bang” economic reforms after a decade of lacklustre Congress rule; “underwhelming” is the word used in New Delhi to describe the government’s first budget in July.
“Here is a government that came in with a lot of hope, riding a tide of high expectations, promising change. Ennui has already set in,” writes Bibek Debroy, co-editor of Getting India Back on Track , a book telling the government what it should do.

Ashoka Mody and Michael Walton, writing in BS, provide a rationale for reforms in slow motion:

The business-as-usual economic policy, with which this government has begun, should have been expected. For about a century, a motley group of lower middle class voters has steered Indian politics. Since independence, meeting their insistent livelihood demands has been the prime objective of every political party and government. The Bharatiya Janata Party (BJP) attentively wooed this coalition with finely-tailored promises and remains anxious to hold on to this constituency in the forthcoming state elections. India's central political dynamic remains intact.....

The absence of a transformative agenda is a calculated accommodation to India's political economy. Modi brilliantly channelled the cry for change into an electoral platform. But the government has neither the mental model nor the political courage to effect real change. As so often, political and bureaucratic elites have made promises to the Indian electorate that they cannot keep. Acchey din may be a long way off.  

Shreekant Sambrani, also writing in BS, suggests that Modi is trying to emulate what he did in the Gujarat, which is to focus  on execution rather than sweeping changes in the policy framework:
Modi's strategy was to run the state as a business entity. For this purpose, he depended on two younger members of his team, both with business background and experience, Nitin Patel (current finance minister) and Saurabh Patel (current industries and energy minister). Modi trusted their acumen and gave them key responsibilities. They delivered on issues such as 24x7 power supply and industry-friendly ambience, leading to showcase projects such as Vibrant Gujarat. Modi orchestrated and executed many a scheme with great aplomb, which caught everyone's imagination, most of all, that of India Inc. Thus was born the legend of the Gujarat Model.
To this end, Modi depended heavily on the bureaucracy. His chief secretaries such as P K Laheri, D Rajagopalan and A K Joti delivered plenty. All through his chief ministership, Modi was very much his own chief economist with little regard for theory or ideology, but possessing pragmatism in abundance and an unerring instinct for what sells.
Sambrani thinks this won't work at the national level. Well, we have to wait and see. After all, the political pundits were telling us that, whatever Modi's oratorical skills and record in Gujarat, he would find it impossible to win a national mandate on his own steam. And yet we know he brought it off. It may well be that the answer to India's problems is not to attempt radical reforms and face the political unrest these will trigger but to get the government machinery to deliver better.

Economists argue that reforms must come first, then you get growth. Modi's approach seems to be to do a little better on growth first; once the economy recovers and incomes rise, perhaps the receptivity to reforms will be greater. He may well be proved right. It is wise not to under-estimate the capabilities of extraordinary leaders.

Wednesday, August 06, 2014

Mh 17- will the mystery be unravelled?

Writing in Atimes, Pepe Escobar asks why it's taking so long for the black box recorder transcripts to be released. In the case of the Algerian plane that went down recently, these were ready within days. He points to increasing evidence that MH-17 was brought down by cannon fine from a Ukranian plane, not by a missile fired from the ground by pro-Russian separatists:
Meanwhile, the MH17 tragedy is undergoing a fast metamorphosis. When the on-site observations by this Canadian OSCE monitor (watch the video carefully) are compounded with this analysis by a German pilot, a strong probability points to a Ukrainian Su-25's 30 mm auto-cannon firing at the cockpit of MH17, leading to massive decompression and the crash.

No missile - not even an air-to-air R-60M, not to mention a BUK (the star of the initial, frenetic American spin). The new possible narrative fits with on-site testimony by eyewitness in this now famously "disappeared" BBC report. Bottom line: MH17 configured as a false flag, planned by the US and botched by Kiev. One can barely imagine the tectonic geopolitical repercussions were the false flag to be fully exposed. 

This has not prevented the US and Nato from trying to box in Putin, aided and abetted by vicious media propaganda:
NATO's Plan A is to install missile batteries in Ukraine; that is already being discussed in detail in the run-up to NATO's summit in Wales in early September. Needless to say, if that happens, for Moscow, that's way beyond a red line; it implies a first strike capability at Russia's western borderlands.

Washington's short Plan A, meanwhile, is to organize a wedge between the federalists in Eastern Ukraine and Russia. This implies progressive, direct funding of Kiev in parallel to building up, via American advisers already on the ground, and vast weaponizing, a huge proxy army (nearly 500,000 by the end of the year, according to Glazyev's projection). Endgame on the ground would be to seal the federalists off into a very small area. Ukrainian President Petro Poroshensko has been on the record saying this should happen by early September. If not, by the end of 2014.  

Commentators have noted that Cold War 2.0 has started. The consequences could be no less serious than what unfolded a 100 years ago following one assassination and ended up as a ruinous world war. Why would the western powers want to precipitate a crisis? The motivation is pretty stark:
For Western plutocracy, that 0.00001% at the top, the real Masters of the Universe, Russia is the ultimate prize; an immense treasure of natural resources, forests, pristine water, minerals, oil and gas. Enough to drive any NSA-to-CIA Orwellian/Panopticon war game to ecstasy. How to pounce and profit from such a formidable loot?
Note that India under PM Modi has kept a cool ahead in this unfolding drama. Sushma Swaraj fielded a press conference with US Secretary of State John Kerry during which she was asked how India intended to deal with Russia following the imposition of sanctions. Swaraj replied icily that a nation's foreign policy did not change with a change in government and that ties with Russia would remain unchanged.