Monday, November 21, 2022

Forex reserves and RBI intervention

I pinched myself in disbelief when I saw a news item that said the RBI may have BOUGHT $8 bn dollars in the market in the past month. 

So the RBI is causing the dollar to strengthen vis-a-vis the rupee, meaning it wants the rupee to depreciate In the previous months, the RBI had been doing quite the opposite- it had dipped into its forex reserves to SELL dollars in order to contain the depreciation in the rupee. As a result, India's forex reserves fell by about $ 85 bn in the period April-September 2022. 

But that was not entirely because of sale of dollars by RBI. Dollar sales are said to account for about a third of the decline in reserves. The rest of the decline was because of revaluation of reserves. The RBI holds large amounts of bonds in foreign currency, especially US Treasury bonds. These holdings have been falling in value thanks to rising interest rats.

As you know, we've had people howling about RBI's market intervention. Many were worried about the fall in our forex reserves. They said: why intervene? Let the rupee fall. It would be good for exports. 

The RBI Governor gave a fitting response recently. About the fall in reserves, he said that is what the reserves are meant for- for a rainy day. They are not, he said, meant to be a 'showpiece'. As for export growth, I doubt that rupee depreciation will do much to help in the current situation. The export markets are down, so it's unrealistic to expect a big boost to exports. Our major imports, such as oil, as price inelastic, so imports will shoot up with rupee depreciation. Chances are BoP will worsen, not improve, with rupee depreciation. 

That apart, it makes no sense to let the market dictate the exchange rate entirely. It may dictate the direction of the exchange rate but not the magnitude. The RBI is committed to containing rupee volatility. It has an unstated objective, namely, containing the Real Effective Exchange Rate (REER) of the rupee within a band of plus or minus 5 per cent. Excess volatility in the exchange rate makes investors jittery. 

Net portfolio investment flow into India  turned hugely positive in August reversing the trend of the previous months. It turned negative in September and October but has turned positive thus far in November. If portfolio investors sense that the rupee is in a free fall, they will head massively for the exit, causing the rupee to plunge. Rupee volatility must always be managed.

I wonder what is going to happen to the forecasts of the forex pundits who saw the exchange rate headed towards Rs 85 to the dollar or even above that. The rupee is now less than Rs 82 having touched Rs 83 on October 19. The trend has reversed in recent weeks. Inflation in the US has begun to respond to earlier rounds of tightening. There is a sense now that the Fed may not have to tighten as much as thought until now.  

Overshooting of exchange rates is a well-established phenomenon. There are periods when the rate goes above or below the equilibrium value before returning to equilibrium. Some of the depreciation we have seen in recent months falls in the category. The necessary correction may be happening, helped by perceptions about future rate moves in the US. As interest rates in the US correct downwards, the value of US Treasuries will rise and with that India's FX reserves.

I wouldn't be surprised if the exchange rate at the end of FY 22-23 is closer to Rs 80 than to Rs 85.( Caveat: I'm assuming no serious escalation in the Ukraine conflict).  I won't be apologetic if I'm proved wrong: the tribe of economists has long claimed a divine right to be wrong in its forecasts. 



 


Friday, November 18, 2022

Central banker jokes

RBI Deputy Governor Michael Patra's recent speech on monetary policy transmission will be of interest to many. The part I liked best was where he cracked a couple of jokes at the expense of central bankers.

These are not the best times for central bankers to wax eloquent. From being knights in shining armour during the pandemic, they have become much maligned and are held responsible for the darkening outlook globally. The story is told of a man stuck in a traffic jam in the capital of a major economy. He asks a policeman about what is going on, and is told that the Governor of the central bank of the country is so depressed about the economy that he wants to douse himself with gasoline and set himself on fire. So, in sympathy, the crowd has decided to take out a collection for him. “How much has been collected?” asked the man. The answer: “40 gallons”.

Here's another one:

A man needs a heart transplant. The doctor offers the heart of a five-year old boy. “Too young!” says the man. “How about the heart of a 40-year old treasury head?” “He doesn’t have a heart”. Then how about the heart of a 75-year old central banker?” “I will take it!” “But why?” “It’s never been used!” 

 If a central banker can laugh at himself, there is still hope for the breed.

Thursday, November 17, 2022

Missile attack on Poland : no takers for Ukraine story

 A missile landed in a village in Poland yesterday killing two persons. Ukraine was quick to denounce it as a Russian missile attack on a NATO country. If true, it could lead to the invocation of  Article 5 under which the attack would be deemed to have happened against all of NATO and could provoke a suitable retaliation.

Well, that's not happening in this case. Poland says the missile is not Russian. NATO boss Jens Stoltenberg thinks the missile probably emanated from Ukraine. Biden has said it is unlikely the missile was fired from Russia. So, at the moment there is no prospect of NATO getting dragged in. 

Former CIA analyst Larry Johnson provides an interesting analysis. He contends that it was probably a 'false flag' operation by Ukraine intended to get NATO involved

  • The missile landed in the Polish village of Przewod√≥w in the east of the country, about four miles from the Ukrainian border. ....
  • The closest Russian ground forces, who in theory could have launched this missile, are located east of Kherson. The distance from Przewodow to Kherson is 613 miles. That distance exceeds the capability of the S-300 by a factor of 3.5.
  • The S-300 was fired by Ukrainian forces located somewhere to the west of Kiev. It is highly likely that U.S. and Russian satellites recorded this launch. In other words, both sides know where the S-300 originated.

    It is highly unlikely — hell, impossible — that this was an “errant” missile that Ukraine fired in a moment of desperation trying to take down an in bound Russian missile. Why? The Russian missiles are flying from the south to the north or from the east to the west. That means if Ukraine is firing an anti-missile defense system at those inbound missiles the Ukrainian missile would travel from west to east.

    But that is not what happened here. The S-300 traveled east to west. Unless the Ukrainian operator who launched the S-300 was drunk on his ass, it is impossible to “accidentally” fire this air defense missile in the wrong direction.

Johnson provides a possible motivation for Ukraine's misadventure:

I believe this is another indicator of Zelensky’s growing desperation. Think about it for a moment. If Ukraine really had Russia on its heels, why fabricate an easily disproved claim that Russia attacked Poland with a missile? This was sloppy trade-craft. If Ukraine had used another Russian missile capable of flying the distance from current Russian lines to that farm in Poland, then the circumstantial evidence might have ignited the desired fire among the NATO members.

Johnson is among the analysts who believe that Russia is poised for a major offensive and that the end game in Ukraine is probably not very far off.


Friday, November 11, 2022

Global economic crisis? Banks are unfazed

 

The world economy faces, perhaps, the worst shock since the global financial crisis (GFC). But the world’s global banking system seems not have noticed! How come?

During GFC, regulators banks woke up to the realization that they did not have the capital (in particular, equity capital) needed to survive a major shock. Governments everywhere blew up enormous amounts of tax payer money on saving banks.

After the GFC, the Bank for International Settlements (BIS) put in place higher capital requirements. These were pretty modest. For instance, core equity capital (what we understand as equity in accounting terms) requirement was raised to just 4.5 per cent of risk-weighted assets.

Bankers howled at the time. The cleverer ones realized quickly that the market rewards banks with high capital adequacy through higher valuations. So they built up capital buffers well above the regulatory requirements.

The global average for CET 1 (or core equity capital) is now 14.1 per cent, well above the 4.5 per cent mandated by regulation. This means that we can have an economic crisis but that won’t translate into a banking crisis. Banking crises are the most difficult to get out of, so that’s good news for the world economy.

Not to pat myself unduly on my back, but students of my banking courses at IIMA (SPB and MFI) will remember that I had emphasized that higher capital was crucial to competitiveness and valuation in banking post the GFC.

My article in BS, Global Banking is a bright spot.

 

Global banking is a bright spot

 T T Ram Mohan

The Ukraine conflict poses the biggest challenge to growth since the global financial crisis (GFC) of 2007. The world economy will grow at 3.2 per cent in 2022 and 2.7 per cent in 2023, says the International Monetary Fund (IMF).  Growth in 2023 will be the lowest since 2010, leaving aside the pandemic year of 2020.

Slow growth and rising interest rates are bad for banks. Slower growth spells an increase in bad loans. Rising interest rates translate into losses in the bond market.   

The astonishing thing is that it appears that the global banking system does not face any high risk of collapse even in these trying times. There is thus hope that the global economy can get back to normal after 2023. Assuming that we escape nuclear annihilation.

The world’s financial system faces an intimidating set of challenges, apart from slowing growth and rising interest rates. The IMF’s Global Financial Stability Report (GFSR, October 2022) lists these challenges:

  • China’s housing market woes: Stringent lockdowns in China have impacted home sales. Buyers do not want to make advance payments for the purchase of properties. As a result, developers face liquidity pressures and many have gone bankrupt.   Banks’ exposure to the property is 28 per cent of total loans. (In India, a bank exposure of more than 10 per cent to the property market is considered risky). The IMF estimates that, in a sample of Chinese banks it looked at,  15 per cent (mostly small banks) could fail to meet the minimum capital requirement.  
  • Poor market liquidity: Central banks are tightening monetary policy and shrinking their balance sheets. This has meant less liquidity in the market. Investors would like to sell securities when interest rates rise.   When liquidity is limited, the fall in prices can be steep. Investors trying to exit their holdings of securities end up incurring losses that can trigger panic. 
  • Corporate debt at risk: Rising interest rates pose challenges for firms with high debt. The composite picture across advanced and emerging markets is not pretty. The IMF’s sensitivity analysis shows that under conditions of stress 50 per cent of small firms would have difficulty servicing debt. Banks are bound to be impacted. The IMF warns that government support may be required to contain bankruptcies at small firms.
  • Leveraged finance under pressure:  Leveraged finance is lending to companies with high debt or a poor credit history. It is, therefore, of the high-yield variety. An increasing share of leveraged finance in recent years is “private credit” or credit that is outside the regulated bank market and the financial markets and is of poor quality. As a result, in the US today, more than 50 per cent of leveraged finance is composed of firms with a B rating or relatively higher risk of default. The leveraged finance market is under increased risk in the present conditions.
  • Housing price declines: Rising interest rates could trigger a steep decline in housing prices worldwide. The GSFR estimates that in a “severely adverse scenario”, housing prices could fall by as much as 25 per cent in emerging markets over the next three years; in advanced economies, the fall could be 10 per cent. These orders of declines will have adverse implications for banks.

 

Now, that is a pretty serious set of risks that banks are exposed to. One would think that, in combination, these could spell disaster for banks. The big surprise in the GSFR report is that the world’s banks seem well-placed to cope with the very worst.

All growth forecasts at the moment are predicated on economic conditions continuing pretty much as they are today —that is, the Ukraine conflict remains at the present level, oil prices will be around $92 per barrel, inflation starts coming around to normal levels in the next couple of quarters, etc.

But what if conditions worsen? What if the Ukraine conflict escalates and the US and its partners impose secondary sanctions?  What if the risks listed above materialise together as a result? 

Obviously, global economic growth will be severely hit.  The IMF looks at a nasty scenario. Growth drops from the baseline projection of 3.2 per cent to below minus 3 per cent in 2023 before recovering to around 3 per cent in 2024. The global Common Equity Tier I ratio (the pure equity component) in banking falls from 14.1 per cent of risk-weighted assets in 2021 to 11.4 per cent in 2023 and 11.5 per cent in 2024. These are all well above the regulatory minimum of 4.5 per cent. 

Banks in emerging markets would face a serious problem: Banks accounting for a third of banking assets would lack the minimum capital required. Globally, however, banks that fall below the 4.5 per cent minimum would account for no more than 5 per cent of global banking assets. 

Suppose global growth turned out to be below the IMF projection of 3 per cent plus in 2024 in the adverse scenario. Even then, on the average, one can expect banks globally to be well above the regulatory norm. 

How do we explain these outcomes? Well, there has been a big change in the banking system following the GFC. Bankers have come to realise that it pays to have capital way above the regulatory norm. The market rewards them with higher price to book value ratios because it sees these banks as less susceptible to failure. As a result, banks have raced well ahead of the regulatory curve when it comes to capital adequacy. That is standing the banking system in good stead in these difficult times. 

That is true of the Indian banking system as well. Except that, far from being under stress like their counterparts elsewhere, Indian banks today appear to be on song. The 12 public sector banks together have reported a second quarter increase of more than 50 per cent in profit after tax (PAT) over the previous year. Private banks have reported a growth in PAT of over 65 per cent in the same period. Loans in the banking system are growing at 17 per cent. If the global economic outlook is grim, Indian banks haven’t noticed it!


Saturday, October 29, 2022

A corporate leader pens a novel

 

Former Ashok Leyland CEO and well-known business leader, R Seshasayee, has a penned a novel, A Dance of Faith. It is an utterly charming work.

The novel is about a Muslim boy in a village in Tamil Nadu who develops an interest in dance while at school. It turns later into an irresistible craving to learn Bharata Natyam. After a great deal of struggle, he finds a teacher in Chennai who is willing to accept him and even help him out financially in his quest.

Seshasayee weaves out of this story-line a tapestry comprising many elements: the conflicts and turmoil in the mind of the Muslim boy as he pursues his quest; family relationships; village life with its many restrictions, prejudices and cruelties; the cultural life of Chennai' and musings about life, religion, art, music and dance. All of this is captured with a deep sense of irony and dashes of humour.

The characters in the novel come alive and their voices are authentic. The reader is left in no doubt as to the literary quality of this debut novel. I particularly liked the Tamil flavor to the novel-  there is a smell of rasam and sambar in the last part.

Two things that struck me were Seshasayee’s grasp of a range of literary techniques and his exquisite turns of phrase. I have known the author for a while now. I must confess I never suspected that he harboured literary talent of such an order.  I have little doubt that his first novel will be acclaimed as a considerable achievement.

 

 

 

Friday, October 28, 2022

Elon Musk takes control of Twitter

It can happen only in the US. 

Elon Musk, who will soon formally become the owner of Twitter, entered the headquarters of the firm dressed in casuals and carrying a kitchen sink. He tweeted the image later with the legend, "Let that sink in". The remark was a reference to the changes he had in mind for Twitter. 

Can you imagine the CEO of an Indian company announcing his arrival in similar terms? Even if he or she had wanted to carry a sink, there would have been an orderly carrying it. Casuals are also an unlikely possibility. And the fellow would have had an army of flunkeys around him.

Musk has reassured employees that he has no plans to prune 75 per cent of the staff as has been speculated. He has also reassured advertisers:

" Twitter obviously cannot become a free-for-all hellscape, where anything can be said with no consequences! ....In addition to adhering to the laws of the land, our platform must be warm and welcoming to all, where you can choose your desired experience according to your preferences, just as you can choose, for example, to see movies or play video games ranging from all ages to mature....Fundamentally, Twitter aspires to be the most respected advertising platform in the world that strengthens your brand and grows your enterprise.”

There is scepticism about Musk's intentions. Many think that easing of content moderation means that extreme statements will become acceptable on Twitter. They believe right-wing extremists will have a free run.

It would be wise to put one's judgement on the deal on hold. Musk is too shrewd a businessman to compromise the worth of the brand. If Twitter degenerates into a platform for abuse, the brand will be seriously undermined. 

It is reasonable to hope that Musk will do what he think is necessary to protect and grow the business. I am reminded of the grim prophecies that accompanied Rupert Murdoch's takeover of Wall Street Journal many years ago. People said it would be the end of the sort of journalism WSJ was known for. Well, they have been proved wrong. WSJ remains pretty much what it was- except that Murdoch managed to turn it around commercially after investing millions of dollars in the paper.

Don't underestimate the competence of top businessmen - or of top politicians.

Wednesday, October 26, 2022

Early assessments of Rishi Sunak

Rishi Sunak has become PM after Liz Truss's short-lived tenure. It was a period in which the government's ill-conceived fiscal proposals sent the financial markets into turmoil. You could say that after that disaster, anybody would be an improvement.

That's ok, but can can we expect anything more? A columnist in FT, Janan Ganesh, thinks that Sunak's competence is over-rated:

He has crammed a lot of misjudgments into a short career. Among the prime ministers since the EU referendum of 2016, two voted Remain (Theresa May, Liz Truss) and one (Boris Johnson) embraced Leave with the tardiness of an opportunist. Britain is now led for the first time by someone who believed with real fervour that Brexit was a good idea. The lost trade, the forfeited fiscal receipts: he failed to anticipate these costs, or overrated the ease of making them up elsewhere. He does not even have the excuse of being a nostalgic. There was and is a coherent traditionalist case for Brexit. There was never a liberal or free-market one. How a man of modernist, pro-growth sensibilities came to believe otherwise is not just an academic mystery. It forces the question of what other eccentric choices he might make as head of government.

Ganesh still thinks that Sunak is a good choice because of his rectitude. I thought the writer was talking about his integrity in financial matters. No, it's not that. 

Ganesh thinks that Sunak took a principled position in quitting Johnson's cabinet after its murkiness crossed limits. Well, I am not sure. There are many who saw it as opportunism, a case of jumping off  a sinking ship. Johnson supporters saw it as back-stabbing on Sunak's part. It's rather naive to think that there is much room for principle at that level of politics- if you were constrained by principle, you would not survive. Look at what happened to Jeremy Corbyn, the former leader of the Labour party.

A more perceptive article in Russia Today sees the Conservative party as riven by divisions between the old and new elites. The old elites believed were somewhat wary of globalism, identity politics, transgender rights and the rest. They were more inclined towards traditional values such as nationalism, family, Christian work ethic, etc. These divisions explain the conflict between the pro- Brexit brigade (to which Sunak belongs) and the anti-Brexit brigade. The writer thinks these divisions doom the Conservative party. Sunak does not have the skills to achieve a reconciliation:

.....if the party is to survive, even in the short term, it needs a head with real stature and genuine political skills. Rishi Sunak, who has just become the new leader, does not even come close to fitting this bill.  

The writer thinks Sunak will not last till Christmas, which implies he will give close competition to Truss! Well, we'll wait and see.


Friday, September 16, 2022

Ukraine escalation spells gloom for world economy

 The escalation in sanctions against Russia, including a price cap on oil and a possible cap on gas prices, means more trouble for the world economy and especially for the economies of Europe. On top of that, Ukraine has launched counter-offensives against Russia in the north and the south. The Russians cannot be expected to take that lying down.

So, the outlook for the world has worsened in recent days. But it doesn't look as though the world's leading stock markets have noticed. Do they know something that the world's leading agencies, including IMF and World Bank, have missed.

My article in BS today, Global outlook grows murkier after Russian setback


FINGER ON THE PULSE
T T RAM MOHAN

Global economic outlook grows murkier after Russian setback

As Ukraine escalation raises the risk to global economy, it is time to hunker down for the rough ride ahead

“We are at war”, says French President Emmanuel Macron.” German Chancellor Olaf Scholz sounds only a little less sombre. “We live in serious times… but we are prepared”. After more than six months of relatively low-intensity warfare in Ukraine, there is the prospect now of a substantial escalation on both the economic and military fronts. That bodes ill for the world economy. India’s policymakers need to brace for a rougher ride than thought until recently.

Russia has shut down the Nord Stream 1 gas pipeline that supplies gas to Europe. Last year, the pipeline provided an estimated 35 per cent of Europe’s gas imports from Russia. Russia says that Western sanctions against it make it difficult to ensure effective maintenance of the pipeline. Nord Stream 2, which was due to start supplying gas to Europe in early 2022, faces sanctions from the US and the EU, which make it a punishable offense to utilise the system.  

Russia’s decision to shut down the Nord Stream 1 pipeline came soon after the G-7 countries agreed to impose a cap on Russian oil prices. The G-7 intends to apply the cap to all countries purchasing oil from Russia. How to enforce a price cap in the case of non G-7 economies? The idea is to deny insurance and finance to oil cargoes that are priced at above the price cap that the G-7 will impose.   

. The EU is contemplating a cap on the price of gas imported from Russia as well. The West contends that it has little alternative given the steep rise in gas prices. Speaking at the East European Economic Forum earlier this month, Mr Putin explained that the West had only itself to blame for the spiralling price of gas. 

Mr Putin said that Russia had long tried to persuade the EU and other buyers to enter into long-term contracts for gas— at one point, Russia was negotiating the supply of gas at $100 per 1000 cubic metres. After the Ukraine conflict erupted, Ukraine chose to shut down one of the two gas pipelines passing through it. Poland sanctioned the pipeline passing through Poland. For these and other reasons, gas prices have climbed to $3,000 per 1000 cubic metres. 

The EU now thinks price caps on Russian gas are the answer. Mr Putin has warned that price caps would amount to violation of contractual obligations and Russia would not hesitate to cut off all energy supplies — gas, oil, coal and fuel oil — if that happened.  

As though the escalation in the economic war was not bad enough, there has been a change in the military situation on the ground. Until a few days ago, the general sense was that the war of attrition of the past several months would continue. The Ukrainian counter-offensive in the Kharkiv region in the north and in the south has changed perceptions. Ukrainian claims about territory regained need to be taken with the proverbial pinch of salt —the government in Kyiv is known to make exaggerated claims in order to sustain the flow of arms from the West.

Nevertheless, it is clear that Russian forces have been dealt a blow in the north. This has triggered nationalist outrage in Russia and scathing comment from sections of the Russian media. Russia has responded by pounding the eastern region of Ukraine with missiles, causing power blackouts in several parts.  

Russia has thus far contented itself with launching what it calls a “special military operation”, intended mainly to protect lives in the two provinces in eastern Ukraine that have declared independence. But increased Western military support to Ukraine and setbacks on the ground for Russia have prompted calls for a radical change in  Russia’s approach. Mr Putin is under pressure to deliver a knock-out blow by bringing the full might of Russia to bear on Ukraine. Prospects of a negotiated peace have seem very distant now.

These developments render the global economic outlook murkier. The International Monetary Fund (IMF) had projected global economic growth of 3.2 per cent for 2022, down from 6.1 per cent last year, and at 2.9 per cent in 2023. That was the baseline scenario. 

The IMF had also looked at an alternative scenario in which Russian oil exports fall by 30 per cent relative to baseline, Russian gas exports fall to zero and inflation expectations become more elevated. Global growth in that scenario drops to 2.6 per cent in 2022 and 2 per cent in 2023.  The EU would bear the brunt of the shock with growth in the EU being near zero.

That scenario, which would place global growth in the bottom 10 per cent of outcomes since 1970, does not appear far-fetched now.  The changed outlook will increase uncertainty over the conduct of monetary policy in advanced economies —to hike or not to hike policy rates will be a difficult call (except, perhaps, in the US).

How does India respond to increased uncertainty about  global growth prospects? First, it is unrealistic to expect exports to be a key driver of growth in today’s troubled environment. The decision to walk on two legs — to push exports where possible and also promote indigenous production through modest protection and subsidies — is an experiment worth persisting with.

Secondly, it is not advisable to allow the exchange rate to depreciate too steeply and bear the full impact of the shock in the hope of benefiting from a rise in exports. In a crisis such as the present one, the dollar is the default option for investors. Net foreign institutional investor (FII) flows have turned positive in July and August. Too steep a depreciation in the rupee with respect to the dollar could lead to a swift reversal of this trend. The Reserve Bank of India must continue with careful management of rupee depreciation. 

Thirdly, embarking on “big bang reforms” at this point, as many urge, would be unwise. We do not need political turmoil in the country to add to the grim global outlook. We need instead to hunker down for the rough ride ahead. 

 

 


Sunday, August 28, 2022

Management consulting firms hike pay for new MBA hires

 This item should tickle the present batches at the top IIMs.....

 McKinsey, Bain and Boston Consulting Group have unveiled one of the biggest rounds of pay rises for new hires in more than two decades, as inflation, booming demand for advice and a tight labour market force the trio of consultancies to compete harder for talent. The firms, which do not publicly disclose their pay scales, will increase annual base salaries for MBA graduates in the US from $175,000 to between $190,000 and $192,000, according to people familiar with the matter. Top performers will be in line to receive more than $250,000 in their first year when performance-related and signing bonuses are included.

 The hope must be that these firms will want to likewise hike pay for recruits in India.

Freebies: Supreme Court frames questions

The Supreme Court has decided to refer the freebies matter to a three-judge bench. Earlier, it had been inclined to constitute a committee of experts on the subject. Now, that is one of four questions put to the three-judge bench. The questions:

  1. What is the scope of judicial intervention? 
  2. What should be the composition of the expert panel to examine the issue? 
  3. Can the court pass any enforceable order? 
  4. Whether Subramaniam Balaji vs Government of Tamil Nadu judgment needs reconsideration?

In Subramaniam Balaji vs Government of Tamil Nadu, the petitioner had challenged the decision of the DMK government in Tamil Nadu to distribute colour TVs to identified individuals. The petition was dismissed by the Madurai High Court in 2007. In 2011, the same petitioner approached the High Court with a prayer to restrain the AIADMK government from distributing freebies such as mixies, grinders, electric fans, etc. The case was transferred to the Supreme Court. In 2013, the Supreme Court dismissed the case saying it had no grounds to interfere.

Question no (3) above was, in a way, addressed by the Supreme Court then. The honourable Court decided it could not issue any guidelines in respect of freebies.

I guess the larger issue that has arisen now is whether political parties can provide freebies in ways that undermine public finances. That seems to to the point addressed in questions (1)  and (4) above. While the grounds on which the SC had ruled in 2013 may be valid, is there a further ground, fiscal responsibility, on which Subramaniam Balaji can be revisited? It's going to be a tough call. 

 

Tuesday, August 23, 2022

RBI and government of India differences?

The RBI put out a paper on bank privatisation in the RBI Bulletin..  The paper argued that public sector banks (PSBs) have done better on financial inclusion that private banks. It also found that counter-cyclical policy happens better through PSBs, no surprise as they are subject to broad government direction.

On these grounds, the paper argued that 'big bank' privatisation is not desirable, we must hasten slowly. Somehow, the seems to have got interpreted in some quarters as anti-privatisation. The RBI was constrained to issue a clarification. The RBI said the paper does not reflect the views of the RBI. It also said that "instead of a big bang approach, a gradual approach as announced by the Government would result in better outcomes", which is correct. 

Any controversy over the paper is entirely avoidable. 

There is another issue, however, on which there appears to be a difference. The RBI put out a discussion paper seeking views on the question of charging for UPI payments. The government clarified promptly that "UPI is a digital public good with immense convenience for the public and productivity gains for the economy. There is no consideration in Govt to levy any charges for UPI services.".


Privatisation of PSBs: why 'big bang' is not feasible

 

Those pushing for aggressive privatisation of public sector banks (PSBs) in India must keep three points in mind.

One, the evidence on the superior performance of private sector banks over PSBs over a long period is not unambiguous- indeed, there was a trend towards convergence in performance until the first decade of the 2000s.

Two, the sale of PSBs is fraught with practical problems given RBI’s norms for private and foreign ownership.

Three, as a recent paper put out by RBI points out, ‘big bang’ privatisation of PSBs is not desirable as it could create a void in financial inclusion.

My article in EPW focuses on points one and two.

Comparisons between PSBs and private banks are distorted by the fact that the comparisons do not eliminate “survivorship bias.” The PSB sample includes more private banks that have failed (25) and have got merged with PSBs than the number of private banks that failed (11) and were merged with other private banks (Ghosh and Kumar 2022).  

Secondly, the divergence in performance between PSBs and private banks happened after the global financial crisis (GFC) of 2007–08 and became glaring only post 2011–12. In 2010, the gross NPAs/gross advances ratio were 2.3% at PSBs and 3% at private banks. By March 2020, the position had changed dramatically: the respective numbers were 11.3% and 4.2%.

The divergence happened because PSBs lent massive to infrastructure (power and telecom) and related sectors, namely, mining, iron and steel, textiles, and aviation. These five sectors accounted for 29% of all advances at PSBs and 14% of advances at private banks. Such lending was not on account of poor underwriting skills at PBS. The Economic Survey of 2016–17 noted,

the vast bulk of the problem has been caused by unexpected changes in the economic environment: timetables, exchange rates, and growth rate assumptions going wrong.

As to the mechanics of privatisation, we need to be clear answers to the question: whom do you sell the PSBs to? You can't sell them to corporate houses, RBI policy does not allow corporate ownership in banking. Foreign banks are either not interested or are not willing to enter the country via the subsidiary route as mandated by RBI. The larger private banks have large enough networks and don't want to be saddled with the legacy issues at PSBs.

That leaves you with FIIs, including private equity. The RBI is willing to allow only a maximum stake of 15 per cent for such entities. They will want a controlling stake, preferably 51 per cent and with zero government presence. That is not a condition that can be easily met.

Then there are the legislative amendments needed to the Bank Nationalisation Act, on which Parliament has to sign off.

So, you see, in the very nature of things, PSB privatisation can't be accomplished in a hurry.


Saturday, August 20, 2022

Debate on freebies: no easy answers

The debate on freebies- handouts or subsidies of one kind or another by the central and state governments- is getting shriller by the day. Everybody thinks freebies should be curbed because they wreak havoc with the government's finances. The solution is not as obvious as many think.

One of the most common answers is: subsidise items that generate positive externalities such as health and education. Clamp down on those that do not, such as power.

Former RBI Governor D Subbarao points out in an article in ToI today that it's hard to measure the welfare effects of a given subsidy, so it's hard to determine what are 'merit' and 'merit' subsidies. He proposes that we abolish the classification. Let politicians agree on a cap on subsidies. An independent fiscal council must vouch for the integrity of budgetary numbers. 

Dr Subbarao is right on the measurement issues. MGR's now-famous Mid-Day Meal scheme for school children was decried by many as simply giving away food for free. We know now that school attendance went up sharply, with the ensuring benefits. Politicians, with their acute understanding of realities at the grassroots, may have a much better sense of the welfare effects of a given subsidy than economists. So, many freebie schemes may not be as perverse as economists think. Any sensible Railways minister will include a junction in his constituency in the Railways budget- he knows how a rail junction can transform the local economy.

I am not sure that Dr Subbarao's suggestion for a cap on freebies will work. It may well go the way of the limits on the FRBM caps. Politicians will find ways around limits.

It is important to recognise that jobs in industry or services go to the relatively privileged, that is, those who have access to education and the means to afford it. A big chunk of freebies goes to those who will not be able to access the jobs created by productive expenditure. 

So, how much to spend on freebies relative to productive expenditure is a question of equity. It is a question that can be answered only by the electorate. Expenditure on freebies will fall only the potential beneficiaries of these diminish relative to the potential beneficiaries of job-creating expenditure- the votes will no longer be as strongly in favour of freebies. Politicians understanding this better than economists, so they will go on spending on freebies until this condition is met. 

Wednesday, August 17, 2022

HBS announces tuition waiver for low income students

Harvard Business School has announced waiver of tuition ($76,000 for each of the two years) to the lowest income students for about 10 per cent of its annual intake or 200 students. Students will still have to incur living costs of approximately $35,000 per year. 

HBS is known to offer limited scholarships based on merit. Th expansion of scholarships to those who satisfy certain socio-economic criteria is a huge leap forward. It will make it easier for talented students who lack the means to access one of the most reputed business schools in the world.

The move should make IIMA and some other leading schools in India sit up and think. IIMA used to offer scholarships to the needy but these have been more or less phased out over the years. IIMA argues that the placement salaries on offer at the school are good enough to help students pay back students loans for the two-year programme. So those who gain admission should simply take loans to pay for the programme.

This argument is flawed. Several of the most disadvantaged students would be deterred by the uncertainty factor: what if they ended up with a  below-average placement salary so that it took them very long to repay a student loan? A typical student from a poor family would have to take care of the burden of several family loans. The prospect of having to take another loan could prove a deterrent to his or her accepting admission or even applying. 

For years, the leading IIMs would declare in their Admissions ad that no student would be denied admission for want of funds, meaning the IIM would take care of funding. They need to go back to that noble affirmation. 

Friday, August 12, 2022

Should central banks prioritise inflation or growth this year? No easy answers

Central banks in advanced economics cannot make up their minds whether they should priortise growth over inflation in the months to come. That is because it's hard to predict how the Ukraine conflict will shape. 

At the moment, they have prioritised inflation. But if the conflict worsens, growth will be the bigger problem. My column in BS today, Central banks haven't got it wrong.

FINGER ON THE PULSE

Central banks haven’t got it wrong

TT RAM MOHAN

Central banks in advanced economies are today in thrall to the conflict in Ukraine. Emerging market central banks, in turn, are in thrall to the actions taken by the US Federal Reserve. Those who fault  central banks for their response to inflation in recent months seem to gloss over these facts.

During the global financial crisis of 2007, central banks knew what they had to do- loosen monetary policy and keep doing so. Likewise, during the pandemic. Now, the course is nowhere as clear.

The conflict in Ukraine has rendered the conduct of monetary policy extremely difficult. There is still no knowing how the conflict will pan out. Western sanctions against Russia are unprecedented in their scope and severity. And it’s hard to say how Russia will respond as the conflict rages on. 

The US Federal Reserve faces an unenviable task.   With the inflation rate in the US at 9.1 per cent in June, analysts warned  that a recession was imminent.  Some claim that the US is already in recession. This would imply that the Fed should go slow on rate hikes to fight inflation.

Hold on. After the last meeting of the Federal Open Markets Committee, Fed  Jerome Powell poured cold water on talk of a recession. US unemployment rate in July was 3.5 per cent, which was the level before the pandemic set in. This meant that the Fed should tighten more aggressively, not less so, as the recession school contended.

If that is not confusing enough, the conflict in Ukraine is a huge imponderable. Do we know whether or not the impact of Ukraine on the world economy is played out? If central banks reckon that the oil price will stay in the range of $100-110, they would be justified in concluding that inflation is the bigger threat at the moment. However, if Russia moves to cut supplies drastically, all bets on oil prices are off and growth is seriously threatened.  

JP Morgan Chase has warned that, in an extreme scenario, Russia could slash dramatically oil supplies in response to the oil price cap imposed by the West. Oil prices could then surge to $380 dollar a barrel. At that price, global growth will collapse and inflation will cease to be the priority for central banks.

So great is the uncertainty created by Ukraine that, after the last meet, Mr Powell refrained from providing forward guidance, that is, any indication of exactly what rate hikes to expect in the coming months. Nor is the Fed in a hurry to return to the inflation target of 2 per cent for the US. It seems quite happy to return to the target by end 2023.

If the task for the Fed is so complicated, the challenge for central banks in emerging markets, including the RBI, can well be imagined. In addition to factoring in the outlook for growth and inflation, they have to keep a wary eye on the exchange rate. Coping with the “spillovers” of Fed policy is testing the mettle of emerging market central banks.

That should explain the stance taken by the Monetary Policy Committee (MPC) of RBI earlier this month. The MPC made no change to its forecasts for growth and inflation in 2022-23. Nevertheless, it thought fit to increase the policy rate by 50 basis points. The MPC argued that the increase was needed to anchor inflation expectations and to bring the inflation rate closer to the target of 4 per cent.  

That does not sound very convincing. With the actions taken so far, the RBI can at best hope to bring the inflation rate down to the target only by end 2023, exactly as the Fed intends to. The RBI, like the Fed, has chosen not to provide forward guidance.

The more plausible explanation is that the RBI is keen to manage the exchange rate of the rupee after the Fed’s rate hike of 75 basis points. The real effective exchange rate of the rupee against a basket of currencies has been steady over the past year. Analysts have argued that we could do with a depreciation in the real effective exchange rate in order to boost exports.

However, when it comes to managing capital flows, it is the exchange rate with respect to the dollar that matters. The dollar is the safe haven for funds. In order to stem the outflow of capital, it is important that the rupee not depreciate too much with respect to the dollar. If portfolio investors sense a steep depreciation with respect to the dollar, they will flee the rupee. The RBI’s policy rate moves are thus substantially dictated by the Fed’s own.  One wonders whether the RBI would have thought it necessary to raise the repo rate if the Fed itself had settled for a more modest increase.

On a broader note, critics of central banks say that central banks failed to catch the impetus to inflation post the pandemic. Many believe central banks have laid the ground for stagflation similar to the one witnessed post the oil shocks of 1973 and 1979. As the annual economic report of the Bank for International Settlements (June 2022) makes clear, the critics are off the mark.  The behaviour of commodity prices this time has been different from that in the 1970s. So are the economic backdrop and monetary policy regimes.

First, the oil price shock has been less severe this time around. Oil price have increased by 50 per cent since mid-2021 and are around their long-term averages. In 1973, oil prices doubled in a month and touched historic highs. Secondly, higher energy prices impact growth to a less extent today because of the reduced energy-intensity of GDP. Thirdly, the 1973 rise in prices happened on the back of several years of rising inflation. In contrast, today’s episode follows years of low inflation. Lastly, the institutional frameworks for monetary policy and for anchoring inflation expectations are far more robust today.

Forecasts of economic doom in the year ahead are premature and central bank-bashing is misplaced. Central banks are not behind the curve on inflation nor is a soft landing inconceivable  in the US. To be sure, things could change dramatically if the conflict in Ukraine worsens. But that is hardly something central banks can prepare for.

(ttrammohan28@gmail.com)

 

 


Tuesday, August 09, 2022

IIM salaries and fees: what are the larger implications?

TOI carried a story saying IIM placement salaries had not kept with rising fees for the two year  MBA programme. 

The story quotes a director as saying that the rule of thumb was that the fee should not exceed the average annual salary. The fee seems to have exceeded the average salary at only two IIMs. But that is not the correct measure.

The correct measure is how many years it takes to repay student loans. Taking into account costs in the large cities, I was told this takes seven to eight years-  using average salaries. For those earning less than average, which would be half the cohort, the time taken would be a lot more. 

Moreover, one should not confine the analysis to the leading IIMs. The leading IIMs' fees are the benchmark for lesser IIMs and non-IIMs. At the latter, the pain felt by students would be more.

There are a few fundamental points about IIM fee pricing that tend to get overlooked.

First, what is the basis for the fee charged? IIMA used to charge Rs 4.8 lakh until 2007. Surely, costs cannot have multiplied five-fold since! The fee clearly is not based on cost-plus pricing but simply what the market can bear. If 450 students can pay Rs 25 lakh or more, why not charge that much?

Is that responsible pricing? At top B schools in the US, the fee typically does not even fully recover the cost. So there is an element of subsidy in the fee. On top of that, the schools offer a few scholarships based on merit and financial need. B schools in the US bear the cost of subsidy through large endowments, consultancy, executive programs and the rest. In other words, the fee at US B Schools is not intended to include a profit margin.

At the IIMs, there is not only a profit margin but the margin but must be obscenely large. What are the profits used for? The IIMs are structured as non-profit, non tax-paying trusts. So, they can have a surplus of only 20 per cent over cost. Any surplus above that has to be used. Typically, they have been using the surplus for infrastructure- more and better buildings, better facilities for faculty and students, etc.

The IIMs have also introduced variable pay for faculty (and, to a lesser extent, for non-faculty staff). Some of the surplus goes towards that. A portion of the fee is thus a straight transfer from students to the pockets of faculty. 

Secondly, the fee at IIMs has implications for the choice of employer or jobs. If students take out a large loan for the MBA program, they will be under pressure to take up only the highest paid jobs. That rules out most of the public sector, where there is a crying need for superior managerial skills. It could also preclude entrepreneurial ventures on the part of graduating students- risk-aversion amongst students will be the norm. Is that what the economy needs? Are the IIMs intended solely or mainly to produce talent for Big Tech, the international consulting firms and the top Indian business houses?

Thirdly, the fee have implications for the student profile. It is reasonable to expect that steep fees would deter the disadvantaged sections from applying, given the risk that repayment of loans could stretch out over a very long period when the family looks to the MBA candidate to take care of it. In other words, steep fees dis-favour inclusion.

There is a more important consequence of high fees at IIMs. Many of the graduates at IITs and NITs have offers from the same companies that go to the IIMs. They also have other opportunities such as going abroad from higher studies in engineering or management. High fees create incentives for students at IITs and NITs to pursue alternative opportunities instead of applying to the IIMs. This is certainly happening because the proportion of graduates from IITs and NITs has been falling over the years at the leading IIMs. The IIMs no longer attract the "cream of the cream" although they like to parroting that. Does this not have implications for the brand equity of the IIMs in the long run?

Unfortunately, there seems to have been  no discussion of the larger implications of high fees at the Governing Council or among the faculty. The IIMs keep rubber-stamping five per cent increases in fee ostensibly "to cover the cost of inflation"! So much for research-based policy making at the IIMs!

Unfortunately, after the IIM Act of 2017, the government has let go of all monitoring of IIMs. It seems happy that it does not have to fund many of the IIMs any more. The IIMs are accountable to Parliament, so government needs to shed its hands-off approach and look carefully into the functioning of the IIMs. 



Friday, July 29, 2022

Scepticism about inflation targeting: Edward Chancellor

Inflation targeting has become the norm in many countries, including India. Edward Chancellor, journalist, historian and author, sounds a sceptical note in this article. He has provided a more elaborate critique in a book, The Price of Time.

Chancellor says that inflation targeting has allowed central banks to set ultra-low interest rates in response to bouts of deflation and to justify the same by citing the inflation target given to them. As long as inflation stays below target, the interest rate set by a central bank is okay.

Chancellor thinks that is not okay. There are a number of malign effects of ultra-low rates that must be taken into account:

Yet these targets produced a number of corruptions and distortions. Ultra-low interest rates pushed the US stock market to near record valuations and provided the impetus for the “everything bubble” in a wide variety of assets ranging from cryptocurrencies to vintage cars. Forced to “chase yield”, investors assumed more risk. The fall in long-term rates hurt savings and triggered a massive increase in pension deficits. Easy money kept zombie businesses afloat and swamped Silicon Valley with blind capital. Companies and governments availed themselves of cheap credit to take on more debt.

Central banks must, therefore, be guided not just by the level of inflation but also by its effects of interest rates on asset valuation, financial stability, leverage and investment. In other words, we are back to multiple objectives for central banks instead of a single objective, namely, inflation! 

This may sound plausible. Except that, elsewhere, Chancellor argues that the alternative to ultra-low interest rates is simply to not respond to bouts of depression because they tend to cleanse the economy of unproductive or inefficient firms. That is more than a little extreme. The idea that governments should have stood by when the pandemic erupted is hard to swallow. You must read Martin Wolf's critique of Chancellor's  book to get the complete picture. It is all very well to ask central banks to take asset bubbles into account but we know that that is a notoriously difficult task. When is an increase in asset values a bubble? We do not have a clear answer. 

At the same time, as Wolf points out, it is important to take on board Chancellor's plea to factor financial stability into central bank policy. The interest rate is a useful tool for battling recession. At the same time, central banks must address threats to financial stability through various instruments of regulation. Excessive leverage is an issue both in the financial sector and in the corporate world. Wolf says that removing tax deductibility for debt must be part of the solution. The solution has been urged by many. The time may have come to consider it seriously.

Tuesday, July 12, 2022

Inflation in India: potential breach of MPC mandate

There is much breast-beating over the possible breach of the upper limit for inflation of 6 per cent set for the MPC. The RBI has come in for flak from some quarters.

The critics make no allowance for the fact that the challenges facing the world economy are unprecedented. To be doctrinaire in one's approach in such a situation is not helpful.

The inflation rate for the current year is projected at 6.7 per cent (without factoring in steps the RBI would take to contain it). The RBI's approach, reflected in the views of its three members on the MPC, is to bring inflation to within the tolerance band without too much of a sacrifice of growth. I cannot see how this approach can be faulted.

The Indian economy's growth rate sank to 3.7 per cent in 2019-20. Thereafter, in 2020-21 it declined by 6.6 per cent.  It recovered to 8.7 per cent in 2021-22. Real GDP in 2021-22 was just 1.5 per cent above the level in the pre-pandemic year of 2019-20. Under the circumstances, it is impossible for the RBI to ignore the growth imperative. 

Some argue that growth is not part of the mandate of the MPC. Well, it is part of the mandate of the RBI. Are the three RBI representatives on the MPC required to be blind to considerations of growth when they sit on the MPC? The MPC works within the framework of RBI just as RBI, while autonomous, works within the framework of government.

To those who say that the MPC mandate is sacrosanct, I would say: it is certainly not part of the mandate to kill the Indian economy!  

For a vigorous defence of the RBI's approach, you may read Michael Patra's address of June 22.

I have commented on the issue in my last column in BS. As the article is behind a pay wall, I reproduce it below.

FINGER ON THE PULSE

T T RAM MOHAN

Negotiating India’s soft landing  

The glass is half-full. Inflation at the moment may be above the upper limit of the inflation targeting framework but there is room for optimism about growth prospects for the Indian economy in 2022-23.

The inflation rate needs to fall. But analysts seem to be having second thoughts about the degree of monetary tightening that needs to happen. That is the cause for optimism about growth.

The CPI inflation rate touched 7.9 per cent in April followed by 7 per cent in May. In June 2022, the MPC raised its inflation forecast for 2022-23 to 6.7 per cent. There was panic amongst market analysts. Some analysts saw the repo rate going up to as much as 6.25 percent in 2022-23 over the starting point of 4 per cent.

There seems to have been a rethink since. RBI Deputy Governor Michael Patra’s well-argued address on June 22 to the PhD Chamber of Commerce and Industry has had a sobering effect on the markets. After the address, the yield on the ten-year government bond fell by 18 basis points. That says something about the credibility of RBI’s pronouncements on monetary policy.

Mr Patra made three important points. First, he indicated that we might expect inflation to fall back into the tolerance band of 2-6 per cent by the fourth quarter of 2022-23. Secondly, Mr Patra seemed hopeful that “monetary policy actions in India will be more moderate than elsewhere in the world”.

The third point is potentially more controversial. Mr Patra indicated that inflation may exceed 6 per cent for three successive quarters, which would be a breach of the MPC’s mandate. However, if India’s GDP can grow at 6-7 per cent in this year and the next, “the RBI will have fulfilled its mandate of prioritising price stability while being mindful of growth.”

Read together, the second and third points could be interpreted to mean that interest rate hikes hereafter would not be so drastic as to cause GDP growth to fall below 6 per cent. This approach may result in a breach in the accountability mandate of the Monetary Policy Committee (MPC). So be it, Mr Patra seemed to suggest.

Some are outraged. How could the MPC countenance such a breach? Mr Patra has a plausible response: these are “extraordinary times”. Nobody can disagree. Having just emerged from successive waves of the pandemic, the world economy is facing new supply constraints. The last thing we need now is that, in reining in demand, we create supply constraints within the Indian economy as well. The critical issue in managing inflation is not so much the precise level of inflation as the predictability of it. The RBI must not give guidance that misleads the market. That is clearly not the case here.

So far, so smooth. The spoiler could be the actions of the US Federal Reserve. The Fed has of late taken a ‘we will do whatever it takes’ approach to fighting inflation. Market analysts feel the Fed could hike interest rates by a further 120-150 basis points in the months ahead. If the RBI were to match that, the repo rate could rise to as much as 6.4 per cent. That would render a soft landing difficult for the Indian economy.

The best outcome would be that the Fed does not hike the policy rate as much as feared. The other possibility is that the RBI does not have to match the Fed’s rate hikes. The price to be paid is a further flight of portfolio funds and a depreciation in the rupee.  We can live with such a depreciation. Despite the fall in the exchange rate of the rupee with respect to the dollar, the 40-currency real effective exchange of the rupee has remained virtually unchanged in May 2022 compared to May 2021.

Mr Patra is right. When it comes to a soft landing, India is better placed than the US and many European economies. Even at May’s inflation rate of 7 per cent, inflation in India is 2.5 percentage points above the average for the previous five years. In the US, the difference is about 5.5 percentage points. Monetary tightening required is greater in the US.

Secondly, as the latest annual report of the Bank of International Settlements notes, the Phillips curve, which gives the trade-off between inflation and unemployment, has turned flat in the US in recent years. The flatter the Phillips curve, the greater is the monetary tightening required to produce a given fall in the inflation rate. In India, the Phillips curve seems to have acquired its normal shape after having been relatively flat for six years starting 2014. (RBI Bulletin, November 2021).

Mr Patra’s address, which echoed many points the RBI Governor had made earlier, may prove to have been a turning point in shaping the inflation trajectory in the months ahead.

Banking sector in good shape

The health of the banking sector is yet another cause for optimism about the economic outlook. The latest Financial Stability Report of RBI points to several indicators of improvement.

Gross Non-Performing Assets (GNPAs) were at a six-year low of 5.9 per cent of advances in March 2022. They are expected to fall further to 5.2 per cent in March 2023. Capital adequacy in the banking system averages 16.7 per cent, a full 5.2 percentages points above the regulatory minimum.  Provision coverage ratio is at a healthy 71 per cent. Annual credit growth in June 2022 was 13.1 per cent, a rate last recorded in March 2019. India’s banking system can be said to have emerged from a banking crisis that lasted nearly a decade.

If the projected NPA level is correct, regulatory forbearance during Covid has paid off. It hasn’t ended up postponing the day of reckoning, as critics had feared.  

Unless the geopolitical situation worsens considerably, the Indian economy should manage growth of 6.5-7 per cent in 2022-23 while inflation falls gradually to within the tolerance band. In today’s troubled environment, that would be a considerable achievement. It would show that the Indian economy is stronger today than in earlier crises and we are getting better at macro-economic management.


Saturday, July 02, 2022

Roe v Wade: the economics of abortion

Martin Sandbu, writing in FT, argues that the recent US Supreme Court judgement overlooks the economic implications of abortion and the judgement is flawed for that reason. (Please see my earlier post below first).

In his judgement, Justice Alito said that a balance has to be struck between the "interests of a woman who wants an abortion" and the individual states'  "interest in protecting fetal life". It was for individual states to determine where that balance lay.

Sandbu argues that not granting abortion in the interest of protecting fetal life has serious economic implications for the women involved. He cites a study that has shown that women denied abortion are more likely to end up in poverty than those who were not. There are other studies that have shown that women who had the right to abortion had a better chance of finishing college and getting a professional occupation.

The right to abortion not only has implications for poverty and inequality in society, it also influences the equations between the sexes. Besides, Sandbu argues, those who profess concern for fetal life have not shown much interest in providing the necessary economic support to those denied abortion and who are compelled to raise children in trying circumstances. The anti-abortionists often are also against welfarist measures.

These are all valid and fairly incontrovertible points. But how does change the fundamental proposition put forward by the US Supreme Court? Faced with all the above facts, it is legislatures that have to make choices and they have to make those choices based on their understanding of the will of the people. If people in a given state believe that denying abortion results in an incorrect balance between individual and societal interests, they are free to give expression to their will through the power of the ballot.

I'm afraid the point I made in my earlier post on the subject does not change: the Supreme Court ruling is about what the Constitution says, it is not about taking a position on abortion

Roe V Wade: it's about interpreting the US Constitution

There has been outrage over the judgement of the US Supreme Court overturning the historic judgement in Roe V Wade that affirmed women's right to abortion. 

A commonly heard observation is that right-wingers, who hate abortion, have been planted in the Supreme Court by Republican administrations and they have had their way.

One needs to be clear about what the US Supreme Court has said. The Court does not say that abortion is bad and should be outlawed. No, it says that the US Constitution does not include the right to abortion. So, if people want the right to abortion, it is up to individual states to make legislation that reflects the will of the people. 

The SC is interpreting the Constitution as it understands the document. It is not taking a position on abortion. If the people of the US want an overarching legislation that confers the right to abortion across states, it is is up to Congress to make suitable amendments to the US Constitution. I'm afraid many of the harsh comments on the judgement seem to overlook these points.

FT has provided excerpts from the judgement that make the above points crystal clear. Here is a quote from the majority judgement written by Justice Samuel Alito:

We hold that Roe and Casey (another ruling on the abortion question) must be overruled. The constitution makes no reference to abortion, and no such right is implicitly protected by any constitutional provision, including the one on which the defenders of Roe and Casey now chiefly rely — the Due Process Clause of the Fourteenth Amendment. That provision has been held to guarantee some rights that are not mentioned in the constitution, but any such right must be “deeply rooted in this nation’s history and tradition” and “implicit in the concept of ordered liberty”.

A concurring judgement by Justice Cavanagh provides the clarification I mention above:

 To be clear, then, the court’s decision today does not outlaw abortion throughout the United States. On the contrary, the court’s decision properly leaves the question of abortion for the people and their elected representatives in the democratic process.  ..... In sum, the constitution is neutral on the issue of abortion and allows the people and their elected representatives to address the issue through the democratic process. In my respectful view, the court in Roe therefore erred by taking sides on the issue of abortion.