Saturday, May 21, 2022

Gerhard Schroeder: How free is the Western world?

Just how much freedom is there today in the West? We know that after 9/11, many governments, including those in the US and the UK, armed themselves with sweeping powers to take away an individual's freedom on suspicion of links with terrorism. There is very little recourse in such cases.

But leaving aside restrictions linked to terrorism, just how much freedom of expression do people have even otherwise? You may not be jailed for certain things but the social and economic costs of veering from the mainstream or establishment line can be pretty steep.

A classic illustration is the hounding of Gerhard Schroeder, former Chancellor of Germany, no less. Schroeder is a friend of Putin's and he has refused to join the strident condemnation of Putin in his country from Russia's actions in Ukraine. Schroeder is certainly open to criticism for his position. But we are seeing is a lot worse. 

Schroeder was Chairman of the supervisory board of Rosneft, the Russian oil company, and Chairman of the shareholders' committee  of the Nord Stream gas pipeline projects. Schroeder came under pressure to quit these positions after the Russian operation in Ukraine. When he refused, he lost access to his office at the Bundestag. Next, the EU parliament drafted a resolution extending sanctions to individuals sitting on the boards of Russian companies. Schroeder has now decided to quit the two boards. 

Schroeder has also faced a storm of outrage consequent to the alleged atrocities in Bucha caused by Russia, he told an interviewer that the incident would have to be investigated, a perfectly reasonable stand to take! It is just not possible to have a legitimate disagreement on some matters in the supposedly free societies of the West. If this is the plight of a former Chancellor of Germany, just imagine what dissenters in, say, the media or academic would have to face.

India has come in for severe criticism in the Western media in recent years for displays of intolerance of dissent. Without in any way justifying acts of intolerance in India, it is time to tell the West: Physician, heal thyself.

Friday, May 20, 2022

Loophole in Places of Worship Act 1991?

The Places of Worship Act 1991 has been in the news. Very simply, it is Act of Parliament whereby the religious character of any place of worship, as it existed in 1947, cannot be disturbed. An exception made to the Act was the dispute site in Ayodhya.

If that is so, how could  the mosque in Varanasi (Gyanvapi) come under challenge? Meaning, how could any court entertain a challenge? That is the stand of prominent Muslim groups. Since the character of the place cannot be changed due to the Act, where is the question of any court entertaining any petition related to the mosque?

I can't pretend to be a legal expert. From what I have read in the papers, it appears the Act has another exemption. It exempts places of worship that qualify as ancient monuments. So, if there is a Shivalinga inside the Gyanvapi mosque, as the Hindu petitioners in the case content, does it become an ancient monument so that the Act does not apply to this site? And if it does not, does that mean access to the site will have to divided between Muslims and Hindus? Or can the Hindus claim the site itself/

In the Ayodhya case, the Supreme Court decided the matter looking at the case as one of a land dispute. The party that could establish that it had had greater access to the land over the centuries won, namely, the Hindus. How would the Gyanvapi dispute be resolved if the petition of the Hindus is considered maintainable?

I await the wisdom of legal experts.

Wednesday, May 18, 2022

Can boards ever keep executive pay in check?

My answer is a blunt 'No'. Boards cannot get executive pay within reasonable bounds- they will almost always tend to err on the excess. 

The latest case in point is JP Morgan. Shareholders at the bank have voted against the pay package recommended by the board for six top executives at the bank, including CEO Jamie Dimon. The package amount to -umm...- only $ 201.8 mn. Dimon stands to get $50 mn from a one-time award. The shareholder vote on exec pay is non-binding in the US. But it does send out a strong signal. Boards may pretend to notice the signal but it is unlikely to change board behaviour a great deal.

The board has conveyed that it is giving a large one-time award to Dimon because it wants him around for many more years. Dimon is 65 and has been at the helm since 2005, that is, for 17 years. If the board thinks nobody in the world can replace Dimon, then it is confessing to a major failure: it has failed to find a successor. It is also acknowledging that JP Morgan's business is unsustainable- there is only one person who can run it.

How absurd! It is not that Dimon is irreplaceable. It is just that the board finds it expedient not to disturb the status quo. And one good reason for that might be that disturbing the status quo could be that any change would be annoying to the CEO.

Boards just can't get executive pay right any more than they can get succession planning right. There is a common reason for the two failings. Boards are in thrall to CEOs. Board members owe their appointments, in large measure, to the CEO and they owe their continuance in office to the CEO. (Forget the nonsense about the Nominations Committee of the board deciding board memberships. Few boards would induct a board member without a nod from the CEO. It would be rare for a board to turn down names proposed by the CEO himself.). And a board membership at the top firms in the world means something- the money is good and the prestige riding on a board position is not to be sniffed at.

I can only reiterate what I have said several times before: we need to change the way board members are appointed if we want serious board room reform. Board members must be appointed by multiple stakeholders- shareholders, banks, financial institutions, employees. Self-selecting boards are a recipe for dysfunction- and spiralling CEO pay, among other things. 

Monday, May 16, 2022

Narcisstic bosses: how does one deal with them?

An article in FT that uses Robert Maxwell, the newspaper baron (long deceased), as a model of a narcisstic boss has a short answer to the question pose above: find another job. But that, as it suggests, is easier said than done: we all have financial needs, so we can't chuck up a job at will.

Very true. But there is another problem as well. There is a high probability that the organisation you move to would also have its share of narcissistic bosses. And the higher you go, the greater the narcissism.

In a book I wrote in 2015, Rethinc: what's broke at today's corporations and how to fix it, I cited a study that showed that the proportion of psychopaths among CEOs was far above that in the general population. Psychopathic traits include things such as a lack of empathy, a tendency to manipulate others, etc. These are qualities one would also associate with narcissism. 

Success in the corporate world- and, perhaps, most walks of life (perhaps, with the exception of advanced research)- is won on the strength of such qualities. This may not sound very pleasant but the heights of success are not for the faint-hearted. It is through a certain disregard for scruple, ruthlessness and self-admiration that people rise. Narcissism breeds success which fuels more narcissim. At the very top, the individual begins to think he is infallible, so he has no patience for anything other than adulation and flattery. He certainly has no room for dissent.

When people go into meetings and stay silent, heartily endorse whatever the boss is saying or indulge in outright flattery, they recognise that these are the things that will help them survive and prosper. They understand they are dealing with a narcissist, if not a psychopath, and fall in line because the costs of not doing so are painfully high. There may be a few honourable exceptions but what I have described here is pretty much the norm.

What can we do about it? Get together will colleagues and take the matter to the board ? No way. There will not be any takers for the petition. And it's no use going to the board because the board too has its fair share of narcissists who will not be able to relate to things such as fairplay and justice.

In government, your job is protected and you can choose to forswear ambition and do your job in your little corner. Alas, in the private sector, there is little choice other than to grow a thick skin. Psychopathic bosses are the primary reason why organisations are so toxic and one reason those toiling in them nurse all kinds of ailments. 

If that sounds a trifle gloomy, please do let me know if you have better suggestions.



Friday, May 13, 2022

High inflation: could central banks have acted earlier?

Prices are surging everywhere. Central banks are being panned for not having acted early enough. In the US, the Fed is said to waited for too long before raising rates. In India, the RBI is being criticised for being dovish on inflation.

I beg to disagree. The sort of inflation that the Ukraine conflict has unleashed could not have been anticipated by central banks. 

The IMF has forecast inflation of  5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January, a month before Ukraine erupted. Nothing that central banks could have done would have altered the basic post-Ukraine inflation trajectory.  

In India, the RBI could have raised the policy rate in February, 2022. It could have signalled a less accommodative monetary policy. But these actions would not have made much of a difference to the inflation outlook.

I elaborate in my BS column, Blame Ukraine conflict, not central banks.

FINGER ON THE PULSE

T T RAM MOHAN

 

Blame Ukraine conflict, not central banks

The origins of the inflation shock the world is experiencing are primarily political, not economic or monetary

 

The global economy faces a combination of slowing growth and rising inflation in 2022. Many commentators ascribe it to the excesses, fiscal and monetary, of the past several years. They are wrong. The deceleration in growth and inflation of the magnitude we are seeing now are more on account of the conflict in Ukraine.  

 

To grasp this, you only need to look at forecasts before and after the Ukraine conflict that commenced in February 2022.

 

Let us take the growth forecasts first. The year 2022 was to have been the year of recovery for the world economy from the ravages of Covid-2 in 2021. In October 2021, the IMF’s World Economic Outlook (WEO) saw the world economy growing at 4.9 per cent. In its April 2022 issue of WEO, the IMF projects world economic growth at 3.6 per cent in 2022 or 1.3 percentage points below the October 2021 forecast. Note that the April forecast is 0.8 percentage points below the forecast of January 2022, a month before the Ukraine conflict erupted.  

 

So, yes, the world economy was slowing even before the conflict in Ukraine. Prices of commodities had started rising due to the recovery in the world economy. Central banks had started responding with an increase in interest rates and this was impacting private consumption and investment.

 

But Ukraine has greatly amplified the deceleration in growth. The sanctions against Russia have no precedent and have disrupted long-standing supply chains and trade linkages. Inflation, as we shall see, has received an enormous boost. Capital flight from emerging economies is putting pressure on exchange rates, giving central banks another reason to raise interest rates.

 

Increases in interest rates threaten to undermine government finances across economies. Western banks are poised to take a hit of around $10 billion on their exposures to Russia. Western corporates retreating from Russia face huge write-offs. There is, above all, uncertainty about the course of the war and the possibility of secondary sanctions against nations found to be violating sanctions imposed on Russia. All this will tell on growth. One cannot compare the slowdown projected prior to February 2022 with what faces us post-Ukraine.

 

The comparison of trends in inflation pre- and post-Ukraine is even more compelling.

 The World Bank’s Commodity Markets Outlook (April 2022) shows that between January 2020 and December 2021, that is, over 24 months, energy prices rose at a compounded annual rate of 22.4 per cent. In 2022, in just three months from January to March, energy prices rose by an additional 34 per cent! Non-energy commodity prices rose by an annual rate of 18 per cent over the previous two years. In the first three months of 2022, these rose by an additional 13 per cent.

 

As a result, the World Bank’s forecast for energy prices in April 2022 is 92 per cent higher than in October 2021. For non-energy commodities, the forecast is 49 per cent higher. The forecast for food prices is a good 57 per cent higher. The Ukraine conflict has caused prices to soar in a way that central banks could not have anticipated earlier.

 

It makes no sense to criticise governments for having boosted spending, first after the global financial crisis (GFC) of 2007, and then after the Covid crisis. Nor can central banks be faulted for policies aimed at supporting growth. These policies saved the global economy from collapse after the GFC. They were also successful in containing the damage from the Covid crisis, in particular, to vulnerable groups, such as the poor and small enterprises. 

 

Proponents of Modern Monetary Theory (MMT) contend that the only limit to government spending is inflation, not government’s capacity to repay borrowings through future taxes. Critics of MMT say that its advocates have seriously under-estimated the inflation risk to government spending. This is by no means obvious. It is more plausible that the fault lies, not in the economic policies of well over a decade, but in the stars of NATO. The inflation shock we are seeing is political in origin. It is primarily on account of the NATO’s opting for a head-on confrontation with Russia over the eastward expansion of NATO.

 

Commentators say central banks have been late in reacting to inflation. This is strictly hindsight. Our analysis above suggests that prior to Ukraine, the US Federal Reserve was justified in waiting to see if the supply disruptions caused by Covid had played out. It had grounds to believe that a series of 25 basis points increases in the policy rate would suffice to head off inflation. No central bank can anticipate the sort of supply shock that has emanated from Ukraine.

 

Similarly, the Reserve Bank of India (RBI) may not have erred in forecasting an inflation rate of 4.5 per cent for India in 2022-23 last February. The revision in the inflation forecast to 5.7 per cent that happened in April is strictly a post-Ukraine event.

 

At a forecast inflation rate of 4.5 per cent, the RBI had grounds for prioritising growth over inflation. As long as inflation is within the band of 6 per cent, it is appropriate to prioritise growth especially at a time when the growth rate has been below the trend rate. When the inflation forecast moves closer to 6 per cent, it is appropriate to prioritise inflation.

 

Those who say that the RBI should be fixated at all time on an inflation rate of 4 per cent forget that there was a question mark over the continuance of the present band mandated for the MPC. The argument was made that, in the interest of facilitating a higher growth rate, the target rate for inflation could be raised to 5 per cent plus or minus two per cent.

 

The government decided to stay with the present mandate, perhaps, because it thought that relaxing the monetary policy target at the same time as the fiscal deficit target was being continuously deferred would unsettle foreign investors. Against this background, the RBI cannot be faulted for its interpretation of the inflation mandate.

 

The outlook for both growth and inflation has changed dramatically as a result of a force majeure event, Ukraine. It makes little sense to fault demand management for the effects of an unprecedented supply shock.




 

Thursday, May 12, 2022

Credit Suisse woes: can banks be cured at all?

Can banks be cured of their penchant for taking excessive risk? Or is banking an ailment for which there is no cure?

The question is prompted by the astonishing confession of the Chairman of Credit Suisse, Axel Lehmann:

It has become clear that the challenges of the past were not solely attributable to isolated poor decisions or to individual decision makers,” he (Lehmann) told the Swiss lender’s shareholders. “Within the organisation as a whole, we have failed too often to anticipate material risks in good time in order to counter them proactively and to prevent them.

Well, if a bank can't anticipate material risks, what are its executives getting paid for? The problem, I suspect, is not lack of awareness of material risks. It is the way incentives operate in banking: heads I ( the bank manager) win, tails you (the shareholder) lose. If a banking bet goes hugely wrong, the shareholders and bondholders are left holding the can. The manager, at worse, will lose his job. He won't starve as a result: he will enough millions to live off for the rest of his life. As long as there are no penalties, including criminal penalties, for irresponsible decision-making and as long as banks are leveraged the way they are, it seems futile to expect bankers to behave. 

Credit Suisse has got singed on account of exposures to high-profile collapses. It lost $5.5 bn on account of its exposure to the disgraced fund, Archegos. And its clients have  $10 bn of their money trapped at a failed fund, Greensill Capital. 

An investigation carried out by law firm Paul, Weiss at the instance of Credit Suisse remarked that the bank's losses that the losses were the result of a "fundamental failure of management and controls" at the bank and a "lackadaisical approach to risk".

Makes you wonder. If this is the quality of risk management at the one of the best known names in the world of banking, what does it say about the efficiency of foreign banks? What does it tell us about the functioning of the boards of top institutions? Is corporate governance an illusion? Does it make sense at all to talk of foreign banks coming in and acquiring underperforming public sector banks in India? 

I leave it to you to ponder.

Saturday, April 09, 2022

IIMA logo controversy-II: autonomy and the IIM Act

IIMA and the two other leading IIMs have enjoyed considerable autonomy ever since they were set up. Nevertheless,  starting in the early 2000s, faculty and the director set up a clamour for more autonomy, especially financial autonomy. I have never been able to quite figure out what they wanted. I guess they wanted full freedom of pricing in respect of the various programmes. They may also have been keen to come out of the Pay Commission straitjacket for faculty pay.

In 2008, freedom of pricing was granted: the fee for PGP  was increased by more than 150 per cent (and without any consultation with faculty whatsoever). Yet, the clamour for autonomy did not die down. The community wanted to be free from any sort of government control.

I was a little sceptical about this demand myself. My suspicion was that more autonomy meant freedom for the director to do as he pleased without any checks on the part of the government. It would not translate into more faculty autonomy. I sensed that the faculty's position would worsen if we came out of the government fold in practice, even if legally we we remained a public institution.

Some time in 2015, Smriti Irani introduced a draft IIM Bill that introduced better checks into the IIM system - or at least that was my view. The then director, Ashish Nanda, and several faculty decided to oppose it.

I saw nothing wrong with the Bill and wrote an article in the Hindu saying so. I pointed out that the IITs had done quite well for themselves while being under government control and that the IIMs need not fear any undue government intrusion. To my surprise, my article drew a torrent of favourable responses on the faculty notice board. As I mentioned earlier, faculty had long demanded more autonomy. However, over the years they (a large section of faculty) had seen the drift of power away from themselves to the  director and the board over the past decade and had come around to my view !

The Ministry of Human Resources Development (MHRD) invited responses to the draft Bill. Nanda circulated a note that was highly critical of the draft Bill. It was  to be sent to the Ministry via the online link provided. I wrote to him saying that I disagreed with him. The question of greater autonomy, I said, had not been properly debated by faculty. I suggested that the matter be debated and a vote taken on the draft Bill. Only if the vote was in favour should his note be sent as the Institute's response, otherwise it should go strictly as his personal response. 

Nanda did not reply. He and the then Chairman, AM Naik, went on to hold a press conference where the Chairman denounced Irani for trying to reduce the IIMs to a post office of the government. Irani took umbrage and gave vent to her feelings in a TV interview.

The debate I had asked for never happened. Nanda (and a few other IIM directors) kept meeting with the government. In the meantime, it turned out that the PMO itself favoured much greater autonomy than Irani had contemplated. Irani was moved to another ministry and Prakash Javadekar took her place. Thereafter, in 2017, the IIM Act was enacted which took the autonomy of the IIMs to a higher level.

The point is that the views of IIM faculty were not factored into the drafting of the Act. The dialogue was between the government and a few IIM directors.

Once the Act was passed, the number of government nominees on the Board of Governors was reduced from four to two. These two nominees (one each of the central and state government) ceased to take interest in the proceedings, leaving it to the rest of the board to take all decisions. The other members on the board are representatives of industry, alumni and two faculty of the Institute. 

Everybody knows what the 'board' anywhere is, even in the corporate world. It is basically the CEO. The CEO comes up with proposals which boards duly approve, except where there is a serious crisis in an organisation. Now, this is the case even in the corporate world where boards are subject to company law, securities regulations, exchange regulations, investor scrutiny, etc. The majority of boards are dysfunctional and ineffectual, which is why we keep going on and on about corporate governance.

In the IIM context, boards are not subject to any of the checks mentioned above. Nor is the government now acting as a check. The result is that autonomy has, in effect, become untrammelled freedom for the director. This is the case even at the leading IIMs. One can well imagine the situation at the lesser IIMs.   

This has been going on for some five years now since the IIM Act was passed.  Within six months of taking over as director, Nanda proposed that the iconic Louis Kahn structures (including faculty and staff residences) be demolished. He wanted faculty and staff to move into multi-storied structures to be built for them at one corner of the campus near the Azad Society gate. An exception would be made for the director himself- he would he housed in a newly constructed bungalow.

Faculty asked what would happen to the entire stretch between the Azad gate and the main building. Nanda said it would be a "green area'. We heard unofficially that the entire construction project would cost more than Rs 200 crore. Fortunately, the board did not favour the idea. Many of us wondered why the construction of new buildings would be a priority for a director who was said to have come on a two year sabbatical from Harvard. We had supposed that institution-building was more about institution than building. 

In 2020, the present director and the board revived the proposal. The staff residences near Azad gate were demolished. Two ugly, multi-storied structures are under construction. The director wanted to do away with the student dorms as well except for a few outer ones. The main building structures would remain. There was an outcry not just in India but abroad. Several petitions were sent to the Chairman.  That stopped the board in its tracks. 

The point is not that existing structures can never be replaced by new ones. But the case for doing so has to be properly made. Can the existing structures not be renovated using current technology? What are the relative costs of renovation and new construction? Alas, such a case was not made. The project was sought to be rushed through under a cloak of secrecy.  

Now, we have the logo controversy. I have written about it in my earlier post.  The issue is the same: why are these decisions being taken without proper consultation with all stakeholders?

The answer is that greater autonomy has meant poor oversight and no checks on the director. That is why we are now seeing a faculty revolt at IIMA. The government needs to understand this. The situation cannot be rectified by merely arriving at a compromise on this issue. We need to step back and examine where the IIM Act went wrong. 

I am afraid the situation cannot be set right without government intervention and a re-look at key provisions of the IIM Act. 

I have written about it in my column, Time to revisit the IIM Act,  in BS. The article is reproduced below for those who don't have access to the website.

Time to revisit the IIM Act

The government must jettison its hands-off attitude towards the IIMs and address the governance deficit

T T Ram Mohan

There has been turbulence at IIM Ahmedabad (IIMA) in recent weeks. Almost half the faculty are upset with changes in the logo announced by the director and have written to the chairman of the Board of Governors. Faculty members have also raised issues of governance, including violations of long-established norms.  

Other IIMs have not been free from trouble. At IIM Calcutta, there was a breakdown in communications between the previous director and the faculty in 2021. The matter was resolved only by the departure of the director before her term ended. At IIM Rohtak, the board gave a second term to the present director even as a controversy attending his first term remains unresolved. One could go on. There is a case for reviewing the experience with the IIM Act of 2017, and making the necessary course corrections.

IIMA is the premier management institution and has historically had the best governance amongst the IIMs. It is worth taking a closer look at IIMA following the IIM Act and deriving the necessary lessons for governance in the IIM system.

The issue at IIMA is not merely the changes to the logo. It is also the process followed in doing so. The director got two logos approved by the board and then informed the faculty about the change. It doesn’t seem to have occurred to the board to ask: What does the faculty think?

That hurts. IIMA has long prided itself on being a faculty-governed institution where key decisions — admissions, placement, course syllabi, recruitment of faculty, etc. — are taken by the faculty. That is its uniqueness and the secret of its success.

Over the years, faculty governance has got eroded and decision-making has moved from the faculty to the board. A pivotal moment came in 2008 when the institute announced a more than 100 per cent increase in the fee for its post-graduate programme. The faculty were informed about about the biggest increase in fee in IIMA’s history after the board had approved it.

Several issues agitating the faculty have remained unresolved. One that has figured in the current controversy is the appointment of two faculty members to the board. The noble intent was that the two members would act as a bridge between the faculty and the board. At IIMC and IIMB, the faculty elects its representatives to the board. At IIMA, the director selects them.  As a result, faculty members on the board at IIMA are not spokespersons for the faculty body.  Another contentious issue is the absence of norms for the appointment of Dean, a post one rung below the director. 

The IIM Act has given a fillip to the erosion of faculty governance at IIMA.  The leading IIMs had enjoyed considerable autonomy even before the IIM Act. The Act gave formal shape to such autonomy and enhanced it by leaving the appointment of the chairman and the director to the board. 

The crucial change that has come about after the IIM Act is that the government decided not to influence the working of the IIMs. The central government and the state government have one representative each on the boards. These nominees play a passive role where they used to be active. Earlier, faculty could expect the government to intervene if the chairman was unresponsive. Now, they have little recourse. 

The IIM Act says that the board is accountable to the government. It requires IIM boards to evaluate the performance of the institute once every three years through an independent agency, submit an action taken report to the government and place the report in the public domain. A visit to the websites of IIMA and IIMC fails to elicit any such report.  At IIMB, an external review is said to be nearing completion. The Ministry of Education must immediately ascertain how many IIM boards are compliant with the relevant provisions of the IIM Act.   

In the US, the boards of higher education institutions are filled with large donors who have enormous stakes in those institutions. Competition among the leading schools is fierce. Both these factors make for accountability. If a school’s ranking drops sharply, heads will roll because the boards care. 

In India, the leading IIMs do not have meaningful competition. Board members come and go and have virtually no stake in the IIMs. It is futile to expect IIM boards, as they are constituted today, to enforce accountability or provide redress.  

We thus have a serious governance deficit in the IIM system. There is no meaningful accountability of the director or the board. The governance deficit needs to be addressed. 

First, the government must jettison its hands-off attitude towards the IIMs. Until such time as a regulator for higher education is created, the government will be required to play the role of umpire at the IIMs. 

The IIM Act must be amended to revert to the earlier position of four government nominees, two each from the central and state government. These nominees need not be from the Ministry of Education. The government may appoint qualified persons to represent it in the same way it appoints independent directors at public sector enterprises.  Once the government nominees start playing an active role, comatose boards will spring to life.

Secondly, the government must constitute an IIM Advisory Board (IAB) that is tasked with commissioning an independent performance audit of each IIM every three years as required under the Act. It makes no sense to ask the boards to commission the audit because the boards themselves need to be evaluated.  The IAB may also be asked to propose chairmen and directors for the lesser IIMs and, if thought necessary, for the leading IIMs as well. Its role would be similar to that of the Banks Board Bureau for public sector banks. 

Thirdly, the IIM Act must be amended to ensure that faculty members on the board are chosen by the faculty and not by the director.

Fourthly, the government nominees on the board must insist on clearly defined criteria for important posts such as those of Dean, membership of the board and membership of the Committee that evaluates faculty. 

The IIMs are public institutions that owe their autonomous status to the generosity of the government. It would be tragic if the formidable brand equity of the IIMs were to be squandered for want of accountability in the system.

 






Friday, April 08, 2022

IIMA logo controversy-I : symptom of a deeper malaise

IIMA announced a change in its over sixty-year logo recently. The director had told the faculty that the board had approved two logos, one that retained the original Sanskrit quote and another that did not retain it (and was intended for an international audience).

Faculty protested against the changes that had been made without consulting them. Here is one of the many media stories on the subject. The Institute then came out with an announcement. Here is a part of it:

The proposed logo continues the legacy of the original logo, retains the status line in Sanskrit (VidyaViniyogadVikasa) as in the original, the colour rendition has been improved, the fonts modernized, the 'jaali' inspired brand mark has been made more amenable to communication in digital media, and the brand name made more distinct. The proposed logo is to be released in June of this year after the annual vacation.

But the controversy has not died down. Current and retired faculty and alumni have mounted a campaign against any change in the logo. Some point out that leading universities in the world have retained their logos for centuries.

Like many of my colleagues, I find the new logos distasteful. But that's not the point. The point is that faculty are miffed over the fact that they were not consulted.

Those who know about IIMA would know that it what conceived as a 'faculty-governed' institution, that is, key decisions would be taken by the faculty. Legally, all powers vest with the board. The board delegates powers to the director. Successive directors have chosen to be guided by the faculty, in effect, sharing powers with faculty. This beautiful construct was the work of Vikram Sarabhai, the scientist, and Ravi Matthai, the first full-time director of IIMA. 

The idea that something as important as a change in the Institute logo can happen without any faculty input is revolting to anybody associated with IIMA.

The erosion in faculty governance is not sudden, it has happened over time and over the tenures of several directors. To me, a turning point was the fee increase of over 150 per cent in 2008. Faculty were told about the increase via email on Convocation day after the increase had been approved by the board. Some of us who had not checked our email got to know from the newspapers the next morning! No explanation was given for the stupendous increase in fee.

There is an interesting post-script to that episode. After the fee was announced to the public, it came up for 'approval' at a subsequent faculty meeting. Somebody asked what was there to approved since the board had already taken a decision on the matter and announced it to the world. One of the lackeys of the director chimed in to say that the approval sought was not for the fee itself but the components thereof- how much for the academic programme, how much for the hostel, mess, etc! So much for faculty governance.

Over time, the lack of consultation has extended to various matters. Centres have sprung up without faculty approval or discussion. Important appointments have happened in arbitrary ways. IIMA has, for years, followed the 'Nominations' process for appointments to administrative positions, such as Dean. The director would invite nominations from faculty. The idea was that the leadership would emerge from within instead of being imposed from above.

I have no idea how well it worked in the initial years. What I do know that, in recent years, it has been  nothing but a fraud perpetrated on faculty by successive directors. Faculty put in their nominations and the director sticks to his pre-meditated choices. In some cases, we came to know that the director had sounded out individuals for positions even before nominations were sought.

On one occasion, the director appointed a contemporary of his from IIMA at Visting Faculty for one year. A year later, the concerned area found the individual unsuitable for a permanent position. The Director then gave him a five year appointment as VF and proceeded to elevate him to the post of Dean (alumni), a  post just one rung below the Director. Evidently, none of the permanent and senior faculty qualified for the position.

There are three Deans at IIMA. Prior to the IIM Act, one of the Deans was eligible to officiate as Director when the incumbent stepped down and until a new director was appointed. So we could, in principle, have had someone who did not qualify or a permanent position presiding over the faculty of the Institute in his capacity as Officiating or Acting Director!

There is also a complete absence of norms for other appointments such as membership of the Faculty Development and Evaluation Committee and faculty membership of the Board of Governors. Earlier, many of these positions went by seniority- you had to be a full professor and one of the senior-most faculty would be chosen. All that has fallen by the wayside. Directors have made these appointments according to their whims and fancies.

The current turmoil at IIMA thus has deep roots. The logo issue is a symptom of a deeper malaise, the steady erosion of faculty governance and the shift in decision-making from the faculty to the board (in effect, the director). 

The sad part is that things have become worse after the IIM Act that has conferred greater autonomy on the IIMs. I will post separately on that subject. 


HDFC Bank-HDFC merger: euphoria is misplaced

After the initial spurt in stock prices after the announcement of the merger of the HDFC duo, prices have fallen back. There is a better appreciation of the realities.

Yes, the merger was required, more so by HDFC because of the obvious difficulties in sustaining earnings growth. But that doesn't mean that the new entity is going to produce fabulous returns. The chances are that returns of the merged entity will be lower than that of either entity before the merger. 

The issues are:

  • The statutory requirements that will apply to the liabilities of HDFC
  •  The difficulty in cross-selling deposits to HDFC customers
  •  The managerial challenges of merger, including managing a more complex entity than before
  • The problems with growing earnings on a larger base
  • The prospect that the competitive landscape will have changed by 2025 when the presumed benefits of the merger will start kicking in

I elaborate in my article in Bloomberg Quint.

For those who can't access it, here it is:


HDFC Bank-HDFC merger signals goodbye to the halcyon days

T T Ram Mohan

HDFC Bank reported a return on assets (RoA) of 2.3 per cent last quarter and earnings growth of over 18 per cent. These are numbers that should make analysts and investors salivate- internationally, even an RoA of 1.25 per cent is considered very good.

Yet, the price to book value ratio of HDFC Bank was just 2.3 before the recently announced merger with HDFC, way below the multiples that the bank commanded at lower returns. The stock has underperformed the index over the past year.

Why so? Clearly, investors did not think that HDFC Bank could sustain high earnings growth.  

One reason surely was the bank’s low exposure to home loans: these constitute only 11 per cent of HDFC Bank’s portfolio.  A reasonable share of home loans in the overall portfolio of a private bank would be 25 per cent. Post the merger, management expects home loans will constitute 33 per cent of the overall book.

Right since the bank’s inception, not being able to have adequate home loans in its book has been an issue for HDFC Bank. The bank had the distribution capability but could not have its own home loan book because that would mean competing with its parent.  This did not matter much in the initial years because there was enough scope to grow through other products.

A few years down the road, HDFC Bank entered into an arrangement whereby the bank would sell HDFC’s home loans for a fee. It would also have the right to acquire 70 per cent of the home loans it had distributed as mortgage-backed securities. These securities would have the yield of home loans minus a servicing charge for HDFC. This gave the bank a product with a decent margin. But it wasn’t quite the same thing as being able to finance home loans on its own.

Analysts could see this clearly. So they would keep asking Aditya Puri, the former CEO of HDFC Bank, when the bank would do the obvious thing, namely, merging with HDFC. If memory serves correctly, Mr Puri had to tell analysts that that was the one question he didn’t want to hear any more! Mr Puri told analysts that the merger would happen when the timing was right.

The timing was never right in Mr Puri’s time because there was no way that Mr Puri would settle for a position that was less than that of the CEO. It would have been difficult for the parent’s top brass to settle for less either. There is little doubt, therefore, that the personality issue came in the way of the logical thing for HDFC Bank, namely, merger. The argument that interest rates have declined, so the cost for HDFC of complying with statutory liquidity ratio requirements is less onerous is correct. But high interest rates were not the principal hurdle to the merger.

Now, Mr Puri is no longer at the helm at HDFC Bank. Keki Mistry, Vice Chairman of HDFC Renu Karnad, Managing Director are both in their late sixties. There is no difficulty in their making way for the relatively youthful CEO of HDFC Bank, Sashi Jagadishan.

Without its own home loans, growth in recent years at HDFC Bank has come from MSMEs and the unsecured book. These are high-yield products but risky. Home loans have a lower yield but serve the purpose of lowering overall portfolio risk. Investors would prefer a bank whose growth was driven by the latter.

For HDFC, the parent, there was no problem in sustaining growth in the loan book because the potential for home loan growth remains huge in India’s under-penetrated market. The problem was being able to sustain its current margins in the face of tighter regulations.

Non-banking finance companies (NBFCs) have the disadvantage of not having access to low cost savings and current accounts. They had advantages. A big one was not being encumbered by the liquidity and priority sector obligations that banks face.   This is what is called ‘regulatory arbitrage’.

In October 2021, the RBI moved towards bringing regulatory norms for the larger NBFCs broadly in line with those for banks. In particular, the liquidity requirements for larger NBFCs were made the same as for banks with effect from 2025. The RBI’s intent is clear: the larger NBFCs must convert into banks.

The larger the NBFC, the greater its dependence on bank borrowings. Large NBFCs are thus a source of systemic risk. Better, then, that they submit themselves to the tighter regulation that applies to banks. There was no way that HDFC could have kept growing without considerable pressure on its margins. The answer was to access the low-cost funds available to HDFC Bank.

Mergers are touted as great strategic coups. Markets fall for this line and respond by boosting the stock prices of the two entities involved after  a merger  announcement. This has happened with the HDFC Bank- HDFC merger. For that reason, CEOs love mergers.

The prosaic truth is that mergers are confessions of failure: the failure to grow earnings on an organic basis. As our analysis shows, the HDFC Bank- HDFC merger is no exception.

Mergers are expected to reward investors through synergies and cost savings.  Alas, a large proportion of mergers- in some sectors and economies, the majority- fail, that is they failed to enhance the combined shareholder value of the two erstwhile entities. That is because the supposed benefits are overwhelmed by the complexity of the  larger entity. Every merger thus represents the triumph of hope over experience- every CEO hopes that his adventure will belong to the successful minority.

What of the HDFC Bank-HDFC merger? The two entities belong to the same family. HDFC’s employees are a small fraction of that of the bank but there is still the task of integrating the senior management of HDFC and resolving issues of who reports to whom.

Analysts talk of the benefits of scale. But these economies kick in at a much lower scale than that of the behemoth that will be created in the present merger. Beyond a certain scale, there is little to be gained.

Then, there is the potential for cross-sell. HDFC Bank can certainly push home loans in a bigger way to its customer base than before. Selling deposits of HDFC Bank to HDFC’s customer base is a more challenging proposition. HDFC’s customers would have their own banking relationships and switching from one bank to another is not easy. Had it been easy, HDFC could have  sold the bank’s deposit products all these years and collected a fee from the bank.

The merger is to be completed in 2024. The presumed benefits will happen in the years thereafter. The banking landscape then is unlikely to be the same. The newly consolidated public sector banks will have got to their acts together by then and may pose stiffer competition on both the liabilities and the asset side. Some of the NBFCs promoted by industrial houses may get the nod to convert into banks. Who knows what other changes are in store? The gains of the merger are thus subject to considerable uncertainty.

What is certain is the negative impact, post-merger, of the SLR and priority lending requirements against HDFC’s deposits. The returns of the enlarged HDFC Bank will fall as a result.  It Is not clear whether the RBI will allow HDFC Bank to directly hold the numerous subsidiaries of the merged entity. If the RBI insists on a holding company structure, that again will impose costs and returns will fall.

In sum, the merger is the answer to slower earnings growth faced by the two entities. We will have a giant that can be expected to do better than either entity would have done sans the merger. However, it is unlikely that the glorious past of either entity can be recaptured on a much larger base.  It does appear that the halcyon days of the HDFC duo  are over.

(Disclosure: The author is on the board of directors of IndusInd Bank Ltd. ttrammohan28@gmail.com)

Sunday, March 27, 2022

BlackRock chief on globalisation

BlackRock CEO Larry Fink thinks the Ukraine conflict marks the end of globalisation. You may have seen my post on the subject earlier.

The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades,” Fink wrote in his annual letter to shareholders of BlackRock, which oversees $10tn as the world’s largest asset manager. While the immediate result had been Russia’s total isolation from capital markets, Fink predicted “companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries.

FT has another article   that cites other corporate chieftains as echoing these sentiments.

 The Ukraine war is part of a pattern of supply chain disruptions getting more frequent and more severe,” said Dan Swan, co-lead of McKinsey’s operations practice, pointing to the trade war between the US and China, the blockage of the Suez Canal last year, and the coronavirus pandemic.

Nations and companies will want greater control over their supply chains. They will want to minimise dependence on fossil fuels by focusing more on renewable energy sources. They will want to accelerate indigenisation of defence production because they would not want to be at the mercy of outsiders for the supply of spare parts and ammunition in a crunch.

It is back to the much-derided Nehruvian focus on self-reliance with a bang. The approach has been derided in recent years by those who contrast the faster growth of outward-looking economies with that of India post independence. They overlook the fact that India, unlike small nations, will have to have a voice in world affairs. It will have to make sure its foreign policy and policy towards neighbours is not vulnerable to external pressure. Self-reliance is needed to give ourselves what is now called 'strategic autonomy'. That necessarily entails a sacrifice of growth.  

Democracy may involve a sacrifice of growth in the medium term when compared to authoritarian regimes. But we in India value freedom of expression and are willing to sacrifice growth. Similarly, we value the freedom to conduct an independent foreign policy. That too may require us to sacrifice growth.

This realisation is dawning on others as well. The more you integrate with the global economy, the greater is your susceptible to outside pressures and the greater the compromise of national sovereignty. 

Monday, March 21, 2022

Ukraine conflict: impact on the world economy

 The FT has a long article on the economic impact of the war in Ukraine. The highlights (shown in italics):

  • Impact on world economic growth: Before the war, global growth was expected to be in the region of 5 per cent in 2022, but Sheets (Citibank Chief Economist) reckons “if the [Ukrainian] tensions are prolonged or escalate further, the markdowns to this year’s growth outlook may need to be denominated in percentage points”.

  • Impact on Europe: The organisation (OECD). simulated a 1.4 percentage point hit to Europe’s economy in 2022, based on the effects so far, but officials are worried this underestimates the true economic impact. .... The worst-case scenario modelled by economists and central banks is if Russian energy supplies to Europe are cut off. Jan Hatzius, chief economist of Goldman Sachs, estimates an EU ban on Russian energy imports would cause a 2.2 per cent hit to production and trigger a eurozone recession, defined as two consecutive quarters of economic contraction.

  • Impact on the US: The US is, perhaps, the best placed which, perhaps, explains why the US is keen on propping up the government in Ukraine.  In contrast to Europe, the US economy is running too hot, with unemployment at 3.8 per cent in February almost back to the pre-pandemic rate of 3.5 per cent, and inflation at a multi-decade high last month, with consumer prices 7.9 per cent higher than a year earlier.
What about China and the emerging markets? China, as observers have noted, will be careful not to violate sanctions against Russia even while it provides moral support to Russia. Unless there is covert Chinese support to Russia that invites the wrath of the US, China should be well placed to withstand the present turbulence. The West has to be careful in imposing sanctions against China given that China is far more closely integrated with the global economy than Russia.  

As for emerging markets, a flight of funds is inevitable as interest rates in the US rise. But most emerging markets, including India, are well placed to deal with the pressure on their currencies, thanks to strong foreign exchange reserves. But emerging markets cannot escape the impact on growth as the global economy slows. 

Sunday, March 20, 2022

Book review: Spy Stories: Inside the Secret World of ISI and RAW

 

26/11, the attack on Mumbai by terrorists who came by boat from Pakistan, was widely seen as state-sponsored terrorism. The world was horrified by the loss of lives in a leading city of the world. India went on the diplomatic offensive and had some success in painting Pakistan as a rogue nation.

According to Adrian Levy and Cathy Scott-Clark, authors of  superbly researched Spy Stories, 26/11 was the work of set of non-state actors who may not have had the sponsorship of the state of Pakistan. (The authors had earlier written an acclaimed book on 26/11, the attack on Mumbai).

The mastermind behind 26/11 was one Pasha, a former officer of the Pakistan military. Pasha had been sent to Afghanistan to fight the Al Qaeda. He refused to fight as he placed “his faith before his country”. He was demoted and he quit the Pakistan Army. He initially joined the Lashkar e Toiba (LeT) and then moved to 313 Brigade, a Kashmiri militant outfit that kept its distance from the ISI, Pakistan’s spy agency.

The authors believe it was Pasha who conceived of the daring idea of a raid across the sea to Mumbai instead of the usual trek across the mountains in Kashmir that militants were used to. The astonishing part of their narrative is this: the CIA had comprehensive details of the 26/11 plot, passed on by David Headley, an American of Pakistani descent. Headley had been a drugs trafficker who had defected to the CIA. The intelligence, the authors say, had been passed on to the Indian authorities. But the authorities failed to act on it.

The authors’ source is Monisha, an officer at RAW, India’s external intelligence agencies. Monisha wonders whether the lapse was intentional. She speculates whether the authorities in India allowed the raid to happen in the knowledge that it would help them paint Pakistan in the darkest of colours and break the cosy relationship between Pakistan and the US.

The authors say that 26/11 did break that relationship. It also forced on Pakistan the realisation that terrorism in Pakistan, if not reined in, would cause the collapse of the state. There followed a crackdown on a unit in ISI which was seek as creating trouble. Hafiz Saeed, the LeT chief, came to be placed under house arrest. Monisha, for her part, is disillusioned with the way India’s intelligence agencies are functioning and emigrates to the US.

26/11 is just one of many episodes in a riveting book. Parts of it seem like something out of a Robert Ludlum novel or even from Mission Impossible. The authors have talked to numerous individuals connected with the two agencies (in India, they had access to NSA Ajit Doval). One wonders about the risks the authors took in doing the book.

Apart from Monisha, another individual figures prominently, Major Iftikhar, an ex-operative of ISI who is on the run from his own country’s agencies and can be reached only in complicated ways.  The cast includes numerous militants and agents, some of whom are double agents.

In Kashmir, it is hard to tell who is working for whom. Militants turn law enforcers. Some law enforcers turn renegade. The ISI passes on information to Indian agencies about some of its former assets who have now become a headache for it. The Indian agencies make short of them. It is a crazy world, one in which accountability and the rule of law is notably absent.

After 9/11 and until 26/11 dynamited the relationship between Pakistan and the US, the two had been very intimate indeed. After 9/11, the US sought two important favours from Pakistan. One was the use of Pakistan’s air bases and air space for sending its drones across the border into Afghanistan to eliminate America’s enemies and for housing its Special Forces.  Another was information on various terrorists it was trying to hunt down and who were using Pakistan as a safe haven. The US paid generously for these services. By 2004, Pakistan was making $4.7 bn for its services. It used the money to improve its defence infrastructure and to beef up the operations of the ISI.

The authors have their own take on the attack on the Indian Parliament in December 2001. India, they say, was quick to seize the opportunity to portray Pakistan in the worst possible light. They suggest that the “evidence” gathered in the case was cooked up. They write, “A special cell of Delhi Police officers with a reputation for staging fake encounters worked in record time, recovering mobile phones, SIM cards, receipts, and scribbled-down phone numbers- apparently left lying on the ground, critical identification brought on to a clandestine raid and then left undamaged after it”. The investigation was led by an officer, Rajbir Singh, notorious for fake encounters and with a distinctly shady past in the police force.

Two individuals who were incriminated were cousins Shaukat and Afzal Guru. Police claimed that the two had been intercepted while driving back to Kashmir. In their vehicle, investigators said, were recovered laptops, templates for counterfeit passes to enter Parliament and fake identity cards. Afzal Guru was said to have brought the terrorists to Delhi. Shaukat and Afzal gave the court signed statements saying that Jaish e Mohammed, the Pakistani terrorists organisation, had ordered the attack.

The authors say that Afzal Guru brought the terrorists to Delhi at the bidding of a police officer in Kashmir, Davinder Singh. The courts did not think it necessary to probe Singh’s role or his murky background. Singh was arrested in 2020 when found escorting a Hijbul Mujahideen Deputy Commander in a car in Kashmir. Singh was accused of “waging war on India”. Afzal Guru was hanged. But Western analysts and intelligence agencies, the authors say, remained sceptical of the official version on the Parliament attack. Pakistan, for its part, decided to crackdown on Jaish, believing that it had been infiltrated by RAW and IB! Talk of wheels within twisted wheels.

There is more in this vein in the book. What you hear or are told by the law enforcement agencies or the media often bears little relation to the reality. It is hard to tell who is friend or foe and whether an incident has been engineered by the intelligence agencies or not. It is best that read the book yourself and get a flavour of the diabolical games that underlie the official version of events that make newspaper headlines.

 

 

Friday, March 18, 2022

India: inflation outlook

CPI inflation came in at 6.1 per cent in February  2022. This breached the upper limit of the tolerance band for inflation set for RBI. 

Some analysts are pressing the panic button and asking for a rise in the policy rate or forecasting one. The raging conflict in Ukraine has lent an edge to concerns about inflation worldwide and analysts in India are no exception.

The analysts need to calm down. Oil prices have fallen back to $100 a barrel after rising much higher. Please note that Russia has not restricted its supply of oil. European nations are continuing to buy oil from Russia as payments related to oil and gas are exempt from sanctions. The earlier rise in oil prices reflected fears about a supply crunch, it's not a supply crunch had happened. True, many commodity prices have risen but this is merely the continuation of a trend that began long before Ukraine.

The war in Ukraine will dampen growth. The IMF had projected growth of 4.4 per cent for the world economy in 2022 compared to growth of 5.9 per cent in 2021. A downgrade is expected with Europe being significantly impacted. India's own growth prospects will not remain unscathed. As growth slows down, inflationary tendencies should recede. In other words, the supply-shock induced inflation should be a transient phenomenon.

The RBI believes that the high levels of inflation in recent months are account of the low base of the previous year. As soon as the base effect peters out, the inflation rate should fall.  This is the basis for the RBI's forecast for inflation for FY 22-23 of 4.5 per cent. Even if we factor in the rise in prices as a result of geopolitical factors, there is no reason to suppose at the moment that the upper band of 6 per cent will be breached. CRISIL has raised its own forecast to 5.4 per cent after taking into account recent developments.

RBI Deputy Governor Michael Patra gives a clearer idea of the RBI's thinking in a recent talk. He makes the following points:

i.  headline inflation has stayed in single digits and has tended to revert back to the target as each supply side shock receded.

ii. India has also transformed its food economy from deficits in key food items to surpluses and exports.

· iiiii. the absence of second round effects on wages and rentals, and low pricing power among corporates and excise duty cuts on petroleum products have tempered these upside pressures.

iv.iv. the evolution of CPI inflation up to January 2022 shows that statistical base effects have been keeping it elevated; the momentum or month over month changes in prices have actually declined during December 2021 and January 2022.

dd  The bottomline? Expect the RBI to revise its inflation forecast upwards at the next MPC meeting but it does not follow that the RBI will move towards raising the policy rate or even signalling one in the future. Growth rather than inflation remains the overriding concern for India.





 




Friday, March 11, 2022

Ukraine conflict will further derail globalisation

Whatever the stories the Western media may put out about the heroic resistance put up by the people of Ukraine and the heavy weather the Russian army is making of the operation, the outcome of the conflict is not in doubt. Ukraine will be suitably subdue and de-militarised, it will not be allowed to become a NATO member.

Don't take seriously the talk of a several mile- long convoy of Russian vehicles being stalled on the route to Kyiv. Such a convoy should be a sitting duck for the Ukrainian air force. The very fact that it hasn't been hit bears out Russia's claim of having established supremacy over the Ukraine skies. 

President Putin has chosen to proceed cautiously in order to limit civilian casualties. He also thinks that it suffices to cut off the Ukraine army into isolated pockets in cities encircled by the Russian army and wait for supplies to the Ukraine forces to run out. No need, then, to storm cities and endanger Russian and Ukrainian lives.

NATO has been careful to stay away from getting involved. It's not clear how much truth is in claims of Western arms being reached to Ukraine. How will the supplies reach encircled forces? Will they not be taken out en route? 

Anyway, I do not wish to dwell on the military details of the campaign. In my BS article, I argue that the conflict between Russia and the West will not settle even after Ukraine is subdued. A new international order is struggling to be born and it won't happen overnight. '

The casualty in the conflict is greater economic interdependence or globalisation. It is not just Russia that is getting cut off from the world economy. All countries will think carefully about the costs of integrating with the world at large- such integration makes you more vulnerable to external pressures. The movement of goods, services and capital across borders will receive a serious setback consequent to the sanctions imposed by the West on Russia. That is the long-term impact. In the short-run, we must expect higher inflation and lower growth.

More in my BS article, A fresh blow to globalisation.

A fresh blow to globalisation

The conflict in  Ukraine will   deepen   concerns about globalisation and national security

 

The world has changed since Ukraine. It is too early to grasp the full dimensions of the change that is upon us. But two things are reasonably clear. The reordering of international relations that Russia’s military operation in Ukraine is intended to bring about is likely to be a protracted affair. Two, the trend towards globalisation, which had suffered reverses even before the Ukraine crisis, has received another severe jolt. 

To grasp these changes, we need to first discount the narrative on Ukraine put out by the West. The Western media would have us believe that the conflict in Ukraine has happened because President Vladimir Putin wants to recreate the Soviet empire. That the Russian military operation has gone horribly wrong and will spell a major reverse for Mr Putin. That Mr Putin has underestimated Western resolve to deal with Russian aggression. And that Western sanctions will bring Russia to its knees. A large section of the Indian media and the Indian intelligentsia has bought this narrative.  

There is an alternative narrative that needs to be taken seriously if only so that policymakers can plan realistically for the difficult months ahead. Mr Putin sees the inclusion of Ukraine in NATO as an existential threat and the intervention in Ukraine as necessary to prevent a nuclear conflagration in the near future. No cost for Russia is too high to be borne in order to prevent such a denouement.  

Mr Putin is not the only person to have warned the West about the eastward expansion of NATO. Several leading American thinkers, including George Kennan, Henry Kissinger and Stephen Cohen, had warned that conflict with Russia was inevitable if the expansion continued. Mr Putin may now see the Russian operation in Ukraine as a precursor to a roll-back of NATO presence in Russia’s periphery. The West, for its part, is determined to punish Mr Putin for his adventure. As a result, the conflict between Russia and the West will not end soon even while few doubt the outcome in Ukraine itself. The war in Ukraine is not likely to end the way the West wants it. Western analysts are crowing over Russia’s failure to achieve a quick victory. They see the Russian campaign ending up in a quagmire. This is   wishful thinking. As several independent analysts have pointed out, the Russian army has moved slowly because it is under orders not to impose large civilian casualties. The Russian army also reckons that its objectives can be met by encircling Ukrainian troops and cutting off supplies instead of seeking a head-on confrontation.   

The tactics seem to be working. Ukraine President Volodymyr  Zelensky said on March 9 that he is willing to give up his quest for NATO membership and also consider some of Moscow’s other demands. This is a clear indication that Ukraine does not believe it can hold out for much longer. 

  In a speech that Mr Putin made on February 24 before the commencement of the military operation, he used chilling words to warn the West against any interference with the military operation. He said, “To anyone who would consider interfering from the outside — if you do, you will face consequences greater than any you have faced in history."

The warning seems to have had the necessary effect. NATO countries have ruled out involvement of their troops in Ukraine. Talk of a “no fly” zone over Ukraine imposed by NATO was swiftly scotched. Poland’s offer to transfer Russian-made fighter planes to the US for onward transfer to Ukraine has been rejected as untenable by the Pentagon. NATO prefers economic war to military war against Russia. 

The West has imposed what are supposed to be the harshest sanctions ever faced by any country. The US has banned oil and gas imports from Russia. The UK is curtailing oil imports. Russia has been cut off from the SWIFT messaging system. Select Russian banks have been barred from the payments system. 

Russia has not retaliated with its own sanctions so far. But an announcement it has made on foreign currency payments owed by Russian entities to countries it has declared “hostile” gives an indication of its capacity to hurt the West. These payments can now be made only in roubles parked with designated Russian banks. 

Western banks and companies face huge losses in consequence. The ruble has depreciated steeply since the Ukranian conflict erupted, it is not clear how foreign entities can access ruble payments parked with Russian banks and repayment of dollar-denominated Russian bonds are now in doubt. Even without Russia curbing supplies, oil and gas prices have soared. The West and, indeed, the rest of the world will have to suffer the costs of higher inflation and lower growth. 

Rising protectionism and concerns about national security had slowed the momentum of world trade and investment flows even before the Ukraine crisis. The corona pandemic raised doubts about nations being overly dependent on supply chains scattered across the world. The Ukraine crisis will deliver another blow to globalisation. 

The problem is not just the trade and investment relationships between the West and Russia. It is also relationships between the West and others, such as China and India, who may choose to continue to deal with Russia. If the sanctions regime is applied to those who deal with Russia, the potential for disruption is mind-boggling.

Russia faces severe restrictions on its access to its central bank foreign currency reserves parked in the West. As many commentators have noted, this is a development that will get other countries, including India, thinking seriously about parking foreign exchange surpluses with central banks in the West. The broader lesson that will go home is that greater integration with the outside world makes an economy more vulnerable to external pressures and could compromise a nation’s sovereignty.

Against this background, Prime Minister Narendra Modi’s slogan of “Atmanirbhar Bharat” is likely to gain in appeal. It is a slogan that has been interpreted in different ways by different people. However, a basic theme is to promote self-reliance in identified sectors, including defence. 

The government’s stance is that we do not wish to sacrifice competitiveness, we will produce for the world but we will support domestic industry through tariffs and subsidies.  in order to make this possible. In the post-Ukraine world, self-reliance is not just about producing national champions, it is about ensuring national security by reducing vulnerability to external pressures.