Friday, November 17, 2023

Gaza's plight: is there hope at all?

How will Israel's assault on Gaza pan out? Will it lead to the ethnic cleansing of vast portions of Gaza, a repetition of what happened when Israel came to be founded? Or will the world rouse itself to put an end to the suffering of a helpless people?

Here's  a somewhat bleak view penned by a former UN official:

To date, only Bolivia has severed diplomatic relations with Israel to protest against the ongoing war crimes perpetrated against the Palestinians. Unless Egypt, Jordan, UAE and Morocco sever their diplomatic relations with Tel Aviv as their people demand; unless countries such as Turkey, South Africa and Brazil, which have denounced Israel’s war crimes, align their diplomacy with their own pronouncements; unless these countries emulate Bolivia’s principled diplomatic move and put pressure on their Western partners; unless Saudi Arabia, UAE, Iran, Qatar, Azerbaijan and other large exporters of oil and natural gas use their economic leverage on Israel’s blinded backers, Gaza and its population will be destroyed, inch by inch, soul by soul. And no one would be able to say: “We didn’t know.”

The view from a South African who was witness to the end of the apartheid is more hopeful:

They will do well to learn from white South Africans who, after 300 years of minority rule, realised it was an impossible political project to continue to defend so violently, and still maintain any semblance of a moral high ground.There is a tipping point when even for the defenders of such a project, the faint question rings louder and louder in the collective conscience: how far is too far? There can be no going back to the promises of security based on what was before. There can be no going forward in peace if it means more and more blood of children and civilians haunting successive generations who will have to take responsibility for the actions unfolding before our eyes today.

The most astonishing thing about the ongong carnage is much of Western Europe (UK, France, Germany) is firmly with Israel with dissenting voices being heard from the smaller countries such as Belgium and Spain. 

Thursday, November 16, 2023

Gaza conflict unlikely to derail world economy


When the Ukraine conflict erupted in February 2022, there were all sorts of apocalyptic forecasts. The war would escalate in terrible ways, the pundits said. NATO would increase its involvement until Russia felt obliged to retaliate with strikes against NATO countries. Russia and US would confront each other directly. World War III loomed. The world economy, already reeling under massive interest rate increases effected by central banks, would go into a tailspin.

Nothing of the sort happened. The world has not ended- yet. The world economy slowed down in 2022 but it did not collapse- the threatened recession in the US did not materialise. The reason: NATO and Russia both made sure the conflict did not escalate beyond a point. The conflict remained largely localised around the borders of Russia and Ukraine.

Today, the Ukraine conflict hardly figures in the news. We hear the same apocalyptic forecasts about the Israeli assault on Gaza. The Arab world, angered by the suffering inflicted on the people of Gaza, would band together in confronting Israel- and soon the US and Russia would be drawn into the rival sides.

The 50 nation summit hosted by Saudi Arabia recently should serve to quell any such misgivings. The Arab- Muslim world is willing to bark but afraid to bite. The summit steered clear of measures such as an oil embargo against Israel and the West and cutting off of diplomatic relations. Instead, we heard words of condemnation and pious platitudes. Nobody wants a full-blown conflagration. The World Bank’s Commodities Markets Outlook sees crude oil prices at $84 per barrel, 16 per cent below the $100 per barrel average of 2022. The world economy is unlikely to be derailed by the conflict in Gaza.

I explore these themes at greater length in my recent article below.

Geopolitical risk: After Ukraine, it's Gaza

“Geopolitical risk” has been a huge buzzword since the eruption of the Ukraine conflict in February 2022. It connotes  the potential for disruption to the world economy arising from armed conflict.    “Geopolitical risk” sounds more technical and impressive than “war”.  People use it for the same reason they prefer “mindset” to “attitude”. 

In 2022, the significant geopolitical risk was an escalation in the Ukraine conflict that would derail the world economy by causing crude oil prices to spiral well above $100 per barrel. That did not happen. Will it happen now with the conflict in Gaza? 

Let us first examine how oil prices came to be contained post-Ukraine.  Oil prices touched a peak of $140 per barrel in March 2022, a month after the conflict erupted. It is not as if the supply of oil was disrupted. The markets were merely reacting to the prospect of a major disruption. They feared that $140 was the price oil would touch if there was an escalation in the conflict.  

The conflict did escalate. Nato progressively chose to supply tanks, longer-range missiles and fighter aircraft to Ukraine after initially ruling out these items.   But the significant escalation, one that would draw Nato into direct confrontation with Russia, did not happen. Oil prices fell from the peak of March 2022 and averaged $100 per barrel in 2022. In 2023, oil prices declined further to a low of $72 per barrel. 

One factor has turned out to be crucial in putting a lid on oil prices: The imposition of a crude oil price cap by the G7 and the European Union (EU), referred to as the Coalition. The Coalition was keen to curtail the flow of oil revenues to Russia so that it lacked funds for its operations in Ukraine. 

The G7 countries decided to phase out and altogether ban oil imports for themselves. They then thought of prohibiting other economies from buying Russian oil through the threat of sanctions. However, they realised that if Russian oil supplies were removed from the oil market, the price of oil could shoot up to as high as $150 per barrel. That would have crippled several economies (including India) and dragged down the world economy.  How was the G-7 to keep Russian oil flowing into the world market while hurting Russian revenues? 

The answer was the oil price cap. The G7 insisted that nobody should purchase crude oil from Russia at above $60 per barrel. They hit upon a mechanism for ensuring this outcome. All companies in the Coalition that provided shipping, insurance or finance related to oil would have to observe the cap or face punitive action. 

Since the countries within the coalition provided 90 per cent of all maritime services related to oil, the price cap turned out to be largely effective. Russia continued to export oil to countries outside the Coalition. China and India increased their imports of oil from Russia. However, the use of Western maritime services meant that Russia had to sell oil at close to $60 per barrel. The OECD economies had been procuring roughly a third of their oil imports. They were able to shift to other sources of oil. The geopolitical risk from Ukraine did not materialise.  

What does Gaza now bode for the world economy? The first thing to note is that Opec and other oil producers announced cuts in production in October 2022. This was followed by further cuts in production through 2023. Oil prices have risen as a result.

Secondly, Russia has found ways to circumvent the oil price cap. It has developed its own “dark fleet” of oil tankers that can operate without Western maritime services such as insurance. The Financial Times (September 25, 2023) estimates that as much as three-quarters of Russian oil travelled without Western insurance last August. As a result of these two developments, oil prices currently hover around $80 per barrel. FT reports that virtually no Russian crude was sold at below $60 per barrel last October.

Will the conflict in Gaza make things worse? The World Bank is surprisingly sanguine about the prospects. After factoring in the Gaza conflict, the Bank’s Commodities Market Outlook (October 2023) sees oil prices at $84 per barrel in 2023 – or 16 per cent below the level in 2022- in its baseline scenario. It sees the commodities index as a whole at 24 per cent below the level in 2022. Oil at $84 per barrel will hurt the world economy, but it is not be  crippling.

Only if the conflict in Gaza morphs into a regional conflict does the World Bank see oil prices shooting up to $150 per barrel. Military analysts say that would be a conflict that draws in the Hezbollah group in Lebanon along with its backer Iran (and possibly Syria and Turkey). In that event, the US will weigh in on the side of Israel.  Such a prospect looks unlikely at the moment. 

As more than one commentator has pointed out, Israel’s responses to provocations in the neighbourhood typically involve a race between the clock and the casualties it can impose. The US will back Israel to the hilt for a certain length of time. Then the clock stops. Once it has exacted a certain price, Israel will be told to call off its offensive. Both sides will claim victory. 

There is every indication that the same script is being played out this time. The most recent utterances from the White House and the US Secretary of State suggest that time is running out for Israel. Other players are also adhering to this script. For all its belligerent noises, Iran is holding its proxy, the Hezbollah militia in Lebanon, on a tight leash. Prominent Muslim nations such as Egypt, Jordan, Turkey, and Saudi Arabia will not go beyond condemnation. Nobody wants a full-blown conflagration. 

That is what we have seen happen in the Ukraine conflict.  It is also what happened through much of the Cold War years that followed World War II. The great achievement of nuclear deterrence was that the world’s two leading military powers, the US and Russia, learnt to keep conflicts strictly local. They never got into a direct shoot-out. World War III was often predicted but it never happened. The world, it seems, has learnt to live with geopolitical risk. Financial crises and pandemics pose greater threats to the world economy than geopolitical risk.  

Tuesday, November 14, 2023

IIM Bill 2023- new rules notified

The government has notified new rules for the IIMs consequent to the IIM Bill 2023 being passed in Parliament last July, that is, within four months of the Bill having been passed.

That is quite striking. It is not common for bills to be passed or notified so quickly. In the case of IIMs, any changes to rules would take a fairly long time to happen. First, there would be consultations with the directors of the leading IIMs, if not all IIMs. Then a discussion paper would follow with the public invited to respond. After that changes would be negotiated with the IIMs.

Not so with the IIM Bill 2023. It was introduced in Parliament in July 2023. The next week, the Lok Sabha passed it. The following week the Rajya Sabha passed it. The changes were duly notified in the government gazette mid- August. No discussion, no negotiation, no waffling.

This is decisiveness of an order not seen in government. What could be the explanation? I believe the government sensed that a governance emergency had arisen in the IIM system, one that required a swift response if the IIM brand was not to suffer lasting damage.

Ever since the IIM Act came into force in January 2018, accountability in the IIM system had flown out of the window. Directors and boards at various places behaved as though they were accountable to none. At least two leading IIMs, IIMA and IIMC, witnessed turmoil of a sort not seen during the long years when government had better control over the IIMs.

In the new scheme of things, the government, through the Visitor (the President of India), can dissolve an IIM board on three grounds- if it was satisfied the board was not performing its duties, failed to carry out directions given by the Visitor or in the public interest. It can also remove any director without reference to the board. It will have the final say in the appointment of Chairmen and directors of IIMs.

I believe the government has grounds to proceed against several of the IIM boards under the powers it has assumed. The overwhelming majority of the IIM boards have failed to comply with the requirement under the IIM Act of having an independent review done within three years of the passing of the IIM Act. The couple of review reports I have seen are pathetic documents- they sound more like official brochures than an independent management audit. Many IIMs have been non-compliant with the Constitutional requirement of reservations for designated categories in faculty recruitment.

We have to wait and see. In the meantime, the ushering in of a modicum of accountability into the IIM system deserves three cheers.



Thursday, November 02, 2023

Israel's war on Gaza: assorted links

 An article in Aljazeera has an interesting take on some of the top people in Israel's government starting with PM Benjamin Netanyahu:

Kimhi, who teaches at Tel Aviv University, has studied Netanyahu’s mind for almost a quarter of a century. In 1999, the same year that Netanyahu’s first term as premier would end, Kimhi’s behavioural analysis of the leader found a concerning pattern of behaviour. Some of his conclusions: Netanyahu was narcissistic, entitled and paranoid, and he reacted poorly under stress.

Kimhi revisited Netanyahu as a subject in 2017 but found not much had changed. As people age, Kimhi said, their behaviours tend to become more extreme. For Netanyahu, his paranoia and narcissism have grown. He trusts no one, except maybe his immediate family, and prioritises his “personal future” over all else, Kimhi’s research found.

         ....National Security Minister Itamar Ben-Gvir has been convicted of incitement to racism, destroying property, and joining a “terror” organisation when he was 16 years old. Finance Minister Bezalel Smotrich leads the hardline Religious Zionist Party that not only rejects Palestinian statehood but denies the existence of the Palestinian people and has condemned LGBTQ activists. Interior and Health Minister Aryeh Deri is an ultraorthodox rabbi who was sentenced to three years in jail for taking bribes.

 A senior official at the UN has resigned his post in protest against what he calls Israel's 'genocide' in Gaza:

The director of the New York office of the UN high commissioner for human rights has left his post, protesting that the UN is “failing” in its duty to prevent what he categorizes as genocide of Palestinian civilians in Gaza under Israeli bombardment and citing the US, UK and much of Europe as “wholly complicit in the horrific assault”.

Craig Mokhiber wrote on 28 October to the UN high commissioner in Geneva, Volker Turk, saying: “This will be my last communication to you” in his role in New York.

Mokhiber, who was stepping down having reached retirement age, wrote: “Once again we are seeing a genocide unfolding before our eyes and the organization we serve appears powerless to stop it.”

 Heartening to see there are still a few people in high positions with conscience left in them.

And finally, South American countries have chosen to express their outrage over what is going in in various ways. Bolivia has cut off diplomatic relations, others have recalled their envoys. In the Arab world, only Jordan has reacted in such a fashion, choosing to recall its envoy:

Bolivia said on Tuesday it had broken diplomatic ties with Israel because of its attacks on the Gaza Strip, while neighbors Colombia and Chile recalled their ambassadors to the Middle Eastern country for consultations.

The three South American nations lambasted Israel's attacks on Gaza and condemned the deaths of Palestinian citizens.

Bolivia "decided to break diplomatic relations with the Israeli state in repudiation and condemnation of the aggressive and disproportionate Israeli military offensive taking place in the Gaza Strip," Deputy Foreign Minister Freddy Mamani said at a press conference.

....."What we have now is the insanity of Israel's prime minister, who wants to wipe out the Gaza Strip," said Brazilian President Luiz Inacio Lula da Silva on Friday.


Thursday, October 26, 2023

Storm over historian article on Israel 's war against Hamas

 An Israeli professor who resides in the US has kicked off a storm by writing an article that asks Israel to stop 'weaponising the holocaust' in its conflict with Palestinians. Segal argued, as many including the UN Secretary General have, that we should not be mindful of the background to the Hamas attack on Israel, which is no way to overlook the atrocities that happened. Simply to portray Palestinians or Hamas as barbaric or as animals is not helpful:

The context of the Hamas attack on Israelis, however, is completely different from the context of the attack on Jews during the Holocaust. And without the historical context of Israeli settler colonialism since the 1948 Nakba, we cannot explain how we got here, nor imagine different futures; Biden offered us, instead, the decontextualized image of “pure, unadulterated evil.”

Segal also underlined the issue of accountability in such cases:

The history of the Holocaust also points to the importance of accountability, even as post-Holocaust accountability remained limited. In the case of Israel’s assault on Gaza, accountability needs to begin from what is very clear: incitement to genocide, which is punishable under article 3 of the UN genocide convention, even when genocide does not follow. While the debate about genocide in Israel’s current assault on Gaza will undoubtedly continue for years, perhaps also in international courts, Israeli war crimes and violations of international humanitarian law are beyond dispute.

Understandably, Israeli officials and several Jewish groups have reacted fiercely to Segal's comments.  

The important thing to note, however, is that Segal is an Israeli. There are many voices like him in Israel itself, people who do not hesitate to criticise the policies of the present government. One of the magnificent forums for the expression of dissent is the newspaper, Haaretz, that hosts the famous dissenter, Gideon Levy. It is fair to say that dissent and the tolerance of dissent in Israel is greater than in most other countries and that is an aspect of Israel that is worthy of admiration. As long as such dissent thrives, there is reason for hope. 

RBI directive to private banks on wholetime directors

The RBI has directed private banks to have at least two whole-time directors on the  board within four months. 

Establishment of such a team may also facilitate succession planning, especially in the background of the regulatory stipulations in respect of tenure and upper age limit for MD & CEO positions,” the RBI said in its notification

Of course. But we need to ask: why is it necessary for the regulator to issue such a direction in the first place? Is it not the job of banks boards to have ensure succession planning by having a couple of whole-time directors? The RBI has been nudging private banks to do so. Its directive probably reflects the failure of banks to respond suitably. It is noteworthy that public sector banks do not suffer from the malaise of having none other than the CEO on the board.

The RBI directive tells us how poor succession planning is in banks. Indeed, succession planning is poor almost anywhere in so-called professionally managed companies. No CEO wants a couple of alternatives to himself or herself around. Most succession planning is about ensuring that no successor emerges. A paper once compared the photograph of the CEO surrounded his top management team with a photo of about ten years earlier. The only constant in the two photos was the CEO! He had ensured that all others in the team had departed.

That is not unusual. Only when the CEO is about to leave or has left do boards scramble to find a successor. How pathetic!  

Sunday, October 22, 2023

US regulators push for higher bank capital


The regulatory direction for banks is clear enough: more capital rather than less. Bankers have been pushing back for reasons that, to me at least, defy comprehension.

Bankers say higher capital will mean higher borrowing rates, lower credit growth and diminished investor interest. They are wrong. We need banks to be better capitalised in order to protect ourselves against bank failures, banking crises- loss of economic output that stretches out for several years.

It’s heartening to see that American regulators have seen the light and are pushing for higher capital norms for banks under Basel 3 regulations. 

My article in BS, Will bankers ever learn?

Will bankers ever learn?

T T Ram Mohan

Jamie Dimon, the chief executive officer of J P Morgan Chase, is that rare banker who doesn’t hesitate to take on regulators and lawmakers. He was severe in his criticism of the Dodd-Frank Act that led to stricter regulation of banks in the US after the global financial crisis (GFC).

Now, Mr Dimon has trained his guns on the Basel III “end game” rules for banks planned by American regulators. These are the final rules related to the implementation of the norms widely agreed upon after the GFC. The new rules will mean higher capital requirements for banks. While Mr Dimon may be gutsy in taking on regulators, it doesn’t   mean he’s right.

US regulators are proposing several changes in the way capital requirements are determined under Basel III. They want all banks with assets exceeding $100 billion to use standardised models, instead of internal models, for providing capital for credit risk and operational risk. For market risk, these banks will have to calculate risk-weighted assets using both standardised approach and model-based approaches and use the higher of the two. In addition, banks will have to reflect unrealised losses or gains on available-for-sale securities. These and other proposals will cause bank capital to increase, and that’s what we need.

Requiring the use of standardised models for risk assessment is a huge shift. In standardised models, risk is assessed based on the average risk experience. Under Basel II rules, which were in place until Basel III came into force, the focus was on capturing risks specific to a bank using Internal Risk-Based (IRB) models. Banks that effectively managed risk would end up having a capital requirement lower than that required under standardised models, resulting in a higher return on equity.

Only banks that could demonstrate the robustness of their risk models would qualify for use of the IRB approach. The very fact that a bank had been approved for the use of the IRB approach signalled to the markets its superior prowess in managing risk.

Regulators are now having second thoughts on the use of IRB models. During GFC, it turned out that many of the banks that used IRB models just did not have the necessary capital to cope with losses. In drawing up the Basel III norms, regulators judged that placing too much reliance on IRB models was unwise. They decided to supplement the earlier capital requirements with a simple leverage ratio, defined as Tier I capital to total assets, of 3 per cent. This translates into a debt-to-equity ratio of 33:1. If this seems an absurdly high level of leverage, remember that banks were even more leveraged earlier.

With the latest Basel III proposals, American regulators are changing tack. They would rather not rely on banks’ internal models at all. They aim to do away with internal models for credit risk and operational risk and play safe with models for market risk. The Reserve Bank of India (RBI) has been moving towards estimating credit loss based on IRB models. It may now want to revisit the proposition. 

The underlying principle driving the new US proposals is simple enough: For banks, more equity capital is better than less. Mr Dimon opposes the move based on arguments we have been hearing from bankers for years now. Two American academics, Anat Admati and Martin Hellwig, have devoted a whole book to showing up the fallacies in these arguments (TheBankers’ New Clothes).

Mr Dimon says more equity capital will translate into higher lending rates for borrowers. This is based on the premise that equity is costlier than debt, especially when we take the tax shield   for debt into account. In banking, that is true only because bank debt is hugely under-priced.

Lenders to banks know that a large bank will not be allowed to fail (“too big to fail”) and are willing to lend at a lower rate than would be dictated by the level of debt. There is thus an implicit subsidy received by banks considered “too big to fail”.  This is a cost that is borne by the taxpayer. It is only when we ignore this implicit subsidy in bank debt that it appears as cheap as it does today. To ignore this is to pave the way for more bank failures and bailouts by taxpayers.

Mr Dimon also contends that investors find bank stocks unappetising if capital requirements go up and return on equity falls. That is not true either. The share price of a bank is a multiple of the price/earnings ratio (P/E) and earnings per share (EPS). Higher equity requirements tend to cause the EPS to fall but they result in a higher (P/E) ratio as investors perceive banks with higher equity as safer and re-rate bank stocks with higher equity capital.

Which of the two effects above will dominate? Bankers seem to think it is the (P/E) effect that will dominate and result in higher valuations. What else can explain the fact that the capital adequacy ratios at the best-performing banks have raced far ahead of the regulatory minimum?

In the US, capital adequacy at an International Monetary Fund (IMF) sample of banks averages over 16 percent, while the requirement stands at around 11 per cent for most banks and slightly higher at 16-17 per cent for very few large banks. The averages in the UK, Switzerland and Sweden are 22, 20, and 23 per cent, respectively. In India, private banks operate at a capital adequacy of 19 per cent, even though the regulatory requirement is just 12 per cent. If higher capital is going to cheese off investors, how do we explain the fact that banks with higher capital than average also command the highest valuations?

Bankers must be aware of this, so why do they set up a howl every time the regulatory requirement goes up? One explanation put forward is that bankers are paid bonuses based on return on equity. The solution, then, is for boards to change the metric for performance awards from return on equity to return on risk-adjusted capital.  Allowing a high level of debt so as to show higher return on equity is certainly not the solution

The regulatory trend is in the direction of increasing capital requirements for banks. That is good for both banks and the economy. The question is: Will bankers ever gracefully accept this reality?

Saturday, July 15, 2023

Central bank autonomy

This is now an old debate. But it's worth getting the perspective of Y V Reddy on the subject in India Forum. 

Reddy begins by noting that the RBI is a full service bank. It appears that bank regulation was added to RBI's mandate down the road along with various functions:

The important functions of the RBI include issue of currency, monetary management, banker to banks and the government, management of public debt, and management of foreign exchange reserves. Over a period, it has subsumed and assumed powers to regulate money, securities and foreign exchange markets, regulation of banks and non-banks and payment and settlement systems. In serving the public good, the RBI has traversed a long distance and faced many challenges. In the process, it has evolved into a full-service institution encompassing regulatory and developmental roles in the financial system, besides partnering with union and state Governments as their fiscal advisor in domestic and external sector policies.

Reddy gives the arguments for and against central bank autonomy. For autonomy:

The first is what is called time inconsistency. Essentially, it means that the time horizon of democratically elected government is short-term and hence they may favour growth over price stability. However, on matters relating to money, actions have to be taken keeping a long-term view. The central bank is expected to take a longer-term view......There is a second reason: that there are political cycles and there are business cycles, which do not coincide. For instance, elections will encourage politicians to have expansionary policies at that time... The third reason is that governments have a tendency to spend more money than appropriate and some limits have to be put on the spending. These can be put in the Constitution. This can also be enforced by independent central banks.

Against autonomy:

There is no democratic legitimacy for a technocratic body to decide on the important matter of money...Second, the independence of central bank may result in friction between fiscal and monetary authorities. Third, a central bank may 'impose' its outlook and preferences on the people, contrary to democratic preferences.

The tricky question is how to enforce accountability. Reddy gives some suggestions:

They should provide regular reports on their policy decisions and the economic outlook and be subject to external audits. Transparency helps build credibility and public trust in the central bank's actions. 

I have advocated external audits for all autonomous government institutions, including RBI. But hardly any of it happening.  It happens rarely and when it does happen, it is perfunctory.

Moreover, central bank autonomy can be largely in respect of the conduct of monetary policy. On various other matters that the RBI handles, such as bank regulation, foreign exchange and management of public debt, there has to be close consultation with the government. Autonomy cannot be sought across the entire range of a full-scope central bank's activities because ultimately the government is accountable for outcomes in a way in which the central bank is not.


Thursday, July 13, 2023

NATO will give Ukraine arms but no membership

The NATO meeting at Vilnius in Lithuania failed to produce the outcome that Ukrainian President Zelensky was looking for. Zelensky is desperate for NATO membership because that would automatically confer on Ukraine the defence cover that NATO nations are entitled to.

The US and others are in no mood to oblige. They refused also to commit to a time-frame for Ukraine to get NATO membership. There was only a vague promise to consider NATO membership once Ukraine had met “conditions” that were left delightfully unspecified. What NATO Secretary General Jens Stoltenberg spelt out would be of no comfort to Ukraine:

We will provide support to Ukraine for as long as it takes. Because unless Ukraine wins this war, there's no membership issue to be discussed at all.

NATO clearly does not want to be drawn into a direct conflict with Russia because it knows very well that that could lead on to a nuclear exchange. What NATO is happy to do is to continue to arm Ukraine as much as it can. Ukrainians will perish in large numbers in a war that Ukraine cannot win. But Ukrainian lives will help bleed Russia militarily and economically. There is a fond hope in Western capitals that a prolonged war may create enough discontent in Russia to dislodge President Putin. That hope has been belied in the past eighteen months.

It looks as though the stalemate in the conflict will continue. The Ukrainian forces will hurl themselves at Russia in a counter-offensive that produced little thus far. The Ukrainian army has not been able to cross the buffer zone and reach the Russian defense lines. Fresh supplies of arms are unlikely to materially change the situation. More Ukrainian and Russian lives will be lost while NATO cheers from the sidelines.

The problem is that matters may not end there. There is always the risk of a serious provocation from the Ukrainian side. That will draw a severe response from Russia. We cannot be sure that the escalation will not then draw NATO into direct conflict with Russia – with perilous consequences for the world at large.  

Wednesday, July 05, 2023

C Rangarajan and India's economic reforms

 C Rangarajan was one of the principal figures in the making of India’s economic policies from the 1980s onwards. His memoir, Forks in the Road, should be compulsory reading for those who want a deeper understanding of the reform process.

It will interest IIMA students and alumni to know that Dr Rangarajan was a professor at the Institute for more than a decade and a half. He was at New York University School of Business (now Stern School) when Ravi Matthai, the then director, offered him a job at IIMA.

Dr Rangarajan’s course in Macroeconomics was hugely popular with students. He was entrusted with the task of launching IIMA’s doctoral program. In 1981, he was appointed Deputy Governor of RBI. Thereafter, there was no looking back.

Dr Rangarajan went on to don several hats: Member, Planning Commission; RBI Governor; Chairman, 12th Finance Commission; Chairman, PM’s Economic Advisory Council. He was also Governor of two states and member, Rajya Sabha. A life of rich accomplishment!

My review article on the book in BS today.

It's behind a pay well, so here is the full text:


 The ideas of economists

 Former RBI governor C Rangarajan’s memoir is a testament to the crucial role economists can play in shaping policies and people’s lives

T T Ram Mohan

Do economists matter? Can they make a big difference to public policy? Economists will find answers that are gratifying in Forks in the Road, the memoir of C Rangarajan ( ‘Ranga’ to old-timers at IIM Ahmedabad, with which he had a long association in its formative years). Yes, they do. And, yes, they can make a big difference to public policy, provided they can get political masters to align with their thinking. 

Dr Rangarajan’s memoir is about the economic events and decisions in which he was an active participant for nearly three decades, starting in the early 1980s. He wore several hats: Deputy governor and governor of the Reserve Bank of India (RBI); member of the Planning Commission; chairman of the Twelfth Finance Commission; and chairman of the Prime Minister’s Economic Advisory Council (with Cabinet rank). Somewhere in between were stints as governor of two states and member of the Rajya Sabha.

Unlike most memoirs, Dr Rangarajan’s is less about himself and more about issues. It is replete with tables and statistics. But it doesn’t just tell us what transpired. It examines the alternatives that were open to policymakers and explains why a particular course was chosen and what outcomes followed. The result is a fascinating piece of economic history. 

Dr Rangarajan joined the RBI in 1981. As deputy governor and governor (with a break in between), he dealt with two of India’s biggest balance of payments (BoP) crises,  the overhaul of monetary policy and banking reform. 

The first BoP crisis, in 1981, was handled largely within the then economic paradigm. Yet, operating  within the paradigm, Dr Rangarajan and his colleagues at the RBI managed a steady depreciation of the rupee in both nominal and real terms. They were very clear that it would be difficult to manage the current account deficit without boosting exports and curtailing imports.  The economists at RBI seem to have had a free hand in managing the exchange rate even before the reforms of 1991. 

Another significant reform in the 1980s arose from the Sukhamoy Chakravarty report of 1985. Following the report, monetary targeting or setting a money supply target consistent with output growth and prices came into vogue. This was the first attempt to tackle “fiscal dominance” over monetary policy. Here again, the political authority went along with the recommendations of the economists. 

The BoP crisis of 1991 required far more drastic measures. An immediate step was the raising of a foreign currency loan by pledging some of our gold reserves. The Chandra Shekhar government gave the go-ahead, and the Narasimha government that followed raised no objection. Again, a steep depreciation in the exchange rate of the rupee was required. This was done in two stages with the approval of the government. Yet another win for economists.

The achievement of the time, as is well known, was the radical break with the past that finance minister Manmohan Singh pushed through. Dr Rangarajan highlights the three significant breaks that are now part of economic lore: The dismantling of licenses, the reduction in public ownership of business enterprises, and the move away from the inward-looking trade policy of the past. All of this was possible only because of the backing of the political authority. Dr Rangarajan notes wryly that Narasimha Rao was able to rally his party behind him by talking of “continuation” in economic policy when there was really a break. At the time, Dr Rangarajan was at the Planning Commission.

Returning to the RBI in the early 1990s, Dr Rangarajan set in motion reforms in monetary policy and banking at a breath-taking pace. The phasing out of ad hoc Treasury bills; market-determined rates for government borrowing; the dismantling of the administered structure of interest rates in banking; the reduction in  the Statutory liquidity ratio and cash reserve ratio; licensing of new private banks; and a great deal more was done. The chapter is titled “The beginnings of autonomy” but  but the freedom given to the professional economists at RBI was not inconsiderable.

In the management of the external sector, the RBI worked closely with the finance ministry. Far-reaching reforms happened: Foreign institutional investors were allowed into the Indian stock market; foreign direct investment (FDI) norms were liberalised; and the exchange rate became largely market-determined. The framework for management of external capital flows was put in place. There was clarity that long-term equity flows should be preferred to short-term debt flows. These and other measures taken at the time have since become pillars of Indian economic policy. 

On all these, the political authority had no difficulty in heeding solid professional advice. There must have been occasions when the economists couldn’t quite have their way. Perhaps those occasions were not so consequential. At any rate, there is little indication in the memoir of any serious confrontation between economists and the government. On the major issues of policy, once the politicians had decided on a fundamental change of course, they didn’t interfere with the work of economists. On lesser, more technical matters, they always left it to the professionals to do what was required.

The big area of failure for economists has been the fiscal deficit or the savings-investment balance. Dr Rangarajan highlights the point in his concluding chapter, “Ruminations”, where he ponders the long-term outlook for the economy. Over the past three decades, it is an issue that has not proved amenable to the persuasions of economists, no matter what the complexion of government. We have since arrived at times when the global consensus on keeping public debt relatively low has been undermined. Economists themselves seem resigned to greater levels of public debt than they have been comfortable with in the past.

Not pushing through “big-bang” reforms— such as aggressive privatisation, including bank privatisation, land acquisition, and the freedom to hire and fire labour — is seen as a big political failure. Dr Rangarajan doesn’t seem to think so.  He makes little mention of these. “The reform regime,” he writes, “will be incremental in character. It has to be”. That is also the political consensus on reforms.  

Working quietly within the system, Dr Rangarajan was able to make a difference. His place as one of the principal architects of economic policy from the 1980s onwards is secure. For his compelling chronicle of the economic history of the period as much for his many contributions, he deserves a bouquet of the choicest roses.

Wednesday, May 24, 2023

Rethinking fiscal rules

Public debt ratios have risen since the Covid shock as governments sought to cushion the impact of the shock. Global debt to gdp averaged 96 per cent in 2021. The average for advanced economies was 120 per cent. In 2008, after the Global Financial Crisis, the numbers were 64 per cent and 79 per cent.

The general view, articulated by the IMF, is that the rise in public debt was inevitable and desirable. But… it needs to be brought down quickly. That is, of course, the received wisdom taught in all Macroeconomics courses, namely, the lower the public debt, the better.

It is refreshing to hear a different view from Andy Haldane, former Chief Economist of the Bank of England. Haldane makes two interesting points. One, over centuries, global debt to gdp has tended to rise as governments respond to the need to create more and more public goods. Two- and this is very interesting- even as public debt has risen, the interest costs have fallen. Not quite what you the Macro course would tell you.

How do you explain these? Well, public debt is used often to create assets. These assets generate streams of income over time that can service the debt. So lenders to government look, not just at the debt, but at the assets that the debt creates. What matters thus is not public debt per se but net worth of government, that is, assets minus debt.

Recognising those assets would give us a measure of the true net worth of the government. Just as a company or household would look at their net worth when making investment choices, so too should government. Countries with high net assets have been found to have lower borrowing costs. Bond market vigilantes target poor ancestors, not borrowers.

Moral of the story? The need to create important public goods remains, perhaps, including those relate to climate change. No need to panic over rising debt levels- focus on debt sustainability. As long as debt creates productive assets, physical or human, chances are debt will be sustainable.


Friday, May 19, 2023

India's growth prospects in FY 2023-24


Growth projections for India for FY 24 show wide divergence.

  •  The RBI Governor recently threw his weight behind the RBI forecast of 6.5 per cent
  • The Chief Economic Advisor estimates growth at 6-6.8 per cent with downside risks being greater, meaning growth will be closer to 6 than to 6.8 per cent
  •  The IMF has scaled down its growth forecast for India to 5.9 per cent
  • Dr C Rangarajan, former Chairman, PM’s Economic Advisory Council, thinks we will end up with 6 per cent
  • Many private sector forecasters see growth below 6 per cent, some peg it close to 5 per cent  

What do we make of these forecasts? I guess much depends on whether or not the downside risks materialise. A big one is an escalation in the conflict in Ukraine. Another is further bouts of banking instability in the US and elsewhere. The IMF mentions several other downside risks: higher than expected real interests at a time when debt levels are high; stickier inflation; sovereign debt distress in emerging and developing economies (already seen in Sri Lanka and Pakistan); faltering growth in China; greater retreat from global integration.

The IMF estimates that the probability of global growth going below 2 per cent in 2023 is 25 per cent- this has happened only five times since 1970. (The IMF’s baseline forecast is for 2.8 per cent). That will happen if many of the downside risks materialise. 

My guess is that we will be lucky if India’s growth rate exceeds 6 per cent in FY 24.  

Sunday, May 14, 2023

Interpreting Karnataka poll results



We are seeing all commentaries about the decisive victory score by the Congress in the Karnataka Assembly polls. We need to be careful in interpreting the results. Going by the seats secured by parties in elections, we know, can be deceptive. Small swings in votes can result in disproportionate changes in seats won.

A better gauge of a party’s popularity is vote share. The BJP vote share in Karnataka remains what it was in 2018- 37 per cent-, going by this article. It appears that the BJP lost marginally in some areas, gained massively in Bengaluru and held on to its vote share in the coastal regions. The marginal losses in some places sufficed to change the outcome in terms of seats. What brought about the small change in votes in areas where the BJP lost needs to be analysed.

It does seem that the theories for the outcome that are being put forward- polarisation gone wrong, developmental story winning, leftist orientation of Congress going down well, etc- are premature. We need a rigorous analysis of the outcomes in various regions to tell a convincing narrative.


Saturday, May 13, 2023

FRB review of the failure of Silicon Valley Bank

The US Federal Reserve Board has published a review of the failure at SVB. The lessons are pretty straightforward. Regulation and supervision have to get tighter. Boards have to do a better job. Managerial incentives need to be aligned to risk-adjusted returns, not nominal returns. With respect to boards, I would add: we need an overhaul of the mechanism of independent directors- we can’t leave it to promoters and CEOs to decide who the ‘independent’ directors should be.

The RBI may want to commission a similar review of the failures at IL&FS and Yes Bank. Regulators unilaterally subjecting themselves to public scrutiny is good for good for the regulator’s credibility and standing- and good for bank stability in the long run.

My article in BS, Anatomy of a bank failure

Anatomy of a bank failure

A radical change is necessary in the appointment of independent directors in India in light of the extensive failures in oversight and management of banks in the US




Silicon Valley Bank (SVB) and its holding company, Silicon Valley Bank Financial Group (SVBFG), failed last March. This resulted in the immediate failure of Signature Bank and, with a lag, of First Republic Bank. More mid-sized banks may follow.


The US Federal Reserve Board (FRB) has been quick to commission and publish a review of the failure of SVB. Even more creditable, the review pulls no punches in apportioning blame. The bank’s management failed. The board of directors failed. The supervisor failed. Regulations turned out to be inadequate. Everything that could go wrong went wrong.


The Fed review should be compulsory reading for bankers, bank boards, regulators and supervisors. The report will help drive home an important point: It is futile to expect “market discipline” by itself to take care of banking stability.


Let us begin with management and board failures. SVBFG’s assets tripled in size between 2019 and 2021. Deposits flowed in. The technology sector was booming, so lending expanded rapidly. Any growth in loans that is way above average loan growth in the sector is a recipe for trouble, a point often lost on managements as well as boards. Management does not have the bandwidth to assess risk properly. Internal controls and systems cannot keep pace with runaway growth.  Reliance on volatile wholesale deposits tends to increase. 


Managerial incentives are often linked to profits without adjusting for risk. For CEOs, the temptation to quickly grow the loan book is irresistible. The onus is on the board of directors to apply the brakes.  Rarely does this happen. Boards tend to be mesmerised by CEOs who show dazzling performance for a few years. They find it hard to tell a performing CEO, “Sorry, this is not on.”  


At SVBFG, the board was not even responsive to supervisory warnings. The FRB report remarks acidly, “Moreover, the board put short-run profits above effective risk management and often treated resolution of supervisory issues as a compliance exercise rather than a critical risk-management issue.” That could be said of many boards. 


Starting in July 2022, SVBFG failed its liquidity stress tests repeatedly. Management moved to increase funding capacity but the necessary actions were not executed until March 2023 when it was too late. Management chose to mask liquidity risks by changing the stress test assumptions. 


Interest rate risk too was poorly managed. The bank had breached its interest rate risk limits on and off since 2017. Instead of reducing dependence on short-term deposits, management fiddled with assumptions about the duration of deposits. Hedges on interest rate risk were removed in the interest of boosting short-term profits. Management was massaging earnings by hiding the underlying risks. The Risk Management Committee of the board should have picked up these lapses. It failed to do so, again not a huge surprise. 


The supervisors did not cover themselves with glory either. For governance, SVBFG got a “Satisfactory” rating, despite repeated supervisory observations about inadequate oversight.  The bank had large, uninsured deposits that were volatile, yet managed a “Strong” rating on liquidity. Despite breaching interest rate risk limits repeatedly, it got a ‘Satisfactory’ rating on the item.  Clearly, supervisors in the FRB set-up were hard to displease. Banks in India must pine for such a supervisor; they find the Reserve Bank of India (RBI) almost impossible to please. 


What accounts for these supervisory failures? The report says joint oversight by the FRB and the 12 Federal Reserve Banks is a factor. The Board delegates authority to the Reserve Banks, but Bank supervisors look to the FRB for approval before making a rating change. Getting a consensus is time-consuming. 


But that was not the only reason. In 2018, heightened supervisory standards were made applicable only to banks with assets of more than $100 billion. Moreover, supervisors were under pressure to reduce the burden on banks and to exercise greater care before reaching conclusions or taking action


Finally, there were the failures of regulation. The Dodd-Frank Act, passed after the Global Financial Crisis (GFC), provided for stiffer prudential standards for banks above a threshold of $50 billion. In 2018, the Act was amended to raise the threshold to $250 billion. For banks in the range of $100-$250 billion in assets, the Fed was given the discretion as to what standards to apply. When SVBFG reached the threshold of $100 billion, it was subjected to less stringent regulations than would have applied before 2019. Had the dilution in regulations not happened, SVBFG would have been compelled to enhance liquidity and capital before it was too late. 


The problem is fundamental. The philosophy of “light touch” regulation and supervision hasn’t quite lost its hold on the US system. Multiple regulators and supervisors are another problem. There is also the “revolving door” syndrome -- regulators join private banks, then jump back to the regulator in a senior capacity. The relationship between regulator and banks is too cosy for comfort, which may explain the kindness shown to SVB. 


The RBI, as your columnist argued last month, is well ahead of the regulatory and supervisory curve in the West. Its intrusive approach is a better safeguard for banking stability than the light touch elsewhere. However, supervision can only be a third layer of defence against bank instability. Regulations are the primary layer, followed by the board. The RBI must find ways to get bank boards to do a far better job.   


A radical change would be to alter the way independent directors are appointed at banks. At present, the promoter or CEO has the dominant say in the appointment of independent directors (at both private and public sector banks). The RBI may want to insist that, for instance, one independent director be chosen by institutional investors and another by retail shareholders (from a list of names proposed by the Financial Services Institutions Bureau). Until we have independent directors who are distanced from the promoter and management, it’s unrealistic to expect board oversight to improve. 


The RBI is hosting a conference for bank directors later this month. Here are two suggestions.  One, in the interests of transparency and accountability, the RBI may want to commission a review of the failures at IL&FS and Yes Bank. Two, it may prescribe the FRB’s review of SVB’s failure as one of the “readings” for the conference. It may also include the report of the UK's Financial Services Authority on the failure of Royal Bank of Scotland during the GFC. At least, bank directors can’t say they weren’t warned.