What were bank boards doing?

What were bank boards doing as the sub-prime crisis built up? What penalties do they face in banks that has suffered huge losses. Many CEOs have lost their jobs; not many directors have. One fact that took away my breath was mentioned in an FT report: nearly two thirds of bank boards were bereft of banking expertise.

So, who typically sat on these boards? Well, the mighty and the respectable, ex-CEOs of manufacturing firms, faces and names that have wide recognition. Is that good enough? I don't think so. I think it makes sense to have a minimum of finance and banking expertise on board boards. Here, India's Banking Regulation Act gets it absolutely right: at least 51% of board members must have expertise in specified areas: banking, economics, agricultural, small enterprises, etc.

The RBI also has norms for bank governance over and above the norms applicable to listed companies under clause 49. This is entirely appropriate: in many other countries too, governance for banks tend to be stiffer than for other firms or there are separate norms for governance for banks and for other companies.

Is having expertise on boards an insurance against failure? Not at all. Boards are limited by the information that management presents to them and the form in which these are presented. So, the best-intentioned boards may proved ineffective. But there is a more fundamental reason why boards are not as ineffective as one might like.

Most boards are clubby affairs. Those invited to serve as "independent" directors are pals of the CEO, they brush shoulders in the same watering holes and they are often retired people who value the handsome fees that many companies pay these days.

The atmosphere in boards is that of a mutual admiration society. CEOs pay ritualistic obeisance to the "sage guidance and wisdom" of boards in their annual statements- one retired CEO, whom I respect, told me there was not an iota of truth in this. Boards compliment management on their stewardship. Over sumptuous lunches and equally sumptuous snackes, top management and directors share jokes and anecdotes, there is a general air of conviviality. I mention this because, in this atmosphere, it is not done for an independent director to probe or to question. Bad form, old chap.

So, having expertise on bank boards is not enough. We need to ensure that there are enough directors who are independent of management, that is, they are not beholden to the management for their positions. This can happen only if financial institutions with equity stakes in the company and minority shareholders can directly elect a certain number of directors. The present concept of "independent" director, whereby management invites outsiders on to boards, is something of a farce. Alas, I don't see such a revolution happening in the near future.

More on this in my ET column, Banking's governance disaster.

Rating agencies - only a light rap?

Moody's confession of a botched $1 bn securities rating, thanks to a computer bug, is only latest in a series of woes for the ratings industry. Let's face it- rating agencies are not the most popular species in the financial sector today. They had eggs on their face after the East Asian crisis; they seem to have gone and blown it again in the sub-prime crisis.

But it appears the agencies will get away with a mild rap or two. The Economist reported last month that despite half a dozen agencies looking into their role in the recent crisis, the outcomes will be inconsequential: a commitment not permit 'ratings shopping' among clients; more transparency; more disclosure of the collateral; and the like. No fines, no crippling prohibitions.

I guess part of the reason is that it's hard to find an alternative- an independent rating agency promoted by government and funded by investors through the exchanges is a non-starter because governments getting into financial markets is the last thing people want.

The role of rating agencies is poised to get bigger with the implementation of Basel II because, for starters, most banks will rely on the ratings approach- this requires capital to set aside based on ratings assigned to borrowers by rating agencies. Basel II itself is under discussion now. I think there is a case for allowing the better banks to go with their own internal ratings instead of requiring them to go by rating agencies' ratings.

In India, I can't see that the better banks' rating of borrowers is likely to be of lower quality than that of the agencies- most banks, in any case, use the rating models supplied by the agencies and superimpose their own judgement. This probably makes more sense than banks relying entirely on the rating agencies.

Contrarian views on the nuclear deal

The debate on the Indo-US nuclear deal has been reduced to a test of patriotism. Those who who favour the deal want India to be a great economic power with the help of the US and are patriots. Those opposed to it have hang-ups about the US and are not averse to India falling behind China; their patriotism is questionable.

I have found this characterisation utterly puerile given the many nuances to this issue. Remember three top nuclear scientists in the country have come out with a statement expressing their reservations even now.

How refereshing, then, to come across two contrarian views on the deal on the same day. In an interview to Rediff, former diplomat M K Bhadrakumar makes a number of points:

• The UPA government is guilty of breach of trust in pursuing the matter of IAEA safeguards without the concurrence of the Left. When the Left gave the go-ahead to the UPA government to negotiate safeguards with the IAEA last November, it was on the understanding that the agreement itself would later be discussed and approved by the joint UPA-Left committee on the subject. The Congress has gone back on this assurance.
• There is lack of transparency on the safeguards agreed with IAEA- the government has not disclosed what these are.
• The IAEA agreement, once signed, will be 'in perpetuity'; once this agreement is signed, the further course of the nuclear deal is out of India's hands. Even if the form of the NSG waiver is unpalatable to India, it is out of our hands.

In another article, Brahma Chellaney questions the current line that the deal is about reducing dependence on oil and opening up prospects for nuclear power. He points out that India's dependence on oil for electricity purposes is negligible- just 4% of all our needs. Oil is primarily required for transportation purposes whereas nuclear power plants are all about generating electricity! He goes on to blast the case for nuclear energy as a substitute for oil:

If global oil demand is threatening to outstrip supply, so is the case with uranium. Current concerns associated with oil’s price volatility, supply security and geopolitical risks are no different than uranium’s. And if global oil reserves are finite, so are uranium resources, with proven uranium reserves likely to last barely 85 years, according to the Red Book published jointly by the OECD and IAEA.

In fact, in the past five years, the international spot price of uranium has risen faster than that of crude oil, with uranium today trading six times above its $10 a pound historical average. Oil and uranium prices are likely to stay volatile, but the long-term trend for both is surely up. Just as cheap oil now seems fanciful, cheap nuclear power for long has been a mirage.

Chellaney is right. This deal is about a strategic alliance with the US to counter the rise of China, it is merely being presented as an energy proposition for political and diplomatic reasons. The real worth of the strategic alliance lies in the transfer of a whole range of advanced dual-use technologies- these technologies cannot be transferred unless India's status as a nuclear power changes.

The key question is: do we want the strategic alliance at the cost of surrendering some of our freedom of action in foreign policy and in the nuclear field? I do think there is a case for an open national debate and that there is no compulsion to be bound by some artificial time-table.

Governance issue at Ranbaxy?

In today's TOI, Gurcharan Das has this to say about the sale of the promoters' equity in Ranbaxy to Daiichi of Japan:

For some years now I have been on the board of Ranbaxy and have watched with admiration as the company transformed itself into India's first real multinational. I have seen it inspire a dozen other companies and helped create a world-class generic drugs industry that is feared by western giants for aggressively challenging their patents and admired for lowering the cost of medicines around the world. How, then, was I to respond to the announcement by Ranbaxy's CEO, Malvinder Singh, that he wanted to sell his family's stake for Rs 10,000 crore to a Japanese company, Daiichi Sankyo? The family was equally shocked. A CEO's ability to keep months of negotiations secret in a country afflicted by verbal diarrhoea speaks of the company's character.

Das' comments suggest that, as a board member, he had little inkling of the deal until it was announced in public. Are we to conclude, then, that the deal was not approved by the board? If yes, is this appropriate?

This is not a case of any investor selling off his stake. The dominant investor is also top management. The decision of the promoter to sell his stake thus implies a decision by top management to let another company acquire Ranbaxy. Can such a decision be taken without the concurrence of the board? It does look as though there is something here for Ranbaxy's shareholders as well as Sebi to ponder.

Media hype is a threat to growth outlook

Seeing the coverage of the rise in inflation and the reactions to it, you might think the Indian economy is in the midst of a crisis or headed towards one. Relax. Take a few deep breaths, pinch yourself nicely and chant thrice: this economy is growing at 8%. Done? Now, read my latest ET column, Inflation threat is exaggerated. Let me elaborate on why I am fairly optimistic.

A top CEO told me a couple of days ago that most firms are "investing like there is no tomorrow". Existing projects will be not be delayed or cancelled. Any hesitation will relate to future projects and fresh fund raising. This means investment will continue to drive growth this year. That is one reason for optimism.

Another is corporate profitability- PAT growth of 40-50%! In most economies, this would be regarded as a fantasy. That gives enough scope for absorption of price increases. The consumer will not face much higher prices, so consumer demand, while being moderated, will not be undermined.

Thirdly, extremely low leverage, thanks to strong profit growth in the recent past. With such low leverage, interest rate increases can be shrugged off by corporates.

Fourthly, the runaway increases in salaries- these make it possible for the real spenders to keep spending. The distributive implications of inflation are another matter. Inflation will not affect growth but will demolish the UPA's chances especially if it relates to food inflation.

Most analysts take the view that cost-push inflation is a threat and the RBI needs to clamp down even if it means putting the brakes on growth. I disagree. The impact of supply shocks on the price level is not clear enough, although we can say with some assurance that large supply shocks tend to raise the inflation rate.

I go with the view that inflation is primarily a demand-side problem. This is true of our present situation as well. Aggregate demand is much too strong for comfort. If the Indian economy accelerates in the second half of the year as global problems recede, we may find growth in the region of 9% plus, which I would regard as the 'overheating zone'. So, in my view, it is the prospect of too rapid a growth rate for the sixth year running that provides the rationale for a rise in interest rates, not cost-push factors.

It is not interest rate increases that pose a threat to growth. The biggest threat to growth is posed by media hype on inflation, the global outlook, etc- the continuous blast from news channels may come to be taken seriously at some point by investors and consumers, which is when the problems will begin.

Soaring cost of living- yuppies feel the pinch!

The Indian Express on Sunday had a story about this IT professional, Srijesh Nair, who's struggling to make both ends meet because of the home loan burden he is carrying.

Nair's annual income is Rs 14 lakh. His home loan monthly payment is Rs 17,000. The increase in interest rates in recent months meant an additional Rs 2000. Nair says that he found it difficult to maintain his standard of living in consequence. Nair disposed of stock options and other assets to shrink the home loan outstanding.

I read the story in some amazement. Nair's annual pay translates into a monthly income of around Rs 1 lakh (assuming that Rs 14 lakh includes company contribution to PF). Take away income tax of Rs 34,000. That would leave Nair with Rs 66,000. The home loan at the increased rate of interest would mean a deduction of Rs 19,000. So, Nair would have had Rs 47,000 to cover his monthly expenses. Evidently, this was just adequate, giving Nair's standards of living, so Nair has no savings to dip into.

I do not for a moment wish to question any of this- I accept that Nair's predicament is for real. The question that troubles me is: if this is the situation with somebody making over a lakh of rupees a month, what about millions of others, including salaried employees, who make a lot less? The Arjun Sengupta committee on the unorganised sector showed that the majority of workers were making barely Rs 20 a day or Rs 600 a month.

The question is particularly troubling at a time when the inflation rate is rising. For millions, even a small rise in prices, especially of food, is the difference between subsistence and starvation. When you read stories like Nair's, you begin to understand why a rising inflation rate spells doom for the government of the day.

Business media boom

This is boom time for the business media and business journalists. A business journalist recently filled me in on what is going on:

Mint, the HT publication, is said to have crossed the 2 lakh mark in circulation. Financial Chronicle of the Deccan Chronicle group is also said to be doing well.

The buzz now is about the entry of Financial Times into the Indian market. This should be cause for worry for its present partner, Business Standard, which has positioned itself in the quality segment. Another foreign entrant that can be expected to pose a threat to Indian journals is Forbes magazine of the US.

TV channels for business news are also proliferating. UTV has launched UTVi, its business channel. The Economic Times is said to be readying to launch a TV channel. The Sahara group has plans for a business paper in Hindi.

All this is great news for business journalists. Salaries have spiralled. Journalism in general and business journalism is no longer an underpaid profession- it has become highly lucrative.

CMIE growth forecast is 9.5% !

As readers of this blog and my column, I remain upbeat about growth prospects in the current year (2008-09) despite the combination of financial market shocks and oil shocks. But the CMIE forecast for this year takes the cake- they see growth at 9.5%! This is driven by a huge investment boom.

I agree that investment will be a big driver but my own assessment was that growth would be moderated by interest rate rises and would settle at 8-8.5%. If the CMIE's forecast is borne out, Indian growth would be an astonishing achievement. It would demolish once and for all the thesis that the recent growth boom was a cylical phenomenon, driven by foreign inflows, cheap credit and global demand. It would confirm the view that many of us hold that growth is structural in character.

Secondly, if underlying growth is as strong as CMIE believes, that gives the RBI so much more elbow room to tackle inflation. The inference that would follow is that there are strong demand pressures in the economy and monetary policy needs further tightening.

Bank consolidation not a priority in India

Some people get a terrible complex when they look at the size of Indian banks. Too small, they say, compared to even banks in China. We have to do something about this. Indian banks must consolidate.

I have long been sceptical about this proposition and have written about it at length. My scepticism was reinforced when I had a chance recently to compare the market caps of Indian banks with those of the world's top banks. The comparison is quite revealing.

India's top two, SBI and ICICI Bank, are not very far from the world's top banks in market cap. Both are valued at over $20 bn today. This is not bad compared with $110 bn of Citigroup or about $53 bn each of Barclays Bank and Deutsche Bank. Only HSBC with a market cap of $200 bn looks distant.

Two factors are responsible for Indian banks drawing closer to the world's top banks in market cap. The proximate factor is the sharp decline in share prices of international banks consequent to the sub-prime crisis. Indian banks too have seen sharp declines in prices. But the effect has been to narrow the absolute difference in market cap. Citigroup is down from over $250 bn to $110 bn. SBI is down from nearly $50 bn- which was one fifth of Citigroup's market a year or so ago- to $23 bn, which is close to a quarter of Citigroup's market cap today.

The longer term factor is the wide difference in earnings growth. Indian banks are growing earnings at 20-25%; the world's top banks consider themselves lucky if they touch 10%. This is bound to draw the top Indian banks closer to the world's majors.

Can Indian banks then hope to make international acquisitions? Unlikely, I am afraid. Financial muscle is not the only thing that counts, you need solid managerial capabilities. Most banks lack this. ICICI Bank may just bring it off but not public sector banks.

More on this in my ET column, Banks' asset size is not the issue.

Six new IITs- will 'merit' be a casualty?

Today TOI carries an article by Swagato Ganguly on the proposal to set up 6 new IITs. Ganguly finds fault with the idea of starting IITs without campuses. Later in the piece, he indicates they may not have the requisite faculty either given the huge shortage of faculty.

What is the government to do? Should it wait until full-fledged campuses are set up and the country starts generating enough faculty? IIMA started off in a small building and with a small complement of faculty. So have the newer IIMs such as IIM (Indore). Over time, these problems came to be addressed. The point is: you get started, you muddle through for a while and then things start happening. I am optimistic about the new IITs and the contribution they can make.

Let me add: you can have spanking infrastructure, you can pay faculty very well and yet you may not have a good institution. In many private business schools, neither of these is a problem but the institutions don't count for much in academic terms.

The concerns about faculty and infrastructure may be valid but from there Ganguly wanders off into reservations and their potentially malign impact on IITs. He seems to suggest that the new IITs are all about pandering to caste politics:

The human resources minister, in particular, has turned the IITs and IIMs
into a tool of his political ambitions. A 27 per cent OBC quota is being rammed
down their throats, yet the number of open, non-quota seats has to be preserved.
It was decreed, after doing the math, that the total number of IIT seats
have to be expanded by 54 per cent, with next year's Lok Sabha elections setting
the general deadline. Therefore, the phenomenon of building- and facility-less
IITs, in one case even a homeless IIT which doesn't know where it will be
eventually plonked down.

Sorry, I don't get the connection. You can have OBC quotas by expanding seats at existing IITs by 54%- the government was under no obligation to set up new IITs. Having new IITs expands the availability of seats for the general category as well, so I can't see what the complaint is.

Ganguly warns: "If IITs are made to jettison merit they, too, will be forced to their knees."
As an ex-IITian, he should know that IITs have long had SC/ST reservation. Over 50 years of such reservation, the IITs have built up a formidable brand. I rest my case.

Oil prices in India

Two notions about oil prices in India need to be debunked.

One, the notion that the consumer is being subsidised. True, the consumer is being charged a price less than what the price would be tax is added to oil companies' selling price. But this is only because the duties are stiff. The consumer today does not bear all of the duty but he is still paying a price above the oil companies' selling price. This means he is being taxed, not subsidised.

Two, the notion that oil in India is still very cheap. The Economist compares petrol prices at the retail level in several countries. India ranks seven in a list of 15 countries- China, the US, Malaysia, Indonesia all have lower prices than we do.

Secession of the Indian elite

Gated housing enclaves, private guards, exclusive clubs, private aircraft.... the Indian elite has known how to insulate itself from the masses. But when industrial barons decide to hope from their helipads to private airports they propose to build for themselves, they have taken a truly gigantic leap.

Ronald deSousa, director of the Indian Institute of Advanced Studies, Shimla, has interesting thoughts on the subject in an article in ET:

Three basic arguments have been forwarded for private airports. The first concerns simple pragmatics. It will reduce congestion at a time when our airports are getting overcrowded and since private planes take longer to land, by moving them out we will save landing time of the other aircraft. The second relates to safety. The aviation authorities will ensure that these airports will maintain the highest safety standards and so, for the flying public, there is no cause for anxiety. The third is a version of ‘he who pays the piper calls the tune’. As long as they pay for it they can have it.

......When seen from a host of other perspectives the policy seems perverse. Take the secessionist argument which holds that the policy encourages the super-elite to live life in a bubble. From the helipad at the top of the corporate headquarters, to another helipad in the factory complex, to perhaps a private airport for a journey to Delhi, the captains of industry can journey across the country without having to meet, or rub shoulders with, or even see the ordinary Indian, let alone experience the minimal existential reflections on the lives of those who live in the slums they have to drive through on their way to the airport

Those people, in many cases, might be their own workers. They will thus never know the possible causes that have reduced to a life of indignity those who beg at red-light crossings, or the conditions of the villagers who have to walk for miles for water, or the anxieties of our rural youth as they search for a space between the rural and urban

There is more to private airports than elitism or snobbery. At a time of soaring oil prices, we would like to encourage public transport as a substitute for private cars. Private aircraft as a substitute for public ones seems the ultimate obscenity. Finally, as always, there is always the issue of land, as deSousa points out:

There is another important concern. Private airports will require a lot of land. The country has just witnessed political movements on the SEZ policy requiring the government to take corrective measures and in some cases reverse its decisions. Again the poor farmer will have to give up prime land with the Land Acquisition Act being used to get (let me get it right) private land for a public purpose for a private airport.

Managing versus teaching management

"Those can, do; those who can't, teach." There is profound truth in the old crack. But we need not be ashamed of it. Teaching management and managing require very different skills and temperament- and rarely shall the twain meet.

Accepting this fact would save us all unncessary vexation. The question is frequently asked: if management professors know so much about management, why can't they do a good job of managing- starting with their own institutions? For instance, B-schools have renowned professors of strategy who go out and advise corporations on how to win. Why can't they apply more of their expertise indoors?

The story is told of a finance professor who was asked by a senior executive in a training programme, "If you are smart, why aren't you rich?" To which the prof retorted," If you are rich, how come you are dumb?"

I argued in my last ET column, Can management gurus manage?, that this is a pointless debate. Knowing something in the sense of being able to conceptualise something is very different from translating it into practice- the translation requires implementation skills, people skills, high energy levels, commercial acumen, etc all of which management gurus are liable to lack.

By the same token, we cannot expect managers to come into the classroom and excel. They may have done a great job of managing but putting things in a conceptual framework is a discipline in which professional teachers excel, not managers. My own experience with inviting senior executives to offer sessions has been less than exhilarating. Many can't do better than recount anecdotes. ("I was having lunch the other day with the prime minister of Singapore...). The ultra-bright types at the B-schools can recognise bullshitting when they hear it and quickly switch off.

How can managers contribute to improving the quality of teaching at B-schools? My column offers a couple of suggestions.

World Bank wisdom- or lack of it?- on growth

This is the hottest new thing on how to achieve growth and it has been driven by the World Bank, among others.

A high-powered 21- member Commission on Growth and Development headed by Nobel Laureate Michael Spence has published a report, “Growth Report: Strategies for Sustained Growth and Inclusive Development.” (India is represented by Montek Ahluwalia, Dy Chairman, Planning Commission).The Commission is an independent body supported by Australia, Sweden, the Netherlands, United Kingdom, William and Flora Hewlett Foundation and the World Bank Group.

I haven't had a chance to read the report but I did read the overview at the World Bank website. The report identifies 13 economies that sustained growth of ovr 7% for 25 years. It says they had the following in common. Each economy:

• Fully exploited the world economy
• Maintained macroeconomic stability
• Mustered high rates of saving and investment
• Let markets allocate resources
• Had committed, credible and capable governments

Since China is among the economies mentioned, one has difficulty accepting all the five "common" elements. Nobody can seriously argue that China, which has undervalued its currency and has a state-dominated banking system that funnels resources to state enterprises lets "markets allocate resources".

The report will fuel much comment, not necessarily favourable. William Easterly, himself formerly of the World Bank, has a scathing piece in the FT- he calls the report a "debacle":

After two years of work by the commission of 21 world leaders and experts, an 11- member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out.

... Why should we care about the debacle of a World Bank report? Because this report represents the final collapse of the “development expert” paradigm that has governed the west’s approach to poor countries since the second world war. All this time, we have hoped a small group of elite thinkers can figure out how to raise the growth rate of a whole economy. If there was something for “development experts” to say about attaining high growth, this talented group would have said it.

What went wrong? Experts help as long as there are useful general principles, such as could be established by comparing low-growth and high-growth countries. The Growth Commission correctly pointed out that such an attempt to find secrets to growth has failed. The Growth Commission concluded that “answers” had to be country specific and even period specific. But if each moment in each country is unique, then experts cannot learn from any other experience – so on what basis do they become an “expert”?

China's turn to lecture the West !

A fallout of the sub-prime crisis is that financial regulation in the US and other industrial economies has been shown in poor light. In contrast, regulators in China and India are patting themselves on their backs for their measured approach to financial sector liberalisation, which, they say, has helped insulate their systems from the financial market crisis.

The acting of the China Banking Regulatory Commission did not mince words in an interview to FT:

“I feel the western consensus on the relation between the market and the government should be reviewed,” said Liao Min, director-general and acting head of the general office of the China Banking Regulatory Commission.

“In practice, they tend to overestimate the power of the market and overlook the regulatory role of the government and this warped conception is at the root of the subprime crisis.”

When asked what other countries could learn from China’s regulatory system, he pointed out that Chinese financial institutions needed CBRC approval to launch individual product types, making it nearly impossible for exotic financial instruments, such as the ones blamed for the subprime crisis, to exist in China.

The majority of China’s financial sector is still owned by the state, and the government retains tight control over many aspects of the industry, including senior personnel decisions at the country’s largest banks, insurers and brokerages.

Thanks to China’s lack of integration with global financial markets as well as the cautious regulatory approach of the CBRC, Chinese banks have emerged relatively unscathed from the global credit crisis, which so far has caused nearly $380bn of losses at western financial institutions.

Not everybody buys the argument that the diminished frequency of crises is an argument for hastening slowly with financial liberalisation. Alan Greenspan argued recently that occasional financial turmoil may be the price to be paid for rapid innovation and growth. The answer, Greenspan urges, is to ensure that banks have enough capital to withstand shocks:

“If we want rapid growth in productivity, innovation, standards of living, we may have to accept that there will be periods of turmoil,” the former chairman of the US Federal Reserve told the Financial Times.

Rather than try to suppress bubbles, he said, policymakers should ensure that financial institutions were well enough capitalised to withstand the hit from bursting bubbles as well as other shocks.

Mr Greenspan backed efforts to develop counter-cyclical capital rules that would force banks to hold more capital in good times than bad.

Such rules might make it less likely that asset price and credit booms would feed each other, as they did during the housing upturn.

But he said this would be difficult to implement in practice because “we are never certain where we are in the cycle”.

New spin to dynastic politics

PA Sangma was among those who walked out of the Congress along with Sharad Pawar to form the Nationalist Congress Party. At the time, they said they could not stomach the Congress' brand of dynastic politics any more.

Now, Pawar has now qualms about being part of a Congress-led coalition. As for Sangma, he is busy inducting his kids into politics, whether at the state or national level. His justification: he is not grooming any kid in particular, there will be equal opportunities for all, so he can't be said to be guilty of practising dynastic politics.

Sangma even distinguishes his brand of dynastic politics from Sonia's: Sonia has clearly identified one successor, Rahul! Even by the standards of Indian politics, this qualifies as a new low.

ET has some acerbic comments:

His (Sangma's) daughter Agatha has just been elected India’s youngest MP. His elder son Conrad is Meghalaya’s Cabinet minister for finance and power.

His younger son James is the parliamentary secretary for home. The position of Meghalaya Planning Board chairman is itself defined as equivalent to that of the CM who is expected to step down after two-and-a-half years so that Sangma can take over for the next 30 months.

And yet Sangma maintains he is not trying to encourage any dynasty. His children, he says, are foreign-educated and it is their duty to pay the state back. Earlier this year, when he resigned as MP from Tura to contest the assembly elections and his daughter was chosen as the NCP candidate for the Lok Sabha by-election, he was quoted as saying that the “people of Garo Hills did not have any other choice as Agatha K Sangma is the only available right choice”.

....Maybe it is just as well Sangma left the Congress exactly nine years ago. In the latest Karnataka polls, the Congress insisted that the kith and kin of party office-bearers should not be allowed to contest. All of which upset some senior leaders who wondered why the same principle did not apply to the Nehru-Gandhi family

UBS

UBS has had the second biggest write-downs in the sub-prime crisis after Citigroup. This once highly regarded bank is now the butt of jokes. The Economist has a crack in its recent survey of international banking about what the acronom stands: Used to be Smart.

Soaring oil prices- are analysts to blame?

Are high-profile analysts responsible for oil price soaring past $130? One analyst who's frequently mentioned is an Indian, Arjun Murti, who works for Goldman Sachs. Murti is credited with having forecast the rise past $100 long back- now he's looking at $200 in the near future. FT has a report on this:

Ali Naimi has been the most powerful man in the oil market since he was named Saudi Arabia’s oil minister in 1995. Even the smallest hint from him about future supplies or prices could send energy prices spiralling up or down.

But Mr Naimi’s influence is today being threatened by a gang of Wall Street and the City of London analysts whose price forecasts and trade recommendations are not only moving spot prices but also shaping long-term trends.

Among those with the strongest claim to take over Mr Naimi’s mantle are Jeffrey Currie and Arjun N. Murti of Goldman Sachs.

Three weeks ago, Mr Murti suggested that crude oil prices could hit $200 in the next two years.

“The current energy crisis may be coming to a head,” he said on May 5. This immediately sent spot prices to a new record, but also triggered an unprecedented rally in long-term prices such as contracts for delivery in 2016. The bullish trend was reinforced last Friday when Mr Currie told investors to buy long-term crude oil futures, warning that “long-term oil prices will need to continue to rise to bring trend oil demand growth in line with trend supply growth”.

I have said before: speculation is an element in the rise in oil prices but the root cause is a imbalance in supply and demand. The imbalance is small but in commodities small imbalances suffice to create huge swings in prices. I would also mention geopolitical factors: nervousness over the Middle East and especially Iran.

How high will oil prices go? As far as the US can stomach, to put it bluntly. George Bush's visit to Saudi Arabia elicited a commitment from the Saudis to step up output. That and weakening demand from China in the coming months should rectify the supply-demand gap in the near future. The medium-term outlook is hard to call.

Techies didn't vote in Bangalore

Bangalore's techies were vocal on TV during the Karnataka elections. The Congress directed much of its campaign towards them. But they couldn't be troubled to go to the voting booth, it appears.

Swapan Dasgupta had some scathing comments in Sunday's TOI:

In London, the voter turnout on May 1 was 45% — very high by the standards of British local elections; it was 44% or so in Bangalore — pathetic by Indian standards. The turnout of registered IT professionals was estimated at just 20% — a far cry from the 78% turnout in Bangalore Rural.

The poor turnout of those who see themselves as the face of a new India is intriguing. First, the English media gave disproportionate coverage to the views of the IT sector during the campaign. To a non-Bangalorean it appeared that there is nothing apart from IT in the city. The Congress Party's advertisement campaign seems to have been directed totally at this special interest group.

Secondly, the ambassadors of the Brave New World were vocal in articulating their dissatisfaction with the state of Bangalore. They gave umpteen sound-bites sneering at politicians, almost implying that it would have been better if politics was run by corporates. Finally, while "old industry" engaged with politicians to promote and safeguard their own interests, the IT sector spurned them — that is, all except S M Krishna with whom it has a very special relationship. The techie honchos conveyed the impression that they were in Karnataka on sufferance; they could just as well have been in Shanghai.

Will oil prices derail the Indian economy?

Could soaring oil prices wreck short-term growth prospects? The pessimistic view is that it can - especially because it comes on top of troubled conditions in international financial markets.

Not so, methinks- and I said as much in my ET column, Please, this is not the 90s economy.

• First, I don't buy the proposition that prices above $125 are here to stay. The imbalances in oil supply and demand are very small - and feverish speculation is at the root of the present spike. Saudi Arabia's decision to step up oil output in response to President Bush's plea will have the necessary softening effect.
• Oil prices of around $100 are not a big deal for the world economy- in real terms, these would be close the peak of the seventies. But the developed world is far more energy efficient today than i the seventies.
• A high inflation- high interest rate cycle putting the brakes on India's economic growth is unlikely. Inflation will moderate in the months to come. Interest rates have risen but, in real terms, are way below those in the nineties.
  
• The structural characteristics of the Indian economy are far superior to those of the nineties, so the chances of a lapse into a 6-7% growth band are negligible.
• The prospects of the international financial market crisis receding are brightening by the day- the latest addition to the ranks of the optimists is Fitch, the credit rating agency. Ftich estimates total losses on account of the crisis at $400 bn, with banks accounting for half of this. Of the total $200 bn in estimated losses, banks have already provided for $160 bn.
  

RIchard Nixon the wierdo

Much has been written about Nixon's mental make-up and temperament. His bizarre behaviour when he was under pressure over Watergate has been particularly well documented- one story is about how a wild-eyed Nixon would go racing down the stairs with Secret Service personnel in hot pursuit.

A recent biography, reviewed in the Economist, adds to the repertoire of stories of Nixon's weird behaviour:

Nixon hardly has a reputation as Mr Normal. But it is still astonishing to be reminded of quite how odd Nixon and his circle were. He wore a necktie when he was in his dressing gown. He once visited his mother, camera crew in tow, to wish her a happy birthday—and shook her by the hand. He sent memos to his wife, Pat, about how “RN” would like his furniture arranged. Nixon matter-of-factly ordered H.R. Haldeman to draw up a list of the “big Jewish” contributors to the Democratic Party. “Could we please investigate some of the cocksuckers?” Chuck Colson, Nixon's general counsel who famously said that he would run over his grandmother for his boss, once contemplated firebombing the Brookings Institution, a stately think-tank, and then sending in FBI officers dressed as firemen to steal a document that Nixon wanted.

To think that such a man was in charge of America's nuclear button!

OBC quotas-uncertainty continues

I was away over the past week. I found I couldn't escape the OBC quota row even while away from the campus.

The SC has stayed the Calcutta High Court's own stay on the operation of OBC quotas in IIM- Calcutta. The Hindu's report provided more detail than most others:

the Chief Justice said: “It is strange that such an order has been passed by the Calcutta High Court. Once the Act has been upheld by us where is the question of stay? We don’t think the [Calcutta] High Court can sit over the judgment of this court.”

When counsel for respondents — K.K. Venugopal, Harish Salve, P.P. Rao and Rajeev Dhavan — opposed the stay on the Calcutta High Court order, the Chief Justice said: “Your argument is very strange. If you feel our judgment is being violated, you file a contempt [against the Centre]. We can’t allow the stay order to operate.”

The way I understood the various petitions filed in the High Courts, the principle of OBC quotas in central educational institutions is not being questioned. The issue now is whether the HRD ministry's directive on this subject is in conformity with the letter and spirit of the SC judgement in the case.

The CJ's remarks suggest that the remedy, in the event that the HRD ministry directive is in any way violative of the judgement, is to file a contempt petition against the government, not to seek a stay of OBC quotas in IIMs and elsewhere.

But I am at a loss to understand what would happen if the government were to be found guilty of contempt- say, because some of the admissions made were not in strict confirmity with the SC's observations and guidelines on the 'creamy layer'. The present SC order says that admissions made wil be 'provisional' subject to final disposal of the present bunch of petitions filed in various High Courts ( a point missed in the Hindu story).

What happens if some of the admissions made in accordance with Ministry's directive are seen to be violative of the SC judgement in the OBC quota case? Will the concerned students have to withdraw? Suppose this happens several months after they have joined one of the central educational institutions?

There are more fundamental issues that have been raised. One is whether the proportion of 27% would be valid if the OBC population after excluding the creamy layer turned out to be lower than this. The appropriateness of the figure of 27% was one of the issues raised when the SC heard the petitions against the central educational institutions' Act. The SC then took the view that since Parliament had accepted this figure, there must be some basis for it.

C K Prahalad on corruption

Management guru inveighed against corruption at the CII:

On the civic side, he said the prerequisites for growth were an emphasis on individual rights as against group rights and the urgent need to treat corruption as treason. "A nation becomes less corrupt before it gets rich."

Rousing stuff - and no doubt the money-bags at CII cheered lustily- but not something that withstands critical scrutiny. If Prahalad's statement is correct, China should have become poorer by now, not richer. When you look at the rankings of, say, Transparency International, you find that there is no precise correlation between these rankings and growth performance. Some corrupt economies flounder- as in Africa. Others prosper.

As a nation gets richer, petty corruption diminishes- the traffic constable is not going to wave you on if you pay him Rs 25 because this is small change in relation to his salary. But big ticket corruption is not eradicated as easily- and is indeed embedded in the very fabric of most economies, modern or antiquated.

More broadly, the evidence on the relationship between institutions and growth is suspect. Historian Gregory Clark points out in his monumental work, Farewell to Alms, that the quality of institutions in pre-industrial England was as good as it is in modern societies today. Yet, the existence of sound institutions did not cause growth to accelerate. America's own rapid growth at the turn of the last century happened against a background of some pretty weak institutions- banking and capital market scandals were rife at the time.

It may be well that a society that is not corrupt, that sets store by all sorts of norms, is a nicer place to live in. But it is not necessarily more prosperous.

Credit crisis receding?

Warren Buffett has sounded bearish earlier- he was among those quoted as saying the crisis was the worst since the Great Depression. But he's among those who think the crisis is showing signs of receding at least for Wall Street.

The worst of the crisis in Wall Street is over,'' Buffett said on Sunday. ‘‘In terms of people with individual mortgages, there's a lot of pain left to come.''

A number of Wall Street CEOs have said much the same thing (although some still sound grim). The Bank of England has weighed in on the side of optimists. The Bank echoed what I had said several times in my posts: the credit markets are overstating the losses because of inaccurate mark-to-market accounting practices.

The Bank joins issue with the IMF, which swung from an extreme of optimism last year to an extreme of pessimism in its most recent update. The IMF estimated financial sector losses at $945 bn. This, as the Bank points out, confuses "true credit losses and losses implied by market prices". If the marked-to-market losses are taken at face value, that would imply that 76% of prime loans would default with a recovery of less than 50% !- something that not even the gloomiest types subscribe to.

I stick to my forecast made at the beginning of the year: the market crisis and its real economy effects should start receding from the second half. This may well go down as the crash that never was.

Educational loan subsidy

Business Standard today has a news story on a concessional education loan scheme being crafted by the ministry of HRD. The essence of the scheme appears to be waiver of interest on educational loans.

"At present, students who take loans from banks get a moratorium period in the sense that they don't have to pay interest till they complete their studies. But with the launch of this scheme, the entire interest amount would be subsidised (waived)," an official told Business Standard.

The loan amount taken by the student should be commensurate with the course fee he/she is paying the institute, according to the contours of the scheme. Loans taken from any bank under the Indian Banks' Association will be eligible.

...The scheme assumes significance in the wake of premier educational institutes like Indian Institutions of Management (IIMs) announcing a sharp hike in fees.

Growth in education in management, medicine and engineering is being driven by private institutions. So, having a concessional education scheme is a good idea. However, the availability of concessional education loans does not mean that there is a case for steep fee hikes in public institutions.

First, the principal amount still has to be repaid. Second, if the state is provide some subsidy in public institutions, it might as well do so directly through lower fee. Why go through the cumbersome route of raising the fee and then subsidising the loan that would be required?

It could be argued that when fees are pegged a low level in public institutions, that is not good for their finances. Not true. The government can compensate for lower fee through direct grants. As I said, no need to involve banks.

Two other points are worth making. One, fees in state-run universities in the US are lower than those in private universities even though the US has an excellent student loan scheme. Two, even with a concessional loan scheme being available, private universities have a subsidy element built into the fee- this subsidy comes from private endowment.

In other words, it would be incorrect to say that once a concessional educational loan becomes available in the country, that is a signal for institutions, private or public, to charge what the "market can bear". There are huge externalities to higher education- public benefit exceeds private benefit. So, there is always a case for not recovering the cost of education in full.

Why MNCs have taken a beating

HBR (March 2008) has an article, "How local companies keep mulitnationals at bay", which explains why MNCs have taken a beating in several emerging markets, including India. I wrote a critique of this paper in my ET column, Keeping MNCs at bay on home turf.

The authors mention six strategies that homegrown companies have used in fending off the MNC challenge:

• Create customised products or services
  
• Develop business models to overcome obstacles (eg. products that are impossible to pirate in a market such as China's where privacy is common)
• Use the latest technologies: Amul has state of the art technology that enables it to collect 6.5 million litres of milk each day andyet weigh the milk, measure the fat content and pay the farmer in all of five minutes
• Invest in inhouse training: this happens not just in software companies but also others such as Apollo Hospitals
• Scale up quickly
• Invest in talent: local companies have shown impressive managerial and entreprenuerial abilities

I would have liked to know whether the successes are confined to private sector firms or whether state-run companies have also taken on MNCs successfully. China has a car manufacturer, Chery Automobile, that is a leading exporter- it is state-owned. In India, LIC has shown an amazing ability to match international firms in customer service and has clawed back some of the market share it lost initially.

Why RBI governor is bullish on Indian growth

I noted earlier RBI's bullish tone in its latest monetary policy. Yesterday, I watched a fascinating interview with RBI Governor Y V Reddy on CNBC yesterday in which the Governor explained why growth in the present period is different from growth in the early nineties. He was seeking to rebut the view that we could witness the sort of deceleration the Indian economy went through in the late nineties:

• In the nineties, the investment boom was on account of anticipated demand, now it is in response to pent-up demand. (There's a world of difference between the two; the first will peter out if anticipated demand materialises; the uncertainty in respect of the second is smaller)
• Savings and investment rates are a good 10 percentage points higher today and can sustain a higher growth rate
• Manufacturing was in the doldrums in the nineties, it has since reinvented itself and has turned competitive.

For these reasons, Reddy can't see Indian GDP growth slipping below 8%.

Reddy also explained why the idea of allowing the rupee to appreciate in order to combat inflation was misplaced.

The question of using an exchange rate for fighting inflation will be an interesting intellectual proposition. If you say that the exchange rate should essentially be determined by the market forces, where is the question of using an exchange rate?

Secondly, you have to have some policy on exchange rate, that has to be consistent with macroeconomic balance. You cannot keep changing the exchange rate at will because it is not like an interest rate that you can change. But exchange rate is determined as much by what others do and what you do. So, therefore the degrees of freedom that you have to handle as an instrument are to be considered.

Thirdly, if you just take empirical evidence and take ECB for instance, it is appreciating like never before, but has the highest inflation for decades. So, that type of correlation is misleading. So, the whole concept that exchange rate can be used as an instrument to fight inflation on a one-to-one basis is a proposition to which I won’t agree to.

Finally, Reddy had a pretty good explanation for why the RBI had raised the CRR and left interest rates untouched:

There is maximum flexibility for CRR and there is certainty of considerable overhang of liquidity. So, there is certainty of a problem and flexibility of an instrument, which is mostly related to identifiable problem. With regard to repo rate, it is a policy rate and in some senses it is reflective of fundamental view.

Domestically there are underlying demand pressures but there is also been a supply shock in the last one-quarter. Globally, what will happen after 4-5 months is that people are uncertain about the type of impact on the economy. So, when there are too many uncertainties, you don’t get locked in an instrument.

RBI stays bullish

The RBI's growth forecast in its just unveiled annual monetary policy, I am pleased to say, is identical to mine:

In view of these factors, overall, for policy purposes, real GDP growth in 2008-09 may be placed in the range of 8.0 to 8.5 per cent, assuming that (a) global financial and commodity markets and real economy will be broadly aligned with the central scenario as currently assessed and (b) domestically, normal monsoon conditions prevail.

The central bank, being a central bank, has hedged its forecast with the mandatory qualifications but these are not terribly consequential. I don't see any reason to think that the global outlook will change materially; and the news on the agricultural front has been good.

Remember, every single forecast on the Indian economy in the past five years has been an under-estimate. So, I wouldn't be surprised if growth hits 9%. That would be the decisive deathblow to those who claim that the spurt in economic growth was a fluke created by the global boom. If you can grow at 8-9% in these conditions.........

MBA education- old wine in new bottle

I zoomed in on an article in today's ET by Yale Management School Dean , Joel Podolny, with high expectations. It's titled "Transforming the MBA for the 21st century". I must confess I was more than mildly disappointed. The problem Podolny identifies is familiar enough but I can't see anything novel or striking in the solutions he proposes.

The problem:

There are two fundamental drivers behind the demand for changes in business education and MBA curricula. The first is that the world of management has changed tremendously from the 1950s. Then, a typical manager could spend his or her entire career within a single function — say, marketing or finance — of a large bureaucratic organisation.

There was thus a strong alignment between these careers and MBA curricula that were siloed by related disciplines. But organisations have become increasingly flat, and the leaders of modern enterprises competing in the global economy are looking for managers who are capable of leading and managing across the boundaries of function, geography, and sometimes even organisation, industry, and sector....

The second driver is that today’s students learn in a way wholly different from the way students learned in the 1950s or even in the 1980s. The Internet, the 24-hour news cycle, the popularity of social networking, and almost instantaneous ‘on-demand’ access to knowledge have all contributed to a significant shift in the mindset and the learning process for the 20-somethings now entering our MBA programmes.

Okay, so what are the solutions? Podolny proposes two. One is a "raw case". This, it turns out, is not a case in a specific area- finance, marketing or production- but one that spans multiple areas and contains reams of text and material, perhaps running into a thousand pages! The other idea is to put the material online.

Sorry, I am not bowled over. The "raw case" that Podolny talks about is already there in many places, including, I daresay, IIMA. We call it an "integrated case" and we often have three or four faculty in the classroom teaching it together. If this is new to Yale, all I can say is IIMA is way ahead.

As for putting material online instead of giving it out as hard copy, that too has been practised by several b-schools for years now- and, yes, we have it this too at IIMA today.

If this is Yale's idea of "transforming the MBA", my suggestion to American (and overseas) students is that they consider applying to IIMA.

Too many IITs ?

I would not have thought this merited a serious debate but since one is on in right earnest, let me add my two cents to it.

Creating an IIT in a state has an impact similar to setting up a railway junction- also sorts of developmental impulses radiate out of it. The state or area in which IIT is located certainly gets a boost. So, if you have the resources, go for it. IITs can command resources of a higher order than plain colleges or universities, there is a certain discipline which the IIT system brings along with it, and there is also scrutiny and assessment that is qualitatively superior.

The problems will be there- notably, finding good faculty- of course but those problems would be there even if were to invest in colleges that did not carry the IIT tag. A potentially favourable factor is returning NRIs- some may just find it worthwhile to be in their home states and may be willing to sacrifice the prestige of being with one of the older IITs especially if these are people in their forties and above and have already made a reputation for themselves.

I also think that creating competition from IITs - and IIMs, for that matter,- is a good thing although it will be a long time before the new entrants pose a threat to the entrenched players.

What about the problem of "brand dilution"? I don't see any cause for apprehension. The three top IIMs have not suffered in the slightest because three other IIMs have come up and a fourth one is due. Nor have IIM- Indore and IIM- Kozhikode been able to ride on the reputations of the older IIMs. The pecking order in most rankings is the top four IIMs followed by several other non-IIM institutions with IIM-I and IIM-K coming way below. We can see the difference clearly in the new fee structures that the IIMs have proposed- the market leader, IIMA, is way ahead of the rest.

SC judgement in OBC quota case

The SC judgement in the OBC quota case is seen as a politically correct judgement- it allows quotas (which will please the reservationists) but disallows the creamylayer, which will please opponents of quotas.

Well, that may well be the outcome but it would not be correct to suggest that was the intention. A careful reading of the judgements suggests that it is based on a careful interpretation of the Constitution and the formidable case law that has accumulated on reservations. I read the judgements and was left with a sense of admiration for the fundamental justness of the verdict. My comments on a couple of legal aspects and the implications of the judgement are there in my ET column, Expect quota battles to continue.

The thirteen key legal questions and the answers to these are summarised in Chief Justice Balakrishnan's judgement. I reproduce this portion:

Questions:

1. Whether the Ninety-Third Amendment of the Constitution is
against the "basic structure" of the Constitution?

The Constitution (Ninety-Third Amendment) Act, 2005 does
not violate the "basic structure" of the Constitution so far as it
relates to the state maintained institutions and aided educational
institutions. Question whether the Constitution (Ninety-Third
Amendment) Act, 2005 would be constitutionally valid or not so far
as "private unaided" educational institutions are concerned, is left
open to be decided in an appropriate case. (Paragraph 79)

2. Whether Articles 15(4) and 15(5) are mutually contradictory,
hence Article 15(5) is to be held ultra vires?

Article 15(5) is constitutionally valid and Articles 15(4) and
15(5) are not mutually contradictory. (Paragraph 100)

3. Whether exclusion of minority educational institutions from
Article 15(5) is violative of Article 14 of Constitution?

Exclusion of minority educational institutions from Article
15(5) is not violative of Article 14 of the Constitution as the minority
educational institutions, by themselves, are a separate class and
their rights are protected by other constitutional provisions.
(Paragraph 102)

4. Whether the Constitutional Amendment followed the
procedure prescribed under Article 368 of the Constitution?

The Ninety-Third Amendment of the Constitution does not
affect the executive power of the State under Article 162 of the
Constitution and hence, procedure prescribed under Proviso to
Article 368(2) is not required to be followed.
(Paragraph 103)

5. Whether the Act 5 of 2007 is constitutionally invalid in view of
definition of "Backward Class" and whether the identification
of such "Backward Class" based on "caste" is
constitutionally valid?

Identification of "backward class" is not done solely based on
caste. Other parameters are followed in identifying the backward
class. Therefore, Act 5 of 2007 is not invalid for this reason.
(Paragraph 142)

6. Whether "Creamy Layer" is to be excluded from SEBCs?

"Creamy Layer" is to be excluded from SEBCs. The
identification of SEBCs will not be complete and without the
exclusion of "creamy layer" such identification may not be valid
under Article 15(1) of the Constitution. (Paragraph 152)

7. What should be the para-meters for determining the "creamy
layer" group?

The parameters contained in the Office Memorandum issued
by the Government of India, Ministry of Personnel, Public
Grievances and Pensions (Department of Personnel and Training)
on 08.09.1993 may be applied. And the definition of "Other
Backward Classes" under Section 2(g) of the Act 5 of 2007 should
be deemed to mean class or classes of citizens who are socially
and educationally backward, and so determined by the Central
Government; and if the determination is with reference to caste,
then the backward class shall be after excluding the creamy layer.
(Paragraphs 153 and 155)

8. Whether the "creamy layer" principle is applicable to
Scheduled Tribes and Scheduled Castes?

"Creamy Layer" principle is not applicable to Scheduled
Castes and Scheduled Tribes. (Paragraph 163)

9. Whether the principles laid down by the United States
Supreme Court for affirmative action such as "suspect
legislation", "strict scrutiny" and "compelling State
necessity" are applicable to principles of reservation or
other affirmative action contemplated under Article 15(5) of
the Constitution?

The principles laid down by the United States Supreme
Court such as "suspect legislation", "strict scrutiny" and
"compelling State necessity" are not applicable for challenging the
validity of Act 5 of 2007 or reservations or other affirmative action
contemplated under Article 15(5) of the Constitution.
(Paragraphs 184)

10. Whether delegation of power to the Union Government to
determine as to who shall be the backward class is
constitutionally valid?

The delegation of power to the Union Government to
determine as to who shall be the "other backward classes" is not
excessive delegation. Such delegation is constitutionally valid.
(Paragraph 186)

11. Whether the Act is invalid as there is no time limit prescribed
for its operation and no periodical review is contemplated?

The Act 5 of 2007 is not invalid for the reason that there is
no time limit prescribed for its operation, but a review can be made
after a period of 10 years. (Paragraph 187)

12. What shall be the educational standard to be prescribed to
find out whether any class is educationally backward?
The contention that educational standard of matriculation or
(10+2) should be the benchmark to find out whether any class is
educationally backward is rejected. (Paragraph 189)

13. Whether the quantum of reservation provided for in the Act is
valid and whether 27% of seats for SEBC was required to be
reserved?

27% of seats for other backward classes is not illegal and
the Parliament must be deemed to have taken into consideration
all relevant circumstances when fixing the 27% reservation.
(Paragraph 193)

Damn those meetings!

I have alway felt that meetings everywhere and always are unproductive and a bore. If meetings are held at all, the time spent on these should be minimal. I was happy to see these views echoed in an FT article:

Does anyone ever walk into a meeting fired up with enthusiasm? Or do they groan in anticipation of the politicking, the bureaucracy and the office bore taking up what little oxygen remains in the room? And, in any case, all the decisions have probably already been taken, haven’t they?

Jim Buckmaster, the unconventional chief executive of Craigslist, the internet classified advertising company, is no fan of meetings. “I’ve always found them to be at best unproductive and boring, and at worst toxic and destructive,” he says. “The people who want to show off do, the brown-nosers brown nose, everyone else wastes their time. I also think the larger the meeting, the worse it is.”

Sixth Pay Commission Report

I had meant to post this comment long back but it just escaped me. I wrote about the Sixth Pay Commission (SPC) report in my ET column. Let me just add a few thoughts here.

• As I point out in my column, the perception that the Commission has gone overboard in increasing government servants' pay is wide of the mark. Yes, they have been generous with grade A employees and there too only in respect of those of the rank of Joint Secretary and above. For the rest, the increases recommended are modest. The ratio of top pay to lowest pay has, as a result, moved up from around to 12. The nominal increase on the average is of 13%, including pensions. Excluding pensions, the increase in pay and allowances may be slightly higher- 15-20%. My guess is that, in real terms, the increase relative to the pay of a decade ago is negligible.
• In the months preceding the Commission's report, commentators had set up a terrific drumbeat as to how the SPC would devastate goverment finances. In fact, the fisc will hardly feel the impact- 04% of GDP is the first year impact, including arrears. In about three years' time, the impact wears off. What on earth were these commentators talking about?
• There is a perception that government is getting fatter. Wrong. It is getting leaner. In two ways. One, through attrition- jobs falling vacant through retirement are not getting filled. Two, increases in manpower have not kept pace with increase in government revenues or GDP. Compensation to government revenues has fallen by a third over the past decade. This is a measure of downsizing. People don't see it because employees have not been fired. But this is cleverer downsizing- let revenues rise, don't let manpower costs rise as fast. It is a form of downsizing that doesn't hit the headlines and hence is politically more manageable. It is the only sort of downsizing that makes sense in a democracy such as ours.
• How to make government more efficient? One element is reasonable compensation. Not that pay in government can ever be on par with the private sector but private sector pay does serve as a distant benchmark. The problem today is that private sector pay has soared into the stratosphere, so pay in government lags behind. The answer, as I point out in my column, is more frequent revisions in government than once in 10 years. The SPC has failed to make this recommendation. However, there are other sensible proposals- running pay bands that end stagnation in a given pay scale is an overdue reform. At present, people are stuck at the top of their scale for years!
  
• Instead, the SPC takes the view that there be selective rewards linked to performance- a private sector idea. I'm afraid given the problems in measuring performance in government and politicians' tendency to abuse such schemes, this just won't work.
• One last point: the SPC favours market-based pay for regulators. The chairman of SEBI or IRDA can make Rs 3 lakh per month. Alas, this won't fly. I can't see the top bureaucrats allowing this. If the cabinet secretary must get less than the president, why should regulators be in a different category?
  

Justice Raveendran on OBC quotas

In my last post, I had flagged an issue that troubles people in states such as Tamil Nadu. There is a huge quota for OBCs. On top of this, OBCs get in through the merit pool. The total OBC representation thus exceeds the quota limit which itself is generous. Can this happen in central educational institutions now that the Supreme Court has rejected the challenges to the 93rd Amendment?

Justice Raveendran flags this issue in his judgement but refrains from expressing an opinion:

<>

<>I would however leave open the question whether members belonging to other backward classes who get selected in the open competition field on the <>basis of their own merit should be counted against the 27% quota reserved for other backward classes under an enactment enabled by Article 15(5) of the Constitution, for consideration in an appropriate case.

My guess is that this may not be a problem in the elite institutions to start with. Once the 'creamy layer' is excluded, it will not be easy to fill up the 27% earmarked for OBCs.

But, yes, over time, it could be an issue. That is why I say that we must monitor total OBC representation: watch the percentage of OBCs in the quota category and also in the general category. Cut-offs for quotas and definitions of OBCs must be revised periodically so that total OBC representation amounts to 27%.

OBC quotas and the 'creamy layer'

The SC judgement on OBC quotas is in. The focus now turns to implementation. There are two issues as I see it:

i. How do we define the 'creamy layer' for education purposes;

ii. Whether the 27% quota is to be introduced at one go or in phases as the Moily committee had recommended.

On the latter, I just saw on TV that Ramadoss wishes to have 27% at AIIMS right away. I have favoured phased implementation not just because it is politically more acceptable ( to those adversely impacted) but also because we are not clear as to how OBC representation in educational institutions will be impacted by the 27% quota. Let me, therefore, focus on (i) above.

I have not had a chance to go through the judgements myself. From what I could make out from newspaper reports, the 27% quota is subjected to several constraints:

• 'Creamy layer' to be excluded. For jobs, the definition was those from families with income of Rs 2.5 lakh per annum. It appears that, on top of this, the present judgements impose several other criteria: children of those occupying certain high posts or belonging to certain vocations, graduates, etc. Whether these are mandatory or indicative is not clear. On TV yesterday, I heard several people say that each state has evolved its criteria for determining the 'creamy layer'. It is upto the HRD ministry, I suppose, to clarify what criterai would apply to central educational institutions.
• Private unaided institutions are not covered by the existing legislation. On whether fresh legislation can be framed to cover them, all judges except Justice Bhandari are reported to be silent. Justice Bhandari is said to have taken the position that private, unaided instiutions fall outside the ambit of the 93rd constitutional amendment.
• Graduates do not qualify as backward, hence there will be no OBC quota in post-graduate courses. This is one issue that needs to be resolved quickly because we have to determined whether quotas apply to the likes of IIMs or not.
• There is to be a review of the quota level after five years. Again, whether this is merely a suggestion or a direction needs to be clarified.
• The OBC quotas will be subject to minimum eligibility criteria. According to some reports, the difference between the eligibility cut off for the general pool and for the OBC quota should not exceed 5 marks (some say 5%). What this means for IIMs which follow the percentile system is not clear- is the OBC cut off 5 percentile below the normal one or 5 marks below the normal one. My guess is that the latter would be much lower than the former. The Moily committee itself had a sentence to the effect that quotas should not be at the cost of institutional quality- this meant that institutions could exercise their discretion in judging how far they should go to accommodate OBCs.

On the face of it, it would appear that the constraints imposed by the SC will result in a representation for OBCs below the 27% intended. On TV yesterday, I heard dalit activist and scholar, Kancha Iliah, say that the combination of 'creamy layer' and higher fees at educational institutions would prove lethal to the cause of OBC quotas- those with incomes below Rs 2.5 lakh would be sufficiently intimidated by the increasing levels of fees not to seek admission; those could afford the fee would be ineligible. The 27% quota would remain a dream.

Iliah argued that the additional seats being created for OBC quotas would end up being appropriated by the higher castes ( the SC judgement apparently says that seats not filled by qualifying OBCs must go the general pool). Thus, OBC quotas would have the perverse effect of giving greater representation to the higher castes than they enjoy at present!

How plausible is this scenario? Health minister Ramadoss (who was on the same show on Times Now) made the point that 17 years after the implementation of Mandal I, OBC representation in government was just around 5%. If the same happens with educational institutions, I guess the upper castes would be richer by 22%!

However, I am not sure we can extrapolate from the experience with government jobs. People have cited some surveys done in educational institutions (where quotas do not exist at present) that show that OBC representation is quite high even now- on the TV show yesterday, somebody mentioned a figure of 24%. It may well be that OBCs who graduate from good institutions do not seek government jobs, hence the representation in education does not translate into commensurate representation in government.

Iliah may be right: outside the 'creamy layer', not enough people may qualify to meet the quota of 27%. But he overlooks one fact: 'creamy layer' OBCs may be getting in without any concessions, on pure merit, that is. The objective should be overall OBC representation of 27%, not 27% through quota plus whatever OBCs get in the general category. This translates into a higher than mandated representation for OBCs in many states such as Tamil Nadu and is the cause of much of the anti-reservation sentiment.

So we need to monitor OBC representation in the general pool and that in the quota pool and see whether the total approaches 27% or not. This is why phased implementation is desirable. Start with 7% or 10% in the first year for quotas and see what the total OBC representation, including that in the general pool, is. Adjust the definition of 'creamy layer' accordingly.This gives us an empirical basis for defining the 'creamy layer'. It will be so defined as to ensure that OBC representation in the general pool plus that in the quota category amounts to 27%. It also gives us a basis for setting cut-off levels of marks for quotas.

HBS is 100

Harvard Business School, the mother of them all, turned 100 on April 8. There is a critique by Stella Bradshaw in FT. It's a critique as much of the MBA degree as of HBS:

Strip away the hype surrounding the MBA, though, and it is difficult to come up with hard evidence to prove that 100 years of management education, and the MBA degree in particular, have been beneficial to business or society. Indeed, even among its proponents, many are questioning whether business schools teach the right things, in the right way, to the right people.

..........Given the obvious popularity of the MBA, it may seem strange that business schools, particularly in the US, are facing a crisis of confidence about what they teach. One of the biggest issues is surprisingly similar to the dilemma faced by Harvard 100 years ago: that is, the extent to which business schools should teach the practical and research the theoretical.

The 'crisis of confidence' in the quote above is for real. Unlike in law and medical schools, faculty lack the conviction they are adding value. Motivation is low amongst students in the second year because only the first year grades are made available to recruiters. This means that how you fare academically in the second year doesn't have a bearing on the job you will land. Take care of the first year grades and you have made it.

I liked the variations in the FT article on what MBA has come to mean: Mediocre but Arrogant, Master of Brainless Axioms. A student from Insead is quoted in the article as saying that the MBA programme is a 'bullshitter's paradise'.

Soros on the financial crisis

George Soros lashes out at market fundamentalism:

For the past 25 years or so the financial authorities and institutions they regulate have been guided by market fundamentalism: the belief that markets tend towards equilibrium and that deviations from it occur in a random manner. All the innovations – risk management, trading techniques, the alphabet soup of derivatives and synthetic financial instruments – were based on that belief. The innovations remained unregulated because authorities believe markets are self-correcting.

Regulators ought to have known better because it was their intervention that prevented the financial system from unravelling on several occasions. Their success has reinforced the misconception that markets are self-correcting. That in turn allowed a bubble of excessive credit to develop, which extended through the entire financial system. When the subprime mortgage crisis erupted it revealed all the weak points. Authorities, caught unawares, responded to each new disruption only after it occurred. They lacked the ability to foresee them because they were in the thrall of the market fundamentalist fallacy. They need a new paradigm

HRD ministry okay with IIMA fee hike

That's what the media has reported today:

After a meeting with HRD minister Arjun Singh, IIM-A board chairman Vijaypat Singhania ruled out a review, but added that enough scholarships would be available to support meritorious but poor students. Against Rs 40 lakh earmarked for scholarship, the amount now would be Rs 8.5 crore, covering 62% of students.

There are two issues here:

1. Do scholarships address the problem? Let's see... Rs 8.5 crore for 62% of students or around 360 students. That's Rs 2.4 lakh per student against the fee of Rs 11.5 lakh. On the average, qualifying students (the eligibility limit now is Rs 6 lakh of family income) would have to cough up Rs 9 lakh- nearly double the existing fee. This is the extent of help that IIMA's tuitution waiver and need-based scholarship will give- where ordinary students face a tripling of the fee, "needy" students face a doubling. IIMA's move to increase financial support is laudable but, on the average, the increase in the burden on the students remains high.

2. Should educational institutions pass on full costs to those who can afford to pay? This is taxen as axiomatic by many. But the principle that subsidies through scholarship are required only for needy students while the rest pay market-related fees is open to question. As I have said repeatedly, quality, non-profit institutions do not accept this principle. Higher education is subsidised for all. It's just that the subsidy is greater for the needy.

In the best schools, costs are seldom recovered in full through fees from students on the ground that students have the capacity to service loans. Fees cover only a portion of the costs for any student. I read that the IITs follow the rule that one-third of costs are recovered from students, one third from consulting and one-third from government funding.

At the best universities in the US, private endowments cover part of the costs for any student. On top of this, Harvard has a total exemption from tuition fee for those coming from families with income of upto $60,000 and a slightly lower subsidy for those coming from families with income of upto $100,000. And this in a culture where the family does not necessarily bear the educational costs of the child. At IIMA itself, the practice has been to cross-subsidise PGP through other income. If the IIMs do not wish to accept government funds, it would be worthwhile for them to explore fully other sources of income - consulting, endowments- that will help them cover a portion of the cost of the PGP.

Anyway, HRD minister Arjun Singh may have been convinced about the rationale for the IIM fee hike but not his precdecessor, Murli Manohar Joshi:

''It is a decision of the elite, by the elite and for the elite,'' Dr Joshi remarked, adding ''it will put a damper on Indian middle class dreams of good management education. Dr Joshi called for an audit of educational institutions built with taxpayer funds. ''It is high time there is an academic and financial audit of institutions built on public money and government mandate.''

Sorry, the Hyde Act does apply to us

We have been going back and forth on the Indo- US nuclear deal for a while now. One of the strongest arguments mounted in favour of the deal has been that the Hyde Act is a purely domestic legislation of the US. We will be bound only by the 123 agreement with the US. Advocates of this line will be swiftly disillusioned by this report in Rediff from its Washington correspodent about the recent discussions that a US Congresionnal delegation had with the Indian government:

The Massachusetts Democrat (Ed Market) reiterated, "So what I did was just to raise for them what the law of the United States is with regard to the impact that a nuclear explosion would have since the section, which is being amended is the Section 123 of the Atomic Energy Act and the Non-proliferation act of 1978, and obviously the Hyde Act amends that to make it possible for have a transaction with India."

Markey said that while the delegation was in India, the debate continued to rage 'inside India as to whether or not -- the Hyde Act was the final arbiter'.

The delegation had impressed upon all Indian officials and parliamentarians that India has to abide by the provisions of the Hyde Act, he added.

He said the delegation had pointed out to the Indian officials and parliamentarians that US Secretary of State Condoleezza Rice [Images] had assured the US Congress that 'the Bush Administration intends on abiding by the Hyde Act and we made it clear that the Hyde Act was the law of the United States when we were there -- when we were speaking with all of the various groups that we met with."

Asked if there was an appreciation by Dr Singh and his senior Cabinet colleagues and others that it was the Hyde Act that superseded the 123 Agreement, Markey said: "I hope so. The discussion turned exclusively while we were there on the Hyde Act -- that was the discussion. And, whether or not, the Hyde Act was binding upon the President of the United States, which we assured them, it was."

Business Standard on IIM fee hike

BS today has an edit today on the IIM fee hike. Let me dissect a couple of points it makes because these reflect the conventional wisdom:

1. Amazingly, faculty at the IIMs and IITs, being government institutions, are subject to these (UGC) pay-scales too. They not only lag their global counterparts by a huge margin — even in purchasing power parity terms — but also their colleagues in private institutions in India who are by no means generously paid.

We should expect compensation (including housing) at the IIMs to amount to around Rs 15 lakh after the Sixth Pay Commission. This does not include consulting income. Now, Rs 15 lakh is about Rs 45 lakh in PPP terms- or $ 110,000. That does not strike me as "lagging global counterparts by a huge margin".

2. To be sure, the UGC scales will continue to apply, but with higher fees the IIMs will have the flexibility to consider solutions similar to those followed by many public sector banks. Like any government-owned institution, senior bankers in public sector banks suffer the malady of low pay scales. To get round this, many such banks offer valued senior executives contracts that are more in tune with private sector salaries and outside the purview of government scales.

I don't know of many quality institutions that offer superior pay to faculty on a contractual basis. That's because you can't set targets for output over a contracted period. Even chair positions at top schools abroad are on a tenured basis.

In any case, I must question the presumption that higher fees will translate into higher pay for faculty. None of the IIMs, so far as I know, has made this connection. As far as I can make out, higher fees are meant to cover increased costs on the existing basis and to preempt the need to go to government for funds.