A globalised world?

Schumpeter has an interesting column based on Pankaj Ghemawat's latest book on globalisation. Ghemawat contends that the statistics don't bear out contentions about the world becoming flat- or flatter:

Mr Ghemawat points out that many indicators of global integration are surprisingly low. Only 2% of students are at universities outside their home countries; and only 3% of people live outside their country of birth. Only 7% of rice is traded across borders. Only 7% of directors of S&P 500 companies are foreigners—and, according to a study a few years ago, less than 1% of all American companies have any foreign operations. Exports are equivalent to only 20% of global GDP. Some of the most vital arteries of globalisation are badly clogged: air travel is restricted by bilateral treaties and ocean shipping is dominated by cartels.

...Foreign direct investment (FDI) accounts for only 9% of all fixed investment. Less than 20% of venture capital is deployed outside the fund’s home country. Only 20% of shares traded on stockmarkets are owned by foreign investors. Less than 20% of internet traffic crosses national borders.....today’s levels of emigration pale beside those of a century ago, when 14% of Irish-born people and 10% of native Norwegians had emigrated. Back then you did not need visas.

Companies that operated on the 'flat earth' premise have actually burnt their fingers badly; the ones that were quick to adapt to local realities have done well.... The key question is whether globalisation will accelerate in one key respect: emigration. Demographics requires it should- Europe, Japan and the US all require foreign hands in a big way. But security considerations and xenophobia militate against it. Outsourcing is one way of dealing with the challenge of lower costs: instead of bringing in low cost labour, simply shift production to where costs are low.

Corruption in India- does it affect growth?

Arvind Subramaniam poses the question in today's BS. His answer is equivocal, as is to be expected (of any economist, on the subject of corruption). Contrary to what the popular press would have us believe, the evidence from economic analysis does not suggest that corruption- or bad governance- necessarily derails growth. It's not just India's example that is telling; there is China's and, before that, of numerous other countries, such as Indonesia.

Subramaniam argues that India has managed to sustain growth by intense use of skilled labour, while not making the most of unskilled labour. Since skilled labour is drying up fast, he says, land will become an important factor. Since corruption will push up land costs, it will impact adversely on growth.

I am not so sure. Land is already mired in corruption and its costs have already shot up in many parts without affecting growth. I suspect that the contention that the 'governance deficit' will undermine growth is fated to go the same way as the contention about the 'infrastructure deficit', especially the shortage of power in the nineties. Remember the figures put out as required for investment in infrastructure? Investment, especially FDI, did not come anywhere near the projection but that did not prevent the Indian economy from taking off in the last decade.

Indian business found ways around the infrastructure shortage. They will do the same with shortage of labour or land. The Economist, in another article, talks about the 'Hindu rate of self-deprecation'. It suggests that grumbling about approvals required or corruption has not stopped India from growing so far. I would venture to suggest it won't do so in the future either.

Indian growth overtakes China's?

Commentators project India overtaking China's in the near future. The IMF reckons this has already happened, the Economist reports.

The explanation runs as follows. India reports GDP by factor cost; China by expenditure. Look at India's GDP by expenditure and you find Indian GDP was a shade ahead of China's in 2010 (calendar year)- 10.4% and 10.3%. The Indian growth rate is at constant prices, so it has nothing to do with the high rate of inflation.

Bhargava-II report on the IIMs

Amit Gupta and Ganesh Prabhu, faculty members at IIMB, offer a detailed critique in EPW of the second Bhargava report on governance at the IIMs. This report, along with other reports and decisions taken by the ministry recently in consultation with IIM directors, has evoked a strong response from a section of the IIM faculty.

The authors argue that it is wrong to vest governance exclusively in the board of the IIMs, as faculty are important stakeholders. They point out that the IIMs have had a decentralised model of governance where faculty also have responsibility for governance. True, but is it appropriate to persist with a self-regulatory model? The board should certainly not review the performance of individual faculty, as the Bhargava report recommends. But some authority needs to take a look at the aggregate performance, whether it is in line with agreed objectives.

I agree with the authors that the boards, having been ineffective all these years, cannot be expected to spring to life all of a sudden. But, then, the question remains: who is to be the monitoring authority? Well, I think the question has been answered to some extent with the ministry constituting what is, in effect, a pan-IIM Council where the minister sits down with IIM directors every six months and reviews performance. Better to stay with this, I feel, than to rely on boards. Vesting more power in the boards will only mean vesting even more power in the directors of IIMs- and this is best avoided since there is already a heavy concentration of power in the office of the director.

The authors refer to the Bhargava report's recommendation that directors be paid amounts in addition to their income and calling it 'self-serving' since three IIM directors sat on the committee. The rationale for making extra payments itself needs to be questioned. The report claims that "the director of an IIM earns less than the faculty who are involved in training programmes."

What is the basis for this statement? Did the committee obtain data on directors' earnings from consulting? It is certainly not true of IIMA that the director loses out on consulting income because he does not participate in it. The government needs to look at the ratio of directors' consulting income to average faculty income at the different IIMs.

Meanwhile, R C Bhargava has given an interview to Business Standard where he defends the decision to sell seats in IIM societies to corporate donors on the ground that this will augment the corpus of the IIMs, which, in turn, will enable them to compensate faculty better. This argument is flawed. Corporates are free to make endowments to the IIMs but they must not expect a seat on the Society in return. There are huge corporate endowments in the US but the corporations don't get to running the educational institutions. At best, they have a hall or a centre named after them (and not always).

However, Bhargava may have a point when he says that, in attempting to augment the Institute's and faculty's income, the IIMs may be spending too much time on executive training to the detriment of long-duration programmes and research. At least at some IIMs, an imbalance may have crept in. For this, the IIMs have only themselves to blame: the older IIMs decided they did not want revenue grants from the government, which leaves them with little choice but to augment income through training.

Mohandas Pai begins to speak up

Mohandas Pai's resignation from Infosys was a huge news item in the media. Pai's departure will not make a difference to Infosys, certainly not the sort of difference that would cause a sharp drop in the stock price- he's neither a marketing person nor a software person, he was in charge of HRD. I suppose his departure caused news because it was seen as signalling a difference with the board and especially Narayana Murthy over succession planning and it also raised the question whether a company, which is said to be a model of governance, had got its succession planning right.

In his initial remarks, Pai sought to refute any suggestion of differences with the board and insisted he was merely making way for younger people. He also disclaimed any intention of wanting to become CEO himself. The company spokesmen themselves made statements that suggested that Infosys is not your run-of-the mill- company where people at the top have differences over such petty matters as who should be become CEO.

A couple of days later, Pai seems to have thought it necessary to give vent to his feelings. Here's an excerpt from a report in Indian Express:

“What goes against me? Seniority. You are discriminated against because the founders have spent longer years,” Pai told The Indian Express from Bengaluru. “I know the law, so long as the founders are there, professionals who are late entrants will not get a chance.”

....According to Pai, Murthy had, in an interview to a business newspaper, said if there are two very capable people, both fit to take on leadership roles, the one who has served for longer, would be the choice. “I don’t agree... you have to go by the person best suited for leadership over the next five years,” he said.

So, there you have it. The remarks appear to confirm speculation in the media that Pai was not too happy with the choice of S D Shubulal, one of the founders, for the post. In a separate interview with NDTV, Pai also hits out at what he calls the 'conservatism' of the company which, he thinks, has led to others overtaking in the recent past. He also suggests that Infosys might have done a better job of choosing its next CEO:

"When you choose a CEO, you should have a very transparent process and you choose the best person for the job," Pai said, adding, "In corporate India, the whole idea of CEO succession requires more transparency."

--"If left to me I would have drawn a list of people and I would have interviewed them and invited them to come and present to the board what their vision for the future is and I would have looked at their capability and decided for the next 5-10 years who are the people we should back and what they are going to do," he said.

Pai implies that what he has in mind did not happen at Infosys- and he has a point. It's hard to defend a system whereby the founders take turns at becoming CEO; this betrays too much of a closed shop mentality. It could be argued that it turns out that, in a competitive process, one of the founders was the best suited. However, this strains one's credulity- it cannot be that, after NRN, three successive CEOs who were best suited all happened, by a coincidence, to be founders.

Infosys has a board committee looking into CEO selection. Pai's remarks do raise a question mark over how effective this process has been, whether the board has exercised the necessary independence in the matter and made its choice based on a truly global and competitive search.

Anna Hazare and the political class

Round One to Anna Hazare, no two ways about that. His fast in Delhi, played up by the visual media ( as only it can play up such things), brought the government scurrying to the table with a compromise proposal on the Lokpal Bill. There was joy unconfined in the media and the chattering classes.

Where do we go from here? Not very far, I fear. With every respect to Hazare and his well-meaning supporters, particularly young people, it's a serious mistake to suppose that non-political actors can provide solutions to political problems.They can act as pressure groups from outside and that's a valuable contribution. But anything beyond that would be unrealistic to expect.

This will not be the first campaign against corruption. In 1974, the JP movement aimed at bringing about a Total Revolution. It ushered in a non- Congress government. Thereafter, it was indeed a revolution- back to where it started from. In the 1980s, we had the Bofors scandal which swept V P Singh to power on the promise of a clean government. We know what happened.

We need to streamline various processes in government and to take purposeful action where corruption is detected. The Lokpal would be one instrument in tackling corruption but it cannot be the answer to the problem. And an all-powerful Lokpal, envisaged by the social activists, is a dangerous idea. Why must we suppose that a set of professionals would be above and beyond corruption?

There is one strand to the present outrage against corruption that is particularly dangerous. This is the vilification of the political class. In the course of a chequered career, I have come across not only politicians but professionals in various walks of life- corporate executives, doctors, lawyers, chartered accountants, and, yes, academics. I am unable to testify that any of these groups has standards of conduct superior to those of politicians.

The middle class is complicit in corruption in many ways, and it happily applauds neo-liberal policies that impoverish millions of people. Businessmen and companies are amongst the biggest beneficiaries of corruption. For these people to single out politicians for blame is absurd.

There is a Bollywood stereotype of the politician- as a venal nincompoop and part-time rapist- that unfortunately has wide currency. With all their venality and ruthlessness, politicians bring to their jobs a certain degree of competence or knowledgeability that is not generally appreciated. And the democratic process works miracles in its own ways. Condemn individual politicians by all means but, please, do not devalue the democratic process. More in my ET column, Don't demonise the politician.

Another IIM- MHRD confrontation?

Outlook magazine has several pieces on what appears to be another looming confrontation between the IIMs and the ministry of HRD. The main story focuses on a couple of items that figured in the last meeting between the ministry and the IIM directors: selling seats in IIM societies to corporates and individuals and raising the teaching hours at IIM from the current 100 hours or so to 160 hours. The first remains a proposal; the second is minuted as a decision.

The story presents these and other proposals as an imposition on IIMs.This ignores the fact, pointed out by the minister in an interview, that both the proposals emanated from committees that comprised IIM directors (three in the case of the Bhargava committee that recommended sale of seats) and one IIM director ( in the case of the Balakrishnan committee that recommended an increase in teaching hours). The IIM directors do not seem to have seen anything wrong in taking decisions on these matters without consulting their own faculty first.

Mohanty of IIM Calcutta has a telling commentary in the same issue:

The committee does not contend with research that has established that bicameral governance has served the long-term interests of both academic institutions and society. It also disregards evidence that results of unicameral academic governance have been less than satisfactory. In short, the report is bad in theory and bad in practice. That is not to say that IIM governance should not be revisited. But any restructuring must retain its bicameral character and the public nature of the IIMs. The less said about boards that perpetuate themselves in perpetuity the better

The current proposals give rise to several questions. The IIM Societies have been moribund all these years. How is it supposed that they will become effective when seats are sold at high prices to corporates or individuals? Are these people expected to invest large amounts without expectation of return? If the intention is to raise funds, why not seek straight endowments (on which corporate India's record has been miserable) instead of selling seats? Should the workload for IIMs be decided at the Institute level or at the level of the ministry? What is the appropriate form of governance for an academic institution- does it make sense to replicate the corporate command- and-control system in an academic context?

Michael Atherton on India's World Cup win

The hysterical coverage of India's recent World Cup cricket win is redeemed by former England cricketer Michael Atherton's lyrical account. Some excerpts:

The greatest innings ever played by a captain in a World Cup final was Clive Lloyd's monumental hundred against Australia at Lord's in the inaugural tournament in 1975 and if this was not its equal then it was not far behind.

Lloyd was in Mumbai in his role as chairman of the ICC's Cricket Committee and as Dhoni past him on the stage to collect his man of the match award, the West Indian would have recognised a fellow traveller.

Nobody, except Sachin Tendulkar, has been under more scrutiny. Every decision, every move, every statement has been pored over by an army of writers and pundits. After the defeat against South Africa, Dhoni criticised his batsmen for playing to the gallery rather than for the team and it was as if he had tossed a meaty bone to the most voracious pack of jackals imaginable ... they gnawed on this juicy offering for days to come.

The question throughout was not whether India had the talent to win the World Cup but whether they had the men to do it. Could they cope with the round-the-clock scrutiny, the suffocating, all encompassing demands of public for whom anything other than the ultimate victory would have been unacceptable. In short, did they have the bottle?

They had it all right _ whole jeroboams of it _ and, on a magnificent and moving night in Mumbai which sealed the glorious career of one modern master whilst bringing down the curtain on another, nobody embodied this strength of mind and character more than their captain Dhoni. His calmness throughout has been a key factor in enabling this team to reach its potential.

Management experts on Dhoni

I wrote yesterday that I lived in fear of management experts wanting to derive mileage from Dhoni's success. Alas, my fears have come true. TOI today carries a story on Management lessons from Dhoni. All of it is just hindsight. Here is a selection:

Adi Godrej: "He sets stretch goals and works determinedly to achieve them by getting the best out of his team." By "stretch goals", Godrej presumably means winning the World Cup. Is he implying that other captains did not have such "stretch goals", that they took part in the World Cup in order to lose?

Harsh Goenka: "He led the attack from the front and was not afraid to make this change" (promoting himself in the batting order). Yes, and if it had not worked out, I am sure Dhoni would have been faulted with tampering with the batting order and not letting in the best player, Yuvraj Singh.

Santrupt Misra (HR head, Aditya Birla group): "A leader should maintain his calm. He should know his business well and take appropriate decisions in changing contexts". Can't quarrel with that, I suppose. Except that we know whether the decisions were "appropriate" only after the outcome.

There is more in this vein. I would have bought all this if even if one them had said prior to the final, "Dhoni is somebody who observes the following principles of management. These principles lead to success. I expect Dhoni to succeed". They didn't. Instead, I heard people say that Dhoni was flouting the one management principle necessary for success: leading by example. Had Dhoni failed with the bat in the final, I am sure this management principle would have been tom-tommed to death.

What is it about management theory that it reduces so quickly to the level of drivel?

Cricket pundits

They said it would all depend on whether Sachin and Sehwag fired. It would be a titanic contest between two greats, Sachin and Muralitharan. Whoever won the toss and elected to bat would have a decisive advantage. The wicket would favour spin as it wore on, so spinners would have the upper end when the second team was batting. India, playing to a home crowd, would be under greater psychological pressure. And, of course, the first ten overs would be crucial- as would the middle ten and the last ten.

Well, well, as we know now, the outcome has made fools of the pundits. I have never been able to make up mind which category is worse: stock market pundits or cricket pundits.

The thing I now dread is the management experts jumping in with 'Lessons in leadership from Dhoni'. It could have easily gone the other way, you know, not only in the final but also in the semi-final. Then, I suppose, we would have had 'Leadership lessons that Dhoni forgot'.

Quotas for women on corporate boards

The ministry of company affairs proposes to mandate at least one seat for women on boards of companies with five or more independent directors. I think this is a great idea but not for the reason put forward, namely, gender equality or social justice. I would argue in favour of the move from the point of view of introducing diversity on boards.

Boards suffer from group-think because their members are drawn from a small club- businessmen, corporate executives, retired bureaucrats. Anything that broadens the membership and introduces diversity should be welcome. Are there enough qualified women? Will it compromise the quality of the board? Well, you don't need extraordinary qualifications to serve on boards. Any reasonably educated person can contribute on a board if he or she wants to- and to improve on the present set of people, who shuffle in and out of board meetings without making any contribution, will not take great effort.

Critics are right in saying this won't do much for empowerment of women. For that it is important to have more women executives. But having women on boards should not be seen as a favour that companies do to women. It is more a favour to their own shareholders. It is important, of course, to get more women on board, but it's also important to have them on the board.

More on this in my ET column, Say yes to board seats for women.

Privatisation of IIMs?

I had flagged this issue in an earlier post. Today, P K Sett of IIM Calcutta comments on the proposed changes in the governance structure of the IIMs. One proposal, made by a committee constituted by the HRD ministry, is for IIMs to sell seats in their Societies for Rs 20 crore (corporate) and Rs 5 crore (individual). This is intended to create 'ownership' in the IIMs. Sett rightly points out that this would mean a fundamental change in the character of the IIMs. I have two observations to make.

First, it's not clear yet that the ministry favours this proposal. Indeed, at a meeting between the minister and the IIM directors, it appears that the ministry had reservations about it. Two, it's not correct to blame the minister for this proposal or another proposal that would have faculty plans approved by the Board of Governors.

Both the proposals have emanated from committees on which the IIMs were represented. The Bhargava committee, which came up with the obtuse suggestion to sell seats to private donors, had the directors of IIM Bangalore, Calcutta (Sett's own boss) and Kozhikode as members. The Balakrishnan committee, which wanted the Board to approve faculty plans, had the director of IIMA as a member. All IIM directors were present at the meeting last October with the minister where the two reports were discussed.

Sett writes,'The public at large only has to stand and watch the demise of a great icon of modern India - if the HRD minister has his way.' Well, if the proposals go through, you can't blame the minister for that- the IIM directors are very much party to it. Why is it that we always end up making the government out to be the villain?

Arab revolt

When George Bush first talk of promoting democracy in the Arab world, it seemed like another neo-con justification for intervention, as hypocritical as talk of "human rights" in the erstwhile communist countries. But, after reading Bush's memoirs and seeing the tumult in the Arab world, I am having to change my views. It does appear that the basic conviction underlying Bush's decision to intervene in Afghanistan and Iraq is being borne out, namely, that only the creation of democracies in the region would be in America's long-term interest. More on this in my ET column.

It is interesting that Obama has intervened decisively in favour of popular sentiment in both Tunisia and Egypt and so has Western Europe. I am not very sure of the situation developing in Libya, though, whether it reflects majority sentiment or a minority revolt that the west wants to shore up for its own reasons.

Bush's memoirs reveal a president more thoughtful than made out to be in the media, a man capable of thinking for himself and willing, on more than one occasion, to overrule his advisors. His questioning of his military advisors is interesting. In various situations, he does not get into the details of military planning but asks questions that a leader should and that military men don't necessarily worry about.

The book ends with Bush walking his dog around near his home and having to clean up after him- not what you would expect the typical hot-shot politician in India to do.

Deutsche Bank succession

BS ran an interesting Reuters story yesterday on Deutsche Bank planning for a future without its rainmaker, Anshu Jain. I must say that my respect for the institution went up enormously after I read the story.

Anshu Jain heads the investment banking division which accounts for 70-80% of the bank's profit in recent years. But the supervisory board is inclined to believe, so the story goes, that Jain is not the right person to succeed Josef Ackermann as CEO because the bank needs to cut back its dependence on investment banking and invest more in stable businesses such as retail banking and wealth management. That's a brave decision to take, even if justified by the experience in the recent crisis.

The board is also not in favour of Jain because it believes that the next CEO must enjoy the confidence of the German political and corporate establishment, which criterion, apparently, Jain does not meet.

What if Jain decides to leave? The board is keen to retain him but is not fazed by the prospect of his departure because "everybody is replaceable" and "You cannot be held to ransom". Well said, indeed.

Government rejects IIMB proposals on autonomy

I resume blogging after a fairly long lay-off occasioned by various preoccupations.

Let me start with the news about the government rejecting IIMB's proposals for amending its MOA. (I must thank an anonymous reader for the tip-off). The proposals rejected are:

• Ending the government's power to take over the administration and assets of the Institute if it is not satisfied with their functioning.
• Making it mandatory for govt to seek Board approval for probing irregularities
• Not allowing the government a role in setting the mandate for IIMB
• Ending govt's role in deciding the fate of assets bought from govt money
• Ending IIMB's responsibility for management education in the south
• Selecting the director without approval of government

On the selection of a director, the ministry has indicated that it would like this to be done by a national collegium of experts. This, I think, is a good idea. A sub-committee of the Board to select the director because it allows insiders, including the Chairman and the Director, a decisive say in the selection process. Distancing the selection of the director from the institution is more conducive to a transparent and competitive search.

The ministry has also said it does not favour proposals to delink IIMB salaries from the government framework and end to reservations for specified groups in the BoG.

What do we make of this news? Well, it's no surprise at all because similar proposals from autonomy, made by IIMA in the past, have not found favour with the ministry. The surprise, if any, is that IIMB even submitted these proposals because the ministry had earlier informed the IIMs exactly what amendments it was willing to entertain.

It is clear that IIMB, like IIMA, has arrived at an interpretation of autonomy that it can hardly expect the government to entertain, namely, independence from government. I have always found it strange that institutions that owe their success to the fact of their being public institutions should now want to shed their public character. Especially so when there is nothing to suggest that it is the public character of these institutions that is coming in the way of their advancement.

'Small ticket' reform is key to India's success

There is a continuous clamour for 'big ticket' reform. This will be heightened in the week of the coming budget. I never ceased to be surprised about this. The success of the Indian economy, I argue in my ET column, is all about 'small ticket' reform.

'Big ticket' reform in a democracy can spell popular unrest. One example of such reform that has remained in abeyance is 'reform' of labour laws ( a euphemism for hire-and-fire in the organised sector.) 'Small ticket' reform is all about gradualism, of waiting and judging the results before proceeding further.

The best example of 'small ticket' reform is disinvestment of PSUs. Thanks to phased disinvestment, the government is sitting on a gold mine in listed PSUs and PSBs. Had they been sold off at one go, the exchequer would have lost heavily. The 'presumptive losses' from 'strategic sale' of PSUs, which Arun Shourie attempted, would have been far higher than in the sale of 2G spectrum.

Had this gone through, Shourie would today be facing the CBI not just for his actions as minister of telecom but as minister of disinvestment as well!

Western dean for Chinese B-school

John Quelch, a former dean of the London Business School, is set to take over as dean of the China Europe International Business School (CEIBS), the Economist reports. Quelch is a former faculty of HBS, where he was a 'star professor' of marketing. CEIBS is said to be a partnership between the European Commission and the Shanghai Jiao Tong University.

The news is interesting for several reasons. For one thing, China appears to have opened its higher education doors to foreigners, even if it requires a partnership with a local entity. Secondly, it is willing to import a dean for one of its top institutions. This is not just a matter of paying top dollar. It is a matter of being open to a foreigner as a leader. Is there a single institution in India that has a foreigner as dean or director? For that matter, is it possible even for an NRI to become the director of any of the IIMs?

The IIMs preach the virtues of an open economy and globalisation to their students but they operate a closed shop when it comes to manning leadership positions. For the older IIMs, it is inconceivable that there can be a director from outside the IIM system. At IIMA, it is inconceivable that the director can be anybody from outside IIMA itself!

Until recently, IIM directors were chosen by their boards and through a process of nomination by eminent persons, a process that restricted the pool of talent to choose from. Lately, the ministry has required the positions to be advertised but even the top IIMs do not advertise internationally.

Education in China, like other spheres, is still controlled. Business schools are still in their infancy. Yet, when it comes to getting talent for leadership positions, China seems capable of greater boldness than an open society such as India. Makes you wonder whether democracy necessarily scores on every count. You can have a democratic society with some of the most closed minds.

No fee hike for IITs

The decision of the IIT Council to reject the Anil Kakodkar committee's recommendation for a fee hike has not received the attention it deserves. The Kakodkar committee wanted the IITs to raise the annual fee from Rs 50,000 to Rs 2.5 lakh so that they could generate more funds on their own. The IIT Council, headed by HRD minister, Kapil Sibal, has shot down the proposal, India Today reports:

HRD minister Kapil Sibal, who chaired the IIT council meeting to discuss the report on Friday, said: "This fee hike would act as a deterrent to IIT aspirants." The IIT council also left the decision on increasing hostel fees to the respective board of governors in each institute. An HRD ministry official said: "The mathematical model proposed by the committee has to be reworked. The committee will now take a month to submit its report after considering the feedback and the response of the IIT council, which comprises the directors of all IITs."

The IIT Council's stand is commendable. It clearly does not accept the position that because IIT students can get loans and they can get jobs that can enable them to service those loans, students must pay a higher fee. A high fee and large loans are a deterrent to aspiring students. But how come this logic has not be applied to the IIMs and the IIMs have raise their fee at will in recent years? The HRD ministry needs to be consistent in its approach to commercialisation of education.

More on Malegam committee

I commented yesterday on the Malegam report on microfinance. A couple of other observations.
The RBI needs to bestow greater thought to the composition of its committees. The Malegam committee, with due respect to the eminence of some of its members, does not have much expertise either on the rural economy or on banking. True, the RBI committees have the benefit of RBI's expertise but simply having people of eminence on such committees does not suffice.

A more serious problem is the presence of two members of the RBI Board, Y H Malegam and Kumaramangalam Birla. It is not a good idea for Board members to take on operational roles. It cannot be that, as members of a committee, they make recommendations and, then, as members of the Board, they sit in judgement on those very recommendations or the actions taken based on these. There is a clear conflict of interest. Surely, this country has enough expertise for committees outside the Board of RBI.

Malegam committee on microfinance

The Malegam committee's report on MFIs came out a while ago. The intention is good: they want to rein in MFIs and subject micro-credit to norms and disciplines. But micro-management of the microcredit by the RBI, which is what the recommendations amount to, is not the right approach. It will be difficult for the regulator to ensure that not more than two MFIs lend to one borrower, that the total sum borrowed does not exceed Rs 25,000 or that the cap on interest rate is always observed.

My solution: put the onus of credit discipline by banks. The way to do this is to subject all lending by banks to MFIs to a consortium. Then, it will be up to the banks to see what limits they want to impose on borrowers, what the interest rate caps should be, etc. The banks will also be obliged to monitor the end-use of funds and they will be able to ensure that runaway lending by MFIs does not happen. More on this in my ET column, MFIs: Malegam misses the point.

Incidentally, on the very day the Malegam report came out, the RBI decided to allow banks to restructure loans made to MFIs. This display of regulatory forbearance was uncalled for. Clearly, the attempt is to sweep under the carpet the losses to banks on account of loans to MFIs. But does the RBI believe that, after restructuring loans made to MFIs, banks will be in a mood to resume lending in a big way? There is not the ghost of a chance.

Debt restructuring the only option for EU

The EU is planning to top up its rescue fund and improve the quality of funding by way of reassuring the markets. These are cosmetics. They just won't work. The EU has to act collectively to get investors (creditors) to restructure. Either that or you will have serial defaults down the road.

Sovereign default is regarded as taboo, as something that countries must avoid at all costs. But countries that have defaulted haven't done badly at all. More on this in in ET column, Who says it doesn't pay to default?

Forecast for India in 2011

Growth will match or exceed 8.5-9% projected in 2010; the EU will hold together despite crises, so we need not fear disruption of financial flows; inflation rate will stay high, perhaps 7-8%; the UPA government will survive and very little of the mud flung at it on account of 2 G sales will stick.

More in ET column, What lies in store for India in 2011?

Three golden jubilees

Three well-known institutions, IIMA, IIMC and The Economic Times are currently celebrating their golden jubilees. I happen to have been a bit player in all three. I record my impressions of these institutions in my ET column, A tale of three jubilees.

Great Lakes stake sale

Bala Balachandran, founder of Great Lakes School of Management, is in talks to sell 51% of his stake to Tata Foundation and Pirosha Godrej Foundation, BS reports.

“I have 90 per cent stake in my institute. I have decided to give the ownership to somebody who can give me some money to expand. I may offload as much as 51 per cent. The valuation of the institute would be around Rs 220 crore,” Balachandran told Business Standard on the sidelines of an event in Mumbai.

Balachandran would make a cool over Rs 110 crore on his stake sale. Not bad for an investor in a school that has been around for less than 10 years. What was his original investment, I wonder. The money that Balachandran makes would go into his pocket because it arises from sale of his equity, not through additional issue of equity. Presumably, for the expansion, the new investors will provide the additional funding.

Is the original promoter in an educational institution allowed to exit this way, possibly at a profit? I would like to know. The BS report states:

Great Lakes was formed in 2002 as a Section-25 company. Section-25 companies are those formed for the purpose of promoting commerce, art, science, religion, charity or any other deemed “useful object” and whose profits are used solely to further its stated objectives.

Balachandran will be taking over the Mumbai Business School, which will be named Great Lakes, Mumbai. Great Lakes is also venturing into Gurgaon and Orissa. In Gurgaon, it has bought land. In Orissa, the government has given it 100 acres of land on a 99 year lease. I have said this before: we need to review the policy on making government land available to private parties at less than market prices.

Making a career out of board memberships

An article in the latest HBR proposes a solution today's corporate governance problems: have professional boards. That is, board memberships become something of a career. No professional director will serve on more than two boards. He will be required to spend time at the company other than for board meetings. He will have to be knowledgeable about the sector or products in which the company operates. And, of course, he will be paid more for his exertions.

I doubt that this will work. No matter how knowledgeable about a sector or how much time you spend on it, you can never become as knowledgeable as management. They can always withhold information or pass on information in ways that suit them.

Boards are ineffective not because of lack of knowledge or ability but because independent directors don't have it in them to question and challenge management. It is more rewarding to go along with management than to do otherwise. Remember, directors are beholden to management for giving them lucrative directorships. You can hope to get independence only when other interest groups find a place on the board- institutional investors, employees, minority shareholders.

More in ET column, Board membership as career?

Guru of microfinance under fire

Mohammed Yunus, the Nobel prize winning founder of Grameen Bank and originator of the idea of microfinance, is facing an investigation over alleged diversion of funds given by a European donor from the Bank to an affiliated organisation. He has now come under fire from his PM, Sheikh Hasina Wajed, FT reports.

Wajed is quoted as saying, "Micro-lenders make the people of this country their guinea pig ... They are sucking blood from the poor in the name of poverty alleviation.”

More ammunition for critics of microfinance in this country. Don't expect anything to move until the RBI's Malegam committee submits its report, expected in mid-January.

Does corporate governance matter?

It is assumed that corporate governance defines the health and performance of a company. How true is this? In the Economist, Schumpeter cites a recent study that casts doubt on this view;

The authors conducted a comprehensive study of the performance in 2007-08 of 296 financial institutions with assets of more than $10 billion. They found that none of the tenets of good corporate governance stood up to close examination. Directors who were well informed about finance performed no better than know-nothings. Companies that separated CEOs and chairmen did no better. Far from helping companies to weather the crisis, powerful institutional shareholders and independent directors did worse in terms of shareholder value. Indeed, the proportion of independent directors on the boards was inversely related to companies’ stock returns.

The authors of the study are quick to also point out that in East Asia, external monitoring has led
to better performance. So, maybe, one cannot generalise from banks?

Well, a good way to address the question of whether corporate governance matters is to ask whether management will do without boards at all? Is this desirable? Most people would think not. Some checks, however imperfect, are better than none.

Secondly, we have to look closely into the role and motivation of independent directors. In most cases,' independent' directors are selected by management. Management also pays them well in some cases. It's hard to see these directors taking their role seriously and challenging management. We need to find a different way to select independent directors. Even then, they may be co-opted by management. But it's worth trying something different.

When Ireland rocks the world

Ireland, which accounts for 0.3% of the world GDP, has been sending shock waves through the world economy. Earlier, it was Ireland and Greece. How do contain disruptions of this sort emanating from relatively small economies? I touch upon this in my ET column, Small economies, big headaches.

Ratan Tata is angry

About a week ago, I may have been forgiven for getting the impression that the Tatas could not start an airline some years ago because they didn't want to bribe the minister concerned. That is the impression I got from newspaper headlines.

I now learn that it wasn't anything like that. A businessman told Tata that he would be stupid to pass up an chance to start an airline just because it meant paying some minister R 15 crore. Here are the details that I came across at a site on the Internet (and I hope they have reproduced Tata's clarification correctly):

I ( Ratan Tata) happened to be on a flight once, a fellow industrialist sitting on a seat next to me & he said you know I don’t understand, you people are very stupid. You know that the minister wants 15 crore of rupees, why don’t you just pay, you want the airlines. I said you will never understand this; I just want to go to bed at night knowing that I haven’t got the airline by paying for it.”

The company then included a clarification on the following three points, which India Real Time is reproducing verbatim:

–No minister ever asked Mr. Tata for a bribe

–The fellow industrialist expressed his personal view point that some minister (sic) were asking for a bribe

–Mr. Tata in no way was in agreement to the fact that he was asked for bribe by any minister

Business Standard wrote an edit saying that instead of 'whining' about the issue, Tata should name and shame the minister. Tata has written an angry letter to the paper roughly making the same points as above.

Which raises the question: how did so many papers report the news inaccurately?

Vedanta university - and land grabs of private colleges

The Vedanta group's ambitious plans for a world-class university has suffered a huge setback - and perhaps won't happen now- with the Orissa High Court's adverse ruling in the case related to acquisition of land for the project. FT reports:

The Orissa High Court has ruled that the Orissa government’s acquisition of about 6,500 acres of land – including 500 acres from Puri’s famous Jagannath temple – and the land’s subsequent transfer to Mr Agarwal’s eponymous foundation to build Vedanta University was illegal.

The court has ordered that the land be returned to its original owners. The judgment – in response to a clutch of public interest lawsuits challenging the land acquisition – will bring a formal end to the long-stalled plans for the university, which Vedanta had already concluded was unlikely to ever get off the ground in Orissa.

The ruling has brought to the fore the question of land being acquired for setting up of private universities and colleges. BS has an interesting feature on the subject today. The article notes that the Anil Ambani group has recently been alloted 110 acres by the MP government for its foray into education while ISB got 70 acres of land in Mohali. The land allotment is disproportionate to the requirement in many cases. Where it is made over to private parties, the suspicion of a land grab is bound to be there.

BS notes that a good engineering institute can be set up on 10 acres and a management institute on 5. So why are private institutions asking for and getting so much land? It also notes that Infosys' Mysore training facility is on a 337 acre campus. This is not even a degree-granting facility, it is strictly for a private company. Interestingly, Shiv Nadar and Aziz Premji are acquiring and pay for the land they need for their educational ventures instead of seeking concessional land from the government.

Microfinance myths

Now that recoveries of microfinance institutions in AP have virtually ground to a halt, what happens to bank exposure to MFIs of some Rs 27,000 crore? I am surprised that the question has not been posed thus far. Under the agreement between the financial services secretary and MFIs, not only MFIs cap their interest rate at 24%, they will now only have monthly repayment with repayments to be made at an approved panchayat council office. The slightest hint of harassment means the recovery agent could end up in jail.

What sort of recovery is possible in these conditions? Certainly not the 100% claimed by MFIs thus far. I would be very surprised if banks did not end up taking a substantial hit. This should prompt some introspection among banks. How did they fall over each other to lend to entitities that were mostly one-person affairs and whose governance left much to be desired? Did they keep track of cumulative bank exposure to a given MFI?

On a broader note, the MFI model itself will have to be revisited. MFIs should now be brought under stringent regulation, of course, but also on-lending of bank funds through MFIs cannot continue as before. Let MFIs garner their own funds either as equity or as deposits (with deposits being linked to net worth). More on this in my ET column, Five myths about microfinance.

G 20: putting the pressure on China won't help

The US seems to believe that a revaluation of the yuan holds the key to global imbalances. Of course, the Chinese need to revalue. But they will be more willing to do so when the see the US economy picking up smartly and continuing to generate demand for their exports. That means US has to pep up domestic demand. It's fast becoming apparent that monetary policy alone won't do the trick for the US.

Quantitative easing-II has led to funds flooding into emerging markets and triggering competitive devaluations. It hasn't done much to revive the US economy. Fiscal policy, discredited since the Greek crisis, may have to play its role. More in my ET column, G 20 accord needs US policy shift.

Financing higher education

Government universities cannot afford to continue large subsidies to students. They have to raise fees. This is true not just for India but for other countries as well. How to increase fees without undermining accountability? In today's ET, Arvind Panagriya cites the recommendations of a panel on higher education in the UK.

The panel suggests that students not be asked to pay fees upfront. The government should foot the expenditure of 6000 pounds per student. Students should start repaying the fees to the government once their income crosses a certain threshold- say, 21,000 pounds.

I don't know whether such a scheme is enforceable. It means keeping tabs on every graduating student and the income he or she is earning after graduation. But the underlying principle is interesting. The panel has not asked that students simply finance their education costs through loans. It apparently sees education loans as impeding access. It is one thing to repay fees as and when able. It is another to be committed to huge outflows at the point of graduation.

The panel's approach is in refreshing contrast to the approach in India where education loans are seen as the answer to rising fees especially in the professional courses. The IIMs, for instance, have taken this line to justify huge increases in fee in recent years. As HRD minister, Murli Manohar Joshi had opposed high fees at IIMs and other places during the tenure precisely on the ground that it would impede access.

The problem with the IIMs' increasing their fees is that it has led to an across the board increase in fee in business management course. While IIM graduates may be able to repay their loans, students at other b-schools are finding the going rough. Commercialisation of education comes in the way of inclusion. The answer to universities' or schools' need for higher fees has to be some combination of government subsidy, private endownment and loans or, if feasible, pay-as you- earn schemes.

Backdoor privatisation of IIMs?

The report of the second Bhargava committee on governance at the IIMs was made available to the government a few weeks ago. It was discussed at a meeting that Kapil Sibal had with IIM directors recently. (The first Bhargava committee report came out in 2008 and was shelved following objections from the IIM establishment).

I read the report with some dismay. Let me just react to one or two proposals for now. The committee wants the ownership of the IIMs to vest with the Society in which ownership is nominally vested today. It suggests that corporate entities be allowed to become members at a price of Rs 20 crore. For individuals, the price could be Rs 5 crore; for alumni Rs 3 crore. These numbers may be lowered if the IIMs think that is necessary.

What does this mean? That any businessman and his family are associates can garner three or four memberships of the Society for Rs 20 crore or so? Or that any industrial group can pick up two or three seats for Rs 60 crore? And then proceed to call the shots? This strikes me as backdoor privatisation of the IIMs. The worst part of it is that businessmen or affluent individuals would be able to run the IIMs without having to invest a great deal.

At the same time, the committee wants the government to continue to meet capital expenditure for the older IIMs, revenue expenditure as well of the newer IIMs and make contributions towards pension liabilities at the IIMs. Call it PPP if you like- a public private partnership in which the government bears the costs, the private sector calls the shots. It is astonishing that three IIM directors should have been party to this proposal. (The fifth member was an alumnus of IIM-B).

The report says somewhere that ownership should vest in the Society, not in the faculty. That will be news to faculty at least at IIMA where the concept of a 'faculty-governed institute' is sacrosanct and ownership or decision-making is divided amongst the Board, faculty and government.

Microfinance bubble burst?

Many have been warning that the runaway growth in microfinance assets is not sustainable. is the bubble about to burst? Well, the AP government's ordinance is certainly ominous as it requires microfinance institutions to suspend collections until they have registered with local authorities. (see FT report). Banks cannot escape the fall-out as they as the primary funders of MFIs mainly in order to meet priority sector obligations.

A number of practices of MFIs are now coming to light: multiple lending, aggressive marketing of loans to the unwary (much like the sale of credit cards and consumer loans done by foreign and private banks), dubious HR practices (hiring 18 year olds and not issuing any appointment letters), weekly repayments, harsh recovery methods, forming liability groups out of self-help groups created by NABARD and other government agencies.

Some of the arguments for high interest rates charged by MFIs are downright absurd. Eg. The interest rate of 30% if ok as money-lenders charge over 100%. Says who? Besides, money-lenders don't market their loans. They make loans to people who come to them- and strictly against collateral.

It has taken the SKS IPO and a spurt in suicides in AP for people to wake up to what's going on. One thing is certain: microfinance will not be the same again.

Rumblings in NIT system

Directors of two NITs, Warangal and Trichy, have been suspended following various charges against them, IE reported a while ago. The ministry of HRD has sought the approval of the President for the dismissal of the chairman of the board of NIT, Kurukshetra. Apparently in a sign that it is not happy with the state of affairs of NITs, the ministry has commenced the search for various NIT directors a full year before the completion of tenures of the present ones.

I can't comment on the specific cases above. But if the system is acting at all, it is a good sign. One of the sorriest things about our elite institutions is the complete lack of accountability of directors and the boards. If people are being called to account, that is a healthy sign. I also approve of the search process commencing well in advance. Typically, the search starts so late that the incumbent hangs of for several months after his tenure.

Here's a suggestion towards ensuring accountability of directors: there should be a mid-term appraisal of all directors. The appraisal should document what has been accomplished during the director's tenure up to that point and what is proposed to be accomplished in the remaining period of his tenure. This appraisal should be placed in the public domain by being posted at the Institute's website.

US bail out cost less than 0.5% of GDP!

The US government faced fire for its $700 bn rescue of the financial sector in 2008 which was called Tarp. Surprise, surprise. The final cost is now estimated at less than $50 bn. My latest ET column explains how.

The losses in the financial sector across the world too were exaggerated by estimates made in a time of panic. Financial institutions hold mark to market securities whose prices are heavily depressed in times of panic. No point in estimating losses at these prices and the costs of a rescue. Governments will be frozen when they see the numbers. Just go out and save the large banks. Markets will bounce back and the costs will be far less than thought earlier. That's the lesson from the Tarp experience.

Khandelwal report on HR in banks

The report on HR in banks, prepared by a committee headed by A K Khandelwal, former Chairman of Bank of Baroda, came out in June. It wasn't made public. I happened to get a copy of it last week. I am concerned about the focus on variable pay in the report. As I argue in my ET column, HRD in banks is more than just pay, I have serious concerns about whether such schemes can work in the public sector.

There is much talk about the public sector losing talent because of poor pay relative to the private sector. The IAS wanted a huge job in salary to make jobs comparable to the private sector. The army, as I recall, wanted the Chief of staff, to paid Rs 1 crore. IIT faculty agitated for pay superior to what the Pay Commission wanted. The IIMs grumble about pay. And, of course, all PSUs would like pay to be benchmarked to the private sector.

In many ways, pay in academics is a lot better than it has ever been before - and there is no indication that it is drawing in superior talent. Nor are there signs of the opposite kind, that the talent coming into IAS, for example, is poorer than in the past. Senior IAS officers have told me that the composition of probationary officers is changing- more come from lower middle class and rural families and they may lack polish but they are very bright and committted. Competition for the administrative services remains fierce- as fierce as that for IITs and IIMs.

So, we should not make the mistake of seeking parity in pay across the public and private sectors. The two offer different career choices and different lifestyles. This goes for public sector banks as well. They need to improve pay but not catch up with private sector either in what they pay or how they pay (fixed pay or variable pay).

Limit IIT directors to one term

I wrote in my last post about the increase in the retirement age of IIT directors from 65 to 70. I said I did not favour the idea. Some people wrote in saying that they would like to see cogent reasoning for my position, apart from the fact that youth is to be preferred.

Well, the main reason is that in our institutions of higher education, we do not have a system of accountability for the director. So, we lack a proper basis for extending the director beyond 65 or giving him a second or third term. The decision would become subject to the whims of government or the Board.

The IIMs have long had a convention of a single term for the director and this has served them well. It was convention put in place by IIMA's legendary Ravi Matthai. I elaborate on this in my ET column, Let IIT directors retire at 65.

IITs allowed to raised retirement age to 70

The ministry of HRD has allowed the IITs to raise the retirement age for faculty to 70, according to the Hindustan Times. The retirement age of IIT directors can also be raised to 70, which would allow several directors to stay on for a second term. This is a bad idea.

Letting IIT directors stay on for until 70 is bad not just for the reason mentioned in the report, namely , that it will render IIT directors vulnerable to outside pressures. We need younger people at the top, not older ones. And, believe me, there is plenty of talent in the IIT system and outside the country that can be tapped.

Ditto with faculty. Since extensions will, in effect, be at the discretion of the director, this will render faculty totally subservient to the director. It is also not good for faculty to hang around an IIT or IIM for too long- not good for them, not good for the institution. Even as it is, faculty stay on for 30-35 years. I shudder to think of having faculty around for, say, 45 years. Faculty must be extended beyond 65, if at all, provided they have not spent more than 25 years at the institution.

I sincerely hope this does not get extended to the IIMs. The IIMs, by and large, have followed the principle of a single term for the director although, regrettably, this healthy principle was not followed in the recent past in the case of the directors of IIM Calcutta and IIM Lucknow. There is very little accountability among IIT and IIM directors and allowing them to reign for 10 years risks causing serious damage.

Basle 3 doesn't look promising

The BIS will soon unveil proposals for bank capital under Basel 3. From what has been revealed so far, these won't be tough enough on banks. The new capital requirements will be phased in over a longish period. Regulators are worried that tougher requirements will impact on the weak global recovery but this is not supported by BIS research on the impact of additional capital.

I'm afraid it doesn't look as though policy-makers are serious about preventing recurring banking crises. Maybe they just want to shrug these off as part of the ups and downs of capitalist economies?

More in my ET column, Banks, relax- until the next crisis.

Another committee on IIM autonomy

Yet another committee will go into the issue of autonomy for central universities, IITs and IIMs, TOI reports:

The HRD ministry has set up a high-power committee, under noted legal expert N R Madhava Menon, to come with a comprehensive policy on the issue of autonomy for higher educational institutions like central universities, IITs and IIMs.

The six-member committee, which also has three additional special invitees, has been asked to review the state of institutional autonomy in central universities, IITs and IIMs in academic governance and financial matters.

The panel will recommend mechanism for norm-based funding of central educational institutions for development and maintenance, with an aim to enhance their financial autonomy.

It will examine the decentralisation of autonomy within central universities, IITs,IIMs and suggest measures by which institutional autonomy can percolate to governance structure within the university and to the teacher.

An IIM review committee under R C Bhargava had submitted a report on governance of IIMs in 2008. Another committee under the same Bhargava is currently looking at governance issues and its report is awaited. What would be the rationale for another committee on autonomy and accountability and covering the IIMs again?

Paid news

In the last elections, several newspapers are said to have covered election campaigns for a price. This phenomenon of 'paid news' was exposed by P Sainath of the Hindu following which the Press council of India (PCI) constituted a sub-committee to go into the matter.

The sub-committee confirmed that news had indeed been paid for and furnished whatever information it had been able to gather in a report submitted to PCI. Following this, the PCI decided, by a narrow majority, not to make the report public. Mitali Saran has some strong words on the subject in her column in BS:

Concerned journalists on the panel called the PCI a ‘toothless tiger’. They talked about how in the 1980s and 1990s, regional newspapers didn’t pay their reporters a salary, but gave them a commission on any ads they brought in; how corporate management is increasingly sidelining editors; how journalists are given lists of subjects to cover in a target number of column inches.

The PCI sub-committee report, the burial of that report, and the media’s lack of interest in the topic points to a complicity so deep that nobody can afford to turn the lens on themselves. It takes the idea that there are always a few rotten apples in the barrel, and shows that the one you bite into every morning is ridden with maggots. There’s no better reason for you to care.

I have long maintained that two of the pillars of the fourth estate that need strengthening are the judiciary and the media. There are signs of greater accountability being brought into the judiciary. When will the media's turn come?

Land for institutions of higher education

The Punjab government has given ISB 100 acres of land in Mohali. BS is critical of institutions of higher education appropriating vast tracts of land:

Why do India’s institutions need so much land, and that too subsidised by the taxpayer? In an increasingly urbanising India, with land costs going up, the idea of large campuses, and of ones far away from city centres, should be discouraged. Some of the world’s best educational institutions function out of tall buildings in city centres. The only purpose large campuses serve is to preserve greenery and forest cover! If private institutions wish to acquire land, they should pay for it, more so if these are institutions that charge hefty fees and have well-heeled trustees, like the ISB does.

Why would they want 100 acres to build a business school that houses 500-odd students? Government-run universities and colleges, which cater to thousands of students and offer training in a number of disciplines, often operate from much less land. Is it any wonder that people whose land is acquired by the government and given out free to others feel the way they do?

There are answers to the questions raised here. Renting apartments is not as easy or inexpensive as it is in the US and elsewhere- a new batch of 500 or 1000 students will not find it easy to find rental accommodation in the vicinity of a college. Housing faculty and students on a campus makes for smooth functioning of the institutions round the year despite dislocations in the cities in which they operate. Campus accommodation is one of the few attractions of an academic position at IIT or IIM and it remains one of the very few means of attracting Indian faculty from abroad.

That said, questions may be asked as to why ISB needs so much land when it uses a visiting faculty model. We also need to push the IITs and IIMs to scale up their capacities on the land they occupy.

Licensing new private banks

The RBI has come out with a detailed discussion paper on the licensing of new private banks. The paper documents the Indian experience with new private banks and also provides information on regulations in other countries.

Prime candidates for new banks are industrial houses and NBFCs. The latter are regulated and the RBI will know whom to let in and whom not to. Industrial houses setting up banks is a dicier proposition. I discuss the issues in my ET column, Tread warily on new private banks.

My bottomline: let us make a modest start with allowing industrial houses to set up exclusively rural banks. That is where we need initiative and capital. The urban crowd and industry are well taken care of. Let us watch the performance of industrial houses for a few years and then take a view on whether they should be allowed to spread their wings.

India decoupled from the world now?

India is eyeing 9% growth when growth prospecs in the US and other advanced economies are uncertain. Fiscal and monetary policies have been tightened over the past several months in India. In the advanced economies, the stimulus vs austerity debate has not died down. Is India getting decoupled in the present situation? Maybe. We got couple in 2009 because of panic outflows of capital. In today's uncertain condition, the same sort of capital outflow appears unlikely. So we may steam ahead regardless of what happens in the advanced economies.

More on this in my last ET column, The world falters, India booms

India and China

One of the tantalising questions in economic debate is who will win the economic race in the coming years: India or China? Until recently, there was not much to debate. Everybody knew it would be China. But, in the last year or so, one notices a shift. India has a better demographic profile. China's currency is set to appreciate which will drag down export growth, so the contention goes. India will move into double digits. China will drop into a single digit.

Arvind Subramaniam wades into this debate and he favours China. He sees corruption, insurgency and poor governance in general as going against India.

Long-run growth depends on the quality of supporting public institutions. True, the India of today is less of a regulatory nightmare than before the opening-up in 1991. Some institutions – those that hold elections, preserve financial stability and regulate telecommunications, for example – have worked well. But these exceptions apart, the state is weak and fraying. Policy reforms do not deserve the spectacular acceleration in growth that the economy has delivered.

Well, then you have to explain why economic growth has improved in recent years. There is more corruption. Is there more insurgency? We may hear more about the Naxalite problem but that does not mean there we have no faced insurgency earlier- we have had enormous problems in the North- East, some of which continues. Is governance worse? There are some areas- such as tax services- where one sees an improvement. Telecom has seen a revolution. The RTI is a big change. I am not sure governance is worse than it was ten years ago.

The explanations for improved growth that Subramaniam provides- more entrepreneurship, bigger role for the private sector, competition among states- are not the whole story. The solid underpinning comes from higher savings and investment. If these continue to rise, why should governance problems hold up growth?

Incidentally, Morgan Stanley is willing to bet on India, a rather surprising forecast coming from a firm that was quite bearish about India's growth prospects some time ago.

HP boss pays for an indiscretion

HP boss Mark Hurd's ouster as CEO is a case of a board setting unusually high standards. In an earlier era, these standards may even have been regarded as puritanical.

Hurd was ousted by the board for what appears to be a minor indiscretion, according to an FT report. Hurd was accused of sexual harassment by a woman contractor. To his credit, Hurd promptly handed over the letter to the company's general counsel who took it to the board. The board's investigation found no evidence of sexual harassment but believed that Hurd had fiddled with expense statements to conceal his meetings with the contractor.

The amount involved was $20,000 over a two year period. This was considered a sufficiently serious ethical lapse to fire one of America's best-performing CEOs. Of course, it is possible that the board also believed that if it dug deeper, it might uncover worse.

Hats off to the board of HP- not many boards would have taken such a tough line. Partly, the tough line shows the extent to which boards themselves are under close scrutiny in the US.

IIT Kharagpur had quotas for faculty's children!

For over 40 years, IIT Kharagpur kept aside seats for children of faculty and staff, letting in students who had failed to secure admission through the JEE. This sensational disclosure appears in HT which procured the details under the RTI Act (for the nth time, one marvels at the wonders of this great piece of legislation):

Documents accessed by HT using the RTI Act show the country’s oldest IIT — started in 1951 — blocked 25 per cent of its seats in popular five-year integrated science courses (up to M.Sc level) for handpicked nominees, even as students from the rest of India had to clear the IIT-JEE for admission.

IIT wards merely needed 60 per cent marks in their Class XII Board examination and should have appeared in the IIT-JEE to be eligible for the quota seats, doled out at the institute director’s discretion.

Between 2003 and 2005, those who got in through this illegal quota didn’t even need to appear for the entrance exam.

The secret quota was suspended in 2005, the year the RTI Act was launched, and was abandoned in 2006 under pressure from the Joint Admission Board of all IITs, which organises entrance examination.......

The IIT admitted 88 students through the secret quota bet-ween 1998 and 2005, including 50 in 2003 and 2004, documents reveal. The quota was never disclosed in admission brochures — unlike all other reservations for backward communities that the IITs have.

Among the beneficiaries was the ward of the chairman of the IIT-JEE in 2006. One ex-director calls it a 'shameful chapter' and claims he did his best to stop it but could not convince his colleagues. Sorry, that's a lame excuse. The right thing to do would have been to take the matter to the Board and the ministry and to have gone public with the facts. The Board of IIT-Kgp must have the matter thoroughly investigated and documented and place the full record in the public domain.

Business Standard has a scathing edit on the subject. As the edit points out, these are the same characters who have opposed quotas on the ground that these dilute quality.

I may mention here that early in IIMA's history an attempt was made to introduce similar quotas. A senior professor made the request to Ravi Matthai, the legendary first full-time director of IIMA. Matthai took the proposal to the faculty where it was promptly shot down as Matthai must have known it would.

Management gurus and b-schools

I have been extremely preoccupied in recent weeks, hence this long lay off from my blog. I hope to be more regular starting next week.

What exactly is the link between b-schools and good management? Can good management be taught the way it is done at b-schools? These are questions that have vexed people for long and we don't have good answers. Of course, many successful managers have come out to b-schools but that's because b-schools simply get the brightest. And we have lots of successful entrepreneurs and managers who never touched a book on management.

Incidentally, Ravi Matthai, the first full-time director of IIMA, had no academic background in management. He was a BA (Hons) from Oxford and had been a chief executive at a firm in Calcutta before he moved into academics. He went on to become a pioneer in management education.

To return to my questions, law journals contribute to lawyers' effective practice. Doctors benefit by reading medical journals. Scholarly management journals are read only by academics so that they can produce more papers that other academics can read. HBR is, perhaps, the one management journal that executives read- and it would not help an academic make tenure in most places.

I had a chance to read Michael Stewart's The Management Myth and write an op-ed piece based on it, Begone, management gurus! Stewart skewers the OB and strategy stuff but there is more to management than that- finance and the quantitative sciences have applicable stuff that is based on sound theory. But I would go along with Stewart's proposal for a remake of the MBA programme by including a heavy dose of the classical liberal arts education.

Trends in consulting

With big cuts in government spending, consulting firms face the heat all over the world. Talk of merger between two leading firms, A T Kearney and Booz and Co, underlines the need for consolidation in the industry.

But the shake-out won't disturb the dominance of the top three, McKinsey, BCG and Bain, argues Stefan Stern in the FT. Much of consulting firm, he points out, focuses not on glamorous things like strategy but on more mundane things such as efficiency and cost reduction.

Still, with some many MBAs out there in industry, it's a bit of surprise that there is still so much need for consulting firms. One reason is that the top firms do invest in knowledge and they have sought to broaden their services by hiring doctorates, lawyers, even musicians. Another is that in the corporate world, people lack time to sit down and think, to collect and analyse data. Consultants serve as auxiliary staff- no need for a full-time strategy or planning department, just call in the consultant when required.