It's no use quoting stress tests that show only 8 banks are vulnerable. Or pointing to potential losses of €300 bn on sovereign debt. Once mayhem breaks out in the markets, losses will escalate and so will the number of failing banks. The key to understanding the banking problem is not to tot up losses on sovereign debt exposure as of today but to understand their dependence on short-term US money market mutual funds. It is is this dependence that creates the potential for another Lehman moment. More in my ET column, Europe's Lehman moment.
Friday, September 30, 2011
Europe can avert a Lehman
Time is running out for the Eurozone economies. They have to show quickly that they have the will and the means to tackle the sovereign debt problem emanating from Greece and embracing several other countries, including large ones like Italy. It is possible to avert a 'Lehman moment', a cataclysm in the financial markets. But this requires deep pockets to recapitalise banks and to provide finance to distressed economies, including Greece. There is no escape from doing these two things. Either this is done in an orderly way, and possibly at a lower cost, or it is done in a chaotic way, and at a higher cost.
It's no use quoting stress tests that show only 8 banks are vulnerable. Or pointing to potential losses of €300 bn on sovereign debt. Once mayhem breaks out in the markets, losses will escalate and so will the number of failing banks. The key to understanding the banking problem is not to tot up losses on sovereign debt exposure as of today but to understand their dependence on short-term US money market mutual funds. It is is this dependence that creates the potential for another Lehman moment. More in my ET column, Europe's Lehman moment.
It's no use quoting stress tests that show only 8 banks are vulnerable. Or pointing to potential losses of €300 bn on sovereign debt. Once mayhem breaks out in the markets, losses will escalate and so will the number of failing banks. The key to understanding the banking problem is not to tot up losses on sovereign debt exposure as of today but to understand their dependence on short-term US money market mutual funds. It is is this dependence that creates the potential for another Lehman moment. More in my ET column, Europe's Lehman moment.
Thursday, September 15, 2011
No more JEE- IITs/NITs to have aptitude test
The IIT Council has decided in favour of a common aptitude test for IITs/NITs and all state government and private engineering colleges, TOI reports.
The exam will replace the current JEE. The Council favours giving due weightages to the aptitude test and standard XII marks. This is subject to the approval of the finance ministry and, in the case of state government colleges, to approval by the states. If it goes through, this will be a huge relief to thousands of engineering aspirants in the country and, of course, a massive blow to private tutorial colleges for the JEE.
The Council also decided to retain the IIT fee at Rs 50,000 per year but will require those with a family income of over Rs 4 lakh to cough up an additional amount totalling to about Rs 6 lakh for the course once they take up a job. There will be exemptions to those pursing M Tech or Ph D courses. The modalities of recovering the fee from salaries is to be worked out.
The change in the exam format and the idea of a common exam for all engineering colleges are both to be lauded. But I have to wonder: how is it that initiatives such as these emanate from the ministry and not the IITs themselves? Why do the IITs have to be prodded towards doing the sensible thing by students and the education system?
The exam will replace the current JEE. The Council favours giving due weightages to the aptitude test and standard XII marks. This is subject to the approval of the finance ministry and, in the case of state government colleges, to approval by the states. If it goes through, this will be a huge relief to thousands of engineering aspirants in the country and, of course, a massive blow to private tutorial colleges for the JEE.
The Council also decided to retain the IIT fee at Rs 50,000 per year but will require those with a family income of over Rs 4 lakh to cough up an additional amount totalling to about Rs 6 lakh for the course once they take up a job. There will be exemptions to those pursing M Tech or Ph D courses. The modalities of recovering the fee from salaries is to be worked out.
The change in the exam format and the idea of a common exam for all engineering colleges are both to be lauded. But I have to wonder: how is it that initiatives such as these emanate from the ministry and not the IITs themselves? Why do the IITs have to be prodded towards doing the sensible thing by students and the education system?
Basel III bounty for India
Basel 3 may turn out to be a blessing for India- and other BRICS countries such as China and Brazil. Basel 3 will depress returns on equity in western banks by raising capital requirements. Indian banks's return on assets of 1% and return on equity of 12-18% is better than what western banks can produce and it's likely to stay at that level, thanks to financial inclusion.
Financial inclusion will force Indian banks to reach out to high-yielding small borrowers. This will entail a significant upfront cost but will yield payoffs in terms of an increase interest rate margin. Indian banks also have the potential to increase overall returns by raising fee income and by returning to credit cards and personal loans.
Thus, Basel 3 will have the effect of accelerating the process of catching up of emerging market banks with those in the west. More in my ET column, Stormy tide favours Indian banks.
Financial inclusion will force Indian banks to reach out to high-yielding small borrowers. This will entail a significant upfront cost but will yield payoffs in terms of an increase interest rate margin. Indian banks also have the potential to increase overall returns by raising fee income and by returning to credit cards and personal loans.
Thus, Basel 3 will have the effect of accelerating the process of catching up of emerging market banks with those in the west. More in my ET column, Stormy tide favours Indian banks.
Thursday, September 01, 2011
Christian Lagarde steals the show at Jackson Hole
No mistake who was the star at the central bankers' meet at Jackson Hole. It was neither Ben Bernanke, the Fed chief, nor Trichet, the president of the ECB. It was Christian Lagarde, the former French minister and now head of the IMF.
Most economists think that all policy bolts have been shot in the present crisis. They have become classical economists for now: sit back and watch while economies slowly get back to normal. Naturo-therapy for economies, if you like. But this may be just wishful thinking. Not doing anything could cause the bottom to fall from the global economy.
Lagarde alone had some concrete prescriptions to offer. Although a European, she didn't hesitate to call a spade a bloody shovel when it came to Europe's banking sector. More in my ET column, IMF's bold recipe for recovery.
Most economists think that all policy bolts have been shot in the present crisis. They have become classical economists for now: sit back and watch while economies slowly get back to normal. Naturo-therapy for economies, if you like. But this may be just wishful thinking. Not doing anything could cause the bottom to fall from the global economy.
Lagarde alone had some concrete prescriptions to offer. Although a European, she didn't hesitate to call a spade a bloody shovel when it came to Europe's banking sector. More in my ET column, IMF's bold recipe for recovery.
Thursday, August 18, 2011
Forget S &P downgrade, watch Eurozone
The S&P downgrade is a non-event. It could be turn out to be an event for S&P and for other rating agencies, given that the Senate is to initiate hearings into the downgrade. This could eventually result in a major downgrade of the ratings business itself, but that's a different matter.
The downgrade signifies nothing of importance in the US economy itself. All the bad news is already in and there is nothing to suggest that a recession is imminent although recovery will remain sluggish. The danger to the world economy is posed by the Eurozone where bank exposure to government debt has the potential to trigger another financial crisis.This too is a low probability event as of now, since it appears that sense has dawned finally on the leaders in the Eurozone.
Comparisons of the S&P downgrade with the collapse of Lehman are completely misplaced. The Lehman collapse happened when banks were battered and it wrecked money market confidence in the banking system, making things worse for banks. Banks are today better capitalised and bank exposure to Eurozone debt is well documented although exposure to credit default swaps is a grey area. The S&P downgrade changes nothing on the ground and it could, in effect, be something of a wake-up call for leaders everywhere.
The prospects are for slow growth in the world economy and this will impact on India's growth prospects. Since, lower growth is what our policy makers are praying for in their bid to contain inflation, they will not lose much sleep on account of recent developments. More in today's ET column, A continuation, not a repeat, of 2008.
The downgrade signifies nothing of importance in the US economy itself. All the bad news is already in and there is nothing to suggest that a recession is imminent although recovery will remain sluggish. The danger to the world economy is posed by the Eurozone where bank exposure to government debt has the potential to trigger another financial crisis.This too is a low probability event as of now, since it appears that sense has dawned finally on the leaders in the Eurozone.
Comparisons of the S&P downgrade with the collapse of Lehman are completely misplaced. The Lehman collapse happened when banks were battered and it wrecked money market confidence in the banking system, making things worse for banks. Banks are today better capitalised and bank exposure to Eurozone debt is well documented although exposure to credit default swaps is a grey area. The S&P downgrade changes nothing on the ground and it could, in effect, be something of a wake-up call for leaders everywhere.
The prospects are for slow growth in the world economy and this will impact on India's growth prospects. Since, lower growth is what our policy makers are praying for in their bid to contain inflation, they will not lose much sleep on account of recent developments. More in today's ET column, A continuation, not a repeat, of 2008.
Wednesday, August 17, 2011
Anna Hazare's googly
Am I the only one to be taken by surprise by the turn of events in L'affaire Anna Hazare? Yesterday, when I heard on TV that Hazare had been subjected to preventive detention, I cannot say I was outraged.
There is merit in the contention that the police, having availed of Sec 144, were within their rights to judge whether Hazare's proposed actions would disturb the peace or not. But I did feel that the politically astute course for the government would have been to allow Hazare and his fans in the visual media to spend themselves over a day or two.
That was not to be. The government sent Hazare to Tihar Jail only to reverse its decision and order his release by the end of the day. I am not in a position to judge how great was the groundswell of sentiment in favour of Hazare in Delhi and elsewhere. But the TV channels (one of which openly espouses his cause) certainly made one feel it was significant. They and sundry personalities kept clobbering the government through the day, perhaps giving the Congress bigwigs the sense that they were losing the PR battle.
What followed was even more astonishing. Hazare refused to accept the release order and leave the jail until assured that he could carry on his protest at a venue of his choosing. This was indeed a googly and the government was completely stumped. It could not, I suppose, have asked the cops to evict Hazare. The option of escorting Hazare out of Delhi must have been weighed and rejected. It appears now that Hazare will have his way.
It is certainly a blow to the government but that is not the point. We need to consider what the episode forebodes for the functioning of our democracy. What happens to the prerogative of parliament to make laws? Does this get suspended when parliament is seen to be not heeding the wishes of a large number of people? Who decides this in a given case and who is to be presumed to speak for the people? And if some of the clauses of the Janata Lokpal Bill are to be included in the government's draft, what purpose will be served by parliament debating them? Parliament can reject them only at the risk of facing another fast and trial by media!
This is not a referendum. It is not even mobocracy. It is mediacracy. Once the TV channels decide to root for a cause, an individual with a reasonable following may be able to foist his wishes on the elected government and parliament. Why have elections, let's settle for TV debates and online polls.
There is merit in the contention that the police, having availed of Sec 144, were within their rights to judge whether Hazare's proposed actions would disturb the peace or not. But I did feel that the politically astute course for the government would have been to allow Hazare and his fans in the visual media to spend themselves over a day or two.
That was not to be. The government sent Hazare to Tihar Jail only to reverse its decision and order his release by the end of the day. I am not in a position to judge how great was the groundswell of sentiment in favour of Hazare in Delhi and elsewhere. But the TV channels (one of which openly espouses his cause) certainly made one feel it was significant. They and sundry personalities kept clobbering the government through the day, perhaps giving the Congress bigwigs the sense that they were losing the PR battle.
What followed was even more astonishing. Hazare refused to accept the release order and leave the jail until assured that he could carry on his protest at a venue of his choosing. This was indeed a googly and the government was completely stumped. It could not, I suppose, have asked the cops to evict Hazare. The option of escorting Hazare out of Delhi must have been weighed and rejected. It appears now that Hazare will have his way.
It is certainly a blow to the government but that is not the point. We need to consider what the episode forebodes for the functioning of our democracy. What happens to the prerogative of parliament to make laws? Does this get suspended when parliament is seen to be not heeding the wishes of a large number of people? Who decides this in a given case and who is to be presumed to speak for the people? And if some of the clauses of the Janata Lokpal Bill are to be included in the government's draft, what purpose will be served by parliament debating them? Parliament can reject them only at the risk of facing another fast and trial by media!
This is not a referendum. It is not even mobocracy. It is mediacracy. Once the TV channels decide to root for a cause, an individual with a reasonable following may be able to foist his wishes on the elected government and parliament. Why have elections, let's settle for TV debates and online polls.
Friday, August 05, 2011
Ratan Tata succession
There is word of a professional (instead of a member of the Tata family) succeeding Ratan Tata as head of the Tata group. Many people have been rooting for such a move. I am not so sure. There was the same talk when Mr Tata himself succeeded JRD. Not many gave Mr Tata a chance of succeeding. The sceptics have been proved wrong.
The number of businesses in the group has been pruned (although not enough, some would say). Controls have been tightened. The group is more international today (with the majority of revenues coming from overseas). The group has got into areas for which many had believed it unsuited (eg cars, communications). Mr Tata has put pep into many of the older businesses (steel, power, chemicals, tea).
True, the group's image has been dented by the 2 G affair and the Radia tapes. But, in commercial terms, Mr Tata has succeeded beyond all expectations. I see the Tata experience as part of a broader phenomenon of the reinvention of Indian family businesses. Reforms have not sunk India's family managed businesses but have brought out the best in many. It is no longer obvious that family-managed businesses must turn to professionals and not entrust their destinies to family members.
More in my ET column, It's okay to keep it in the family
The number of businesses in the group has been pruned (although not enough, some would say). Controls have been tightened. The group is more international today (with the majority of revenues coming from overseas). The group has got into areas for which many had believed it unsuited (eg cars, communications). Mr Tata has put pep into many of the older businesses (steel, power, chemicals, tea).
True, the group's image has been dented by the 2 G affair and the Radia tapes. But, in commercial terms, Mr Tata has succeeded beyond all expectations. I see the Tata experience as part of a broader phenomenon of the reinvention of Indian family businesses. Reforms have not sunk India's family managed businesses but have brought out the best in many. It is no longer obvious that family-managed businesses must turn to professionals and not entrust their destinies to family members.
More in my ET column, It's okay to keep it in the family
Monday, July 25, 2011
Are sprawling IIM campuses justified?
The IIMs have campuses that sprawl across 100 acres of more or land. They produce less than 3000 MBAs put together, says Nirmalya Kumar in an article in ET. He believes this is inefficient use of a scarce resource, land. Is this true?
There are two components to this point. One, the IIMs don't need sprawling campuses in order to meet their educational objectives. Two, given that they have so much, the IIMs can produce more postgraduates or doctorates.
To take the first point, Kumar argues that London Business School operates on less than 5 acres and graduated 1000 students this year. Why can't the IIMs do likewise? Maybe they should sell off most of the land they are sitting on?
I am not sure this is a valid argument. Both faculty and students in London (and other western cities) can easily rent apartments over a wide range of rentals. In Indian cities, it is rather more difficult, so there is a case for a campus that will obviate the need for people to look around for a place. Public transport in many places is nowhere as good as in London and there can be difficulties in commuting to work as well. Many cities may not be as safe those in Europe or North America. So, for the smooth functioning of the school, a campus may be required.
Secondly, the IITs and IIMs are governed by the Pay Commission framework and are restricted in the pay they can offer faculty. Campus accommodation is a valuable perk and we know from experience that for NRI faculty wanting to relocate to India, it's a big attraction. One would, therefore, make out a case for a campus on grounds of promoting academic excellence.
Having said that, there remains the question of whether the IIMs are producing enough graduates to justify the land on which they are sitting. One reason often trotted out is that the IIMs are unable to attract quality faculty. I do not entirely buy this argument. As Kumar points out, it should be possible to bring in visiting faculty from overseas. This does not happen, nor is recruitment of faculty vigorous enough, because it suits the IIMs to limit the intake. This enhances the scarcity value of an IIM product and hence the value of the IIM brand itself, and it limits competition to existing faculty. I have made a reference to this issue in my recent book, Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad.
It does appear to me that the IIMs work backward from a high average salary in determining what should be the intake of students. Whereas the need of the country is for a large number of MBAs. In recent years, the IIMs have had to increase their capacity by 54% consequent to the introduction of OBC quotas- this is the most significant scaling up in the IIM system since they were set up! So they could do it when they were driven to by law. Why can't they scale up on their own as well- and provide better justification for the land they are using?
There are two components to this point. One, the IIMs don't need sprawling campuses in order to meet their educational objectives. Two, given that they have so much, the IIMs can produce more postgraduates or doctorates.
To take the first point, Kumar argues that London Business School operates on less than 5 acres and graduated 1000 students this year. Why can't the IIMs do likewise? Maybe they should sell off most of the land they are sitting on?
I am not sure this is a valid argument. Both faculty and students in London (and other western cities) can easily rent apartments over a wide range of rentals. In Indian cities, it is rather more difficult, so there is a case for a campus that will obviate the need for people to look around for a place. Public transport in many places is nowhere as good as in London and there can be difficulties in commuting to work as well. Many cities may not be as safe those in Europe or North America. So, for the smooth functioning of the school, a campus may be required.
Secondly, the IITs and IIMs are governed by the Pay Commission framework and are restricted in the pay they can offer faculty. Campus accommodation is a valuable perk and we know from experience that for NRI faculty wanting to relocate to India, it's a big attraction. One would, therefore, make out a case for a campus on grounds of promoting academic excellence.
Having said that, there remains the question of whether the IIMs are producing enough graduates to justify the land on which they are sitting. One reason often trotted out is that the IIMs are unable to attract quality faculty. I do not entirely buy this argument. As Kumar points out, it should be possible to bring in visiting faculty from overseas. This does not happen, nor is recruitment of faculty vigorous enough, because it suits the IIMs to limit the intake. This enhances the scarcity value of an IIM product and hence the value of the IIM brand itself, and it limits competition to existing faculty. I have made a reference to this issue in my recent book, Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad.
It does appear to me that the IIMs work backward from a high average salary in determining what should be the intake of students. Whereas the need of the country is for a large number of MBAs. In recent years, the IIMs have had to increase their capacity by 54% consequent to the introduction of OBC quotas- this is the most significant scaling up in the IIM system since they were set up! So they could do it when they were driven to by law. Why can't they scale up on their own as well- and provide better justification for the land they are using?
Thursday, July 21, 2011
How do we price higher education?
I continue with the theme of pricing of higher education on which I had a couple of posts earlier. We need to ask ourselves: why do fees in higher education keep rising at a rate ahead of inflation in many countries? In b-schools in India, for instance, fees have doubled or tripled since 2007.
It turns out that the explanation is a straightforward one: institutions of higher education keep raising their fees because there are enough people out there willing to pay these. There is a mismatch between supply and demand and supply is not easily created because it takes years for a new institution to establish its reputation. In these conditions, universities and colleges get away with anything - if they are free to do so- and have no incentives to reduce costs or improve efficiency.
That must also explain why the production technology has not changed one bit in higher education for several centuries now- it's still the teacher using chalk and blackboard or, at best, slides and power point presentations. Quality is seen as a function of keeping the student-teacher ratio as low as possible.
The only way in which fees will be contained is if institutions are run by the state and are duly subsidised. If we leave it to the private sector, we must expect fees to escalate. We have to choose between the US model where private institutions are entirely free to set fees and the German model where the accent is on modest fees or free tuition and universal access. I argue in my recent ET column, Soaring costs of higher education, that the latter would be preferable in Indian conditions.
It turns out that the explanation is a straightforward one: institutions of higher education keep raising their fees because there are enough people out there willing to pay these. There is a mismatch between supply and demand and supply is not easily created because it takes years for a new institution to establish its reputation. In these conditions, universities and colleges get away with anything - if they are free to do so- and have no incentives to reduce costs or improve efficiency.
That must also explain why the production technology has not changed one bit in higher education for several centuries now- it's still the teacher using chalk and blackboard or, at best, slides and power point presentations. Quality is seen as a function of keeping the student-teacher ratio as low as possible.
The only way in which fees will be contained is if institutions are run by the state and are duly subsidised. If we leave it to the private sector, we must expect fees to escalate. We have to choose between the US model where private institutions are entirely free to set fees and the German model where the accent is on modest fees or free tuition and universal access. I argue in my recent ET column, Soaring costs of higher education, that the latter would be preferable in Indian conditions.
Wednesday, July 13, 2011
Britain struggles to price education correctly
I wrote yesterday about the contrarian move in Germany to make university education free. The UK moved the other way in Tony Blair's time by opting for more market-driven fees. The new government opted to stay the course, last year allowing universities to raise the maximum fee from £ 3375 to£ 9000 with effect from September 12. To the dismay of the government, most universities have veered towards the maximum, according to the Economist.
How come? One would have thought fee would vary depending on quality. I suppose mediocre institutions get away with the same fee because of the scarcity value of higher education: there is isn't enough competition and entry and exit are not really free. We see in India as well. The moment the IIMs raised their fee, so did other b-schools including those that are not a patch on the top IIMs. They know that even at absurdly high fees, there will be enough takers in the Indian market.
Now, the British government wants to introduce differentiation in the market. It has come up with two ideas. One, higher quality institutions will be allowed to expand as much as they like (higher quality being defined by the number of applicants with a certain number of A grades). This, it is believed, will force mediocre institutions to drop their fees in order to attract clever students. Secondly, 5% of all places will be reserved for institutions that charge £ 7500 or less. This latter, of course, assumes that capacity is sufficiently elastic at the cheaper institutions.
Will these measures work? I doubt it. Leaving aside a handful of top institutions, quality for the rest is rather hard to define. Besides, students will opt for institutions that are closer to their place of residence, other things being broadly equal. In other words, the link between quality and fee will not be as strong as expected and the gap between supply and demand in higher education will remain acute given that more and more people aspire for university education.
Right now, it is the government that makes available loans to students, not banks. Higher university fees only spell higher bad debts for the government0- at the best of times, the government finds it difficult to collect repayments. In other ways, the government's subsidy burden will go up. Whether transferring more of the subsidy burden from the private sector to the government will improve quality is doubtful- quality is not a function of fees alone, it is a function of overall funding and the broad ecosystem as well.
How come? One would have thought fee would vary depending on quality. I suppose mediocre institutions get away with the same fee because of the scarcity value of higher education: there is isn't enough competition and entry and exit are not really free. We see in India as well. The moment the IIMs raised their fee, so did other b-schools including those that are not a patch on the top IIMs. They know that even at absurdly high fees, there will be enough takers in the Indian market.
Now, the British government wants to introduce differentiation in the market. It has come up with two ideas. One, higher quality institutions will be allowed to expand as much as they like (higher quality being defined by the number of applicants with a certain number of A grades). This, it is believed, will force mediocre institutions to drop their fees in order to attract clever students. Secondly, 5% of all places will be reserved for institutions that charge £ 7500 or less. This latter, of course, assumes that capacity is sufficiently elastic at the cheaper institutions.
Will these measures work? I doubt it. Leaving aside a handful of top institutions, quality for the rest is rather hard to define. Besides, students will opt for institutions that are closer to their place of residence, other things being broadly equal. In other words, the link between quality and fee will not be as strong as expected and the gap between supply and demand in higher education will remain acute given that more and more people aspire for university education.
Right now, it is the government that makes available loans to students, not banks. Higher university fees only spell higher bad debts for the government0- at the best of times, the government finds it difficult to collect repayments. In other ways, the government's subsidy burden will go up. Whether transferring more of the subsidy burden from the private sector to the government will improve quality is doubtful- quality is not a function of fees alone, it is a function of overall funding and the broad ecosystem as well.
Tuesday, July 12, 2011
Germany opts for free tuition
Continental Europe can often surprise us in a big way. Most countries are going the way of increasing fees for university students. The model is market-based fee financed by loans (which may or not be subsidised by the state). Not so in Germany, according to a report in the Economist.
Many German states are opting for free university education. Fees in Germany generate revenues of only € 1.2 bn compared to total expenditure of € 36 bn. Private sources account for only 15% of revenues in German universities compared to two-thirds in the US. It could well be that not getting students to pay may be affecting the quality of universities- it's difficult to finance research and other activities of top quality without better funding. But education is inclusive.
Which model is better - the American model which imposes an enormous loan burden students but can produce very high quality or the German model which results in universities of lower quality but provides the widest access? The German economy is doing fine. Even though research in Germany may not be cutting edge, German manufacturing is known for quality. I leave it to you to judge.
Many German states are opting for free university education. Fees in Germany generate revenues of only
Which model is better - the American model which imposes an enormous loan burden students but can produce very high quality or the German model which results in universities of lower quality but provides the widest access? The German economy is doing fine. Even though research in Germany may not be cutting edge, German manufacturing is known for quality. I leave it to you to judge.
Wednesday, July 06, 2011
India's services-led growth
Two aspects of India's services-led growth are striking. One, modern services, comprising IT, financial services and communications have taken off at lower per capita levels than in the OECD economies. Two, there has been rapid growth in traditional services, most of which have been untouched by reforms.
Modern services in India should continue to grow thanks to tradability of these service: India's great good fortune that these services started developing in India precisely at a time when many of them became exportable. Traditional services, such as railways, hotels, trade too have plenty of potential. Hence, services can continue to be an engine of growth in India.
Can they absorb enough of India's labour force? Quite possibly, yes. When you say 'services', most people think IT and programming. They believe services require high levels of training. This is not entirely true. There are plenty of jobs opening up at call centres and data entry centres, jobs that don't require very high levels of training. Financial services and communications also are throwing up jobs in large numbers (on the sales side, for instance) where training required is not very high. So services-led growth can boost employment as well, although it cannot completely substitute jobs created by manufacturing.
More in my ET column, Can services-led growth continue?
Modern services in India should continue to grow thanks to tradability of these service: India's great good fortune that these services started developing in India precisely at a time when many of them became exportable. Traditional services, such as railways, hotels, trade too have plenty of potential. Hence, services can continue to be an engine of growth in India.
Can they absorb enough of India's labour force? Quite possibly, yes. When you say 'services', most people think IT and programming. They believe services require high levels of training. This is not entirely true. There are plenty of jobs opening up at call centres and data entry centres, jobs that don't require very high levels of training. Financial services and communications also are throwing up jobs in large numbers (on the sales side, for instance) where training required is not very high. So services-led growth can boost employment as well, although it cannot completely substitute jobs created by manufacturing.
More in my ET column, Can services-led growth continue?
Sunday, July 03, 2011
IIM Indore five year programme
IIM-I's five year programme in management has drawn a response from the AICTE. The regulator believes that IIM-I can't offer a degree at the end of the third year, as promised, because it does not have the power to grant degrees. IIM I has clarified that it will grant a diploma as all the IIMs do with their post-graduate programme. (The IIMs are not covered by any Act of parliament, unlike the IITs, and hence do not have the power to grant degrees).
IIM-I's 3+2 offering (undergrad courses plus MBA), after the 12th standard, will be watched with interest. It is the first ever attempt by an IIM to move into the undergrad space. It also offers students an entry into the MBA programme without facing the huge odds of CAT. The undergrad courses will cover, not just business management, but several elements of liberal arts, history, literature etc, as also IT.
There has long been talk, endorsed by the Yash Pal committee, of the IIMs becoming full-fledged universities. The issue has been one of scale as well as scope. If IIM-I can show that it can deliver quality in a broad-based undergrad programme, it will be a feather in its cap and it could be the forerunner of similar programmes from others, including the IIMs.
IIM-I's 3+2 offering (undergrad courses plus MBA), after the 12th standard, will be watched with interest. It is the first ever attempt by an IIM to move into the undergrad space. It also offers students an entry into the MBA programme without facing the huge odds of CAT. The undergrad courses will cover, not just business management, but several elements of liberal arts, history, literature etc, as also IT.
There has long been talk, endorsed by the Yash Pal committee, of the IIMs becoming full-fledged universities. The issue has been one of scale as well as scope. If IIM-I can show that it can deliver quality in a broad-based undergrad programme, it will be a feather in its cap and it could be the forerunner of similar programmes from others, including the IIMs.
Wednesday, June 29, 2011
Regulatory overkill in banking?
That's the title of my last ET column.
At least some bankers think so. They see the proposed capital requirements for banks as too onerous. They are against any restrictions on investment banking or on size. Alan Greenspan takes a different tack. He thinks policy-makers and regulators simply do not enough to intervene, that the international financial system is far too complex for the sort of regulation proposed under the Dodd-Frank Act.
Greenspan is in a minority today at least among policy-makers. Both in the US and in Europe (and especially in UK), the tide is firmly in favour of tighter regulation. It's difficult to resist the proposition that inadequate regulation was a factor in the sub-prime crisis, if not the most important factor. My biggest concern is that regulatory reform will be late in coming. The biggest nightmare facing us is a macroeconomic crisis triggered by the problems in the Eurozone hitting the world before banks are shored up with more capital.
At least some bankers think so. They see the proposed capital requirements for banks as too onerous. They are against any restrictions on investment banking or on size. Alan Greenspan takes a different tack. He thinks policy-makers and regulators simply do not enough to intervene, that the international financial system is far too complex for the sort of regulation proposed under the Dodd-Frank Act.
Greenspan is in a minority today at least among policy-makers. Both in the US and in Europe (and especially in UK), the tide is firmly in favour of tighter regulation. It's difficult to resist the proposition that inadequate regulation was a factor in the sub-prime crisis, if not the most important factor. My biggest concern is that regulatory reform will be late in coming. The biggest nightmare facing us is a macroeconomic crisis triggered by the problems in the Eurozone hitting the world before banks are shored up with more capital.
Sunday, June 26, 2011
Saturday, June 25, 2011
Launch of book on Ravi Matthai-IIMA
We had a launch function for my book on Ravi Matthai-IIMA (Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad;Rupa Publications) on June 20. Dr C Rangarajan, Chairman, Economic Advisory Council to the PM, released the book.
Dr Rangarajan was a professor at IIMA in Matthai's time. He had been recruited from the US by Matthai and became a close associate of his here. Among those present were IIMA director Samir Barua, faculty and staff of the Institute, former faculty members of IIMA, people from the corporate world and the government of Gujarat and members of the media. The event was well covered in the Ahmedabad editions.
Saturday, June 11, 2011
Zhou Enlai was misquoted?
Talk about revisionism. This bit on Zhou Enlai, the former Chinese PM, is going to cause a bit of history to be rewritten. Zhou is famous for having said of the French Revolution and its impact, 'Too early to say'.
This has been famously interpreted as a sign of the far-sightedness of the Chinese, their ability to do serious long-term thinking. A news item in the FT now says that Zhou was misquoted. He was talking of the 1968 student riots in Paris, which had happened three years earlier, not of the storming of the Bastille.
At a seminar in Washington to mark the publication of Henry Kissinger’s book, On China, Chas Freeman, a retired foreign service officer, sought to correct the long-standing error.
This has been famously interpreted as a sign of the far-sightedness of the Chinese, their ability to do serious long-term thinking. A news item in the FT now says that Zhou was misquoted. He was talking of the 1968 student riots in Paris, which had happened three years earlier, not of the storming of the Bastille.
At a seminar in Washington to mark the publication of Henry Kissinger’s book, On China, Chas Freeman, a retired foreign service officer, sought to correct the long-standing error.
Apparently, this is not the lone instance of a Chinese leader being misquoted. Deng Xiaoping's, 'To get rich is glorious' is said to be fictional.“I distinctly remember the exchange. There was a misunderstanding that was too delicious to invite correction,” said Mr Freeman.
He said Zhou had been confused when asked about the French Revolution and the Paris Commune. “But these were exactly the kinds of terms used by the students to describe what they were up to in 1968 and that is how Zhou understood them.”
Thursday, June 09, 2011
Are margins too high in Indian banking?
The RBI seems to think so; one RBI official was even quoted as saying that Indian banks' margins are 'usurious'. It's hard to draw conclusions from the aggregate level of NIM because a bank's NIM is a function of a number of factors; for the same reason, comparing with other countries may not be useful.
The regulator must simply ensure that there is adequate competition- and live with the margin that results. There is a case for tolerating higher NIMs given that banks' capital requirements are poised to rise due to Basel 3 and stiffer regulation in the years to come. That will put banks' return on equity under pressure and make it a little difficult for Indian banks to finance their huge requirements of capital from abroad.
More in my ET column, RBI mustn't dicate bank margins.
The regulator must simply ensure that there is adequate competition- and live with the margin that results. There is a case for tolerating higher NIMs given that banks' capital requirements are poised to rise due to Basel 3 and stiffer regulation in the years to come. That will put banks' return on equity under pressure and make it a little difficult for Indian banks to finance their huge requirements of capital from abroad.
More in my ET column, RBI mustn't dicate bank margins.
Wednesday, June 08, 2011
How much equity does a bank need?
15-20%, says Sebastian Mallaby in an article in the FT. The Basel 3 norm of 7% core equity is not enough, he says. His argument is as follows:
Tuesday, June 07, 2011
Book on Ravi Matthai - IIM Ahmedabad
My book on Ravi Matthai- IIM Ahmedabad, published by Rupa Publications, is out (Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad). ET carried a story on it a couple of weeks ago.
The book is timed to coincide with IIMA's golden jubilee and is meant to celebrate the remarkable effort at institution-building in the Institute's formative years. IIMA stands out in the Indian education landscape for one reason: it is that rare institution that has been at the top for most of the five decades for which it has been around. There is an Iron Law that operates in Indian education and that dictates that institutions of higher education, started with great fanfare, must go to seed in about thirty or forty years' time. IIMA is a noteworthy exception.
My book attempts to explain IIMA's success and to answer the questions: what sets IIMA apart in the IIM fraternity? why does it enjoy a premium rating? I also devote a chapter to the governance issues in the IIM system today and make suggestions on how to inject greater accountability into the system.
The answer to the above questions, which I came to grasp only after I had spent some five years at IIMA, lies in the culture and processes that Vikram Sarabhai, its founder, and Ravi Matthai, its first full-time director, put in place. That something, which is intangible but which makes all the difference to an academic institution, has been solid enough to sustain IIMA for five decades now.
When IIMA was founded, Ahmedabad was a small town. The infrastructure at the Institute was very basic, they did not have today's IT and the connectivity it provides, communications were poor. And yet IIMA quickly made an impact on the nation as a centre of excellence. Can you imagine an IIT or IIM being set up in Tirunelveli or Patiala making a similar impact today? That is a measure of the achievement of IIMA's founding fathers.
Matthai was all of 38 years old when Sarabhai and others chose him as the first full-time director. He was not an academic by training, he had been a corporate executive. He achieved what he did in just seven years' time. His appointment as director was not a contractual appointment, and yet at the age of 45, he chose to step down. He spurned numerous lucrative offers and turned his energies towards a novel experiment in rural education in Jawaja, a small block in Rajasthan. It was a story waiting to be told. I am privileged to have had the opportunity to tell it.
PS: The book is expected to reach the market in about a week's time but it can be ordered from flipkart. com or from Rupa's website.
The book is timed to coincide with IIMA's golden jubilee and is meant to celebrate the remarkable effort at institution-building in the Institute's formative years. IIMA stands out in the Indian education landscape for one reason: it is that rare institution that has been at the top for most of the five decades for which it has been around. There is an Iron Law that operates in Indian education and that dictates that institutions of higher education, started with great fanfare, must go to seed in about thirty or forty years' time. IIMA is a noteworthy exception.
My book attempts to explain IIMA's success and to answer the questions: what sets IIMA apart in the IIM fraternity? why does it enjoy a premium rating? I also devote a chapter to the governance issues in the IIM system today and make suggestions on how to inject greater accountability into the system.
The answer to the above questions, which I came to grasp only after I had spent some five years at IIMA, lies in the culture and processes that Vikram Sarabhai, its founder, and Ravi Matthai, its first full-time director, put in place. That something, which is intangible but which makes all the difference to an academic institution, has been solid enough to sustain IIMA for five decades now.
When IIMA was founded, Ahmedabad was a small town. The infrastructure at the Institute was very basic, they did not have today's IT and the connectivity it provides, communications were poor. And yet IIMA quickly made an impact on the nation as a centre of excellence. Can you imagine an IIT or IIM being set up in Tirunelveli or Patiala making a similar impact today? That is a measure of the achievement of IIMA's founding fathers.
Matthai was all of 38 years old when Sarabhai and others chose him as the first full-time director. He was not an academic by training, he had been a corporate executive. He achieved what he did in just seven years' time. His appointment as director was not a contractual appointment, and yet at the age of 45, he chose to step down. He spurned numerous lucrative offers and turned his energies towards a novel experiment in rural education in Jawaja, a small block in Rajasthan. It was a story waiting to be told. I am privileged to have had the opportunity to tell it.
PS: The book is expected to reach the market in about a week's time but it can be ordered from flipkart. com or from Rupa's website.
America's moon mission and the public sector
John F Kennedy's moon mission was meant to make a point about US supremacy in science after the jolt delivered by the Soviet Union's putting a man in orbit. It cost an enormous sum- $150 bn in 2010 dollars, according to an article in the Economist, "five times as much as the Manhattan Project and 18 times the cost of digging the Panama Canal." The Economist points to an irony at the heart of the moon mission:
The Economist oversimplifies, methinks. The Apollo mission succeeded, not just because it invoked national pride. It was a case where expense was no consideration because a matter of national prestige was involved. Other giant public sector projects do not come with a blank cheque, expenditures are subjected to scrutiny and are pruned at the first opportunity.
Here in India, we have seen that several projects in the public sector have delivered for the same reason- ISRO, BARC, DRDO, IITs and IIMs. It is only when people start demanding results commensurate with expenditure that we have a problem- and indeed that is what is happening today. No longer are people willing to back the pursuit of excellence with an open purse.
In short, it is not the nature of the project that matters or the fact that is in the public sector, it is a matter of the resources with which it is backed.
The Apollo programme, which was summoned into being in order to demonstrate the superiority of the free-market system, succeeded by mobilising vast public resources within a centralised bureaucracy under government direction. In other words, it mimicked aspects of the very command economy it was designed to repudiate.However, attempts to mobilise the public sector for other large projects failed, for example, Lyndon Johnson's attempt at social engineering on a huge scale. The Economist believes that Obama's calls for a leap in technology and infrastructure will fail for the same reason.
The Economist oversimplifies, methinks. The Apollo mission succeeded, not just because it invoked national pride. It was a case where expense was no consideration because a matter of national prestige was involved. Other giant public sector projects do not come with a blank cheque, expenditures are subjected to scrutiny and are pruned at the first opportunity.
Here in India, we have seen that several projects in the public sector have delivered for the same reason- ISRO, BARC, DRDO, IITs and IIMs. It is only when people start demanding results commensurate with expenditure that we have a problem- and indeed that is what is happening today. No longer are people willing to back the pursuit of excellence with an open purse.
In short, it is not the nature of the project that matters or the fact that is in the public sector, it is a matter of the resources with which it is backed.
Thursday, June 02, 2011
IITs say no to greater autonomy!
Going by a report carried by BS, the IITs don't really want greater autonomy, at least as envisaged by the Anil Kakodkar committee report on IITs.
The Kakodkar committee has favoured devolving greater powers to the IIT boards, with decisions on salaries, recruitment etc being largely left to them. Towards giving IITs greater operational freedom, it has suggested a substantial increase in fee from Rs 50,000 to Rs 2-2.5 lakh per annum. The IIT directors that BS spoke to had a different point of view from that expressed by the Kakodkar committee.
IIT Madras director MS Ananth is quoted as saying, "“In my personal opinion IITs have adequate autonomy. As an institution funded by tax-payers, I do not expect to be handed more on a platter." The IIT directors and also some faculty see any government withdrawal as coming in the way of the IITs' future growth:
The attitude of the IIT directors is in refreshing contrast to that of some IIMs. The IITs have less autonomy on paper than the IIMs as the former are governed by an Act of Parliament whereas the latter are not. And yet the IITs believe they have all the autonomy they need while some of the IIMs keep bleating about lack of autonomy.
The older IIMs have been saying just the opposite of what the IITs are saying. They say they need to be financially independent of the government; they want more power be given to the boards; they have resisted moves to evolve a common policy across the IIMs through a pan-IIM board and other means; and they would rather have individual IIMs promoting their own brand.
So who has got it right on autonomy? The IITs, whose brand is better known worldwide than the IIMs, or the IIMs? I leave it to you to judge.
The Kakodkar committee has favoured devolving greater powers to the IIT boards, with decisions on salaries, recruitment etc being largely left to them. Towards giving IITs greater operational freedom, it has suggested a substantial increase in fee from Rs 50,000 to Rs 2-2.5 lakh per annum. The IIT directors that BS spoke to had a different point of view from that expressed by the Kakodkar committee.
IIT Madras director MS Ananth is quoted as saying, "“In my personal opinion IITs have adequate autonomy. As an institution funded by tax-payers, I do not expect to be handed more on a platter." The IIT directors and also some faculty see any government withdrawal as coming in the way of the IITs' future growth:
“While the whole idea of the Kakodkar Panel is rooted in providing us more autonomy, I am not so sure that this will provide us with the prospects of growth that we need in the immediate future and in the long run,” said an IIT-Kharagpur professor on the condition of anonymity.Gautam Barua, director, IIT Guwahati, expresses the view that key decisions should be taken by the IIT Council, which includes all IIT directors, rather than being left to the individual boards; leaving it to the boards would mean the absence of uniformity across IITs and the dilution of the IIM brand.
The attitude of the IIT directors is in refreshing contrast to that of some IIMs. The IITs have less autonomy on paper than the IIMs as the former are governed by an Act of Parliament whereas the latter are not. And yet the IITs believe they have all the autonomy they need while some of the IIMs keep bleating about lack of autonomy.
The older IIMs have been saying just the opposite of what the IITs are saying. They say they need to be financially independent of the government; they want more power be given to the boards; they have resisted moves to evolve a common policy across the IIMs through a pan-IIM board and other means; and they would rather have individual IIMs promoting their own brand.
So who has got it right on autonomy? The IITs, whose brand is better known worldwide than the IIMs, or the IIMs? I leave it to you to judge.
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