EU quotas for women on boards

The EU is planning legislation that will make it obligatory for member countries to ensure that, by 2020, 40% of directors on corporate boards are women, FT reports. As I have argued in earlier posts, I am all for gender diversity and, indeed, for diversity of every kind on boards.

Opposition is building up in the UK and the argument is a predictable one: it is better to find ways for women to move naturally up the ladder. But this won't happen any more than we will have better representation for SCs/STs through a natural process (of superior education, economic betterment etc). For these things to happen naturally would take another 100 years or so and, that too, with a lot of luck. There are entrenched prejudices. Equally important, women's need for motherhood could come in the way of their corporate careers. Also, their preference for soft skills, such as HR, instead of marketing and finance could prove something of an obstacle in the rat race. This preference, in turn, arises from women realising that being in areas such as HR can given them more flexibility in their careers and work schedules.

Schumpeter makes these points well in a recent article in the Economist:

Several factors hold women back at work. Too few study science, engineering, computing or maths. Too few push hard for promotion. Some old-fashioned sexism persists, even in hip, liberal industries. But the biggest obstacle (at least in most rich countries) is children. However organised you are, it is hard to combine family responsibilities with the ultra-long working hours and the “anytime, anywhere” culture of senior corporate jobs. A McKinsey study in 2010 found that both women and men agreed: it is tough for women to climb the corporate ladder with teeth clamped around their ankles. Another McKinsey study in 2007 revealed that 54% of the senior women executives surveyed were childless compared with 29% of the men (and a third were single, nearly double the proportion of partnerless men).

Many talented, highly educated women respond by moving into less demanding fields where the hours are more flexible, such as human resources or public relations. Some go part-time or drop out of the workforce entirely. Relatively few stay in the most hard-driving jobs, such as strategy, finance, sales and operations, that provide the best path to the top.

Thus, quotas are the only way to ensure greater gender diversity on boards.The contention that this will dilute 'merit' or 'quality' on boards is utterly laughable. The performance of boards everywhere is so pathetic that almost any change or innovation would be an improvement. One of the things about quota for women is that it will necessarily bring in people from outside the closed club in which boards now operate.

Perhaps the most important reason boards do badly is that there is not enough diversity of views or perspectives. Bringing in women will make some difference in this respect. To improve boards, bring in women and also bring in workers, minority shareholders and institutional shareholders- in short, anybody who is a stranger to today's charmed circle whose members think they need only to nod their heads and slap each other's backs.

How to find a B-school dean?

Well, I wish I knew but it's useful to know that two French B-schools have brought in heads from the university system. FT reports:

ESCP Europe has become the latest French business school to look to the university system for its next dean. History professor Edouard Husson, who for the past two years has been the Vice-Chancellor of the Universities of Paris, has been appointed dean of ESCP from September 1. ESCP, like HEC Paris, comes under the auspices of the Chamber of Commerce and Industry of Paris.

 

......In March 2013 another French business school, EMLyon, announced the appointment of meteorologist Philippe Courtier, director of the Ecole Nationale des Ponts et Chaussées (ENPC), the engineering school in Paris, as its next president (dean). He took up the position in July.

 

A history professor and a meteorologist as b-school deans- that's serious out-of-the-box thinking! European B-schools have also not hesitated to look outside academia: they have brought in people from industry. So did ISB in India when it appointed Ajit Rangnekar as dean. There's no need to be fixated with the idea that the head of a B-school has to be an academic and, of course, still less with the idea that it has to be an insider.

A good start is to advertise the position and advertise widely. The ad must mention that people of eminence are free to make nominations: the worst thing any search committee can do is to expect highly talented people to put in applications, complete with covering letters and CVs. ('I am a professor of Marketing with a creditable record of publications and exposure to consulting and I write to ask that I be considered for the post of Dean at......'.)

Tackling the growth slowdown

Some people think the global environment is mostly responsible for the slowdown; others think it is 'policy  paralysis' or high interest rates or some combination of domestic factors. The RBI's latest annual report quantifies the impact of interest rates and global factors. Surprisingly, a large chunk of the industrial slowdown is not explained by other.

So what is it? It could be just supply bottlenecks, such as coal, natural gas etc. If that is so, I argue in my ET column (Don't blame slowdown on RBI), then we should simply focus on these. Not worry about grand things such as FDI in retail or insurance or pension reform or even cutting the fiscal deficit.

Yes, the deficit needs to be reined in and fuel subsidies need to be tackled at some point. But the priority right now is boosting public investment in infrastructure. If you can't cut subsidies to find funds for these, you have the forthcoming 2G auction revenues and you might try some quick disinvestment. We need some different thinking for a change, public discourse of late betrays mental paralysis!

N J Nanporia

N J Nanporia, the legendary former editor of the Times of India and the Statesman, passed away recently. I did not see any mention of his passing in any  paper and got to know about it after seeing a tribute in BS by Sunanda K Datta-Ray, himself a former editor of the Statesman. Datta-Ray says he got to know from friends who had seen an insertion for the sale of Nanporia's art collection.

If I am not mistaken, Nanporia, better known to TOI readers as NJN (his column was titled, ''One point of view"), succeeded Frank Moraes and preceded Sham Lal, both legends in their own right. He was half-Japanese (Datta-Ray says he was born in Kobe). How he came to India one does not know but he brought to journalism an excellent grasp of foreign affairs and a command over the language and a style that would have flattered the Times of London.

NJN's finest hour was the Chinese attack on India in 1962. The Chinese army overran Indian positions in the North-East as well as in Ladakh and came within shooting distance of Assam. Nehru made a pathetic broadcast to the people of Assam about his inability to defend them. There was a huge evacuation at Tezpur along with the destruction of official papers and currency notes. NJN, who had forecast China's troop movements with uncanny accuracy until that moment, made bold to say that China would not enter Assam. He argued that China's intention in attacking India was not acquisition or expansion but the humiliation of India in the eyes of the world and especially of the non-aligned movement. It wanted to send out a message that it was numero uno in Asia. That objective had been achieved with the rout of the Indian army and, therefore, the Chinese would now withdraw.

Lo and behold! China announced a unilateral withdrawal in the eastern front to positions it had held before the war. Assam remained safe. Nehru and the rest of India heaved a sigh of relief. The TOI was so proud of its editor's analyses that it brought out the entire lot in a collection after the war. I have heard that the government was so perplexed by NJN's accurate analysis of the course of the war that it had kept him under surveillance for a while, thinking he must be a Chinese agent!

The immediate outcome was that Nehru developed great regard and affection for the TOI editor and NJN became a confidante and advisor of sorts. This close relationship had an unfortunate fall-out. Nehru had always been wary of what he called the "jute press" and its influence on public opinion ( TOI was owned by Dalmia and Jain and Indian Express by Goenka) and he kept tabs on TOI through NJN.

Now, for some reason, a certain friction developed in the relationship between Shanti Prasad Jain and NJN. In a fit of pique, NJN dashed off a letter to Nehru expressing concern over the state of affairs in Bennett, Coleman and Co, which published TOI and other publications. This gave Nehru just the opportunity he was looking for to oust the Jains from management control of the company and appoint government directors to run it. (This was done under the aegis of the Company Law Board).

Later, NJN was to express contrition for his action and he admitted that his apprehensions about SP Jain and suggestion of interference in editorial matters had been without foundation. (He did so in articles he wrote for the now defunct Indian Post,  published by the Singhanias from Mumbai).  He even wrote that Jain had great affection for his stable of publications - it was a different world from the one he had inhabited- and he rather enjoyed the company of his journalists and editors.

This could, of course, not compensate the Jain for the loss of control over the Times group. A few years later, it became known that control would shortly be restored to the Jains.  NJN's position was clearly untenable and he chose to leave the TOI and join the Statesman. (The Economic Times' first editor, PS Hariharan, was also seen to be aligned with the government; he too left to become PRO at the Asian Development Bank). 

Much later, when NJN was out of a job, the proprietors of Bennett, Coleman and Co chose to be magnanimous. He was allowed to write a weekly column for the TOI's Sunday supplement, then edited by Fatma Zakaria (mother of Fareed Zakaria). The column was a great hit. Later, NJN wrote for Outlook magazine.

As editor, NJN had the reputation of being something of a snob and somebody who confined his interactions largely to the assistant editors who wrote for the edit page. One famous story is that at a party in Mumbai, he was accosted by somebody who complimented him on a piece he had written recently. NJN thanked him and said, "And what do you do?" Said the other, "I am your Chief Reporter!"

It doesn't surprise me to learn from Datta-Ray that there was not much of a market for NJN's column in recent years. NJN's sophisticated prose and turns of phrase would be beyond the current crop of readers. I did not think much of NJN's political analysis-at times he gave the impression of having mastered the art of writing 2000 words without saying anything in particular- but as a prose writer, he had few peers in journalism in his time

Maruti's Manesar plant

Maruti Udyog Ltd has announced that it will reopen its Manesar plant but only after dismissing about 500 workers allegedly involved in the recent disturbances leading to the tragic killing of one of its managers. I have been reading the news stories in the media to get a coherent account of what led up to the explosion of worker fury at the plant. I wasn't able to. A commentary in EPW has helped me gain some sort of perspective.

We cannot take seriously the insinuation that the problems are the work of 'Naxalites' who have infiltrated the workers at the plant. Nor can we subscribe to the notion that it was the result of vaulting  aspirations of a new generation of workers, who are keen to have the good things of life without regard for issues of affordability or productivity. It takes a lot for workers to rebel seriously in a situation such as Maruti's because the odds are stacked against them.

There is a fundamental asymmetry in management-worker relationships: the management has financial muscle and staying power, backed by support from the government which includes the police force and the labour department of the state. Workers eke out a precarious living and cannot do without their wages for long. To risk disruption and jobs and to incur the wrath of the law enforcement authorities would require serious provocation.

The EPW article tells us something about the immediate provocation:

A handful of workers we managed to speak to were unanimous in the view that the death of the Maruti Suzuki ­executive Awanish Kumar Dev “should not have happened”. According to a worker, Awanish Dev had agreed to take back Jiya Lal, the suspended worker, who had protested caste abuse by a supervisor during the A-shift on 18 July, but then Awanish Dev got a call from a senior, instructing him otherwise. Naresh Narwal, additional labour com­mis­sioner, and Gurgaon district administration officials told a joint trade union delegation that they too had received word that Maruti Suzuki management had agreed to take back the suspended worker the next day on 19 July and that the matter was almost resolved. Some B-shift workers we spoke to report hearing the same.What happened in the matter of a couple of minutes that changed the course of events that evening? 

But this episode only provided the spark to an explosive situation. The following factors seem to have been at work:

• Management's refusal to recognise the workers' union  until the workers first agreed to form grievance and welfare committees
• Management's unwillingess to implement the long-term wage settlement for casual workers and not just for for permanent workers. (There is huge gulf in wages between the two and casualisation has become the norm for many companies)
• Worker discontent over harsh working conditions including the limited breaks available for meals and toilet visits.

How the Manesar affairs pans out will have important implications for industrial relations. If management is allowed to ride roughshod over workers' sentiments and legitimate demands with the connivance of the state government and if it is emulated by other companies,  there is risk of a dangerous backlash in the years to come.

We are revisiting land acquisition and envrionment policies that have worked to the disadvantage of the poor for decades. It would be tragic if industrial relations were reworked to suit management and came to militate against the interests of workers.

Leadership training and research

Leadership is a big deal in management. Open any issue of the Harvard Business Review and you are bound to find something on the subject- the latest issue has three articles. Books on leadership are truly legion. Training programmes in leadership are amongst those widely subscribed to. I sometimes regret I didn't get into this business. It seems easy to do- you can get away with almost anything as long as you present it plausibly- and it is enormously lucrative.

Leadership material falls into several categories: great men ('Leadership lessons from Gandhi'), books ('Leadership lessons from the Gita'), business ('Leadership in the services industry'), etc. Then, you have things that are fairly eclectic: eg. Climb the leadership ladder in eight easy steps.

Interesting, then, that we should have a book now by somebody who has spent a lifetime in training and research in leadership that suggests that much of the stuff is bunkum. Barbara Kellerman of the Kennedy School of Government has done just that with her recent book, The End of Leadership.

Her basic thesis is hard to dispute. The days when people at the top dictated things and people down below just followed are over, whether in politics or in the corporate world. People no longer look up to leaders as they used to and followership is as important as leadership. (The latter includes things like standing up and saying 'no' to your boss). Leadership training has, however, failed to make the necessary adaptation.

I would go further. It is not just leadership training that needs to change. The basic business model is broken and it needs to be replaced with something more egalitarian and decentralised. But those in the business of teaching leadership won't say so because the ones at the top will not pay them for saying such things.

More in my ET column, Leadership industry in crisis.

Jagdish Bhagwati on plagiarism

Jagdish Bhagwati comments on the Fareed Zakaria plagiarism episode in the FT and then goes to say that it has become a big problem in academia as well. He suggests ways in which institutions of higher education can deal with it:

Universities have become victims of plagiarism by students in an age when there is free access to information and assignments can be written by simply copying huge chunks of text, even entire essays, from the internet.

Once difficult to perpetrate, plagiarism is now so easy that a university such as Columbia will explicitly warn incoming students of the dire consequences, such as expulsion, if a student is caught...a remedy that I find useful is to ensure that a fraction of the grade depends on multiple-choice examinations where one cannot steal or copy.... 

...Universities should also ensure that big fish such as Mr Zakaria who are caught plagiarising are firmly dealt with: letting them off with a soft rap on the knuckles can only breed cynicism among students who are exhorted not to plagiarise. Withdrawal of honorary degrees and expulsion from boards of trustees are among the punishments that should be automatic once plagiarism has been acknowledged.

Much of the plagiarism is, I guess, wilful but, in a PC and Internet world, there is a heightened probability of oversight. You are writing up an article for a newspaper or magazine, you find something you can use, you cut and paste and then carry on with the rest of the piece, hoping to cite the reference later... in the rush to meet the deadline, you forget to reference the quote.... You attach the article and press the 'Send' button, heaving a sigh of relief..... until all hell breaks loose.

This must be every writer's nightmare, particularly columnists who are under pressure to regularly churn out pieces. Every columnist must hope and pray he doesn't get tripped up. This is, of course, not to justify the failure to cite sources.

Finance crunch in US universities

It should be no news that American universities are facing a financial crunch. In today's economic scenario, one would expect state funding to be cut and donations not easy to come by. One would also expect universities to cushion the impact through higher fees. All three are happening, as an article in the Economist points out.

The details are interesting (and both these are quotes from the journal):

• The average cost of college per student has risen by three times the rate of inflation since 1983. The cost of tuition alone has soared from 23% of median annual earnings in 2001 to 38% in 2010."
•  Federal support for higher education remains at historically high levels, but states have cut back

The article contains an interesting nugget: for-profit universities (which are doing well) also get subsidies from the government. Apart from raising fees, universities are responding by trying to prune administration costs and merging colleges across various campuses.

But raising fees forever cannot be an option. How are universities to restore their finances? One answer may be to eliminate extravagant expenditure on libraries, hospitals and the like (they need some of these but can make these facilities more utilitarian). A more radical option may be to make research focused on specific goals or to reduce the size of tenured faculty. In other words, a new balance between teaching and research may have to be found. US universities will balk at such solutions on the ground that they would lose their pre-eminence. But then they may find that a full-blown financial crisis forces even more unpleasant solutions.

Ambedkar - greatest Indian since Gandhi

I am not a fan of polls that decide an individual's greatness but I find it very satisfying all the same that a CNN IBN- Outlook poll ended up with B R Ambedkar getting the highest votes for the title of the 'greatest Indian after Gandhi'.

I don't know whether the title refers merely to chronology or whether it is meant to signify rank, that is, that Gandhi is number one and Ambedkar is next. If so, the ranking is bound to be bitterly disputed. I guess it will come down to how you measure greatness- in terms of the impact somebody had on the people of India or the worldview that somebody espoused.

If the latter is the criterion, then Ambedkar has few competitors, not only in India, but anywhere in the world. His is a liberating, egalitarian view in which all men (and women)  get an opportunity to realise their potential. There is fundamental fairness and decency to Ambedkar's vision of India, as also a progressive or forward-looking dimension. If India is to realise its potential, not just in terms of growth or military power, but in terms of uplifting all sections of India, then the Ambedkar view is one that commends itself.

The Outlook issue on the subject is a collector's item; I have read several of the pieces in it already. S Anand's article deserves special mention. Anand asks how it is that Ambedkar ending up at the top of this ranking when this did not happen in earlier rankings. He explains:

Sceptic that I am, this “victory” for Ambedkar is most likely a result of the presence of a burgeoning internet-savvy, mobile-wielding, dedicated Dalit middle class that is almost invisibly making its presence felt. Still largely kept away from mainstream media, the private sector and our universities—which have undisguised disdain for Ambedkar’s greatest weapon, reservation—the Dalits, in India and abroad, have fashioned their own websites, mailing lists and blogs such as Round Table Conference, Dalit & Adivasi Students’ Portal and Savari, a YouTube channel called Dalit Camera, besides scores of Facebook groups.

Anand mentions the heart-rending story of Ambedkar's attempt to get his terrific work on the Buddha (The Buddha and his Dhamma) published:

The greatest exponent of Buddhism after Asoka had ruthlessly been kept out of this Buddha Jayanti committee presided over by S. Radhakrishnan, then vice-president and a man who embarrassingly believed that Buddhism was an “offshoot of Hinduism”, and “only a restatement of the thought of the Upanishads from a new standpoint”. Worse, when Nehru replied to Ambedkar the next day, he said that the sum set aside for publications related to Buddha Jayanti had been exhausted, and that he should approach Radhakrishnan, chairman of the commemorative committee. Nehru also offered some business advice, gratuitously: “I might suggest that your books might be on sale in Delhi and elsewhere at the time of Buddha Jayanti celebrations when many people may come from abroad. It might find a good sale then.” Radhakrishnan is said to have informed Ambedkar on phone about his inability to help him.

Today, thanks to a website (or several websites) dedicated to his memory, we have access to all of Ambedkar's works. That's how I discovered him myself - about six or seven years ago- and was shocked that I had remained unaware of his greatness all these years. Anand quotes a historian as saying that Ambedkar was "intellectually head and shoulders" above Gandhi, Nehru and other Congress leaders.

This is entirely true. He had a PhD from Columbia, a DSc from LSE and had also qualified as a barrister. Reading his works, one is struck, first, by the depth of his scholarship. This was a man who was steeped in public life and the world of action, who tirelessly fought for causes and laboured on the Indian Constitution, and yet found time to produce several works, at least a dozen of which could qualify as doctoral theses. One is also struck by his forensic mind and his dispassionate tone. Ambedkar had much to be angry and bitter about and yet very little of it intrudes into his scholarly analysis. He lays out the evidence and then proceeds to derive conclusions in a clinical way.

It is natural that the dalits should have claimed him as their icon but it is also unfortunate in a way because Ambedkar deserves to be  presented as a figure with universal appeal, somebody to whom all Indians, irrespective of caste, class and religion, can look up to as an authentic icon for the twenty first century.

Anna's flop show

Anna and his team have called off their fast and have indicated that they would like to enter politics. Both items have been hotly discussed in the media.

Why did they call off the fast? Because it was evident that support for the anti-corruption movement was negligible. Many reasons have been given as to why support has dwindled since last year: corruption fatigue, the unreasonableness of Team Anna's positions, the fact that parliament is now processing the Lokpal Bill etc. The one I find most plausible was given by a friend who happens to be a businessman.

My friend says that the numbers last year were swollen overwhelmingly on account of support from the RSS- and the RSS would have its reasons for throwing its weight behind an anti-Congress movement. Members of Team Anna thereafter made disparaging remarks about the Sangh Parivar, causing the RSS to distance itself from the agitation this time.

If this interpretation is correct, it suggests that the Anna movement lacked popular support even last time and was primarily the creation of the media. Past anti-corruption movements, such as the JP movement in the 1970s, have also been made possible by political parties throwing their weight behind a charismatic or clean figure. The Anna movement petering out on account of lack of any political support thus makes sense.

Many have pointed out that converting the movement into a political party or backing one of the political formations would further erode Anna's standing. Creating a new political party to fight the elections would be an uphill task and would again involve serious compromises.

All this is correct. But the problem is more fundamental. Corruption is not about some individuals being bad guys, the decent guys being those who don't take cash bribes. It is the more sophisticated forms of corruption, such as a politician' next of kin getting contracts for a legitimate business in exchange for favours done to a business group, that are significant in scale and truly dangerous. These are next to impossible to root out. You can stamp out small-time corruption- and this will make life easier for the ordinary man- but stamping out big-time corruption is a tall order.

Corruption is not about individuals, it is about the basic economic and political structures. When a whole system is weighted in favour of a few haves- politicians, businessmen, bureaucrats, professionals or, broadly, the upper middle class - what you have is an exploitative structure in which the beneficiaries are all accomplices in corruption. The middle class manager who looks the other way when his company indulges in dubious practices; the academic who lends respectability to a company or to the government; members of the police force who collude with those in power; media persons who turn a blind eye to rapacity on the part of the powerful; all these are party to corruption in one form or another, regardless of whether there is acceptance of cash bribes or not.

If you have moved up the corporate or bureaucratic or academic or media ladder by not raising your voice against what is questionable, you are party to corruption. I find it amusing that some former members of the establishment are shouting themselves hoarse over corruption after having retired from service. Friends, what were you doing when you were in power?

The font of all corruption is the corporate world. Politicians are merely lesser partners in corruption as the bigger portion of the spoils goes to businessmen, with bureaucrats, managers, policemen and others getting their share in way or another. And  yet we heard very little from Team Anna about corporate corruption.

The idea that a corrupt economic structure can be combated by the creation of a new institution, peopled by the very same members of the existing power structure, is sheer nonsense. We need to strengthen democracy in many ways and that means strengthening the existing institutions, not creating some new institution will sweep aside all ills. We may well end up with a Frankenstein monster, the mother of all corrupt institutions.

Are you corrupt? Here is a simple test. Did you have the courage, in the environment in which you are located, to speak up when you were supposed to? Or did you choose to look the other way?

A return to Glass Steagall?

Sandy Weill, the architect of Citibank's transformation into a huge universal bank, has triggered a huge debate by suggesting a separation of commercial banking from investment banking alone the lines of Glass-Steagall. Like many others, he seems to think that banks have become too big to manage and that it is not correct to have depositors money funding trading activities.

In an article in FT, Luigi Zingales of Chicago university, throws his weight behind G-S. He  thinks  a straight separation would be superior to the restrictions on trading proposed under the Volcker rule. He also argues that separation would lead to more numerous and smaller investment banks and this would make for greater liquidity. Further, today's universal banks wield too much clout and this must be curbed.

I am not persuaded by these arguments. For one thing, Zingales mixes up bigness with scope of operations; even if investment banking were hived off, many commercial banks would still be too big for comfort. Secondly, there are benefits to banks as well as customers from combining commercial and investment banking activities. Independent investment banks would have to access funds at a higher cost, for instance. Banks can offer loans at a lower price if they can make up through fee income from investment banking. Indeed, it is the perceived benefits from combining operations that brought about the combination in the first place.

We must contain risk not through separation but simply through superior risk management that is driven by regulation. One element in this approach could involve shrinking the size of banks, although the mechanics of this would need to be worked out. (For instance, who will buy the assets in today's conditions?). Another element would be public ownership of a few large banks; this would reduce incentives for big gambles that apply under private ownership. The thrust has to be on improved regulatory norms for risk that go well beyond Basel 3 norms.

More in my ET column, How not to break up banks

Media hysteria over power blackout

The breakdown in power supply in the north over two days was terrible. But does it warrant the sort of media hysteria we have seen? I am not conversant with the technical aspects of the situation. But, yes, if technology can spot and cut off excessive demands on the grid from any state, certainly we should go for it. And I take EAS Sarma's point in today's TOI article that we should be investing in maintenance of existing facilities and not just in additions to capacity. These points apart, are there indeed "lessons" to be drawn from the episode, as the media has been making out? I am not at all sure.

Does the power breakdown say anything about our economic growth prospects, as Ramachandra Guha seems to suggest in the FT? Not at all. Is it anybody's contention that if you wish to be seen as a credible economic power, you should not be having breakdowns at all? Well, as the new minister of power has pointed out, the US has had a power breakdown a few years ago and it took longer to restore supply. And don't forget the blackout in New York city a few decades ago and the riots that followed. Are to conclude this renders Sushil Kumar Shinde unsuitable for the Home ministry or for the power ministry itself? Do we judge a minister on the basis of a single episode or do we look at his broader record? Just to clarify, I hold no brief for Mr Shinde either as Home minister or Power minister, I am just posing questions that would apply to any minister.

These kinds of disruptions cause enormous inconvenience and suffering to people and we should do our best to avoid them. But to regard these as proof of national incompetence or a reflection on our future prospects is, to put it mildly, to be getting carried away. The lesson, if any, is one that the media needs to reflect on: every murder does not become a national crisis, every report on corruption does not mean scams are the norm, and every ministerial lapse does not mean the political system has failed.

Incidentally, I have become an ardent fan of Doordarshan news in recent months. You get the news of the day, national and international, without any varnish, and with very few commercial interruptions, and news time is not the usual suspects bashing each other in some discussion on current affairs. The current affairs discussion has a separate slot, and the one in Hindi at 7:30 pm is of pretty high quality, with a whole range of uncommon faces presenting their views- and doing a great job too. Ditto for the discussions on Lok Sabha TV and Rajya  Sabha TV.

Try the national channels sometime, you will find these a refreshing change.

How do we tame international banking?

I return to a theme I have flagged several times in the past. Banking in the west is in the doldrums. How do we revive it?  One of the most thorough expositions comes from former RBI governor YV Reddy. For those who came in late, Reddy is widely recognised for his contribution in inulating the Indian banking sector from the financial crisis. He was profiled in the New York Times, perhaps a first for a central banker from India. His views are heard with respect in international banking circles.

Reddy outlines his views on the present problems in banking in his Per Jacobsson lecture delivered in Basel. We need a multi-pronged approach, he says, that covers regulation, the size of the financial sector in the economy, global governance and the ownership structure in banking.

I covered the lecture in my ET column, How do we restore trust in banks?

Western banking model is flawed

It took two phone calls to the outgoing Chairman of Barclays to oust Bob Diamond, the CEO of the embattled British bank. One was from the governor of the Bank of England. The other was from the Chairman of the Financial Services Authority. The calls followed what has come to be called the rate-rigging scandal in which Barclays (and, supposedly, other banks) tried  to manipulate the Libor to suit their ends.

This is not the only brush Barclays has had with regulators in recent years: it has faced charges of tax evasion and mis-selling of products. It invited strong criticism when its CEO was awarded a large pay packet last year despite the bank's poor performance.

For bankers, this is the second big blow in recent months. Earlier, we had JP Morgan Chase's huge trading loss, now estimated to be in the range of $5-9 bn. The blow is especially hard because Diamond and Dimon- the phonetic similarity in the names of the two CEOs is striking- were in the forefront of bankers'  counterattack on regulators who had been leaning hard on bankers ever since the sub-prime crisis. Diamond famously said after he took over as CEO about 18  months ago that it was time for bankers to stop apologising and to get on with making money.

Banking reform has focused so far on higher capital requirements and some separation between investment banking and commercial banking activities. There are also 'living wills' for large banks, an early version of which has just been put out.  Alas, it is becoming clear that these will not tackle the problems that beset banking today. Concentration has increased and large banks are proving unmanageable; employee pay as a proportion of income refuses to come down even when returns on equity do not meet the cost of capital; banks are in a deleveraging mode which makes it even more difficult to produce returns; they are exposed to the Eurozone debt crisis; and their orientation towards retail customers especially is appalling.

What is required is a broom that will sweep clean and sweep aside a culture that has come into vogue since the Big Bang in London and in which investment banks dominate the commercial banking side. I am inclined to believe that the ownership structure in western banks has to change. I do not advocate 100% public ownership- that creates inefficiency. But nor do I favour 100% private ownership- that creates instability because bankers face the wrong incentives in a situation of high leverage. What is required a mix of ownership in the banking sector where listed public sector banks compete with private banks. Then you have competition and efficiency, and you also have stability because public ownership, with its innate conservatism, acts as the sheet anchor of the system.

In other words, the time is ripe to export the Indian banking model to the west (or at least to Europe since the US will find it difficult to stomach public ownership of banks). More in my ET column,
West needs Indian bank model.

Why did Rajat Gupta do it?

Umm... I realise I am walking into something of a minefield here. And I really don't want to indulge in psychobabble- I never set much store by it anyway. However, since the question has been asked and answered in ways that I do not find persuasive, I thought it was worth a brief comment.

To say that Rajat Gupta was greedy is a non-statement- the rest of us are not angels anyway. If we accept that living is, for the most part, one big ego trip, then it's impossible to keep greed out of the equation.

Some would argue that the issue is not greed per se. It is greed that goes beyond reasonable bounds, whatever these are. This is the line that most critics of Gupta have taken. He was alright during his McKinsey days, his downfall began when, in the company of fund managers  and other Wall Street types, he began to entertain visions of moving from being a multi-millionaire to a billionaire. That is when things began to wrong. He would have been okay had he stuck to his multi-millionaire status, his mansion and three apartments. All of us need to survive, you know.

The inference, of course, is that people at the top who don't fall into this trap are people who have "managed" their greed- I teach at a b-school, so I guess I should be using the right expressions. That is how they end up as decent, law-abiding, tax-paying, non-insider trading citizens.

It was left to John Gapper of the FT to prick this delusion in an incisive article:

  

Like politicians, executives who reach the top are not saints – they must build alliances, defeat rivals and be highly ambitious. They may behave with nobility once in the job but that is not how they got there.

Studies have found that many executives share qualities with psychopaths. One study of British managers identified similar traits in both – superficial charm, grandiosity, lack of empathy, manipulativeness. These flaws, far from holding them back, had helped them rise.

There you have it. Being at the top in the corporate world is not about higher values or concern for mankind, much less about being a balanced guy with lots of inner harmony. It is the ruthless pursuit of self-interest, the indulgence of greed in every way, that takes people to the top. In the process, some transgress the law in obvious ways, some in not-so-obvious ways, and a great many are blind to any moral code but cannot be said to have violated laws. Again, some get caught, others don't.

Viewed thus, what happened in Gupta's case represents a continuum, not an abrupt discontinuity. His misfortune was that he happened to get caught. There must be many like him whom people still queue up to listen to, shake hands with, are eager to write about.

I will leave you to ponder Gapper's unsettling punchline:

The nastiest conclusion is that the “norms and expectations” of the corporate elite are corrupt – that at such heights, illegal information-sharing is no big deal.

S&P warning

The rating agencies have never been kind to India. Through the nineties when we were growing at more than 6%, we were regarded as below investment grade. It took several years of growth of 8-9% for S&P to upgrade us to investment grade in 2007. Today, we are BBB-, just one notch above below-investment grade, the same as Iceland (which went through a frightful financial crisis recently). We are two notches below Ireland (yet to recover from a banking crisis) and Spain, which has just received a bailout. Beats me.

Now, S&P has warned India of  a possible downgrade further ahead unless it gets its act together. India's external debt to GDP of 3.4% is among the lowest in the world. We have not defaulted on our foreign obligations all these years and are unlikely to do so even if growth slows to 6% in the next year or two years. We are among the few nations whose debt to GDP ratio has declined in recent years. What, then, is the basis for S&P's warning?

I visited the S&P website to understand their rating methodology for sovereigns. They use a combination of political, economic, external, fiscal and monetary scores. Even if one parameter, the external score, looks good,your rating can go down if the other scores worsen. Let's say that an unwieldy coalition looks likely to assume power in Delhi. The political score would worsen and you could get a downgrade- so I understand their methodology.

In India's case, this approach looks suspect because the link between a worsening of various scores and default probability is weak. Politics could get more contentious; reforms may grind to a halt; the monetary authorities may not have room to lower interest rates. But this does not increase the probability of default on foreign obligations because external debt is so low.

This is not the only argument I would make. I do not believe that the link between political regimes or even economic regimes and growth in India is all that strong. If the global situation improves, the present set of reforms could easily give us 7.5-8% growth; if the global situation remains bad, some of the reforms people are talking about will not make a big difference. 

More in my ET column, S&P, India Inc overdoing gloom.

Rajat Gupta trial judge

One question that is being asked after the conviction of Rajat Gupta is: why did he not settle when the SEC brought an administrative action against him? He would have paid a fine and been barred from securities trading but would have kept his freedom. Maybe he thought he could hired the best legal brains to get him an acquittal? A recent article in ET makes clear that the odds were against him: only 1% of defendants in the US get acquitted; 89% settle with the prosecution. The trial has also cost Gupta serious money: $30 m so far (paid for by Goldman Sachs but refundable in the event of conviction).

The silver lining, as a story in ET suggests, is that Gupta may get a relatively light prison sentence, say, three years. Judge Rakoff is known to given lesser sentences in such cases than what the prosecutors have recommended. In one recent case, he handed out a four year prison term against the maximum of 10 years.

The Economist carries an interesting profile of the judge:

Outside the confines of the courtroom, he has demonstrated a work ethic at least as rigorous as the bankers and consultants parading through the witness box, seeming to break only to watch the New York Yankees (which he encouraged jurors to do as well). In response to a tricky legal issue raised on a Friday, he requested that briefs from the opposing counsels be brought to his chambers on Saturday, and he delivered an opinion when the court reopened on a Monday.......

....Perhaps because of his willingness to work long hours and grapple with areas of law that others have circumvented, Mr Rakoff has produced a remarkably large amount of work over the past five years—six times the number of opinions by another longtime judge in the same district, and more than double the number of several others....

Horrors of world war II

I have read a fair bit about World War II and seen some excellent documentaries. Nevertheless, some of the facts and figures about the human costs of the war, mentioned in two books reviewed by the Economist, came as a revelation:

• 70 m deaths of which two-thirds were non-combatants
• 15 m Chinese deaths and 27 m Soviet deaths ( I was aware of the latter but not the former)
• Red army soldiers chopped of the legs of dead Germans. They wanted the boots which could be had only after the legs had been defrosted
• Outside Leningrad, scene of one of the epic battles of the war, amputated limbs were stolen from hospitals and corpses from mass graves to be used as sources of food
• In Leningrad city itself, 2000 people were arrested for cannibalism; children were at risk of being eaten by their parents
• The Japanese threw thousands of prisoners into burning papers and killed locals for meat
• The Soviet army, fighting its way to Berlin, raped an estimated 2 m women and girls.

In sheer scale of brutality, World War II has few parallels in history.

I liked the reviewer's criticism of one of the book's praise of the fighting qualities of Soviet, Japanese and German soldiers compared to those of the allies:

Mr Hastings’s repeated admiration for the fighting qualities of German, Japanese and Soviet soldiers compared with British and American forces is especially trying. Germany and Japan were militarised societies that glorified war and conquest, held human life to be cheap and regarded obedience to the state as the highest virtue. Russian soldiers were inured to the harsh brutalities of Soviet rule and driven on by the knowledge that they were fighting “a war of annihilation” against an implacable enemy. If they wavered, they knew they would be shot by NKVD enforcers. More than 300,000 were killed pour encourager les autres.

The majority of the civilian soldiers of the Western democracies, by contrast, just wanted to survive and return to normal life as soon as possible. That also meant that American and British generals had to eschew the dashing aggression of their Russian and German counterparts, who could squander lives with impunity.

Ferrari ki sawari

I am not much of a movie buff and certainly no fan of Bollywood. And yet I found myself at a theatre yesterday watching the newly released Ferrai Ki Sawari produced by Vidhu Vinod Chopra. It struck me as low-budget film: just two actors, Sherman Joshi and Boman Irani, and no actress (except for a guess appearance by Vidya Balan). No expensive locations or sets either.

I watched the film with some disbelief. I could not have imagined that, in this day and age, Bollywood was capable of producing such trash. The story is about a Parsi father (Joshi) trying to get his small son a break in cricket by enrolling for a training programme at Lord's. A lady promises him the fee for the programme if he can arrange to get Sachin Tendulkar's Ferrari for the wedding of the son of a municipal corporator. Joshi manages the feat in ways that would be credible only in Bollywood. He manages to have the Ferrari returned again in ways that would be plausible only to those mentally challenged.

Joshi plays the doting father. He seems to make the mistake of confusing simplicity or straightforwardness with appearing moronic- you can be straightforward without wearing an asinine smile all the time or rolling your eyes. Irani is his gifted self as a grandfather who never quite got the chance he deserved as a cricketer in his time. The politician/municipal corporator and his imbecilic son are horrors that only Bollywood can produce. The child artiste is the redeeming feature.

If there is a message in the movie- and it would take some effort to extract any from this movie- it is that politicians rank at the bottom in the esteem of the public. Bollywood, with its appalling stereotypes, is itself responsible for the complete lack of respect today not only for politicians but, alas, for the democratic process itself.

Presidential candidate

The UPA's choice of Pranab Mukherjee as its presidential candidate has been well received not only in political circles but in the country at large. It's hard to think of many people with credentials comparable to Mr Mukherjee's- or with such broad acceptability. If Mukherjee does make it to Rashtrapati Bhavan- and this looks highly probable now- it would show that, for all its contentiousness, the Indian political process is capable of throwing up the right choice.

Two other comments on this issue. One, the discussions in the political class highlighted the complete disconnect between the social media- the Internet and Twitter crowd- and the political class. The social media had been pushing for a non-political person. Some of the names one came across: N R Narayana Murthy, E Sreedharan, Ratan Tata and even Anna Hazare. In the last few weeks, as the race hotted up, not one of these names was mentioned even in passing in political circles. Whatever the differences amongst them, politicians are united in believing that the president should be somebody with a political background. (Kalam qualifies now as he has been president and I guess he qualified earlier as somebody who held a position in government for very long). In this, I believe the political class was entirely right. The havoc that a non-politician posing as a messiah can create is unimaginable.

Two, am I the only one disappointed with Kalam not shooting down his candidature? By convention, nobody has held the office for more than one term. Kalam is 81. It would be have been appropriate for Kalam to have declared at the very outset that he would not like to be considered. Instead, I understand from media reports that he is still keeping his options open.

America's industrial might

When you say America is a $14 trillion economy (India is approaching $2 trillion), it doesn't quite give you a sense of America's industrial might. Reviewing a book on the crucial role of America's industrial might in World War II, the Economist mentions a couple of interesting facts. In 1944, the US produced a plane every five minutes, 50 merchant ships and eight aircraft carriers a month.  India commenced work on its first indigenous aircraft carrier in 2005 and it is to be commissioned in 2014! And how many fighter planes have we produced in the last 65 years?

Now, you know why talk of India becoming a superpower is poppycock. And why China is furious with American plans to move 60% of its naval strength to the Asia-Pacific region, from the current 50%

Do we really understand India's economic slowdown?

My post below on the Eurozone impact on India has drawn jeers from some readers consequent to the latest GDP data becoming available. I am asked whether I stick to my 7% forecast. Another reader warns me that I will have to swallow my words. I accept these comments in all humility.

But that is not to say that I feel the need to change my position. If anything, the low base of 2011-12 improves the chances of 7% growth in 2012-13. That apart, the depreciation of the rupee and the decline in oil prices are positive factors in the present environment.

What do we make of the sequential decline in growth over the last four quarters? I am still not persuaded that major errors of policy have contributed. Most people point to the fiscal situation and say that the government's basic orientation towards higher social spending and reluctance to rein in subsidies has led up to the present situation where a high fiscal deficit along with high inflation limit the scope for RBI to cut interest rates and stimulate investment.

A very basic conundrum remains, however. The overall investment level is close to 35%. Why is this level of investment not producing growth of 8% this year when it did so in the past eight years except for 2008-09, the worst year of the financial crisis? That tells me that the fundamental factor in 2011-12 that impinged on growth in 2011-12 must be similar to that in 2008-09, and that would be the Eurozone crisis. It cannot be any of the policy factors that most commentators point to. Add to this delays in approvals of projects at a time when the anti-corruption crusade has created a fear psychosis and supply bottlenecks in coal and power sectors, and you have an explanation for the slide this year.

It follows that if the supply bottlenecks are sorted out to some extent, and fiscal correction paves the way for a further cut in interest rates, the growth rate should be better in 2012-13, without any of the 'big bang' reforms people are talking about. Maybe the stock market has caught on to this possibility in recent days?

More in my ET column, Slowdown: do we know why?

Unreasonable bankers

Is it too much to expect a modicum of reasonableness in bankers?

FT has analysed the share of bankers' pay in relation to profits at the top 13 international banks. One would have thought that, in this adverse environment, banks would respond by reducing rewards to bankers so that shareholders' returns are protected? But no! Bankers' rewards have increased while that of shareholders has fallen.

Here are facts in the FT story:

• staff costs accounted for more than 81 per cent of the total (of staff costs and net profits), compared with a pre-crisis tally of 58 per cent
•  Dividends are came down to 4.5% of the pot compared to 15% earlier
• In the period under consideration, banks' share prices slumped nearly 60%

After the sub-prime crisis, the focus has been on the design of compensation, how to ensure that compensation schemes, such as stock options, do not increase firm- and systemic risks. It is becoming clear now that this will not suffice. The absolute levels of pay have to be tackled because bankers seem to think that banks exist for themselves first, next for shareholders. This would have been an egregious position to take at any time; it is more so when banks have had to be  helped out with taxpayers' money. (Caveat: One to examine whether some problems are distorting the overall results or whether the trends indicated above are common to most banks).

This is not a situation that can be remedied by market forces'. The fact that such distortions exist points to the absence of adequate competition and also to a failure of governance. Time for the regulators to step in and check pay excesses in banking.

JP Morgan risk management

JP Morgan has made a change in its risk management committee consequent to its trading loss that is now estimated at upwards of $2 bn, FT reports.

A lady, the president of the American Museum of Natural History, will make way for the former chairman of KPMG.  I don't see this as a reflection on risk management at JP Morgan but I certainly see it as a reflection on how seriously management takes its board. One should not be surprised. Lehman Brothers had a theatre impresario as member of its risk management committee prior to its failure; Citibank had a former spook from the CIA on its board. ( I say this from recollection).

Now, I do not subscribe to the view that merely because one is an expert in a subject, one is effective on the board. You can be the ultimately authority on risk management and still nod your head to whatever the management wants done. But for certain specialised roles, qualifications are a necessary, though not sufficient, condition.

About the $2 bn trading loss itself, it is a lapse, a bad call but it cannot in itself become a condemnation of top management. JP Morgan made a profit of $19 bn last year; it can afford to take a $2 bn loss, especially on a balance sheet of over $2 trillion. JP Morgan's return on equity has been higher than average, so shareholders have little to complain about. If Jamie Dimon is attracting unusual flak, it is because he made the cardinal sin of taking on regulators and policy-makers, he sounded a little too cocky, which is a bad idea for the head of a bank.

You could say that a loss of $2 bn today could become a loss of $20 bn tomorrow, that is why banks should not combine traditional banking activities with trading. But, then,  a bank can run up a loss of $2 bn on credit risk as well. So the JP Morgan loss also does not in itself become an argument for the Volcker rule.  The British proposal to ring-fence deposit-taking activities with higher capital may be a better answer than asking banks to shed trading and other activities. Restricting the scope of banking is not the answer to bank failure; restricting the size is a better way to contain the costs to the tax payer.

Eurozone impact on India

There is more than element of panic in the reaction to the fall of the rupee this month, methinks. India Inc has been howling ''crisis'' and it blames it on ''policy paralysis". These concerns are misplaced. The fall in the rupee is a natural response to the widening of the current account deficit beyond 4%, exacerbated by the flight of FII capital in the wake of the Eurozone crisis. The decline in the rupee is a natural stabiliser and should cause the CAD to fall this year. Remember, an important reason for the large CAD we are seeing now is huge gold imports. The fall in the rupee should help address this issue.

It may well be that Rs 56 is a bit of an excess but that is to be expected given overshooting in the currency markets. Some intervention may be required whenever there is too steep a fall because FIIs can start pulling out in an even bigger way if they suspect a free fall. The RBI is doing its bit and can be counted upon to do more if required. The government, for its part, is trying to address the fiscal deficit by raising the prices of petroleum products.

It is not at all clear that the flight of FII capital is on account of "policy paralysis". There was little movement on reforms in 2011 but that did not come in the way of nearly $10 bn of FII flows in the first three months of 2012. The present flight of FII flows is a  reaction to the Eurozone crisis and represents the preference for the safe haven of US treasuries in times of crisis. Those who think government inaction has led to foreign investment sentiment must explain why FDI rose significantly in 2011-12 over 2010-11.

I don't see the decline in the rupee as a harbinger of bad times to come. The Eurozone crisis that we are now faced with is no different from what we faced in late 2011. Since we managed growth of 7% then, we can be optimistic about touching 7% this year as well. You think that's bad? Think again. If we touch 7%, we will be the second fastest growing economy in 2012 in the world after China.

More in my ET column, Global recovery is two years away.

Quotable quotes in Rajat Gupta trial

The trial of Rajat Gupta, which commenced this Monday, has already produced a couple of quotable quotes from the judge, Jed Rakoff:

"If Mother Teresa were charged with bank robbery, the jury would still have to determine whether or not she committed a bank robbery.".

Judge Rakoff also told Gupta's lawyer "I will not allow you to say that he is world renowned leader", adding that he would not approve of any reference to "Aids, malaria ... or the bubonic plague".

Storm over executive pay

A fresh storm has erupted on both sides of the Atlantic on the subject of executive pay. There has been a shareholder revolt at Citibank, Barclays and other places. Shareholder vote on pay is non-binding but negative votes do cause boards and managements to pause in their tracks.

Linking pay to performance has proved elusive despite the best of efforts. I am convinced that neither boards nor management will settle for moderation. If  you can loot and get away with it, why not?- this really is the sentiment in boardrooms.

What is to be done? I came across two off-beat suggestions in an article by Philip Stephens of the FT:

The effort should start with two simple measures to increase transparency and to frame pay levels in the context of wider society. The first, which should be included in Mr Cable’s legislation, would require chief executives to make a personal statement at the front of the company annual report.
The statement would set out in plain English the total in pay, bonuses, incentives and benefits in kind the CEO had received for the relevant year. It would measure these against short- and medium-term company performance – earnings per share, dividends, the share price and the like. The chief executive would then bring the two together to justify his or her pay. This would be countersigned by the head of the remuneration committee. The whole thing need not run to more than a single sheet of A4. 

....The second measure would further extend accountability by giving an oversight role to MPs. Each year, the Treasury committee, or perhaps the business, innovation and skills committee, would schedule hearings with chief executives to discuss the level of boardroom remuneration.
Invitations would be sent to a cross-section of the richly rewarded but “bureaucratic” performers as well at those at the very top of the pay tree. The focus would be exploring the spread of the something-for-nothing culture more commonly associated with benefit cheats.

The second proposal is especially radical. It seeks parliamentary oversight over executive pay- and in free market Britain, of all places. I can't see the corporate world accepting it. Not in the UK, lesser still in India. But this could well be the answer.

Incidentally, you will surprised how little discussion there is of top management pay in board meetings. The matter of pay is left to a sub-committee of the board and the full board really has little say. Perhaps, the RBI must mandate that pay for the top 10 executives must be discussed and approved by the full board. 

Backlash against austerity in Eurozone

France, Greece, the Netherlands- and now in a provincial election in Germany. Voters are telling their masters: to hell with austerity. Does this mean governments can or should spend their way out of trouble? No way. Where is the money going to come from? Not from private investors: any escalation in spending will get a thumbs down from the financial markets. Official flows, from within or outside the EU, will also not be forthcoming. (Germany is not willing to bankroll deficits elsewhere without tough conditions and, indeed, that is the trigger for the current backlash).

So, the idea that new governments can repudiate the fiscal compact signed in March is sheer delusion. Some of the austerity targets can be moved back; there could funding for select projects. Otherwise, the substance of the austerity conditions will stay. This means that Greece will have to leave the Euro because it is one place where austerity has no chance of producing results even over ten years. What then? Spain, Portugal, Italy all will find the going rough weather. And if Greece finds its feet after default, they too would be sorely tempted to exit the Euro.

So, Germany and other pro-Europe countries in the EU face a stark choice. Either they are willing to back austerity with a measure of debt forgiveness, which alone will make the austerity conditions viable. Or it''s The End for the Euro.

More in my ET column, Markets can trump voters. 

Let me add a footnote. What would be the implications of a Greek exit? There would be chaotic conditions in the markets but, on balance, the crisis can be contained using the financial muscle of the EU and the IMF. However, it does mean that in 2012, uncertainty in the financial markets will continue as in 2011. That's bad news for investment in general and in India in particular. Unless the ongoing crisis is quickly contained, our hopes of a modest acceleration in growth will take a beating.

Economic affairs secretary on S&P warning

R Gopalan mounts a spirited defence of India's economic position in the face of the recent S&P warning in an  interview to ET. The points he makes are very similar to what I have said in my post below: India's debt to GDP ratio has come down and there has been substantive improvement in the fiscal position of the states.

IITs set to improve transparency in JEE

IITs will post the evaluated answer sheets of JEE candidates online, TOI reports:
  

If a candidate finds any discrepancy, he or she can lodge a complaint online. These evaluated answer sheets will be available online from May 5 to May 10. The facility to submit requests for revision will close at 5pm on May 10 after which representatives of all IITs will meet to consider the requests. If found correct, the responses will be updated by May 14. According to IITD director, R Shevgaonkar, it may happen that the scanner does not pick up correct responses if a candidate has not filled the response bubble completely.

 

Naturally, the answer sheet will have to be provided for candidates to be able to compare. This is a huge step forward in improving transparency in the JEE and it will reinforce public confidence in the exam, which has stood the test of time. One wonders why such a simple step was not taken earlier- and why others in the business (such as IIMs) have not done likewise.

The big reform in the JEE, which is assigning a suitable weight to the 12th standard exam, has been stymied by concerns amongst IIT faculty about being able to normalise across various boards. This is a legitimate concern but it's worth mentioning that the IIMs have already gone ahead with giving a 30% weight to earlier exams. The underlying principle is unexceptionable: one cannot judge a candidate's merit on the basis of a single test where the difference in scores between one candidate and another is   miniscule.
 

India's inflation rate will stay at 6-7%

There is little chance of India's inflation rate going down in the medium term. If anything, the rate may go up. A rate of 6-7% need not be feared. It is only a very high rate of inflation (at least above 10%) that imposes significant efficiency costs.

The social consequences are not very disruptive, as it appears rural and urban workers, both in the organised and unorganised sectors, are having wage increases that are above the inflation rate. The losers would be pensioners, the unemployed and foreign purchasers of Indian goods (to the extent that rupee depreciation does not offset price increases). Trying to reduce the inflation rate at this point would mean a growth rate of below 7%- and that would be psychologically damaging to Indian and foreign investors. So the RBI was right to cut its reference rate earlier this month.

More in my ET column, Higher inflation is here to stay. 

Boards of banks

It is news to me that UK's Financial Services Authority actively monitors the effectiveness of bank boards and also interviews candidates proposed by financial firms for their boards. I got to know this when I read a speech delivered by Hector Sants, the outgoing chief of FSA, to which my attention had been drawn by a blog in the FT.

Here's what Sants had to say about how the FSA judges the effectiveness of bank boards:

The regulator assesses this effectiveness on a continuous basis.  It does this through many tools such as board effectiveness reviews, regular supervisory discussions with the Chair, senior independent director, and key executives.  Enforcement will also be used when absolutely necessary.  However, the principal and earliest intervention the regulator can make is through the SIF authorisation process and it is this I would like to turn to now.

Sants has some caustic remarks to make about candidates proposed for boards:

Too frequently we still see applicants who:

• don't understand what the job entails and have no job description;
• have done no due diligence into the firm they are proposing to join;
• are unable to discuss the risks/ issues facing the sector in a proportionate way to the role they are applying for; and
• often significantly underestimate the commitment required to perform the role effectively.

 Of the 653 applicants interviewed by the FSA, 43 were withdrawn.

What Sants says about bank directors would apply equally to directors at non-financial firms. Most directors would not bother to brush up on basic facts before getting on to a board- and they would not bother to know the basics even while serving on the boards. Here's a suggestion: let the RBI and SEBI run a surprise quiz for directors. They should be asked just two numbers: the sales and profit of the boards they sit on. I would be surprised if even 50% got it right. If you want to really fox the directors, ask them a third question: how much is the CEO paid?

S&P warning

S&P's changing the outlook from stable to negative is seen as a 'warning'. What sort of 'warning'? Well, if things get worse about a year down the road- if the fiscal deficit remains as high or if growth goes down to 5.3%-, India will face a downgrade.

Some warning, that! Any sophomore could tell you that if things worsen, the rating goes down; if things get better, there is an upgrade. Mind you, S&P does not say that things will get worse or that they are likely to get worse.

What do we make of this warning? I know of nobody else who thinks growth could be down to 5.3%. As for the fiscal situation, S&P might have made some mention of the fact that India must be among the very few countries whose public debt to GDP ratio has gone down in recent years; for a whole range of countries, the debt to GDP ratio has shot down. Moreover, while the centre's finances have worsened, state finances are showing an improving trend.

The threat of a downgrade of some Indian companies, including HDFC Bank, means even less. These ratings are partly linked to the sovereign rating, so if there is a sovereign downgrade, it will be reflected in the firm's downgrade. Let me say one thing, however: anybody who suggests that conditions at HDFC Bank warrant a re-look at its rating needs to have his head examined

Right to Education Act

The RTE Act coming into force is an important landmark in the evolution of this country. From long years of neglect of primary education to providing access to superior schooling to the underprivileged is indeed an astonishing transformation. As an unabashed champion of inclusiveness, I cannot help feeling a wave of exultation.

Alas, as a hard-nosed observer of the Indian system and a cold-blooded student of management, I cannot help having reservations. The idea is laudable. The poor should be able to walk into any school in their neighbourhood, not just into a municipal school. But will reserving 25% of seats in private schools (leaving aside exceptions) work? First, the central and state governments will bear some of the cost, not all of it. The rest of the cost will presumably be passed on to the 75% well-off children through higher fees. (The government will pay as per the fee in the central Kendriya Vidyalaya schools).One can expect private schools to face the usual hassles in settlement of dues on account of the reserved category.

Alright, suppose the financial part is taken care of. What then? We will have children from the disadvantaged category sitting next to well-heeled children. The differences in status will be glaring and is bound to tell on morale and confidence in the reserved category. One can expect discrimination from the teaching staff. The reserved category may face a high failure rate, which could itself prompt drop-outs.

Most importantly, the reserved category will find the going difficult beyond a certain class- say, seven or eight- for the simple reason that, even in so-called good quality private schools, the overwhelming burden of teaching- or preparing for the exam- rests with private tutors and coaching classes. In many schools, in the tenth grade, even the pretence of teaching disappears. There is mass absenteeism for much of the year as the children are busy preparing on their own by attending classes outside. You could argue that poor children suffer from this disadvantage - of not being able to afford coaching classes- even when they attend public schools. True, but now they will find themselves in the CBSE and other schools where the handicap could prove more crippling than in the state boards.

In a municipal or public school, the poor child is less likely to feel socially handicapped, whatever the other problems. Can poor children do well in schools where they face enormous hostility and serious handicaps in coping? These are the issues one has to reckon with. I would imagine that the government will have to step in with cash vouchers that enable the children to attend coaching classes as well.

This is a bold experiment that deserves a try. The results should be closely monitored and correctives introduced from time to time. I doubt, however, whether it can be an alternative to adding to and improving the quality of public schools.

China's military expenditure

The Economist issue of April 7 carries a story on China's military rise. It has a tell-tale table on the top 10 nations by military expenditure.China is no 2 with $90bn, more than 2.5 times India's $37bn. The US is no1, with military expenditure of - hold your breath- $739bn. The total military expenditure of the other nine nations is less than $500bn. Now, you understand what underlies Pax Americana.

The numbers help place the so-called Chinese threat in perspective. China does not even remotely threaten American hegemony- a Chinese general is quoted as saying that the gap between US and Chinese defence forces is 30 or even 50 years. But China can clearly defend itself against American attack. And it can also pose a threat to its neighbours, keeping the US out of its vicinity if necessary. That raises the chances of an all-out offensive to take over Taiwan.

What could contain China's attempt to dominate the region? One, China's interest in the global economic system and its preoccupation with increasing the prosperity of its citizens. Two, its focus on maintaining internal stability. Three, the relative obsolescence of its military equipment following sanctions imposed after Tiananmen Square. Four, America's decision to focus its military efforts more on the Asia-Pacific region. One might add a fifth factor, namely, the question mark over China's ability to sustain its high growth rate and the possibility that India might forge ahead and emerge as an active counterweight.

TCI takes on Coal India

TCI's battle with Coal India Limited (CIL) is giving India a bad press abroad. TCI is known to be an activist shareholder. Just before the financial crisis, it was amongst those who pressure ABN Amro to split up and sell the pieces to various parties, including RBS. The deal eventually sunk RBS- so much for TCI's activism.

TCI's demands on CIL are downright unreasonable- they certainly cannot dictate pricing policy or, for that matter, personnel policy or any other policy. Shareholders must focus overwhelmingly on outcomes- are they getting their target returns or not? Judged by this test, TCI has no business to get worked up over CIL. CIL's return on equity in the past couple of years were 37% and 33%. It seems to me that it is customers who are getting ripped (or maybe suppliers, including the supplier of land, the government), not shareholders.

The bottomline is this: the PSU business model is very different from the private sector model. If you don't like this model, stay out of PSUs. It can't be that you invest in a PSU and expect it to behave like a private company. I am sorry to note that the independent directors on the board of Coal India do not seem to have applied their mind to the problem; they seem to think that independence is best displayed by not toeing the government line.

More in my ET column, CIL: TCI's Misplaced Zeal

India Inc rules the world?

India's outward FDI has increased in recent years. It was $16.5 bn in 2010-11. Before the global crisis erupted, we had a number of high-profile takeovers by Indian firms. This gave rise to the view that India Inc was all set to conquer the world. India's low-cost advantage, the high growth rate of the Indian economy and the flood of liquidity, which translated into easy access to finance for Indian firms- these seemed to make an Indian onslaught on the west inevitable.

Much of this euphoria has faded since. When the crisis erupted, international finance evaporated for Indian firms leaving many an incomplete takeover in the lurch. Even otherwise, it hasn't been smooth sailing for a large number of takeovers. Students of finance will not be surprised: we know that the majority of acquisitions fail to enhance shareholder value. Making a success of an acquisition requires formidable managerial ability, a favourable economic environment and a reasonable acquisition price. Indian firms are running into limitations on all counts.

The Economist ran an interesting analysis of a four high-profile acquisitions a few weeks ago: Tata Steel- Corus, Tata Motors- JLR, Hindalo-Novelis and Bharti Airtel-Zain.  Only two, Tata Motors and Hindalco, have seen an improvement in profit. The other two are struggling. In terms of return on capital, only Tata Motors scores.  At the rest, return on capital is likely to be lacklustre for several years.

These four acquisitions accounted for a quarter of India's cross-border activity in the past decade. The smaller deals have not done uniformly well either. The Economist notes that Indian companies have a fundamental problem in doing jumbo deals: they don't want to raise much equity for fear of diluting controlling shareholders.

India Inc ruling the world? Not a chance. Corporate domination is a function of the importance of the economy in the world, as the Economist rightly notes. British firms dominated when the UK was a powerful player on the world stage; ditto for American firms. India still has a long way to go. The sensible thing for Indian firms to do is to attain world class parameters in India, then think of overseas ventures.

Housing India's urban poor

India's urban poor live overwhelmingly in slums- this is true of half of Mumbai's population. How do we provide housing for them? One answer is low cost housing provided by government, as in Singapore, Hong Kong and other places. Not feasible, alas: government lacks the resources or the ability to get this done. Another answer: hand over slum land to developers on condition that they earmark a portion of low-cost housing. This was tried in Dharavi. The housing that got built is of poor quality. Besides, many of the projects are caught up in lawsuits.

A report in the FT suggests a third way. Allow the poor themselves to upgrade through innovative construction:

Some experts, dismayed at the slow progress and disappointing results of more grandiose government redevelopment plans, believe these informal slum upgrade schemes could form the basis for a longer-term plan to help India’s more than 170m slum dwellers.......   “The best option may be for the government to focus on providing the basic trunk infrastructure of water, sanitation and so on, and then let the people themselves invest in upgrading their own houses,” says Ashish Karamchandani, head of the Mumbai office for Monitor Inclusive Markets, a consultancy that has spent a number of years researching low-cost housing markets in India.

 Is this indeed the way to go? Well, it cannot be that individuals do whatever they like. There has to be a process of approval for any construction. That would immediately involve the municipal bureaucracy and the concomitant hurdles. Typically, what happens is that people build as they please and then pay up to legalise the construction. The trick may be to set up local associations comprising the community, one or two NGOs and municipal representatives. These associations can bring about upgradation in a planned manner. Whatever works is worth trying.

 

India's new growth paradigm

That's the title of my latest ET column. I sum up my thesis as follows:

This may sound wildly optimistic but it is possible that India is moving towards a new growth paradigm. The fiscal deficit will remain at a higher level on the average than in 2004-08. Inflation will be above the comfort zone of 4-5%. We will not have a global boom along the lines we saw earlier. And yet, growth of the order of 8-9% will be achievable thanks to a high investment rate.

Goodbye fiscal consolidation but is it a big deal?

To me, one of the most striking figures in the latest Budget is in in the medium term fiscal policy framework statement that accompanies the Budget. It shows the target for the fiscal deficit for 2014-15 at 3.9% compared with the Thirteenth Finance Commission target of 3%, which is the level prescribed by the FRBM Act. This means that the government will not meet the FRBM target even by 2014-15! And it will exceed the target by a full 100 basis points.

The debate on whether the target for 5.1% for 2012-12 is realisable is secondary. My guess is that it this is unlikely even if the revenue targets are met unless the Food Security Act is not going to happen in a hurry. I say this because no explicit provision has been made for the Act. We have to assume that the when the FM says that subsidies will be capped at under 2%, he is talking of the present subsidies, not new ones.

Since fiscal consolidation will not happen, we cannot expect inflation to come down below the RBI's 5% comfort zone of 5% in the near future. In other words, we are stuck with both high levels of fiscal deficit and inflation.

Is this a big deal? Not in terms of debt sustainability. The Finance Commission target of 45% for the centre's debt to GDP ratio by 2014-15 will be almost met in 2012-13. One of the big dangers with rising fiscal deficits is that it may lead to the government not being able to borrow any further. This is clearly not a danger for us.

Will it hurt growth? Well, I suppose so. But this does not mean that growth will not accelerate. Savings and investment will keep rising thanks to private saving, so growth will inch forward. It's just that we won't get back to 9% growth as quickly we might have otherwise.

The optimistic view before the sub-prime crisis was that, having touched 9% growth, we must aim for 10% by the end of the Five year Plan starting 2012-13. Now, it appears that we will move from 7% to 8-9% in the same time horizon. That doesn't strike me as a big disaster. So what are all the media pundits ranting about?

On quitting Goldman Sachs

A senior executive of Goldman Sachs has gone public with his decision to quit the firm by writing an article in the New York Times on the subject:

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

There is no end, it seems, to the public bashing of the investment bank. Wonder how Goldman will respond, if at all.

(Thanks to Sidharth Sinha for the pointer)

Fiscal correction will be slow in coming

All eyes are on the fiscal deficit number in the coming budget. There is a sense that we are on the brink of a fiscal crisis and the acid test for the FM is whether he can contain and reverse it. This is being unduly alarmistic. India's debt to GDP ratio for the centre and the states together of under 70% looks good in comparison with what we see in the advanced world today. Secondly, the states' record in improving the fiscal position has gone unheralded.

As for the centre, other things remaining constant, growth, the tax reforms on the cards (DRC, GST, extension of service tax) and disinvestment should by themselves push the deficit down close to the FRBM target of 3%. If this will not happen now (as it did in 2004-08) it is because the UPA has major spending schemes on its agenda, covering food, healthcare and education.

Most people say that if the fiscal deficit is brought down, it will release savings for investment and growth. Curb the deficit and you get on to a higher growth path. This is largely true. The government's decision to emphasise social sector schemes does entail a conscious decision to settle for a lower growth rate in order to promote equity. But that is a political decision- to settle for 8% rather than 9% growth in the medium term. If it is politically unacceptable, the people will say so in the next elections.

More in my ET column, UPA defines a new trade-off

Dysfunctional boards

Most people tend to think of corporate boards (including the executive team) as repositories of wisdom, maturity, balance, rational behaviour and what not. The people who sit on it are achievers, they understand business, they know how to take decisions. Shareholders must trust these wise men and women.

I have always been more than mildly sceptical about this elevated notion about people at the top. I am glad now to see it corroborated by FT columnist Luke Johnson. Johnson argues that boards are, in fact, riven by intrigue and manoeuvre - and concern for the company and its shareholders is often the last thing on the minds of people at the top:

Boardrooms are overwhelmingly populated by men aged 45 to 60. By this age, most of the players have worked out that more money doesn’t bring happiness; time is taking its toll; maybe the striving and sacrifices weren’t really worth it; and the participants tend to become more acutely aware of their mortality, shortcomings and missed opportunities. Regrets and anger can become the dominant emotions, as optimism and hope gradually diminish.Thus the boardroom can end up resembling a psychiatric ward. Motivations diverge violently, and maintaining a rational sense of purpose can become impossible.

Johnson suggests that the cure of boardroom dysfunction is to have adequate diversity on boards. I would go further. The answer, really, is wider dispersal of power. If you want companies to do better, undermine the role of boards and CEOs and spread power all across the company. Any takers?

China lowers growth target for 2012

China is targeting a growth rate of 7.5% for 2012, the lowest in eight years. This is an economy that had grown at 10% not long ago. So, it's not clear why there is so much breast-beating in India over the decline in our own growth rate from 9% to around 7%.

The international environment has turned adverse. This affects emerging markets in two ways: exports and financial flows.China gets more hit in respect of the former because it's an export-oriented economy. India is, perhaps, more severely impacted on the second  count. The short point is that the primary factor in the decline in the growth rate is the external environment and not what's going on within the country- or what commentators like to call 'policy paralysis'.

To my mind, talk of 'policy paralysis' or the absence of reforms limiting growth is overdone. As C Rangarajan, Chairman of the PM's Economic Advisoru Council, has pointed out, the present policy regime can support growth of 8-9%- provided the international environment is normal. How to achieve 9% in the face of adverse international conditions is the challenge now- and this can't be addressed in the short-run. It requires concerted action on several fronts over a longish period.

Wall Street Journal book review

The Wall Street Journal has just carried a review of my book on Ravi Matthai-IIMA.

Publishing in top journals

Indian academics are being exhorted these days to publish in top journals, many of them US-based. That's how you build knowledge, become thought leaders, we are told. Now, however true this may be for the pure sciences, one has always had reservations about applying this philosophy to b-schools. B-schools teach management, which is the application of knowledge, preferably, to the local context. How arcane research can contribute to this objective has always been an issue.

It is refreshing, therefore, to come across a different point of view being urged by Britain's universities minister, David Willetts. Andrew Hill, writing in his blog in the FT, quotes Willetts as saying that publishing in US peer-reviewed journals mostly involves analysing US data- and Willetts can't see how that will help the UK. He also faults the 'rarefied and recherche' nature of much management research. So, we come back to very basic - and still unanswered questions. What is meaningful research at b-schools? What relative weights do we accord to teaching and research in b-schools?

The sooner India's leading b-schools find answers to these questions, the better. It should not be that they recast incentives in favour of publishing abroad only to find themselves of diminishing relevance in their own environment.

Gloom on Indian economy overdone?

With GDP growth dropping to 6.1% in the last quarter, the chorus of doomsaying about the Indian economy has grown louder. Many commentators think that 2012-13 will be worse. I am not so sure. Among the sectors responsible for the slide are mining and electricity generation. Coal mining is poised to look up in the coming months thanks to initiatives in the public sector; electricity generation has suffered for want of coal and this too is likely to be remedied to a large extent. These two improvements alone should lift the industry growth index in the year ahead.

That apart, there are several positives that should impact positively on investor sentiment in the coming year. The biggest, perhaps, is the defusion of the Eurozone crisis - at least for now. Then, FII flows have returned, disinvestment is poised to get a boost, FDI is doing well, and the government is no longer preoccupied with the Anna Hazare movement. The PM's Economic Advisory Council has forecast growth of 7.5-8% in 2012-13. It does not appear unrealistic.

More in my ET column, No, it's not a downward spiral.