All eyes on the Fed tomorrow

Will she, won't she?

We shall know tomorrow whether Janet Yellen intends to hike interest rates, right  away or in the near ftuure?

Emerging markets face turmoil but some emerging markets think the Fed should go right ahead; at least, it will end the uncertainty they have been facing. On the Fed itself, opinion is divided. Gavyn Davies, writing in the FT, outlines the options:

The first and more likely option is a “hawkish postponement”, under which she explains that the conditions have not quite been met, but that the bulk of the committee believes this will happen by December. I am not sure that would do much to clear the air.
The second is the so-called “one and done” option, under which the FOMC raises rates by 0.25 per cent (or even conceivably by 0.125 per cent), and the “dots” show that no further rate rise is expected in October or December, except by a small handful of hawks.
This option seems to be gaining ground in the public commentary, on the grounds that it would get the bad news out of the way. But the markets know from past experience that they should take the first rate hike seriously as a guide to the Fed’s underlying attitude, and they would probably reprice short rates in 2016 upwards.
A final, more dovish, option — to keep rates unchanged, and also to eliminate the expectation of a rise in December — is probably not one that Ms Yellen could guide through the committee, even if she wanted to do so.

Financing higher education: ideas from the US presidential poll

Tuition fees in the US have doubled in real terms in the past 20 years, partly because universities have felt no compulsion to curb costs. Student debt is soaring. How to make higher education more affordable? The US presidential poll is throwing up interesting ideas, the Economist reports.

Hilary Clinton's solution: Cap repayment of college loans at a maximum of 10% of income over 20 years. Any shortfall in loan repayment made on these terms would be made good by the government. The cost to government is estimated at $350 bn. As for curbing college costs, Clinton would link government subsidies to reduction in college costs.

Another candidate Marco Rubio wants online programmes to be actively promoted. This is easier said than done. The problem is not lack of information on these programmes, it is that online degrees do not have anywhere near the same acceptability in the market as resident programmes. Rubio has a bold proposal for financing of education: opt for equity financing provided by private investors instead of loans from banks. This would link repayments to earning capacity. To ensure that successful students do not overpay, one could limit the tenure over which repayment happens.

The problem with equity financing, as the Economist points out, is that if a candidate should opt for a low-income career after an expensive education, the private investor loses out. Moreover, those who think they will do well in college and thereafter would prefer to have debt finance to equity as repayments are limited.

One thing is clear: simply leaving it to the market to set fees and trying to fund higher education through loans is creating serious problems. In India, we are aping the American model, especially in respect of management education. We need to think again.

Resurgence of the left in UK and US

Political pundits are watching with some astonishment the resurgence of the left in the UK and- of all places- the US.

In the UK, Jeremy Corbyn is positioning himself for the leadership of the Labour party on September 12. That doughty champion of market forces, The Economist, does not approve one bit:

For him no policy is too dog-eared, no intellectual dead-end too futile. Public spending? Yes, please. Higher taxes? Soak the capitalists and the landlords. State ownership? Nationalise the railways and utilities, get the private sector out of public services and reopen the coal mines. If that were the secret of prosperity, Britain would never have fallen apart in the 1970s and Tony Blair would not have won three elections at the head of a modernised centre-left Labour Party.

In the US, Bernie Sanders stands a slender chance of emerging as a shock Democratic candidate. He may end up getting pitted against Donald Trump, the Republican's own shock candidate who leads the ratings. An article in the Economist describes Sanders' broad political position:

A typical Sanders speech resembles a 90-minute sermon on modern America’s ills, delivered in the growling tones of his native Brooklyn. Hunched over a lectern, snowy hair aquiver with emotion, the 73-year-old’s usual targets include the “greed, recklessness and dishonesty” of Wall Street bankers, the malign influence of billionaire political donors, and the “abysmally low” wages that blight the lives of working families. Change will be hard, Mr Sanders warns audiences, and will require a “political revolution”. He is not joking (the senator rarely jokes). His proposals include moving towards a Canadian-style health system with publicly funded care for all, free tuition at public universities and a trillion-dollar infrastructure plan intended to create 13m jobs.

...Mr Sanders detects a chance in 2016 to lead a national uprising, drawing strength from the millions of working Americans who loathe mainstream politicians, news outlets and the economic status quo. Paraphrasing Franklin D. Roosevelt, he told the rally in Boone: “If the Koch brothers and the billionaire class hate my guts, I welcome their hatred.”

The Economist doesn't think that either Corbyn or Sanders can actually emerge as leaders of their respective parties.

BJP leader Varun Gandhi has a comment on this in the Hindu. He ascribes the resurgence to rising inequality. Gandhi's prescriptions for inequality would, perhaps, find easier acceptance in the Congress than in the BJP:

To cut inequality, we need to raise the level of minimum wages, strengthen collective bargaining, and improve employment benefits. Women need equal wages, flexible work environments and better childcare facility. We need better regulation of business, especially for rent-seeking sectors. Climate change requires a systemic response, with enhanced environmental protection.. With new demands for reservation based on economic criteria, the old politics of ethnic, racial and caste based reservation or affirmative programmes will soon die. 

Well, I am not sure the issue is just inequality, although it is an important factor. There is widespread discontent about the economy, for one thing. More importantly, perhaps, a profound dissatisfaction with mainstream candidates and parties and a yearning for something very different. Trump's appeal is precisely on the latter count, although I cannot fathom how he appeals to black voters.

Some of this is reflected in Indian politics as well. Aap undoubtedly has won out because of its anti-establishment orientation. The resistance to reforms reflects a growing realisation that a disproportionate chunk of the economic pie has gone in favour of business and corporate interests.  The BJP's retreat from the Land Bill and its reluctance to privatise government banks are acknowledgements of the realities on the ground. It's hard to think of any party moving decisively to the right in the near future. 

1965 war: a Pakistani view

I read and re-read this assessment of the 1965 war in Pakistan's Dawn newspaper with some amazement. It is scathing in its comments on the handling as well as the outcome of the war on the Pakistani side:

In fact, the war was started when we launched Operation Gibraltar in early July 1965, infiltrating thousands of Pakistani soldiers into India-occupied Kashmir under the assumption that Kashmiris would rise in revolt against the Indian forces. That never happened and within weeks the entire operation had collapsed. Meanwhile, the Indian forces launched a counteroffensive occupying parts of Azad Kashmir.
Subsequently on Aug 30, we launched Operation Grand Slam that was meant to capture the strategic town of Akhnur and to cut off held Kashmir from India. But it was too late. Another disaster happened when halfway through Grand Slam, the command was changed giving more time to the Indians to recoup and gather reinforcements. As a result this operation too ended in a fiasco.

About the Indian offensive on the Lahore front, the writer says:

...the persons most surprised were the president and the army chief when the Indians launched the attack on Sept 6. Ayub was woken up at four in the morning and given the news of Indian advances towards Lahore by an officer of the air force on reconnaissance duty. Ayub telephoned Gen Musa who said he had also heard the news but was waiting for confirmation!

 The author concludes:

Air Marshal Nur Khan, who led the air force, achieving complete superiority over the Indian air force, called it a wrong war that was planned “for self-glory rather than in the national interest”. History has to be put straight so that the mistakes are not repeated.

On the 1967 war, have you come across anything half as self-critical and objective in the Indian media? If the leading newspaper of a country can carry such an article, I would submit that there is something very right about that country. It cannot be a failed state, indeed, it is a country steadfastly battling any descent in that direction.

I have been an admirer of Dawn for many years now. Its liberalism is not confined to India-Pakistan relations. It has a thoroughly modern and reformist view on matters internal to Pakistan as well. Those who want Pakistan to be a vibrant democracy, free from the taint of terrorism, and also want that India and Pakistan should live together in peace must make it a point to read Dawn.

Who's afraid of the Seventh Pay Commission?

The Seventh Pay Commission looms. This is already giving rise to serious apprehensions about the impact on the fisc and negative comments about a government workforce that is said to be overpaid at the lower levels. Here are the standard comments and my responses to these:

i. SPC award will damage the fisc: Total pay of central and state government employees is 5% of GDP. The government projects a pay increase on the average of 16%. This translates into an impact on the fisc of 0.8%. Amortised over five years, the impact is 0.16%- hardly something to get worked up about.

ii. Where is the need for a Pay Commission every 10 years when government employees get DA increases? : Well, over a ten year period, after taking into account DA increases as well the annual increment of 3%, pay typically rises by less than 50%. This is less than the rise in nominal GDP of around 100%. After the Pay Commission hike, we get an increase in 10 years that is slightly below the nominal GDP increase (so pay and allowances as a proportion of GDP have fallen). The increase is way below what happens in the private sector. If the Pay Commission hike were not there, it would become difficult for government to compete for talent at the top, even after taking into account non-pay benefits such as job security, prestige, etc

iii. Government workforce is bloated and needs pruning: It has got bloated in recent years mainly on account of increases in police and paramilitary forces. We need more doctors, teachers, engineers, etc. Pay and allowances as a proportion of total government revenues has been falling by 1% every year. This is not downsizing as conventionally understood- that is, reduction in numbers of personnel. But, in financial terms, it is certainly downsizing. Wages are becoming less and less of a burden on government revenues, which is to be expected when central government revenues grow at 17% and the rise in annual wages is way below that.

The explosion in pay in the private sector is creating huge inequalities in Indian society. Pay in government should be seen as a sort of corrective to private sector excesses. It is not as much of a problem in fiscal terms as it used to be (although you could always argue that savings in wages can be used for other purposes).

It would best to accept periodic pay rises as a given and to focus instead on training and capacity building in the work force. Don't fret about the cost, instead get the best out of the workforce in terms of service delivery.

More in my article in the Hindu, Seventh Pay Commission is no ogre.

Inflation, deflation and Raghuram Rajan

Chief Economic Advisor Arvind Subramaniam thinks the Indian economy may now be in deflation territory. Deflation is a fall in prices. The WPI has been in decline. Subramaniam's remarks are seen as a broad hint to the RBI to cut interest rates.

But trends in WPI have little bearing on the RBI's policies given the monetary policy framework within which the RBI is now operating. In this framework, the focus is resolutely on CPI and the objective is to bring the CPI down to 6% by January 2016.

Those want a rate cut make two arguments. CPI is below 4%, which is below the 6% target, hence there is a compelling case.Two, a cut in the rate will stimulate growth. In a recent speech, Rajan addresses both arguments:

 To take the first argument first:

The statement “Inflation is low, you can now turn to stimulating growth” also perhaps reflects a misunderstanding of how central banking works. Monetary policy works with a lag of 3 to 4 quarters. So in deciding policy today, we need to predict how inflation will look approximately a year ahead. Today’s inflation therefore matters only in informing us about future inflation. However, today’s inflation measured on a year on year basis may be low because there was an unexpected price spurt last year – the so-called base effect.

So we need to take out base effects before we even assess the information from current inflation, something many observers fail to do. Also, there may be many sources of uncertainty that cloud the future inflationary picture and disconnect it from current inflation – the strength and distribution of the monsoon, the extent and persistence of low commodity prices, the effect of external disturbances on the exchange rate, etc. In practice, we use models to project how all this might play out on inflation, and we overlay the models with the subjective assessments that our internal committee and its advisors offer, to ultimately arrive at a policy decision.

Our model based assessments of the inflation path are almost surely going to differ a little from the realization, given that the world is uncertain, but they are our best professional assessments, and we set policy based on those assessments. As information comes in, monetary policy is adjusted – for instance, the substantial disinflation from November 2013 gave us confidence about the persistence of low inflation into the future, allowing us to cut the policy rate three times.

What such an approach rules out is what might best be described as “inflation following policy” that some populist commentators on monetary policy advocate.

In other words, the policy rate is set based, not on past inflation, but on expected inflation. Given that the RBI is committed to an inflation target of 6 per cent and has to explain any failure to meet the target, the tendency will naturally be to err on the side of caution- and any number of indicators can be found in the future to support such caution. The inflation targeting framework thus creates a bias against rate reduction.

As for the second argument, Rajan has this to say:

Modern economic theory suggests there is indeed a short run trade-off between inflation and growth. In layman’s terms, if the central bank cuts the interest rate by 100 basis points today, and banks pass it on, then demand will pick up and we could get stronger growth for a while, especially if economic players are surprised. The stock market may shoot up for a few days. But if the economy is supply constrained, we could quickly see shortages and a sharp rise in inflation. The central bank may then be forced to raise interest rates substantially to offset that temporary growth. The boom and bust will not be good for the economy, and average growth may be lower than if the cut had not taken place. This is why modern economics also says there is no long run trade-off between growth and inflation – the best way for a central bank to ensure sustainable growth is to keep demand close to supply so that inflation is moderate.

This is true when the economy is operating at its full output potential. Today, the Indian economy is not because projects are stalled on the ground, partly for want of funds. Cutting the interest rate impacts the supply side as well, not just the demand side. How? By increasing retained earnings, it improves the debt to equity ratio of companies. Some companies can access debt, some can access more equity. Projects can be completed and supply can increase. Further, the rate cut increases the value of securities held by banks and is a clever way of recapitalising them. With more capital at their disposal, banks are more ready to make loans and take risks. A rate cut thus can have important supply-side effects in the situation we are in.

A cut in the interest, of course, provides a stimulus to demand. it lowers the cost of capital and makes some fresh investment feasible. It stimulates demand for housing from consumers and allows housing stock to sold, making cash flows available to builders. 

Axis Bank: Irena Vittal and conflct of interest

Irena Vittal has quit as independent director on the board of Axis Bank. The reason is said to be that her husband is CEO of Bharti Airtel, which won a license for a payments bank to be set up in partnership with Kotak Bank, a competitor of Axis Bank. There was a perception of conflict of interest in this situation.

The implication seems to be that Vittal was placed in a situation where she could share information about Axis Bank with her husband and this would not be in the interests of Axis Bank. This suggestion has drawn fierce criticism from many who see the suggestion as proof of gender bias, implying that we in India cannot believe that a lady can separate her family life from her professional obligations.

What do we make of this situation? Well, I doubt that anybody would want to cast aspersions on Vittal, a professional of repute. But the point is that it is best to avoid a situation that has potential for conflict of interest. There are lots of competent lady professionals out there. If Axis Bank can find somebody who is not placed in a conflict of interest situation, why not do so?

Of course, you could say that since conflicts of interest are par for the course in boardrooms, why get worked up over this one? One situation is where A sits on B's board and B sits on A's board and they happily scratch each other's backs. Independent directors on most private boards are drawn from the same cosy club of CEOs, retired bureaucrats and chartered accountants. Even if there's no technical conflict of interest, independence is the last thing one would expect from the members of this cosy club.

The central issue in boardroom reform is not conflict of interest but having directors who are capable of acting independently of management or the promoter. I have said this before- and I argue at length in my recent book RETHINC (Random House), that the long-term answer is to have proportional representation on boards, with various constituencies other than the promoter and management - institutional investors, minority shareholders, large lenders, emloyees, etc- also been given the right to appoint independent directors.

Then, we have independent directors answerable to those who have put them there, not 'independent' directors who are beholden to  management or the promoter for their seats and fat fees and who will happily nod their heads to whatever management or the promoter wants done.

I spy

James Bond is passe. The spy of the 21st century is more likely to be software secretly smuggled into your computer which enables somebody to know exactly what you are doing with your PC or laptop. Or it could be a drone drifting into a cave harbouring Afghan militia.

The Economist has  a fascinating article on how spying has evolved.  In the old days, the thing to do was to smuggle in a smart guy- preferably from an elite institution, such as Oxbridge- into the target country with a fake identity, visiting cards and plenty of cash. Today, with biometric identification, this has become difficult. The other form of 'humint' - or human intelligence- is simply paying people on the other side for passing on information. This is, of course, alive and well. But, targeting the right people who will spy for you is becoming more sophisticated- it's no longer a matter of accosting people at clubs or parties.

The thing to do is to get data on a whole lot of people and look for weaknesses- medical problems, financial problems, hints of scandal. That's what the people who hacked the site of America's Office of Personnel Management were looking for. I am surprised people didn't think of hacking Ashley Maddison for this reason.

This gives us an idea of what the focus of spying game will be: electronic communications and materials stored on PCs and laptops. One begins to understand why the NSA and other intelligence agencies are so keen on scrutinising email and related traffic. By combing through this, one can lead a treasure of information. The equivalent of this is listening into phone conversations, including mobile conversations.

One problem for spy agencies, the Economist mentions, is encrypted messages. Since it is the receiver and the sender who hold the keys- and not the channel that allows them- spy agencies want the channels to insist that users give them the keys. But this may not be necessary. You don't have to crack an encrypted message. It's enough if you can track what the sender is typing or what the receiver is typing- and there's plenty of spyware available for this.

The flip side is that spy agencies that store information are themselves vulnerable- as the Snowden episode highlighted in a big way. How to steal somebody's else data while safeguarding your own is the central challenge of modern spying.

All of this seems pretty clear. Still, some doubts remain. Electronic spying may be effective when it comes to spying on official agencies. Will it work with terrorists or criminal groups? Such groups are more likely to rely on passing messages on a slip of paper or by word of mouth. Electronic spying can't help here. Since, James Bonds can no longer be smuggled in to mingle with such groups, it's just possible that spying on terrorists and the like has been weakened in recent years.

Making sense of crashing markets

Markets have crashed all over the world, including the US. It's not easy to make sense of this phenomenon. The glib explanation is that it has to do with the inability of Chinese authorities to stem the crash in markets there and the devaluation of the yuan. Both point to clear slowdown in Chinese growth and falling Chinese demand for imports. China is a big source of incremental global growth, so this is bad news for the world economy.

All of which is true. But what's new in that? Why should markets crash instead of declining in an orderly way? How does that explain the panic? One possible explanation is that the slowdown in China will be more severe than thought- growth won't be even 7 per, it would be, say, 6 per cent. But, again, why would markets latch on to this virtually overnight?

The other suspect is the impending Fed rate hike. But this has been long in coming. Also, it's not as if the Fed will press ahead regardless of what's happening to markets worldwide. An article in Business Insider highlights these points very well but does not come up with a plausible alternative. So let me stick my neck out and offer one.

Might worsening geo-politics be a factor? There's been news in recent days that both Russia and Nato have carried out exercises that military analysts see as a clear preparation for war. Then, there's been news that the US is moving some of its most advanced aircraft to its European allies. Oil prices have fallen to close to $40 and there's been another run on the rouble. This adds to Russia's economic woes and puts Russian president Putin under further pressure.

It could well be that the flight of funds from emerging markets is a sign of a full-blown global crisis that is not just economic in nature. I read in the Economist recently that Russia will find it difficult to hold on to Chechnya and other states in the federation the moment it runs out of cash. Any impending turbulence in Russia, with all the uncertainties it carries, would certainly frighten the life out of investors.

Worsening ties between the west and Russia are part of worsening geo-politics in general: think the situation in West Asia, China- Japan, India- Pakistan, etc. Don't get me wrong. I don't see any of these crises playing out in the near future. But worsening geo-politics makes it difficult to get the necessary focus on the economic situation. Indeed, crashing asset prices, notable that of oil, which is crucial to Russia, may just suit the  agenda of the western powers.

My sense is that the US and its allies under-estimate Russia, as it has been under-estimated by others in the past. When this becomes clear enough, the geo-political situation should improve and panic should dissipate. However, this learning could be a long and painful process. Until then, however, risk aversion will be high. It's the combination of a weak economy and worsening geopolitics that, perhaps, explain the current panic.

(Updated on August 27, 2105)

Indradhanush: a fortune for PSBs at the end of the rainbow?

The government has unveiled a plan for revamping PSBs titled Indradhanush. One thing is striking: the government is implementing the recommendations of the P J Nayak committee in form but not in content. The Nayak committee wanted a radical departure in the way PSBs are run. Its model for PSBs was Axis Bank, the former UTI Bank in which the government allowed its stake to fall below 51% and let it be run like a private bank, with a professional board and with private sector scales.

Well, it doesn't look as though any of this is going to happen with PSBs under Indradhanush. The centre-piece is the infusion of Rs 70,000 crore over four years, with Rs 25,000 crore being infused this year itself. This marks a turnabout in the government's position on recapitalisation. In its first budget, the government took the view that capital infusion would be a reward for performance.

The departures from the Nayak committee report are striking:

• There will be a Bank Board Bureau that will make top appointments in PSBs, including appointments of independent directors. But this is not going to be manned entirely by professionals as the Nayak committee wanted. Some reports say half of the six members will be government appointees. One report quoted the banking secretary as saying he will be the sole representative. Either way, the government will make the final call on appointments. It cannot be otherwise as long as the public sector character of the banks continues. I have always thought that the idea of government distancing itself from control of PSUs and PSBs was hogwash- it just can't happen.
• Two of the five appointments have been from the private sector. But the finance secretary has assured PSBs that hereafter there will be no more appointments from the private sector- EDs at PSBs will be given a chance.
• Performance-linked pay and private sector pay scales: If this happens, it will be in a restricted way. The basic framework of government, defined by the Pay Commission, won't go away.
• Bank Investment company: The Nayak committee wanted government equity to be transferred to a BIC with the BIC dropping its ownership in individual banks below 51%. The BIC won't happen in a hurry. And when it does happen, government will not drop its ownership below 52%. That means, CVC and CAG will stay.

So, nothing changes with respect to the UPA? I won't say that.  The government has moved to separate the roles of chairman and managing director (about which I have my reservations). The
appointments process has been more rigorous than what we say in UPA-II.

More in article in Quartz, Slow, steady and sensible: Modi's new approach to reviving banks

Land Bill setback could be a blessing in disguise

The Modi government has had to backtrack on the Land Bill. Industry is howling but, on a longer view, this may not be such a bad thing.We need an approach that farmers regard as fair. Perhaps, parliament can now consider a fresh set of options.

It's not enough to say glibly that farmers should not complain as long as they are compensated and that twice the market value in urban areas and four times the market value in rural areas is good enough. The problem very often is that the market value is not easy to determine. Simply looking at recent land sales may not help, as the Economist points out, because these may distress sales made by farmers to other farmers or because the sale price may have been under-reported to dodge stamp duty.

The fact of the matter is that the true value, in acquisition for industrial use, becomes known only after the industries are set up. This means that farmers should have a 'call option' on the property that is sold to industry. The approach taken by AP Chief minister Chandrababu for the construction of a new capital for AP may well be the way to go. Naidu has offered to give back to farmers 30% of the land pool they have together contributed once the city is constructed. This is a way of providing  a call option to sellers.

The problem of dealing with holdouts- people who simply refuse- may still be there. The Economist cites a suggestion made by two economists. Ask for bids for plots close to the ones being acquired and offer these as compensation to those unwilling to sell in the acquired area.

Land acquisition is a hugely emotive issue and more so at a time when farmers are in distress. Forced and unfair acquisition is a factor underlying insurgency in many parts of the country. We need to think of new solutions. So the setback to the government on the Land Bill may well be a blessing in disguise.

Srikrishna on the RBI and the IFC

You must read this interview Justice Srikrishna has given to the Economic Times.Here's what he has to say about the MPC and separation of public debt from the RBI:

Originally, there was a proposal that there will be a veto with the RBI governor. The government said a veto is not good. Originally, we had said the majority in the Monetary Policy Committee should be outsiders. The RBI objected, saying we should have a majority. So the government, after consulting the RBI, conceded ground and said, 'Let there be three Reserve Bank nominees including the governor, deputy governor and the one nominated by them'. So, the new thing has been accepted.

On public debt, the government says right now we don't have the capacity to deal with this issue, the Reserve Bank says, 'no we have to do this'. One by one things are being done. So, what is the controversy being generated? The government has no controversy, the Reserve Bank has no controversy and I see no scope for controversy. You chaps are creating the controversy.

Srikrishna is also worth quoting on RBI independence about which misconceptions abound:

Nobody is independent except the judiciary, for obvious reasons. Under the Constitution, the only independent body is the judiciary. Now, the RBI is merely putting into practice the policy to be pursued by the government in financial matters. It is of course undeniably an experts' advisory body and its advice has great weight. On recapitalisation of banks... the government has neither the time nor is it competent. So, the Reserve Bank looks at all such things as the exchange rate, inflation targeting, etc. The mandate is given to the RBI but the government may still disagree with it, unlike a Supreme Court judgement where it is bound by the decision.

 

Nobody is independent except the judiciary, for obvious reasons. Under the Constitution, the only independent body is the judiciary. Now, the RBI is merely putting into practice the policy to be pursued by the government in financial matters. It is of course undeniably an experts' advisory body and its advice has great weight. On recapitalisation of banks... the government has neither the time nor is it competent. So, the Reserve Bank looks at all such things as the exchange rate, inflation targ ..

Read more at:
http://economictimes.indiatimes.com/articleshow/48445829.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Originally, there was a proposal that there will be a veto with the RBI governor. The government said a veto is not good. Originally, we had said the majority in the Monetary Policy Committee should be outsiders. The RBI objected, saying we should have a majority. So the government, after consulting the RBI, conceded ground and said, 'Let there be three Reserve Bank nominees including the governor, deputy governor and the one nominated by them'. So, the new thing has been accepted. On public d ..

Read more at:
http://economictimes.indiatimes.com/articleshow/48445829.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Originally, there was a proposal that there will be a veto with the RBI governor. The government said a veto is not good. Originally, we had said the majority in the Monetary Policy Committee should be outsiders. The RBI objected, saying we should have a majority. So the government, after consulting the RBI, conceded ground and said, 'Let there be three Reserve Bank nominees including the governor, deputy governor and the one nominated by them'. So, the new thing has been accepted. On public d ..

Read more at:
http://economictimes.indiatimes.com/articleshow/48445829.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Originally, there was a proposal that there will be a veto with the RBI governor. The government said a veto is not good. Originally, we had said the majority in the Monetary Policy Committee should be outsiders. The RBI objected, saying we should have a majority. So the government, after consulting the RBI, conceded ground and said, 'Let there be three Reserve Bank nominees including the governor, deputy governor and the one nominated by them'. So, the new thing has been accepted. On public  ..

Read more at:
http://economictimes.indiatimes.com/articleshow/48445829.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Originally, there was a proposal that there will be a veto with the RBI governor. The government said a veto is not good. Originally, we had said the majority in the Monetary Policy Committee should be outsiders. The RBI objected, saying we should have a majority. So the government, after consulting the RBI, conceded ground and said, 'Let there be three Reserve Bank nominees including the governor, deputy governor and the one nominated by them'. So, the new thing has been accepted. On public  ..

Read more at:
http://economictimes.indiatimes.com/articleshow/48445829.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Originally, there was a proposal that there will be a veto with the RBI governor. The government said a veto is not good. Originally, we had said the majority in the Monetary Policy Committee should be outsiders. The RBI objected, saying we should have a majority. So the government, after consulting the RBI, conceded ground and said, 'Let there be three Reserve Bank nominees including the governor, deputy governor and the one nominated by them'. So, the new thing has been accepted. On public  ..

Read more at:
http://economictimes.indiatimes.com/articleshow/48445829.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Maoist policies would not change China's future growth rate

I found this hard to believe when I read it but it appears to be the result of solid research. If China were to revert to Maoist policies, the Chinese economy would grow on the average at 4-5% every year between now and 2050- about one percentage point lower than the growth rate projected for China under the pro-market liberal policies it has had since the 1970s. These projections have been made by four US-based economists, says a report in the FT.

The projections made for the Chinese economy under current policies are interesting:

Assuming a continuation of current policies, the paper predicts the Chinese economy will expand by 7-8 per cent for the next 10 years or so, with growth slowing to 5.2 per cent on average between 2024 and 2036 and then a rate of just 3.6 per cent between 2036 and 2050.

India's economic growth should overtake China's this year. India's superior growth rate should persist thereafter until 2050- barring unexpected political shocks.

The interesting question thrown up by the projections on China is whether the focus on continued "reforms" isn't a little overdone in India. Perhaps, the PM's instincts are right: it may be more useful to focus on implementation of existing policies than on bringing about radical policy changes that are, in political terms, a hot potat.

More capital for public sector banks

The government has made a welcome about-turn on the question of infusing fresh capital into public sector banks (PSBs). It plans to infuse Rs 70,000 crore in the next four years, starting with Rs 25,000 crore this very year. The government's position in the first year in office was that the government would reward performing banks with capital; non-performers would have to fend for themselves.

This is an untenable position to take because it leaves unaddressed the issue of how non-performers are to fend for themselves. They can raise capital from the markets, if at all, only at throw away prices, which means the government as the owner is giving away equity cheaply. It makes sense to tap capital markets only after valuation improves. Valuations can improve only if revenue and profit grow. Revenue and profit can grow only if banks can lend more. (Options such as selling off non-core assets may not fetch enough capital and they cannot be done in a hurry in the government scheme of things), And banks can lend more only if they have more capital. QED.

The government's hand has, perhaps, been forced by the rise in NPAs in recent months. Provisions against these will reduce profit or increase losses and erode capital. It's not clear what level of capital adequacy the additional infusion of capital is intended to achieve- hopefully it will be at least two percentage points above the regulatory minimum of 9%- only then can PSBs take some risks in lending.

The general perception is that bouts of recapitalisation of PSBs are uncalled for and a colossal drain on the exchequer. Neither is true when one looks at the worldwide experience with bank recapitalisation. There is always a fiscal cost associated with recapitalising banks. If you can keep the cost below, say, 5% of average GDP over a 20 years and prevent a banking crisis, you have achieved something.

In India, we have done just that and we have prevented a full-blown crisis. Contrast that with economies where governments recapitalise banks after a crisis and end up paying a higher fiscal cost, not to speak of the bigger loss of output arising from a banking crisis.

More in my article in the Wire, Three myths about recapitalising public sector banks.