My latest book, Rebels with a Cause, is out

Happy to share that my latest book, Rebels With A Cause: Famous Dissenters And Why They Are Not Being Heard, is out. It's published by PenguinRandomHouse.

 

I reproduce the blurb:

Democratic societies take pride in freedom of expression. Indeed, the right to dissent and tolerance of diverse viewpoints distinguish a democratic society from a dictatorship. In his new book, Prof. TT Ram Mohan profiles well-known dissenters Arundhati Roy, Oliver Stone, Kancha Ilaiah, David Irving, Yanis Varoufakis, U.G. Krishnamurti and John Pilger to illustrate how, in practice,  dissent tends to be severely circumscribed.  It is only the celebrity status of these dissenters that has kept them from being actively harmed. Through an exploration of the lives and ideas of these personalities , the author argues that, while one may not agree with their positions on various issues, their views merit discussion and debate. Engaging with them and responding to their analyses holds out the prospect for substantive reform within the system. Yet, the dominant elites prefer not to do so, instead marginalizing and even ostracizing dissenters precisely because they find change of any sort threatening.

 Rebels with a Cause is book that asks hard questions to challenge the way we view, and live in, the world—an important book for anyone who refuses to lamely accept the status quo.

 

 

The university after the pandemic

 Is the residential university soon going to be a thing of the past? Will online learning displace it in  a big way? Will young people opt not to go the universities?

No, no, no, going by article in the FT on the future of the university. 

The pandemic has forced a lot of experimentation and improvisation. Blended learning- a combination of online and classroom learning- is pretty much the norm. Alternatives to the 2-3 hour exam are being explored. Online exams through special proctoring mechanisms have come into vogue.

At the end of the day, however, the university will not go away and the residential university will remain dominant. As everybody knows, there is more to the university than classroom learning- the social interactions on campus and group learning have their place. And online learning, many students seem think, is not the real thing.

The most striking fact in the article is that the flow of UK students this year is undiminished, with some universities, such as Cambridge, even seeing a small rise. (Although the experience in the US and Australia seems to be different). That's again because students do not see online as an alternative to the residential university.

What is more likely is that online education will supplement, not supplant, the residential university. It will be an useful aid to classroom learning. And universities will use their learning from the online model to offer it to those who can't make it to university. That will boost revenues at universities- and it will also result in greater inclusion.

Standoff with China: India's options limited

 The government's critics accuse it of meekness in the face of China's land grab in Ladakh. The fact of the matter, as many security experts have testified, is that China has appropriated chunks of Indian territory. What is not stated as explicitly is that India's military and diplomatic options in responding to Chinese belligerence are limited, as an article in The Wire makes clear, citing a recent paper by two US analysts.

There are three options. One, take on the Chinese and throw them out before they consolidate. This is a huge challenge in the Himalayan heights given that defenders have an enormous advantage. Two, seize Chinese territory that can then be exchanged for ours. We haven't quite attempted this: the territory we have moved into at Pangong is our own. The third is to accept the fait accompli. This would mean more Chinese aggression down the road.

It does appear that, faced with a superior economic and military power, our options are limited. Some hawks says we should make it costly for China to embark on such adventures by mobilising in a big way along the border. But this raises costs for us too- and China can outlast us, given the strength of their economy.

Any suggestions, anybody?

(Thanks to SM Deshpande for the pointer to the Wire article)

Depsang is a headache for India

 The present standoff with China in Ladakh has had one positive: the large number of insightful military analyses it has spawned.

India has been on the defensive in Ladakh ever since China upped its belligerence a few months ago. There is an impression that our moves in the southern part of Pangong lake have changed the scenario and China is seriously rattled.

It may be that the Pangong thrust has moved things to our advantage in that area. But the real problem for us is Depsang where, as military analyst Sushant Singh points out, China blocks access to 900 sq kms of our territory. That blockage is a real headache because it could limit India's access to Siachen Glacier and give Pakistan a chance to mount an attack on it. As Singh points out, it is not that the PLA and the Pakistani army can link up. However, acting in collusion, they can pose a serious threat to our positions. Singh notes that the defence minister was conspicuously silent on Depsang in his recent speech to Parliament.

RBI's loan restructuring scheme has a good chance of success

The RBI's loan restructuring scheme is now on. It is only for corporates. For SMEs, there is a separate scheme that was unveiled in 2019. 

Restructuring will become imperative with the ending of the six month interest moratorium on August 31, 2020. Unfortunately, it is not ended as yet because a petition on chargeability of interest in the moratorium period is pending before the Supreme Court. 

There is an issue of whether interest can be charged at all; there is a further issue of whether interest on interest can be charged, that is, whether the interest during the moratorium period can be capitalised and added to the outstanding loan as on August 31. 

The Supreme Court will hear the matter again on September 28 after  the government submits an affidavit outlining its position on the petition before the SC. A three member committee under former CAG, Rajiv Mehrishi, has been set up to define the government's position.

About the restructuring scheme, there are doubters. Many see the scheme as yet another attempt to kick the can down the road. Precisely because the market is sceptical, the scheme has a better chance of success. Banks will want to keep the proportion of restructured loans down to the minimum if they don't want their valuations driven down. 

Secondly, provision coverage ratios at banks are higher than in the past, so they don't have to worry about recognising bad loans as much as before. 

Thirdly, the RBI and the KV Kamath committee have laid down fairly stringent norms for restructuring. The tenure of a loan can't be extended by more than two years, for instance, and for 26 sectors, thresholds in respect of key financial parameters have to be observed.

So there's reason to believe that this restructuring exercise won't go the way of earlier ones.

The practical problem for banks is how to decide the extent of restructuring given the uncertainties about the growth outlook. I believe it makes sense to wait for a month or two and gauge the strength of the recovery before rushing into restructuring plans (except where default is imminent). They must also put in provisions for an upside to repayments that is linked to cash flows.

A good bit of non-restructured loans will have to be provided for. There will also be slippages in respect of loans that meet the requirement that no default should have occurred more than 30 days prior to March 31, 2020 (which requirement is laid down to ensure that the restructuring covers only covid 19-induced stress). Banks, especially public sector banks, will need capital. Unless adequate capital is forthcoming, the objective in cleaning up bank balance sheets, which is to ensure higher credit flows down the road, will not be met.

More in article in BS, Loan restructuring: this time is different

How not to reform the IAS

Today's TOI carries an article by two ISB profs on reforming the IAS. Frankly, I find the proposals impracticable.

The authors propose that at the end of seven years, IAS officers be given the following options;

Continuation in the service at a prestigious senior position for which the officer may have to compete with other experts from outside the service who could be inducted laterally (something that Prime Minister Narendra Modi has espoused).

A fully paid scholarship to any PhD, MBA, or other top professional programmes in the world (eg Harvard MBA, Princeton Masters in Public Policy, or a PhD at the University of Chicago) into which the officer can get admission based on his or her merit.

  A Rs 1 crore seed capital from a capital fund run by professional venture capitalists to begin an entrepreneurial startup venture

 

Those who can compete with. Others will try to upgrade themselves with higher studies. Those who want out can be turn entrepreneurs.

 

Well, it's not clear that the alternative to being in the IAS is becoming an entrepreneur. But even if some want to take the plunge, the government cannot, by any stretch of imagination, lavish Rs 1 crore on anybody who wants it. How do you ensure accountability of the money spent?

As for the second option, it is already being exercised.  Many go for higher studies, a few quit thereafter.

It is also not possible to get IAS officers to compete with outside experts for all positions. This can happen only for a few positions that require technical expertise.For the vast majority of generalist positions, outsiders can't fit in- the IAS training and background are indispensable.

The authors also propose that the government recruit from professional courses even at the entry level. That would completely undermine the IAS exam. Today, IITians and IIM students appear for the IAS exam. The authors are saying they- and others from professional courses- could be hired from campuses, as  happens with corporates. This overlooks the fact that the IAS written exams plus interviews look for qualities other than mere technical competence. That is what gives the IAS exam its cachet and ensures high quality of recruits.

 

 By and large, the IAS at the centre remains meritocratic above the joint secretary level. And the pressure to perform is pretty intense. The problem is at the states. That has to do, not just with the motivation and incentives of IAS officers, it has to do with the way politicians run the system. That calls for reform of a different character from what the IBS profs propose.

RBI, financial stability and central bank independence

 Viral Acharya, the distinguished academic who served as Deputy Governor of RBI from December 2016 to June 2019,  has been vocal on the subject of financial stability over the past several weeks.  

In several interviews and webinars following the publication of his book, Quest for financial stability in India, Acharya has said that lack of concern for financial stability on the part of successive governments has led to recurring problems in the banking system. This, in turn, has resulted to growth getting stalled time and again. 

The book is a collection of speeches Acharya made as Deputy Governor. The highlight is a lengthy introduction that Acharya has written in which he expatiates on the importance of financial stability. Acharya says that during Urjit Patel's tenure as Governor, the RBI made a valiant attempt to defend financial stability but, ultimately, could not stem pressures in favour of faster credit growth at the expense of stability. He suggests that both Patel and he had to quit as they could not reconcile their stand on financial stability with that of the government.

Acharya contends that the root cause of financial stability is what he calls 'fiscal dominance', that is, the imperative of governments having to spend in order to boost growth, no matter what the implications for the fiscal deficit. After a point this becomes untenable.Governments then lean on the central bank to facilitate faster growth through credit expansion. 

This invariably involves sacrificing financial stability in a number of ways- by not recognising bad loans and the associated losses, not recapitalising public sector banks as required, manipulating the yield curve to keep interest rates low so that governments can borrow cheaply, etc. Compromises on financial stability result in banking crises and weak growth down the road. 

The answer, Acharya suggests, is first to ensure that fiscal discipline is practised. Secondly, to ensure that the RBI enjoys greater independence, preferably conferred by law, so that it can resist pressures to compromise financial stability.

There are problems with the thesis. First, it is not true that credit booms and financial crises result exclusively or mainly from fiscal dominance. The global financial crisis of 2007 as well as multiple bank crises in numerous economies in the past several decades did not flow from fiscal dominance.

Secondly, financial stability can result from excessive concern with financial stability at the expense of growth. If you are too focused on inflation and allow growth to weaken, that itself can cause financial stability. If you are not willing to relax regulations in unusual times, such as the pandemic, and insist that defaults should automatically result in loans being categorised as non-performing assets, you are going to create a major banking crisis here and now- in the cause of financial stability. Find me one banker who thinks that the loan restructuring scheme announced recently by RBI is not desirable and that we should accept Urjit Patel's contention that a restructured standard asset is an oxymoron.

Thirdly, conferring independence on the RBI by law is a bad idea. Matters of monetary policy and regulation cannot be decided by technocrats alone. It is the elected government that is accountable to the people for its decisions that must have the final say. This is because monetary policy and regulation involve choices about trade-offs between growth and stability and they have distributional implications. These choices cannot be made by technocrats sitting in Mint Street. If central bankers are not to accountable to the government, how will make them accountable? We need a vibrant media, swift judicial redress and a culture of peer pressure that will ensure accountability once central banks are given independence by law. Those conditions are not satisfied in India today.

Fourthly, it's extremely naive to think that governments make "political" choices while technocrats are utterly apolitical or detached in their approach to questions of public policy. All public policy choices are overtly or implicitly political in nature and central bankers are political animals in their own ways. We know central bankers are not unworldly in their outlook: many have the happy gift on landing juicy positions with private banks after they have demitted office. 

We have to accept that those elected to office have the right to decide matters of public policy. If they make mistakes, the electorate has the choice of voting them out the next time. Pitting the saintly technocrat against the diabolical politician can only undermine democracy and pave the way for the technocracy known as dictatorship. 

More in my column in BS, Technocrats versus politicians

World’s top banks grapple with CEO succession

There is much speculation about who will succeed Aditya Puri as CEO of HDFC Bank. the search for a successor has commenced just about eight months before Puri is due to leave. If it’s any consolation, it’s not the only leading bank that’s trying to ensure a smooth succession. Some of the world’s top banks are grappling with the same problem- and the circumstances at those places are far more challenging.

The CEO of UK’s Barclays Bank, Jes Staley, announced last month that he would step down in about a year’s time. Staley had to quit after financial regulators announced a probe into his links with Jeffrey Epstein, the billionaire who died in jail while facing charges of paedophilia.

Two years, Staley had faced a storm when it was disclosed that he had tried to uncover the identity of a whistle blower who had written to the board of Barclays with complaints about him. The board let Staley keep his job but he had to pay a fine of £640,000 levied by the regulators. 

Staley has been CEO for five years. The board has said it will look outside for a CEO. That says something about succession planning at UK’s second largest bank. If nobody inside measures up, the board should have made the assessment long back. It would then have had time to induct an outsider and groom him or her for the top job.

Things are not much better at HSBC. Its CEO, John Flint, had to step down last August on grounds of under-performance after just 18 months into his job. The board has opted to name an interim CEO which meant that it was keeping its options wide open in respect of the appointment. If that wasn’t bad enough, last month the interim CEO chose to announce a restructuring that would involve shedding 35,000 jobs over the next three years.  What CEO want to own a radical restructuring initiated by somebody else? 

At Swiss giant Credit Suisse, the CEO, Tidjane Thiam, the first black chief of a top European bank, was somewhat abruptly shown the door last month following unsavoury revelations. Last September, a detective from a private agency was caught tailing a former senior executive of Credit Suisse. It turned out that agency had been hired by the Chief Operating Officer of Credit Suisse.

The COO was fired and the board sought to distance Thiam from the affair. However, the plot thickened. Credit Suisse, it was revealed, had also spied on its former head of human resources! To its credit, the board has been quick to name an insider and bank veteran as CEO.   But the perception that the bank’s culture is flawed will not go away quickly

At J P Morgan Chase, Jamie Dimon reigns supreme after more than 14 years as CEO. Last January, Dimon declared blithely that he had not set a retirement date for himself. There is no obvious successor in sight. Naturally. Several potential successors have left to take up CEO positions elsewhere. J P Morgan Chase is a star performer. However, performance does not exempt an organisation from the requirement of succession planning.  

Boards must have a set of two or three potential successors at any given point, with the choice narrowing to one over time. Goldman Sachs is a good example. More than a year before Lloyd Blankfein stepped down as CEO, the bank named two co-chief operating officers. A year later, one of them got the job. At GE under the late Jack Welch, three insiders were marked for succession several years before Welch’s retirement. Jeff Immelt got the job. 

A G Lafley, a former CEO of Proctor & Gamble, has written about how he started work on succession planning virtually from day one.  “Many CEOs,” he wrote in an article in the Harvard Business Review, “don’t push their boards to discuss what might happen when they leave because they don’t want to think about it…”  This was said in 2011. It seems not much has changed since. The upheavals caused by the global financial crisis of 2007 have evidently done little to change governance and culture at private banks. 

Can SBI's rescue attempt save Yes Bank?

Well, it's a long shot. First, the capital infusion may prove inadequate and the non-SBI investors may not have the appetite for investing more. Secondly, a bank cannot be run for too long with deposits from public sector banks (the amount of deposits being talked about is Rs 30,000 crore). A public-private partnership to save a private bank is a first of sorts. The outcome will be awaited with interest.

In 1998, a consortium of banks and brokerages rescued Long Term Capital Management (LTCM) by infusing capital on which they later made a modest profit. But LTCM was a hedge fund,  not  a bank. Here SBI and some private banks will be rescuing a bank that has been a competitor and will remain one if turned around. That's a big difference.

Questions have been raised about regulation and supervision, following the Yes Bank failure. I have not come across any specific lapse that people have ascribed to RBI. They simply presume that if a bank fails, there must be a failure on the part of the regulator. To my mind, the failure happened in September 2018 when IL&FS was allowed to fail. The shocks created then are continuing to take a toll on the financial sector and the economy. In a way, the Yes Bank collapse is the result of the worsening conditions in the economy and in the financial sector consequent to the failure of IL&FS.

More in my article in BS, Question Marks Remain about Yes Bank Rescue.  I also joined the Hindu Parley on the subject with Prof Ananth Narayan of SPJIMR

Yes Bank collapse should prompt rethink of bank privatisation

So SBI has been tasked with rescuing Yes Bank. It's a tall order. We don't yet the details of the plan. SBI, it's reported, will submit a plan to RBI, which, in turn, will put it up to the cabinet. That should be a couple of weeks at the least. In the meantime, will the cap on withdrawals of deposits of Rs 50,000 at Yes Bank be lifted? It would be risky, to say the least.

Giving Yes bank to SBI is, I'm afraid, a wrong move. It won't be enough to share up depositor confidence. The government should have nationalised Yes Bank. Then, perhaps, SBI and others to put in some equity and turn it around (although I have reservations even on that count).

Yes Bank was a star performer until 2017 or so. The performance of new private banks has been contrasted with that of public sector banks. There are several issues with some comparisons. They do not cover long enough periods. They ignore rescues of private banks by PSBs. They overlook the larger obligations that PSBs are saddled with and for which they are not compensated (demonetisation, Jan Dhan Yojana, financial inclusion, etc). They do not take into account the fact that PSBs were asked to finance infrastructure projects in the2004-09 boom while private banks focused on retail finance.

Once you make all these adjustments, you will get a different picture. One or two things are fairly certain. All private banks will feel the impact of the Yes Bank collapse. (The Maharashtra government's decision to withdraw funds from all private banks, if imitated by other state governments, is sure to have private banks reeling.). Two, given the shock to the banking system, any privatisation or even a fall in government ownership below 50 per cent is off the table for now.

More in my article for Bloomberg Quin, Yes Bank Revival is a Formidable Challenge.

How intelligence agencies use businesses as a cover

America suspects that Huawei, the Chinese telecom firm, could be used for espionage. It has good reason to do so, given that it has a long history of using businesses as a cover for its operations.

Schumpeter has a piece on the links between intelligence agencies and the world of business. The classic example he gives is of a CIA-owned company that produced cipher machines. Governments bought the machines not knowing that their secret communications would be read by America's spying agencies:

By the 1990s it was apparent that the firm (Crypto AG)was in bed with the National Security Agency (NSA), America’s eavesdroppers. The truth, it turns out, was even more remarkable. From 1970 to the 2000s, at least, Crypto AG was wholly owned by the CIA and, until 1993, the BND, Germany’s spy agency, according to the Washington Post. “It was the intelligence coup of the century,” crowed a CIA report. “Foreign governments were paying good money…for the privilege of having their most secret communications read.”

 Schumpeter cites other instances:

In the 1970s, at the height of the Troubles, the British Army established a brothel and launderette in Belfast. Not only could soldiers use laundry vans to move around discreetly, but IRA suspects’ clothes could be tested for explosive residue (both operations were eventually exposed and shot up). MI6 similarly operated a bogus travel agency that would lure republicans to Spain with free holidays, where they could be recruited as double agents. In the 1980s Mossad, Israel’s spy agency, ran a Sudanese beach resort that was used to smuggle out thousands of Jews from neighbouring Ethiopia.

The intelligence agencies also work closely with genuine businesses, often planting their people as employees.  This enables spies to travel freely as corporate executives instead of having to produce fake covers. Schumpeter makes the astonishing disclosure that Soviet double agent Kim Philby worked as a correspondent for the Economist in the Middle East shortly before his defection.

Businesses get paid for cooperating with the intelligence agencies. Schumpeter notes that America's telecom firms have been paid hundreds of millions of dollars for cooperating with the government. Intelligence agencies also provide useful information to companies for their help, information that could given them an edge over competition.

The links between intelligence agencies and the media have been well documented.Government departments are, of course, penetrated. One wonders now about their links with academia.

Storm over Trump nominee for Fed Governor, Judy Shelton

Shelton the charlatan, wrote economist Bradford de Long. Shel-no, commented the Economist. This is no way to run a central bank, pontificated the New York Times.

When the establishment gangs up against somebody as solidly as it has done in the case of Judy Shelton, one of two individuals nominated for Fed Governor by President Trump, you begin to suspect there must be something faintly right about her.

Shelton is not an economist. She has a doctorate in business administration. She was appointed Executive Director to the EBRD by President Trump. She was written extensively on economic matters- and quite well, I might add.

What do Shelton's critics have against her? They say she has in the past favoured a return to the gold standard- this makes her seem archaic. They argue that she has changed her views on the Fed's policies several times. She was against monetary loosening a few years ago. Today she favours loosening. She was opposed to the Fed supporting stock prices a few years ago. Now she wants the Fed to do just that.

Well, it's been pointed out that Ben Bernanke himself has spoken favourably about the gold standard at one point. Policy prescriptions can change as economic conditions change. It's not clear that these are sufficiently strong arguments against a nominee for the Fed.

No, the reason that many in the establishment are up in arms against Shelton is that she has challenged a key tenet of the establishment, namely, central bank independence. Shelton has said:

How can a dozen, slightly less than a dozen, people meeting eight times a year, decide what the cost of capital should be versus some kind of organically, market supply determined rate?. We might as well resurrect Gosplan ( the agency of the Soviet government that ran its economy.). 

You can see what gets the goat of the technocratic elite that runs our financial system.

Central bank independence, at the very least, means that monetary policy is set by technocrats insulated from political interference. The idea is that politicians are driven by short-term considerations, such as winning elections, whereas technocrats can afford to take the long view.

Well, maybe, maybe not. Technocrats do have political leanings and loyalties and may want to tailor monetary policy to favour a particular party at election time. Leaving aside voting preferences, central bankers do have views that are politically important. They may favour low interest rates and how stock prices because they have had links with financial firms (or want to hop on to cushy posts in financial firms after they retire). There is nothing apolitical about decisions on money supply.

Money is a public good. And banks, because they enjoy the public safety net, have a public dimension to themselves. The supply of money and the stability of banking are matters that involve the larger public good. Is there any reason why these matters should not be subject to political direction when most other matters in the public realm are? In other words, has the time not come to democratize central banking especially when the track record of central bankers before and after the global financial crisis has not exactly been exemplary?

Many are asking these questions. Shelton's problem is that she asks these questions and wants to get on to the board of Fed.

World Bank chief economist departure

I guess I picked this up a little late... the World Bank's chief economist Penny Goldberg, who's from Yale, is quitting.

While the departure was reported to be over the Bank's decision not to publish a paper produced by its research department, the precise details were not know. The FT today  enlightens us on the subject.

The paper, authored by a World Bank staffer and two academics, was about how aid given by the Bank to countries was creamed off by the elite. This is hardly a secret. But for the Bank to substantiate the point with research is clearly to too hot for the Bank's top brass and its principal shareholders.

The link I have provided gives the details of the research paper. The authors looked at aid flows to 22 most aid-dependent countries, flows from those countries to tax havens and also flows from those countries to non-tax havens. They found that periods of large aid flows to a country also saw large flows from the country to a tax haven. At the same time, there was no such surge in flows to non-tax havens.

This is not conclusive proof of the aid being creamed off but it's also not evidence that you can shrug off. The study estimates that 7.5 per cent of the aid leaks out. That may not take away the case for aid to the country- there's still a large portion that could benefit the people there. But it's clearly embarrassing for the Bank to accept that it is abetting corruption in aid-receiving countries. Also, there could be political reasons for the Bank's principal donors to keep the dominant elites in some countries happy.

Goldberg's departure follows the departure in2018 of David Romer following a quarrel over the use of some statistical methods. One should not be surprised if this causes top economists to think twice about spending time at the Bank.

Goldman Sachs woes

Goldman Sachs, prima donna among investment banks and once the darling of investors, is today a laggard in stock performance, the Economist says.  A dollar invested in Goldman in 2010 would today be worth just $1.60; the same dollar invested in the S& 500 would be worth $3.60.

Investment banks produced higher returns in the past than commercial banks. Today, J P Morgan Chase earns a return on equity of 19 per cent whereas Goldman earns only 11 per cent.

Well, one should not get carried away by the example of J P Morgan; banks in Europe and many in the US produce a return on equity of less than 10 per cent. Goldman's performance is still good but it's not the star it used to be.

One reason, as the Economist points out, is that trading, which typically produced the lion's share of profit for investment banks, today requires far more capital than before, thanks to tighter regulations. It isn't just that. One imagines Goldman would be subject to restrictions on proprietary trading under the Dodd Frank Act. Proprietary trading is where Goldman used to make enormous profit. Moreover, a bank with a strong retail franchise, such as JP Morgan Chase, would have greater access to lower cost funding the form of retail deposits than Goldman.

Goldman is trying to boost returns by trying to expand its consumer finance arm with the help of technology. This is useful but it has its limits: you need a solid branch network to reach out to retail customers, digital alone won't be enough. Another response could be to reduce dependence on trading profit and to try to boost fee income through more debt and equity placements, advisory services, etc.

A fundamental problem for firms such as Goldman is the culture of high pay and bonuses. Despite falling returns, investment banks have been loath to cut back on pay. Until this changes, it may be difficult for them to boost shareholder returns significantly.

LIC disinvestment is not a great idea

The FM's announcement in the budget about LIC going in for an IPO was roundly cheered by market analysts. Apart from the fact that it is intended to fetch Rs 90,000 crore in revenues to a cash-strapped government, analysts lauded the move saying it would lead to greater transparency and improved governance.

Now, 'transparency' and 'better governance' are things it's hard to argue with. However, it's worth remembering that these are not ends in themselves. In the context of a commercial institution, they are meant to result in better performance and outcomes.

The case for an IPO at LIC must, therefore, be that it's under-performing at the moment and that an IPO would result in better performance. This is simply not true. LIC is an outstanding performer, judged by any criteria one would like to apply to an insurance company. The entry of private companies into insurance, far from undermining LIC, has led to a surge in sales volumes. LIC still commands 70 per cent of the market for insurance premiums. It offers returns on annuities that hardly anybody in the market can match. And it is financially sound.

LIC has achieved these outcomes while performing a larger social role. It intervenes to support the markets where required. It is a big investor in public sector banks and is now the majority shareholder in IDBI Bank. It has a terrific reach in the yet under-served rural areas. LIC's social role has not   come in the way of commercial performance.

There's no case, therefore, for LIC being listed on the exchanges at this point- you can't seriously say that listing is necessary in order to improve outcomes. What listing would do is call into question the larger social role that LIC performs. We still need an institution that can support the market given the fickleness of foreign investors. Until a measure of stability returns to the banking system, it would not be wise to list LIC as retail and institutional shareholders could challenge its socially-driven actions as inimical to shareholder interest.

The only reason for listing LIC is that it will fetch enormous revenues for the government. That's not a good enough reason for an institution as vital and vibrant as LIC.

The good news is that listing LIC would require parliament to amend the LIC Act. LIC unions are opposing the move. Valuation of LIC and other steps required for listing would take a couple of years, so it's unlikely that the listing will happen in FY 2020-21.

Frontline carries a good article on the subject.

The bombing of Dresden

On February 13, 1945, as war against Germany was nearing its end, 800 Allied bombers mounted a raid on the Germany city of Dresden at around 10 pm.The next wave came at mid-night. The third one came the next morning. Three raids in the space of fourteen hours. The city was reduced to rubble. A firestorm swept through the city.

The casualties are a matter of dispute. The controversial British historian David Irving  claimed that as many as 200,000 could have died. Official estimates are closer to 25,000. It was hard to estimate casualties because the city had had an enormous influx of refugees who were fleeing the Soviet  army advance to the East.

Dresden was thought to have little importance as a military or industrial centre. Its claim to fame was more as a cultural centre. Many writers have contended that the intention was to terrorise the German population and force a surrender on the Hitler regime that was still putting up a tenacious fight. Some have called it a war crime. Others say that there was military objective, which was to disrupt communications in the region and prevent the flow of troops to the Eastern front.

Dresden was not unique in the savage treatment it had received. Berlin, Hamburg, Tokyo and other cities were severely bombed.  Then, we have the nuclear bombs dropped on Hiroshima and Nagasaki. Nevertheless, the bombing of Dresden will be forever remembered as a symbol of the savagery of World War II. Here is one appraisal of the event and here is another.

Fiscal deficit target is now a mirage

The fiscal deficit target of 3 per cent of gdp was supposed to be met by March 2008. It won't be met by March 2023!

Several amendments and an 'escape clause' built into the FRBM Act in recent years has made it possible for successive governments to avoid meeting the target.

Is there an answer? I'm afraid not. We will keep muddling along until a global recovery helps improve the chances of meeting the target.

More in my BS article, Missing fiscal deficit target is in Budget DNA.

Clayton Christensen

Clayton Christensen, the Harvard professor who popularised the idea of 'disruptive innovation', passed away recently. Schumpeter pays him a in tribute in the Economist.

Schumpeter explains Christensen's contribution:

In a nutshell, Mr Christensen’s insight was that it is not stupidity that prevents great firms from foreseeing disruption but rather their supreme rationality. They do “the right thing”, focusing on better products for their best and most profitable clients, often to the point of over-engineering (how many Mach and Fusion blades does a chin need?). But that is “the wrong thing” if it blinds them to the threat from poorly capitalised upstarts offering cheaper stuff in markets too obscure to worry about. Such threats can swiftly turn existential if the rivals move upmarket and go for the jugular.

I am not sure that great firms focus merely on "better products for their best and most profitable clients". They are also trying to grab market share by reducing costs and the prices of their products. Take banks, for instance. When they manage to increase the proportion of low cost deposits in their liabilities, banks compete for the best companies and retail borrowers on price.

Secondly, the idea that companies are trying to improve their products without seeing challenges emerging from altogether new ways of satisfying the customer is not all new. Peter Drucker spoke about it long ago and Theodore Levitt elaborated on the same theme in his paper on 'Marketing Myopia'.

It may well be that, in the era of the Internet, Christensen's idea caught the imagination of large companies in a way that Drucker and Levitt had not. So, as Schumpeter points out, big firms have moved to buy up challengers as Google did with YouTube and Facebook with WhatsApp. But the idea that, in a market economy, upstarts are forever dislodging entrenched giants is an old one. As Schumpeter points out, disruptive innovation merely builds on Joseph Schumpeter's idea of 'creative destruction'.

Budget 2020-21

The positive in the budget is that government capital expenditure will be 1.8 per cent of gdp, higher than the average of 1.6 per cent we have seen in recent years.

The fiscal deficit target of 3.5 per cent of gdp is unlikely to be met. Disinvestment and telecom revenues are likely to fall short. No provision has been made for bank recapitalisation, my guess is some amount will be required. Expect fiscal deficit to end up at around 3.7 per cent of gdp.

None of the structural reforms mentioned in the Economic Survey have been addressed. There's no overhaul of governance in public sector banks, no mention of a Temaske-like entity for PSUs. ( I happen to think the latter is unrealistic in our situation). Status quo on land acquistion, labour laws.

There's more focus on specific projects in mission modes. That's where the PM excels, a prime example being Swaccha Bharat. Better to focus on projects that can make an impact on the ground instead of expecting a miracle on the macroeconomic front.

My detailed analysis in the Hindu of Feb 2.