UK's 'cash for access' affair

I had to pinch myself in disbelief when I read this. UK's fund managers pay brokers for getting access to the latter's CEO clients. The payment rate is as much as $20,000 an hour and total spending on this account in the sector runs into millions, FT reports.

Ed Harley, head of asset management supervision at the FSA, raised the prospect of multimillion-pound fines for fund managers found to be in breach of its rules......Mr Harley said analysis by the FSA of the use of client commissions by 15 asset managers found large payments that were “hard to justify”. The bulk of them covered payments for corporate access, alongside smaller sums for access to market data.

Why would fund managers pay for access to CEOs? Presumably, they glean information that is not otherwise available? There is public disclosure of information and CEOs take conference calls from analysts and fund managers after results are disclosed. So, what exactly is to be gained by meeting the CEOs in person? And if there is something to be gained, does not that not qualify as insider information?

Incidentally, ending cash payments for access may not solve the problem. There are so many other ways in which fund managers can take care of cooperative brokers and CEOs. 

IT sector: a case of successful government intervention

It's fashionable to say that India's IT sector has been a terrific success precisely because it doesn't need support from government- it was never subject to the licensing regime, for instance. We know this is not true because the sector has been supported through tax concessions and because it was state-subsidised education that made possible the initial supply of trained personnel.

In a thought-provoking article in EPW, Jyoti Saraswati elaborates on the theme of state intervention and shows how the sector's success is, in fact, a case study in successful intervention, contrary to the nonsense that is spouted by advocates of neo-liberalism or the leading figures in the sector.

The author mentions two big forms of support in the initial period. One, the 1972 Software Export Scheme which provided 100% loans for computers meant for export use. Secondly, investment in telecom infrastructure that made possible off-shore delivery of services. The state has continued to support the sector in the post-liberalisation phase as well- the Software Technology Parks of India was one such significant initiative. Another point worth noting is that India's IT firms were able to move up the value chain by gaining experience in the domestic market which, by then, had begun to find use for their services. (eg CMC's experience in computerising the Indian railways' ticketing system helped it win the London Underground contract).

The author's  conclusion is worth quoting:

The experience of the Indian software industry over the past 20 years supports the argument that the Indian state should not be seen as pro-market but be understood as pro-business (Kohli 2010), i e, it is able and willing to intervene in support of selected sectors and industries regardless of the neo-liberal rhetoric it may espouse and the international diktats it claims to adhere to. Indeed, the state can continue to play a significant supporting role for firms, industries and sectors.

The broader point I would add is that private entrepreneurship in most countries flourishes on the back of covert or overt government support. The idea that the state should back off  and 'leave it to the market' is a myth that is perpetuated by private sector interests when it suits them. 

Kumbh Mela managerial marvel

FT joins others (including a  team from Harvard) in marvelling at the managerial capabilities that underlie the successful organisation of the Kumbh Mela festival this year.

On the sandbanks of the river Ganges at Allahabad, bureaucrats and workers from Uttar Pradesh, India's most populous state and one of its poorest, took less than three months to build a tent city for 2m residents complete with hard roads, toilets, running water, electricity, food shops, garbage collection and well-manned police stations.....

.....Devesh Chaturvedi, a senior official who is divisional commissioner of Allahabad, is proud of the “huge task” that he and perhaps 100,000 workers have completed in organising this year’s festival.
He mentions 165km of roads on the sand made of steel plates, 18 pontoon bridges, 560km of water supply lines, 670km of electricity lines, 22,500 street lights and 200,000 electricity connections, as well as 275 food shops for essential supplies such as flour, rice, milk and cooking gas.

The obvious question that is being asked is if such a feat of organisation can be accomplished for this purpose, why not elsewhere? Why can't India's villages and towns be similarly transformed. Well, motivation apparently is everything: the people involved in the project think they are actuated by a sense of mission, given the religious significance of the event. In principle, however, India should be able to replicate it in other places: neither talent nor resources is the real constraint:

First, the authorities ensure that all those working on the project are accountable for their actions and the money they spend. Second, those involved are highly motivated.
“They feel it’s a real service to all these pilgrims who have come here, the sadhus [holy men] and the seers, so it’s a sort of mission which motivates them to work extra, despite difficult working conditions.” 

Good organisation and efficient infrastructure, in short, are no more impossible in India than anywhere else. “The lesson is, it can be done,” says Bhagawati Saraswati, a Californian-born Hindu devotee camped on the river bank with other members of an ashram based on the upper Ganges.

 

Capping bankers' bonuses

The European parliament has grasped the nettle when it comes to bankers' bonuses. They have passed a law that mandates a 1:1 limit on the salary to bonus ratio. This can be go up to 2:1 with shareholder approval. The move has raised a storm in London where bankers and politicians believe that the proposal will undermine the City's importance as a financial centre, perhaps by causing banks to move key personnel to locations where the caps would not apply. FT has a primer on the new regulations.

One obvious response on the part of banks would be to increase base pay so that the overall compensation is not affected. But this has its own problems: it raises a banks' fixed cost and leaves it vulnerable in times when revenues and profits shrink. The EU banks fear that the proposal would confer American banks, operating in the US, with an advantage. (Presumably, the rules would apply to American banks' subsidiaries in the EU). Andrew Hill has a critique in the FT, but I am not convinced by his arguments.

The cap on bonuses follows regulations that require banks to defer the vesting of stock options over a longish period. Increasing the requirement of bank capital, which will reduce returns to equity in banking, should also help address the issue of systemic risk posed by large bank bonuses.

Incidentally, we are seeing the first major attempt at clawing back bonuses. Barclays is clawing back 300 million pounds paid to its bankers. The claw back follows huge fines the bank has incurred for Libor rigging and mis-selling various products.

Where does all this leave banking? The outcome, one imagines, would be to reduce incentives for taking excessive risk. Will it curb innovation? Perhaps, but, then, there is the perception that much of the innovation we have seen in recent years is of dubious value. A certain imbalance has crept in between the financial sector and the real economy. There is such a thing as excessive 'f'inancialisation' of the economy. Tackling compensation in banking is one element in addressing the larger problem of systemic risk in banking.

At the mercy of the rating agencies

The FM has kept his pledge. He has contained the fiscal deficit for 2012-13 at 5.2%. All of us know that this is at the cost of a cut in Plan Expenditure of nearly Rs 90,000 crore. He pegs the deficit for the 2013-14 at 4.8%. Since he sees no choice but to appease the rating agencies, chances are he will stick to this target as well. The question is: how?

Many analysts have pointed out that the revenue estimates are optimistic even if we grant that growth revives to 6%- the figures non-tax revenues, including divestment proceeds, certainly are ambitious. Subsidies in the coming year are to decline by Rs 25,000 crore, which means fuel subsidies will be axed even further, which would be a tall order as elections approach. It is more likely that the FM will meet the fiscal deficit target the same way he did this year- by pruning Plan expenditure and capital expenditure. The increase in 29% in Plan expenditure is clearly iffy.

Growth has sagged in the current year because of an investment famine and cuts in government capital expenditure have clearly contributed. If the government resorts to the same in 2013-14, that is bound to tell on growth. The betting is that private investment will somehow revive strongly, helped by lower interest rates. As fuel subsidies are pruned, inflation will stay in the region of 7%, so there is little the RBI can do to help. More importantly, it is not at all clear that high interest rates are the deterrent to private investment- real interest rates today are way below they were doing the boom period of 2004-08.

Private investment will revive if investors see demand looking up. Either export demand must pick up with an improvement in the global situation. Or domestic demand must revive- and, in the present situation, this requires a strong push from the government. Think of the what the highways project did during the NDA regime. But, if the government is fixated on a fiscal deficit number, there is no way this can happen.

For me, the big puzzle is why rating agencies are so obsessed with the fiscal deficit number. India's total debt to GDP ratio of less than 70% looks good in the present environment; India is among the few countries to have seen the ratio declining post-crisis. States have got their acts together on the fiscal front. External borrowings are low. If only the rating agencies would allow elbow room in respect of the fiscal deficit, it will be easier to get into a virtuous cycle of higher growth, higher revenues, and lower fiscal deficit. Historical experience shows that nations grow their way out of a high debt situation. The G-20 is veering towards reducing austerity. But here the rating agencies won't allow it. And we can't annoy the agencies thanks to our yawning current deficit.

Just hope and pray that gold prices collapse. Then, the current account deficit will narrow. That will give us greater freedom in respect of fiscal policy. Also, pray that the global environment improves. t's hard to see how the present fiscal approach can lead to any early revival in growth.

Some related thoughts in my ET column, Budget must cheer the markets.

Sebi paper on corporate governance

Sebi has just come out with a consultative paper on corporate governance. I know most people can't help yawning- so much has been said about corporate governance and yet we have so little to show.

Still, I would recommend the Sebi paper because it not only gives the background to the situation in India but also documents some undramatic but useful initiatives Sebi has taken of later. The consultative paper itself contains some useful proposals, some of which I will mention:

• Giving minority shareholders in large companies the right to nominate at least one director: This is a useful step towards broad-basing the board, which today consists entirely of  nominees of  promoters.
• Requiring independent directors to give reasons when they resign: True, they can always cite "personal reasons" in order to avoid unpleasantness. But if things blow up later, they can't say they were aware of what was going and that is why they resigned; if they knew, they should have said so in their letter of resignation.
• A maximum tenure for independent directors: Two terms of five each. I am not sure I favour the same directors returning after a hiatus of three years. Surely, there is enough talent available in the country, notwithstanding claims to the contrary made by companies?
• Restricting the number of independent directorships: This should not be more than six or seven in my view. It is shameful that many people don't think it necessary to impose limits on their own when  they know you can't do justice otherwise.
• Performance evaluation of independent directors: This is to be done by peers, which could lead to back-scratching. But even a few adverse evaluations should have some effect,
• Making a whistle-blower mechanism compulsory: This is long overdue. It should be possible for employees to disclose wrong doing to a designated independent director. It should be mandatory for the said director to bring the matter to the board for discussion.
• Mandatory succession planning and disclosure of these plans to shareholders
• Mandatory e-voting

These are some of the more important proposals. The disappointment is that we are not seeing a wider participation of shareholders in the appointment of independent directors. I would like to see institutions nominate their directors who would be regarded as independent. Strangely, the Sebi paper thinks institutional nominees should not be regarded as independent presumably because they represent the interests of one groups. But institutional interests are also, in general, aligned with those of the broader shareholder body, aren't they?

You cannot have an effective board as long as management or promoters appoint independent directors and reward them lavishly. The appointment of independent directors should be done by different stakeholders, including minority shareholders. I believe not insisting on this is the big lacuna in an otherwise interesting paper put out by Sebi.

More in my column, Sebi dodges the central issue.

Corruption- India isn't unique

Spain's PM Mariano Rajoy has been implicated in a growing corruption scandal in Spain, which is already under pressure in the Eurozone crisis, FT reports:

Spain’s prime minister has become embroiled in a growing scandal over secret cash payments to ruling party politicians after a newspaper published that it claimed to be accounts showing payments reaching as high as Mariano Rajoy himself..... 

“The level of trust in politicians in Spain is very, very low, and corruption is one of the main problems,” said Antonio Argandoña, professor of Business Ethics and Economics at IESE business school. “Politicians must tackle this problem before any more damage is done.”

A recent poll for El País suggested that 96 per cent of Spaniards believed that political corruption was “very high”.

 

I know this is poor consolation but it helps to know that political corruption isn't unique to India.  It is alive and kicking in rich economies as well.

Big banks and operational risk

Big banks pose big risks. That has been clear enough in recurring banking crises. But the risks don't relate to credit or market risk alone. Bigness leads to problems with operational risk as well. This is the lesson from the huge finds that banks are paying out for the Libor scandal, money-laundering etc. The underlying reason is the same: lack of incentives to curb violations of law or regulations when you know criminal prosecution will not follow. Just pay out a big fine, which is still small in relation to profit, and move on.

More in my ET column, It's fine to be a big bank.

Cash transfers

There are indications that the government is having second thoughts on cash transfers- it is being restricted to fewer schemes in fewer places. This is appropriate. Without rigorous testing and feedback, the scheme can give rise to serious problems.

There are two issues here. One is the use of cash transfers for existing payments, some of which are made in cash and the rest by cheques. Another is the use of cash transfers in lieu of subsidies.

As for as the first is concerned, transferring directly to bank accounts should be fine in principle. Still, one must question whether such transfers need to be linked to Aadhar at all. Where pensions or loans are concerned, identities of individuals are not an issue. It is not clear why somebody, who has a bank account to which funds are to be transferred, should have an Aadhar identity as well, unless the idea is to give Aadhar itself wider currency. In the case of MNREGA, perhaps, Aadhar may help to avoid duplication of payments to individuals but this has to be clearly established through trials.

Cash transfers in lieu of subsidies built into prices of foodgrains are a different matter altogether. Paying cash may not ensure availability of food; and it is hard to find out what the market price for foodgrain is at a given point in time at a given place and, therefore, whether the cash transfer is adequate to enable purchase of the necessary quantities of foodgrain. Nor can cash transfers mean the dismantling of PDS. If the idea is to plug leakages in PDS, then it is important to take into account the fact that, in several states, leakages have been greatly reduced. These practices must be emulated elsewhere instead of opting for cash transfers to Aadhar accounts.

A letter signed by several economist and social activists in EPW says it all. It should be compulsory reading for those involved in making policy on cash transfers.

India's TV channels in crisis

India's TV channels are in the midst of a financial crisis which has serious implications for how report news, argues Sandeep Bhushan in a hard-hitting article in the Hindu. Bhushan points out that major industrial groups, such as Reliance, have acquired significant stakes in TV companies. (Even otherwise, one would think that intense competition for advertising revenues would tend to influence news coverage on TV networks). Bhushan spells out the impact:

The most far-reaching is the redefinition of the role of the editor. Increasingly his/her profile not merely entails leading the pack in the TRP race, but crucially acting as the “front” for the promoter in order to provide an appearance of both credibility and acceptability within the industry. The promoter’s line — his whims and fancies, idiosyncrasies and perhaps, most damagingly his political “preferences” — is increasingly the editorial line. It is not my case that this state of affairs uniformly prevails in all TV broadcast networks. But any “insider” will confirm that this is pretty much the picture by and large. 

This has resulted in growing centralisation of newsgathering operations. Editorial monitoring is closest with regard to “political” reportage because it is here that the government of the day can be really hit hard. In my experience of reporting “political” stories it was virtually impossible to generate a story in the field and hope that it got aired unless it coincided with the editorial “line.” “Political” stories invariably emerged from the “top.” Often a reporter may not even have a say in the particular “angle” of a story to which only he or she has privileged access. This has virtually taken the (political) reporter out of the scheme of things in broadcast journalism. 

It is not just the slant to political and corporate news coverage that is worrying. It is the lack of news coverage in the first place. If you want to know what happened in the country on a given day, you would be hard put to find it on any of the private TV channels. Instead, you get slanging matches performed in the studio, often with the same set of familiar faces. Going out and covering and reporting news is costly; it's much easier to get a bunch of talking heads into the studios.

Bhushan urges better protection of journalists, more professionalisation of management and anti-trust laws to counter the present trends. All this is easier said than done. Perhaps, a simpler way is to strengthen public broadcasting so that it emerges as a serious threat to popular channels. As I noted in my blog sometime ago, Doordarshan has improved in a big way and Lok Sabha and Rajya Sabha TV have some very interesting programmes to offer. This trend must be strengthened so that private TV channels and their owners find that better content is needed to retain and attract viewers and hence advertisers. 

 

Peer evaluation for IITs, IIMs

The IIT Council has said that all IITs will be subjected to evaluation by peers every five years, TOI reports. Apparently, the government intends a similar review for IIMs. I welcome the move- I had myself advocated external audit of the IIMs in my book on Ravi Matthai- IIMA, Brick by Red Brick, published in 2011.

An external audit is required for two reasons. One, we do not have sufficient competition for the IITs and IIMs and, therefore, it cannot be left to market forces to arrive at a judgement, reflected in applications for admissions. Given the acute scarcity of quality colleges in engineering and management in relation to demand, the market cannot be expected to deliver judgement. An alternative mechanism would be the Board of Governors of IITs/IIMs but this mechanism has simply not functioned. One reason is that those appointed to these boards have very little stakes in the institutions and cannot be expected to devote the attention necessary to keep management on its toes. Besides, for the Board itself to monitor effectively, an effective market for higher education needs to exist; as mentioned, it does not.

As a result of poor monitoring, the IITs and IIMs today are places where there are few checks and balances on the office of director. The scope for discretion is enormous and there is virtually no accountability. Whether a director performs or not performs, whether he abuses office or not has no bearing on his completing his term and even getting another term.

This is an unhealthy state of affairs. All public institutions should be accountable- in the case of the IITs/ IIMs, directors as well as faculty. And such accountability can be established only through an independent management audit. Indeed, the principle of independent audit needs to be applied to regulators and other public authorities, such as RBI, SEBI, the CAG, CEC, etc. No public institution should be beyond the pale of public scrutiny of their activities, decisions and performance.
 
The modalities of the independent audit are important. It appears the expert committee will be chosen by the minister of HRD from a panel of 10 names submitted by the Board of Governors of an IIT. This is not the most desirable state of affairs. The Boards cannot provide names for the audit panel because the boards themselves need to be audited. It would be better to create a collegium of distinguished academics (including NRIs) who would propose names to the ministry.

Secondly, the audit must not be based on meetings with top management of IITs/IIMs or on published documents alone. The audit panel must meet all stakeholders: faculty, students, staff, alumni, the corporate world. Not only the actual outcomes (placement, publications, number of doctorates, etc) need to be reviewed but the internal processes and important decisions. It should be open to any faculty member to submit written documents for consideration by the audit panel. It is only by shining the light on the internal processes and governance of these institutions that improvements can be brought about.

Lastly, the audit reports must be placed in the public domain. In today's world, we can expect the reports to be commented on not only in the mainstream media but also in the social media. Audit and disclosure are the keys to accountability at public institutions.

It is striking that the gurus of governance at the IIMs did not think of subjecting themselves to a peer review all these decades; it was left to their bete noire, the ministry, to initiate this proposal. 

Banking reform must focus on financial inclusion

One gets contradictory messages on banking reform these days. Some talk of consolidation as the need of the hour. This means fewer banks and less competition. Others say net interest margins are too high and we need to drive them down, which would require more competition. And yet others talk of the imperative of financial inclusion- one would imagine this is best done through keeping the existing set of public sector banks with their branch networks instead of opting for consolidation.

Neither consolidation nor lower margins is the need of the hour. India's banking system is not so fragmented as to be unviable and, besides, more concentration means greater systemic risk. If we want to pursue inclusion, we need banks to have reasonable surpluses, so they will need the margins they currently enjoy.

Financial inclusion is what we must focus on. The success of Indian banking in the post-reform period, it is not often realised, is the fruit of the substantial investment in inclusion during the nationalisation period. The branch network created in that period has created the low-cost deposits that form the backbone of Indian banking today and partly account for its financial success in the post-reform period. Inclusion on the asset side helped strengthen agriculture and SMEs and laid the foundation for industry doing well.

There is an opportunity to cash in on inclusion again, thanks partly to the direct cash transfer scheme. This will mean creating millions of new accounts with large cash floats. Whoever can make success of this will getting a hoard of low-cost funds and will also be creating potential borrowers and buyers of financial services a few years down the road.

The issue of licenses for new banks must be linked to financial inclusion targets. With industrial houses, the regulatory issue is not just interconnected lending. Interconnected borrowing is also an issue. A bank set up by an industrial house can easily acquire deposits and salary accounts from other business entities within the house and hence is saved the trouble of having to garner deposits through a large branch network. It is not enough to ask industrial houses to set up branches in under-banked centres. There must be clearly specified quantitative targets for inclusion for each branch. In other words, industrial houses can be allowed into the field, subject to their meeting the basic objective of financial inclusion.

More in my ET column, Banking reform needs focus.

Narayana Murthy on CEO pay

How do we determine CEO pay? Narayana Murthy, writing in ET, suggests that the ration of the  highest to the lowest pay in a company should be of the order of 20-25. This is rather more liberal than what Peter Drucker, the management guru, had proposed many years ago: 5: 1. But even NRN's prescription is way below what obtains in the corporate world today. In India, I would imagine the ratio is as high as 300: 1 or even 500:1 in many companies. If we factor in perquisites and stock options, the differential escalates even more. It is only in the much-derided public sector that NRN's prescription comes close to being true- and, that too, when you exclude the market value of perquisites such as housing provided by the company.

NRN's argument that companies are bound to benchmark pay with global practices is not persuasive for the simple reason that overseas companies do not have very clear norms for setting CEO pay. Nor is one persuaded by the point about independent directors setting pay- all of us know how independent these directors and how generous they can be when they are looked after well by the company.

The way CEO pay is set is just another manifestation of the fundamentally inequitous nature of modern society- those at the top will simply get away with doing whatever suits them. The best we can ask for more comprehensive disclosure not just of the total pay packages at the top but of the norms used for setting pay. The latter is seldom made available to shareholders or the general public.

More broadly, the answer to reining in private sector pay is to have a public sector alternative that offers a different lifestyle- more security, more job satisfaction, linked to more modest pay. When people have that sort of a choice and many spurn private sector salaries, however attractive, in favour of something that is inherently more satisfying, that might contribute to limiting pay in the private sector. 

Global economy more crucial to growth than reforms

India's growth prospects, it is generally agreed, should improve in the next year. That is because the global outlook has improved. One indication is the return of FII flows into India in a big way- net FII inflows this calendar year are over $20 bn, the same as in 2010. FII money fled India last year following the Eurozone crisis. The relatively stability in the Eurozone this year has prompted a return.

Note that FII flows did not return because of the burst of reforms. The bulk of the FII flows , $12 bn out of $20 bn, came into the country by August whereas the reform burst happened in September. This underlines an important point: what happens to the economy in the near future will be governed more by global conditions that any reform initiatives.

This proposition is borne out by the fact that India grew at 8-9% in 2004-08 without any serious reforms. Similarly, growth plummeted to 6.8% in 2008-09 at the peak of the global crisis. India's economy is far more integrated with the world economy than before through both trade and capital flows. Another reason the global economy matters is more is that private investment in infrastructure, which drove growth earlier, is hampered now by regulatory and legal issues and high leverage in infrastructure companies. We can't really expect domestic investment to drive growth in a big, given the difficulties in the big growth area, infrastructure.

As for reforms, the potential impact of these is constrained by two factors. One, the persistence of high inflation- this won't change in the next two to three years as domestic prices are gradually aligned with international prices. Two, the fiscal deficit will remain high upto 2014 if only for electoral reasons. Both these will mean a low rate of savings. High inflation will keep financial savings low as households prefer to park their savings in gold. A high fiscal deficit implies lower net savings. The fiscal deficit will decline substantially only when growth revives strongly on the back of a revival in global demand. It is unrealistic to expect that we can compress fiscal deficit to a level where interest rates fall, investment revives and growth accelerates.

Whichever way you look at it, the global outlook holds the key to India's return to the growth path of 8%. The Eurozone crisis will stretch out until at least 2014-15. That implies that India will have to wait at least until then before it gets to seeing growth of 8%.

More in my ET column, Slow return to 8% growth.

Reservation in promotions

The reservation in promotions for SC/STs Bill has been passed in the Rajya Sabha. Its passage in the Lok Sabha is awaited. Many of those who favour reservation for SC/STs at the point of entry are opposed to extending the principle to promotions. The merits of the Bill can be debated but the crucial thing to note is that the Bill will have to withstand any challenge in the  Supreme Court. The Hindu today carries an article that brings out the constitutional aspects very well.

There are two criteria of the Supreme Court that are relevant to any provision for reservation in promotions for SC/STs. One, such reservation must not come into conflict with requirements of efficiency. Two, the government must demonstrate lack of representation of the SC/STs by providing appropriate data. The article points that as part of the negotiation with the BJP, the UPA government agreed to drop an earlier provision in the Bill that would have allowed it to ignore concerns about efficiency. However, the present draft contends that the government need not demonstrate under-representation. The author writes:

The draft of the 117th Constitution Amendment Bill has a rather short-sighted response to the Supreme Court’s demand that the inadequacy of representation of the SCs/STs must be demonstrated on the basis of each cadre. In essence, the Supreme Court’s position is that if the state wants to provide quotas in promotions for clerks, it should demonstrate inadequate representation of the SCs/STs among clerks . The response of the 117th Constitution Amendment Bill is to remove any reference to the requirement of demonstrating inadequacy of representation. The Supreme Court’s demand that the cadre must be the basis for demonstrating inadequacy of representation is far from ideal. A cadre-based determination of inadequacy of representation of the SC/STs would not result in an accurate picture of representation of the SC/STs in public employment as a whole. The 117th Constitution Amendment Bill should have clarified that a cadre-based determination of inadequacy of representation was not required by the Constitution and that it would be sufficient for the State to demonstrate inadequacy of representation in public employment as a whole. Instead, the Bill that has been passed in the Rajya Sabha goes to the other extreme and no longer requires the state to demonstrate any sort of inadequacy of representation. 

I am not clear as to how quotas on promotions will work. Are we to suppose that there will be 22.5% reservation for SC/STs at each level- joint secretary, additional secretary, secretary- in the government? Or will governments settle for, say, representation in the office cadres as a whole? If SC/STs are adequately represented at the joint secretary and additional secretary level and in the services a whole but there are not enough of them at the secretary level, would this call for government intervention?

The implications of having 22.5% quota at every level should be evident. Promotion would become virtually independent of performance or any comparative evaluation of merit. However, if we don't have enough SC/STs at the senior levels, that could be construed as violative of the intent of the amendment proposed. A compromise would be settle for some rough indicators- at least 5-10% of SC/STs for all posts at senior levels in the aggregate. But, then, an argument could erupt about the numbers; some would say that anything short of 22.5% is discrimination.

I'm sympathetic to the idea of quotas in promotions but I'm afraid I can't see how quotas in promotions will operate or can be operated. Any suggestions?

Basel III complacency

Basel III is supposed to be a tough answer to Basel II- better quality capital and more capital for banks. Banks have resisted the higher requirements saying it they will affect loan growth. It is sobering to be reminded, therefore, that equity to total capital at banks, following Basel III, will be a mere 3%- that is, a leverage of 33! The reminder comes from the Vice Chairman of America's Federal Deposit Insurance Corporation:

Despite the promise of higher capital levels and better quality capital, Basel’s new minimum leverage ratio requirement is only 3 per cent, about the same as that of the largest US banks when the global crisis erupted. Basel III offers more complexity and, therefore, new opportunities to circumvent the system. But it does not offer any more certainty that banks will be well capitalised when the next crisis hits.

What is the answer? Go for a simple leverage ratio that is reasonably high:

We can establish a simple but stronger capital base by replacing the unmanageably complex Basel risk-weighted standards with a tangible equity capital ratio of around 10 per cent, and use a simplified risk-weighted measure as a check against excessive off-balance sheet assets or other factors that might influence banks’ safety. If the financial industry had had tangible equity capital approaching this level in 2008, we might still have had a crisis. But it would have been far less severe and far less costly to the public.

Interview on Narendra Modi

I found Rediff.com's interview with Gunvant Shah perceptive. The interview is about Modi- his strengths and weaknesses. Shah makes no bones about either. He condemns the Gujarat riots as a blot on the state but does not hold Modi personally responsible:

So you think he should not apologise.
Not at all! You are talking nonsense. When there is rioting and provocation of this dimension, do you think there won't be any reaction from the majority community? You conveniently forget that in 1984, Sikhs were killed by Hindu Congressmen. Not a single non-Sikh was killed. You can call it a pogrom. Here in Modi's Gujarat, 218 Hindus were killed in police firing... And do you know even Congressmen came to fight Muslims on that day?

It is good to see the media talking to people on the ground in  Gujarat. Rediff's coverage of the elections has been excellent.

Financial Times and Economist up for sale?

Well, there is certainly speculation on this account. FT is said to be losing money. The report does not say anything about the finances of the Economist. As somebody who is addicted to both periodicals, I sincerely hope that they don't lose their character if they are acquired. I wonder why Rupert Murdoch is not interested- could it be because of the troubles he has had to face in the UK? Whatever his failings, Murdoch will be gratefully remembered by journalists as the man who has helped preserve two of the greatest titles in journalism, The Times of London and the Wall Street Journal.

I have only one other thought. The FT and the Economist do not lack commentators who advise policy-makers and businessmen on how to get their policies and strategies right. FT has a whole section on Management. The redoubtable Schumpeter of Economist dissects corporate strategies all the time. Are we to believe that the pundits at these journals do not merit attention within their own publishing house? I do remember that some years back, the Economist flew Michael Porter in for a strategy session.  The cynical could say that that doesn't mean much: after all, Porter's own consulting firm, Monitor, is in the doldrums.

Economic growth can't be left to the market

After the financial crisis, the case for regulation of the financial sector has grown stronger; most people believe that leaving things too much to the market was part of the reason for the crisis. Still, not many would argue for a role of the state in promoting economic growth. The wider view is that the state should take care of law and order, infrastructure and efficient financial markets and leave the rest to entrepreneurs.

Chinese economist and former World Bank chief economist, Justin Lin argues otherwise in his recent book, The Quest for Prosperity. He makes the point that nations have seen sustained and strong growth all owe it to strong support from the state- very often, support for particular sectors. The proposition is not new. Robert Wade and others have pointed out that the East Asian miracle was pretty much state-led. But, the earlier thesis was that the state should generally support firms that were in competitive businesses, especially those that were trying to win in export markets. Lin goes further. He wants the state to target particular sectors and guide private investment into those areas.

This is really a strong form of what used to be called 'industrial policy'. Lin shows that this sort of thing is not unique to East Asia. It happened to all the advanced economies of the west earlier. What is more, the advanced economies practise this even today, although sometimes in not so obvious ways.

More in my ET column, How the state can boost growth.

J S Verma on SC judgement on Vodafone

I return to my blog after a fairly long time- preoccupied on many fronts in recent weeks.

I wanted to flag Justice JS Verma's comments on the Supreme Court verdict on Vodafone. There has been much criticism of the government's attempt at changing the tax law retrospectively in the Vodafone case. Many have differed, however, with the SC's views in this particular case and it is interesting that Justice Verma is one of them.

Justice Verma gives two reasons for his difference of opinion with the SC judgement. One, he believes that "the three-judge judgment in Vodafone bypasses a five-judge constitution bench judgment in the McDowell matter in 1985. The McDowell judgment in substance said that in this context what you have to see is the substance of the transaction to determine the tax liability and not merely the form of the transaction." Justice Verma points out that a three-judge bench cannot bypass the view of the larger five-judge bench in the McDowell case.

The bigger reason, according to Justice Verma, is as follows (all quotes here are from the report in the Indian Express):

Judges need to be committed to constitutional philosophy and not the philosophy of the ruling party. The constitutional philosophy in this case as laid out in Articles 38 and 39. The effect of benefiting a corporate is to cast a higher tax burden on the common man and when you uphold an illegal tax avoidance, then you cast a higher tax burden on the honest tax payer. According to me the Vodafone judgment has all these implications.

Justice Verma believes the Vodafone judgement is to be clubbed with two other SC judgements- those in the habeas corpus case during the emergency and the JMM bribery case as judgements “which are best forgotten or allowed to pass”. In the habeas corpus case, the SC had ruled that the right to habeas corpus stands suspended during an Emergency- this was subsequently changed by parliament through a constitutional amendment. In the JMM bribery case, the SC ruling was that the MPs who were accused of taking a bribe to vote in a particular way had committed no crime that the legal system could act on as they enjoyed immunity granted to members of parliament.