Forecasts for 2010.

FT's reporters and commentators put out their key forecasts for 2010. Here is an edited version:

Will the UK suffer a double-dip recession?
No.

Will the UK government sell any of their stakes in the banking sector?
No.

Where will oil finish the year?

....oil is most likely to end the year within its present trading range of about $70-$80 a barrel.

Should investors put their money into the stock market?
Yes. ...Next year’s stock market gains will be less spectacular than 2009’s.

Will there be a trade war in 2010?
Conflict, yes. Full-blown war, no.

Will the eurozone experience a sovereign default in 2010?
No. ...Since a clean default is impossible, governments will have no choice but to retrench, however painful the consequences.

Who should I bet on in the British general election?
Forget David Cameron’s Conservatives; pity Gordon Brown’s Labour. Put your money instead on Nick Clegg’s Liberal Democrats. No, I don’t think Mr Clegg is about to sweep into Downing Street as the leader of the first Liberal government for a century. The firm prospect – to my mind as near a certainty as you can get in politics – is that Mr Cameron will be the next prime minister. But those who fancy a wager should look at the odds on the third party.

Will Putin declare his candidacy for Russia’s presidency?
Mr Putin will not formally declare his candidacy until closer to the election date but it seems likely that over the next 12 months he will send ever-stronger signals that he intends to run for the presidency in 2012.

Will the world make progress on nuclear disarmament?
Yes.

Will this be the year that Israel bombs Iran’s nuclear installations?
No.

Will Afghanistan turn into Obama’s Vietnam?
No.

Will bonuses in Wall Street and the City of London be cut?
No.

Upbeat on the Indian economy

I am upbeat on the Indian economy as the year end and for reasons I spell out in my ET column,, Economy's stronger than we think. I find I am in good company- several other commentators have since come out with optimistic assessments.

My reasons are:

• This year's growth forecast of 7% plus shows India is not a bubble economy whose growth of 8-9% earlier was linked to the global economic bubble
• The fiscal problem will come under control as growth gets back to the normal trajectory.
• The polity will not be a drag and fears about the country coming apart because of the demand for newer states is misplaced.

On the demand for newer states, I note:

As for the demand for new states, concerns on this account carried greater force when states were first organised along linguistic lines. Then, the greatest fear was that language would rend the country as religion had during Partition. In the early sixties, an American analyst, Selig Harrison, wrote a book, India: The most dangerous decades, in which he warned that linguistic and caste divisions — ‘centrifugal pressures’ — could tear the country apart.

Our experience has been refreshingly different. The creation of new states in the fifties and thereafter has strengthened democracy by creating a better sense of participation among people. As many commentators have pointed out, this has also been our experience in more recent times with the creation of states such as Chhattisgarh, Jharkhand and Uttaranchal.

The division of states being demanded today is not even along linguistic lines. People speaking the same language want to go their separate ways because they want better representation, because administration is too remote in many of the larger states. We have no reason to fear these demands. The movement towards the creation of newer and newer states shows that the Indian state is responsive to aspirations for self-governance. The economy will benefit as it has in the past.

Surjit Bhalla, writing in BS, echoes my optimism and goes further. He thinks India will grow faster than China in the coming years:

China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level.

This scenario will have predicted effects — China’s GDP growth should moderate to a less polluting 8.5 per cent in 2010 and then proceed on a declining trend for the rest of the decade. This will mean jobs for the rest of the world. The other side-effect of the China growth rate decline will be on carbon emissions. They too will decline, and allow China to reduce its carbon intensity of output to at least the world average. In stark contrast, India does not have pressure from the world community to mind its currency or emissions. The productivity growth advantage of 2 per cent a year that China currently enjoys will soon disappear, leaving India with a GDP growth rate in excess of China, and in excess on a sustained basis.

Family member to succeed Narayana Murthy?

There has some speculation as to who might succeed N R Narayana Murthy as chairman when he retires in two years' time. Murthy has in the past indicated that it could be somebody from outside the company. For the first time, an ET report hints at the possibility of somebody from his family taking over. This will come as a surprise as the Infosys founders have thus far been at pains to distance their families from the company:

I would not like to rule out bringing talent from outside...(but) we have to first assess the talent within the company so that we reward smart, loyal people and then look outside," Murthy told a news channel when asked about his succession plans for the company.

However, he did not rule out the possibility of someone younger from his family to take over the charge of the company either.

"We have not ruled out anyone from younger generation in joining (the company) but whatever will be done will be done purely on the basis of merit, suitability and competence," he said responding to a question on the possibility of someone from his family running the company in future.

A sympathetic portrait of Goldman's boss

FT carries a sympathetic portrait of Goldman boss Lloyd Blankfein, not something that he has been getting over the past year. The paper has been fair to him despite the fact that he declined to be interviewed for the article. But Blankfein does have a long-standing relationship with the FT: he sits on their jury for the Business Book of the Year. ( I am not going to pronounce this a conflict of interest).

Blankfein's background is interesting. He was the son of a postal clerk and grew up in a public housing project in the New York's downmarket burrough, Bronx. Now, as CEO of Goldman, he has a $26 mn apartment in the Central Park area. (That's over Rs 100 crore- you could probably acquire an apartment building in Cuffe Parade, Mumbai, at that price). Along the way, he went to Harvard thanks to a scholarship. That's called meritocracy- the US is what it is because it has more of it than any other country.

Fiscal consolidation and Keynesian economics

In India, there is a clamour for swift return to fiscal consolidation. So also in the UK, despite the fact that the British economy has to still to recover from the crisis. Why fiscal consolidation? To prevent interest rates from rising and crowding out investment; and to prevent exchange rate appreciation and boost exports. In both ways, consolidation is seen as coming the way of growth.

Robert Skidelsky, the famed biographer of Keynes, questions these contentions:

If its borrowing is not rapidly reduced there will be a “gilt strike” – investors will demand higher and higher prices for holding government paper. Faced with the evidence that, despite increased government borrowing, gilt yields have been at a historic low, the critics say that this is only because the gilts are being bought by the Bank of England. Once the Bank stops buying government debt, interest rates will shoot up.

A parallel argument is that the expansion of the fiscal deficit is preventing a natural fall in the exchange rate sufficient to boost exports. The tortuous logic seems to be that “fiscal consolidation” will cause the rate of interest to fall and the fall in interest rates will cause the exchange rate to fall, thus increasing the demand for British exports......

Empirical evidence supporting the view that cutting the deficit causes the exchange rate to fall is very thin. A 1997 study by the International Monetary Fund showed that in only 14 out of 74 studied instances did fiscal consolidation promote a recovery via a fall in the exchange rate. In all the other cases fiscal policy either had no discernible exchange rate effect or it was the expansion of the deficit that caused the exchange rate to fall.

At the best of times, the arguments made for fiscal consolidation have sounded hollow; in crisis times, they sound ridiculous.

BJP's new president and competitive politics

Nitin Gadkari, the new president of BJP, has been portrayed in much of the media as somebody hand-picked by the RSS and, therefore, intended to give the RSS a better hold over the BJP. It may well be that he is the RSS's choice. But, what is ignored is that he has a great deal going for him. It was left to ET to carry a story that highlighted his strengths and accomplishments. I could not find the story in the online edition and hence am unable to provide a link.

In brief, Gadkari is credited with a great deal of modernisation that has happened in Nagpur, he was instrumental in getting the Mumbai-Pune expressway done and he was also in charge of Vajpayee's Golden Quadrilateral. The story also spoke of his performance as PWD minister when he got the state's infrastructure arm to bag projects in the face of competition from private investors and despite political pressures to favour industrial groups. The projects were executed at a much lower cost than quoted by private parties.

The media has highlighted his skills as an organiser. The ET story also mentioned that media persons found it a pleasure to meet him - and not just because he's a foodie who can serve terrific meals to his guests but because he is a man full of ideas and loves to get into intellectual exchanges.

If all this is true, then you cannot but be amazed at what has happened. The BJP has reached out beyond the Delhi coterie and brought in somebody relatively young (he's 52) and with the potential to shake up and revamp the party. This is quite an achievement when you consider how difficult it is to break into any entrenched set-up, whether the bureacracy or the corporate world or even academic institutions. It has happened in the BJP because Indian politics is extremely competitive and party workers expect to see results. If a given leadership cannot produce results, then the party dynamics contrives to bring in an outsider who can change things. The rise of Rahul in the Congress also owes to the imperative to project a new face and to come up with new ideas.

How Gadkari will perform is anybody's guess. But his rise to the top job in the BJP underlines that Indian democracy is alive and kicking.

PS: Thanks to Vishal for providing the link. Here is the relevant excerpt:

Maharashtra is strewn with Nitin Gadkari’s signature projects, almost all of them are testimony to his drive. As a former PWD minister, Mr Gadkari has shown the guts to overrule his party boss Pramod Mahajan and Shiv Sena supremo Bal Thackeray, who were keen on awarding Mumbai-Pune expressway project to a certain corporate house. Fiercely committed to the state’s cause, Mr Gadkari even offered to quit the post, but refused to give theproject to the said industrial house.

In the end, he won. The private company had quoted the project cost Rs 3,100 crore. The state-run Maharashtra State Road Development Corporation (MSRDC) — Mr Gadkari’s brainchild — completed it in just over Rs 1,600 crore. Even the currently inaugurated — though incomplete — Bandra-Worli sea link was Mr Gadkari’s idea, which he launched but could not complete because Sena-BJP failed in the 1999 state polls.

The test of his innovative skills came during 1996 when the newly formed MSRDC tried to tap the market for its various infrastructure projects. The regulator refused the state corporation permission to issue bonds since it didn’t have its own assets.

As a PWD minister, Mr Gadkari wasted no time and just in a day transferred all PWD assets in Mumbai to MSRDC. Thus came into existence a body that went on to build some 55 flyovers in Mumbai and the country’s first auto-bahn Mumai-Pune Expressway, all completed in the promised time-frame.

Subramaniam Swamy on Paul Samuelson

The best tribute to Paul Samuelson I have seen comes from Subramaniam Swamy. It is what tributes ideally should be- a combination of personal memoir and assessment of the individual. (Not that Swamy is able to do full justice to Samuleson's varied contributions). An interesting aside is on how the establishment at Delhi School of Economics prevented Swamy from getting in (and he had to settle for IIT Delhi instead):

Amartya Sen invited me to join the Delhi School of Economics as a full Professor in early 1968 stating in a hand-written letter that my 'gaddi was being dusted.' I therefore spent three months in the summer of 1968 at the Delhi School of Economics as Visiting Professor, before returning to Harvard with the intention of winding up and joining as Professor of Economics at the Delhi School.

But I did not realise then that the Left triumvirate of Sen, K N Raj and S Chakravarty had in the three months discovered that I was not only not ideologically neutral or soft like Jagdish Bhagwati, but hard anti-Left and wanted to dismantle the Soviet planning system in India besides producing the atom bomb.

So when I arrived in India in late 1969 this triumvirate scuttled my ascending the dusted gaddi. Sen was at his hypocritical best in explaining to me his volte face.

Samuelson was enraged when heard this and perhaps felt empathy because of his own experience in the late thirties at Harvard, and urged me to return. When I returned to Harvard to teach in the summer of 1971, Samuelson told me, "Stay here and write a treatise on Index Numbers and you will be worthy of a prize." But I was in a fighting mood and told him I would return.

Fortunately there was a professorship open at IIT-Delhi. Dr Manmohan Singh was the chairman of the selection committee. Samuelson with Kuznets, the 1971 Nobel Laureate in economics, wrote the committee strong letters of recommendation. Armed with it, Dr Singh did not wilt under the huge pressure mounted by the triumvirate and I was appointed a Professor of Economics in October 1971. But it did not last long.

The triumvirate then persuaded Indira Gandhi that I was a closet member of the RSS with chauvinist views, and a danger to her. With the KGB favourite Nurul Hasan as education minister, I was easily sacked in December 1972, but re-instated by court in 1991.

Remembering Peter Drucker

If you are at a loose end and would like to spent time productively, here is a suggestion: pick up an book of Peter Drucker's, open it anywhere and start reading. Chances are you will have gained. I remember listening to him at a seminar at Stern School. Along with him were an official of the World Bank and somebody from the corporate world. He spoke briefly and succinctly. It was thought-provoking. When the others followed, it sounded pretty flat. I guess Drucker's cosmic mind had a way of making everybody else look mediocre.

Drucker would have turned 100 last month. The event was widely celebrated. I dipped into some of his writings at random and emerged refreshed as always. Drucker laid down the key principles of management some fifty years ago. They remain relevant because nobody bothers to practise them. And they are not practised because they do require an element of idealism, a commitment to a bigger something. That, alas, is not something you associate with business managers.

I highlight some striking ideas of Drucker's in my ET column, Peter Drucker lives on. One of them really hit me. It was about the board of directors being the Supreme Court, somebody to whom people down below could appeal. Do you know of any board that accepts such a role? Boards are so thoroughly captured by top management that if some middle manager wrote a complaint to them, they would dismiss it, saying, "We can't look at individual cases". Somebody should ask these fellows, "Is there anything you look at other than the cheque for your sitting fee?"

IIT Gandhinagar attracts quality faculty

IIT Gandhinagar has received nearly 700 applicants for faculty positions, half of whom are NRIs from quality institutions abroad, ET reports :

Director of IIT-Gandhinagar Sudhir Kumar Jain said at least three NRIs teaching in prestigious universities in the US and Singapore will join them by the end of December. ....

"This is a great development as we would get Indians who are involved in cutting-edge research and academics and are finding opportunities in India attractive. More so for us as the faculty would get to prove academic excellence given that we are a new institute compared to other IITs and hence more open to ideas," says Jain. ...

"To attract more talent from abroad, we are also offering them option to go abroad twice a year to pursue research and academics," says Jain.

So much for the supposed faculty crunch and the problems new IITs would have. I feel vindicated because I have always held that the newer IITs and IIMs would be able to attract faculty by offering suitable terms (not higher salaries but the flexibility indicated above).

In some ways, they may have a better chance of getting good faculty because in the existing institutions, entrenched interests are often the biggest obstacle to getting faculty- they simply won't let very talented or reputed academics in. Agreed, it is not easy to entice academics based abroad, so there are supply-side problems. But the artificial problems on the demand side are also a factor - and this is generally overlooked. Besides, NRIs would prefer to get back to their home town or to some place close to it and may want to steer clear of the larger metros where the older IITs and IIMs are located.

Somehow, IITs and IIMs have not used the mechanism of well-endowed chairs in order to attract talent. This is again primarily because the academics who are already in think they have first rights to any chair that is created and, often, they can't agree amongst themselves as to who deserves it. As a result, chairs are not created and, when created, go untenanted.

The IIT Gandhinagar experience is very promising indeed and augurs well for the government's decision to set up new IITs and IIMs. We need competition for the four or five IITs and IIMs that dominate the field today. So, all power to the new institutions.

Banking bonuses can't be left to market

Both Martin Wolf of the FT and the Economist have joined the chorus for containing bank bonuses in today's conditions. Wolf wants a 'windfall tax'. The Economist asks that a 'funding premium' be recovered from banks before bonsuses are calculated- this would compensate the tax payer for government support to banks.

I think the problem goes beyond the present crisis. We need to view executive pay in banks as a potential source of systemic risk. I cannot see the market responding suitably to this problem. We will soon require regulators to approve top management pay in banks. This is not as novel as it sounds- the RBI has been doing it for long. The challenge for regulators is to put in place norms for executive pay at banks and apply these to the entire sector. We need regulators in different countries to agree on this as otherwise we are bound to see 'regulatory arbitrage'.

More on this in my ET column, Reining in rogue bonuses

Corporate architecture

One of the things about post-reform India is that companies have spruced up their looks and environs. Go to the Bandra-Kurla complex in Mumbai and you get at least a faint whiff of Manhattan, with ICICI's headquarters standing out. Among campuses, Infosys must be one of the stars, each one meticulously designed and spectacularly well-maintained. But those who are more sensitive to architectural style than I am have a different view, and this is the subject of an Outlook feature, which is interesting read.

The main point is that many of our organisations seem to want grandeur in their buildings but are not very concerned about whether it is rooted in Indian sensibilities or the Indian environment. For instance, there is a readiness to go in for glass buildings regardless of whether these energy efficient or even aesthetically pleasing. ( In passing, Outlook must be among the very few in the media willing to take pot-shots at Infosys):

This September, two supposed marvels of institutional architecture were unveiled before the public. The first, in honour of the fast-approaching Commonwealth Games, was a Lutyens-style makeover—large white pillars and incongruous purple-black glass—for the Ajmeri Gate side of New Delhi railway station. The second was the spanking-new addition to the Infosys Mysore campus: the classical Greek architecture-inspired Global Education Centre-2 (GEC-2). Inaugurated by a radiant, admiring Sonia Gandhi who said she wouldn’t mind “bunking party politics” to study there, it was hyperbolically proclaimed by Infosys chief mentor Narayana Murthy to be “the largest monolith classical building of post-independent India”.

The GEC-2 might win the awe of its young executive trainees, and the New Delhi railway station the glancing attention (or dismay) of those hurrying through it, but these two buildings nevertheless throw up a few questions about the practice of institutional architecture in India. Is imitating the architecture of the past—including colonial styles intended to intimidate and subjugate us—really the way to engage a contemporary public? Why does institutional architecture in India invariably entail ransacking the past and reducing it to a bunch of carefully traced out columns and pediments? Is it possible to adapt historic references to modern uses in a responsible, low-impact manner?

Here is what one of the critics has to say about Infosys' latest wonder:

The GEC-2, to Burte, is a missed opportunity for Infosys to provide a counterpoint to the wasteful, power-guzzling, glass-faced cut-rate copies of Singaporean skyscrapers that have now become synonymous with IT sector buildings. “This overblown rhetoric is a letdown considering what we know to be Infosys’s progressive work culture, and their emphasis on a knowledge economy,” says Burte. “A low-impact, climate-sensitive, energy-efficient, sensible building; a vision of sustainable corporate living and working, would be commensurate with the image we have of them.”

Another critic concludes that our latest buildings are a comment on national character:

“Right now, we see ourselves as second-rate; our approach is just to play catch-up to other cultures—the Chinese, the Europeans, or Lutyens. It’s about time we followed our own instincts.”

Rating agencies and Indian debt

India has always received a raw deal from rating agencies. This carries a cost to the country. India's present sovereign rating of BBB implies that Indian companies will rate lower and hence pay highs spreads over the risk free rates. Taking into account outstanding ECBs and NRI deposits and assuming that they cost 2 percentage points more than they should, Jaimini Bhagwati estimates that the additional forex outflow to India on this account is $2 bn annually.

Of the rating of BBB for India, Bhagwati writes:

Is it really credible that as of November 2009, the Government of India (GoI) has a higher probability of defaulting, over a five-year horizon, on its external debt obligations as compared to Enron four days before it went bankrupt or Lehman in the second week of September 2008? Currently, the GoI’s BBB– rating is the same as that of Iceland and the UK is rated triple A while China is placed at A+. Are countries rated higher if they impose fewer controls on their capital accounts? Clearly, the answer is that CRAs do not have the answers. One way forward could be for India to push for discussions about perceived anomalies in sovereign ratings in FSB and BCBS forums. Since rating agencies serve a quasi-regulatory function, we could seek the setting up of a multilateral CRA.

More flak for Goldman

Goldman Sachs is set to pay out record bonuses. Its employees should be thrilled and not thrilled. The latter because the bonus payment is likely to comes as a climac to a period that has turned out to be a PR disaster for the once-admired financial giant.

Goldman's soaring profits are today perceived as unfair- the result of implicit taxpayer guarantees and the demise of competitors such as Lehman and Bear Stearns. They are somehow not seen as legitimate reward for success. In the US, a rash of agitations has broken out against the firm. Goldman CEO, Lloyd Blankfein, did not help matters by claiming that he and his firm were doing 'God's work. This remark added various sections of the clergy to the firm's critics.

Blankfein said his remark was meant to be a joke. This points not just to a poor sense of humour but to poor judgement- the public is in no mood today to listen to jokes from Goldman top brass. Blankfein also apologised for the firm's role in the present crisis and the firm promised a commitment of $500 mn towards financing small businesses. But these moves have done little to assuage popular anger.

FT has an article that analyses the principal reasons for the firm's success for so many years now:

Goldman’s stellar performance has been built on two main strengths: a long-standing commitment to making money as a firm rather than a collection of individuals; and a daring boldness in trading and regulatory matters.

....The theory is simple: unlike other banks, where star traders routinely overrule lowly compliance officers, at Goldman the two roles have equal status. “The risk management side is just as powerful as the risk-taking side,” says a former executive. “If a trading desk makes $35m in a week, the attitude at other firms is to let these guys do whatever they want. At Goldman it is: ‘What am I missing?’ ”.

......By cultivating trading and advisory relationships with thousands of companies and investors, Goldman gains knowledge it uses to inform its own trading.

Banks are banned from “front-running” – using specific information provided by clients to trade on their own account before they act on behalf of customers. But they can, and do, use aggregate information, “market colour” gleaned from their interactions with investors, hedge funds and companies. By virtue of being the world’s largest and best-connected trader, Goldman has turned this into an art that has raised rivals’ eyebrows but not sparked regulators’ attention.

So, what does it add up to? Good people and risk management, of course, but also superior information and networking. In the present environment, add implicit government backing and weaker competition. The short point: profits at Goldmanare not driven exclusively by superior skills. Hence the widespread public hostility.

Goldman may look invincible for now. But a basic truth can't be wished away: business cannot succeed in the face of hostility. Just one false step somewhere and the regulators, politicians, media and the social sector will come down on Goldman like a ton of bricks. The biggest challenge for the firm is softening popular anger. It's doubtful that a deep-rooted culture can change sufficiently for the purpose.

HRD panel for PSBs

This is the best news PSBs have, perhaps, had in a long time. The government has constituted a panel headed by BoB ex-CMD A K Khandelwal to look into various HRD issues at PSBs. It is a timely move because PSB unions are planning a march to parliament next month and a strike in support of various demands, including strengthening PSBs.

Apart from a status report, the committee’s mandate include preparing an action plan on how to professionalise 27 public sector banks. Besides, the government wants to work out a system of succession plan at these banks, which often have to do without a chairman for months altogether.

In addition, the committee has been asked to recommend how the banks should go about preparing their recruitment plans and whether it was desirable to follow common hiring and HR practices across all these banks, accounting for nearly 75 per cent of the business carried out in India.

I am pleased because I have made the argument for constituting an HRD panel for PSBs more than once in my ET column and I have been shouting that HRD should be the no 1 priority for PSBs, not consolidation or overseas branches or getting into new areas such as insurance. My argument is simple: until you have strengthened HRD at PSBs, don't even think of other things. What has galvanised the government into action is the prospect of nearly three fourths of senior management at PSBs retiring by 2012. I only hope this is not a case of too little, too late.

I hope the committee doesn't get sidetracked into issues like performance-linked pay. I am extremely sceptical - as many academics are- about the merits of variable pay even in the private sector. In the public sector, it could be a disaster. Those at the helm need to realise one thing: you don't compete through imitation.

Fresh bout of disinvestment

Hopefully, we should soon see a fresh bout of disinvestment, with several unlisted PSUs being brought to the market. That's very good news. Not because it will help contain the fiscal deficit, as some commentators have rushed to point out. The fiscal impact of disinvestment tends to be exaggerated. Its real value lies in its potential to bring about greater commercial discipline through listing on the stock exchange.

Disinvestment helps improve performance when combined with competition and better board room governance. Liberalisation has taken care of competition. More needs to be done on board-room governance in PSUs. Unlike in the private sector, there is scope for doing a great deal more, as I argue in my ET column, Disinvest for better governance.

Tackling asset bubbles

There is a sense that we have to do something about asset bubbles in order to prevent major financial disruption although it's not clear what is to be done and at what point. Frederic Mishkin, writing in the FT, draws a distinction between "credit bubbles", which are driven by excess bank lending, and "irrational exuberance", such as the boom in IT stocks in 2001. The former are a problem, he says, because they endanger banks. The latter are ok, some investors get burnt, that's all.

Right now, Mishkin argues, the US does not face a credit bubble although various asset prices may have shot up. Credit is, in fact, in short supply, so monetary tightening would be premature.

I am not entirely persuaded about this distinction. Take a stock market bubble. It could be driven, not by excess domestic credit growth, but by a surge in foreign inflows. Does this need to be tackled or not? A sudden withdrawal of foreign funds could cause the stock market to collapse and it may derail investment plans of companies to which banks are exposed. Domestic bank credit has not driven the stock bubble, yet banks could be imperilled.

Of course, the central danger to guard against is bank exposure to risk assets- real estate, stocks and commodities. But, it's not necessary that banks are at risk only from bubbles caused by excess credit. There could be an indirect impact on banks from the collapse of bubbles for which banks are not primarily responsible. Corporates' overseas borrowings, which find their way into the domestic market, for example.

Some bubbles may be more dangerous than others, as Mishkin points out, but all bubbles may need watching.

Rich pickings for independent directors

Naresh Chandra, former cabinet secretary, made a cool Rs 2 crore from his independent directorships last year, according to an ET story. This included Rs 75 lakh from Vedanta. Omkar Goswami, the economist, raked in Rs 1.3 crore. Deepak Satwalekar, formerly of the HDFC group, and Rama Bijapurkar, marketing consultant, are among the big earners.

Not to grudge anybody their earnings but has there been any attempt to evaluate board performance and contributions of board members? And what is an optimal level of payment for board members? When payments are too low, you can't get good people. Whey they are too high, you can't expect independence.

I don't have the answers. But I am surprised these questions aren't being pursued. I guess it suits all concerned not to be asking these questions.

Indian corporate sector's lip service toeducation

India's corporate sector bemoans the lack of investment in education and the resulting skill shortages. It talks of education a a great opportunity. Businessmen have been quick to latch on to money-making opportunities in professional courses- engineering, medicine, management. But their commitment to producing first-rate educational institutions has been zilch, as Devesh Kapur points out in TOI.

The commitment of Indian business to philanthropy in higher education was strong prior to independence and has dwindled ever since. Pre-independence, business interests not only made the transition from merchant charity to organised professional philanthropy, but did so in a significant way. They created some of India's most enduring trusts, foundations and public institutions, including the Aligarh Muslim University, Banaras Hindu University, Jamia Millia, Annamalai and Indian Institute of Science. Of the 16 largest "non-religious" trusts set up during this period, 14 were major patrons of higher education.

Today, the so-called not-for-profit educational institutions do not engage in philanthropy. Their income comes from fees rather than endowments and investments. Thus even while the number of "trusts" set up for philanthropy in higher education has been steadily rising, the total share of "endowments and other sources" in higher education funding has been consistently falling - from 17 per cent in 1950 to less than 2 per cent today. Some of this decline is to be expected, as the government has expanded its role in higher education, yet the extent is remarkable.

So, what is the implication for policy? If we accept that quality in education exists only in the non-profit model and Indian business is not interested in this model, how do we produce quality education? The answer, it would seem, is a combination of higher investment by government and foreign universities. I have my doubts about foreign universities coming in entirely on their own: their cost structure would make it difficult for them to provide mass education. Perhaps, central universities and the proposed national universities forging partnerships with foreign universities may be a solution.

Greater government investment would also require putting in place proper governance mechanisms. This does not mean leaving matters to academics or 'autonomy' as interpreted by some IIT and IIM faculty, which means boards run by professionals, with government keeping a distance. This hasn't worked and it won't work, as I have argued ad nauseam in my posts. The proposed collegium for IIMs and the pan-IIT council are the sort of mechanisms we need but much work needs to be done to make these effective.

Cash transfer versus NREGS

NREGS, the national employment scheme, drew a lot of flak when it was first introduced. It has since received some grudging credit and its critics have at least recognised the value of the fiscal stimulus it has provided.

The standard argument against NREGS, which is also the argument against subsidies, is that it is better to make transfers to a carefully targeted segment, namely, the BPL category. If you spend Rs 100 on the NREGS, Rs 20 will be siphoned off, Rs 30 will be spent on administration, Rs 20 on materials, which will be wasted because of poor quality of works, and only Rs 30 will reach the poor as wages. Far better to transfer Rs 30 to designated accounts.

Tushaar Shah addresses this argument in an article in TOI.

The NREGS launch in 2006 had created a widespread impression in many parts of rural India that it would eventually end up as a cash transfer programme. Many people believed the job card-holder household would be entitled to an annual cash transfer of Rs 10,000. This is why numerous well-off households and local bigwigs, including village sarpanchs, acquired them.

NREGS design - guaranteeing 100 days' unskilled manual work toany household, rich or poor, willing to do such work - minimises type II error. Even if the rich acquire job cards, they can benefit from NREGS only if they are ready to do unskilled manual work, which they are generally not. NREGS self-targets the needy. The BPL card, ration card and NREGS job card under cash-transfer denote entitlement, not what their holders do. That NREGS reduces type II error is evident in the fact the number of households registering for work that is much smaller than that of job card-holders. Again many NREGS projects remain unfinished and funds are returned because those who registered for work do not show up. This would hardly be the case if all job card-holders were automatically entitled to Rs 10,000 deposited in their accounts.

There you have it: cash transfers would amount to looting by the powerful in the countryside. Those who advocate it have no clue as to how things work in the countryside. Shah concedes that poor quality of works is an issue. But this needs to be addressed through better governance. Indeed, that is an argument I would make for NREGS, that by mobilising NGOs and other agents at the grassroots level, it becomes a powerful tool for improving governance.

One aspect of NREGS is that the access to information on the scheme is superior to what would be provided under the RTI Act. To make NREGS-based works worthwhile, we have to bring about greater accountability at the grassroots. It is a challenge, of course, but the effort is worth it, quite apart from the purchasing power it confers on the poor.

Novel suggestion on bank bonuses

Even that paragon of the free market, the Economist, has joined the chorus against bank bonuses. I suppose you could call that progress in thinking after the sub-prime crisis.

Banks argue that they have repaid government capital, they need to retail talent, that management pay is for shareholders to approve and that the government, the media and the public should stay out of it.

The Economist makes the point that the top ten investment banks at the start of 2008 made an average return on equity of just 8% between 1999 and 2008. Four made cumulative losses. Staff got four times as much as shareholders did in profits. So, bonuses are at the expense of shareholders.

Moreover, banks are handing out large bonuses to employees while arguing that higher capital requirements would be too onerous for them! In a free market, you could still argue that these are matters between management and shareholders and that the government and the public should stay out of it. But this is not a free market situation: the banks have been bailed out by tax payers and- more, importantly- still enjoy subsidies:

It is not just that they were saved from destruction. They got public capital (much of it now repaid), short-selling bans on their shares and rescues of counterparties, such as American International Group, which the public otherwise had no interest in saving. Today they enjoy laxer accounting, loose collateral rules at central banks, explicit debt guarantees and asset-purchasing schemes. And, critically, they can borrow cheaply because they are deemed too big to fail. All of them—from comparatively healthy Goldman to the nationalised weaklings—are being subsidised by the rest of us. As a way to keep cash flowing to the wider economy and help banks rebuild their capital, this subsidy made sense; nobody intended it to go to employees.

<>If we accept that outsized bonuses, courtesy of public subsidies, are just not on, how do we deal with them? The popular solution is to rein in bonuses. The Economist thinks this won't work and it will lead to micro-management by government. It proposes an alternative:

Assume that America’s top five investment banks would pay two percentage points more on unsecured borrowings without an implicit guarantee. On that basis the subsidy is $36 billion a year (compared with pay this year of perhaps $120 billion). Providing banks have built up adequate capital, they could face a funding “premium” in much the same way that they already pay premiums for deposit insurance......The premium would last at least until the state guarantees are withdrawn. The longer-term debate may yet move from wishy-washy living wills to breaking up banks (as the governor of the Bank of England suggested on October 20th—see article).