RT: Russia's very effective counter to western propaganda

In the course of surfing the Net some time ago, I stumbled on RT, formerly Russia Today, which presents news and perspectives from a point of view (not necessarily Russian) different from that of the mainstream media.

It's easy to brand it an arm of Russian propaganda but I have found the news coverage sober and balanced and, what's important, it does present a refreshingly different perspective. RT is a must read for anybody wanting to arrive at a rounded assessment of international affairs in the face of the fare dished out by mainstream western media.

FT carries a fascinating interview with its editor, Margarita Simonyan.

Here's a telling quote:

“I don’t see why you have the nerve to think that you know better than anyone how to run the world, and who’s marginal in the world and who isn’t. You’ve made so many mistakes, you’ve started so many wars in the last few years, destroyed so many lives, killed so many people, created so many problems.”

Update: Here's a link to an NYT story on how RT is covering the presidential elections in the US. Its' worth pointing out that RT's correspondents and contributors are not just Russian- it hires locals. In the US, it has roped in former talk show host Larry King.

The 'revolving door' in finance continues to revolve

Mervyn King, former Governor of the Bank of England, has taken up a position as a senior advisor to Citigroup, FT reports. See also this story in the FT. The FT report notes the following:

Lord King has repeatedly criticised banks and bankers in the wake of the financial crisis, both during his tenure as governor, up to 2013, and since. He has described bankers as “incompetent and greedy”. In 2009, he told a parliamentary committee that the “vast amounts of money beyond the dreams of ordinary people” paid to bankers had engendered a reckless culture in the City of London. A year earlier, he bemoaned as “unattractive” the fact that so many top graduates were drawn to the City rather than other more worthwhile careers.

King follows in the footsteps of former US Treasury Secretary who hopped on to Citigroup after his stint as Treasury Secretary. FT mentions other such instances in recent times:

• Former EU President Jose Manuel Borroso has joined Goldman Sachs as chairman, a move that the French president Francois Hollande called "morally unacceptable"
• Former British PM Tony Blair got a juicy $2 mn a year contract from JP Morgan
• Former Fed Chairman Ben Bernanke took up an advisory position at Pimco, the bond trading house

Those who have served in government or with regulatory agencies are in demand for obvious reasons. They can iron out problems with regulators or they can make phone calls that open doors on the strength of the relationships they have acquired while in government. The problem this poses is two-fold. One, it's not healthy for an ex-regulator or government servant to use his contacts to sort out regulatory issues of a private party. Another, more critical issue is: what degree of independence can one expect of a regulator or government servant while in service when it comes to dealing with important financial institutions? Who would not want to curry favour in the knowledge that a heft contract awaits on retirement on exit?

Thus, the 'revolving door' syndrome poses a serious threat to the framing of laws and regulations. How do we deal with it? An outright it may not be an answer because it could prevent talent from coming into government or regulatory agencies. Many argue that since jobs in government or in regulation are not well paid, there is every justification for those who have done these jobs to encash their expertise in the private sector by taking up advisory roles or serving as 'independent' directors ( the use of quotes is deliberate).

It's worth noting that RBI governors in general have conducted themselves much better. Y V Reddy faded gracefully into retirement and D Subbarao preferred a Fellowship at NYU to private sector offers. I recall Dr Subbarao being quoted as saying that he found that the terms offered to him seemed to have more to do with his association with the RBI than with the nature of the assignment offered to him. C Rangarajan served the government in various capacities and steered clear of the private sector.

I suppose one way to deal with the revolving door problem would be to give regulators a substantial payment (say 100 per cent of their salary) for, say, three years after they have stepped down in exchange for their committing not to associate with the private sector at the time they take up positions in regulatory agencies. Again, some may not be willing to join even on these terms but at least this goes some way towards addressing the problem.

RETHINC now available in paperback

I am happy to share with you that my book RETHINC: What's broke at today's corporations and how to fix it  will be available in paperback from July 27. It's a slightly abridged and more accessible version of the hard cover- I've cut out some of the technical portions and simplified the language.

As readers of this blog would know, the book won  the Best Business Book of the Year award for 2015 at the Tata Literary Festival.

Here's are some of the links to the media coverage of the hard cover:

1. India Inc's attitude problem, Business Line.

2. Why you should question the cult of the charismatic CEO, Quartz

3. Offices without bosses? Achievable, says book by IIMA Prof, MoneyControl. Com

4. Can workplace democracy work across organisations? Business Today

5. Start from the bottom, Business World

6. The Statesman

Subbarao and RBI autonomy

D Subbarao's recent book on his tenure as RBI governor has occasioned another bout of government-bashing. Ministers trying to browbeat the RBI, we are told, is nothing new. What happened to Rajan also happened to Subbarao.

I haven't read the book but I have gone through the excerpts and reports that have appeared in the media. I can't resist the feeling that the idea of the RBI's autonomy being threatened by the government is hugely overblown.

When it comes to internal matters of the RBI, there is virtually no interference. On recruitment, pay and perks (broadly within the government framework), promotions, and numerous other matters, the RBI has a free hand.

On matters that impact on the economy- monetary policy, bank regulation, exchange rates, etc- yes, the government does seek to influence outcomes. But seeking to influence is not the same as browbeating or imposing. There are discussions and phone calls and the government conveys its views. There is nothing wrong with that as long as the it's left to the RBI governor to take the final call- and that has been pretty much the case with both Subbarao and Rajan.

What many people mean by autonomy is that the RBI should be left to its own devices in these matters and also that terms of RBI governors should be automatically renewed. That's too much to expect of any government, it won't happen and it isn't even desirable. The government is responsible for overall economic outcomes and thus will influence decisions at RBI and will also want to have as governor or deputy governor individuals with whom it has a degree of comfort. This does not, in my view, conflict with central bank independence.

More in my article in the Hindu, Limits to autonomy

Chilcot report: Blair is not the only guilty one

Former British PM Tony Blair has been justifiably skewered by all and sundry following the publication of the Chilcot report on the Iraq war.

To me, the most striking part is not Blair's role- that was plain enough even without the report. It is the role played by the rest of the British establishment- the spineless characters in the cabinet, the acquiescent bureaucrats, the willingness of MI6 to oblige a war-mongering PM and, not least, a jingoistic and baying media (supposedly the 'free press' of Great Britain). Every part of the establishment was party to the American effort to oust Saddam Hussein by force and in defiance of the United Nations.

Leaving aside a few luminous exceptions such as Robin Cook, the foreign secretary who made a terrific speech in the House of Commons and then resigned, the barbarity and manifest injustice of what the British government embarked upon did not evoke outrage or protest. After the horrors of the Third Reich became known and the Nuremberg trials highlighted the enormity of the atrocities perpetrated, the question was asked: how could a whole nation have been complicit in such thing?

Well, after the Chilcot report, it is worth asking: how was the behaviour of the British establishment different from that of the Germans in the time of Hitler? That was a totalitarian regime and dissent would have carried a huge price. But what about democratic Britain? Is the price of dissent so high that nobody is willing to pay it? Or is it simply that even the modest price that dissent involves- such as losing a ministerial job or lack of career progression in the bureaucracy- something that supposedly decent people are not willing to pay?  For all the claims that democracies make, a culture of dissent is noticeably absent in all walks of life- politics, the bureaucracy, the corporate world, the media and even academics. It's so much easier to simply toe the line.

I was thrilled, therefore, to read the story of a whistle-blower from GCHQ, the British equivalent of the National Security Agency in the US. The whistle-blower, a lady, received an email from somebody in NASA asking for information on countries on the UNSC that were holding out against a vote in favour of a war. She leaked the email and ended up getting charged by the government for violation of the Official Secrets Act. The charge was dropped when it became clear that pursuing the case would not be rewarding for the government. The leak of the email should have prompted scrutiny from parliamentarians and others of what the Blair government was up to. It didn't happen:

I believed that on receiving the email, UK parliamentary members might question the urgency and motives of the war hawks, and demand further deliberations and scrutiny. I thought it might delay or perhaps even halt the march towards a war that would devastate Iraqi lives and infrastructure already crushed by a decade of unrelenting sanctions. A war that would send UK and US service men and women into harm’s way, leaving hundreds of them dead, disfigured and traumatised. Unfortunately, that did not happen. It couldn’t, for now we know via Chilcot that Blair promised George W Bush he would be “with him, whatever”.

Amidst the yes-men and sycophants everywhere, there is the odd brave soul that is willing to speak up. There were a few other heroes and heroines-  amongst them, the head of MI5 who warned Blair of the dangers of Muslims everywhere being radicalised.

How do we nurture a society where more people are emboldened to express dissent? Unless we do so, all so-called democracies are seriously flawed. The mindset is essentially totalitarian with only one difference- you get a chance to vote every few years.

There's one other aspect of the Chilcot report that Robert Fisk, the well-known journalist, highlights. We do not hear the voices of the victims, the people of Iraq. The Chilcot enquiry did not seek their testimony:

The Arabs of Iraq – and now Syria – endure human disaster on an unprecedented scale because of the Blair-Bush lies, yet all Chilcot can produce with his seven years of literary endeavour and volumes to break the strength of any library shelf is a puny little domestic report on British politics and the self-righteousness of the midget who got it all wrong.

Sudha Murty, IIIT Dharwad and institutional autonomy

This is one item I have been following with disbelief- and, of course, I am assuming that ET has got the facts right.

The story, as you can see for yourself, is that IIIT Dharwad has plans for constructing buildings which were to be financed by MHRD (50%), the state government (35%) and Keonics, a state PSU (15%). After Sudha Murty was appointed Chairperson, she proposed that Keonics be replaced as a partner by Infosys Foundation. In return for the funds that Infosys Foundation would provide, the buildings at IIIT would be named after Infosys.

The MHRD referred the proposal to the law ministry. The law ministry objects on grounds of conflict of interest involving Ms Murty. I have a more fundamental objection: how can an institution funding 15% of a project want its name to be assigned to the project? At best, there could be a plaque in the buildings thanking Infosys Foundation for its contribution.

The story doesn't end there. Ms Murty apparently wants the mentoring institution, NIT Suratkal, to be replaced by IIIT Bangalore of which she happens to be a board member- another conflict of interest.

This little episode reinforces a point that I have long been making and that readers will be familiar with: it is most unwise to leave the governance of public educational institutions entirely to boards of governors in the name of autonomy. Those sitting on these boards have little stakes in these institutions and cannot be expected to take care of the long-term interests of the institutions. The government needs to keep a watchful eye through its own representatives and by requiring the institutions to obtain government approval in important matters.

This is the reason I favour the IIM Bill. TOI reports the Bill is being held up following objections raised by the PMO to certain provisions. The PMO does not want the HRD minister to head the IIM council and it also has reservations about the President being the Visitor to the IIMs. The PMO does not think that the IIT model is appropriate for the IIMs.

I'm afraid the PMO is mistaken on these counts. Matters cannot be left to the IIM boards- there has to be an independent authority to oversee the boards of the IIMs. This is because there would otherwise be no checks and balances otherwise on the functioning of the boards. Boards are ineffective even when they are subject to the discipline of the financial market. Where market discipline is absent, boards can become seriously dysfunctional and harmful.

This is not just my view. Matters haven't been put to vote at the leading IIMs but my sense is that a majority of faculty feel that way. We feel that faculty autonomy is better safeguarded by having the ministry watch over the boards than by leaving matters entirely to boards. Our greatest apprehension is that faculty autonomy will be undermined if matters are left to IIM boards as, in practice, this would result in unchecked powers for the directors of the IIMs. We see the government as the saviour and protector of faculty autonomy, not as a threat. As long as we are governed by the rules of service of the government of India, we believe we can express ourselves freely as academics.

It would be worthwhile for MHRD and the PMO to engage faculty at IIIT Dharwad and at the IIMs in these conversations. The PMO may be well-intentioned but it seems unware of the facts on the ground. It would benefit by eliciting faculty views on these matters.

Fixing the banking system

The banking system is floundering. The NPA burden, which seemed manageable a few months ago, threatens to get out of hand partly because the government has not moved decisively to fix the problems in the banking sector.

We are in a situation where public sector banks (PSBs) don't want to lend or are not in a position to lend to corporates. At the most, they may provide working capital. Project finance is a no-no. Like private banks, they are happy to seek to retail loans.

PSBs don't want to lend because they don't have enough capital and because of a pervasive fear psychosis. They don't have enough capital because they are unable to effect recoveries on loans (on which they have made provisions), because the government is not infusing enough capital into them and because they are not generating enough earnings for want of adequate credit growth.

How to get out of this low-level equilibrium? First, the government must provide them enough capital- and the Rs 70,000 crore earmarked under Indradhanush just isn't enough. Secondly, they must be empowered to effect recoveries but taking suitable hair-cuts on loans and seeing viable projects through to conclusion. This isn't happening because any banker who takes a loss on a loan exposure will be implicated as a 'scamster'.

Bankers are not going to do what it takes to get projects completed and effect recoveries until they have the assurance that they won't be hauled for writing off some portion of loan dues. I have been saying for long that an apex authority which vets all loan proposals is required, otherwise bankers aren't going to lift their little fingers. The news is that such an authority is being constituted. It will have to get cracking on large loans quickly.

Some banks don't have chairmen or MDs. The Bank Board Bureau must remedy these lacunae as fast as it can. Amidst all this comes the talk of the decision to merge SBI with its associate banks. This could well go down as one of the worst decisions in banking ever. SBI needs to focus on sorting its bad loan problem first. Trying to assimilate associate banks will drain the energies of the bank for at least two or three years- and even after that one is not sure of the outcome.

Make no mistake: the SBI merger has the potential to weaken one of the strongest banks in the country and a key pillar of the banking system. A good way for the next RBI governor to give an early demonstration of his independence and assert the RBI's autonomy would be to dissuade the government from staying with this ill-advised course.

More in my article, Banking revival must be a priority.

Also read Montek Ahuliwalia's article on the subject.

8 per cent growth in 2016-17 ? Unlikely

The growth rate of 8 per cent in the last quarter has revived talk of a return to 8 per cent growth rate in the near future. Sorry to be a bit of a spoilsport but I'm afraid this is highly unlikely.

In 2015-16 the Indian economy grew at 7.6 per cent compared to 7.2 per cent in 2014-15. This was mainly on account of the steep fall in oil prices which translated into a surge in private consumption and also into higher government capital expenditure through higher taxes on oil products.

The hope was that this bonanza would continue in 2016-17 although in a muted form, with oil prices falling further to $30. This hope is being dashed by the rebound in oil prices to $50, which was the average for 2015-16. This takes away the whole of the contribution of 1-1.5 percentage points to growth that arose from the sharp fall in oil prices in 2015-16.

Some analysts think this will be compensated by greater rural consumption following better monsoons and better urban consumption because of the Pay Commission hike. I estimate the benefits on account of this two factors at 0. 3 per cent and 0.6 per cent of GDP respectively. As you can see, this doesn't compensate for the impact of oil prices.

Another blow is that the world economy is not only not reviving but is likely to slow down. The Economic Survey (2015-16) expected exports to contribute a solid 1.3 percentage points to growth. This looks likely to get washed out. In fact, export growth could slow down even further, dragging down economic growth.

Lastly, analysts have been making a hoopla over increased public capital expenditure. They overlook the fact that this is being offset by compression of government expenditure on other counts and also higher taxes. The fiscal deficit is going to shrink by 0.4 percentage points. That, basic economics should tell us, means a shrinkage in demand from the government. Using a multiplier of 1, this means minus 0.4 percentage points of growth.

I add up the numbers and find that the Indian economy is likely to grow at 7 per cent rather than 8 per cent in 2016-17- unless oil prices fall back to well below $50.

That's the short-run view. The medium-term outlook is just as sombre. Whoever is forecasting a return to 8 per cent growth has some explaining to do.

More in my article in the Hindu today, Tempering economic ebullience.

Committee to review FRBM targets

I was on ET Now along with Prof M Govinda Rao to discuss this topic.

My view is that there is  a strong case for revisiting the targets. I give many reasons. Here I will mention two. One, our deviating from the FRBM target for nearly a decade past the deadline has not led to an unsustainable debt  situation. On the contrary, India is among the few economies whose debt to gdp ratio has declined over the past decade- at 67% of GDP today, it looks quite okay.

Two, we worry about the fiscal deficit because it can impact on interest rates. The impact on long-term rates of fiscal deficits is negligible, as empirical work has shown. However, the deficit can impact on short-term rates. On this count, concerns must be subdued at the moment given relatively low oil prices.

More fundamentally, I would question the idea that the way to reduce the fiscal deficit to GDP ratio is to attach the numerator, that is, reduce expenditure and, if possible, raise tax rates or increase the tax base. The point is that that is not how our ratio came down significantly in the first decade of the 2000s when we were almost close to attaining the 3% FRBM target at one point.

Rather, the numerator, the GDP, shot up due to exogenous factors, such as the global boom, and also due to the increase in the savings and investment rate over time. This also caused the numerator to decline because tax revenues rise with rising GDP.

The bottomline: the presumption that reducing the fiscal deficit is the key to better or stable growth must be questioned. It's very often the other way round. You do various things to boost growth - and the the fiscal deficit to gdp ratio takes care of itself. 

Rajan controversy generates more heat than light

A fair bit of dust has been kicked up by Subramaniam Swamy's letter to the PM asking that RBI Governor Raghuram Rajan not being given another term in office. However, it's disappointing that much of the analysis focuses on personalities and does not attempt an objective analysis of Rajan's performance. There are three areas in which Rajan needs to be judged: monetary policy, bank regulation and foreign exchange management.

Most of the controversy is over Rajan's handling of monetary policy. The charge against him is that he reduced interest rates too late and too little. But the reluctance to cut interest rates arises from the more fundamental policy of inflation targeting and the particular band - 4 to 6 per cent- to which the RBI has committed itself. This leaves little room for flexibility on interest rates and its inevitably corollary is a certain loss of output in the short-run. Since the finance ministry agreed to this policy, it would not be correct to fault Rajan alone for this policy. I believe there is room to revisit this policy.

On bank regulation, Rajan has moved to open up space for niche players such as payment banks and small banks while also promising on-tap licenses. Foreign banks have been noticeably reluctant to come in through the subsidiary route given the requirement of capital. The cumulative impact of these policies on the competitive situation  will not be significant in the medium term.

In respect of public sector banks, it is the finance ministry that has called the shots even on matters of governance. The overhauling of bank boards and the appointment of new CEOs for banks is yet to happen- and it will happen under the auspices of the Bank Board Bureau on which the RBI will be represented through a Deputy Governor. My own view is that having the RBI Governor head the appointments process would have been a better bet for now if only because the Governor (and I don't mean this particular governor) is more capable of exercising the necessary independence in this matter. Rajan must given due credit for not having bought the line on bank privatisation- I am surprised that his remarks on the need to improve governance in the private sector first have not got the attention these deserved. Rajan has also been circumspect on PSB consolidation- he has indicated that it may not be appropriate to burden PSBs with mergers at a time when they face several other challenges.

Finally, forex management. There is a school that believes that the RBI has helped shore up the rupee unduly and that this has hurt exports. This could be true but there are serious risks to rupee depreciation at a time when emerging markets have faced large outflows of capital. On balance, it appears that erring on a slight over-valuation was worthwhile.

We must also give Rajan due credit for upholding the stature and independence of RBI and for his efforts at communicating with audiences in India and abroad. For Rajan, it must be some consolation that he's not the only central banker under fire at the moment. In the UK, politicians have asked for Bank of England governor ( a Canadian by the way) to be sacked for saying that Brexit could have serious short-term implications for the British economy. ECB chief Mario Draghi has been bashed by the German finance minister for his unconventional monetary policies. And Janet Yellen, the Fed chief, would not have been pleased to hear that Donald Trump would replace her if re-elected.

Fresh storm over executive pay

Executive pay has been  a subject of controversy for several years but nothing has come out of it all- CEOs are still laughing they way to the bank.

Small wonder that a fresh storm has erupted over some of the most recent news on executive pay. British Petroleum boss was given a 20% rise in a loss making year for the company. Although this was rejected by shareholders, the vote was non-binding. And VW's recently departed CEO got 6 million pounds as performance-related award despite the scandal that has sent the company's stock plummeting.

In the UK, hedge fund TCI  has taken a stake in VW in order to shake up its governance, FT reports. 
The reason put forward by its head is an interesting one. It's not the cost of CEO pay itself; it is that aggressive incentives lead to bad behaviour that impose costs on shareholders. Think of what happened at the leading banks in the world in the financial crisis of 2007.

Norway's oil fund, the world's biggest sovereign fund, has decided to take a position on executive pay. By this it means, the level of pay, not just the structure of the pay package.

The moves by the two funds are a good start. CEOs can get away with outrageous pay packages thanks to boards packed with yes-men. Also because institutional investors are not willing to invest the time and effort required for reform of pay. One reason is that those at the head of institutional investors themselves command huge packages, so it's a case of  birds-of-a-feather. Who wants to invite attention to their own obscene packages?

A third reason for soaring CEO packages is that investors don't really mind as long as the going is good- they are certainly not concerned about things like equity that angers social activists.

The best argument to make is not a moral one. It is that outsized pack packages are not in shareholders' own interests. They will lead, one way or another, to under-performance in the long run  because performance is the result of collective effort, it's not magic wrought by one person. If you focus too much of the reward one person, the collective effort is undermined.

Don't expect bankruptcy code to change things overnight

The Bankruptcy Code, passed by the Lok Sabha and pending in the Rajya Sabha, is a considerable improvement on existing bankruptcy procedures:

• It brings disparate insolvency procedures under a uniform institutional structure 
• It sets a 180 day time limit for resolution
• It keeps insolvency matters out of the purview of civil courts
• It has provisions for Insolvency Professionals who will be part of the insolvency resolution and will be incentivised through fees linked to recovery

 There are three issues that the Code cannot and does not address:

• Legacy NPAs at banks- so it's not going to help address our immediate problems
• Bankers being unwilling to take a loss in restructuring cases, given the fear psychosis in banking. Given this, it's not clear how they can stick to the 180-day deadline
• Clogging up of matters in the adjudicating authorities and appellate tribunals to be created- the necessary infrastructure will take long to create and will not be equal to the sheer volume of cases, given our past record. Governance of regulatory and appellate authorities badly needs improvement- and not just in respect of bankruptcy.

More in my article in Quartz,why-indias-new-bankruptcy-code-wont-fix-its-broken-banks-overnight/

Default drama in banking

I was on Bloomberg TV yesterday to discuss issue related to loan defaults and how to address this issue.

Vijay Mallya's offer

Excuse me if I sound naive or I am missing important details but it seems to me that, on the face of it, businessman Vijay Mallya's offer to banks is a pretty decent one and banks should get into serious talks with him. They can hope to write back losses and boost profits in the quarter ahead if they do so.

FT reports today that Mr Mallya is willing to repay 440 million pounds out of a principal amount of 512 million pounds. The Indian papers had reported an offer of close to Rs 7000 crore. The banks need to clearly indicate what figure is acceptable to them and what terms they would like. Simply rejecting an offer does not take us anywhere.

Bankers know very well that going down the legal route- getting Mr Mallya extradited and, perhaps, arrested on return- will not take them very far. Indeed, the danger is that a legal battle will stretch out for years and the banks get back very little. The government needs to make up its mind: does it want to get Mr Mallya or does it want the banks' money back?

I had a chance to talk to some bankers. They all agreed that they go for Mr Mallya's offer. However, they told me they would not lift their little finger until the government told them in writing that that they could go ahead. As one of them put it," Who wants the CBI after him five years from now?".

It's a pretty sad state of affairs. We are faced with banking paralysis today, a variant of the policy paralysis that undermined the UPA government. Stalled projects can't go through to completion because banks are unwilling to take a hair-cut and plough in fresh funds. They can't effect recoveries again because they can't take the necessary hair-cuts. Because they can't effect recoveries, their capital position is worsening and they are unable to make new loans. Fear psychosis has gripped bankers in the public sector- so much so that bankers are now focused on retail lending and would like to stay out of corporate loans and especially project finance.

Banking paralysis is, perhaps, the biggest factor impending our economy recovery along with falling exports. The government needs to get its act together. The steps required are: an independent Settlement Advisory Board to vet loan settlements; recovery followed by fresh lending; and infusion of greater capital into banks. Without this combination of measures, prospects of accelerating growth are pretty dim.

Here is a quote from Mr Mallya's interview with FT:

Chain-smoking cigarillos and sipping English tea, the pony-tailed multimillionaire confirms he has offered, in a submission to India’s Supreme Court, to repay £440m on outstanding principal of £512m borrowed from state banks. 

But the banks declined because — in his words — they are fearful of taking any haircut on their loans in the face of the public frenzy whipped up against him in India.
“It is important to understand the environment in India today. The electronic media is playing a huge role not just in moulding public opinion but in inflaming the government to a very large extent.”

.....Mr Mallya blames the political climate for the failure to reach a deal with the banks, a climate that saw him described this week as a “fugitive from justice” by the country’s attorney-general.
“As professional bankers, they would like to settle and move on but, because of my image as portrayed, they are reluctant to be seen as giving me any discount,” he says. “It will attract huge media criticism and inquiries by vigilance agencies in India.”

World economy: welcome to the 'new mediocre'

World economic growth in 2016 will be poorer than thought earlier. Ditto in 2017- so says the IMF.

In terms of market values, world output will grow at 2.4 % in 2016-  growth of around 3% is considered modest. Is this a short-term thing or does it presage a long-term trend?

Many economists think it's the latter. The world is entering a period of low growth- what IMF Managing Director Christian Lagarde calls the 'new mediocre. Why is the world sliding into a low growth era. There are several competing hyptheses:

i Secular stagnation: This is a term coined by Alvin Hansen, an economist, in the 1930s. It has been resurrected of late by Larry Summers. The basic idea is that demand for goods is declining for a number of reasons. One is low population growth in the developed world.Another is that modern industry is less capital intensive and hence demand for investment goods is lower per unit of output than before- consider that   Facebook is worth billions in market cap while employing a fraction of what GM or GE employ. Thirdly, inequality is rising. This means the rich appropriate more and more of incremental income. They can consume only so much, so spending is impacted and so is investment. We have high savings and low investment, which is what explains why real interest rates are so low today.

ii. Liquidity trap: This is Krugman's view and it's a variant on the above. Monetary policy is ineffective at the low interest rates we have today and hence can't do much to stimulate output

iii. Falling productivity: Richard Gordon argues that economic growth is simply population growth multiplied by productivity growth. Both are falling. So, we have to accept that growth will be low in the years to come.

iv. Debt overhang: This is the view propounded by economists Rogoff and Reinhart. There's excess debt in the world economy following the financial crisis. Coming out of the debt overhang typically takes very long.

Now, if you accept any of the above, it means that it's futile for policies to push growth (although Summers think that public spending on infrastructure in the developed world can still make a difference).

The IMF in, its latest World Economic Outlook, seems to think that current growth rates represent policy failures- too much reliance on monetary policy and too little on fiscal policy and structural reforms. A combination of these along with moves to put life into banking systems in the Eurozone and elsewhere could make a difference.

I doubt that the political will exists for the purpose. I also believe that geo-political risks are pretty high, given the return of the  Cold War. So, we're going to be stuck with the 'new mediocre' for a while. That's bad news for those hoping for a return to 8 per cent plus growth rates in India.

More in my article in the Hindu, How to better the 'new mediocre'.

I have to say the title is rather deceptive- I argue there's little you can do to better the 'new mediocre'.

Indian banking prospects

I have a detailed paper in EPW on The changing face of Indian banking


My conclusions:

India’s banking sector is going through a period of stress. It is as if the global financial crisis is impacting the Indian economy and Indian banking with a lag. It would be unwise to draw conclusions or prescriptions about Indian banking by looking at performance indicators over the past three years of stress. One has to consider the post-reform period as a whole and, in particular, the decade of 2003-12. Over a long period, there has been a secular improvement in efficiency and stability. It is important to understand that public ownership has been an important factor underlying this trend.

While competition is set to increase in the coming years, it is unlikely to impact full-scope commercial banks in a significant way, except for PSBs that have lagged behind badly in technology and performance. There is scope for improvement in the performance of PSBs within the framework of public ownership. We need to strengthen management and governance at PSBs while recognising the uniqueness of the PSB model. The answer does not lie in getting PSBs to conform to practices of private banks.

It is important to find ways to deal with stressed assets in the system. This entails creation of an independent authority to vet restructuring agreements between PSBs management and promoters, infusion of greater capital into PSBs than is currently envisaged and resolution of various issues in the economy at large.

 

Water crisis and the IPL

Read an excellent interview with Yogendra Yadav on the furore over the water crisis in Maharashtra and elsewhere and the question of moving IPL out of the state (since ordered by the High Court).

It's not that IPL is going to impact the water situation. It's just it seems rather extravagant in the face of a crisis:

I am in favour of shifting the matches. Not because I feel there is any relation to the IPL matches and the drought, not because the IPL is aggravating the drought, nor do I believe that shifting IPL matches from these grounds will alleviate the drought.
There is no direct relation, but there's a symbolic relation. The IPL is not a sport, but an extravaganza. It is a festival.
It is a tamasha and there is something obscene and vulgar about holding this kind of festivity in the middle of a drought.
And how would not holding the IPL matches help? It would help not in terms of litres of water and so on; all these arguments are silly. This entire controversy, this judgment and the petition has served one cause -- it has reminded this country that there is a severe drought.
Over 50 crore (500 million) Indians are currently suffering from a livelihood crisis, something to which the whole country had shut its eyes for the past six months.
The drought began in October 2015. We conducted our first Samvedna Yatra on October 2 and the whole country was ignoring the situation. If this IPL controversy wakes the country up to this reality, I cannot complain.

Yadav says the solutions to the water problem are all there in government documents:

Some of the most effective and routine things they should have done, about which everyone knows, is to repair canals, hand pumps and water supply channels and identify affected areas. These are routine matters about which every bureaucrat knows.
All this has been written in a Government of India document, Manual for Drought Management. It spells out the steps that need to be taken to avoid this (water crisis).
But, politically, a more difficult thing which they needed to do was to disallow growing sugarcane in drought-stricken areas. Sugarcane is one of the most water-guzzling crops. We gave this suggestion also.
Second, opening of new sugarcane and liquor factories could have been postponed by six months. Our third suggestion was to regulate water bottling plants, which take away some of the best potable water.
Moreover, diverting water for industrial purposes can't be a priority at a time when you have such a serious water crisis. We had suggested regulating this.

Global growth: medium-term prospects are tepid

The world is not about to return to rapid growth in the medium-term. Recovery will be slow in both advanced and emerging economies. Because people don't see a rapid recovery in the future, demand will be depressed today. Those are the bleak messages from Olivier Blanchard, IMF's former Chief Economist.

Blanchard notes that estimates of long-term potential growth have come down by 0.5 to 1 per cent since 2007. The reasons? Ageing and low productivity growth. Blanchard writes:

Productivity growth has been much lower since 2007, more so in Europe where the rate has declined by over 1 per cent in major countries, than in the US, where it has only declined by 0.5 per cent. This decline reflects in part cyclical factors and the effect of lower capital accumulation. But there is more to it: for the US at least, the evidence points to a slowdown in underlying productivity, starting before the crisis and reflecting the end of a period of successful implementations of IT innovations. The safe assumption is that the high pre-crisis productivity growth rate was unusual, and we should expect lower underlying productivity growth in future.

Expectations of the future feed into the present. When people believe that things aren't going to be a lot brighter in future, they will cut back on spending, whether investment or consumption. That will affect the ongoing recovery in the advanced world. Lower growth in the advanced world will impact emerging markets through lower demand for exports and a drop in commodity prices. Add to this the slowdown in China because of problems internal to that country and the picture is complete.

Blanchard believes there's little that policy can do to change the picture- neither negative interest rates nor helicopter money can change the long-term reality.

If this is correct, we in India should be bidding goodbye to growth of over 8 per cent in the medium-term. For 2016-17, the upper end of the range forecast by the finance ministry, 7-7.75 per cent, should be a challenge.

Central banks' push into negative territory is not working

Central banks have tried one thing after another since the 2007 financial crisis: lower interest rates, quantitative easing and, most recently, negative interest rates. They aren't getting the results they want: the IMF has recently again downgraded its growth forecast for the world. So, what next?

Well, one thing to understand, as Martin Wolf points out, is that negative interest rates are not entirely the work of the monetary authorities. Central banks are merely responding to supply-demand conditions. Where investment demand is way below savings, rates are bound to fall- and they could go into negative territory as well. Wolf writes:

Some will object that the decline in real interest rates is solely the result of monetary policy, not real forces. This is wrong. Monetary policy does indeed determine short-term nominal rates and influences longer-term ones. But the objective of price stability means that policy is aimed at balancing aggregate demand with potential supply. The central banks have merely discovered that ultra-low rates are needed to achieve this objective.

Wolf is right. He is also right in pointing out the big danger that goes with negative rates. Banks are passing on negative rates to borrowers but not depositors for fear that the latter will not park funds with them. This is bound to impact banks' bottom lines and threaten financial stability. The other concern with negative rates is that they low rates are getting consumers to save more, spend less- a point made by Larry Fink of Black Rock.

So, what do we do? The Economist has urged more unconventional measures: monetisation of the government's deficit (or helicopter money) and pushing up wages through tax incentives. Both will cause an increase in inflation and hence in aggregate nominal demand.

The Economist correctly points out that there is a more conventional tool that governments can employ: fiscal policy. It is worth pushing up public debt when the cost of it is as low as it is today. The time is ripe for a massive push to infrastructure in the advanced economies (exactly what we are attempting here in India today under different conditions).

Finally, the advanced economies of Europe need to get their banks' balance sheets into shape (again, echoing conditions in India). This means writing down bad debts and raising capital from the markets. The problem for European banks is that markets may not be in a mood to advance them funds. We are better placed here given that 70 per cent of banking assets are with public sector banks and the government can infuse funds into them instead of having them raising money from the market.

Lower interest rates, fiscal expansion and bank balance sheet repair- the ingredients of a recovery are much the same in the advanced economies as in India although the relative weights for each may vary.

How do you attract and keep millenials?

That's the biggest challenge that firms face today: how do you attract bright, young people and how do you keep them?

Lucy Kellaway has a scathing piece in FT on what you should NOT do and what you might do.

The standard answer, which she got from a Columbia university prof, was: motivate through learning, market your benefit, invest in HR.When she put this to her kids, all beginning to work, it was met with derision.

What puts off new recruits to a firms and makes them want to leave sooner rather than later? One reason certainly is that they don't get the necessary respect or attention:

One graduate told me she had just spent four months working on a deck of 250 PowerPoint slides no one would ever read. Another said juniors at her law firm were expected to nip out to buy sandwiches for seniors, as if they were their fags at Eton. A graduate with a first in English from Oxford university said her boss insisted on checking every email she wrote before it was sent, making her doubt her own ability to write a sentence. Almost everyone complained of the sheer stupidity of the tasks they were given to do. 

Another is the gap between expectations and the reality. Employers promise youngsters the most exciting jobs in the world and then go on to under-deliver by a wide margin. Then, there is the gap between what companies profess and what they practise:

More dangerous still is the gap between the corporate bullshit and the business itself.  A young graduate at a management consultancy tells me that every day it is drummed into him by superiors that the firm always acts in the best interests of the client. But every week he watches the same people trying to flog further costly services that the client doesn’t need. 

Kellaway has a simple answer to the problem of retaining millennials: stop promising big things and just try to make the job a little interesting.

I can assure you that this is not a British thing. A few months ago, a student of mine here at IIMA told me that he was in touch with dozens of his seniors. Not one of them was enjoying his or her job. They were sticking to their jobs because it meant a certain status and money and because there weren't too many meaningful alternatives (unless you wanted to go into academics).

Maybe my sample is biased but, amongst middle and senior executives I have come across in the public sector, I see less complaint, a greater sense of fulfillment. In many cases (such as the Railways), a very deep sense of loyalty. Clearly, all the money the private sector is throwing at people doesn't seem to be creating loyalty or satisfaction.