Rhetoric over Uri attack

The sound and fury over the attack on the army camp in Uri is understandable. The loss of soldiers' lives has been heavy and tragic. But the rhetoric and the jingoism evident in the media make little sense. It's important to underline two key points.

First, as an editorial in today's Business Standard points out, there have been lapses on the part of the security forces. The infiltrators were able to cross the LOC and they were able to get into the camp quite easily. Among other things, it points to unsatisfactory vigil at the border. This is not just a matter of equipment or terrain, although these factors do count. BS makes the point that the border is porous because there's laxity on both sides. And the laxity is on account of the thriving drugs trade. Smugglers are able to move in and out because sections of the establishment make this  possible. And once you relax the vigil for smugglers, the jihadis get their opportunity. So it's no use simply pointing the accusing finger at the Pak army.

Secondly, all talk of retaliation is futile because the international community at large and especially the US will not take kindly to a military strike, as ambassador M K Bhadrakumar points out. The writ of the US runs across the world and the Indian establishment has cosied up to the US in recent years. The question of any major military action on India's part without US approval does not arise. And hostilities with nuclear Pakistan is the last thing the US wants today:

...despite the government's sustained public diplomacy to create an impression in domestic opinion that its foreign policies have burnished India's international standing and image and so on, in reality, India's actions -- especially any military moves -- will come under close scrutiny and be weighed in terms of international law and the United Nations Charter.
The bottom line is that the present ruling elites dare not think of crossing any 'red line' that Washington demarcates.
The US State Department, in a series of statements, has distanced Washington from the Indian positions with regard to the situation in the Kashmir valley, India-Pakistan tensions and Balochistan.
Conceivably, the Americans have cautioned our leadership already against making any precipitate military moves. The kind of brazen military adventures that many self-styled Indian defence analysts are espousing will not get Washington's approval.
As the Barack Obama administration tiptoes toward the lame-duck period, the last thing Washington wants as legacy is an India-Pakistan conflict.......

.....If the Americans do not want a war between India and Pakistan or any precipitate Indian military moves that violated international law, Modi cannot act otherwise.The umbilical cord that ties the Sangh Parivar and our ruling elites to the US establishment may be invisible, but remains robust.

So that's it- the rhetoric and sabre-rattling on our part will remain just that. The media pundits can rant as they much as they want. Perhaps the saner course for us is to simply put our house in order first.

Tread warily on labour reforms

India's labour unions fired a warning shot across the bow of the government on September 2 by having a mammoth all India strike. They were relaying their concerns about the proposed reforms in labour laws and other issues such as privatisation and FDI.

The way people go on and on about our labour laws one would think that simply by allowing hire and fire we can generate massive employment. The academic literature on the subject is by no means as clear cut as that. India's labour laws are not more restrictive than that of France and you can't say that France has not developed manufacturing over a century.

When you begin to look closely, you find that not hiring labour often has to do with other factors such as tax incentives for capital, which makes it worthwhile for business to substitute labour with capital. In the present context, we have serious issues constraining private investment, such as weak global demand, high interest rates, high leverage in industry, etc. Tweaking labour laws isn't going to help. On the contrary, by provoking a labour backlash, it might make things worse. It would also cost the ruling coalition dearly at the hustings.

More in my article in the Hindu today, Labour's love's lost.

Do we need universities?

I know that's hardly the right question for somebody sitting in an elite educational institution to ask. And it may sound dumb coming from anybody- who could argue against higher education? But the case needs to be made rigorously. Tim Harford, the undercover economist, takes a look at the pros and cons.

Pro: a recent study suggests that universities boost the growth of economies in the region:

Valero and Van Reenen find that universities do indeed seem to boost the income of their region. Double a region’s count of universities — say from five to 10 — and GDP per person can be expected to rise by 4 per cent. Double the university count again, from 10 to 20, and that’s another 4 per cent on GDP per person. Neighbouring regions also benefit. This is not a trivial effect.

Con: a degree from a reputed university is no more a signal of talent. You got into a good school, so you must be worth something. It's not that you have learnt something at the university that is useful at the workplace:

....undergraduate degrees have no value to society: they enable employers to pay higher wages to smarter workers, but lower wages to everyone else — and in order to enjoy these higher wages, smart people must waste time and money going to the trouble of acquiring a degree. Everyone might be better off if the whole business was abandoned.

In other words, as we at B-schools understand very well, universities, more often than not, are about placement, they are not about learning. But one mustn't carry this too far. What people learn at engineering and medical schools is, indeed, of value. To put it differently, you may start off as a trainee at a company without any B-school degree and rise to become CEO. But it's doubtful that somebody can simply land up at a hospital and be trained to become a doctor.
 

Coal scam and HC Gupta

H C Gupta, the former coal secretary, has drawn enormous support from the IAS association, assorted bureaucrats and the media in connection with the many CBI cases he's facing. He's an upright man, everybody says, the last person to use his position to make money for himself. His is a case of how the Prevention of Corruption Act can be used to harass an honest, retired bureaucrat.

As this article in Scroll.in points out, the issue is not just whether Mr Gupta made money out of the allocations are not. The issue is whether he was party to a seriously flawed process, whether he abetted wrong decisions on the part of higher-ups:

From all accounts, Gupta is an honest and upright officer. But when the coal scam was underway, what was needed from him was more than personal incorruptibility. He needed to hold his responsibility to the country higher than what the functionaries in the Congress seemed to have been telling him to do....

....The Screening Committee that Gupta headed disregarded its own internal comparisons of all the applicants, as a Central Bureau of India official had pointed out. Subsequently, as we know, several of the files pertaining to the allocations went missing as well.
In other words, Gupta is not in the dock because he made recommendations that benefitted some companies. He is in the dock because he cannot explain why those companies were chosen. He cannot explain those decisions because he is not the one who made those decisions to begin with. Politicians, especially from the ruling Congress Party, influenced the allocations, this reporter was repeatedly told while covering the coal scam.

The charge against Mr Gupta, then, appears to be that he looked the other way. Bureaucrats are riled because that's precisely what many of them are required to do- in order to move up the ladder, if not to keep their jobs. It frightens them that something that's considered routine now in the bureaucracy- looking the other way- can bring retribution down the line.

And why single out bureaucrats? In PSUs, in private sector companies, indeed, in every organisation, safety, comfort and prosperity lie in looking the other way, not raising the voice of dissent. People know that wrongs are being perpetrated but they rationalise their silence by telling themselves that they are not profiting directly from questionable decisions. (They do profit indirectly because the reward for keeping silent is that you get your promotions and bonuses).

The amendment that bureaucrats want now in the law against corruption is that they can prosecuted only if they are shown to have derived a personal benefit. If they did not uphold or defend the public interest, that's fine. Politicians may well be inclined to oblige them because otherwise the basis of the neta-babu nexus gets broken. Without pliant bureaucrats who will not stand in their way, the netas cannot make hay.

It will be interesting to see how Mr Gupta's case plays out- and whether the amendment sought by the bureaucracy will be forthcoming.

 

P2P lending: early warning signs

A storm has erupted over P2P (peer-to-peer) lending in China, FT  reports.

P2P platforms offer higher returns for savers. They do so in two ways. First, they identify borrowers who are willing to pay high rates because they do not have access to formal lending channels. Secondly, they reduce the intermediation cost- there are no branches and large staff that these platforms have to pay for. These platforms claim to have evaluated borrowers by using big data.

Alas, matters are not that simple:

Within the past year, ordinary Chinese people have fallen victim to scandals in which online financial platforms have disappeared with billions of dollars, provoking angry protests on the streets.

In February, more than 20 people were arrested for their involvement in Ezubao, a “complete Ponzi scheme”, that allegedly took more than Rmb50bn ($7.6bn) from investors, China’s biggest case of financial fraud to date. A month later, a court in southern China jailed 24 people for defrauding about 230,000 investors of nearly Rmb10bn in a similar scam.

In response to such problems, the regulator last week issued rules forbidding online lenders from accepting deposits or guaranteeing principal or interest on loans they facilitate. It also capped borrowing at Rmb1m for individuals and Rmb5m for companies.

One of the China's best known businessman calls P2P lending a "scam".  Looks as though those who think banks will disappear because of the arrival of such platforms need to wait for a while.

Storm over the revolving door

Former EU president Jose Manuel Barroso is the latest high-profile figure to go through the revolving door to the private sector. He joined Goldman Sachs as non-executive chairman of the bank's London operations in early July. This has triggered a massive online protest, with 76,000 signatures being collected already.

Barroso- not to be confused with the Hindi word bharosa - collects a cool 100,000 Euro as pension every year. Clearly, this isn't enough for him- it would be small change compared to what Goldman would pay him. Barroso complied with the 18 month cooling off period mandated by the EU. But the storm over his joining Goldman shows that people don't believe this limitation is adequate. As EU president, you would be dealing with cases involving high-profile companies. How you act is bound to be influenced if you know that there are post-retirement plums to be picked up from the companies you are dealing with.

No wonder French president Hollande calls it "unacceptable". The current EU president Jean Claude Juncker has a more nuanced comment. “The fact that Barroso works for a bank doesn’t bother me. But the fact that it’s that one causes me a problem.”

Change of guard at RBI

On the Saturday that Raghuram Rajan sent his letter to employees saying he would not be staying on after completing his term, I got a call from the correspondent of a foreign paper seeking my reaction. The correspondent told me that the name of Rajan's successor would be announced on Monday itself as the government wanted to ensure there was no uncertainty. I told him that was most unlikely- a process would have to be followed, including approval by the Cabinet Committee on Appointments. He insisted his information was from reliable sources.

Well, it's taken a while since then for the appointment to be announced. In the intervening period, the media speculation on the subject has been unbelievable. They said the appointment would happen by mid-April, soon after the PM returned from his visit to Africa. It didn't. Modi had told WSJ that the RBI governor's appointment was an administrative decision. Since the governor's term expired in early September, a decision would be taken close to that date. He has been true to his word. One hopes the media begins to take the PM more seriously hereafter.

As for the candidates, the front-runner kept changing every few days. Initially, it was said that it would be some internationally known economist of stature comparable to Rajan's. Perhaps Arvind Subramanian?.. he was well known and was also less hawkish than Rajan, so he had a great chance.  A little later, it was ...no, no, it would be a bureaucrat who was on the same wavelength as the government. Shaktikanta Das, Expenditure Secretary, emerged as a favourite. Further on, BREAKING NEWS....Arvind Panagariya was set to be named (never mind that he had Cabinet Minister rank and this would be a step down for him). 

A few days later, it Arundhati Bhattacharya's turn. Sorting out the banking mess was now the priority, hence a banker! Two other names entered the fray at some point, K V Kamath and Kaushik Basu. Then, one day, there was a buzz around Subir Gokarn... he had met Rajan and Das, so there must be something to it? (As though the government would first share the news with the RBI governor).

One is glad this silly game has ended. To give the media its due, Urjit Patel was always in contention although I don't recall his being cited as the hot favourite.

One thing is clear. The government runs a tight ship, so the media is pretty clueless on these matters. It also appears that a rigorous process has been followed. Two rounds of the Committee on Financial Sector appointments followed by discussions between the PM and the FM. This is as it should be. Due process must be followed in the case of high appointments, so all credit to the government for adhering to one.

After the announcement, the excitement moved to a dissection of the governor-designate. Would he continue Rajan's hawkish stance? Or would he be something of a dove? Neither, they said, he would be an owl!

The usual platitude was rolled out- there would be continuity with change, although it wasn't clear what would continue and what would change. One paper quoted government officials saying that they expected Patel to take a more "balanced" approach to inflation. Fighting inflation was, of course, a priority but he should not ignore growth.

The fact of the matter is that no governor has much of a choice on interest rates, now that the Monetary Policy Framework has articulated the inflation rate band (4 plus or minus two per cent) and also said that the indicator used would be CPI. The governor is also somewhat constrained by the proposed constitution of a Monetary Policy Committee. We are bound to have continuity in respect of monetary policy.

The more interesting question is whether there will change in respect of the banking sector. Patel does have the option of relaxing the accelerator on NPA recognition and giving PSBs and the corporate sector a bit of a breather. Whether he opts for this course or not depends on the view that he and the government will take on PSBs. It does appear that there is an effort on to shrink the market share of the PSBs by curbing their access to capital and hence their ability to lend. Even if this is the game plan, it would be unwise to push it at this point because then lending to the corporate sector and infrastructure will be stuck. That would not be good for the economy. One has to see whether pragmatism trumps ideology in the incoming governor's approach to PSBs.

There's just one other observation I'd like to make. Perhaps Rajan's biggest contribution, which has gone unheralded, is that he changed the stuffy, hierarchical culture of the RBI. He made himself accessible to staff at all levels (I was told they only needed to check with his secretary whether he was free and could walk in). Rajan himself did not hesitate to drop in at colleagues' offices, sometimes just for a casual chat. In more ways than one, he took away the aura of aloofness and inaccessibility attached to the governor's office (and now the governor's floor)- this was no small achievement in an organisation in which the governor had always been some distant God perched on the top floor.

In meetings, he was refreshingly free from airs of any kind, unfailingly polite and courteous and a good listener, as I can myself vouch for. This was not an affectation, it was a genuine something, just an aspect of the personality of a very cultured person. Perhaps, it helped that Rajan came from an academic background, not a bureaucratic one.

This was a great contribution because organisations are ultimately about team work, motivating and leading by example. In an organisation such as RBI, you cannot motivate through bonuses and stock options. You can only motivate by creating a culture where people feel respected and cared for. Three years is too short a period in which to bring about a radical change in culture but we must salute Rajan for his efforts.

Deutsche Bank whistle blower refuses SEC award

A former investment banker who blew the whistle on Deutsche Bank in a case involving wrong valuation of its derivatives portfolio has declined the $8.5 mn award given to him by SEC ( his ex-wife and lawyers have a claim on some of it).

In an article in the FT, he explains he's doing so because he's unhappy that the SEC let off senior executives of the bank:

But Deutsche did not commit this wrongdoing. Deutsche was the victim. To be precise, the bank’s shareholders and its rank-and-file employees who are now losing their jobs in droves are the primary victims.
Meanwhile, top executives retired with multimillion-dollar bonuses based on the misrepresentation of the bank’s balance sheet. It is therefore especially disappointing that in 2015, after a lengthy investigation helped by multiple whistleblowers, the SEC imposed a fine on Deutsche’s shareholders instead of the managers responsible.

Compare this outcome with a contemporaneous SEC enforcement action against the less connected executives of a smaller firm, Trinity Capital, and its subsidiary Los Alamos National Bank. The violations at Trinity seem similar to Deutsche, but orders of magnitude smaller. Five executives at Trinity were charged, the chief executive settled and paid a fine, and litigation continued against two senior officers. 

He explains that this happened because of the "revolving door" sydrome about which I have written often:

So why did the SEC not go after Deutsche’s executives? The most obvious concern is that Deutsche’s top lawyers “revolved” in and out of the SEC before, during and after the illegal activity at the bank. Robert Rice, the chief lawyer in charge of the internal investigation at Deutsche in 2011, became the SEC’s chief counsel in 2013. Robert Khuzami, Deutsche’s top lawyer in North America, became head of the SEC’s enforcement division after the financial crisis. Their boss, Richard Walker, the bank’s longtime general counsel (he left the bank this year) was once head of enforcement at the SEC.
This goes beyond the typical revolving door story. In this case, top SEC lawyers had held senior posts at the bank, moving in and out of top positions at the regulator even as the investigations into malfeasance at Deutsche were ongoing.

This is a classic case of regulatory capture. And because regulations will always be weak and will be undermined by crony capitalism, the idea that free markets can function efficiently, subject to their being regulated properly, will remain a myth.

Lehman Brothers should have been saved

One of the biggest controversies around the financial crisis of 2008 is about the decision to let the investment bank Lehman Brothers fail.

The moment that happened, it was as though somebody had dropped a bunker-busting bomb on a shaky and dilapidated building. The money market mutual funds, on whom the banks depended for short-term funds, withdrew their funding raising the prospect of the collapse of the financial system. It required a series of bailouts, including that of insurance giant AIG, and the guaranteeing of money market mutual funds' investment in banks, to rescue the system.

One argument trotted out at the time was that the US Treasury Secretary Hank Paulson wanted to send out a clear message on moral hazard to big players: no more rescues. However, since further rescues followed the failure of Lehman, that argument has worn thin. The official position since has been that the Fed simply could not provide liquidity to Lehman because it was not solvent and could not provide the necessary collateral. The Fed would violated the laws applicable to it had it tried to save Lehman.

Larry Ball of Johns Hopkins has done a brilliant analysis of the Lehman failure and he finds that the arguments don't stand up to scrutiny. He believes that Lehman was allowed to fail because the US Treasury and the Fed didn't quite anticipate the disastrous consequences that would follow. He also contends that the Fed has failed to provide the necessary documentation to substantiate its contention that Lehman wasn't solvent at the time.

More in my article in the Hindu, The cost of political interference

More on helicopter money

I wrote about the possible use of helicopter money in the UK in my last post. The question is asked: how different is helicopter money from Quantitative Easing. Helicopter money is the government financing its spending by borrowing from the central bank. This leads to an increase in the creation of money. In QE too, the central bank pumps money into the system by buying bonds from banks.

So, where is the difference? As an article in the Economist explains, QE is, in theory, subject to reversal. The central bank can sell back the bonds in the market. This, of course, has not happened with the QE we have since post the crisis of 2007. Helicopter money, on the other hand, is a permanent expansion in money supply. It can, therefore, be expected to have a more stimulatory effect.

The flip side is that the markets would view helicopter money unfavourably for precisely that reason. It is easy money for governments- it's just a matter of dipping one's hands into the central bank's till. This could easily lead to a sharp depreciation in the currency.

Helicopter money for the UK

'Helicopter money' is a policy option that is being urged seriously by serious economists. In its most literal form, it means dropping money from a helicopter. People who get the notes will go out and spend.This will boost aggregate demand, which is the policy objective today.

On the other hand, people may not spend the money, they may hoard it. For the UK, Robert Skidelsky favours other approaches that have been in the public domain:

The government should pay for, say, an investment programme not by issuing debt to the public but by borrowing from the central bank. This will increase the government’s deficit, but not the national debt, since a loan by the central bank to the government is not intended to be repaid. Thus the government acquires an asset but no corresponding liability.
However, this is only one possible form of helicopter money. Another way of achieving the desired increase in spending was suggested by the Swiss businessman, Silvio Gesell, in 1906. His idea was to give cash directly to households. But to give people an incentive to spend the money and not hoard it, there had to be a cost to holding on to it. In his scheme, unspent currency notes would have to be stamped each month by the post office, with a charge to the holder for stamping them. 

The combination of the two methods, Skidelsky believes, could be used to inject £100 bn into the British economy. This would, of course, be a repudiation of the austerity measures pursued by ex- Chancellor George Osborne.

Greek tragedy wrought by the IMF

So, Greece, which had paid higher yields than others in the Eurozone before it was created, could now borrow cheaply. The obverse of such borrowings was a widening current account deficit. Following the financial crisis of 2007, the markets became sensitive to sovereign risk. They sensed the possibility of sudden stops to capital flows that had financed large current account deficits. Yields on Greek sovereign bonds began to rise. Large amounts of Greek public debt were falling due. It became clear that some private creditors would not be willing to roll over debt and, even if they did, the government could not afford to borrow at the higher yields.

The IMF and the EU stepped in to organise a €110 bn bailout. The objective in any bailout must be to restore an economy to health. The Greece bailout has clearly failed to accomplish that. That's because IMF did not ensure that the terms of the bailout ensured sustainability of debt. This is astonishing because the IMF's rules required exceptional access to finance to be provided only after this condition was satisfied. How this norm and other norms were circumvented is a story that is well told by the IMF's Independent Evaluation Office, the IEO.

More on this in my article in the Wire, How the IMF bungled the Greek crisis

Did you know? Milosovic has been exonerated!

Would you believe it, the former Serbian President Slobodan Milosovic, widely reviled as a genocidal tyrant, has been exonerated by the International Criminal Tribunal for former Yugoslavia! I'm sure I'm among the vast numbers of people who had assumed that he had committed ghastly crimes that ended only with the liberation of Serbia through Nato bombing.

I guess we should have known better. This piece of disinformation was put out by the west and its obedient media and lives on long after Milosovic's death while still under trial. The exoneration is contained in the judgement that convicts the Bosnian Serb Radovan Karadzic, according to a terrific report in RT.com (on which I had my last post) by well-known journalist and Guardian contributor Neil Clark:

For the past twenty odd years, neocon commentators and 'liberal interventionist' pundits have been telling us at every possible opportunity, that Milosevic (a democratically elected leader in a country where over 20 political parties freely operated)  was an evil genocidal dictator who was to blame for ALL the deaths in the Balkans in the 1990s......
But the official narrative, just like the one that told us that in 2003, Iraq had WMDs which could be launched within 45 minutes, was a deceitful one, designed to justify a regime change-op which the Western elites had long desired.

The ICTY’s conclusion, that one of the most demonized figures of the modern era was innocent of the most heinous crimes he was accused of, really should have made headlines across the world. But it hasn‘t. Even the ICTY buried it, deep in its 2,590 page verdict in the trial of Bosnian Serb leader Radovan Karadzic who was convicted in March of genocide (at Srebrenica), war crimes and crimes against humanity. There was no official announcement or press conference regarding Milosevic‘s exoneration.

Clark  says that Nato put it out that Milosovic had perpetrated horrible crimes in Kosovo. This was proved false by a UN court in 2001. Then, Nato latched on to alleged crimes of his in Bosnia. This claim too has now been thrown out.

The Western propaganda machine has since found other targets: Afghanistan, Iraq, Libya, Assad, Putin:

Since then we’ve also had the NATO destruction of Libya, the country which had the highest living standards in the whole of Africa and the backing of violent 'rebels' to try and achieve ‘regime change’ in Syria.
You don’t have to be Sherlock Holmes to see a pattern here.Sinc
Before a US-led war or ‘humanitarian intervention’ against a targeted state, a number of lurid claims are made about the country‘s leader and its government. These claims receive maximum media coverage and are repeated ad nauseam on the basis that people will bound to think they’re true.
Later it transpires that the claims were either entirely false (like the Iraq WMD ones), unproven, or greatly exaggerated. But the news cycle has moved on focusing not on the exposure of the fraudulent claims made earlier but on the next aggressive/genocidal ‘New Hitler’ who needs to be dealt with.  In 1999 it was Milosevic; now it’s Assad and Putin.

You won't find such stories in the western mainstream media. That's why you should go to channels such as RT.

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.