Time To Go To FRDI Bill’s Roots

Controversy around the bail-in clause aside, FRDI Bill’s clauses 58 and 62(1) regarding governance of a firm declared critical are inherently conflicting

Much has been said and written about the Financial Resolution and Deposit Insurance Bill, 2017. The FRDI Bill was scheduled for discussion in Parliament this winter session but will now have to yield to more immediate concerns such as the Gujarat election results and the Central Bureau of Investigation special court’s verdict on 2G spectrum allocation. In addition, the joint committee of both Houses is yet to submit its report on the bill.

Public discussions on the FRDI Bill have focused on the formation of a resolution corporation and its bail-in powers in the event of a financial company going bust. The said corporation will monitor financial services companies, in coordination with regulators, and resolve them in case of failure. Bail-in implies using the company’s various existing liabilities—different debt categories or deposits not covered by deposit insurance (all deposits over Rs1 lakh)—to resolve impending failure. This is different from bailout, which implies external help, such as government using taxpayer money.

There may be some merit in constructing a resolution regime, given the financial system’s broader linkages. But there are other equally larger issues that also need highlighting, especially because they explain how we got here.

First, there is a need to discuss the relevance of an imported idea, a palliative designed for a different disease in a different body. Soul-searching after the 2008 financial crisis and its broader systemic impact through economic linkages led to the idea of a resolution corporation. It was felt necessary to design shock absorbers to insulate the economy and other financial sector institutions in the event of one single organization going bust, à la Lehman Brothers. The idea was discussed in various global governance institutions and rules were framed.

Some of the global credit rating agencies have been following up assiduously on the progress of implementation. Eyebrows are raised at jurisdictions, especially emerging economies, continuing to defer a resolution regime or designing a custom-built framework suited to their economy. In the meantime, the US, the epicentre of the crisis—which used taxpayer money to bail out all banks, including ensuring hefty bonus payouts to bankers—continues to enjoy the highest credit rating. Irony has, of course, been missing from the global credit rating lexicon.

In India, the idea of a resolution corporation was advocated in 2013 by the Financial Sector Legislative Reforms Commission. This was followed up in 2014 with a Reserve Bank of India (RBI) working group report on crafting a resolution regime for financial institutions. Finally, in 2016, a Union finance ministry committee submitted a draft code on the resolution of financial firms.

Speaking in Parliament on 21 December, Union finance minister Arun Jaitley defended the FRDI Bill, claimed that depositors’ money in public sector banks would be protected and said that the bill was the outcome of a commitment made by the previous government to G20. Jaitley is right. The resolution framework was part of the G20 leadership’s final declaration at the 2011 Cannes summit. Ironically, there’s also a segment in the same communique that’s titled ‘Avoiding Protectionism and Reinforcing the Multilateral Trading System’; see where that’s got us.

This goes to the heart of the issue. The Indian government’s willingness to accept a cut-and-paste formula is curious, coming as it does on the back of similar decisions in the past which seemed alien to the peculiar complexion of India’s financial services—salary cap for financial sector chief executive officers and tightening regulation of “shadow banks”, leading to a squeeze on non-banking financial corporations which provide a unique last-mile solution to the Indian banking system, among others. In a system where banks (with an overwhelming public sector presence) dominate the financial system and are extensively regulated by RBI, there should be some discussion about whether importing regulatory frameworks, in universum, makes sense. More pertinently, whether the bail-in provisions recommended in the Financial Stability Board’s October 2014 guidelines are applicable to India.

By the way, all those fond of citing Singapore’s examples of good governance should look at the city-state’s proposed resolution regime, which excludes all deposits and senior debt from bail-in.

Secondly, there’s the issue of democracy and fundamental rights. In its current form, the FRDI Bill disallows the proposed corporation’s resolution process from being challenged in courts. This might be necessary to avoid undue delays in the resolution process and to avoid failure of wobbly financial companies. But it’s also like a slippery slope: the overwhelming presence of government representatives on the corporation’s board (including regulators’ representatives) can convert the corporation into a blunt tool of vengeful political action. It also disregards the RBI working group’s recommendation that a grievance mechanism be built into the process.

The larger, moral question is: Why does the FRDI Bill have to start off by being ham-fisted and draconian? Add poor drafting to that list; think tank PRS Legislative Research demonstrates how clauses 58 and 62(1) regarding governance of a firm declared critical are inherently conflicting. There are other similarly inconsistent clauses.

Finally, there’s the spectre of new regulators chipping away at the powers of old regulators, such as RBI. It raises the question: Does it really remedy anything?

The above article was originally published in Mint newspaper and can also be read here

Sports And The Ease of Doing Business

There is no arguing that sports and sporting events should be made more inclusive

A recent statement by Rajyavardhan Singh Rathore, Union minister of state for youth affairs and sports, has rattled many private television broadcasters operating in India. Delivering the keynote address at the Confederation of Indian Industry’s (CII’s) Big Picture Summit, he said that media has an important role in taking sports to each and every home in India.

The minister’s intentions are honourable and desirable. But when combined with recent reports in this newspaper and elsewhere that the sports ministry is working with the ministry of information and broadcasting to declare cricket’s Indian Premier League (IPL) a tournament of “national importance”, it has multiple implications. This column usually eschews discussions on policy issues which are works-in-progress, but the multiple consequences of such a policy move are compelling enough to merit a moment of pause.

At the moment, the minister is only thinking aloud. But if the decision does come through, it will require a private sector network that won exclusive media rights to this tournament in an open auction conducted by the Board for Control of Cricket in India (BCCI) to share its live feed of the event with national broadcaster Doordarshan under the Sports Broadcasting Signals (Mandatory Sharing with Prasar Bharati) Act, 2007.

Section 3(1) of the Act states: “No content rights owner or holder and no television or radio broadcasting service provider shall carry a live television broadcast on any cable or Direct-to-Home network or radio commentary broadcast in India of sporting events of national importance, unless it simultaneously shares the live broadcasting signal, without its advertisements, with Prasar Bharati to enable them to re-transmit the same on its terrestrial networks and Direct-to-Home networks in such manner and on such terms and conditions as may be specified.” Section 3(2)(1) of the Act also requires the “contents rights owner” (private broadcaster) to share 25% of advertising revenue with Prasar Bharati.

Apart from the relevance and applicability of the Act to IPL, whether the IPL can be termed an event of national importance or whether the statements were meant to influence the Gujarat state election, two critical issues stand out.

One, any possible ex-post intervention by the two ministries will go against the grain of Prime Minister Narendra Modi’s strenuous efforts to improve the ease of doing business in India. The private broadcaster won the rights to broadcast IPL matches via television, digital media, Indian and overseas media for five years on payment of Rs16,347.5 crore. This winning bid was probably calculated on the basis of certain metrics and revenue projections. But, if the two ministries follow through on their plans, it is likely to send all calculations awry. The issue once again raises the spectre of retrospective action, something that makes it vulnerable to international arbitration and investor anathema.

There is no arguing that sports and sporting events should be made more inclusive. Unlike many other developed countries where access to sports—including tennis or golf—is getting increasingly democratized, sports access in India remains largely sequestered behind elite walls. Even popular sports like football and hockey remain out of reach for a vast section of India’s population. Therefore, the ministry’s attempts to foster a deeper sporting culture and expand sports infrastructure is quite commendable.

However, as a policy imperative, this should have been included as part of the auction’s terms and conditions and not articulated as an afterthought. Bidders would have then structured offers differently, factoring in the changed dynamics and sharing of advertising revenue. Inclusion of the national network would definitely bring more eyes to the event, which would justify the sharing of advertising revenue. The contra argument is that with additional access points now available, it would reduce traffic to the original broadcaster, thereby having an impact on the overall revenue.

That brings us to the second point.

According the IPL the proposed special status raises multiple questions: What trigger points are necessary to declare a tournament of national importance? Can any minister, ministry or government department declare anything nationally important?

What adds to the confusion is whether the ministry of sports and youth affairs has any category listed as “nationally important”. The ministry currently has four categories created to determine eligibility for Central assistance: high priority, priority, general and other. The ministry documents: “In the ‘High Priority’ category, the sports played in the Olympic Games and in which India has won medals in last conducted Asian Games as well as Commonwealth Games or in which India has good chance of winning medals in Olympics have been included.” There are nine high priority sports and cricket is not one of them—athletics, archery, badminton, boxing, hockey, shooting, tennis, weightlifting and wrestling.

The Constitution’s seventh schedule puts sports in List II, or areas where states have jurisdiction. The ministry has been trying to include it in the Concurrent List; till that happens, it is questionable whether any declarations can be made. To be fair, the ministers have not yet got around to acting on their thoughts. But thinking aloud or even vocalizing arbitrary government intervention can send mixed signals to potential investors.

The above article was originally published in Mint newspaper and can also be read here

PPP: Private Profits Promoted

In a PPP framework, the private sector partner needs to maximize profit, which is not always compatible with the stated objective of providing universal access to quality services

The news of how much a private hospital recently charged a patient’s family for dengue treatment, despite not being able to save the patient’s life, has was met with outrage and revulsion. The private healthcare facility, based in the National Capital Region, has denied accusations of over-charging and has justified the bill raised on the family of the deceased.

While social media users may have been hasty and impulsive in apportioning blame for the alleged fudging, it is imperative that the matter be investigated and, if wrongdoing is proven, future remedial measures provided. This is easier said than done. This simple act, normal in any rules-based jurisdiction, is unlikely to reach any logical conclusion or create mitigating circumstances for avoiding repeat performances in the future. One reason is the lack of a proper regulatory framework—whether sector-specific or for entities shadowing the public-private partnership (PPP) model.

At its core, this unseemly incident also questions the nature of government’s ties with the private sector. While there is no doubt that the government needs to partner the private sector in multiple areas, one unavoidable question keeps popping up: How is the lack of sectoral regulators, coupled with the government’s increasing and unflinching faith in the private sector’s capacity to deliver social sector targets despite evidence to the contrary, affecting outcomes?

NITI Aayog vice-chairman Rajiv Kumar hit the nail on the head during a conversation with The Indian Express staffers recently: “All these private hospitals...they have been given land at a very cheap cost—it is really like a public asset—on the premise that they will do what they promised.... I am convinced that private hospitals in the tertiary space need far better regulation than what is in place now. They must be made to stick to what they have promised.”

Indeed, the lack of sectoral regulators is aggravating the risk profile of numerous sectors. In many sectors, the government doubles up as both service provider and regulator, creating serious conflict of interest. It also raises questions about sequencing: should private sector be allowed entry into various sectors without first establishing independent or autonomous regulatory structures? In the absence of a credible regulator or a regulatory framework, empirical evidence shows the sector often falls prey to regulatory capture and cronyism.

Even the Vijay Kelkar committee, set up to revitalize the PPP model in infrastructure, endorsed the setting up of independent regulators: “The committee cannot overstate the criticality of setting up independent regulators in sectors going in for PPPs.”

The Indian healthcare industry is a prime example of how lack of sectoral regulation has resulted in government ceding space to the private sector, even in urban primary healthcare centres in some cases. This has multiple consequences, especially with regard to levy of user charges which remains unregulated. From there, it is just one step to billing a patient for over 600 syringes during a two-week stay, which works out to an absurd consumption figure of 43 syringes a day.

Ironically, the National Health Policy 2017, while advocating a larger role for the private sector, has reserved the regulatory role for the ministry, albeit with a deadpan display of diffidence: “The regulatory role of the Ministry of Health and Family Welfare—which includes regulation of clinical establishments, professional and technical education, food safety, medical technologies, medical products, clinical trials, research and implementation of other health related laws—needs urgent and concrete steps towards reforms. This will entail moving towards a more effective, rational, transparent and consistent regime.”

The PPP framework has many in-built infirmities: there are asymmetries in how the government and the private sector partner share revenue and risks.

There is another fundamental problem with PPPs in the social infrastructure space: the private sector partner needs to maximize profit, which is not always compatible with the stated objective of providing universal access to quality services.

The World Bank’s page on public-private partnerships, while describing the Indian model, says that bids are usually evaluated based on the lowest cost to government. It is common knowledge that the lowest cost bid mode is a slippery slope and prone to abuse and sub-optimal outcomes.

Perhaps, as McKinsey, World Bank and the World Economic Forum have told us on different occasions, the PPP model is indeed the way ahead to improve healthcare delivery in India. But, it is also important to get the design right to make the delivery cost-efficient, timely, affordable and profitable for all stakeholders.

Beyond the PPP nuts-and-bolts, there lies a larger moral question centred around the philosophy of social contract and the elasticity of powers afforded to an elected government. Part of the understanding or compact between the citizen and the elected legislative is that taxation revenue will be used to provide public goods, especially to those who are unable to pay user charges. Over the past 10-15 years, the government has steadily relinquished its space to the private sector as the sole provider of public goods and services, with the private sector player gradually introducing arbitrary and unregulated user charges. This breach of contract has serious implications for society.

The above article was originally published in Mint newspaper and can also be read here

The Rich Know How to Sidestep Responsibilities

The Paradise Papers show how the wealthy and powerful use tax havens—some do it legitimately, others for re-routing illegal wealth—to avoid or evade tax liabilities

Three developments over the past few weeks provide pointers to how the rich, whether individuals or nations, behave when it comes to meeting obligations.

The Paradise Papers have revealed how wealthy and powerful individuals use tax havens—some do it legitimately and some for re-routing illegal wealth—to either avoid or evade tax liabilities. The examples also highlight how this corrosive affliction equally infects industrialists and politicians.

The second example relates to the behaviour of rich nations, which have unabashedly deployed evasive tactics at Bonn, host to the 2017 UN Climate Change Conference to implement the Paris Agreement signed in 2015. The rich countries have been trying every trick to avoid meeting commitments on reducing greenhouse gas emissions, arresting climate change and funding developing and poor countries to help counter the effects of climate change. The US, European Union and some other rich countries—including Australia, Canada and Japan—have blocked efforts by developing nations to review the developed world’s performance vis-à-vis commitments.

Developing nations have been blaming the rich for sidestepping commitments made under the Kyoto Protocol, which placed mandatory emission reduction targets to be achieved during 2012-15. Later, through what is known as the Doha Amendments, the target date was extended to 2020. Developing countries have been arguing that to finalize the rule-book for the Paris Agreement, as the successor to the Kyoto Protocol, it is necessary to understand the achievements so far.

For instance, as part of the Copenhagen Accord of 2009, the developed countries pledged to provide developing nations with $30 billion during 2010-12 and $100 billion every year till 2020 to help mitigate climate change effects. The understanding was that since the industrialized nations were historically responsible for greenhouse gas emissions and the consequent global warming, they have a moral obligation to help poor countries, especially island nations, offset the adverse effects of climate change. But, as data shows, the rich are not only in breach but have been dissembling: Apart from reneging on their promise, they have also been padding funding data.

The third example crosses the Atlantic Ocean to Washington, DC, where the annual meetings of the World Bank and International Monetary Fund were held a month ago. Among other things, the agenda included the Bank’s pivot towards a new financing mode, for which it has been laying the ground over the past few months. The new strategy is called the “cascade approach”, under which Bank president Jim Yong Kim proposes to convert “billions into trillions”, essentially by leveraging the Bank’s financing and crowding in private investment.

The Bank released a document in September titled “Maximising Finance For Development: Leveraging The Private Sector For Growth And Sustainable Development”. This builds on a preceding March 2017 document called “Forward Look—A Vision For The World Bank Group In 2030, Progress And Challenges”. This document defines the scope: “... The Cascade first seeks to mobilize commercial finance, enabled by upstream reforms where necessary to address market failures and other constraints to private sector investment at the country and sector level. Where risks remain high, the priority will be to apply guarantees and risk-sharing instruments. Only where market solutions are not possible through sector reform and risk mitigation would official and public resources be applied.” Currently focused on infrastructure, the approach will be later extended to financial services, healthcare, education and agribusiness.

On the surface, it sounds like a logical progression of the Bank’s strategy and, at a theoretical level, the right thing to do. The Bank, in some senses, seems to be heeding conservative economists who have for long contended that the Bank crowds out the private sector and, therefore, must step back and facilitate private sector project funding. But there’s no avoiding the tricky questions: How do you manage the political economy of reforms, who will bear the risks, how will risk be eliminated, what will be the role of user charges, what is the private sector’s exact role, and, what happens in countries with minimal private sector presence? There are also concerns about involving the private sector in healthcare and education, especially because private and public interests are rarely aligned. Many of these concerns have already played out in India.

To be fair, the Bank’s hands are tied because the rich countries, especially the US, have refused to provide additional capital. India’s finance minister Arun Jaitley was forced to comment at the annual meeting: “The possibility of generating sufficient resources through the management levers has had only a marginal impact given the scale of capital requirement, and hence, early capital infusion into WBG (World Bank Group) is an imperative... The excessive emphasis on the ‘Cascade Approach’ to determine suitability of the financing source and mechanism does not have potential to make a big difference. Applying cascade approach to every project posed to the World Bank will lead to considerable delay. We should be careful in applying this approach especially to social sector projects.”

What is worrying is that the lessons of 2007 and earlier crises are being forgotten as soon as the first signs of economic growth are visible in the Western economies.

The above article was originally published in Mint newspaper and can also be read here

Bank Recapitalisation: Slow-Mo Replay

Scepticism over bank recapitalisation plan is fuelled by the government’s predilection for grandiose policy announcements without adequate preparation or execution

Like all things Indian, there are multiple ways of viewing Union finance minister Arun Jaitley’s comprehensive presentation on the Indian economy and the package of measures formulated to provide some momentum to a decelerating economy.

One is to view government as profligate: throwing caution to the winds, raiding the exchequer and reaping subsequent political dividends. With state assembly elections due in Gujarat and Himachal Pradesh, this package seems custom-built to address concerns over slowing growth, rising unemployment and the severe economic dislocation which followed demonetisation and implementation of the goods and services tax.

Some may even view this development as a snub to the reconstituted Prime Minister’s Economic Advisory Council (EAC). Convened to suggest measures to revive the economy, the council rebuffed calls for a fiscal stimulus programme during its maiden 11 October meeting. EAC chairman Bibek Debroy ostensibly acknowledged, during his post-meeting press briefing, that there was indeed an economic slowdown but, puzzlingly, declined to publicly list the reasons. The new package can thus be seen as realpolitik trumping good economic sense.

Viewed through a different lens, the package can be seen as an attempt to generate temporary feel-good with all the right ingredients thrown in—large numbers, a dizzying number of projects, heady growth estimates. This scepticism is fuelled by the government’s predilection for grandiose policy announcements without adequate preparation or execution. What further bolsters the cynicism is the inordinate rush to announce schemes without fleshing out details: for example, the Rs2.1 trillion bank recapitalisation plan lacks all the relevant details. There is another reinforcing factor: the government has front-ended announcements of funds injection, but all mentions of painful restructuring, if any, have been kept for later.

There is another nuanced view. Keeping the political compulsion as a constant, since the impact of the economic distress on impending elections cannot be ruled out, Jaitley’s package tries to walk a fine line by providing an economic stimulus while also heeding fiscal concerns. While this assessment does seem closer to reality, implementing it is unlikely to be easy. For example, it will be difficult for the government to undertake all the listed infrastructure projects without any budgetary support, given the private sector’s current inability to pitch in with capital.

Many observers and analysts have inveighed against the recapitalisation programme even though the final design is yet to be revealed. They see it as rewarding banks with a free get-out-of-jail card without any corrective measures to avoid repeating past mistakes. There’s also the moral hazard question: recapitalisation studies conducted globally have shown that banks receiving fresh government capital tend to exhibit increased risk-taking activity compared with banks deprived of capital infusion. There are other studies which show that recapitalisation stimulates the credit cycle for only larger banks and existing borrowers. This then contradicts the government’s assertion that recapitalisation will lead to increased credit availability for the micro-, small- and medium-enterprise segment.

While these are legitimate concerns, the recapitalisation programme seemed like a fait accompli, especially since banks were caught in a vicious cycle, leading to a credit impasse which exacerbated the economic distress. As the largest shareholder, it was incumbent on the government to recapitalize banks to kick-start the credit cycle and growth process. Banks could have raised fresh capital from the market by diluting the government’s stake, but their contaminated books made that impossible.

Ideally, recapitalisation and restructuring should go together. The government’s current plan incorporates one without the other or, at best, inserts a time lag between the two actions. Many commentators have been clamouring for an accompanying restructuring programme. One suggestion is to reduce the government’s stake in public sector banks, which, then, one naïvely assumes will provide banks with operational autonomy. Will, say, a 30% or 40% stake prevent ministers and government officials from calling up a bank’s chief executive and influencing credit decisions? Government intervenes in a bank’s credit operations in many other ways.

The Banking Regulation Act mandates that a bank’s board, apart from the executive directors and the regular government nominee (usually a conscientious bureaucrat), should also include professionals with knowledge of accountancy, agriculture and rural economy, cooperatives, small-scale industry, among others. Governments often exploit this section to appoint party loyalists and sympathizers under one category or another since the eligibility criteria is not rigid. These nominees then enjoy unofficial government imprimatur to intermediate between the bank and Big Business. This gap must be plugged.

The other demand is for complete privatization but, realistically speaking, the political economy will not allow that. And, even if that goes through, it is not fool-proof because some of the largest private banks are also struggling with mountains of bad loans featuring the usual suspects: large corporations. A sustainable, long-term solution must therefore include punitive measures for all wilful defaulters, especially majority shareholders, and not just politically convenient soft targets.

The above article was originally published in Mint newspaper and can also be read here

Globalization: Much Needed, Yet So Treacherous

The unravelling of the quarter-century-old global economic order will have many effects, some unpredictable but mostly unavoidable

Developments in Germany have surprised those rejoicing defeats of Marine Le Pen and Geert Wilders. Alternative for Germany (AfD) has won 13% of votes and is Bundestag’s third largest party; significantly, it’s the first time since World War II that a far-right, nationalist party has done this well. AfD will surely want to add momentum to this regained arc of history by chipping away at the economic and social policies that we now take for granted. They are no longer at the gate; they are just one step away from the round table.

It’s not happening in Germany alone. The assault on the established order has begun even in the US and UK, with policies now resolutely inward-looking. The global right wants to fashion many changes, including the framework upon which the current idea of globalization is draped. Politician Shashi Tharoor writes in his Project Syndicate column that the backlash against globalization will be felt on both cultural and economic fronts. The unravelling of the quarter-century-old global economic order will have many effects, some unpredictable but mostly unavoidable.

India’s version of the new world order is still work-in-progress, though early signs indicate a somewhat dichotomous character. India’s social and diplomatic policies are making a departure from the past, including moving away from their pluralistic, cosmopolitan and multicultural moorings. The resistance to Rohingya migrants—including hapless children, women and the elderly—under the implausible and untenable pretext of pre-empting Islamic terrorism is an example.

But, conversely, the current administration’s economic policies endorse the late 20th century world order, which includes an openness to financial globalization and a dogged belief in an economic orthodoxy that has been discarded elsewhere. Ironically, financial globalization—especially portfolio flows—is like the two-faced Janus: much needed yet so treacherous.

McKinsey Global Institute’s report, “The New Dynamics Of Financial Globalization”, sees a return to a “more stable, more risk-sensitive era of financial globalization” though manifold risks remain. India has been a beneficiary of global capital flows. Since opening up to foreign portfolio flows in 1992-93, India has received net inflows of Rs12.6 trillion, of which 32% was invested in debt instruments. In the first five months of 2017-18 (till 15 October), while equities saw net outflows of Rs7,054 crore, debt instruments received Rs1.11 trillion. This could be the fabled chink.

The first warning comes from Mervyn King, a former Bank of England governor and vocal supporter of Aston Villa football club. Writing in The Wall Street Journal, King warns of a “bumpy decade ahead” because of over-borrowing and the spectre of rising interest rates in the developed economies leading to a rash of defaults. This doomsday prediction might resonate with India’s twin balance-sheet problem (over-leveraged companies and contaminated banks). The Reserve Bank of India (RBI) is under pressure to cut interest rates, not raise them. Assuming the RBI does slash rates, the slightest disruption in the global economy could still spell trouble, given Indian corporate and financial sector’s over-reliance on foreign capital.

The second alert comes from Deutsche Bank’s chillingly titled report, “The Next Financial Crisis”. It shows how the frequency of financial crises has increased after the Bretton Woods system broke down in the early 1970s, especially since it allowed nations to issue fiat currency without any disciplining restraint. The report lists 11 probable sources for the next crisis, which include central bank unwinding, escalation of global imbalances or Italy going bust. In short, the report states that the current global economy is “particularly prone to a cycle of booms, busts, heavy intervention, recovery and the cycle starting again...there will likely be another financial crisis/shock pretty soon with their frequency continuing to be high until we create a more stable global financial framework.”

Christine Lagarde, managing director of International Monetary Fund, provides the third cautionary note, saying that balance sheet unwinding by Western central banks, particularly the Fed, could lead to capital outflows from emerging economies and the ensuing volatility could even spill over into the domestic economy. She advocates gradualism and increased communication between central banks.

The fourth arrow comes from the bow of Jerome H. Powell, a member of Federal Reserve System’s board of governors. Like his predecessors, Powell reiterates that adverse consequences from central bank unwinding will be felt only by emerging economies with fundamental vulnerabilities, thus absolving Fed of fomenting global instability. While admitting that emerging economies are better placed this time to manage outcomes, he says significant risks remain. Powell cites research that puts emerging markets’, including the Indian, corporate sector debt at vulnerable levels; any interest rate increase, accompanied by earnings drop and exchange rate volatility can create “unpredictable and outsized” surprises.

So, while growth in the US and Europe is still gradual, Indian policy managers need to urgently put some risk mitigation measures in place. An obvious one is to immediately recapitalize public sector banks. The second is to actively catalyse investment: waiting for miracles to happen while drawing up a 10-point programme is so 42 years old.

The above article was originally published in Mint newspaper and can be read here

India’s New Gene Is Called Plutocracy

India has been called a plutocracy for its manifest disposition towards the rich and the powerful

The stampede at Mumbai’s Elphinstone Road train station last week, which claimed 27 lives, holds up a mirror to India’s policy bias towards the rich and powerful. Many people (including this columnist) impulsively tweeted about the government’s penchant for bullet trains versus apathy towards basic infrastructure for daily commuters; the tragedy, though, showcases a much larger malaise, one that has been patronized by successive governments.

The catastrophe can be sourced to how politicians and industrialists colluded to develop Lower Parel, an erstwhile textile mill neighbourhood that has now been converted into malls, offices, TV studios, restaurants and residential blocks by tweaking rules and with complete disregard for the livelihood of its original residents, public transport or traffic growth. 

All cities around the world redevelop and rejuvenate urban areas but do so with some thought to forward and backward linkages. The rules designed to facilitate Lower Parel’s development had a sole objective: to help mill owners unlock land value without any thought of how millions of office workers and service providers would enter and exit the area. End result: the loss of lives at the Elphinstone Road station.

There is a name for this. India has often been called a plutocracy for its manifest disposition towards the rich and the powerful. Plutocracy, in short, can be defined as rule by the wealthy and the powerful, where policies and systems are designed to deliver greater benefits to the wealthy and powerful. Consequently, plutocracy eats away at the core of any democratic system.

A recent paper by Lucas Chancel and Thomas Piketty shows how India’s average real income growth accelerated post-2000. Simultaneously, it also shows how the top 10% grew at a much faster rate than the average, while income growth of the balance 90% fell below average. While the authors avoid offering any conclusions about the impact of economic reforms on inequality or poverty in India, their findings point to an uncomfortable truth: Post the 1980s, when the process of economic reforms began, the top 1% in India have seen their incomes and wealth grow at a much faster rate than the balance 99%.

Increasing wealth concentration among the rich is corroborated by Credit Suisse’s Global Wealth Report 2016: India’s top 1%, which owned 36.8% of the country’s wealth in 2000, now owns close to 58% of the wealth (the global average is 50%). An Oxfam 2017 report showed that 57 Indian billionaires own as much as the bottom 70% of the population.

Another paper by Dilip M. Nachane and Aditi Chaubal (goo.gl/gxLcwd) finds a plutocratic bias in the way India’s consumer price index (CPI) is constructed, by attaching greater weightage to items of expenditure consumed by higher income groups. This has enormous implications for policy design, especially when the Reserve Bank of India has selected CPI as its chosen benchmark for inflation targeting.

Plutocracy is also characterized by suborning of national institutions. Public-private partnerships (PPPs) are perhaps the best examples of how this financing mode was used to reward private sector partners with state resources (including valuable real estate) with the government (or government-owned institutions) shouldering the bulk of project risk. 

For example, in airport PPPs, private partners have been treating public land as private property. Of course, there were many PPPs that failed because of bureaucratic stasis or other extraneous reasons but the fundamental flaw in Indian PPPs was hard to miss.

Plutocracy can also be identified in the way institutions behave. India’s largest commercial bank, the State Bank of India (SBI), decided to step outside its sandbox and experiment with new revenue sources: it decided to penalize customers who failed to maintain the monthly average balance in their savings bank account.

This example was quickly emulated by some other private banks. SBI’s haste and poor planning in announcing and executing the new revenue stream came back to bite it: a torrent of protests has forced the SBI to exempt pensioners and minors (whose accounts typically empty out soon after money is deposited) and reduce the penalty amounts for other depositors.

Policy haste, without thinking through the consequences, is quite commonplace in India, whether in government or in institutions. 

The SBI example shows how policy moves when it does not take into account customer profile, feasibility options or its impact on various income groups. Demonetization is another example of how an autarchic policy decision affected livelihoods for a wide spectrum of the population. 

What’s more worrying is the bias in policy towards those with more money, power or both. Typically, by the time public policy emerges from drawing board to final design, political and business influences shape its biases.

It is instructive to note the role of politicians in plutocracy. The Supreme Court recently upbraided the Centre for the rapid—and, in some cases, inexplicable—rise in politicians’ assets. Interestingly, when one of their own was banned from flying for perpetrating violence against airline staffers, parliamentarians banded together to get him a reprieve. 

On the rebound, though, the aviation ministry has now empowered airlines to unilaterally ban “unruly” passengers, without offering citizens any means of contesting the one-sided rule. The odds are always stacked against ordinary citizens in a plutocracy.

The above article was originally published in Mint newspaper and can also be read here.

India’s Creative Economy Needs Creative Solutions

It is time to either upgrade Trai’s capacity or to even start thinking again of an independent and separate broadcasting regulator

Sometimes you don’t need to look under rocks to find the objectionable.

The auction for T20 cricket’s Indian Premier League (IPL) broadcast rights, across geographies and media, has amplified the asymmetry in regulatory frameworks operating in the creative economy. The entire issue should also help triangulate a policy conversation between competition law, intellectual property rights and a sectoral regulatory/legislative narrative that has failed to comprehend the dynamics of India’s growing media and entertainment industry.

Star Group’s winning bid for IPL media rights was made via a transparent process. But the voluble protests preceding and following it have their roots in the Indian economy’s enduring legacy of cronyism and government patronage. Even if we move beyond the immediacy of the complaints and try to focus on the larger picture, the state of strife and conflict does underscore the need for regulatory reform in the creative economy. Specifically, it highlights three issues: multiplicity of regulators leading to lack of clarity on regulatory jurisdictions; need to grant supremacy to Indian Copyright Act—which governs creation, broadcasting and monetization of content—over a plethora of other laws and regulations that are stifling legitimate rights of content creators; and, finally, whether the 20th century mode of administered pricing for content produced in the private sector for sale in the open market can still work in the 21st century.

At the heart of the debate is the difference between monopoly over content and content monopoly. Monopoly over content arises when the content creator has the sole right, granted by law, to monetize the intellectual property embedded in the content for a specific period of time. Content monopoly arises when there is only one content producer in the entire industry and can hold distributors and consumers to ransom, which is clearly not the case in the India.

However, the extant regulatory framework seems to be ignoring these nuances and apprehension over content monopoly seems to have engendered systems that grant subordinate status to the Indian Copyright Act for broadcasting organizations, which is in contrast to global norms. Indeed, indications about content’s future were discernible in the IPL auctions: Facebook’s Rs3,900 crore bid for digital rights (for the Indian Subcontinent) trumped Airtel’s Rs3,280 crore and Reliance Jio’s Rs3,075.72 crore bids. Though Facebook eventually lost out to Star’s consolidated bid, the incident demonstrates how digital content is clearly the next battleground and how companies are according supremacy to content. It also brings into sharp relief the question of net neutrality and the role of gatekeepers. This then also begs the question: Is the current regulatory structure, erected to generate societal equity through mandated economic pricing, adequate and symmetrical for content delivered through cable/satellite and through digital pipelines?

The private television industry in India is of fairly recent vintage. Yet, a vice-like grip of regulators and regulations governs its creativity. The key regulatory institutions overseeing the industry are the ministry of information and broadcasting, the ministry of electronics and information technology, the Telecom Regulatory Authority of India (Trai), the Telecom Disputes Settlement and Appellate Tribunal, the Competition Commission of India, the department of industrial policy and promotion in the ministry for commerce and industry, the Intellectual Property Appellate Tribunal and the department of telecommunications in the ministry of communications.

Given the multiplicity of agencies, there is a wide and bewildering assortment of laws, rules and guidelines that govern this sector: Indian Copyright Act, Information Technology Act, Consumer Protection Act, Cable Television Networks (Regulation) Act, plus a labyrinthine web of regulations from Trai.

Historically, all attempts to establish an appropriate regulatory regime for the broadcasting and cable industry fell victim to political fragility of the 1990s, till the Centre reclassified broadcasting and cable services as telecommunication services in 2004 and appointed Trai as the designated regulator. Occasional attempts to create an independent broadcasting regulatory authority suffered pre-mature deaths due to political uncertainty.

With Trai and so many other agencies, acts, rules and guidelines at play—often at cross-purposes to each other—it is only natural that the playing field gets skewed in favour of those with unequal political bargaining power. In the sector’s infancy, the boundaries were stretched by organizations that employed musclemen and were friendly with political parties. Not all companies were born from this violent crucible, but some of the leading names in media and entertainment rose to prominence from this brutal churning. In addition, as various stakeholders have pointed out, the regulator’s lack of capacity has also led to the current regulatory distortions.

According to the KPMG India-Ficci report on Indian media and entertainment industry, 2017, Trai’s March order on inter-connect and pricing of channels may lead to a decline in revenue for broadcasters and might even result in an increased monthly outlay for many subscribers, thereby defeating the very purpose of the pricing model. Clearly, it is time to either upgrade Trai’s capacity or to even start thinking again of an independent and separate broadcasting regulator.

This article was originally published in Mint newspaper and can also be read here 

Pointers To A Future-Ready Payments Policy

Regulation, almost always, lags technology development. But an opportunity to create a future-ready policy framework now seems close at hand

Events over the past few weeks have thrown up numerous pointers to what should be included in a future payments-system policy framework.

The Reserve Bank of India’s (RBI’s) 2017-18 annual report provided the first clue, proving a well-known policy paradigm: competition and freedom of choice are essential tools to avoid distorting markets and the broad economy. An overnight ban on Rs500 and Rs1,000 bank notes—accounting for about 85% of outstanding currency—dealt a body-blow to the economy in terms of jobs, incomes, livelihoods, investment appetite and overall economic growth. The ruinous effects manifested themselves last week: gross domestic product for April-June quarter grew by only 5.7%, the lowest in many quarters.

Demonetisation amounted to suppression of free choice—or freedom to decide how much cash to use, for which transactions—though different reasons were adduced to justify the decision. One of the reasons cited, which has persisted into the post-demonetisation period, is a desire to foster digital payments and to migrate the economy to a less-cash system.

This is a desirable economic objective. However, the policy vectors put in place reveal multiple gaps: lack of a robust competition and innovation policy; uncertainty over the payment regulator’s quasi-legislative powers; an unclear road map for achieving financial inclusion; and, an asymmetric preference hierarchy between different payment systems imposed on the consumer. The last one violates democratic principles by coercing the public to move away from a relatively low-cost payment system (such as cash) to a higher cost platform (such as, mobile wallets which involve connectivity costs).

The Supreme Court’s (SC’s) recent ruling on right to privacy as a fundamental right is likely to complicate the regulatory debate further and might necessitate a systems rethink. The judgement reads: “The balance between data regulation and individual privacy raises complex issues requiring delicate balances to be drawn between the legitimate concerns of the State on one hand and individual interest in the protection of privacy on the other.” The nine-judge bench, while acknowledging that the Centre has already appointed a committee under former SC judge B.N. Srikrishna to study the state of India’s data privacy and to submit a draft bill, hopes that the Union government will take “all necessary and proper steps”.

Still, the right to privacy ruling in itself does set out a future regulatory perimeter for digital financial services. The bench found some pointers in a 2012 report from an expert group on privacy, appointed by the erstwhile Planning Commission. Specifically, the report mentions a five-pillar conceptual scaffolding for drafting legislation to protect privacy: technological neutrality and inter-operability with international standards, which is still lacking; multi-dimensional privacy; horizontal applicability to state and non-state entities to ensure a level-playing field; conformity with privacy principles in line with global best practices; and a co-regulatory enforcement regime which envisages co-existence of independent regulators and self-regulating organizations. Ironically, some of these issues are still being debated in the policy space.

There are multiple views on what to make of SC’s judgement; for example, Chennai’s IFMR Trust, soon after the SC ruling, published a blog advocating stakeholder consultation to determine what kinds of data can and should be collected, the desirable regulatory regime for data mining and algorithmic techniques and a legislative terrain to “ensure that use of personal data is tied to legitimate proportional objectives and interests”.

There is another critical, and slightly obvious, ingredient necessary in the future regulatory mix: trust. This was evident when digital payments spiked during November-December 2016 and then tapered off subsequently; people abhor repression and any attempts to increase the value and volume of digital payments must be achieved through trust, not duress. Regulation must have a consumer bias and should not be designed to favour some service providers.

Lack of trust in paper money issued by sovereigns, and controlled by central banks, is growing as is wider acceptance of crypto-currencies. Already six large global banks—Barclays, Credit Suisse, HSBC, Canadian Imperial Bank of Commerce, State Street and the Mitsubishi UFJ Financial Group—have jointly launched a project to use block-chain for clearing and settling financial transactions, reducing time taken for conventional money transfers.

While bitcoins and other crypto-assets are still in an embryonic state in India, the pace of acceptance is slowly picking up. Many community-based initiatives have been advocating block-chain as an alternative to organized finance, viewed as exploitative. The finance ministry appointed a nine-member inter-disciplinary committee to suggest the way forward with crypto-currencies; the committee has submitted its report, which has not been made public yet. Eventually, though, RBI will have to decide whether it will allow money to also exist as crypto-currency, in addition to its role as a commodity (with or without intrinsic value), a financial claim and/or as an accounting entry.

Regulation, almost always, lags technology development. But an opportunity to create a future-ready policy framework now seems close at hand.

The article originally appeared in Mint newspaper on September 6, 2017, and can also be read here

READING BETWEEN THE LINES: Interpreting Trump’s Not-So-Subtle Threat To India To Do More In Afghanistan

The India-US relationship has conventionally been undergirded by commonly shared democratic traditions, despite periodic upheavals. Thanks to president Donald Trump, this is likely to change soon and acquire a transactional shade based on quid pro quo, where acknowledgement is contingent on favours extended.

This was evident when Trump unveiled his long overdue strategy for Afghanistan, a nettlesome issue that’s remained unresolved through the last four presidencies to now bedevil a fifth one. Apart from his trademark bluster and rhetoric, Trump’s speech revealed two distinct strands: a deal-based approach to achieving strategic objectives, and, a marked candour that separates his speech from the studied diplomatese of past presidents.

Obviously, no speech on Afghanistan and South Asia can ignore India. But, Trump’s hat-tip to India and its critical role in maintaining regional stability has acquired a new binary, apart from a foreboding tenor: “We appreciate India’s important contributions to stability in Afghanistan, but India makes billions of dollars in trade with the United States, and we want them to help us more with Afghanistan, especially in the area of economic assistance and development.”

This is a curious statement, tethering Indo-US trade to India’s help in Afghanistan, and can be parsed in multiple ways.

One, this is a clear and overt threat: cooperate or else. President Trump has been waving the trade flag in all his perorations concerning India. He has been unequivocal about seeking enhanced market access for US goods and services. The joint press statement issued during prime minister Narendra Modi’s Washington DC visit has him saying: “It is important that barriers be removed to the export of US goods into your markets, and that we reduce our trade deficit with your country.” Indo-US trade touched $114.8 billion during 2016, with India enjoying a $30.8-billion trade surplus. It would seem Trump has made India’s trade with the US contingent upon cooperation in Afghanistan.

There is a second aspect. India’s port and associated connectivity projects in Chabahar, south-east Iran, have been delayed. The port, and its rail and road linkages, are expected to provide India an alternative trade route to Afghanistan and other central Asian republics, bypassing Pakistan. The highway linking that port with Hajigak mines in Afghanistan is expected to facilitate movement of iron ore for Indian steel plants. The Afghan Iron and Steel Consortium, a group of six companies led by public sector Steel Authority of India and brothers Naveen and Sajjan Jindal, has won concessions for three iron ore mines, including projects to set up steel and power generating companies in the Hajigak region. Connectivity is expected to help operationalise the $10 billion project, which is beneficial for both India and Afghanistan.

Many similar Indian projects are either in limbo or progressing slowly due to a combination of factors: concerns over security, changing domestic political configurations in Afghanistan, and the global economic slowdown rendering initial cost and revenue estimates awry. A lot will, therefore, depend now on how the US plays its cards with Iran and how additional US boots on Afghan soil affect India’s spectrum of projects in the war-ravaged economy.

There is a third angle, albeit an unspoken one. There has been speculation for some time now that Trump’s Afghan adventure is fuelled by a desire to help US companies access the nation’s vast mineral resources, still unexploited. The minerals range from iron ore, copper, and zinc to precious gems (lapis lazuli, emeralds, rubies) and even rare earth minerals like lithium. Many of these are being illegally mined by the Taliban and other militant rebel factions, largely as a funding source. While many estimates about the value of minerals trapped under Afghan soil have been thrown around, it is believed that the lure of access to these resources is what changed a reluctant president’s mind about continuing the US’s engagement in Afghanistan.

Trump’s exhortation to India on Afghanistan could, thus, also be viewed as an implicit inducement: cooperate and we will allow you to share in the mineral spoils.

Finally, the Indian reference could be an attempt to placate the US’s strategic and political community, which has as many India supporters as opposers. Hence, the attempt to pack both “for and against” sentiments into a short and contradictory statement.

On its part, the Indian ministry of external affairs (MEA) has welcomed Trump’s Afghan initiative, though the gamely and cryptic approval is conspicuously silent on the noisy undertones of the speech. Any shades of glee detectable in MEA’s response, can, of course, be attributed to schadenfreude.

Trump has thundered against Pakistan and held out direct threats to that country. “We can no longer be silent The MEA’s respo about Pakistan’s safe havens for terrorist organisations, the Taliban, and other groups that pose a threat to the region and beyond…We have been paying Pakistan billions and billions of dollars; at the same time, they are housing the very terrorists that we are fighting. But that will have to change, and that will change immediately.”

The MEA’s official reaction welcoming issues of safe havens and cross-border terrorism was predictably pointed.

To be fair, the MEA’s response has been circumscribed by the duality in Trump’s speech. His bluntness on Pakistan is a break from usual president-speak: This is the first time that a sitting US president has openly used such harsh words against traditional ally Pakistan. At the same time, the ambiguity arising from the odd pairing used in the India reference, which is open to multiple interpretations, is bewildering. But it does reveal a slice of Trump’s foreign policy bias: a calculus that will increasingly be based on give-and-take.

The article was originally published in qz.com and can also be read here

The Republic of Statistical Scramble

Straightening out data inconsistencies should be a government priority

Many a caustic word has been exchanged in the acrimonious debate over the Indian economy’s employment data. One set of numbers claims the current phase of economic growth as jobless. Alternative data sets have accompanied vigorous assertions of rising employment. And then there are many in the middle, trying to make sense of the scant (and outdated) data and wondering how anybody reached any conclusion at all.

Welcome to the republic of statistical scramble in the age of Big Data. The Bharatiya Janata Party’s (BJP’s) 2014 election victory was predicated partly on the promise of enhanced economic well-being; straightening out data inconsistencies should be a priority on the path to fulfilling that promise.

Take a look at labour data. Currently, employment data is collated from different surveys, each one measuring different things using varied methodologies. NITI Aayog’s task force on improving employment data recently released the first draft of its report, which lists how several arms of the government get involved in collecting and mashing up data. The report is unequivocal about the current state of data collection: “The available estimates are either out-dated or based on surveys with design flaws that render them unsuitable for inferring nationwide employment level.”

On the demand side, the National Sample Survey Organization (NSSO), in the ministry of statistics and programme implementation (Mospi), conducts a comprehensive household survey once every five years, with the last one occurring in 2011-12. The labour bureau in the ministry of labour and employment also conducts two household surveys—a quarterly quick employment survey and another on an annual basis. These are in addition to the decadal population census surveys, which measure two variables: a headcount of all types of workers at 10-year intervals and all non-agricultural enterprises, regardless of size.

On the jobs supply side, Mospi conducts a statutory annual industries survey for units registered under the Factories Act, 1948. NSSO also conducts an unorganized units survey; this is in addition to the micro, small and medium enterprises (MSME) census conducted by the MSME ministry. Finally, various government administrative bodies, such as the Employees Provident Fund Organization (EPFO) or Employees’ State Insurance Corporation (ESIC), provide some indication of organized sector employment trends (though this is being increasingly undermined by growing preference for contract labour). In addition, there are some private sector surveys also—for example, by the Centre for Monitoring Indian Economy.

All these measures suffer from some infirmity, whether it’s methodological, unviable sample size, inability to distinguish between different types of employment, long gaps or irregular frequencies. But one thing is common: the findings only provide a partial picture and are therefore useless as a tool for policy design. Part two of the Economic Survey says: “The lack of reliable estimates on employment in recent years has impeded its measurement and thereby the Government faces challenges in adopting appropriate policy interventions.”

The NSSO has, in the meantime, begun a fresh, ambitious annual exercise to map all nature of employment data; a quarterly survey will generate similar estimates for urban areas. In its report, NITI Aayog has recommended, among other things, vast improvements to existing surveys, institutional and legislative changes, overhauling physical and digital infrastructure and more aggressive use of technology to crunch the time-gap. 

But the study might need to extend beyond employment data because statistical distortions also exist in other areas. NITI Aayog provides an example about the state of statistical confusion: each enterprise, while filing returns or statutory information, is assigned a different identification number under Good and Services Tax Network, EPFO, ESIC, Factories Act and Shops and Establishment Act.

This problem is not restricted to enterprise data and exists in other government departments as well. Take the example of estimating the cotton crop. Two separate ministries release two separate estimates every year.

The agriculture ministry’s cotton crop estimate for 2015-16 was 30.15 million bales of 170kg each, while the textile ministry’s estimate for the same year was 33.8 million bales—that’s a difference of 620 million kg! In the previous year, 2014-15, the estimates put out by the two ministries were 34.8 million bales and 38 million bales, respectively. This divergence seems bewildering, especially when acreage estimates from both the ministries broadly tally.

Forget discrepancies between ministries: this paper had reported (goo.gl/vsYGzc) how cotton yield figures differ widely within the agriculture ministry. There have also been reports (goo.gl/fd9adW) about vastly varying data on the number of taxpayers added since demonetization emerging from different parts of the government. Mismatch between data sets from within the government also breeds scepticism regarding the statistical robustness of national accounting, especially when anecdotal evidence seems contra to buoyant gross domestic product data.

India’s magnificent statistical heritage distinguishes the nation from its neighbours, whose growth record is often viewed with scepticism globally. This infrastructure needs an urgent overhaul to maintain credibility, perceive economic trends and deliver appropriate policy prescriptions.

The article originally appeared in Mint newspaper on August 23, 2017, and can also be read here

RBI’s Studied Silence Over External Vulnerabilities

Critics are questioning the wisdom of the RBI after a 25 basis point reduction in benchmark interest rates fell short of capital market expectations

The Reserve Bank of India’s (RBI) 25 basis point reduction in benchmark interest rates fell short of capital market expectations. They were expecting a deeper cut but the Monetary Policy Committee (MPC) played safe, given uncertainty surrounding the future inflationary path. Critics are questioning the wisdom of the central bank and its MPC.

MPC members surely deserve to be cut some slack. But, in the general din over low food inflation, insufficient interest rate cuts and RBI’s unchanged neutral policy stance, the central bank’s policy statement omitted mention of a small crimp: a tsunami of portfolio flows, another possible source of inflationary pressures. The central bank’s studied silence about external vulnerabilities raises many questions.

This rush of foreign currency has forced RBI to take steps which have disappointed overseas debt markets and investors: for instance, rules have been tightened for issuing masala bonds through introduction of maturity floors and interest rate caps. This comes when masala bonds were gaining popularity with both issuers and investors. In another (though seemingly unrelated) circular, the RBI has sought to elongate the maturity profile of investments by foreign portfolio investors (FPI) in government bonds. Capital markets regulator, Securities and Exchange Board of India (Sebi), followed through with another circular, ordering a temporary stop to future masala bond issuances.

The RBI has probably sensed higher risk—in terms of both rates and exposures—in the opening of masala bond floodgates, especially after offshore arms of certain Indian companies raised foreign currency loans in overseas markets and then on-lent the proceeds to domestic entities as rupee bonds. This structure defeats the entire purpose of shielding Indian borrowers from exchange rate volatility since it provides original lenders with an indirect claim on domestic assets.

Sebi’s rationale is that FPI investments in corporate bonds have reached close to the limit of Rs244,323 crore. This ceiling includes all rupee-denominated bonds, offshore or on-shore. The regulator’s circular also states that masala bond investments can resume only after limit utilization falls below 92%.

RBI’s rear-guard action also probably stems from the combined effect of two other reports—its own report on India’s external debt and the annual External Sector Report from the International Monetary Fund (IMF). Both sound circumspect about India’s rising short-term foreign debt levels. The IMF reports states: “Given that portfolio debt flows have been volatile and the exchange rate has been sensitive to these flows and changes in global risk aversion, attracting more stable sources of financing is needed to reduce vulnerabilities… Further initiatives on creating a more conducive business environment, particularly the implementation of long-standing labour market and power sector reforms, are necessary to attract greater FDI flows.”

FPI investments in equity and debt markets saw combined net inflows of Rs171,581 crore till July end. This is six times more than the Rs27,055 crore invested by FPIs during the same period of 2016. This surge had rupee appreciating by almost 5.8% between 2 January and 31 July.

Such large inflows put RBI’s absorption skills to the test. First, it has to intervene in the foreign exchange market to absorb foreign currency inflows so that portfolio investments do not push up the rupee-dollar rate beyond its sustainable and economic value. The resultant overhang of rupee liquidity then requires a second defensive action: the RBI has to mop up liquidity through a variety of instruments. For example, in the 11 working days between 17 July and 29 July, RBI absorbed Rs405,228 crore. Sterilization has its costs, especially when central banks sell high-yield domestic instruments while buying relatively low-yielding foreign currency assets. There are also fiscal implications.

The central bank’s woes do not end here: it needs to calibrate another two-step dance. The RBI’s remonetization exercise is still far from complete but it is unable to accomplish that at full tilt, given the wash of domestic liquidity. At the same time, it has to ensure that there is enough liquidity to make up for lost productivity during demonetization. Both will require precision and fine-tuning. Plus, it needs to ensure there’s just enough liquidity to keep yields soft.

There’s another dilemma. The FPI investment limit in corporate bonds was fixed when the exchange rate was below Rs50 to a dollar and common sense dictates a re-calculation of the limit. But the central bank is not doing that just yet, given that its hands are full trying to staunch current inflows.

Times like these are ripe for conspiracy theories. There are misgivings that RBI’s efforts could be an indirect attempt to ensure borrowers do not export the domestic bank credit market to offshore centres. While bank credit growth remains anaemic, Bloomberg data shows Indian companies raised $8.9 billion through overseas bond sales till July, 63% higher than the previous year. It is believed many companies took advantage of tightening spreads and used foreign currency bond sales to refinance domestic bank exposures, thereby intensifying balance of payments risks.

The MPC statement omits mention of external sector developments. Hopefully, the RBI will separately provide a more comprehensive communication that details the risks and the mitigation measures.

The article originally appeared in Mint newspaper on August 9, 2017, and can also be read here

India-Africa Ties: Economics and Multilateralism

If India is serious about its Africa initiative, a lot will depend on how it marshals its banking and financial sector there

The Leaders’ Declaration from G20 this year comes with an added annexure. It is called the G20 Africa Partnership, included at the insistence of Germany, which has the G20 presidency for 2017 and is at liberty to set the multilateral grouping’s agenda for the year. The annexure states its purpose: “The Partnership intends to support related initiatives of the G20 and facilitate investment compacts between interested African countries, international organisations and interested partners to support private investment, sustainable infrastructure and employment in African countries.”

Germany, as well as the European Union, have an abiding interest in Africa. The unrelenting waves of migration from North African shores (often leading to loss of lives while crossing the tempestuous Mediterranean Sea) and Europe’s volatile immigration politics are likely to have prompted Germany to rally the international community around Africa’s plight. Hence the partnership document focuses, among other things, on creating sustainable employment opportunities so that African youth do not risk lives in search of livelihood elsewhere.

Ironically, the G20 club includes only one African nation, South Africa. The Partnership document has its fair share of detractors, especially within African nations, and suspicions about its overwhelming reliance on private sector investment.

It also holds out three lessons for India.

The first relates to deeply embedded historical attitudes towards Africa. These rose to the surface again, perhaps unwittingly, while French President Emmanuel Macron was addressing a G20 press conference in Hamburg. Answering a question on why there was no Marshall Plan for Africa, Macron is believed to have said Africa had a different set of problems, which included “civilizational” problems. Some of the unique problems cited by Macron included failed states, complex democratic transitions and African women giving birth to seven-eight children. This predictably triggered a maelstrom of protests and diverted attention to Africa’s colonial past and France’s role in it. Macron’s statement was also viewed as reflecting Europe’s smug (and enduring) belief of civilizational superiority. Macron almost buried the partnership even before it had an opportunity to take off.

India must take note of this public relations disaster. The impact of government’s intensive outreach programmes has often been blunted by violent displays of racism against African students and citizens living in Indian cities. It is indeed an odd occurrence for India, which boasts of a long and shared history with Africa—especially cultural, social and trade ties. If at all, there is a felt need to accelerate the Indian Technical and Economic Cooperation (Itec) programme which provides capacity building for officials from low- income countries.

The second lesson arises from the G20’s internal contradictions and the possible impact on India. The document has a section on strengthening the framework for investments and private finance in Africa, in which the G20 welcomes other partners and “…complementary measures by the forthcoming EU External Investment Plan, the Forum of China Africa Cooperation, the Tokyo International Conference on African Development as well as others”.

Herein lie the conflicts within the G20: China, Japan, Turkey and the US are all independently competing for a foothold in Africa, with each country aggressively courting nations and their heads of state. Germany and the European Union are joining the fray now. India also has its own India Africa Forum Summit, which has been re-energized and supplemented with state visits by Prime Minister Narendra Modi, then president Pranab Mukherjee, vice-president Hamid Ansari and other senior ministers.

Given the multiplicity of competing interests, it has to be seen whether different countries will be willing to subsume their Africa ambitions under an over-arching multilateral approach. India will need to watch this effort closely. If required, India could consider activating the Asia-Africa Growth Corridor (AAGC), its joint initiative with Japan, through the G20 compact. The AAGC, which places significant emphasis on both infrastructure investment and capacity building, aligns well with the G20’s Africa approach.

The third point relates to the implicit assumptions behind private sector investments—that they will automatically generate more trade. Unfortunately, intra-Africa trade accounts for only 14% of Africa’s total trade. It is true that poor infrastructure slows down intra-Africa trade traffic, and therefore higher investments in road and rail infrastructure will surely help. The problem lies elsewhere—the lack of a trade facilitation culture and customs capacity which hinders cargo movement. India and Itec can definitely help here.

More importantly, there are other opportunities for India. Data from the African Development Bank shows only 31% of Africa’s trade is backed by bank-intermediated trade finance. This is clearly an opportunity for Indian banks. India’s banking presence in Africa seems to have lost its relevance over time: The geographical footprint is built around traditional Indian diaspora habitats in east and south Africa, and operations are tailored around ethnic banking services. Late in entering Africa, Chinese banks have already acquired stakes in leading banks. If India is serious about its Africa initiative, a lot will depend on how it marshals its banking and financial sector there.

The above article was published in Mint newspaper on July 26, 2017, and can also be accessed here 

The Chinese Encirclement: Within and Without

The recent geopolitical dispute highlights the fraught and schizophrenic nature of the India-China relationship

The recent border dispute has again raised the spectre of Chinese encirclement. It comes close on the heels of India’s boycott of the ambitious Belt and Road Initiative (BRI) summit in China. What is unfortunate, though, is that the dreaded encirclement may have already occurred and, if anything, the recent dispute highlights the fraught and schizophrenic nature of the India-China relationship.

The fresh skirmish at the tri-junction of India, Bhutan and China is part of on-going border tensions. The stand-off continues with both sides raising the temperature gradually, much like the dial on a thermostat; apart from incendiary statements, China recently increased its fleet presence in the Indian Ocean Region. In the past, many similar border misunderstandings were resolved quietly. The latest one burst into the headlines with impeccable timing during Prime Minister Narendra Modi’s visit to the US.

India ignored the BRI summit because it objects to the China Pakistan Economic Corridor (CPEC) which passes through Pakistan-occupied disputed territory. India’s contention is that CPEC is a unilateral validation of Pakistan’s claim on disputed territory. There are other reasons for India’s nervousness. China’s BRI is viewed as a strategic encirclement of India: Hambantota port in Sri Lanka, CPEC traversing west China via Gilgit-Baltistan all the way to Gwadar port in Balochistan, a road from Yunan province cutting through Myanmar to end at a deep-sea port in Kyaukpyu.

But, apart from the geopolitical squeeze, developments seem to indicate that a Chinese geo-economic encirclement may have already happened. While there is popular concern over the overwhelming presence of China-made idols of Indian gods or cheap toys, these are the proverbial iceberg’s tip. What seems to have gone unnoticed is an insidious China creep within the Indian trade, business and financial landscape.

News from the cricket world provides a glimpse: Chinese handset manufacturer Vivo won rights to cricket tournament Indian Premier League (IPL). Vivo will pay Rs2,199 crore for the next five years, which works out to 267% premium over base price of Rs120 crore a year. The next closest bidder was Oppo, which bid Rs1,430 crore for five years. Vivo’s bid is impressive, when compared to Oppo’s bid or the base price, or even amounts paid by previous sponsors (such as, DLF or Pepsi).

But it’s hard to miss the irony. Brands Vivo and Oppo are actually siblings and manufactured by the same Chinese company, BBK Electronics (which also owns brand One Plus). The IPL bidding process should have treated them as parties acting in concert, though that seems to have been overlooked in the general brouhaha over the money on the table. Chinese handset brands now command over 50% of the Indian smartphone market share.

Here’s another example. Chinese capital goods manufacturers have made deep inroads into India, with some critical sectors now highly dependent on Chinese spares and after-sales servicing. For instance, in the boiler-turbine-generator (BTG) segment, many Indian power producers have installed Chinese BTGs. In the 12th Plan alone, close to 30% of generating capacity was sourced from China, with the trend continuing in the 13th Plan as well. What tipped the scales, apart from shorter delivery windows, was cheap buyers’ credit (through Exim Bank of China), with installation crews and maintenance staff thrown in.

Chinese portfolio investors are the other angle in geo-economic encirclement. Among the list of banks managing the recent Central Depository Services Ltd initial public offering was a curious name: Haitong Securities India Pvt Ltd. Haitong, as per its website, is China’s second largest securities firm. Many of the firm’s senior management members hold, or have held in the past, organizational positions in the Communist Party of China. Haitong gained a toe-hold in the Indian market through its global acquisition of Espirito Santo. But, what is really interesting is that Haitong Securities was the book running lead manager in an IPO in which government-owned banks—State Bank of India and Bank of Baroda—were divesting their shareholding.

The Chinese footprint in the digital economy is also expanding rapidly. Numerous Chinese companies—Alibaba, Tencent, CTrip, Beijing Miteno Communication Technology, Bytedance—have made large investments in the Indian digital ecosystem, a mission-critical segment for Modi and his ministers.

India suffers a trade deficit with China which has increased over the years: from $38.7 billion in 2012-13 to $51 billion during 2016-17. One of the reasons for the large deficit are Chinese tariff and non-tariff barriers which constrain Indian exports; for example, Indian pharmaceutical exports have found it difficult to penetrate the Chinese market. Increased Chinese foreign direct investment was suggested to counter the rising trade deficit. But, there were no discussions on the nature of that investment: whether for manufacturing or for assembly jobs.

It would be hasty, and perhaps imprudent, to advocate slamming the doors or erecting barriers. But it is difficult to ignore the duality in rhetoric from both sides. The high decibel in security and strategic issues seems to be disengaged from trade and investment realities. One key question, therefore, needs to be answered: What kind of cost-benefit is involved in keeping engaged or in disengaging?

The above article was originally published in Mint newspaper and can also be read here

It’s All In The Sequencing

There is silence on how the digital payments universe will foster competition, spur innovation and design a regulatory framework to protect consumers

Public policy discussions globally have often debated the role and sequencing of regulatory reforms in the series of structural changes necessary for introducing market dynamics to state-controlled economies. In India, post 1991 reforms, this critical issue was not adequately deliberated; worse, the government’s piecemeal approach to reforms and policy planners’ disregard for prioritizing regulatory reform inevitably led to regulatory capture and crony capitalism.

The demonetisation exercise is another pertinent example of how non-systemic reforms, without preceding regulatory reform, lead to chaos and economic dislocation. The withdrawal of 86% currency overnight was accompanied by a steady stream of shifting narratives: launched initially to curtail counterfeiting and currency hoarding, the objective soon segued to facilitating a digital payments infrastructure. But the lack of any planning before introducing this coercive shock, or the absence of preparatory infrastructure build-up and roll-out, has nullified all initial benefits.

Digital payments values and volumes went up between 8 November and 31 December 2016 because people had no other options. A recent research report from securities firm Motilal Oswal estimates that digital payments reduced substantially by May. For example, Motilal Oswal’s calculations show cumulative value of transactions across all digital payments channels during May at Rs111.55 trillion, down from the December 2016 peak of Rs131.45 trillion. The report disregards the Rs180.73 trillion spike during March, attributed primarily to seasonal phenomena.

Even a senior executive from the National Payments Corporation of India (NPCI) was quoted in this newspaper as saying the December spike in digital payments had ebbed by April.

So, what has demonetisation achieved? Observers cite two tangible, but divergent, results: a political victory through electoral gains in Uttar Pradesh and deepening agricultural distress leading to widespread farmer unrest. While there is no detailed, granular research linking demonetisation and these two outcomes, there is one noteworthy collateral benefit though: casting a wider net exposes the asymmetrical regulatory landscape in the payments and settlement ecosystem.

Soon after demonetisation, the Ratan Watal committee on digital payments advanced its deadlines and rushed through its report submission. Another committee of chief ministers was set up by Niti Aayog under Andhra Pradesh chief minister N. Chandrababu Naidu. This committee spawned another committee for digital payments security under IT secretary Aruna Sundararajan. Niti Aayog has set up another committee helmed by chief executive officer Amitabh Kant to “enable 100% conversion of government-citizen transactions to the digital platform”. Meanwhile, the ministry of electronics and information technology (Meity) has issued its own guidelines to facilitate adoption of electronic payments and receipts for various government services. Before all this, in June 2016, the Reserve Bank of India (RBI) had set up an inter-regulatory working group on fintech and digital payments, though the fate of this committee is not yet known. Besides, demonetisation also occasioned a host of other private reports.

Predictably, such a surfeit of committees and reports has led to overlaps and repetition. A cursory reading might even give the idea that committees are competing among themselves to say the same things. However, the burst of reports and recommendations in the first flush of demonetisation seems to have petered out: nobody seems to be listening and there doesn’t seem to be any urgency to implement many of the suggestions.

For example, the Watal committee’s recommendation of carving payments regulation out of RBI’s jurisdiction and making it into an independent body met with resistance from the central bank; eventually, finance minister Arun Jaitley announced the setting up of a payments regulatory board in his 2017-18 Budget speech (to replace the existing Board for Regulation and Supervision of Payment and Settlement Systems, or BPSS) on the lines suggested by the committee, but with one critical exception: the board will have three members from RBI and an equal number from the government, thereby diluting its independent status.

Many other skews in the regulatory architecture have been pointed out but remain unresolved. For example, as owner and operator of the retail digital payments network, the NPCI is a provider of critical infrastructure; but, simultaneously, it also competes with users by pushing its own payment products and services. In addition, its entire equity capital is owned by 56 banks, which automatically puts non-bank payment service providers at a distinct disadvantage and raises questions of infrastructure neutrality.

There is also complete silence on how the digital payments universe and its regulators will foster competition, encourage innovation and design a regulatory framework to protect consumers. Currently, allowing only banks to access the payments network—and denying that to non-banks—seems to be the default regulatory design.

The attention of policy planners and administrators might have been temporarily diverted to the other elephant in the room: goods and services tax, which goes live from 1 July. But, GST’s success is also predicated on a robust and secure digital payments network; an ad hoc digital payments network spells only provisional success for GST.

The above article was originally published in Mint newspaper and can be read here as well