Anatomy of the unspoken word

Loss is inevitable when opacity obscures both government policy and price-sensitive corporate development

Ratan Tata (left) with Cyrus Mistry. File photo courtesy PTI.

This year’s Nobel for economics—on contract theory—continues the Sveriges Riksbank’s quest to reward investigations into information asymmetry, especially its role in contracts, markets and incentives. Theory suggests that asymmetry of information leads to imperfect markets, including adverse selection and moral hazard. While perfect markets are chimeras, restricted to theoretical constructs, communication and information flows play a definite role in reducing imperfections.

Two recent events highlight how lack of communication, or not saying the right word at the right time, can lead to sub-optimal consequences, especially for minority shareholders.

The first is the corporate putsch playing out on prime time. The sudden, unseemly ouster of Cyrus Mistry as Tata Sons chairman, and the subsequent two-way flow of accusations and assertions between him and his predecessor Ratan Tata, highlight how things can go terribly wrong when leaders do not communicate. In fact, the hazy chain of events suggests that breakdown in communications lines led to this abrupt, indecorous turn of events. As a result, the share prices of most listed Tata companies have suffered.

The first thing that strikes any observer is the perception gap between what Ratan Tata wanted from his successor and what Mistry, in turn, understood and delivered. While conversations between the two during the passing of the baton remain private, it is abundantly clear that either Mistry misunderstood his covenant or Ratan Tata was not explicit in describing the role. Ironically, and rather late in the day, both are indulging in excess communication, mostly through the media.

Consequently, there is soiled laundry on display. Leaving the allegations aside, there is sufficient evidence to suggest that Ratan Tata’s and Mistry’s paths to corporate excellence diverged sharply and there were no attempts to make them meet. Mistry also expresses incredulity at the board “replacing” him for non-performance, especially after directors had lauded his performance. He also claims that while he was promised a “free hand”, some directors would leave in the middle of board meetings to seek Ratan Tata’s guidance.

The other side brushes these contentions aside; but it does maintain that Mistry has been on the Tata Sons board for a decade and was, therefore, party to some of the business decisions that he is now questioning.

All these point to a much larger, and grievous, communication gap. Neither Ratan Tata nor Mistry thought it fit to publicly discuss the controversial issues before they blew out of proportion. As a holding company of numerous listed companies, the Tata Sons board should have ensured adequate discussion and disclosure. For example, instead of lavishing Ratan Tata with public commendations, Mistry should have warned shareholders of the impending write-offs that he so direly predicts now.

The second incident of crossed wires is a direct outcome of the government’s multilateral trade strategy. A recent news story, citing unidentified people, said that the Indian negotiating team at the World Trade Organization’s (WTO) recent Oslo mini-ministerial had decided to oppose attempts by rich countries to introduce the promotion of global value chains (GVCs).

Indian negotiators fear that developed nations will sneak in issues like intellectual property rights, investment safeguards, competition laws under the garb of discussing GVCs. India, and a host of other developing countries, want WTO to first settle the pending Doha agenda before taking up new issues. Unfortunately, the Indian government’s ensuing communiqué about the meeting does not reveal whether GVCs came up for discussion at all. And even if they did, how the Indian side reacted.

Conversely, the whole episode might end up muddying the government’s policy stand on GVCs. India has been a proponent of GVCs, especially increasing the share of small- and medium-sized enterprises in GVCs. The government views GVCs as a device to increase domestic and foreign investment in manufacturing. The commerce ministry’s annual report for 2013-14 spells it out: “The business and trade segments of e-commerce and global value chains provide an opportunity to compete at par with other world economies and expanding our technology base.” But in the absence of proper communication, there is a lingering doubt over the government’s stand: Does it want GVCs or is it opposing their entry? Lack of clarity in economic policy hurts everybody because it affects investment decisions and stifles employment generation.

A similar lack of communication besmirched India’s reputation when WTO members met in July 2014 to vote on the trade facilitation agreement. India was the only country to oppose the deal and was subjected to global condemnation, despite having valid reasons for blocking the agreement. What made it doubly intriguing was the fact that India was principally on board with the idea and had already implemented many of the measures listed under the agreement. The problem: India did not communicate adequately with WTO fellow travellers or explain its stand lucidly. Western media, taking the cue from political leaders, labelled India a game-spoiler. Outcome: Global decision makers still look at India askance.

Both examples lead to one indisputable conclusion: Loss is inevitable when opacity obscures both government policy and price-sensitive corporate development.

This article originally appeared in Mint on November 2, 2016. It can also be read here.

Time To Put Substance Before Style

China now views itself as an emerging superpower rather than a ‘developing’ country. India should take this into account

Long after President Xi Jinping has flown back to Beijing, there will remain a host of prickly issues that senior ministers and diplomats on both sides will need to bang heads over. During President Xi’s 48-hour whistle-stop through Ahmedabad and Delhi, the climate-controlled atmospherics, the fastidiously choreographed diplomatic pas de deux on Sabarmati, the thunderous rhetoric and the flurry of MoUs made for good optics. But action is always a poor substitute for achievement.

One of the visible thorns in the blossoming relationship is border uncertainty and both President Xi and Prime Minister Narendra Modi did reiterate a need to settle it. But beyond the omnipresent irritation of a virtual border, it is in India’s interest to resolve numerous pending geo-economic issues with China.

Shifts and moves

Start with World Trade Organisation (WTO) first. India invited universal censure after blocking safe passage of Trade Facilitation Agreement (TFA) at WTO’s General Council meeting in Geneva on July 31, 2014. However, China’s unprincipled floor-crossing on that day was truly shocking, after having supported India’s stand in many multilateral fora (such as G-33, G-20) and in bilateral meetings.

China’s mercurial shift could be understandable if India was found to be acting irrationally. But, on closer analysis, it seems India’s actions were justified. Having agreed at the Bali ministerial to approve TFA, on condition that developing countries not be penalised for food security imperatives till a permanent solution is formalised by 2017, India discovered that all discussions thereafter were focused on only TFA. This was contrary to the post-Bali work programme and gave India (and some other developing countries) grounds to believe that once TFA was out of the way, rich countries didn't care much for the Doha Development Agenda, including food security measures.

But, there are some other valid reasons for India’s principled action. For one, India has a sovereign right to provide food security for its citizens, just as US has the right to buy and stockpile crude oil to provide its citizens with energy security. Two, TFA will cause a spike in infrastructure costs for poor countries; the rich nations were to provide budgetary assistance to help them tide over this unplanned expense, but the amount finalised is too low and the modalities are still vague.

Finally, benefits from TFA are ambiguous, with most gains likely to go to the developed world.

China’s sovereign objectives are somewhat aligned with India on this issue, particularly since it too has to provide food at reasonable prices for large sections of its population. Also, China has been a signatory to all the food security negotiations by G-33, a grouping of developing countries with convergent trade issues.

A change of heart?

While it’s not known if Modi-Xi talks included China’s breach of trust, the joint statement issued by both governments was patently anodyne: “As developing countries, India and China have common interests on several issues of global importance like climate change, Doha Development Round of WTO, energy and food security, reform of the international financial institutions and global governance. This is reflected in close cooperation and coordination between the two sides within the BRICS, G-20 and other fora.”

One reason for China’s change of heart could be India’s lackadaisical communications strategy; also, India’s parleys could have conveyed a message that it’s interested in cherry-picking only food stockpiling from a multitude of other development issues. This might have even influenced some of the other large emerging nations, such as Brazil and South Africa, to isolate India.

But there’s another significant development. There's probably a radical shift in how China views itself: as a world superpower and a trade behemoth, competing with the developed countries. Hence, in keeping with this new-found status, TFA makes more sense rather than hankering for food security. While China is indeed a trade colossus, India needs to keep in mind this change in China’s self-perception when negotiating with President Xi’s men in future.

The border incursion, intriguingly timed to coincide with President Xi’s visit, is a reminder of China’s foreign policy dualism: an extended hand of economic friendship to mask the ugly face of geographic expansionism.

The second issue is climate change and India would do well to keep the new Chinese psyche in mind in future multilateral deliberations.

On the surface, both India and China seem to be on the same page. Apart from a common historical stand, both President Xi and PM Modi have also excused themselves from the UN Climate Summit on September 23.

But that’s where the similarities end. China has already signed a separate climate change agreement with US. While these agreements reduce the climate policy distance between the two superpowers, there are still some sticking points. While China and US agree that that rich countries must provide developing nations with wherewithal to upgrade technology, the divergence is whether the old labels of “developing” or “developed” need to be upgraded.

In essence, the rest of the world’s identity — including India’s — is hostage to progress of talks between two superpowers. The initiative seems to be slipping away from India’s grasp; a climate change strategy is required before the big climate summit in Paris next year. While China’s stand may be driven by thickening smog over its cities, India may have to fashion its own position consistent with its economy and stage of development.

Myriad issues

There are many other unresolved issues on the table — using renminbi as a alternative currency, India’s membership in multilateral institutions (such as Asian Investment Infrastructure Bank) and groupings (Shanghai Cooperation Organisation, for example), discussions on how to take the BRICS Bank ahead, enhanced market access for Indian goods and services, are just some of them.

The lessons for Modi are clear: with China what you see is never what you get. Modi will have to take every opportunity to create an independent policy space for india, even if that requires striking trade and investment deals with Japan, USA, EU, Russia or Australia.

The writer is a journalist and senior fellow with Gateway House

Courtesy: The Hindu BusinessLine, edition dated September 22, 2014 (The original can be read here:goo.gl/Cbm3Ex)