Propagating An Interest Rate Cut (Yet Once Again...!!)

Wrote this piece (click here) for FirstPost on why the RBI should start cutting interest rates immediately instead of waiting for inflation and inflationary expectations to subside. Someone commented that it might be better to wait for inflation to disappear before taking the shears to interest rates. Most other economists have also been echoing the same sentiment: it's better to first squeeze out inflation from the system (albeit with the help of only monetary policy) before easing the tight monetary system.

My only take is: a large component of inflation in India arises due to supply side issues. These have been lingering for decades and no solution seems to be forthcoming. I don't expect the Government to sort these out in a hurry. Given the fact that these structural deficiences are likely to be with us for some more time, we are left with only two choices.

One of them was articulated by RBI Governor D Subbarao in an interview to Wall Street Journal (read here). According to him, the non-inflationary rate of growth for India is around 7% -- in other words, any rate of growth beyond the 7% might get the engine to overheat and cause inflationary smoke to billow from below your bonnet. Somewhat like what has happened in the past 24 months or so. If as an economy, we are content with a 7% GDP growth rate (which, by the way, if infinitely superior than most other countries), then the current economic prescription seems just right.

However, as many studies have repeatedly shown, India needs to grow by at least 8-9% every year, for some more years, to sort out one of its endemic problems -- poverty. And, to grow at that rate, the economy needs a much higher level of investment. There are many reasons why investment growth has slowed in the current context -- scams, bureaucrats getting ultra-cautious, approvals not forthcoming, governance lapses stemming from the country's top-most office, uncertainty over the policy environment, and, high interest rates. While the government is trying to re-set the investment climate by making the right noises about policy and project approvals, these will have to viewed by industry as sustainable in the long-term before they start committing their cash all over again.

In the meantime, interest rate hikes by the RBI have had a greater demonstration effect. Since interest rates are far more visible and tangible, they have earned a disproportionately larger share of the blame for the economic slowdown. Therefore, if the RBI cuts interest rates now -- even if it's by only 25 bps -- it has enormous demonstration effect and has the potential to kickstart the revival process.

This is not to say that the inflation problem is trifle. But there is a limit to which monetary policy can sort out inflationary pressures arising out of government profligacy and neglect.

Investment Allowance As A Partial Panacea

Wrote this piece for ET (read here), advocating a partial solution to the current economic slowdown and the somnolent investment climate. All views are welcome.

Some More Arrests In AMRI Tragedy Needed

The AMRI mishap in Kolkata is really tragic. It shakes up the very core of our belief system -- our trust in doctors and institutions that have been set up to improve and save our lives. There is public outrage at this negligence and one manifestation of this was the Alipore Bar Association deciding that none of its memers would plead for bail on behalf the AMRI brass (read here). However, while all the outrage and indignation is justified, a couple of points, that seem to be getting obscured by the groundswell of public ire, need to be made.

One, while the AMRI shareholders, directors and the top officials of the administration deserve the punishment that is due to them (because it should serve as an example for all other private investors in the healthcare industry), why is no one talking about the punishment that should also be meted out to the municipal authorities or the state government mandarins who were happy to take a small stake in the hospital venture? The hospital adminsitration would never have been able to get away with its record of negligence had the municipal authorities or the state government been regular with inspections or not turned a blind eye at the short-cuts adopted by the hospital authorities. They seemed to be in cahoots with the promoters and are now acting self-righteous about it all.

It also points to the insidious influence of crony capitalism. No wonder, the government has been reluctant to introduce independent regulators across all sectors. An independent regulator with proper credentials would probably not allowed this to happen.

Another point comes through very strongly. In current management literature and some dubious books, much has been made of native ingenuity, which is now been bandied about as "innovation". This point has also been made in the latest instalment of Sidin Vadukut's Saturday column (read here), which concludes that this "jugaad" mentality has much to do with the AMRI tragedy.

But, above all, please also punish the municipal chaps and government guys who were responsible for supervising the state of affairs at AMRI and did not take timely action.

Export Numbers Scaled Down

So, here it is: There is official confirmation that something is wrong with the trade figures. Commerce Secretary Rahul Khullar has said that exports have been over-stated by $9 billion due to "misclassification and errors" (read here). Unlike many of his colleagues, Mr Khullar is not scared of owning up and admitting that mistakes have occured.

The export numbers for the year will now have to be revised. The finance ministry released the mid-year review of the economy on Friday, December 9, 2011. April-September exports were shown as $160 billion. Now that will have to be scaled down to $151 billion. So, the earlier growth number of 52% for the first half of 2011-12 will also have to be scaled down to 43.8%.

Economists and experts (including this blogger) have been complaining about the ureliable nature of the trade data. It was obvious that something was wrong somewhere. Record export growth numbers at a time when the rest of the world is shrinking did sound a bit incongruous. It also does nothing to burnish India's already dodgy record with data. We now hope that the error margin is only $9 billion and not higher. Because even 43.8% growth in exports sounds a bit strange, especially in these stranger times.

Data Grapple

Commerce Secretary Rahul Khullar discussed October trade figures with journalists on Tuesday (November 8, 2011). The numbers were not at all encouraging – exports grew by a mere 12.4% YoY (to $19.9 billion), but imports were higher (at $39.5 billion), leaving a trade deficit of $19.6 billion, the worst in many, many years. Different newspapers have reported Mr Khullar’s briefing differently. While The Economic Times reported that imports had increased by 36.7% (read here), both newspaper Mint and wire agency Bloomberg Businessweek reported that the YoY imports growth rate for October was 21.7% (read here and here). But, soon thereafter, both Mint and Bloomberg disagreed on how bad it was – Mint said it was the worst trade deficit in any month in the past four years, but Bloomberg Businessweek contended that this was the biggest gap since April 1994. Even The Financial Times weighed in (read here)

But, we digress. The press briefing raises two important issues.

1. At the beginning of every month, the Ministry for Commerce and Industry releases official trade figures. For instance, on November 1, it released trade data for September through an official press release. Then, exactly a week later, on November 8, came the provisional October numbers via Mr Khullar’s briefing. But, this data seems to be missing from the ministry website. The question that arises now is: how are we to treat this data? The press release available on the PIB website says: “Dr Khullar informed that these figures are provisional and are likely to change.”

This is a monthly affair. While there is no doubt that timely information is always helpful and provides an early trend indicator, this data should be available on the ministry’s website. There should also be some indications about how the final figures vary from the provisional numbers.

2. The second, and more important, point is this: why have exports dipped in October? The pat answer being dished out is also a seasonal favourite: the crisis in the Euro-zone and the slow growth in USA. But then, this crisis has been continuing in both the continents for a while now and yet exports were growing by 80-120% in the preceding six months.

There have been various reports in the past trying to explain the sudden spurt in exports and some even predicted that exports growth would taper off in October. One of the reasons was the expected demise of the Deemed Export Passbook (DEPB) scheme, which was expiring on September 31. There was some speculation that exporters were front-loading a large part of their exports contracted for later in the year to try and extract maximum benefit from the dying DEPB scheme. The other speculation was that many Indians were bringing back their cash stashed abroad in tax havens, through over-invoicing of exports, before the tax sleuths discovered this hidden cache. The Economic Times carried a story (read here) about how exports to Bahamas had shot up from $22 million three years ago to over $2 billion this year.

However, surprisingly, nobody seems to be asking why was there such an unprecedented spurt in exports when the rest of the global markets were in a funk? One lengthy interview of Mr Khullar by CNBC-TV (read it here) seems to ignore the issue completely. Especially, since principal adviser to Planning Commission and former Chief Statistician Pranab Sen recently fretted about how the buoyant export numbers of April-August did not seem to jive with the torpid industrial production data for those months. It is logical that if there is a pick-up in exports, some of that will definitely reflect in the industrial production data.

When exports were growing at counter-intuitive rates, an explanation was indeed forwarded: that India had successfully diversified both the basket of the goods exported (by including more value-added products) and by diversifying the markets away from the developed economies of USA and Europe in favour of South America and Africa. How come that doesn’t hold good now? How has that changed so soon? Can we have some time series data on the volume and value of goods exported to South American and African countries, please?

A veil of mist continues to shroud, and bedevil, official economic data in India.

Lokpal Versus Lokpal

Parliament is reconvening on November 22 for its winter session. This is no ordinary session. MPs will not only be under public scrutiny but wiill be under tremendous pressure to ensure the passage of Jan Lokpal Bill. Otherwise, the threat of another protest by fast looms large. And, this is no quotidian protest: it promises to galvanise millions of people, Enough reason to give the government a migraine, especially since six states go to assembly polls next year.

A diminutive crusader from the Maharashtra outbacks has sparked off a morality play of an unprecedented scale, unseen and unheard for a long, long time in the history of independent India. The movement has been able to catch the fancy of a wide swathe of India’s population, from the rural peasant to the urban indigent, the village landlord to the city-bred disaffected youth. In simple words, the appeal of this campaign cuts across income, gender and caste divides in India, which again is an exceptional phenomenon. The gale force of this operation has taken the country by storm and has caught the entrenched political class completely by surprise. The champion’s ostensible non-political heritage is his biggest advantage and source of attraction.

But, without getting into the dragnet debate about whether his methods are right or the government’s response to his agitation has been ham-handed (including the naked display of its dirty tricks arsenal ), it is instructive to note that a single word has been capable of rallying around large sections of the Indian population – which, going by recent history, seemed to have forgotten the art of mass protests. In fact, even the student population, which has abjured from politics on and off the campus for an uncomfortably long period, has been inspired by that one word to take to the streets. That one word is “corruption” and its resonance in modern India can be gauged from the groundswell of protests it has generated.

Corruption has become the byword for all transactions in the country. Corruption is also the defining foundation for all business relationships in the economy. It pervades all negotiations and acts as a barrier against all legitimate entitlements. It starts from the very small and goes all the way to the very, very large (such as the Rs 1,39,652-crore loss to the government from the 2G spectrum allotment, as estimated by the Comptroller and Auditor General of India). Corruption touches everybody in the country and the government’s lack of resolve to either uproot it or even check its cancerous spread has helped Anna Hazare touch a common chord across the numerous divides in this country. But, in all the debates and the accompanying sloganeering, there seems to be a marked absence of discussion on how to extirpate corruption from our daily lives – where does it begin and how to get to its roots.

This column tries to approximate some of the broad reasons responsible for giving rise to corruption and also tries to suggest some broad-based solutions.

Campaign Finance: This is the fount of all corruption in the country. This involves all political parties -- yes, sadly, no political party seems to be immune from its lure -- and has become the default pattern for financing elections. Large sums of money is raised by political parties from corporates (irrespective of size -- big, small and tiny), usually in cash, to finance their campaigns. This money is usually used for paying salaries to cadre, meeting the costs of printing posters and other sundry election material, putting gas into numerous vehicles pressed into service during elections, paying for hooch or other inducements (including cash) that need to be supplied to voters, and sometimes even sponsoring arms and ammunition purchases to keep the trigger-happy cadre satisfied. Even in the period between polls, money is often raised to swing politicians or to buy their loyalty. The cash raised from the corporates is like an IOU which gets squared off when the politician assumes some ministerial office and returns the favour by allocating natural resources either out of turn or at cheap rates.

Corporate Culture: The corporates usually hedge their bets by financing all parties. Although corporates are now allowed to legitimately account for donations to political parties, the sums disclosed cumulatively won’t probably finance the elections of even one constituency. The corporates also find the arrangement rather convenient since the generation of cash through operations suits not only the political parties but also the dominant shareholder, who uses the route to generate substantial sums of unaccounted cash for himself.

In fact, the manufacturing sector has been a dominant creator of unaccounted cash in the economy. Many companies sell part of their produce in the market for cash – this produce doesn’t even enter into the formal data collection of the economy. This method not only allows the company (or the dominant shareholder) to generate cash revenues which cannot be taxed, but also helps the shareholder to use different transmission channels in the economy to pay off obligations and add to personal wealth. The only way this can be curbed is through use of smart technology in the levy of excise duty which not only traces every turn of the machine but also monitors the consumption of raw materials and spare parts by the company.

Here's an interesting example: economists have been complaining that the industrial production data (which indicates that the economy is slowing down) does not jive with the export data, which is displying mysterious growth impulses. If export is indeed growing by 30-40% on an average every month, over the same period in the previous year, then some of that buoyancy should have reflected in the industrial production numbers. But it does not. So, what gives? There is speculation that India Inc is bringing back illegal cash stashed overseas by showing sham export orders. This helps not only in laundering the unaccounted cash (sent overseas by hawala, or by understating export prices or overstating the import bill) but also avoid the gimlet eye of the income tax slueths who are increasingly interested in offshore accounts of India Inc.

Control Caper: The government has been reluctant to give up its control over large areas of natural resources, especially the right to allocate at whim. It has also been slow in appointing independent regulators for a large number of sectors (take, for example, petroleum, or even transport). This control over resources is the source of power and the birthplace of all shady deals. This column advocates open auctions for all resources and the immediate appointment of independent regulators in all sectors.

Passion for Power: Getting a ministerial portfolio sometimes requires huge investment – in first winning elections and then contributing substantially to the party coffers. Once, the ministerial portfolio is in hand, this initial investment has to be recovered. This is achieved by distributing the fish and loaves of office – prime postings, lucrative deals, agency commission. One of the visible effects of this distorted structure can be seen in the petty corruption that engages most of the youth on the street – the policeman, the government clerk who will not oblige until his appetite for inducements is satiated, etc. One suggestion is to implement the numerous police reforms suggested by various committees. Ministers should not have the powers to appoint either policemen or judges.

Come November 22, it will be clear whether the political class is serious about the Lokpal Bill, or whether they have some aces up their sleeves that will be used to finesse Team Anna Hazare. Another alternative: both sides choose to walk the middle path. In which case, apart from Anna Hazare, there is another winner: Aruna Roy and the National Advisory Council.

Speculative "I-said-so"...

I know, I know...every charlie in town is saying he had seen it coming. But it took a Twitteroor to precipitate matters, to shake the foundations of IPL. But, why now? Is the government trying to get even with Lalit Modi because he had the gumption to take on a minister in the government? Or, is there something else? Mocha is also throwing its hat into the ring with its version of what might have brought government tolerance to its tipping point (read here) . For a smart man, Lalit Modi has been quite foolhardy in his choice of enemies. Consequently, he may have bitten off more than he can chew...he is now being force-fed humble pie.

Games People Play

The ownership mess surrounding the Kochi franchise of the Indian Premier League, along with all its suggested subterranean filth, is what happens when you put together all the unholy elements of Big Business, Bollywood, Betting syndicates and Ballot champions into a box and shake hard. Now that this vile-looking genie is out and at large, it’s time to raise some issues, ask some questions:

1. Is Lalit Modi going to come clean? He has painted himself into a bit of a corner by forcing the new Kochi franchise to reveal its shareholding details. Now all the other franchises might have to follow suit; plus, the government agencies are reportedly investigating the web of companies that camouflages the real shareholding. Some of the powerful franchise owners might not be happy with Modi for precipitating matters. Things were going smooth so far and, for some inexplicable reasons, Lalit Modi has rocked the boat. Unpardonable.

2. The Income tax department has already showed up in force and any information they get gives them a handle. Some leverage that.

3. This raises questions over Lalit Modi’s managerial capabilities. Or, as they say in India, his ability to manage the “environment”. If he had wanted a certain corporate house to be awarded the franchise (as has been speculated in media), existing Indian management ethos (adopted wholesale from the Indian political narrative) would have expected him to have delivered the result. No questions asked about the means adopted; the ends matter more than anything else. He had managed to have his way so far; what went wrong this time? Time for the ungainly heave-ho, going by unconfirmed reports that a BCCI factotum is likely to be installed alongside Lalit Modi?

4. Why was Kochi selected for the franchise and not Ahmedabad as had been planned a year ago? Did Shashi Tharoor influence the decision? Was there any quid pro quo? The story of how a South African model was denied a visa by the ministry of external affairs – reportedly on a request from Lalit Modi -- remains incomplete.

5. Was Lalit Modi under pressure from Narendra Modi to scuttle the Kochi deal?

6. Clearly, not all IPL team owners have stumped up hard cash. They could be just faces on hire, proxies lending their names for a fee to some moneybags who prefer staying in the shadows for the obvious reasons. How does IPL rid itself of this stigma?

7. Going by reports so far, only the IPL organizers seem to have made any money so far. Most teams still seem to be languishing in the red zone. So far, the league looks like a one-way funnel for pouring in cash with no guarantee of returns. What’s the big rush then for acquiring a franchise? Valuation game? Or, is there a pay-off somewhere else?

8. Sunanda Pushkar’s role is likely to come under closer scrutiny – getting a 5% sweat equity stake, apparently “undilutable in perpetuity (sic)”, according to some news channels, is bound to raise some eyebrows.

War Of The Lords

What an unholy row! The unseemly spectacle of India's two financial sector regulators locking horns in public, and sparring with flailing fists, can only spell disaster for the country’s financial sector and its "orderly" development.

These two regulators should also realize that, with this spat, they have played into the hands of the government. It is well known that North Block in New Delhi, which houses the Finance Ministry, is keen to play mid-wife to the birth of a new super-regulator for the financial sector.

Pranab-babu’s Budget speech in February had promised a new super-regulator for the financial sector but was conspicuously silent on the details. Since then speculation has mounted about this new creature and its genetic make-up. The latest spat between securities markets watchdog Sebi and the insurance regulator, Insurance Regulatory and Development Authority, has now fuelled rumours that the ministry might use this seemingly intractable row to insert itself and lay the foundations for a government controlled super-regulator. SEBI and IRDA will then have to report to this new organization.

It is strange that such a disagreement was not sorted out in the High Level Coordination Committee on Financial Markets, an informal body created to specifically sort out similar issues of turf between different regulators. In fact, the coordinated action by Reserve Bank of India and Sebi recently against Bank of Rajasthan proves that this apex level committee can stymie designs of those who want to profit from regulatory arbitrage. However, there could be one possible weakness: this organization lacks legislative teeth. Various committees have recommended that the HLCC should either be given legislative powers or a super-regulator be set up.

This has become necessary since institutional activities and products increasingly straddle multiple markets today. Also, as the recent crisis has shown, achieving overall financial stability – which means ensuring that risks in each and every part of the inter-connected financial system are within manageable limits – has now been accorded greater importance than ensuring the stability of the banking system alone. And, it is believed that a super-regulator with a 30,000-feet-helicopter-view alone can perform this job. But, the important question that arises is: is the government the right agency to undertake this responsibility? And, if all the regulators in the financial system are to report to this omniscient regulator, what are the consequences?

Conclusion: there should be a widespread debate before finalizing the DNA structure of the yet-to-be-born institution.

Too Many Wise Men?

How many men does it take to run the economy? Numerous, going by the number of experts voicing their opinion in Delhi.

The multiple lines of economic command have been visible for some time now. If there were ever any doubts, one had to only tune into the babble of eco-speak emanating from Delhi soon after the wholesale price index numbers for February were announced. There was understandable panic because the inflation rate was nudging the treacherous double-digit mark. But, going by the comments made, it would seem that there were many more people out there in Delhi who knew what the Reserve Bank should be doing and when it should be timing its next action. And, then came the unexpected RBI rate hike to quell some of the inflationary flames. But, instead of diminishing, the decibel level actually went up by a few notches with the experts now holding forth that RBI needed to implement another rate hike.

But, what has been described above is only a symptom of a larger trend in economic policy management. Over the past few years, the number of ecocrats has multiplied and with it have the number the divergent views and conflicting opinions. All this is, of course, great grist for the electronic media.

Here’s a look at the chief policy manager and the various people in the economic management team.

· Prime minister Manmohan Singh: An established economist with pucca Oxbridge cred. Gained respect worldwide for having pulled the Indian economy back from the brink of bankruptcy and then steering it out of the stifling, controlled regime to a new liberal and competitive framework.
· C Rangarajan: Another well regarded economist. The former RBI governor is currently the Chairman of the Prime Minister’s Economic Advisory Committee. Obviously, knows his monetary onions well and makes them public as well.
· Montek Singh Ahluwalia: Another Oxbridge-World Bank alum who gained fame as an economic advisor during Rajiv Gandhi’s time. Was Chief Economic Advisor in finance ministry when Manmohan Singh was finance minister. Is currently Deputy Chairman of the Planning Commission. A favourite with the sound-bite hunters on all topics – from the state of the monsoons to the interest rate structure.
· Kaushik Basu: A vociferous champion of free economy, this former don – he taught at Delhi School of Economics and Cornell University – has been recently appointed as Chief Economic Advisor to the finance minister. He is the hunting pack's new quarry.
· Pronab Sen: Chief Statistician, Sen is currently trying to overhaul the way data is collected, tossed and diced, and then the manner in which the decision-making apparatus interprets it. He has also been vocal with his views on inflation and interest rates.
· Raghuram Rajan: Occupant of tenured chair at University of Chicago and a former Chief Economist at IMF, this man has been quietly advising the PM on a number of issues, including financial sector reforms. The super regulator proposed in Budget 2010 – which is expected to supercede all the other financial sector regulators in the country, such as RBI, SEBI, IRDA -- was suggested by the panel headed by him.
· Pranab Mukherjee: The man who, as finance minister, is in the thick of it but does not speak much at all, except to voice the government’s overall concern from time to time over inflation, interest rates and their impact on credit growth and the general well-being in the economy.
· D Subbarao: Governor at RBI, who played an impressive role in launching the fire-fighting operations in close coordination with the fiscal authorities soon after Lehman Brothers went belly up. He is also trying to improve some of RBI’s traditional ways (such as, communication), but unfortunately that is seen as a weakness and he is considered fair game by everyone in Delhi. So, almost every ecocrat has a word of advice for him.

There is nothing wrong in having such a large and high-calibre team of economists in charge of policy management. But, policy direction starts sounding out of whack when all of them speak in different and contradictory tongues.