Friday, October 17, 2014

RBI autonomy

What exactly is RBI autonomy in monetary policy? Does it set the policy objective (say, primary focus on inflation), the inflation target as well as the means to achieve the target? Are all these the province of the RBI? Or does the government have a say in these matters?

I would think that the government has the right to decide the primary objective and also the inflation target. When it comes to the means of achieving the objective, the decision is primarily that of the RBI but the government should be involved in decision-making.

That is how RBI governors have viewed matters all these years. They have ensured that the government is duly consulted on monetary policy matters and then taken the final call on interest rates. Over the past year, however, the RBI has sought to change the situation somewhat. The Urjit Patel committee recommended that inflation targeting would be the primary objective and it also set the inflation targets to be met. The interest rate policy to meet the targets has also been decided by the RBI. It does seem that there is over-reach on the part of RBI.

Now, moves are afoot in  government to get the balance right between itself and the RBI. The government wants to set the inflation target. Monetary policy will be decided by a committee dominated by outsiders. This amounts to a dilution of the RBI's autonomy as it takes away the RBI governor's right to be the final authority on interest rates. I guess the government's moves were inevitable given the attempt on the part of the RBI to be the sole decision-maker in monetary policy matters.

More in my article in the Hindu, The limits to autonomy.

Thursday, October 16, 2014

Travails of entrepreneurship

The business media tends to romanticise entrepreneurship by focusing on the success stories, says Schumpeter in the Economist. I would add that it also tends to portray entrepreneurs as people who know how to balance work, leisure and family, have great EQ and, of course, they glorify the millions that entrepreneurs make.

The reality is that entrepreneurship is enormously challenging mentally and physically. Schumpeter writes:

Business professors celebrate the geniuses who break the rules and change the world. Politicians praise them as wealth creators. Glossy magazines drool over Richard Branson’s villa on Lake Como. But the reality can be as romantic as chewing glass: first-time founders have the job security of zero-hour contract workers, the money worries of chronic gamblers and the social life of hermits.

Failure rates are frighteningly high:
Over half of American startups are gone within five years. Most of the survivors barely stumble along. Shikhar Ghosh of Harvard Business School (HBS) found that three-quarters of startups backed by venture capital—the crème de la crème—failed to return the capital invested in them, let alone generate a positive return. In 2000 Barton Hamilton of Washington University in St Louis compared the income distributions of American employees and entrepreneurs, and concluded that the latter earned 35% less over a ten-year period than those in paid jobs.
As for their being balanced personalities, forget it:
John Gartner, who teaches psychiatry at Johns Hopkins University medical school, suggests that a disproportionate number of entrepreneurs may suffer from hypomania, a psychological state characterised by energy and self-confidence but also restlessness and risk-taking. Numerous studies confirm, at the least, that they are prone to over-optimism.
Schumpeter quotes one ex-entrepreneur as urging would be entrepreneurs to have more healthy lifestyles. Somebody else urges them to get support networks and mentors.

I doubt that these can help. Entrepreneurship is a passion. Like great works or art, music or even writing, they are born of enormous sacrifice. Sometimes there are rewards at the end of the tunnel, very often there are none. Entrepreneurship is a form of madness. Entrepreneurs will pursue their dreams regardless. To ask them to do so in a balanced way or with help or guidance is rob them of the special quality that makes for success in some cases.

You cannot ask an entrepreneur to be balanced any more than you can ask a genius or a prodigy to be normal.





Wednesday, October 08, 2014

Is optimism about India's growth prospects justified?

Analysts see an acceleration in growth to 5.5%. 6.5% and 7% starting this year and then in the next two years. Is this feasible? I think yes. But the RBI needs to help out by cutting the interest rate.

My analysis appears in today's Asian Age, Growing Pains.

Tuesday, October 07, 2014

When management gurus dissect politics....

How can we tell whether a political leader such as Narendra Modi will succeed? Three management experts, including Ram Charan, attempt an answer in a business journal. I can't say I was bowled over by their analysis.

The authors say we should look for five signals, on all of which Modi scores. Let me take up two in detail

i. How deep is the politician's insight into public interest? Modi's interest is very deep, the authors say, because of his own background of poverty. Well, Manmohan Singh too came from a poor family in a very backward village. He could, perhaps, claim that he understood the poor as well as the elite and was thus well placed to negotiate his way through the elite on behalf of the poor.In India (unlike in the US), we have hordes of politicians who have come up from the grassroots. Lalu Yadav and Mayawati, for instance. But they have not proved to be transformative leaders in the sense of bringing about an improvement in the lives of the class of people they once belonged to.

ii. Can the leader get things done? Modi has a record as a doer in Gujarat, the authors point out. But Gujarat was one of the best performing states even before Modi became Chief Minister (although, to his credit, Modi was able to maintain that record). India's growth rate has improved since the nineties and through the noughties under a succession of governments and leaders. Not all were headed by doers. However, starting with Narasimha Rao, we managed to put in place policies that paid off. So, yes, it helps to be good at execution but the role of policy must not be understated.

The authors mention other factors that favour Modi: his business mind-set, his ability to engage senior government officials, the broad support he enjoys. It's hard to disagree on these. But none of these by themselves or even put together ensure results.  Both Indira Gandhi and Rajiv Gandhi had broad support but both saw how quickly this could dissipate. A "businesss mind-set" can be a negative if it means being pro-business at the expense of welfarist considerations.

Modi's strengths are his ability to connect with the masses, formidable administrative experience, a a capacity to think out of the box. deep study and reflection, boundless energy and a genuine passion to make a difference at the national level. This combination bodes well for any leader. We don't need management experts to tell us that.



Indian inflation: don't blame it on support prices for foodgrains

Minimum support prices (MSP) for foodgrains have been rising over the years (although the new government has kept increases under control). This is said to be a driver of inflation in recent years.

Amartya Lahiri, writing in IE, thinks the explanation facile. Why? Because MSP increases themselves result from a rise in past inflation! 
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation.
Using the CPI (industrial workers) and a weighted MSP index for the period of 1976-2014, I did precisely that exercise. The bottom-line of the results is that, using the part of the MSP due to past inflation to predict inflation does almost as good a job
as using the overall MSP. Moreover, when both components of MSP changes are used to predict inflation, the effect of inflation-induced MSP is three times as high as that of non-inflation MSP. The main implication of this is that the biggest predictor of inflation is past inflation. It is clear that past MSP changes due to inflation account for a much larger part of overall CPI inflation than does non-inflation MSP.
- See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf

Using the CPI (industrial workers) and a weighted MSP index for the period of 1976-2014, I did precisely that exercise. The bottom-line of the results is that, using the part of the MSP due to past inflation to predict inflation does almost as good a job as using the overall MSP. Moreover, when both components of MSP changes are used to predict inflation, the effect of inflation-induced MSP is three times as high as that of non-inflation MSP. The main implication of this is that the biggest predictor of inflation is past inflation. It is clear that past MSP changes due to inflation account for a much larger part of overall CPI inflation than does non-inflation MSP.

In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf
In as much as the MSP itself responds to current and past inflation, a part of the reported effect of the MSP on inflation is then just the effect of past inflation on current inflation, rather than any independent effect of changes in the MSP on inflation. The MSP may well have an independent effect on inflation, but to determine that one needs to break up MSP inflation into two parts: the part that is induced by current and past inflation and the part that is not. The key test then is to see which of these two components of the MSP has the bigger effect on inflation. - See more at: http://indianexpress.com/article/opinion/columns/dont-blame-msp-for-inflation/#sthash.HZexjpVx.dpuf

Wednesday, September 24, 2014

The brains in a company are at the bottom of the pyramid

The higher you go up the corporate ladder, the duller you become. And yet decision-making is concentrated at the top. FT columnist Lucy Kellaway quotes a graduate trainee on the subject:
The main thing that had struck him so far was that people seemed to get dimmer the higher they went in the organisation. His fellow trainees were almost all brilliant, he said, and people at the next level up were also pretty smart. But those 10 years older were pedestrian by comparison, while some of the partners seemed borderline moronic.

I asked if he had any explanation for this. He looked at me as if I were a moron too and said the reason was self-selection. Really smart people don’t stay at the institutions they have fought so hard to get into. The best leave within two or three years; the slightly less good stay a bit longer, and only the also-rans and the terminally unimaginative are in for the long haul. 
Kellaway rightly points out that success in a company has little to do with brilliance. A company values other things in people:
Rather than reward brilliance it prefers skills that graduates can’t see: good judgment, a nice way with clients, and an instinct for when to bite your lip. Even if today’s partners weren’t boring to start off with, they quickly learn to seem that way. 
So, there are strengths that people at the top bring to the table. The challenge is how to marry the analytical brilliance at the bottom with the sound judgement and rounded view that obtains at the top of a company. One thing that Kellaway highlights is that the two levels need to talk to each - and understand what the other is saying. The other thing, which I believe is important, is that decision-making must be truly participative. Don't leave decision making only to sound judgement; bring in the creative, disruptive types at the bottom as well. 

US takes aim at ISIS- or is the target Assad?

The US, supported by Australia and soon to be joined by the UK, has put together a coalition of an estimate 40 nations to take on ISIS. Initially, the US will launch air strikes and provide advisors on the ground. However, it could only be a matter of time before the US puts boots on the ground.

The coalition is truly bizarre. It includes nations such as Turkey, Saudi Arabia and the GCC who, amongst others, are the very nations that created and propped up ISIS in many ways. The Saudis and GCC provided financial support, if not directly then through private donors. Turkey has kept its borders open for jihadists to go through and for ISIS to sell oil. And yet they have now made a U-turn exactly as Pakistan did with respect to the Taliban post- 9/11.Equally bizarre is the exclusion of the two nations that have steadfastly opposed ISIS, Iran and Syria (although John Kerry, the US secretary of state, has said that Iran may be free to join).

To aid the US involvement in Iraq and Syria, we have seen the figures of ISIS fighters swelling by the week. The earlier 15,000 fighters now number over 30,000. US officials gravely inform the world that the IS is beyond anything they have seen before. What's going on?

The ISIS, intelligence sources have indicated, poses no immediate threat to the west. America's return to the Iraq theatre and, by extension, to the Syria theatre appears to be aimed at Syria's Assad rather than ISIS. In taking care of the ISIS threat, the US hopes to give a decisive push to the efforts to topple Assad and undermine Iran's position in the region, given that Iran has been a supporter of Syria. This despite several foreign policy veterans, including former UK former secretary and currently MP Malcolm Rifikind, saying that an alliance with Assad is vital to the defeat of ISIS.

Listen to Atimes columnist Pepe Escobar:
There is no "Free Syrian Army" - that Qatari myth - anymore. There are no "moderate" jihadis left in Syria. They are all fighting for The Caliph or for al-Zawahiri. And still the Obama administration extracted a Congressional OK to train and weaponize "moderate rebels".

US ambassador to the UN
Samantha Power - Undisputed Queen of Batshit Craziness - at least got one thing right. Their "training" will "service these troops in the same struggle that they've been in since the beginning of this conflict against the Assad regime." So yes - this "sustained campaign" is the back door to "Assad must go" remixed.

People who are really capable of defeating The Caliph's goons don't tomahawk. They are the Syrian Arab Army (roughly 35,000 dead so far killed in action against ISIS/ISIL/IS and/or al-Qaeda); Hezbollah; Iranian Revolutionary Guards advisers/operatives; and Kurdish militias. It won't happen. This season's blockbuster is the Empire of Chaos bombing The Caliph and the ghost in the GWOT (Global War on Terror) machine. 




Monday, September 22, 2014

Will McKinsey be around 50 years from now?

Lucy Kellaway, FT's management writer, suggests somewhat cheekly that the big daddy of strategic consulting may not be around 50 years from now. She comes to this conclusion after looking at a special issue of the McKinsey Quarterly meant to commemorate the journal's golden jubilee. The issue carries a piece of research that purports to look at broad trends that will shape the future:
The first is technology. Its growth will be exponential and there will be “turbocharging advances in connectivity”. Second, growth in emerging markets will continue and a lot more big cities will spring up in places we’ve hardly heard of. Finally, all over the world everyone is going to go on getting older.
If this is all that McKinsey can come up with, based on its research, Kellaway fears for its future:
Fifty years hence, McKinsey won’t exist. This is based on three trends similar to those the firm spotted. If economic activity moves to new cities in far-flung places, these are the very parts of the world where western strategy consultants tend not to flourish. The next trend is that as executives get smarter in dealing with this complex world, they will be more able to solve their own problems......

....Most important is the effect of technology. All the grunt stuff consultants do analysing markets can be done by anyone with an internet connection. The two things that people will always be better at than machines are motivating others and coming up with original ideas. Yet on neither score does the consultant look good. Strategy firms don’t do much in the way of motivation. And as for originality, if the best McKinsey can do after years of study is say that technology, globalisation and ageing will feature in the next 50 years – a robot could have come up with that in a jiffy.



Sunday, September 21, 2014

Hindi Chini Bye Bye?

The Chinese president came, saw but could not conquer. Much of the bonhomie that PM Modi exuded in Ahmedabad seemed to evaporate once the hard reality of the standoff on the borders began to sink in- and for the PM the timing must have been particularly galling.

Xi Jinping was, no doubt, hoping that he would get India to open up to Chinese investment in a big way, providing China with a useful means of diversifying away from Japan and East Asia, without having to address the border issue. It didn't quite work out. There is talk of $20 bn of Chinese investment happening but there is reason to be sceptical.

One should not be surprised at the outcome. Negotiations can yield a fair outcome only if it happens between equals or between a powerful entity and a less powerful one who is seen as a partner. Neither condition is fulfilled in India's case. China and India remain rivals on the Asia stage so far as India is concerned. China sees the rivalry as settled in its favour given that the Chinese economy is today five times India's and China is far more powerful militarily.

The only meaningful resolution that is possible on the border issue is that India accepts China's claims on the western border (Aksai Chin) while China concedes India's claims in the east (Arunachal Pradesh). This was the deal that Chou-en-Lai offered Nehru but it was rejected by the latter. Today, China is perhaps even warier about Tibet and hence about the status of Arunachal Pradesh which borders it. (Mao had famously said that the issue in the 1962 war was not so much the border as Tibet- he thought India was upto mischief under American instigation).

So, the "talks" on the border are bound to drag on until the gap between India and China is narrowed. This means India's growth rate must overtake China's and it must stay that way for, say, five years. India's economy is bound to accelerate and China's is bound to slow down. The cross-over point is probably three to four years away, which would place it at 2017/18. Five years from then would be 2022/23. It is in the decade 2020-30 that we can expect a resolution of the border issue- provided things don't blow up in our face before that. Going by most projections, this is the decade in which India finally begins to come into its own. The rivalry between India and China will intensify in the coming years no matter that the economic relationship deepens.

The military issue for India is how to counter a vastly more powerful neighbour which has the advantage of geography in the North (since China is positioned at a higher level in Tibet)? The Economist has an interesting article on how India's strategic thinkers see the Andaman islands as a useful counter:
Hawks in Delhi who are suspicious of Chinese long-term aims say bluntly that India and its friends will acquire some sway over China only once the Andamans are treated as a “chokepoint”, a place to disrupt Chinese trade in the event of any future confrontation. Four-fifths of Chinese oil imports go through the strait. Chinese naval strategists warn of Indian designs to drop an “iron curtain” there.

Accordingly, there has been a steady build-up of naval and other capabilities centred on the islands:
An air base that opened two years ago in Campbell Bay, Great Nicobar, has taken Indian military aircraft 300km closer than before to the Malacca Strait. Other airstrips are reportedly being built or lengthened to handle big aircraft, including the Hercules transport plane. Airfields for helicopters will follow. The navy wants to deploy drones to track passing ships. New coastguard stations serve a similar purpose. Regular naval exercises with neighbours are interspersed with big international training manoeuvres hosted in the Andamans and named “Millan”. The most recent involved 17 navies in a disaster-relief exercise meant to mark a decade after the 2004 Asian tsunami.
This makes sense because among the three arms of the defence forces, the navy is the one arm in respect of which India comes close to Chinese capability especially in respect of capability to operate in the Indian Ocean.India's build-up in the Indian Ocean will be welcomed by Japan and others in East Asia. Go round the Malacca Straits and you enter the South China Sea. A book review in the Economist highlights the extent of Chinese assertiveness in the South China Sea: China is laying claim to a stretch of rock and coral 1500 kms away from China's coast and just 107 kms from Malaysia's:
The Chinese nine-dash line is claimed also by Taiwan, as the descendant of the “Republic of China” whose mapmakers produced it. It sweeps through the “exclusive economic zones” asserted under UNCLOS by Brunei, Indonesia, Malaysia, the Philippines and Vietnam. The Philippines is challenging its legal validity. But even if it wins, UNCLOS cannot adjudicate on sovereignty over islands, rocks or shoals. And China will ignore it anyway.
America's famed 'pivot' towards Asia is dictated by this display of Chinese assertiveness and the need to counter it. Japan and East Asia are not quite equal to the task. The US may be stretched in undertaking this exercise alone. That's where India and Indian naval strength come in. The US has an interest in bolstering India so that it can be a more useful partner to itself. PM Modi must see this more clearly after the Chinese president's visit. The strategic partnership between India and the US, started by Vajpayee and continued by Manmohan Singh, will be carried forward by Modi although the last years of the Obama regime may not see the proper fructification of it.