Thursday, March 29, 2012

India's new growth paradigm

That's the title of my latest ET column. I sum up my thesis as follows:
This may sound wildly optimistic but it is possible that India is moving towards a new growth paradigm. The fiscal deficit will remain at a higher level on the average than in 2004-08. Inflation will be above the comfort zone of 4-5%. We will not have a global boom along the lines we saw earlier. And yet, growth of the order of 8-9% will be achievable thanks to a high investment rate.

Monday, March 19, 2012

Goodbye fiscal consolidation but is it a big deal?

To me, one of the most striking figures in the latest Budget is in in the medium term fiscal policy framework statement that accompanies the Budget. It shows the target for the fiscal deficit for 2014-15 at 3.9% compared with the Thirteenth Finance Commission target of 3%, which is the level prescribed by the FRBM Act. This means that the government will not meet the FRBM target even by 2014-15! And it will exceed the target by a full 100 basis points.

The debate on whether the target for 5.1% for 2012-12 is realisable is secondary. My guess is that it this is unlikely even if the revenue targets are met unless the Food Security Act is not going to happen in a hurry. I say this because no explicit provision has been made for the Act. We have to assume that the when the FM says that subsidies will be capped at under 2%, he is talking of the present subsidies, not new ones.

Since fiscal consolidation will not happen, we cannot expect inflation to come down below the RBI's 5% comfort zone of 5% in the near future. In other words, we are stuck with both high levels of fiscal deficit and inflation.

Is this a big deal? Not in terms of debt sustainability. The Finance Commission target of 45% for the centre's debt to GDP ratio by 2014-15 will be almost met in 2012-13. One of the big dangers with rising fiscal deficits is that it may lead to the government not being able to borrow any further. This is clearly not a danger for us.

Will it hurt growth? Well, I suppose so. But this does not mean that growth will not accelerate. Savings and investment will keep rising thanks to private saving, so growth will inch forward. It's just that we won't get back to 9% growth as quickly we might have otherwise.

The optimistic view before the sub-prime crisis was that, having touched 9% growth, we must aim for 10% by the end of the Five year Plan starting 2012-13. Now, it appears that we will move from 7% to 8-9% in the same time horizon. That doesn't strike me as a big disaster. So what are all the media pundits ranting about?

Thursday, March 15, 2012

On quitting Goldman Sachs

A senior executive of Goldman Sachs has gone public with his decision to quit the firm by writing an article in the New York Times on the subject:
It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.
There is no end, it seems, to the public bashing of the investment bank. Wonder how Goldman will respond, if at all.

(Thanks to Sidharth Sinha for the pointer)

Fiscal correction will be slow in coming

All eyes are on the fiscal deficit number in the coming budget. There is a sense that we are on the brink of a fiscal crisis and the acid test for the FM is whether he can contain and reverse it. This is being unduly alarmistic. India's debt to GDP ratio for the centre and the states together of under 70% looks good in comparison with what we see in the advanced world today. Secondly, the states' record in improving the fiscal position has gone unheralded.

As for the centre, other things remaining constant, growth, the tax reforms on the cards (DRC, GST, extension of service tax) and disinvestment should by themselves push the deficit down close to the FRBM target of 3%. If this will not happen now (as it did in 2004-08) it is because the UPA has major spending schemes on its agenda, covering food, healthcare and education.

Most people say that if the fiscal deficit is brought down, it will release savings for investment and growth. Curb the deficit and you get on to a higher growth path. This is largely true. The government's decision to emphasise social sector schemes does entail a conscious decision to settle for a lower growth rate in order to promote equity. But that is a political decision- to settle for 8% rather than 9% growth in the medium term. If it is politically unacceptable, the people will say so in the next elections.

More in my ET column, UPA defines a new trade-off

Wednesday, March 07, 2012

Dysfunctional boards

Most people tend to think of corporate boards (including the executive team) as repositories of wisdom, maturity, balance, rational behaviour and what not. The people who sit on it are achievers, they understand business, they know how to take decisions. Shareholders must trust these wise men and women.

I have always been more than mildly sceptical about this elevated notion about people at the top. I am glad now to see it corroborated by FT columnist Luke Johnson. Johnson argues that boards are, in fact, riven by intrigue and manoeuvre - and concern for the company and its shareholders is often the last thing on the minds of people at the top:
Boardrooms are overwhelmingly populated by men aged 45 to 60. By this age, most of the players have worked out that more money doesn’t bring happiness; time is taking its toll; maybe the striving and sacrifices weren’t really worth it; and the participants tend to become more acutely aware of their mortality, shortcomings and missed opportunities. Regrets and anger can become the dominant emotions, as optimism and hope gradually diminish.Thus the boardroom can end up resembling a psychiatric ward. Motivations diverge violently, and maintaining a rational sense of purpose can become impossible.
Johnson suggests that the cure of boardroom dysfunction is to have adequate diversity on boards. I would go further. The answer, really, is wider dispersal of power. If you want companies to do better, undermine the role of boards and CEOs and spread power all across the company. Any takers?

China lowers growth target for 2012

China is targeting a growth rate of 7.5% for 2012, the lowest in eight years. This is an economy that had grown at 10% not long ago. So, it's not clear why there is so much breast-beating in India over the decline in our own growth rate from 9% to around 7%.

The international environment has turned adverse. This affects emerging markets in two ways: exports and financial flows.China gets more hit in respect of the former because it's an export-oriented economy. India is, perhaps, more severely impacted on the second  count. The short point is that the primary factor in the decline in the growth rate is the external environment and not what's going on within the country- or what commentators like to call 'policy paralysis'.

To my mind, talk of 'policy paralysis' or the absence of reforms limiting growth is overdone. As C Rangarajan, Chairman of the PM's Economic Advisoru Council, has pointed out, the present policy regime can support growth of 8-9%- provided the international environment is normal. How to achieve 9% in the face of adverse international conditions is the challenge now- and this can't be addressed in the short-run. It requires concerted action on several fronts over a longish period.

Tuesday, March 06, 2012

Wall Street Journal book review

The Wall Street Journal has just carried a review of my book on Ravi Matthai-IIMA.

Thursday, March 01, 2012

Publishing in top journals

Indian academics are being exhorted these days to publish in top journals, many of them US-based. That's how you build knowledge, become thought leaders, we are told. Now, however true this may be for the pure sciences, one has always had reservations about applying this philosophy to b-schools. B-schools teach management, which is the application of knowledge, preferably, to the local context. How arcane research can contribute to this objective has always been an issue.

It is refreshing, therefore, to come across a different point of view being urged by Britain's universities minister, David Willetts. Andrew Hill, writing in his blog in the FT, quotes Willetts as saying that publishing in US peer-reviewed journals mostly involves analysing US data- and Willetts can't see how that will help the UK. He also faults the 'rarefied and recherche' nature of much management research. So, we come back to very basic - and still unanswered questions. What is meaningful research at b-schools? What relative weights do we accord to teaching and research in b-schools?

The sooner India's leading b-schools find answers to these questions, the better. It should not be that they recast incentives in favour of publishing abroad only to find themselves of diminishing relevance in their own environment.

Gloom on Indian economy overdone?

With GDP growth dropping to 6.1% in the last quarter, the chorus of doomsaying about the Indian economy has grown louder. Many commentators think that 2012-13 will be worse. I am not so sure. Among the sectors responsible for the slide are mining and electricity generation. Coal mining is poised to look up in the coming months thanks to initiatives in the public sector; electricity generation has suffered for want of coal and this too is likely to be remedied to a large extent. These two improvements alone should lift the industry growth index in the year ahead.

That apart, there are several positives that should impact positively on investor sentiment in the coming year. The biggest, perhaps, is the defusion of the Eurozone crisis - at least for now. Then, FII flows have returned, disinvestment is poised to get a boost, FDI is doing well, and the government is no longer preoccupied with the Anna Hazare movement. The PM's Economic Advisory Council has forecast growth of 7.5-8% in 2012-13. It does not appear unrealistic.

More in my ET column, No, it's not a downward spiral.