Did you know? - Harvard gets $9 bn in federal grants !

Harvard is,perhaps, the richest university in the US with over $50 bn in endowment funds. It is a private university. And yet it gets $ 9bn in federal funds, according to this report in the FT! This  includes $256 mn in contracts and $8.7 bn in grants.

That is certainly news to me. I was aware of government funding for projects and funding through agencies such as the National Science Foundation. I was not aware of outright grants. I read also that Columbia gets $400 mn in grants and $5 bn in other forms. 

The Trump administration is asking universities to review their policies on anti-semitism, DEI (diversity8, equity and inclusion), etc. in order to qualify for funding. Columbia university announced its willingness to fall in line with the government's demands. It appears there was a severe backlash from faculty and students which resulted in the president of the University announcing her decision to step down.

My concern here is not with the problems American universities are having with the government. It is about the financing of higher education. The combination of endowments and government funding allows America's private universities to massively subsidise their courses. The fee charged does not cover costs. At the undergrad level, there are tuition and other waivers- Harvard has said that for 2025-26, undergrad education would be free for all students whose family income is below $100,000. 'Free' means the university would cover tuition, food, housing, health insurance, and travel costs. 

In India, courses at government universities are subsidised but not those at private universities. The IIMs have relatively small or no endowments and the leading IIMs do not get government funding, so they recover costs plus margins through enormous fees. The same goes for engineering and medical courses at non-government colleges.

The failure to subsidise higher education in India across a wide swathe of colleges has implications for inclusion, the financial well-being of students who pay for courses and the cost of services such as health for the average person. Much of Europe offers free or subsidised education for its citizens. So does Canada. Our model is seriously flawed and needs to be revisited. 

America's 25 per cent tariff on auto imports are justified

Trump's latest move on tariffs is to impose a 25 per cent tariff on all auto imports, including parts. This article makes the case with great clarity.

The problem for US exports to the EU is that these are subject to VAT. Exports of EU countries, including from one EU country to another, get a VAT rebate. EU exports to the US would, of course, qualifyi for the VAT rebate. VAT is generally 21 per cent. American car makers pay domestic tax and a further VAT on exports to US. The author estimates that, to offset the disadvantage American exporters face in the EU, a tariff of 25 per cent is in order.

That's exactly what Trump is imposing. Whether a like tariff can be justified on exports from Asia and North America is not clear. But it certainly fits in with Trump's grand plan to bring manufacturing back to the US. 

Trump posted on Social Truth:

For years we have been ripped off by very country in the world, friend or foe. But those days are over-Ameica First!!

He has a point at least where the EU is concerned.

Trump is not kidding about his MAGA agenda, he's dead serious

It amuses me that nearly two months in Trump's second term, his critics see his pronouncements as posturing or clowning. Sorry, folks, Trump is dead serious about his MAGA agenda. All nations will have to find ways to cope with it: either they fall broadly in line (perhaps with some negotiation) or they end up confronting the US and paying the price.

Whatever Trump is attempting now is what he wanted to accomplish in his first term itself. The Washington establishment managed to scuttle his initiatives then. Trump has learnt since and will not be deterred. Peter Navarro, an insider in Trump's administration then and now, tells the story in crystal clear terms in his book, Time to Take Back Trump's America.

I have a BS article on how the MAGA agenda is unfolding relentlessly. 

Donald Trump is a man in a hurry

Say the worst about Donald Trump, but you can’t deny that he has hit the ground running. Tariffs, immigration, the Ukraine war, the conflict in Palestine, slashing jobs in government—the pace of initiatives and executive orders has been breathtaking. 

The US stock market has taken a beating. America’s allies in Europe are dismayed. Leaders across the world are bracing to cope with the impact of the tariffs that Mr Trump has rolled out.  Mr Trump is unfazed. 

Critics see Mr Trump as sowing chaos across the world in pursuing ideas that he hasn’t really thought through.  John Bolton, national security advisor during Mr Trump’s first term and now one of his most bitter critics, says the President has no philosophy or policy—his moves are all about making himself look good.     

Mr Trump’s critics underestimate him,   as they did after his loss to Joe Biden in the presidential elections of 2020. They never imagined that Mr Trump would fight off the “lawfare”- the use of the legal machinery to keep him out of the political arena- unleashed on him by the Biden administration and claim the Presidency a second time. They now find it hard to accept that Mr Trump is simply delivering on his election promises. Sensible leaders aren’t supposed to do that — election promises are meant only to win votes. 

To understand that Mr Trump means business, you must read Peter Navarro’s Taking back Trump’s America, published in September 2022. Mr Navarro was an advisor on trade policy in Mr Trump’s first term and remains one in his present term. He’s widely seen as a trusted confidante and a member of the President’s inner circle. 

Mr Navarro has earned his boss’s trust the hard way. He refused to testify before a US House Select Committee in the matter involving Mr Trump’s attempts to overturn the election result of 2020 and ended up being jailed for four months for contempt of Congress. 

You may read the book for sheer pleasure. Mr Navarro is no hack: he has a doctorate in economics from Harvard and was a professor at the University of California (Irvine) School of Business. He   writes with verve and wit about the intrigues and manoeuvrings within the White House—and he doesn’t believe in pulling his punches.   All that is unfolding now falls neatly into place when you have read Mr Navarro’s narrative. Here is the gist of it. 

Mr Trump was elected in 2016 on the plank of what Mr Navarro calls Populist Economic Nationalism. This included: Restoring US manufacturing by keeping out imports through tariffs; cracking down on illegal immigration; being tough on China; and bringing US troops home from endless wars.

Mr Trump was new to politics and Washington and he made the mistake of appointing Washington establishment-types as key members of his team. These were committed globalists and status quoists, with little use for  use for Mr Trump’s policy agenda. The Trojan horses within the administration used every trick to mislead him and thwart his agenda. Mr Navarro quotes Robert Lighthizer, the then US trade representative, as saying there were only two types of people in the Trump administration: Those people who thought they had to save the world from President Trump, and those who thought President Trump would save the world. For the most past, the former prevailed.

 It was, as Mr Navarro puts it, a case of Bad Personnel and Bad Process making for Bad Policy and Bad Politics. Many of these Bad Personnel were fired down the line. However, Mr Trump woke up to their tricks a little late in the day. By the time the 2020 elections came up, the constituencies that had voted Mr Trump to power were left unsatisfied with the outcomes. It was the failure to deliver on the economic nationalist platform that resulted in Mr Trump narrowly losing to Mr Biden in 2020.

The Biden administration failed to address the root causes of widespread discontent in the electorate, notably the loss of jobs through offshoring and unchecked immigration. In the 2024 presidential elections, the electorate was even more responsive to Mr Trump’s platform of Populist Economic Nationalism, handing him a more emphatic victory than in 2016.

Mr Trump has learnt from the failures of his first term. He has made sure his administration is now packed with loyalists he can count on to carry out his mission, not people who will find ways to stymie his orders or cook up misleading intelligence. He knows very well that, given time, the Washington establishment will regroup and attack. That’s why Mr Trump is a man in a hurry.

Mr Navarro spells out the three legs of the Economic Triangle that will serve to achieve Mr Trump’s vision of MAGA (Make America Great Again). First, strengthen American manufacturing. This is to be done through policies such as high tariffs and Buy American, Hire American.   

The second leg of the Triangle is cracking down on illegal immigration. American workers losing jobs to those who are willing to work for lower pay has been another big cause of resentment in the electorate. The third leg is putting an end to America’s endless wars. Mr Navarro speaks for Mr Trump when he says, “They are futile and pernicious ‘plowshares into swords’ wars that have drained trillions of dollars from the American economy to the benefit of a military-industrial complex and at the expense of modernizing our infrastructure, improving our schools, and lowering our taxes.Think Ukraine.

One thing should be clear enough: Mr Trump’s near-daily references to his agenda are not cheap bullying, negotiating tactics, or theatrics. All that has happened in the past seven weeks is strictly according to plan. Mr Trump is determined to  remake the world order and he knows full well that his plans will be disruptive for the everybody.    He concedes  that there will be short-term pain for the US. 

Optimists had construed this to mean at most a one-time increase in the US inflation rate of one per cent. Mr Trump has since spooked the markets by refusing to rule out the possibility of a recession in the US.  He’s confident the US will eventually emerge the winner from whatever turmoil his policies cause.   

 Recent history suggests that the US has the least to fear from global disruption. In the past two decades, we have had a global financial crisis (GFC), a Eurozone crisis, the Covid crisis, the Ukraine conflict, and a conflagration in West Asia. America’s share of world GDP has risen from 23 per cent in 2008 at the time of the GFC to 26 per cent in 2023. Mr Trump has reason to believe that the US has the economic and political clout needed to remake the world order to its advantage.

What can we expect from Union Budget for FY 26?

The imminent arrival of Donald Trump as President of the US has injected enormous uncertainty into the global environment. In such a situation, the Union budget for FY 26 has to be low-key, not overly ambitious and aimed primarily at ensuring the shock waves that Trump is expected to unleash do not destabilise the economy.

My artice in BS, Budgeting in the time of Trump. 

Economic policymaking must always reckon with uncertainty. There are times when the uncertainty is acute. The biggest challenge in recent years was the Covid-19 pandemic. It was hard to tell how long it would last. The policy response to it was, however, quite clear--- fiscal and monetary stimulus, although nations came up with varying degrees of stimuli. 

What looms ahead of the Union Budget for FY26 is, perhaps, even more challenging. Nobody quite knows how the US President-elect, Donald Trump, will proceed with his plans and how other nations will respond.  Also uncertain are his stance on the two geopolitical hotspots at the moment, Ukraine and West Asia, not to mention his own additions, Greenland and the Panama Canal. The only known is that the world economy must brace for major shocks. The focus in the coming Union Budget must be to keep the growth momentum going so that the economy is better placed to withstand any shocks that arise.

Going by the latest estimates of the NSO, the government is likely to fall slightly short of the nominal growth target of 10.5 per cent for FY25. It may still meet the fiscal deficit target of 4.9 per cent of gross domestic product (GDP) because capital expenditure will fall below the budgetary estimate. 

For FY26, the priority must be to maintain the central government expenditure at the FY25 level of 3.4 per cent of GDP, at the very least. This must not happen at the expense of capital expenditure by public sector undertakings (PSUs). Total central public expenditure (central government plus central PSUs) must be maintained at the FY 25 level of 4.5 per cent. 

This could well mean exceeding the fiscal deficit target of 4.5 per cent of GDP for FY26 indicated in last year’s Budget. So be it. The imperative is to aim for GDP growth of close to 6.5 per cent in the coming year. It is hard to see any big rise in private investment driving growth in the face of looming uncertainties. 

The finance minister had indicated in her speech last year that, from FY27 onwards, the government would focus on ensuring a fall in the central government debt-to -GDP ratio rather than on the fiscal deficit itself. In blunt terms, this means letting go of what has turned out to be a futile two-decade quest to meet the Fiscal Responsibility and Budget Management (FRBM) fiscal deficit target of 3 per cent. 

A strong fiscal stimulus is especially required because the scope for monetary easing may turn out to be less than what analysts had hoped for. The issue may not just be the persistence of domestic inflation. Mr Trump’s position on tariffs spells higher inflation in the US and a strengthening of the dollar, at least in the short-run. The US Federal Reserve has indicated that rate cuts in 2025 will be fewer than previously anticipated. Post-Trump, other economies may find it more difficult to delink their policy rates from those of the Fed.

The second priority in the Budget must be the issue of unemployment, especially educated unemployment. Last year’s Budget had announced three schemes aimed at incentivising employment in the private sector, along with an internship programme. It projected an expenditure of ~2 trillion over five years, or ~40,000 crore annually. However, the discernible allocation in the Budget was only ~12,000 crore.

The coming Budget should tell us what the outcomes have been. It is unlikely that the private sector has met the government’s expectations for job creation, or that it will in the future. Manufacturing has not taken off as expected, and it cannot be relied upon to generate large numbers of jobs in the near future. The services sector generates jobs but many are of low quality. 

To alleviate educated unemployment on a crash basis, the government must go all-out to fill vacancies in government. It must also offer the promised internship stipend of ~5,000 to all those who apply for internship through the government’s portal and fail to secure one within six months. 

There will be much hand-wringing over unproductive jobs in government and freebies. Critics will say that the government must instead invest more in education and healthcare or in infrastructure. The latter would create conditions for the growth rate to move to over 7 per cent. 

We have seen, however, that faster growth does not automatically create sufficient jobs or the right quality of jobs, not just in India, but also in other parts of the world. A large swathe of the population needs relief. With both the Centre and the states announcing handouts in various forms, we are moving towards an Indian version of a Universal Basic Income. Like it or not, that is the consensus across the political spectrum. If we can, nevertheless, sustain GDP growth at around 6.5 per cent in an adverse  global environment, investors will view India’s growth-with-inclusiveness model as no mean achievement. 

Lastly, the government must focus on improving governance and performance at PSUs and public sector banks. The imperative is even stronger now that privatisation   and asset monetisation have been put on the back burner.  

The Financial Services Institutions Bureau has turned out to be a good model for making top-level appointments. The Bureau comprises professionals, a representative of the RBI and a representative of the finance ministry. It recommends whole-time directors and non-executive chairpersons for financial institutions. The government takes a call on the recommendations made by the Bureau. 

The Bureau’s mandate should also be extended to the appointment of independent directors. The responsibilities cast on independent directors by the RBI have increased considerably. Compensation for independent directors at public sector banks needs to be improved-it is eminently affordable today. A graded scheme can be introduced, depending on the size and performance of a bank.

The Public Enterprise Selection Board, which performs similar functions at public enterprises in the non-financial sector, needs to be recast along the same lines as the FISB. It too must be mandated to appoint independent directors and on better terms. A separate panel could be created to evaluate the performance of boards at all public enterprises.

A growth rate target of around 6.5 per cent, a high level of public capex, increased government spending on job creation, a relaxed view of the fiscal deficit target, and a greater focus on performance at PSUs/PSBs—the recipe may seem distinctly unglamorous. Well, that is what is required in the uncertain times that the arrival of Mr Trump bodes.

Elon Musk wants regime change- in the UK!

The US is notorious for its attempts at regime change over the years. But that was almost always in the Third World or non-Western world.

Who would have thought that the US would want a regime change at one of its closest allies, the UK? And yet that is what Elon Musk has been doggedly pursuing over the past few months. Earlier, Musk spoke as a private citizen. But  no longer. He is now part of President-elect Donald Trump's incoming administration. 

Musk has publicly called for British PM Keir Starmer to step down saying he no longer enjoys public support. He has said that Starmer's continuance in office could spell civil war in the UK. He has lambasted Starmer for his alleged failure to crack down on criminal gangs in the sexual abuse of young girls when he was Crown Prosecutor.

And now comes the report that Musk is discussion with various groups in the UK to bring about Starmer's ouster well before the next UK elections. Musk has been talking to the UK's Reform Party to bring about regime change in the UK. But he dropped a bombshell recently by saying that the party leader, Nigel Farage, is not the right person to head it. This, after Farage had met him a month ago.

It is astonishing that there has been little condemnation of Musk's activities in the UK in the UK itself, on the European continent and in the US. Russia and China have been condemned for supposed acts that were nowhere as crude as what Musk is attempting.

Any self-respecting government would have warned a foreign individual off such blatant interference in its internal affairs. But when it comes to the US and Mr Trump, the norms are clearly different. How the British have fallen!

Manmohan Singh as talent spotter

Among the many tributes that have been paid to Dr Manmohan Singh, this one focuses on his ability to spot and nurture talent.

Among the many bright people Singh brought into or promoted in government were: C Rangarajan, Y V Reddy, MS Ahluwallia, Rakesh Mohan, Shankar Acharya, Jairam Ramesh, Nitin Desai, Arvind Virmani, Bimal Jalan, Vijay Joshi, Raghuram Rajan and Urjit Patel. Building leaders for the future is one of the principal task of a leader. It can be said that Dr Singh performed this role in an exemplary manner.

There is also a rousing tribute from Martin Wolf in the FT:

Singh achieved what he did because he was a special man at a special time. Ultimately, however, technocrats only succeed if those with power trust them with it. India benefited from the fact that people with power were willing to trust him to use it well at critical moments. He, in turn, provided something that today’s populists increasingly despise: knowledge, wisdom and experience. He also knew the importance of brilliant colleagues. A recent paper from the Mercatus Center describes him as “India’s finest talent scout”. In some quarters today, all this would condemn him as an embodiment of the “deep state”. That is because these people lack belief in the ideal of public service. Singh did believe in it. He believed, too, in a thriving democracy. Indeed, he thought India could not survive without one. The economically dynamic India of today is his legacy. So, too, is his example of service to the cause of a prosperous India in harmony with the world.

Why is media talking about Trump firing the Fed chief?

One is intrigued by the incessant speculation in the media about Trump's firing Fed Chairman Jay Powell once Trump is sworn in as president later this month. Kenneth Rogoff resurrects this speculation in a recent article but is quick to shoot down the possibility. 

By law, the Fed Chairperson has a fixed tenure. The President does not have the legal right to fire him or her. Of course, the President can get Congress to amend the law so as to enable to the President to fire a Fed Chief. But pushing through such legislation will not be easy despite the fact that Mr Trump is riding high at the moment. Opposition from Congressmen apart, Mr Trump has to risk with the damage such a move could inflict on the financial markets. Mr Powell, for his part, has said he has no intention of resigning.

Mr Trump can, of course, seek to undermine Mr Powell by criticising his moves. But he did so in his first term without inflicting any serious damage to the functioining of the Fed. Central bank independence does not mean the political authority cannot air its differences with the central bank in public. 

There is the larger question of whether the central bank chief must serve at the pleasure of the government. That is the case in India. It is open to the government to ask the RBI Governor to go- and without assigning reasons. That does not mean that is easy for any government to do so- as I mentioned earlier, the credibility of the central bank and the damage to financial markets and the economy are considerations that no government can brush aside. It's not easy to ask an RBI Governor to go even if the government has the authority to do so.

That apart, the RBI is not in the same position as the Fed. The Fed focuses on monetary policy and has some responsibility for bank regulation. The RBI is a full-scope central bank encompassing monetary policy, bank regulation, exchange rate management, government borrowings, currency management etc. Independence of the central bank is about independence in monetary policy. Such independence cannot extend to the other areas for which RBI has responsibility.

Lastly, chemistry at the top is important. The head of government must have a certain degree of comfort with the central bank chief . Where that comfort level is not there, the government should have the right to replace the central bank chief. That is not to say that the central bank chief must be a stooge of the government- no intelligent head of government would even want that because ultimately politicians in a democracy do feel the need to deliver. And they would understand that having an independent central bank is crucial to that objective.