Inspiration from parables: Financial Express: 23rd JUne 2013

Books on leadership and self fulfilment come in the dozens these days. Especially after the financial crisis there is a lot of advice being provided to CEOs as to how they should run their business. Prakash Iyer, in his most recent book, The Secret of Leadership, has the reader guessing as to what one means by leadership. It is more in the nature of the sublime search for the leadership inside you and how one should react to situations when leading your professional life. It is a sort of self-help book which tells us how we should look at life and carve a niche for ourselves. The word “leader” is hence used in a broader sense and there is a hard attempt to extrapolate all the parables and anecdotes to a quality of a leader defined this way. The stories of Julio Iglesias or the making of KFC are well known today as to how one conquered adversity and flipped the coin towards the success zones. Iyer would call that as being a part of the broad class of leadership.
The book is divided into four parts and has several little stories that last for three-four pages. It starts with “the leader within” and moves over to the “leader’s mindset” and traverses the “leader’s way” before the finale on “leading teams”. Iyer gets endorsements from the likes of Madhukar Kamath, Rahul Dravid and Nitin Paranjpe, which is significant. Let us see some of the lessons that Iyer has got to give the reader in his framework. We need to run our own race and should not worry about the kind of work we get to do as everything is important. The lessons we learn early in life are important and to illustrate this Iyer gives the example of the mother giraffe which keeps kicking her child to be prepared to face reality, which is escaping from the predatory animals. To discover the inner leader in ourselves we need to have what the acronym PHD signifies: passion, hunger and discipline. An interesting analogy drawn for explaining tackling adversity is the “tea bag” test where the tea tastes better after being dipped more in hot water. The mindset of a leader can also be stylised. There has to be the hunger for achievement and therefore, both a final and intermediate goal should exist. Some wise advice is also provided here that our own outlook to life determines how we view people. We need to conquer fear and not look at the missing piece in our life but concentrate on what we see in front of us. This saves a lot of time and energy. Above all, Iyer reasons that we should not listen to people who discourage us and uses the parable of the frogs which climbed the tower. The third section of “the leader’s way” is a continuation of the mindset, with stories from all over. Tendulkar’s uncompromising full sessions at the nets are noteworthy. He says something which most corporate leaders don’t do—reward the staff before the service is provided, where he shows how waiters work better when the tip comes in advance. Leaders go a step ahead in getting the personal touch and his personal experience with Indra Nooyi is mentioned where she remembered the author’s bandaged hand after she meets him months after the incident. There are some idealistic advice given here, like one should do what one loves and not use harsh words as they cannot be withdrawn – not something which is true of most CEOs today who are quite brash and still respected in the media. This is where the book appears to be talking of characteristics which normally do not hold in real day life. On the positive side he draws the experience of Nelson Mandela who invited his jailers for his swearing-in ceremony—something which is really rare in real day life. The final section on leading teams has some interesting insights. Leaders should have faith in every member of the team and not try and assume that they have to cover for everyone. The book is not really one of success stories but more a set of ingredients of what goes into a successful leader, where a leader is not really a CEO or prime minister but anyone who has a zest to succeed; and with the right qualities also lead a team successfully. It is easy to read this book, though at times it appears that more is being drawn from parables connected to the quality of leadership. Call it poetic or author’s licence.

Much ado about the repo rate: Financial Express 14th June 2014

As we approach the announcement of a monetary policy review, there is the inevitable debate over whether or not the repo rate will be lowered. The call is invariably for RBI to lower it further to spur the economy. The fact that inflation has receded with growth still stagnant provokes this sentiment to be expressed again. Last year, RBI took the stance that the government has to get its house in order and until it did, monetary policy will not make an impact. And in between, India Inc groaned that there was policy paralysis and even if the government did not take any policy decision, the least it could do was not come in the way of the private sector.
Everybody did their bit towards the end of the year. Parliament tried to pass some Bills, with limited success, while others were kept in abeyance. The government actually got the fiscal deficit under control and has actually lowered it to 4.9% in FY13 with a promise to credibly rein it further in FY14. RBI provided support with 100 bps cut in repo rate and 75 bps in CRR. Yet the economy has displayed an unchanged picture. RBI has always maintained that its primary focus was inflation and its expectations; and as long as inflation was high, there was limited scope to lower rates. Yet the RBI response has been quite ambivalent where a similar inflation scenario in the last three policies where the policy rates were lowered by 25 bps each time (a total of 75 bps) and CRR by 25 bps. All the policy notes had one common line of caution that there was limited room for further cuts. But the cuts did surely come in, which makes the market expect one more rate reduction this time. While one can always ask RBI to cut rates further, the questions to ask are whether or not such cuts really work and whether this is a solution for our problems. The view here is that we may be overstating the importance of the repo rate as a tool to spur growth. There are two arguments here. The first is theoretical. RBI has tended to follow the path of the school of Rational Expectations which was popularised by Thomas Sargent and Robert Lucas, who spoke of the shock factor required to make policy effective. Their view was that monetary policy is impotent in case there is perfect information available to economic agents—which means that if the policy stance is clear and the authority sticks to it, then policy is not effective. The rationale is that all economic decisions are taken based on a stated policy framework which leads to an optimal solution. Therefore, the policy move would be ineffective. As a corollary, the only way to make it work is to surprise economic agents. Keeping this somewhere at the back of the mind, RBI has tried to state its objective of inflation and then tried to go against the tenet by lowering rates. However, the market has always expected such a move—supported a lot by the government, which has continuously urged RBI either directly or by innuendo to lower rates. It is not surprising that rate cuts have not really worked. In a lighter manner, the Rational Expectations school says that the only way to make policy work is to fool the market, but when the market is ahead of the curve, the surprise is not really there. The other argument is more practical which RBI has been commenting on. The transmission mechanism is tardy in the banking system. We have seen last year that while RBI got the repo and CRR down, the base rate actually changed by just 30-50 bps even while deposit rates came down by 25-100 bps (1 year). The post Annual Policy base rate has not changed in FY14. Clearly, banks, which are the intermediaries when it comes to passing on the repo benefit, have thought it better not to do so. This has also helped in a limited way to improve their profits given a higher base of deposits relative to credit. The question arises as to why should this be the case? The banking system is free and interest rates are set by individual banks. RBI sets the benchmark but it is left to them to take a call, and the only regulatory part is where the base rate is formula driven. If the cost of funds comes down, the base rate has to come down. Assuming an upper limit of R1 lakh crore being borrowed on a daily basis for the year through the repo window, 1% cut in repo rate over the year translates to R1,000 crore savings for the system. Given that for the system the total interest cost in FY13 was around R4.75 lakh crore and around R80,000 crore in terms of net profit for a set of 42 banks, this additional saving does not really alter the cost for them. Therefore, there is no major gain for them and the repo change is at best a signalling mechanism. Banks evidently look at their own books and the capital requirements as well as NPA and restructured loans books and then take a call on whether they should be lowering rates. Evidently they have not really gone ahead aggressively in this direction, which is justifiable. We evidently need to have the economic climate improve to address these issues. All this means that to project RBI action of interest rates cut as being, what the Bard would have called, the ‘be all and end all’ of our problems is misplaced, and exaggerated. With the initial transmission mechanism being weak between RBI and bank action, and that between banks and industry nebulous—after all investment just does not take place because rates come down by 25 bps, we really need to have all the policy elements work in unison so that we arrive at a concerted solution rather than a piece meal one which is the case today. Investment and growth will take off once we see affirmative policy action along with concrete government expenditure on capital projects and lower interest rates all together. Individual initiatives would at best assuage sentiment for a while and it would be back to the status quo. Curiously, over the last year, the stock market too barely blinked on all the eight occasions when the policy was announced—either with or without a rate cut. A case of the market already factoring in the policy action or inaction?

What’s Behind the Declining Rupee: New York Times 13th June 2013

The Indian rupee, which is known for being mercurial, has only cemented its reputation after its recent sharp slide to a record low, dropping from 56.51 rupees per dollar on May 31 to 58.41 on Thursday. However, the currency’s poor performance began earlier this year — since late April, the cumulative decline has been 8.7 percent, with a 4.2 percent fall in May alone.
A falling rupee is a concern because it is a signal of weakness to the external world, and a weaker currency makes it more expensive to buy imported goods like oil, which in turn aggravates the problem of inflation. And a softening rupee increases the implicit cost of India’s high foreign debt.
The government’s reaction has been predictable: Officials like Finance Minister P. Chidambaram have been assuring the public and investors that the drop in the currency is a temporary phenomenon that has also been witnessed in other countries and that they are working at stabilizing the rupee by addressing issues that affect the inflow of capital.
The question, however, is whether their reassurances are enough to stem the rupee’s fall. To answer that, we have to look at the two sets of factors working to undermine the rupee. The first is fundamentals and the other is sentiment, both domestic and global.
At the basic level, the rupee falls when more money is coming into the country than what is leaving. Foreign institutional investor flows have been negative for all the trading days in June (for a total of $2 billion), though they were positive in May ($4.4 billion). But what is more important is that foreign investors have been moving out of debt, which gives a signal to the Reserve Bank of India, or R.B.I., to avoid cutting interest rates in the near future.
The second fundamental factor involves the country’s trade deficit, which is becoming a more serious problem, judging by the government’s mounting concern about gold imports. The latest comments came Thursday from Mr. Chidambaram, who pleaded with Indians to stop buying gold. Gold and oil constitute around 45 percent of imports, and with oil price remaining steady, evidently gold imports have upset the apple cart.
Further, one can surmise that foreign direct investments and other inflows have not quite made up for the trade deficit, as evidenced by a decline in the country’s foreign currency assets by $3.1 billion in the last week of May. Clearly, India’s balance of payments has turned perverse, which justifies a decline in the rupee.
However, investor sentiment is also playing a critical role in the rupee’s accelerated slide, and this germinates from both global and domestic waves. At the global level, investors have been worried that the Federal Reserve will end its government bond-buying program, which was designed to keep American interest rates low to stimulate the economy, after the Fed chairman, Ben S. Bernanke, suggested that the program may be scaled back in the near future.
The implication is that if this happens, then the foreign funds that have been moving to emerging markets looking for better returns will return to the United States once bond yields there firm up. This would mean that there will be fewer flows to these developing countries, including India, which would pressure the balance of payments and in turn the domestic currency.
This explains to a large extent an apparent paradox in the global currency market, where the dollar has been weakening against the euro, yet has strengthened against the currencies of most emerging markets that have been recipients of fund flows. Brazil’s currency has depreciated 7 percent in May, while the Mexican peso has fallen 4.9 percent, the South Korean won by 2 percent and the Russian ruble by 3.5 percent. This is a point that the Indian government has been emphasizing, that the rupee’s fall is part of a global phenomenon and so there is no reason to worry as things will settle down eventually.
The problem is that when fear sets in the foreign exchange market, it often reinforces the fundamentals. The threat of a further decline in the currency causes importers to rush in to buy dollars while exporters will hold back their dollars for conversion, thus exacerbating the demand-supply gap. This is where the Reserve Bank of India intervened last year, by forcing exporters to bring in their dollars when the rupee fell to its previous low.
The other sentiment wave flows domestically, from the government and the Reserve Bank of India. The more the government and central bank point out that the gold import situation is serious, the more investors believe that economic conditions are worsening and that nothing much can be done to control the slide.
In addition, investors keep expecting these authorities to comment on the dollar, but it’s a Catch-22 for the officials: if they say something that is perceived negatively by investors, the rupee will weaken further, but even if they stay quiet, investors may interpret the silence as a tacit acceptance of the current decline, which would cause yet another sell-off of the rupee. In fact, the free fall of the rupee that caused it to cross the 58 mark on Monday and near the 59 mark on Tuesday can be attributed to these sentiments. This is okay.
Rupee depreciation does have its advantages since it makes Indian goods cheaper overseas and therefore more attractive to consumers, which benefits exporters. But these days, exporters may not actually see significant gains as the global economy is still stagnant and the price advantage on exported goods may not materialize any time soon given their relative inelasticity. In fact, some importers of Indian goods are asking exporters to lower their prices on account of this price advantage.
So, with all eyes on the rupee, investors are waiting for central bank to intervene in the market. This usually starts with some large public-sector banks selling dollars in the market, which could have been one reason for tempering of the rupee’s fall on Tuesday. The second defense is through direct intervention by the R.B.I. to sell dollars in the market. This will directly affect not just the fundamentals but also sentiment. But given that India’s foreign currency assets have at best been stable at around $ 260 billion, there are limits on such intervention.
Under these conditions, it looks unlikely that the R.B.I. will lower interest rates at its next meeting on Monday. The focus will be on ensuring stability in the foreign exchange market before taking further monetary policy action. The recent upgrade in India’s outlook by Fitch Ratings will be a comforting factor, and the R.B.I. will try hard to get the rupee in order before pursuing its goal of easing interest rates to take the economy forward.

Putting consumers first: Buisness Standard 13th June 2013

festschrift with contributions from leading global and Indian economists examines the world economy from an unusual angle

All growth models talk about enhancing efficiency, and elaborate on the policy enablers to ensure that we are on the right path. It's not surprising that the focus of policy is almost always on business and that we tend to forget about the consumer. It is not just a case of consumers not being informed or getting an unfair deal; at times, policies that enable successful business end up making consumers pay more.

Take, for example, those banking services whose fine print you do not notice. Or a standard parking ticket that takes no responsibility for theft. Or the pension fund that actually takes away a large portion of your savings as operating expenses. This is where Consumer Unity and Trust Society (CUTS) comes in. It has been working for the last 30 years to deliver consumers a better deal in all respects. The credit goes to Pradeep Mehta, whose 65th birthday has been celebrated with a rare tribute - a collection, or festschrift, comprising 30 essays in his honour. Nitin Desai and Rajeev Mathur, editors of this volume, cover three areas - trade and development, competition and regulation, and governance within the country and globally - and draw attention to the importance of addressing consumer interests. Some of the best minds of the world and India, such as Pascal Lamy, Bipul Chatterjee, Martin Wolf, V Vyas and T C A Srinivasa Raghavan, share their views through a set of terse writings that highlight the inadequacies in our systems and the way ahead.

We all talk about free trade and the need to make the World Trade Organisation (WTO) work. But we have seen that, ever since the multiple global crises, most of these rules have been flouted: countries, pursued by interest groups, have worked towards ensuring that goods do not traverse borders seamlessly. Therefore, all the engines working towards solving problems in trade, climate, food security, poverty and so on have come to a standstill. With the growth of mercantilism, trade is manipulated through the subtle use of non-tariff barriers - such as exchange rate variations and subsidies - within the broad guidelines set by the WTO. One of the biggest losers, according to Ratnakar Adhikari, is the entire set of less developed countries that have been marginalised, even as the rest of the world has exploited their fuel and mineral resources with little value addition along the way.

Competition is desirable, and good regulation is necessary to ensure that rules are obeyed. Here, S L Rao laments the phenomenon of a multiplicity of regulators - with the appointment of retired bureaucrats, who are subservient to ministers and other bureaucrats in service. It is, therefore, natural that one cannot expect fair play. In this context, T C A Srinivasa Raghavan differentiates between three kinds of institutions: those created by the Constitution that "work"; those created by Parliament that "do not necessarily work" the way they are supposed to; and those created by the government that are least independent and almost "never work".

At the global level, too, Frederic Jenny points out that while competition per se went outside the purview of the WTO in 2004, it cannot be ignored and we need to check the proliferation of cartelisation. An interesting example quoted here pertains to the weak laws in Peru that protect only "reasonable" consumers, where one is defined as being reasonable if he or she knows what they buy - quite absurd for any developing country where a large number of people are illiterate.

On the issue of governance, Arun Maira discusses the need to ensure that the institutions serve the broader community for the system to work more efficiently, while Bibek Debroy talks about a participative approach between institutions, urban local bodies, and communities for better healthcare delivery. An interesting detail shared by Rajeev Mathur is that India, with just one per cent of the global vehicle population, scores very poorly on road safety - one in 10 road accidents takes place in our country and we account for every sixth road crash. Evidently, there is a problem with the way roads are built and traffic managed.

At a different level, Rohinton Medhora discusses the changing balance of power in the world. He feels that if more fair-play policies are to be enunciated and accepted, there is a need for greater inclusion of countries that are smaller and less developed but matter in the larger scheme of things. This is where institutions like the G20 matter.

Martin Wolf seconds this view. In fact, he goes one step ahead and suggests that developing nations should assume a more aggressive role. He looks closely at India and presents three choices: do nothing, turn away from the world economy, or become a leader. He fears that we may go for the first one, which would be incorrect because free riding will no longer work.

This collection is not just interesting but also enjoyable because the authors have discussed issues from the consumer's point of view. Several lessons can be drawn. One, consumers are citizens who deserve a decent life. Two, their interests must be powerful and we should not let other interest groups trample over them. Finally, voices must be raised for affirmative action and continuance of fair-market practices supported by strong legal, political and social systems. And CUTS has done a great service by reinforcing these concerns in various fora. We can expect more to come.

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GROWTH AND EQUITY
Essays in Honour of Pradeep Mehta
Ed: Nitin Desai and Rajeev D Mathur
Academic Foundation; 222 pages; Rs 995

It’s the rupee again Financial Express JUne 16, 2013

The rupee has become the joker in the pack once again. Not a long time back we had analysts talking of the rupee appreciating with serious talk of it reaching the 50 to a dollar mark and the debate was on how soon this would be a reality. Going one step forward economists were already discussing on what RBI should do to stop the appreciation given that exports would be impacted. Everyone seemed to be gung ho about the India story and the fact that exports looked positive between January-March added to the conviction.
The month of May has been more than interesting for the currency market with all attention on the falling rupee (depreciation of 5.1% in one month). On the face of it, there appears to be nothing new really happening—we still have our normal serious CAD problems but FIIs are generally positive with more inflows than outflows. Why then is there this new phase of panic? There appear to be two sets of factors here. The first is physical numbers that are driving the rupee and the other is pure sentiment. The demand-supply of dollars is important as it is fundamental in nature and actually drives the currency. Exports do not quite appear to be growing and demand for imports has gone up. The twin causes remain the same—gold and oil. While the fall in gold prices gave us reason to cheer, our natural tendency to increase demand when the price falls has caught up, thus leading to demand being sustained. The government and RBI have tried all methods to control this demand, with limited success. While demand for gold coins or credit to buy gold can be curtailed through fiat, the same does not hold when one buys jewellery. This has been a concern and a tough one to crack. The move to raise the duty rate to 8% is pragmatic and will help as the only way to stem demand is to make the price unattractive. Global crude oil prices appear fairly stable, but the problem appears to be with rising demand which has caused importers to rush in to buy dollars to meet this requirement. One cannot be too sure of what is happening on the other front—invisible account, but FII investments have been positive for most of May. In fact, between May 1 and June 4, there have been net outflows on 7 of the 25 working days. But, given that there has been a decline in the country’s forex reserves by around $2.5 billion, this could be the ultimate ‘physical’ factor working in pushing the rupee down. The other related factor is the stronger dollar. The dollar has actually strengthened against most of the emerging markets currencies in May, which means that what is happening to the rupee is not really out of the ordinary. The strength of the dollar may be attributed more to the positive prospects of the US economy, though institutions like the IMF are still guarded about the final outcome. The news that QE may be aborted earlier than expected has also made the dollar appear stronger. And this is where sentiment plays a role because once the world believes that QE3 will end earlier, it implies that there will be less dollars available for investment purposes, which, in turn, provides a boost to the currency and the emerging markets get affected the most. Therefore, depreciation of currencies of countries dependent on the US for capital flows has witnessed sharper depreciation than most of those of the developed countries. In the forex market, sentiment is always self-fulfilling and hence when the market expects the rupee to fall, importers rush to buy dollars while exporters hold back their earnings to the extent possible to realise higher returns. What is moving sentiment then? The first is panic where reiterating the need to control gold imports exacerbates sentiment, as the market takes it that this issue is insurmountable. Second, RBI has been talking of the CAD being a major threat, which is interpreted to mean that RBI will not cut interest rates which weaken the rupee further. Also, such an announcement is also taken to mean that RBI would probably not really intervene in the market to defend the rupee to provide a competitive edge to exporters. This makes the possibility of unchecked depreciation more credible, driving down the rupee further. Can anything be done to stem this fall? The answer is ‘not really’. The best that can be done is to have limited comments on the external front as any statement is taken out of context to add to the panic. While expressing concerns over gold imports or the CAD are legitimate, too much of emphasis adds to the emotion. One may not be able to control the currents flowing from global markets on the action to be taken or not taken by the Fed, and hence sentiment will still continue to drive down the rupee. Based on fundamentals, there could be little that could be done given that imports are largely free and exports are driven more by external conditions than from the supply side. At the policy level, there could be some urgency shown in moving ahead in the area of FDI or liberalising ECB limits further, though there are arguably pitfalls of building up our external debt stock if companies borrow more from the global markets. FDI liberalisation, per se, may improve sentiment in the very short run, though to really make an impact, we need to see more dollars actually coming in which will, of course, happen over a period of time. The issue with the fall of the rupee is that we are ourselves not sure of how RBI will behave. While RBI has always maintained that it does not target an exchange rate, the market always creates a number and then builds expectations around until such time RBI actually intervenes to stabilise the rupee. RBI will have to relent at some time because a depreciating rupee also means higher imported inflation. Therefore, volatility may be expected to prevail until such time RBI actually intervenes, which though not desirable, may be the last resort. And surely this market will wait for this action.

Why are we always anti-poor? Financial Express 30th May 2013

Food Security Bill and MGNREGA should be restructured to target the right sections
Today it is sexy to criticise two programmes of the government, the proposed Food Security Bill and the MGNREGA. While they may be laced with political overtones, they are necessary and have helped in moving towards the goal of inclusive growth. The arguments here favour the continuation of them with certain improvements. The tenets of public economics argue that governments should address distributive justice and taxes mobilised should be redistributed to the needy. However, over the years, the focus has changed and public opinion is moulded by the elitist view. Therefore, investors are more important than savers, lower taxes are more desirable for productive sectors than for the middle class, and government spending is acceptable only in case it is productive and so on. We do get overtly critical of the ‘why’ and ‘how’ of anti-poor programmes. Almost everybody will agree that we need to have inclusive growth and that the current model is unable to bring a large number of people out of poverty, and malnutrition still exists. Also, we talk so boldly of demographic dividend when we have a large working age group which has no serious employment, and given that public education is pathetic, those using this medium practically stand little chance in this competitive world. Therefore, direct action is needed to alleviate suffering. The official poverty estimate in India is around 30% where the definition is based on those who are on the verge of starvation and is, hence, very rudimentary. Therefore, when food security talks of covering around 70% of the population, which is about the same number going by the World Bank definition of $2 a day, it is certainly not bizarre. Also, the current PDS deals with around 55-58 million tonnes of foodgrains, while food security talks of around 63-65 million tonnes, which is not incrementally unmanageable with large stocks (about 77 million tonnes as of May 1) lying with the FCI. It is ironical that a country which talks a lot about inclusive growth is against such a programme that offers sustenance to a large number of households. Surely, there are leakages, but the answer is to plug them rather than abandon or truncate the programme. In 2007-08, leakages were estimated to be as high as 40%, which has come down to 10-15% according to the government. Curiously, the Budget talks of tax foregone by the government for FY13 on account of customs, excise and corporate tax being around R5.25 lakh crore. If we are not willing to question whether or not these cuts have led to increase in efficiency or output, is our judgement clouded when we talk of a food subsidy bill of R90,000 crore overshooting by around R25,000 crore? One set of breaks helps growth, while the other helps prevent starvation—both of which are responsibilities of governments. Some of the well known examples of progress are the empowerment of women in Bihar where cycles have been distributed free to girls. In Tamil Nadu, sewing machines and television sets have been distributed to provide access to the poor to these amenities. In Andhra Pradesh and Tamil Nadu, supply of rice free or at a low price has kept people out of hunger. Direct transfers certainly help and the only improvement required is targeting the right group. The other issue is the MGNREGA where households are assured 100 days of work for a minimum wage. Started in 2005, this scheme has been a game-changer as it has elevated the levels of living of the rural folk. The government allocates around R30,000 crore every year which helps farmers between the two seasons and ensures that there is a flow of income. There are four complaints here. First, the scheme does not create capital. Second, there is adverse selection. Third, it has increased the level of wages across the country by raising the benchmark. Last, MGNREGA has added more money in their hands, which has increased demand for protein-based food contributing hence to food inflation. The average wage paid for MGNREGA has increased from R60 a day to around R120 in FY14. Therefore, we are talking of doubling of wages in 7 years, which is an average growth of 10.4%. In this period, the CPI inflation rate for agricultural labourers averaged 9.7%. Therefore, the increase in wages just about takes care of the inflation that these families faced. The argument is that when employee compensation is being increased in the organised sector by 10-15% every year in the private sector and by inflation indexed amount in the public sector, is there anything amiss in paying a higher wage to these labourers? The issue really is that this increase in wages has affected certain industries such as construction, small industry and services where higher wages have to be paid, which, in turn, affects the profit margins of entities. Our mindsets need to change. Further, no system should blame a certain section of people for fuelling inflation through higher consumption as having higher levels of income cannot be the prerogative of the higher income groups only. Economies have to strive towards higher production and such expenditure has played a Keynesian role in increasing demand and growth. Most certainly, the MGNREGA programme should be redesigned to move from being one of ‘digging up holes to fill them up’, to something that creates capital so that it is more productive. But, the current state of the scheme has been very useful for empowering the poor notwithstanding the leakages—which can be addressed by UID. The hallmark of capitalism is when all policies, performance parameters and critiques pivot around pure growth numbers. As long as this is achieved, everything is acceptable, which is what Max Weber’s Protestant Ethic was all about. It is not surprising that we do make role models of those who have excelled in enterprise. This obsession for growth narrows our vision and every policy action is geared towards increasing this number. But we should not ignore the needs of the poor. While there could be political motivations for rushing through with food security, it should not matter as long as there is something good which is happening as someone is benefiting irrespective of the leakages. Our focus should instead be on restructuring these programmes and targeting the right sections. That would be a prudent and humane approach.

The six tenets of a wise leader :Financial Express 26th May 2013

From Smart to Wise is an excellent book on leadership that advises every leader to find his or her own wisdom logic
Leadership is always assumed to be smart, especially if we define ‘smart’ as being intelligent or ‘successful intelligence’. All CEOs or leaders normally fall into two categories—being either functional smart or business smart. If one is functional smart, you are on a narrow path with focus on operational excellence. The organisation ends up looking at profit, but misses the topline story. If you are business smart, you look at growth that loses momentum after a point of time. This is how Kaipa and Radjou broadly classify leaders in the business world. What they suggest is that neither of these two models is desirable and we need to become ‘wise leaders’ who are mature, resilient and flexible. That is why their book is titled From Smart to Wise, as the authors chalk out the path for this transformation so that leadership is sustainable in a complex changing world. All of us look at the world through a set of filters. Blue goes with functional leadership where the CEO is comfortable in a limited zone. Focus is on being grounded, execution and expertise. If you are a smart leader, the filter turns red and the focus is on vision, drive and risk taking. The authors evidently want them to move out of these zones and give the example of Bill Gates, who changed his own image and style after the anti-trust laws were haunting him to turn a philanthropist. We need to incorporate ideas such as prudence, judgment, humility, ethics and common good, and move away from these standardised filters. The authors urge leaders to move away from their own strengths and winning formula, and step out into the world so that they see all colours. It is not surprising that names like Narayan Murthy and Mahatma Gandhi feature as the ideal role models for them. The transition to becoming wise is based on six interlinked tenets that lead to the ideal combination. These are perspective, action orientation, role clarity, decision logic, fortitude and motivation. Though these tenets do not appear to be connected, they do follow sequentially. Let us look at perspective first. Leaders need to find their own North Star according to the authors. They need to ask themselves as to what inspires them and how do they pursue this goal. There is need hence to start with introspection before taking any action because this perspective that we have is based on the sum of our experiences and knowledge, which has to be blended with the final goal. They give the example of Aravind Eye Care System, which brought vision for several challenged individuals at a low cost. This way we eschew being narrowly focused like the blue filter or self-centered if caught in the red filter. The example of VR Ferose, managing director of SAP, testifies the second trait of being action-oriented, where leaders need to identify with their people and lead them. Most leaders tend to follow systems that are either ‘borrowed’ from B-schools or ‘fake’, where they pretend to be what they are not. What is required is that they need to be authentic. Here, they also show leaders like Gandhi, Steve Jobs and Alan Mulally hit the right chord. Indra Nooyi is another example of a leader who has taken Pepsi to new heights with a focus on society—sustainability, nutrition, water conservation, costs, energy savings and so on. On role clarity, the authors argue that wise leaders should not let ego or personal needs come in the way. Drawing from Chanakya’s advice to kings, they extrapolate to conclude that leaders are actually paid servants and should work keeping this in mind. Of special interest is how Murthy went out of the way to share his experiences and strategies with competitors when awarded the prestigious award from Carnegie Mellon for certification of highest level of Capability Maturity Model (CMM). Infosys was one of the first companies to offer stock option that made all employees millionaires. Therefore, when role clarity is aligned with perspective and one takes authentic and appropriate action, it lays a solid foundation for the creation of wise leadership. Moving over to the fourth step, the authors describe decision logic. Steve Jobs started retail stores based on intuition. This separates wise leaders from smart ones. They need to have the sense of discernment and act based on keen insights and judgment. What goes behind such logic? The authors say it is logic, bias, emotion, discernment, discrimination and ethical clarity. Another example provided is how IBM’s Sam Palmisano acquired PwC’s consulting business and increased investment in R&D, which turned out to be a good move just at the time of the dotcom bubble. On fortitude, what is important is the wisdom to know ‘when to hold and when to fold’. Often leaders hold on even when it is time to re-evaluate their options. Alternatively, they give up easily and get impatient when things do not work out. Often new leaders roll back almost all decisions taken by predecessors just for the sake of it or for proving a point. This is where wisdom has to be displayed by leaders. Finally, wise leaders discover the driver for motivation. Ratan Tata was motivated by a road accident he had seen in Bangalore of a family on a two-wheeler and came up with the idea of Nano. OP Bhatt was able to motivate the entire SBI staff by focusing on employee engagement, customer service and technology infrastructure, which more than compensated for the inability to provide monetary rewards. The Gitanjali Group employs a large number of disabled people, which ensures commitment, gainful employment, loyalty, diversity and a motivated set of staff. This is sheer motivation in wise leadership. Kaipa and Radjou argue that every leader has to find his or her own wisdom logic. While ideally one should imbibe all the six traits, normally one would be close to just one or two of them. This is an excellent book on leadership, which should prompt the reader to actually introspect and figure out where he or she stands. There is a fairly comprehensive questionnaire in the book at the beginning where one can actually find out the areas for improvement, provided we are willing to look beyond our standard filters. The crux is to accept that there is something amiss and that there is scope for becoming wise, so that one can look at all the colours and move out of the narrow confines of the existing filters. From Smart to Wise Prasad Kaipa & Navi Radjou Random House Rs499 Pp 250

Crisis management: Financial Express 12th May 2013

a book brings back to life the principles of Keynesian economics and interprets them in today’s environment of global economic crises
‘The objective of economic policy is to defend dark forces of time and ignorance which envelop our future.’ This statement of Keynes is quite profound, especially when viewed in the context of the economic crises in the global sphere since 2007. Hirai, Marcuzzo and Mehrling in their book, Keynesian Reflections, bring back to life the principles of Keynesian economics and interpret them in today’s environment. This collection of essays is vintage debate, which, though targeted at the esoteric reader, drives home the point that Keynes is very much relevant and the demand side of the story cannot be ignored. The authors get into the classic discussion of the superiority of Keynes over his opponents, more notably, the protagonists and followers of New Classical Economics and Monetarism. To argue that markets do automatically clear is questionable as they cannot be in a general equilibrium all the time. Besides, the crisis of 2007, which affected all nations, was a crisis of the financial sector and the new classical theory cannot address this issue as the mathematical models do not include this element. The message is that one cannot separate these two sectors and assume equilibrium even of the dynamic stochastic variety. There are essentially four issues that are discussed through a collection of 14 articles that are Keynesian in spirit. The first issue relates to effective demand in a crisis. The problem is one of demand that has to be addressed by higher government spending and provision of liquidity, which is being done partly by governments today and is clearly a pursuance of Keynesian economics. The problem, according to the authors, is not one of debt and deficit, but demand. Growth theories say investment is dependent on the marginal efficiency of capital and the only way out is public investment, especially when the math does not work out in the private sector realm. In its absence, income will fall, which, in turn, will drive down demand and, in turn, again income. Therefore, public spending on investment and not consumption is the answer because this will create forces to move the economy to fuller employment levels. The higher investment and growth thus generated will compensate for the cost of debt and deficits. The authors give examples of the US, Japan, Germany, Spain and UK to show how higher wages led to higher demand and output in both the short and long runs. Higher government expenditure financed through higher taxation helped to speed up the process, which was aided by favourable credit conditions. The second set of issues is centred on economic theory during a recession. Which is the right one? Is it Keynes, or new classical or monetarism or business cycle hypothesis? The authors look to Keynesian principles for a solution. Here, they look at Japan and the euro crisis. Japan was a victim of exchange rate misalignment wherein the weaker dollar eased out Japanese exports even while it pursued market principles. This, combined with fiscal austerity, thwarted domestic demand, lowering the marginal efficiency of capital. In case of the euro crisis, which started with Greece, the solution was aid through the IMF, ECB and European Commission, which have put strict conditionality for the assistance provided. This, in turn, has led to deflationary forces. More fiscal action is really required under these conditions that cannot be done on account of the conditionality package, which is hindering the recovery process. They also give examples of how the Washington Consensus, which espoused reforms and less government and austerity, led to the collapse of Argentina. The same principles after the east Asian crisis fared no better as high current account deficits were passed on by nations thus aggrandising the crisis. The third issue relates to the state of money and liquidity. Keynes had always argued that the monetary side has to be related to the real sector. Going by what was propagated in the Treatise on Money, way back in the 1930s, we are actually doing exactly as Keynes had suggested—quantitative easing and low interest rates close to zero. The crux lies with the concept of ‘liquidity preference’, which was at the core of his theory. The easing through buyback of securities has helped banks but, unfortunately, they, in turn, have not gotten into the lending mould and have been substituting one kind of non-performing loans with another. Fourth, the authors talk of finance and economic disorder. Here, there is an interesting observation made in terms of 'financialisation' of the global economy in three ways. The first is of commodities wherein speculation through futures trading has led to a disproportionate increase in prices of commodities. This has been the first causality as Keynes would have argued. Second, money market capitalism has got the otherwise staid funds such as provident funds, money managers, etc, create an asset boom that led to a bust subsequently. This is what has been termed as layering and leveraging of the existing levels of production and income. Third is the ultimate ‘financialisation of globalisation’ where the financial crisis was funded in the global market through cross-border banking, which is now going through a phase of reform. Keynes had warned earlier that we need to have shared responsibility of debtors and creditors. Therefore, collective action should be placed before self-interest and pursuance of individual liberty should be subject to stated norms. There had to be a balance between extreme liberalism and pervasive government action. More importantly, the quality of income distribution was important and institutions such as trade unions, minimum wages, employee rights, social protection and unemployment protection were fundamental to stability. Dismantling these institutions in the pursuit of higher flexibility and efficiency of free markets often engenders the onset of a crisis. Finally, would Keynes have supported the euro? He was for a European Payments Union which would endorse free trade between them. But he was against a system where the country had no control over monetary policy and exchange rate, which is the problem with the euro today. This book is a delight for the academic, but could be challenging for the common reader. The authors assume a basic knowledge of economics and Keynes that may not always be the case. Notwithstanding this lacuna, this is an exciting book and our own policy makers should read this carefully as a lot of these principles are pertinent for us today. We may have to, after all, become Keynesians now. Keynesian Reflections: Effective Demand, Money, Finance and Policies in the Crisis Toshiaki Hirai, Maria Cristina Marcuzzo and Perry Mehrling Oxford University Press Rs850 Pp 317

The interest rate-growth disconnect: Financial Express 3rd May 2013

Data supports RBI hypothesis that interest rates cannot be directly linked to growth as loans are only a facilitator
In the last two years, the Reserve Bank of India (RBI) has been constantly chided by everyone for slowing down the growth process by maintaining a high interest rate regime. The view is that by keeping interest rates high, investment has slowed down, which has affected growth. This has happened without really bringing down inflation, which is more structural in nature. RBI, on the other hand, has always argued that the link between interest rates and investment is tenuous, and there is evidence to show that low interest rates by themselves cannot bring about growth. This argument sounds right because nobody borrows money merely because it is cheap—like merely because interest rates come down, one does not buy a house as other conditions also matter such as own income and price of property. One does tend to look at overall economic conditions, which include not just the economic numbers but also the policy environment before taking a call to invest. Therefore, industry would be looking at future demand conditions, current capacity utilisation, future interest rates, etc, before taking a final call. The best way to see where the answer lies is to look at data. The accompanying table looks at the repo rate, GDP growth rate, gross fixed capital formation rate and growth in credit since FY01. The table provides some interesting observations. The first relation that can be examined is between interest rates and growth in credit, as it answers the question as to whether or not high rates deter borrowing. Declining interest rates between FY01 and FY05 witnessed a mixed trend in growth in credit, which also did not follow the GDP growth pattern as high loan growth was achieved in FY03 when GDP growth slumped to 4%. The interesting part then begins when rates were increased through till FY08, where growth in credit was high in all the three years. Here credit growth can be linked with GDP growth, which was robust at over 9% in all the years. Clearly, when economic conditions are good, interest rate is not a limiting factor, as rising demand enables higher demand for credit as investment also picks up. Subsequently, lower interest rates did not quite push up credit growth to the same extent as the entire world economy was recovering from the scare of the financial crisis. Here notwithstanding high GDP growth, credit growth was cautious. The post FY11 period was mixed: higher rates in FY12 had high growth in credit. But, in FY13, while rates came down, it was not adequate to push growth in credit. The picture emerging is that interest rates have less of an influence on credit growth than GDP growth, which can be taken to be a close proxy for economic conditions. A factor that can sever this relation could be the less flexible transmission mechanism wherein the policy rate change does not trigger similar movements in the base rates to affect demand for credit. The relation between interest rates and capital formation can be examined next. The interest rate regimes in the 13-year period can be divided into four parts. The first up to FY05 was one of declining rates that did see the capital formation rate increase gradually, though the rate was low between 23-25%. However, in the next period up to FY08, investment soared and peaked but was associated with robust economic conditions. In the next two years when rates came down, the capital formation rate remained virtually unchanged, while in the next two years up to FY12 it was higher than in the low interest regimes even though interest rates were high. In FY13, lower rates were associated with a decline in the investment rate. The data presented hence does not show a direct link between interest rates and credit growth and capital formation. The transmission mechanism is important, which has been rigid in these years. Also, expectations of interest rates play a role because if potential investors expect rates to come down further, they would defer decisions. But, more importantly, demand conditions are important because as long as demand is there, there will be incentive to produce and invest. In the absence of demand, which has been the case in India in FY13, there is little point in investing at a higher interest rate. Interestingly, the share of the public sector in gross fixed capital formation has been stable between 25-27% across the years and, therefore, the overall picture is dominated by the private sector—corporate and households. Government contribution to capital formation is not really influenced by interest rates as much as by fiscal compulsions. The capital formation rate has come down, especially in construction activity when the fiscal deficit has been under pressure. Otherwise, the government still continues to borrow at much lower rates than what is charged for the private sector. Also, the trends in investment in machinery closely follow that of overall capital formation. The picture in the last 12-13 years definitely supports the RBI hypothesis that interest rates cannot be directly linked with growth as loans are only a facilitator. While high interest rates do affect the internal rate of return for undertaking fresh investment or the profitability, they are just one element that affects investment decisions.