Convergence for change: Financial Express 27th October 2013: Book Review of The Solution Revolution

Today, despite the fact that we all argue for market-driven econo-mies with less government presence, we invariably want the government to be everywhere. It has to look after the economy, the banking system, eschew a financial crisis and rescue institutions as and when it happens, look after infrastructure, environment, education, health and so on. This is just not possible and often different arms of the government are working at cross purposes. One department works towards healthcare and spends money to lower the incidence of coronary diseases and diabetes, while another provides subsidy to the sugar industry. What is the way out?
It is here that the authors, William D Eggers and Paul Macmillan, conceptualise what is called a solution revolution, where a large number of entities, some openly, while others silently, play a role in addressing these issues. While NGOs and social entrepreneurs are the better-known entities, MNCs and individuals can also make a difference once they become a part of the solution revolution. Concepts like ride-sharing, impact-investing or crowd-funding are all part of this set-up. The questions that will be posed are: Who are the players and what drives a solution revolution? How do we grow the movement and how can we, as individuals, become a part of this movement? The authors argue that there are six features of a solution revolution, which develop, not really by design, but mostly from random initiatives taken by entities or individuals. These serve as templates to be followed by others, which, in turn, work to create this structure. These are wave makers, disruptive technologies, scalable business models, impact currencies, public value exchanges and solution ecosystems. Let us see how these work.When we talk of wave makers, as the term suggests, these are people who make a difference and names like Bill and Melinda Gates strike us when we think of philanthropy. This involves a series of entities again. There are investors, like Acumen, which identify businesses that are dedicated to the poor and invest in these enterprises. It could be a hospital chain in India or women issues in Africa. Next, we need conveners who are able to get these kinds of investors to invest in these businesses. Then step in the innovators who do social activities without a fee and those that are commercial, but make a difference. An example could be the 1298 ambulance service in India, which charges patients according to their ability to pay, and fills in the lacunae of such facilities. Crowd-sourcing becomes an important ingredient here, where the public plays its own part, thus creating a virtuous circle. They give examples of companies that would fall in this category such as Coca-Cola for water management, Shell for poverty reduction, Unilever for sanitation, Procter and Gamble for tetanus vaccination, etc. They work to either double or triple their bottomlines—financial, social and environment. This, according to them, can be called ‘Robinhood redistribution’, where the rich finally pay for the poor in this model.The second feature of a solution revolution is the existence of disruptive technologies. Here, the authors give examples of how mobile phones and social media have revolutionised communications. Add to this the concept of cloud computing, where a large amount of data is available for analytics. These technologies, combined with the Internet, have made transactions of various kinds possible. They give the example of how millions of Indians signed a petition against corruption, which exemplifies the power of social media. The third ingredient that the authors talk about is business models that can be scaled up. Here, they show how car-sharing works wonders as it not only saves on fuel costs and the environment, but also lowers the demand for parking space, which was used in Freiburg, Germany, to create gardens that could be used by citizens. Similar scalable models are to be found in the area of education, where we no longer have to have classrooms, tables, chairs, teachers and other amenities when learning is imparted through the online mode. This model can be scaled across frontiers and, hence, involve a larger audience. And the beauty of these models is that they are commercial, run by private enterprise and yet cheaper as they cut across infrastructure costs. Fourth, impact currencies are defined by Eggers and Macmillan as anything that provides economic functions we can associate with fiat money. These currencies come in different forms. For environment, we have carbon credits, which can be traded and add value to society as well as the players. There are ‘currencies’, where a company links investment to an outcome. eBay, for instance, has a clear policy that allows it to invest only in companies that have a social impact. Citizen capital is another example of an impact currency, where social groups create value from open spaces. At a different level, reputation is another form of currency. Kiva Zip enables ‘person to person lending’, which brings both parties together on the Net. Other non-quantifiable currencies are the supply of data, where the value is realised when a crisis strikes. The authors give examples of how maps available online were actually useful for both evacuation as well as relief operations across the globe when natural disasters strike. This again is a non-government initiative.Impact currencies, in turn, have created the fifth constituent of a solution revolution—public value exchanges. New platforms have been created to enables such exchanges. As mentioned earlier, Kiva enables loans to be transacted, and crowd-funding is an extension, where investors are willing to chip in once the cause is agreeable. The organisation here does not manage the projects, but enables funding by doing due diligence and then throwing it open to the public for their consideration. Last, a solution revolution is related to the creation of ecosystems by companies, which build the necessary linkages. Unilever in India has improved sanitation standards in rural areas in a unique way by building this ecosystem. Using women entrepreneurs to sell custom-made products for the rural folks, the project also involved providing access to these women to funds from MFIs. Offering a mark-up of 7%, they were able to service their loans through their sales and also retain the surplus income while inculcating the new hygiene standards among the people through such products. The authors actually exhort the readers to join the solution revolution by changing the lens through which we see the world. By providing examples all through the book, it makes interesting reading and some of the initiatives taken by companies could be really inspiring. But there are doubts on the scalability of such an answer that is posed by this book. Most of the examples provided are independent actions of enterprises working towards a similar goal, which makes a difference to the specific targeted communities. It is not a concerted action, which is probably needed for an outright revolution. While this will work in the long run, it is not yet a revolution as almost all these models have a commercial value and is philanthropic in a limited sense. Further, the authors do not address the issue of any specific country and social dynamics as well as regulation, which can put spokes along the way. Yet, this is probably the only way we can move given the limitations of the government in terms of financial ability and competence to address these myriad issues. This is a must-read book.

Interest rates: the case for status quo:Business LIne 26th October 2013

The RBI has taken a fairly one-dimensional stance on monetary policy in the last couple of years by linking it to inflation rather than growth. The concept of inflation has varied from generalised WPI and CPI inflation to more specific indices such as core and food inflation.

With the WPI and CPI inflation numbers coming in higher for September, there is a natural expectation that the central bank will increase rates on October 29.

However, there are compelling reasons to believe that the RBI will adopt a neutral stance this time, given the singular conditions that we are witnessing.

INFLATION OUTLOOK

First, while inflation has been higher in September, there is reason to believe that prices would move downwards from October onwards, since we are expecting a good kharif crop which should lead to tempering of food prices. This being the case, a final decision can be deferred for the next policy in case inflation does continue to increase.

As monetary policy is ideally forward-looking, waiting for another month and a half will not do much harm.

Second, the government has been talking of pushing personal loans through incentives such as additional capitalisation for banks beyond the Rs 14,000 crore budgeted for the year.

Some banks have taken the cue and lowered interest rates during the festival season ostensibly to encourage borrowings which will boost consumption.

This being the case, increasing interest rates by the RBI will send confusing signals to the market.

As we are working towards pushing forth demand for consumer goods, status quo in repo rate can be justified.

Besides, as we are banking a lot on the spending cycle being rejuvenated this season, increasing rates at this time will spoil the party. Third, the rupee has become stable in the last month partly due to strengthening of fundamentals, with trade deficit coming down and FIIs in equities turning positive.

Therefore, there is less compulsion to increase rates now to defend the rupee as the internal forces are working well.

In fact, the MSF rate could be lowered this time by 25 bps, as it does appear that the MSF rates were tinkered with keeping the exchange rate in mind while the repo has been sued more for signalling policy stance, with focus on inflation.

BEST OPTION

Last, the Finance Minister has been reiterating that interest rates should come down and even recently has urged banks to lower their lending rates.

With such pressures being exercised, the RBI will probably pay some heed to this concern, and while it may not be possible to lower the rate given that inflation has been rising, a compromise would be to leave rates unchanged.

Therefore, it does appear that a status quo on interest rates would be the best option given that there is lot of hope that the festival season will be associated with more consumer spending and lower inflation.

October rain has passed: Financial Express: Ocotber 26th 2013

The month of October has been quite eventful in world history—for example, the October Revolution in 1917 saw the Bolsheviks depose the Russian Tsar. This October, too, there were fears of a revolution, albeit of a different sort, with the US government shutting down and a default looming large as the Congress battled it out on the debt ceiling. The rock group Guns N’ Roses would have probably crooned ‘October (November) rain or storm’, but finally, it was not to be and turned out to be a damp squib. The problem, though not solved, has at least been deferred, and the global economy can breathe easy till early next year—January 15 is when the federal government's funding comes up for approval again and February 7 is deadline for raising the debt ceiling. Given the backdrop, certain points need to be ruminated on.
First, the quality and role of politics is the almost the same across the globe. While we are overtly critical when there is an impasse in our Parliament and get ballistic with terms like 'policy paralysis', the same happened in the US—realpolitik dominated the day with the Republicans and Democrats not willing cede their respective grounds on the Affordable Care Act. Why do we in India make a big deal of the Food Security Act (FSA) when the largest economy in the world isn't doing any lesser? Just that, in our case the issue is food for the poor, in theirs, it is health. So, the US impasse was indeed a case of politics dominating economics with the world watching in disbelief. Everyone knew that there would be a solution simply because things could not be left in a state in which there was no solution. The suspense, however, was around how exactly the impasse would end.Second, the fact that the policies of the government have to be sanctioned time and again by statute has lessons for us. We have the FRBM Act which lays down rules to be followed. However, resetting fiscal deficit targets is the prerogative of the central government and this is where we can borrow from the US story. Can expenditures be capped, as they are in the US, so that separate permission from Parliament will be required if they have to be exceeded? This way there will be an additional layer of discipline. Presently, the financial minister has worked well around the 4.8% fiscal deficit target, but the issue is whether we can go further. The US model is quite interesting because all such bills need to pass through the Senate and the House of Representatives (where President Obama does not have a majority). Third, a curious fact that got little notice is that even though the US was on the brink of a default for the second time in the last 3 years or so, the credit rating of the country remained intact. It is true that being the anchor currency in the world, dollars can be printed at will, though this is, quite prudently, constrained by regulation. But, despite the fact that the default was credible, on the back of the shutdown, none of the global credit rating agencies have gone for a downgrade. This is where there is ambivalence in the outlook of rating agencies, where India is under the scanner almost every month for a possible downgrade, whether the heat is over the FSA or a high current account deficit or growth figures. This is a pertinent issue which the Indian government has to contend with on a regular basis—the anomaly stands out with the US retaining its rating. It is not surprising that the world is asking for alternative approaches to credit rating which are less skewed. The question is whether or not we are missing something somewhere considering that the possibility of a credible default did cause upheavals in the forex, money and capital markets across the globe where the losses outweighed the gains. Fourth, unless the US changes its laws giving the President unlimited powers to raise the debt ceiling on his own without having to go through the channels, the issue to be debated is whether or not it makes sense to invest in US treasuries. Today, out of the US's $16.7 trillion debt, $5.6 trillion is held by other countries—their surpluses are invested in these bonds. Will this continue with the same level of comfort as before? Countries will soon be looking for alternatives though, admittedly, the options are dwindling with the euro being fragile as well while no developing country's currency is acceptable yet to the developed nations. While gold is an option, given the volatility in gold prices, this may not be meaningful at this juncture. Therefore, the dollar will prevail for some time. Fifth, any correction in the fiscal balances by the US government has implications for the revival of the global economy. Today, the Federal Reserve is working towards tapering its QE programme based on the premise that growth is picking up as unemployment numbers become more acceptable. If it were so, then the equilibrium gets distorted if the US government stops spending. The only real option for the US government is to give up on healthcare. But that would mean political defeat. Alternatively if any other expenditure is compromised, it would mean a setback for growth. Either way, the world economy will continue to be wobbly as the search for a solution lingers. Clearly, there are lessons to be learnt from this episode, considering that it will happen again. The way in which things work in the US are definitely laudable where even the government cannot take things for granted. However, keeping the credit rating unchanged poses a dilemma for analysts given that any default can rock the financial markets all over with a large volume of transactions being reckoned in dollars. Surprisingly, even the CDS rate did not show confidence as it jumped from 22 cents per $100 in September to 38 cents just before October 17. Markets do not spare even the biggest.

Solving the conundrum: Financial Express: 22nd October 2013

One of the areas that Dr Raguram Rajan focused on when he made his first speech as RBI Governor was quality of assets. He had indicated that RBI would be looking closely at these numbers and their originators and that there would be little lenience shown to them. Growing NPAs has been an issue in the last two years with a lot of camouflage being alleged by some in the form of restructured assets.


While the talk has largely been on corporate loans that have gone bad, it is also necessary to look at the delinquencies in the priority sector. For example, in FY12, around half of the NPAs of public sector banks emanated from this sector, which contributed to less than 30% of outstanding loans of banks. We have also seen that there has been a lot of thrust being put on inclusive banking, meaning thereby that banking has to be taken to the poor so that they have access to the formal system and do not have to go to the moneylenders. To this effect, RBI has linked new bank licences with the opening of 25% branches in non-banked rural areas. The contention here is that while NPA growth is serious, there can be some contradictions with the objective of inclusive banking as the propensity of priority sector loans going bad appears to be higher than that of regular loans.

Priority sector lending has been spoken a lot by banks as it is politically correct to do so. Also, there has been the non-bankable segment that was supported by MFIs, which later became controversial on account of the high rates charged. Using counter-intuitive logic, if the non-bankable was bankable, then banks would have already been there. Given that banks did not lend to this segment, as most lending is collateral based, and this segment does not generally have collateral to offer and also have more granular demand in terms of quantum, this action was deliberate. Now that we are refocusing on this segment through new banks and, at the same time, talking of controlling growth in NPAs, there is need to revisit our logic.

The accompanying table provides information for the ratio of gross NPAs to total outstanding loans for public sector banks for both priority and non-priority sector loans.

The table shows that the levels of NPAs in priority sector are not just higher but multiple times that of non-priority sector. The non-priority sector loans have risen sharply in FY12, which was the first year of economic decline in the country when the proclivity for NPAs to increase became sharper. This was also the time when restructured assets increased, which got exacerbated in FY13. In fact, total debt restructured increased from R1.10 lakh crore in FY11 to R1.50 lakh crore in FY12 and further to R2.29 lakh crore in FY13. Therefore, the numbers in the table rebound to be much bigger in FY13 for non-priority sector loans.

What are the solutions? In case of inclusive loans, there appears to be little that can be done as banks have perforce to lend to risky segments. A way out is that instead of the government keeping aside money for recapitalising public sector banks, they should be asked to raise the same from the market. The allocations set aside for capitalisation can be disbursed to all banks to write-off loans in this segment. This way banks will be incentivised to lend to this segment as the risk will be partly hedged. Such funding from the government’s perspective would be akin to, say, the MGNREGA programme or food subsidy programme. To make it effective this can be made conditional on being more efficient with NPAs on the non-priority loans.

The challenges for non-priority sector loans are many. To begin with, one must separate the wilful defaulters from those who have genuine problems. This is difficult because the structure of Indian corporates is such that promoters’ liability is restricted to their equity stake and hence the enterprise loss is not theirs’. As a result, the promoter with NPAs can still live the good life. One way to check this is that defaulters should be banned from taking further loans. This becomes difficult because if the cause is genuine, then the penalty is too harsh. Often loans to revive the enterprise are the only way out to get the money back in the long run. But knowing this, companies can choose not to perform, knowing well that they have to be bailed out as they cause a systemic risk in the system. This is a major moral hazard in banking.

How do we solve this problem? There is enough knowledge on defaulters provided by credit information bureaus. There is evidently a commercial angle to this story which still makes banks lend money. At one extreme, corporate debt restructuring should not be allowed. But then there are lots of projects that have been held back due to circumstances beyond their control, such as clearances or land acquisition, litigation, etc, and would be penalised. But such genuine causes would be there for almost all non-wilful defaults. The onus should be transferred to banks through an incentive scheme as outlined earlier.

At a different level, we need to have early warning indicators for NPAs, and the best way out is to have all bank loans rated by a credit rating agency (a lot of them are rated already under Basel II implementation for assessing risk-weighted capital). Credit rating agencies have more stringent criteria for rating and any movement in such ratings should send a signal to the banks that the account is not in order. This way banks can take action at an early stage and not wait for the three-month delinquency mark to be breached before such classification.

It should be recognised that the financial system is getting complex where business cycles are bound to affect the economy and the quality of assets of banks. At the same time, there are compulsions to make banks responsible towards social causes, which can be debated but is inescapable. The government should work towards marrying the two, by funding these NPAs and making it contingent on performance in the secular space. It may just work.

Life, interrupted: Financial Express 20th October 2013 (Book Review The Chaos Imperative)

In The Chaos Imperative, Ori Brafman and Judah Pollack advocate the need for a modicum of ‘disruptive ideas’ in a structured environment to kickstart change or to deliver superior results.

ery often, one tends to be satisfied with the status quo and, therefore, as a corollary, would not like to shake the applecart. This holds in our own lives, as well as that in the life cycle of organisations. Brafman and Pollack, in their book titled, The Chaos Imperative, argue, as the title suggests, that it is essential to really bring in chaos into our lives so that we do better. It is the beginning of progress. In a way, it is not very dissimilar to the Schumpeterian version of creative destruction, though the authors do not really talk of rebirth from destruction, but focus on the necessity of a certain high modicum of chaos to deliver superior results.
In their world, we need disruptive ideas in organisations to kickstart a change, just like how the plague in the 14th century actually got the continent of Europe to restart life and bring about development of an unparalleled magnitude. So much, that people lost faith in the church and the rich channelled money to educational institutions, which sprung up in Vienna, Florence, Prague and their like rather than the church. This was what one could have called a tipping point. Also, the church recruited priests who were rejected earlier, which, in turn, brought in fresh thinking. Hence the plague created what the authors call ‘white space’, which is essential for organisations to leverage. In fact, in Florence, the Basilica of St Mary had to be completed and redesigned, which gave rise to the likes of da Vinci. The rest, as it is said, is history.
The authors speak of three kinds of ingredients for bringing in what is called contained chaos. They call it contained because chaos would be of a specified order before it turns disruptive. They are ‘white space’, ‘unusual suspects’ and ‘organised serendipity’. Let us see how these work.
Chicago’s 37 Signals actually gives one month off to all employees so that can they go home and recoup and come back rejuvenated with new ideas and thought processes. Having such a scheme is an extreme case where all employees lock the office and leave. They enjoy the freedom for some time, but then regroup among themselves and discuss the way forward with one another, and come back with new zest to not just perform better, but implement their ideas. The idea is to essentially give them space to think and improve their productivity.
In fact, at a more down-to-earth level, they give an example of having two classes in a school where students are tested on their productivity by simply having two kinds of environment in which they operate. One class works continuously with a small break, while the other spends more time in class, but has breaks more often, where students can talk or play or just do nothing. Tests showed that the second class performed better simply because they had time to think and come up with different solutions. It is now accepted that, typically, the human mind cannot concentrate hard for more than, say, 45-60 minutes at a time and by allowing a break, the cells could be recouped. This was white space being provided to the students. Other examples given here are those of Albert Einstein who was not a good student in class, but attained what no one else has ever done. The story of JK Rowling is also narrated where she conceptualised Harry Potter when her train was stuck between London and Manchester, and she saw a boy lost, standing there not knowing from where he had come. Steve Jobs was very good at calligraphy, but used the white space to move into the IT field.
The second case of ‘unusual suspects’ is interesting where the premise is that we can get a lot from people where we least expect. An example given here is that during the Romney-Obama elections, everyone bet it would be Romney who would win. All the polls said exactly that. But there was Nate Silver who was good at predicting baseball games results and he got Obama right. This is the case of an unusual suspect who could deliver even in an organisation. They give the example of Cisco, where employees are moved across departments. The premise is that normally in a normal-structured environment, workers are loyal to their boss and not company. Also, often they may not be doing what they are actually good at. Therefore, such kind of rotation helps not only in personal satisfaction, but also drawing what one can call superior results through such selection of unusual suspects. Here, they show how a real estate worker in the company shows value for Cisco in a stadium where the company can provide links with the scoreboard.
The third way of creating chaos is through ‘organised serendipity’. How does one get people from different backgrounds into a meaningful discussion that generates new ideas and actions? There is an interesting example of how patients in a hospital suffering from a disease called MRSA, posed a threat to the doctors and nurses too, and to avoid infection, they had to wash their hands regularly and also bathe the patients with water. But water was available downstairs, which made it a challenge to maintain hygiene. Getting everyone, including the janitor, to solve the problem helped because the janitor knew where the valve was on the floor as it was covered by shelves. Therefore, a simple solution was not known to the others and by getting in everyone, the problem was addressed.
In fact, top management schools also follow the principle of organised serendipity because there are fixed proportions of seats kept for those who have domain knowledge or experience, another slot for uniquely talented students from, say, the sports domain, yet another block for students with different ethnic or religious backgrounds and the last for people with life experiences. The idea is that they all help to provide perspectives from different sides as they come with varying backgrounds. An owner of a steel mill or a homemaker will add to the quality of discussion in these classrooms. Often parties are a way of organising serendipity. Restructuring offices without cabins creates an open culture and encourages exchange of ideas, and at times could stimulate new outlooks that are helpful for the organisation.
The authors conclude that keeping chaos at bay comes in the way of innovation. The three ways of creating this chaos are quite interesting, and they have used these principles in the US army to motivate the soldiers and get the best from them. That is saying something because in the military, rarely is one really allowed to think for himself, as indoctrination is more towards compliance without questioning. If it worked there, it should certainly help organisations flourish. That is the major take-away from this book.

Fiscal jugglery: Asian Age 17th October 2013

The finance minister has taken a stance contrary to that of the International Monetary Fund, and some others, in calculating GDP projections for the current year. At the IMF forum in Washington recently, Mr Chidambaram questioned the world body’s assumptions. He is confident of 5-5.5 per cent, while others put their money on GDP ranging from 3.5-4.5 per cent. The 5 per cent mark is significant because psychologically anything less sounds defeatist. CARE Ratings figures project growth at 5.1 per cent, subject to assumptions being fulfilled.
There are two major reasons why growth should look up now on, while there are two other positive factors working in the background. The first is that the monsoon has been good. Going by the first advance estimates of agricultural production, farm output will be higher this year, which means there will be good spending power. In the past, there was a tendency for incomes to be diverted more to gold and jewellery. This impacted consumption and savings. While the rupee value of gold has increased in net terms, the physical restrictions placed are probably more important. This, combined with conventional spending during the festival season by even non-farm households, should provide a thrust to spending.
Recently the government also announced that it would capitalise banks (news reports suggested that government would pump in an additionl `5,000 crore into banks for this purpose) which sold more consumer loans. This has prompted some public sector banks to drop their lending rates. At the margin this should boost consumer spending. The importance of consumer spending on durable goods forges strong backward linkages with the basic, intermediate and capital goods sectors. While this virtuous circle is a strong possibility, it is built on the premise that rural households do not divert their income to gold.
The second reason for optimism is the government’s indication of clearing investment proposals amounting to `3.8-5 lakh crore. At a pragmatic level, one may not expect all these to fructify this year, given that Indian industry still has spare capacity. But even if 15-25 per cent of these proposals materialise, there will be a turnaround in investment, pushing up industrial growth.
While overall industrial growth would still be in the region of 1-2 per cent for the entire year, a foundation would have been created for future growth.
On the other side, somewhere along the way we are also witnessing the right signs in growth in exports. Though built on a low base, as growth was in the negative region last year, exports will still positively impact growth at the periphery. The rupee depreciation would have also helped in providing an advantage.
Further, the construction space is an area where some action can be expected. The core sector data shows that steel and cement have been relatively buoyant, indicating some movement in infrastructure activity. With support also coming from the services, especially finance, trade and transport, an overall growth rate of 5 per cent could be maintained this year. But, the big assumption is the strong link between farm incomes and spending on consumer durable goods.

UPA or NDA - Who did better: Business Standard: 16th Ocotber 2013

As elections draw close, it has become a part of the propaganda for each party to claim that the country has fared better during its regime. If we move beyond the rhetoric and take a look at the basic concept of such comparison, the approach could be flawed. Economic indicators cannot be linked to a regime, because, frankly, policies implemented in one regime will work with a lag. Similarly, a drought or a global financial crisis can strike a government hard, where it may have little control. Liberal trade policies pursued will impact the current account deficit (CAD) at a different point of time until they are rolled back. Therefore, such comparisons tend to be controversial and the conclusions drawn could be a case of contrived serendipity.

Yet, for the sake of academic argument, it is still worth examining how governments have fared in the last 15 years or so in terms of economic performance. The National Democratic Alliance (NDA) government ruled from FY00-04, the United Progressive Alliance (UPA)-1 reigned between FY05-09, and UPA-2 from FY10-FY13 (FY 14 is still on). UPA-2 is different from UPA-1 not just because of the composition of the alliance, but also because of the controversies that were associated with the regime. Performance numbers have been averaged for each period on an annual basis rather than compound growth rates to eschew end-points biases.

The table has placed the variables in a specific pattern. The first six variables are areas where UPA-1 has superior results to the NDA. But also quite significantly, in five of the six parameters used here, UPA-2 was lower than that of UPA-1. Agriculture was the exception. Again, within this block of six variables, UPA-2 was clearly better than the NDA on three counts: gross domestic product (GDP), agriculture and power. It was higher in case of capital formation, though the NDA also did fairly well. But the NDA scored better than UPA-2 in terms of industrial growth and marginally better in fiscal deficit. In case of debt to GDP ratio of the central government, the NDA did better than UPA-1, though it was inferior to UPA-2.

What are the conclusions that can be drawn here? First, the UPA has been more inclined towards agriculture during its two tenures, hence the resilience we have witnessed in output numbers has been an achievement. Second, capital formation growth has been higher in the UPA reign, though the second tenure has definitely seen a slowdown that can be attributed to both lower GDP growth, that is demand, as well as the controversies that have consumed administrative time. Third, UPA-1 brought in some economies in industrial growth, but that has not been maintained in the last four years. Quite clearly, whichever government takes over, the focus should be on reinvigorating this sector. Fourth, fiscal indicators show clearly that UPA-2 has moved away from prudence unlike UPA-1 and the current focus of the finance minister on containing this number is laudable, but ideally should be achieved not through project expenditure cuts but control on non-development expenditure. Fifth, the control, of the debt to GDP ratio is an achievement under these conditions since this is one indicator that the world is also watching closely. Last, GDP growth has also followed an inverted "v" pattern, rising during UPA-1 and declining in UPA-2 (the number will be even lower if the fifth year is considered).

Let us look at where the NDA regime has been more successful. First, on inflation, the performance has been much better with the consumer price index inflation number going lower than the wholesale price index. Quite clearly, the pro-farmer pricing policies followed by the UPA has probably achieved better crop results, but has affected the cost of living of the common man, which is critical when it comes to elections. Second, in terms of CAD, the NDA managed better with a surplus that deteriorated sharply during UPA-2. The liberal import policy was responsible for this trend. However, remedial measures have been invoked of late that will help to improve the situation. Last, the exchange rate has done better here with a limited depreciation. UPA-1 had to contend with high appreciation too and the currency was more volatile. For the NDA, standard deviation was 4.2 per cent, while for the UPA it was 9.1 per cent and 7.2 per cent respectively.

The UPA can definitely take credit for higher amounts of foreign direct investment and foreign institutional investors that came in during their regimes, though this is more of global factors at play than specific action from within. Therefore, these variables have not been included. In this context, a surprising outcome has been how the country has fared with regards to the governance - the Corruption Perceptions Index of Transparency International. The index, though low, has improved almost continuously from 2.7 in 2001 to 3.6 (out of 10) in 2012. This indicates that notwithstanding the controversies in the last couple of years, the nation has progressed on this score. A tempting conclusion is that what came out in the open was already known and on the aggregate things have only been improving. The same holds when it comes to the Human Development Index that shows an improvement in score from 0.461 in 2000 to 0.547 in 2011. In both these cases, India's rank remains very low.

On balance, it looks like the performance has been quite even. The NDA has done better on inflation and managing the external account and also was steadier on the fiscal and industrial side. The UPA has been more pro-farmer, and delivered better GDP growth and ushered in higher investment. More importantly, the country is silently moving up the ladder in terms of governance and human development, which is comforting.

Picking asset price bubbles: Financial Express: 15th October 2013

It is not surprising that, in the aftermath of the financial crisis of 2007-08, the Nobel Prize for Economics has been awarded to economists who have made significant contributions in the area of asset prices. The names are familiar—Robert J Shiller (student of behavioural economics), Lars Peter Hansen (expert in building models) and Eugene F Fama (a follower of efficient markets hypothesis). The decision was not surprising, as Shiller’s name was the foremost in the list of probable awardees. Their concern was over assets, their prices and possible bubbles.
Broadly speaking, their contribution goes this way. When we look at asset prices, be it stocks or bonds, it is difficult to conjecture their price movements in the short run, which could be, say, a few weeks or even months, though the same can be guessed well in the long run, which could be 3 or 5 years. This makes sense when we look at our own stock market. On a daily basis, we cannot make guesses because there are new bits of information coming in every now and then (Fama), which guides prices. RBI announcement of new banks can push up prices of bank scrips while an impasse on mining laws in Parliament can push back the stocks of mining and related companies.Therefore, predictability is the issue. If all players knew the price and start buying the stock, the price would automatically move up until such time that it becomes less attractive. The unpredictable pattern is more often the case and the movements are random, and hence it is said that stock prices follow a random walk. Therefore, Fama argued that today’s price is no guide to tomorrow—which is seen in our own stock price movements, where the Sensex or Nifty yo-yo on a daily basis being affected more by distant effects such as the Dow Jones or Fed actions in the interim period.In fact, an interesting outcome of Fama’s work is that lots of the information we are talking of have an impact on just one day. A dividend announcement or a stock split will affect the share price on the day and move back to the trend line subsequently. This also appears to be the case with Indian markets, where the Sensex moves up or down to news for a single day and then gets back to the trend, which has been upwards. Therefore, to put the theory into a diagram, daily movements will have sharp or smooth peaks and troughs, but the direction along the trend will be upwards normally for a growing economy.But, over the long run, these things iron out and there are broad principles that are adhered to. Shiller showed that prices would tend to get related to the future dividends on almost all occasions. Also, periods when stock prices are high relative to corporate earnings tend to be followed by periods of below-par returns, and vice-versa. Hansen's view was that mispricing had to do with fluctuations in how much appetite investors had for risk. When times are bad, investors become more cautious, and when times are good, they are more willing to pay high prices for assets.Simply put, the rationale is that when you take more risk while waiting, the return must be commensurate with the deserved compensation. The models that have been used by them have gotten refined over time, enabling better use of data and deriving more rational conclusions. This has improved the power of forecasting of asset prices in the long term and helped the emergence of index funds in stock markets. An interesting outcome of their research is when it is stretched to the performance of mutual funds. Can mutual funds generate returns above the level of risk taken? Their answer is that their returns would be lower once adjusted for their own fees and expenses.The behaviour of asset prices is important for households as the decision to choose from across alternative assets will be contingent on them. For example, when deciding on, say, a deposit or tax-free bond or a corporate bond or equity stock, the asset price matters. Similarly, asset prices are important as they provide information for economic decisions in investment. The market for corporate bonds is not well developed primarily because pricing is an issue. Once the bond is issued it is not easy to gather data on the daily price due to the absence of liquidity. Unless the asset is properly priced (need to have the yield curve in place), the secondary market will not evince interest, which, in turn, has a bearing on the state of the primary issuance market.Their research also shows that, at times, excessive optimism or other psychological mechanisms may explain why asset prices deviate from fundamental values. These high prices may reflect overestimates of future payment streams. A question raised by them is why more rational investors do not eliminate the excessive price swings by betting against less rational investors. Their response is that rational investors may face various institutional limits, such as credit constraints, that prevent them from going against the market on a sufficiently large scale.The US scene of 2007 is interesting. Asset prices existed for the mortgage-backed securities and the entire gamut of structured products. But the pricing was inaccurate or mispriced as institutions multiplied their risks. Mispricing meant that the asset prices were not reflective of the underlying, which led to the crisis. Keeping in mind the financial crisis, one can understand the importance of such theories because ultimately it was a case of mispricing of the assets under question—CDOs and CDS.Therefore, the clue really is that we cannot do much in the short run, but as policy regulators, must watch out for the building bubble once we smell serious mispricing, especially in a boom

An inside view: Book Review of The Firm Financial Express October 13, 2013

When you pick up a book called The Firm, the first thought that strikes you is one of intrigue. Much like the story told by John Grisham, which is fiction, Duff McDonald unveils the real tale of leading consultancy firm McKinsey in a dispassionate manner. We have all read about how McKinsey has grown to become a leading management consultant and is held in awe in corporate circles. In fact, a large number of them swear by the name. But that is the view from outside. McDonald gives us, almost literally, a 3D version of the firm and shows how, at the end of the day, the brand makes a big difference to all users of its services, irrespective of its follies.
While there are those like Jamie Dimon of JP Morgan or Mitt Romney who swear by the firm, there are several cases of failure like GM, Kmart, Swissair, Enron and their likes, which tell us that management consultants are not infallible. But still, the firm is considered to be a major foundation of modern US capitalism. McKinsey’s rise has been quite remarkable. Started by James McKinsey in 1926, it was nurtured to become what it is today by Marvin Bower. While the firm commenced operations analysing accounts of companies, it evolved its consultancy services by looking through all these numbers closely. The firm began scrutinising budgets across departments and then wove them all in a story for client companies through a series of recommendations. McKinsey referred to it as management engineering, and not consultancy. But how is this perceived by the public?The firm, as a rule, does not advertise its clients or business. It lets the companies take credit for what goes well, but also distances itself from failure. After all, they only advice clients on what should be done and is appropriate; and it is for the latter to successfully implement the strategy. McKinsey follows the highest code of secrecy and trust, and believes in recruiting the best. The firm is more important than the employees and, while everyone has a large ego, no one is bigger than the firm. Thus, it is not surprising that their staff is rarely well known, and it was only after Rajat Gupta displayed his aggressive persona that things changed. The terminology of the firm differentiates it from others. The firm has clients, not customers. Everyone plays a role and does not work on a job. Theirs is a practice, not business. And McKinsey is not a company, but a firm. They have values and no rules, and have members, not employees. On the other side, McKinsey is responsible for the maximum number of layoffs across organisations as it seems to be embedded into their solutions of cost-cutting. They prefer a constant rollover of employees and believe that the McKinsey brand name will help anyone go anywhere as there is a lot of respect bestowed on anyone associated with the firm. But clients have not always been too happy. When Conde Nast was told to cut cost through right-sizing, they threw a fit and the analogy drawn was whether you can have a football coach who never played football. Some of their more blatant blunders were: asking JP Morgan to get out of lending, the merger of Time Warner and AOL, Kmart’s foray into groceries, Hewlett-Packard’s acquisition of Compaq (the CEO later lost her job on this score) and Wachovia’s purchase of Golden West Financial, etc. But yet, the fact that companies have been hiring the firm means they add value somewhere. In fact, around 85% of their business comes from the existing set of clients, which is a clear indication of their efficacy. The journey of McKinsey has not been without its set of trials. The firm faced competition for the first time when The Boston Consulting Group came in and spoke of strategy and the ‘four square matrix’. More importantly, while McKinsey worked with all firms in an industry, which gave a feeling that they could pass on secrets, Henderson of BCG stuck to exclusivity. The firm proactively changed its approach subsequently and brought in its own ‘nine box matrix’ and exclusive clients. Now, it was a case of saying that while BCG marketed products, McKinsey sold brilliance. McDonald also adds two other important episodes in the story of the firm that are quite revealing. The first is the contribution of Tom Peters and his book, In Search of Excellence, which came out after he left the firm. His focus was on execution and he dismissed strategy, and felt that what mattered were customers, low cost, productivity, innovation and risk-taking. The second is about Rajat Gupta. The overall ethos of the firm changed when Gupta came in, and while it became more aggressive in the market, it compromised on a number of core principles. But no one bothered as long as the firm made money. He brought in growth of around 20% per annum, while the firm aimed for a normal 10%. He hired from more B-schools and recruited PhDs too, but never sold shares to the public. And then the author unfolds the darker side to his regime. The firm started taking equity stake in clients, which, though it was 2% of revenue, was against the core principles. Similarly, the firm would work for anyone who had a fat cheque book, and the culture of dissent in the firm was smothered. Simultaneously, the compensation to directors was increased and what was earlier access to exclusive clubs got transformed to gifting of ranches. As he took a pay of $5 million, the ratio of salaries of the highest to lowest worker was 40:1. This is a common feature of capitalism where similar rewards are given to the professionals in companies by professionals! Did the firm always work fair? Yes, as no laws were broken even though the firm worked closely with Wall Street. The only smear was, once again, an Indian, Anil Kumar, who was held for insider trading. The author devotes quite a number of pages to Rajat Gupta and his indictment, and points out, quite curiously, that some of the who’s who in India Inc who supported him were the likes of Adi Godrej, Sabeer Bhatia, Mukesh Ambani and Deepak Chopra. McDonald’s book is definitely very engaging and thought-provoking for the reader and goes beyond the narrative. McKinsey could be representative of the entire fraternity of management consultants, and the stories would be similar everywhere, especially in terms of the awe they command in the market as well as the scorn when it comes to failures. He has taken a very balanced view of the way in which McKinsey has worked and while one may get a feeling that he is a bit critical, he has rightly pointed out that if firms are paying the firm for services repeatedly, there must be value in their work. That sort of sums up the view on management consultants because while critics say they only tell you what you want with the right words and graphs, if you are still paying them, then it must be well worth it. A good way of summarising these emotions can be captured by the author’s major grouse against the firm—Enron. The firm has endorsed Enron and advised them on following a loose-tight culture, where executive decisions can be taken without constant approval. They encouraged off-balance sheet financing and atomisation. He poses three questions with answers: First, did McKinsey hype Enron’s fraudulent rise? Yes. Was McKinsey liable for Enron’s misdeeds? No. Would other clients care? No. That’s why the firm still rules.

Banks’ recapitalisation will achieve little: Financial Express 7th October 2013

The recent announcement by the ministry of finance to provide additional capital to public sector banks to fund loans in the personal loans segment is interesting. The government is evidently going all out to increase the flow of credit to all sectors with focus being on the personal loans segment with the hope that easy, and hopefully cheaper credit, will enthuse households to borrow more and increase demand for consumer goods including automobiles. This can set in motion a virtuous chain of higher industrial growth and provide a stronger foundation for GDP growth. The FY14 budget had already spoken of allocating Rs14,000 crore towards recapitalisation of public sector banks and the message given now is that the budget can accommodate more if the need arises. What is one to make of it?
There are essentially 6 issues which need to be put on the table for debate when viewing such a policy since it sets the precedent of the government actually trying to direct credit into certain areas, which goes beyond the conventional channels of priority-sector lending. First, there has already been a lot of debate on whether the government should be infusing capital in the public sector banks, and if it is committed to doing so, how long will this carry on. The requirements for capital are challenging looking ahead and given the constraints on the fiscal deficit, it will not be possible to keep supplying capital. Also, at some point of time, which could be after 5 years or 10, banks would be moving towards the road of hastened disinvestment not just from the point of view of operations but also to become global players. Therefore, tinkering with recapitalisation for short-term gains may not be a very good idea as it sends all different kinds of signals. Second, directing credit to a sector beyond what is defined as priority-sector is curious. There are two issues which come up for discussion. Can we actually differentiate sectors where lending is going from the point of view of capital as money is fungible? Banks can take extra capital from the ministry and map the same with existing personal loans even while using capital, which would have been allocated otherwise to such loans, for other purposes. Further, by directly linking such loans to a sector, the government would be part of the decision-making by banks, which may not be advisable. This leads to the third issue, of asset bubbles.There are already talks of whether or not a housing bubble is building up. Property prices have risen sharply in the recent past at a time when domestic income is down, interest rates high and incomes not growing. In such a situation pushing funds aggressively to the consumer goods segment may just be tempting for banks. Also, borrowers would get a bit enthusiastic as the level of due diligence comes down. This is likely at a time when banks get free capital from the government and feel obliged to lend to a sector. Should we be aggressively pushing credit to a sector at this stage when there may be less voluntary appetite? At present, personal loans (including mortgages) are one of the leading segments in terms of credit allocation. The two specific segments mentioned by the ministry, i.e. auto and consumer durables constituted just 2.4% of total loans as of March 2013. At a broader level, the question that may be posed is whether it is worth setting a precedent for a segment which is not very significant in the overall bank-lending landscape. Fourth, there are two issues which need to be raised when talking of such funding for banks. First, are banks really under-capitalised that they are facing a problem of shortage of capital as a limiting factor? The answer appears not to be in the affirmative as most banks have capital adequacy ratios of above 12%. For nationalised banks it was 12.26% in FY13 and 12.67% for SBI and its associates. Further, is there any shortage of liquidity that is coming in the way of bank lending? The answer again is no, because banks have funds and are anyway preferring such lending today given that delinquencies are lower and demand is stable. Further, if at all liquidity becomes an issue, the RBI could instead just keep using OMO to shore up liquidity, which it has been doing in the last few months or enhance the LAF limits to provide more funds to banks. This leads to the fifth issue—whether the cost of such loans will come down or not. Banks have already stated that they would have preferred the refinancing route on such loans to lower the cost of such credit. This has not been done. Further, the credit risk weight of 125% for consumer loans still remains and in case this was reduced, it could have helped to lower effective cost of such loans. Therefore, on the whole it looks unlikely that the cost of personal loans will really come down through this move.Sixth, from a purely macroeconomic perspective, this route is quite unconventional. The premise is that we want to spur demand to boost growth. The route is not by higher spending through demand for automobiles or consumer goods keeping to the Keynesian model but providing capital for banks, which could lend 9 times that amount for such loans. As mentioned earlier, if it is not proved that capital is a limiting factor that has come in the way of enhanced credit, then this measure will merely help banks swap existing loans into this account. Also, given that the ticket size is small and that it will require several households to come and borrow at a time when job losses and zero increments are the norm, this move could at best be a sentiment-boosting step and may not actually work the way it is hoped it will. Putting all these answers together, it may be concluded that a move to enhance capital to banks to enable more lending to specific sector may not be ideal for the system. Besides setting a precedent, it inadvertently involves the government into lending decisions of banks which may not be desirable. More importantly with the credit

Captivating potential investors: Financial Express: October 4, 2013

It is now accepted that one reason why FIIs are pulling out of emerging markets is that interest rates are increasing in the developed economies. This is happening on the back of the twin expectations of a recovery in the west, which in turn, will lead to the premature withdrawal of QE in the US. The result would be a reversal of flows at a faster pace. Therefore, there is merit in the argument that if India is looking to stem the outflow of dollars, RBI may have to give primacy to rupee stabilisation which necessarily means taking a call on interest rates.
In fact, investors in debt would tend to look at the ‘real return’ on such investment as well as the perception on the exchange rate before taking any decision on where to invest. This means that inflation matters, not just present inflation, but also expectations of the same. When critics highlight our obsession with inflation and exchange rates, they probably err as these are genuine considerations for any central bank. Also, while industry would like interest rates to come down to bring about growth (though anecdotal experience does not justify the same), a central bank, which takes a more macro look, has to look at all these factors when taking a call on policy options. Looking at various markets in the world, an interesting commonality is that nominal bond yields have actually moved up over the last year by varying degrees in different countries. The yield on 10-year GSec or its equivalent has increased by more than 100 bps in countries like Brazil (281), Indonesia (230), South Africa (137), UK (118), USA (114) and Sweden (102). It has been over 60 bps for Mexico, Thailand, Korea, China, Switzerland, and Germany. In case of India it has been almost flat at the current rate of 8.27%. Quite clearly, we will have to compete with markets where yields are increasing—both developed countries as well as competing emerging markets. On the positive side, as the accompanying table shows, at the present level of ‘real yield’ (which is what matters to investors) where the nominal rate is adjusted for the inflation number, our real rate is at 2.48%. It is at the upper end of the ladder—third in the list of 18 selected countries, with Latin American countries such as Brazil and Mexico ahead of us. Inflation has been high in countries like Brazil, India, Mexico, Russia, South Africa and Indonesia. Again, due to structural reasons, inflation tends to be higher in emerging markets than in developed countries where price increase is more controlled. Investors will, necessarily, take a call on future inflation and hence, inflationary expectations play a role.It is here that the monetary policy approach is important as it provides a signal to the potential investors indicating the will of central banks in controlling inflation. Any laxity in policy approach in the midst of high inflation will cause apprehension in the minds of investors. RBI is cognisant of this factor and hence, talks very often of real interest rates as a driving factor behind monetary policy. In a globalised world, where foreign investment is providing succour to the CAD, real interest rates become even more important as investors do not suffer from money illusion. The accompanying table also provides information on exchange rate movements across countries vis à vis the dollar over the last year. Currency depreciation is another factor looked at by investors when investing in any market. Irrespective of whether the funds are flowing into equity or debt, the final purpose is to remit gains back home where the exchange rate plays an important part in their strategy. As seen in the table, the real return is one way of choosing across markets when it comes to debt. But the exchange rate is a clinching factor because an inherently volatile or weak currency will lower effective return for foreign investors when money is to be repatriated. Again two factors matter—the nominal and the expected depreciation. Based on nominal depreciation, the rupee has been more adversely affected and is third in the list with Japan and South Africa being above us. Intuitively, it can be observed that when the currency falls by 16% in a year, the returns on both debt and equity are actually wiped out in real terms even if inflation is under control. Therefore, having a stable currency is a pre-requisite to getting foreign investment. As a corollary, central banks also need to provide a signal that they are serious about protecting their respective currencies and hence would have to have policies in place that stabilise their currencies. A normal depreciation which will vary across countries following trends will be acceptable, but volatile currencies would be a deterrent.Given the overall state of uncertainty relating to the Fed action in the coming months and the wide array of choices that foreign investors have, RBI and government have to take a call on how they would like to prioritise the goals for our economy. As long as the CAD is high, foreign funds are a necessity, especially through the investment route, as they help to stabilise the balance of payments and hence, the rupee. In these circumstances, we do need to see what other countries are doing and the opportunities being offered through returns—nominal and real—which is backed by currency policies. Based on the approach to interest rate policy, the revealed preference of RBI appears to be firm and consistent towards maintaining a stable regime of exchange rates while ensuring a positive real return on debt to retain India as an option for potential investors. This will be painful to industry as it prolongs the recovery process but appears to be inescapable under these testing circumstances. RBI’s actions on interest rates, inflation and exchange rates have definitely been pro-investor even though the policies may not have always delivered according to script.

Demystifying macroeconomics: Book Review of Tim Harford's Undercover Economist Strikes Back: 29th September 2013

Reading Tim Harford is not very different from picking up a book by PG Wodehouse. Harford’s books are easy to read, feature examples that are fairly predictable as we keep looking deeper at things that we experience but don’t generally notice, have a good dose of wit and, most importantly, leave the reader with a good feeling. His latest book does not disappoint, as he takes us through the labyrinths of macroeconomics this time. The style is the same and he brings in everyday examples to explain difficult situations. This time around, he uses a different approach where there are questions and answers. The questions are also posed in terms of the disbelief, or doubt, that the reader might come across while reading his answers. This adds novelty to the discussion.
He begins with rudimentary concepts and links them together. Starting with recession, he moves over to the concept of money, which leads to inflation as he reconciles the concept of a stimulus with growth and inflation, which we keep reading of. Next, he moves to employment and output, and covers the various definitions of domestic product, including the more abstract concept of theoretical happiness by weaving behavioural economics in the network. While also raising issues on inequality, he talks of management quality in a highly entertaining manner. He reconstructs the age-old classic debate about recession and its solutions, and while Keynes and classical economics form the core of these arguments, he relates them with simple examples to make them comprehendible. He takes the case of a babysitting forum among members of a group, where all parents get points for babysitting other’s kids. These points or scrips, as he calls them, can be used by parents who accumulate them for going out for a party while leaving their kids behind. A classic case of a Keynesian recession comes in when all parents want to accumulate scrips and do not want to go out. This is a case of fall in demand, which can be met by increasing scrips to a prudent extent, because, if there are excess scrips to be had, everyone will want to go out and no one would want to babysit. He, therefore, leads this to the debate on flexibility of prices and inflation. He acknowledges that this idea is borrowed from Paul Krugman, but the difference is that he takes this to its logical conclusion. From the standpoint of classical economics, he explains the case of a recession through what happened in a prisoners of war camp in Germany during the war. Prisoners got stuff such as cheese, blades, beef, etc, from the Red Cross and traded products with each other. But when supplies stopped from the Red Cross, trade ceased. This was a supply-side problem and hence the cure could not be to get people to spend more, which would be inflationary, as was the case during the oil crises when countries misread the situation leading to stagflation.Harford gives such examples to engage the reader. While relating the current financial crisis with Keynes, he explains that for the spending theory to work, based on what Obama did, three factors need to be kept in mind. First, there should be a recession. Second, money should not be spent on, say, French wine, which helps France, not the US. In fact, this point is valid because even when we talk of the quantitative easing programme of the Federal Reserve today, most of these funds have moved to the emerging markets, not the US. So has this really helped? This is worth thinking about. And third, he warns us that we should not get into situations where we allocate money and spend on new projects that would be abandoned and not completed when conditions improved. Working on work-in-progress is a pragmatic option.Speaking on unemployment, he gives a very interesting example: How Henry Ford doubled wages in his factory and lowered the number of hours of work to ensure that the issue of labour became permanent. More importantly, they could not move out due to non-availability of similar wages outside. This reduced costs because Ford had employed more than three times the number required, as few worked for more than three months, and as the labour market was flexible, they could find work elsewhere at the low wages. Higher wages changed this possibility.At one point, which we may not like, Harford is quite harsh on India, where he says we probably have the largest number of badly-run companies, in a chapter titled Bossonomics, simply because of the absence of competition. This should be a takeaway for us. He narrates the story of Accenture Consulting, which was paid by World Bank to carry out an audit on textile firms in India, but got the service free of cost. But most were not willing to get this service for obvious reasons. And their own results showed that when companies were also guided by them to change their strategies, it really helped. The point they make is that Indians are unwilling to take such advice, which comes in the way of their efficiency. The book is obviously worth reading. For the layman, it is a good and easy-to-comprehend book on macroeconomics. For the professional, it is light and some of his anecdotal examples are of interest; though for one familiar with the subject, some pages can be skipped. While the first taste of the undercover economist was obviously engrossing for all, this one could look a bit repetitive to the hardcore professionals. This is a challenge for all authors who have a brilliant first book. But then this may not be meant for the professional or academic who is well past the stage of basic concepts.

Building blocks: Brick by Brick: Book Review Financial Express September 22, 2013

There have been a lot of books written on how to make a company succeed and the leadership qualities that go with it. But rarely do we come across one where the authors look at the role of innovation as the driving force in transforming a traditional company into a dynamic one, more due to the force of circumstances. It is even more compelling when the story is about a company that manufactures mere plastic bricks—LEGO.
Brick by Brick, as the title suggests, is the story of LEGO, a Danish company that has become a household name, literally, with the maximum number of bricks existing in this world. The genesis of this book is quite unique. The authors, Robertson and Breen, were on the lookout for separate stories on companies that were models for innovation. While researching the same about LEGO, they realised it was worth more than a chapter, and that nothing less than a book would do justice to the tale. With the exception of probably Apple, no other name strikes a similar chord with the customer and the LEGO brand is probably on a par with those like Coca-Cola and Disney. Quite surprisingly, while the brand is well-known, the organisation is not, since it is a family-run business and not listed on Wall Street. Some of the terms associated with the company are creativity, educational, imaginative and so on. But the story of its rise has been quite inspiring because there is a lot which went behind building the bricks of this storyline. This book is really about the lessons from the strategies put in place by LEGO to reconstruct in turbulent times. Some glimpses of what it has shown can be sampled here: The company has given room for innovation while retaining focus, provided autonomy with responsibility, delivered in short run while building for the long term and, more importantly, has operated within the limits of business orthodoxy while creating value. LEGO is a family-run business started by a master carpenter in 1932 in Billund, Denmark. From wooden toys to plastic bricks to Star Wars, it has had it all. The authors research the practices of the company and find that there are six core principles, which have remained untouched over the years and which can be templates for other companies to consider. The first is that core values should never change irrespective of circumstances, howsoever adverse they may be. Second, companies must focus on relentless experimentation, which, in turn, will beget innovation. Third, companies should look at creating not just products, but a system. By not doing so and focusing on a narrow corner, they lose sight of the bigger picture. Fourth, to have profitable innovation, we need to stay focused on the business. Fifth, the product should be authentic as far as the customer is concerned, which will separate it from competition and imitation. Sixth, the focus should always be on the store and then the customer, not the other way round, as it is the store that sells your product. This may sound contrary to what we normally hear. In the context of these principles, there is an interesting anecdote shared of how LEGO reacted to the Star Wars mania, when the US office suggested they tie up with Steven Spielberg to create these characters in 1997. Internally, they were against the idea of such partnerships and more so as they were against getting into the concept of ‘war’ in children’s play kingdom. It was finally agreed upon only after a survey among parents to ask for their views.The dream run of the company actually carried on till the end of the 20th century. But it lost lustre when the group’s patents ran out on the interlocking brick. Low-cost competition hit it hard, and the response was to bring out more toys every month. This pushed up costs, but not sales, which had reached a plateau, putting pressure on profit lines. By the late Nineties, kids preferred interactive games and other innovative software, leaving conventional toys behind. Compared with Game Boy and Xbox, the brick appeared to be quite a part of a bygone era. As losses mounted, they had to change track with a new management and their new approach is what the book is mostly about. To reinforce these ideas, the authors give examples across companies which have done similar things. P&G followed the connect-plus development initiative, where it formed 1,000 successful agreements with top innovators around the world. Southwest Airlines redefined their industries as they sailed to blue ocean markets that others ignored. Canon’s digital cameras were a case of disruptive innovation, where the film camera was made obsolete. Apple sustained its hold on the MP3 music player as it surrounded the iPod with a full spectrum of complementary innovations. But as is the case with most books on innovation, the lessons matter more than the story. The internal restructuring and the names that go with the story are more for local consumption and may not mean much for the reader. A differentiator in this story is the distinct focus on the retailer, which is a lesson, because to push any product you have to make it attractive for the final seller. The fact that innovation is the driver in this competitive world should be remembered by companies, as otherwise all of them would enter the syndrome of low growth and stagnation, and would have to foster a culture of innovation within to emerge successful.