Lead Review: Spread The Word: Book Review of Contagious in Business World January 27th 2014

hy does product A do well and Product B fail? Or why does a restaurant stand out in a locality when there are 10 others with a seemingly identical menu? At times, we may attribute the difference to pricing or quality or the value from advertising. Jonah Berger, a marketing professor at the Wharton School, has a different take on this.

Berger, in his book Contagious, writes that to be successful, a product needs to crack six principles that make it contagious and, hence, desirable. First, it needs to have social currency: you should feel good talking about it. Second, the product needs to get us thinking about it and then buying it. Third, we should develop a feeling for the product, and hence the word ‘emotion’ is attached to the product. Fourth, we would like to be seen by others associated with the product; Berger calls them ‘public’. Fifth, it should have a practical value and be of use so that we spread the word. Lastly, there should be a story, which he equates with the story of the Trojan horse. Berger goes on to say that ‘physical’ word-of-mouth is far more powerful than social media (the percentage of word-of-mouth that happens online is just 7 per cent).

He explains this theory — which goes by the acronym, STEPPS — with a varied set of examples. He equates social currency with money. Whereas money buys things, social currency is used to buy impressions. Therefore, a blender that can smash an iPhone is worth talking about as it has high social currency value. A restaurant that sells cheesesteak for $100 is news to be shared. Snapple, the soda company, puts little tidbits of  ‘Did you know’ to garner attention.

According to Berger, triggers are always needed to spark the mood. He gives the example of singer Rebecca Black, whose song, ‘Friday’, went viral because it spoke of the ‘youth’ waiting for Friday. The song had mundane lyrics, yet it became a big hit and everyone watched its video during weekends. Similarly, Mars chocolate bars witnessed a spurt in sales during  NASA’s mission to Mars. The word caught on. Triggers could also be as rudimentary as voting patterns where voters prefer a candidate who talks in favour of education!

On emotion, his examples are based on an idea that makes you either happy or mad. Therefore, the story of a plump matronly lady who walks into a singing challenge invites sniggers. But once Susan Boyle started to sing, everyone loved it and wanted to share this emotion.

On the public aspect, the author says that we are indeed influenced by the public. We choose the longest line for a fast food joint as we assume that if all are going there, then it must be the better one. We are always looking for others for information. Therefore, the product we design must keep this in mind too. Last, stories need to be told all the time by a product, which will strike a chord with the customer.

Berger’s book is extremely engaging as he provides lots of examples when discussing the 6 STEPPs that go into any successful product or venture. In fact, you could apply these six traits to any product —  a soap or a gadget –  that has done well. It will invariably have it all. 

 - Contagious: Why Things Catch On By Jonah Berger Publisher: Simon & Schuster Pages 256; Rs 499 -

Let’s not bring in the foreign-hand excuse: Financial Express 13th January 2014

For those who lived through the 1970s and the 1980s, it was almost axiomatic that all problems in the country would be associated with the ‘foreign hand’. With this ‘hand’ not quite being defined, it was assumed that discussion or speculation would end. Today, in an era of globalisation, which has been taken to new heights by the financial crisis and then the sovereign debt crisis, the connections are stark. The foreign hand has assumed a new form which is used for explaining why things are not working. Therefore, it is not surprising that the current problems with the Indian economy have been related to global economic conditions. So much so that even inflation has been driven to the starting point of being global in nature. How far can this be justified in this way?
One may recollect that when the financial crisis took place and the emerging markets came out relatively unscathed, there was this theory of decoupling that was enunciated, which proved that these countries were different and could take charge when the developed countries did not perform. And we in India showed how good our numbers were. Now, can we really go under the umbrella of global distortions to justify our condition? The arguments here show that India is not quite the country that runs on global factors, which, though important, are more peripheral in nature. As a corollary, the basic impetus has to come from within. Let’s look at GDP growth. Ours is a domestic-oriented economy. Agriculture is fully domestic, and while industrial growth is driven by exports, the pattern in the last 5 years shows that the ratio of exports to GDP (at current market prices) has actually increased from 14.9% in FY09 to 17.2% in the first 8 months of FY14, with the ratio being 16.3% in FY12 and FY13. This means that a global slowdown has not quite affected this ratio. We have actually diversified our export destinations away from the US and Europe to Asia and Africa to make them less vulnerable to such disturbances. Services, again, are primarily domestic in nature, and if one looks at the share of domestic advances to total advances of our banking system, it has been constant at around 90%. This means that growth is driven mainly by domestic factors and we cannot quite blame the global slowdown for our travails. How about inflation? Inflation in the last year has been driven by the primary and fuel segments, while manufactured goods' prices have been stable and just about moved by 2-3%. Global commodity prices have been benign across most sectors and, thus, have not quite pressurised domestic inflation. Food inflation has its genesis in production, supply, pricing and logistics issues, which cannot be linked with any of the global factors. Metal prices have remained low and, surprisingly, even crude oil price has actually moved downwards this financial year and averaged $107/barrel compared with $115 and $110 in FY12 and FY13, respectively. If fuel inflation was high, it was more on account of the government’s decision to strike prudence between fuel subsidy and market prices, which thus does not have a link with global prices. Inflation certainly appears to be driven from within. Therefore, the twin problems of growth and inflation have been driven by domestic factors. High inflation has come in the way of domestic consumption while ambivalence in policy as well as hold-up of projects has affected investment. These are domestic factors and require indigenous solutions. The fiscal deficit issue is again domestic in nature and low growth in GDP has affected revenue collections, while all expenditures are directed through policy aspirations that have no link with the global slowdown. Therefore, the classic debate between the government and RBI on fiscal balance is a domestic issue which cannot involve any global developments. How about monetary policy? With the tapering announcement in May having a major impact on foreign outflows, our balance of payments went into a negative frenzy with the rupee moving towards 69 to a dollar until RBI intervened. Here, definitely, there was a global impact when FIIs moved out and there was pressure on RBI to take corrective action, which included keeping interest rates high. But, interestingly, when conditions were corrected quite astutely by the government and RBI, it was not by influencing or countering global influences but correcting the fault line in our CAD, which was gold imports. By putting curbs directly and through taxation and liquidity, this was reversed. And this was strengthened further by opening the swap window for NRI deposits and bank capital. Counter-intuitively, it can be argued that when RBI and MoF say that the tapering programme to begin in January 2014 will not affect India, which sounds all right, it is not because the global environment has changed, but that we have corrected a wrong internally. FII funds continue to be negative in the debt segment and marginally positive in equities, and this major improvement in our balance of payments has not been due to any improvement in global conditions but some good housekeeping. What does all this put together indicate? First, global developments do affect economic variables, but these disturbances only need to be corrected through appropriate policy action. Second, growth stimulus has to come from within and require affirmative action from the government through direct intervention through the budget or provision of incentives to the private sector. By merely sitting back and blaming the global environment, we cannot reverse the trend. Third, inflation has been driven by domestic factors and the global conditions have, in fact, quite to the contrary, been quite favourable during the year where we have had that much of elbow width to address the cause. Fourth, interest rate policy will continue to be driven by domestic conditions and cannot be linked with global developments. While higher rates in the West will cause an outflow, this should ideally not be driving monetary policy, as investors look at the macro prospects when taking any such decision. Keeping interest rates high to invite FIIs may not work if our fundamentals remain weak. While using the bogey of global downturn sounds suave and is important as it does cause distortions, one should not use the route of inaction for exculpation. The strength of the Indian economy is the domestic consumption and investment opportunity as are the weaknesses on our supply-side and infrastructure. Deflecting attention will only take us back, and recognising this situation will help to move forward.

Decade of UPA: The Asian Age 12th January 2014

The performance of the economy during UPA’s regime has been volatile culminating with a set of adverse economic conditions in FY14. However, there are two significant aspects here. The first is that there has been a difference in the performance of the economy during UPA1 and UPA2, with the second term being less impressive. The second is that in qualitative terms UPA has achieved quite a bit in the second term notwithstanding the adverse economic conditions.
If one were to draw a balance sheet for UPA1 and UPA2, then the net worth would slip into negative territory compared with UPA1 which posted superior economic results in most aspects. To make such a calculation, average performance during the two regimes has been taken with a very optimistic projection being taken for FY14 for UPA2 to get a five year average. The chart compares these averages for some leading indicators.
As can be seen, the columns for UPA1 are higher than those of UPA2 for all indicators except agriculture, which showed higher growth rate in the second regime. GDP growth has slowed down in the last three years to be much lower than the path of 8-9%. Within this segment, industrial growth has fallen sharply from 10.3% to 4.4% with growth in capital formation being just 8.9% relative to 15.8% during UPA1. The main reason would be the impact of high inflation rates and consequent high interest rates combined with issues on governance which came in the way of monetary policy action. Inflation surprisingly averaged higher in terms of both the WPI and CPI which was driven more by food prices. This does come as a surprise because with agriculture performing well (3.6% as against 3.1%), food inflation should have been under control. However, supply shocks for specific crops as well as distorted pricing through the MSP came in the way.
The fiscal deficit ratio also averaged 5.6% as against 3.9% in the previous term which made it difficult for the government to finance capital formation. With low growth coming in the way of tax collection, expenditures had to be curtailed to rein in the deficit at the targeted level. Further, on the external front, current account deficit has also deteriorated substantially in the UPA2 regime with a movement of -1.2% to -3.6% of GDP with gold imports being the chief cause. The pressure was finally seen on the rupee which tended to remain strong in UPA1 but declined by an average of 4.5% in UPA2 with the major hit being taken in FY14.
Therefore, on the whole it does look like the momentum that had picked up during UPA1 could not be sustained in UPA2. While the global situation was also quite volatile, it could probably explain not more than 10-15% of the performance as UPA2 did comparably well in terms of getting in FDI and FII funds. It was a case of all adverse conditions coming together, which coupled with policy issues were the impediments.
However, there have been some positives on the qualitative side given there has been an allegation made that reforms have tended to benefit the rich more than the poor. First, the Food Security Bill was passed, which is required to ensure that the poorer sections got this benefit. Second, the NREGA programme is a progressive policy that has provided employment to farmers between seasons. However, both of them would be pressure points for the fiscal balances going ahead. Third, the government has finally managed to crack the fuel subsidy bill, albeit gradually, by making people used to paying prices closer to the market. The steps taken through Aadhaar to link subsidy on LPG to this identification and increase diesel prices in stages, are commendable. Fourth, the manner in which the government got its act to bring down the current account deficit and improve the balance of payments this year with the help of RBI was noteworthy. Last, there have been some interesting reforms spoken of in banking which have been taken up in terms of getting in more banks with focus on inclusive lending.
Hence, while the basic economic parameters have not quite been maintained, in terms of inclusive growth UPA2 has progressed quite satisfactorily though the challenge will be to keep it within the confines of the fiscal constraints. Quite clearly, we will have to depend more on the private sector initiative rather than government for bringing a turnaround.

The hunger conundrum: Financial Express 12th January 2014 (Book Review of Forty Chances)

Philanthropy is a term associated with Warren Buffett, and when one reads a book by his son, Howard G Buffett, one knows what to expect. The title, 40 Chances: Finding Hope in a Hungry World, refers to different stories that have inspired and been dealt with by Howard G Buffett, as he travels across lesser developed countries, primarily in Africa and central America, to understand how hunger treats humans and, more importantly, makes demons of them. Underdevelopment, poverty, political strife, and indifferent and corrupt governments are perfect settings for acts of degradation, which lead to people becoming inhuman. The result is hunger and death.
The author starts from his home ground, agriculture, where he talks of how he, as a farmer, took up the occupation. Quite prophetically, he says, a farmer gets 40 chances to deal with the earth in his lifetime in order to make a difference. This is the entire time period in which a boy takes up farming, becomes a grown-up and then hands over the reins to his children. These 40 chances are analogous to stories he narrates of his own experiences across the world, which could provide lessons—if we are willing to learn. Getting funds from his father for charity was one part of the story, but more difficult was to make use of the funds effectively to ensure that these reach people who need them, and creating delivery channels for this. The stories bring to the forefront the sharp reality of life: what we call progress is very peripheral in nature and there are countries, if not continents, which suffer from acute starvation. Meeting such people, taking their photographs and narrating their stories form the core of this book. Some stories may disturb the reader, as these talk about inhuman incidents, which are commonplace. Buffett talks about young girls in African regimes, who are raped continuously by insurgents or the military. Their life is over even before it can begin. Boys are forced to take drugs when they are less than 10 years old, so that they may lose their sense of feeling. So when they grow up, they can kill without batting an eyelid. Countries like Angola, Somalia, Sudan, Congo, etc, have many such examples of innocence being lost at an early age, with, virtually, no solution in sight. The reason behind this is invariably high levels of poverty. We read a lot about charity and good work being done by NGOs in these countries. However, Buffett raises an interesting point: given the extent of suffering and starvation even today, has this philanthropic work actually meant anything or is it just a drop in the ocean? A way to look at it is to say if these drops did not exist, the suffering would be more. A more realistic or pessimistic view could be that at the end of the day, it hardly matters. Buffett actually calculates and shows how something to the tune of $5 million is required to keep just one village running in terms of basic food or supplements. There has to be spending by governments or else these measures will remain more of the ‘emergency variety’, which alleviate, but cannot solve the problem. Buffett says such emergency intervention is, at best, a painkiller. He is full of praises for celebrities who do their bit and talks, in particular, of the work done by popstar Shakira in Columbia, where her Barefoot Foundation has set up schools, following it up in Haiti and South Africa. Although such work goes deep, it has limited effects and cannot be really scalable. He also acknowledges the work of musician Bono, who has done a lot on the health front in Africa. Buffett also brings to the fore an issue, which is probably even more pertinent in all developing countries and has come in the way of farming: ownership rights to land. This would be of interest in India, because often with unclear rights there is less incentive for farmers to put in more, as they never know when their land will be claimed by someone else. In a number of countries, land is owned by the governments, but with a high level of illiteracy, farmers are deprived of their farming rights by unscrupulous intermediaries, which results in displacement. In fact, we could also juxtapose our own quandary here when we talk of land reforms and the recent bill, which devises a formula to compensate farmers for the takeover of land by corporates or the government. As ours is a democracy, we still have rules. But in autocratic regimes, one does not have a choice. However, the dilemmas are the same. A country like India should think hard on the issue of farming being displaced to placate industry. Quite clearly, governance is the issue that has to be taken head on. This is one of the major reasons why a lot of NGOs have failed, as their work needs the support of better rule of law. Buffett also talks of water as a scarce commodity, which is, invariably, responsible for disruptions in the lives of farming communities. Africa and countries in Central America are dependent on farming and face constraints when water is not available. Water shortage leads to ‘no crops’, which, in turn, lead to starvation. Combine this with the growth of banditry and the fact that aid sent by NGOs tends to get diverted to a large extent. Bandits ensure that people do not starve to death, but plunder a large part for themselves. All this is done with political patronage. The trick is to ensure that aid flows in uninterrupted, which will stop once organisations know it is not working. Therefore, there is some method to this plunder. But Buffett is optimistic and narrates success stories of cocoa growers in Ghana or Belize and the more innovative P4P programme, which involves using aid to ‘purchase from poor’ farmers and hence bring in a virtuous circle. Dumping surplus grains is not a good idea, as it depresses prices and farmers suffer. Similarly, monetising aid—where food is sold and the money is used for other projects—is a bad idea. The book is all about Buffett’s experiences and the work done by NGOs, with both success and failure. One needs to work hard to tackle issues such as farm productivity, food, hunger and starvation. In terms of providing support, the main role has to be played by the government. Norman Borlaug, the father of green revolution, gave us the idea and, quite clearly, we have to take it forward. Buffett’s solution is a package: improve productivity, be sensitive to the needs of farmers, have better governance and focus on the poor. This is the only way forward and though the journey is long, one has to persevere and be patient. There are no quick-fixes to this global problem. Solutions need to be customised with the society we are dealing with.

More idealistic, less practical: Financial Express 9th January 2014

RBI’s report on inclusive banking is visionary and idealistic, which has to be suitably calibrated with the existing system and structures in order to work. The creation of new kind of banks, review of priority sector lending and a revolutionary thought of dispensing with SLR are some issues that provoke discussion.
First, the definition of inclusive banking is laudable as the aspiration is to ensure that every adult has an account by January 2016 with Aadhaar being the facilitator. This goes along with access to credit, and certain norms have been laid down for credit as well as deposits and investment to GDP for every district. In fact, a distance factor has been brought in so that no one has to walk for more than 15 minutes to reach a point of contact. While this is a perfect picture of a perfect banking system, the question is one of incredible cost and financial illiteracy. Shouldn’t the existing system be incentivised to do it rather than create new structures? Second, the report talks of creating payment banks which take small deposits and invest in short-term SLR securities with zero risk like a narrow bank. Given that operational costs are high and return on short-term paper lower than the cost of deposit (there will be products offered with CPI indexation), will such banks be viable? Third, there is a case for having new wholesale banks, which could be subsidiaries of existing outfits. These banks would deal only with wholesale deposits and could be wholesale investment banks or wholesale consumer banks based on the number of branches they have. By keeping a minimum threshold of R5 crore for a deposit, these banks could mimic what were the DFIs earlier, which were transformed to universal banks due to an unviable model. One is not sure if this model would work as banks gain from CASA deposits, which will not be available. On priority sector lending there are some fairly aggressive suggestions. The first pertains to increasing the limit from 40% to 50%. This goes against the grain of an open financial system and antithetical to the ‘One Hundred Small Steps’ report discussed some years ago and Narasimham before that. While banks would rarely openly oppose such lending, pre-empting 50% of the 73% of funds (rest 27% set aside for CRR and SLR requirements) available for a sector, which runs a higher risk of becoming an NPA, may not be palatable. In fact, the report shows how high the NPAs are in the regional banks which are heavily tilted in the priority space of farm and SME loans (urban cooperative banks). With RBI voicing concern over building NPAs, having more space for priority lending is unlikely. The report further asks banks to charge commercial rates on farm loans with the 2% subvention rate being transferred to the Aadhaar account. The argument is that no loan should go at lower than the base rate and the 7% mark of course. If this rule is removed, then banks could charge a commercial rate which could come in the way of farm loans and vitiate the ethos of such inclusive lending. Connected to farm lending, there are suggestions made that banks hedge their commodity price risk through put options. There are two issues here. The first is that we still do not have options in domestic commodity trading and the second is that banks are not allowed to trade in commodities anywhere. Therefore, while the idea is progressive, the Banking Regulation Act has to change to let banks deal with commodities. The Forward Contracts Regulation Act has to be amended to let options in, which has to go through Parliament. Therefore, this is still some distance away as it has not happened for the last decade when futures trading in commodities was revived. Going one step further, the report is also asking for a great deal of sophistication in the operations of regional banks, which will be a tall order as they are spread all across the country and the staff has limited exposure to the world of derivatives. Therefore, expecting them to rebalance their portfolios and hedge commodity risk will be hard to implement. Another interesting recommendation is to do away with the SLR and CRR (to a large extent) eventually. There are three issues here. The first is that having SLR actually provides resilience to the banking system, which has been a strength during the global financial crisis. In fact, as the system becomes more complex with derivatives flooding the market, such buffers are needed to ensure the integrity of the system. Second, SLR is actually not quite as regressive. Banks get around 32-33% as CASA deposits that is virtual free money as it comes at a very low cost, which can be matched quite profitably with the returns of around 7-8%. Third, even today when the stipulated SLR is 23%, banks voluntarily hold on to excess of 4-5% in SLR securities as it makes sense for them. CRR, on the other hand, is effective for monetary policy and removing it weakens the toolkit. The report, though visionary, focuses more on creating new institutions rather than fine-tuning operations of existing banks to deliver similar results, which is possible. Increasing priority sector limits may not be considered to be progressive while removing SLR/CRR, though quite revolutionary, may not really get a buy-in.

Billboard 2013: Financial Express 1st January 2014

All the world’s a stage, And all the men and women merely players; They have their exits and their entrances, And one man in his time plays many parts.
– William Shakespeare Quite like the Bard had said, the economic scene last year had its share of dramatic moments which, though serious, could be narrated with a touch of the sardonic. Let’s look at the top-10 for the billboard. At #10, is the famous tapering programme of the US Federal Reserve, which actually happened just recently. But ever since May, everyone was guessing what Fed chairman Ben Bernanke would do and how Larry Summers would be different from Janet Yellen (both were the top contenders to succeed Bernanke as Fed chair, until Summers quit the race). The chaos the taper-talk caused in stock markets and the damage it did to exchange rates was quite phenomenal, and Bernanke surely left his mark by being the major market-mover, who did things whenever he thought fit. But such is the case with Every man in his humour (Ben Jonson)! Number 9 played out again in the US, when Uncle Sam played truant. The US debt ceiling was not a new issue but it resurfaced, waiting for an utterance. While the problem has not been addressed but simply deferred, it will come back to haunt President Barack Obama in 2014. The US also had a shutdown, something that no one could have thought of. Can a government actually come to a standstill with salaries not being paid? The world fretted and mocked. It was more a case of Man versus Superman and the President was left red-faced seeking acquiescence from the Republicans over the Affordable Care Act. Yes, it did happen. When Americans do recall the shutdown and the partisan politics that led to it, they will Look back in anger (John Osborne). Number 8 played out here, at home, with the proverbial state of denial. We have been consistently told that the economy will pick up during the course of the year and that all policies are in place. Every attempt of the government at moving a bill came with self-eulogy even as it was shouted down by the Opposition. The economy was on the rise and things would turn around. The monsoon was going to be good, and the farmer, who was neglected by our entire reforms process for 20 years, was going to stand up and revive the economy by spending more on consumer durables to set in motion the virtuous cycle. It has not quite happened, but still we are confident that the second half will be better. After all we have targeted 5% growth for the year and if the first half has delivered only 4.6%, then mathematically it has to be higher in the second half. As you like it, as Shakespeare would have said. At #7, is the concept of the red-line, where we have been assured that the fiscal deficit target will not be breached. How will this happen? Growth will be lower by 2.5% points than what was assumed at the time of the Budget. So, revenue has to be lower. Expenditure on interest and subsidies cannot be cut while the disinvestment and spectrum sales have not moved much. There have to be major cuts in project expenditure to avoid breaching the red-line. A case of Misalliance, (George Bernard Shaw)? At #6, are our stock markets that went crazy. Mapping stock movements to any aspect of the economy would have led to the conclusion that it was sheer madness. How can we be so confident of stock prices when there was less belief in our economic numbers? Yet, the markets cheered when state elections results came out, and griped in pain when tapering was first mentioned in May, and got ecstatic when FDI bills moved across the Houses of Parliament. How so?You never can tell (George Bernard Shaw). At #5, is India's affair with the yellow metal. Gold became our scourge. We suddenly realised that we were importing too much of this wasteful metal and our learned men tried to convince housewives on TV that they should not buy jewellery but invest in GSecs. Taxes were raised and curbs put on gold imports by putting a commitment to export. Not surprisingly, gold smugglers were gung-ho. But the current account deficit came down and everyone rushed to take credit. The situation is so much better now that there is clamour to lower duty rates and for the curbs to go. But, All’s well that ends well (Shakespeare). At #4, was the rupee's tumble. The rupee turned out to be the joker in the pack—while it has been weak for some time, taking a beating in May when the US tapering programme was first mooted by Bernanke, it is now showing signs of stability. In May, the market tried to guess how RBI would react, as the rupee fell to new lows and went close to the 69-to-a-dollar mark. A change in RBI guard and a change in policy from focusing on curtailing dollar outflow to encouraging inflow and a large amount of luck got the rupee back to the lower-sixties level. Will it get into the fifties? A midsummer night’s dream—a nightmare, rather—that ended in December! At #3, was the biggest announcement of the year—the clearance of investment projects by the government. This proved to be the game changer and while the R3.84-lakh-crore figure became famous for this reason, the latest revision puts it at past the R4-lakh-crore mark. One has not seen any of this massive amount materialise so far but everyone is waiting. In fact, very often we have gotten into the 3I-syndrome—interpreting intentions for implementation. Therefore, we are still Waiting for Godot (Samuel Beckett). At # 2, was RBI and monetary policy. When Raghuram Rajan took over, it was assumed that the rates would be lowered. But then, he raised rates even when inflation was low. Harold Pinter would have said, Betrayal, but the market cheered and said, that is the way to go. And then in December when we least expected, he paused on rates. Pinter would say, it has to be the eventual Homecoming. At #1, was our tryst with inflation. The monetary authority felt that the government was not doing its bit while the government felt that the monetary authority was intransigent on interest rates and could not control inflation. The central bank spoke of core inflation, WPI inflation, food inflation, CPI inflation, core CPI inflation at different times. But prices still do not seem to have come down and while we keep hoping that inflation will climb down from 11% to 9%, does all the inflation-reasoning matter anymore? The man on the street knows that prices have now spun out of control, and by blaming the supply side, everyone’s just looking to pass the buck. So, he is asking: Whose life is it anyway (Brian Clarke)? Since one axiomatically assumes FY14 will see higher GDP growth, lower inflation, good monsoon, lower CAD, lower fiscal deficit, strong rupee, strong reserves and of course, booming Sensex, one can hope for a happy new year.

Borrowing a retail concept for agricultural goods: Business Standard 25th December 2013

The issue of inflation has been a nuisance for the simple reason that we do not know how to bring down prices, especially of food. Discussions on the subject range from how Wholesale Price Index and Consumer Price Index inflation have moved to which is more relevant. Often, we draw conclusions from statistical biases of high or low base comparisons. It is not surprising that the man on the street does not believe us when we say that inflation is coming down because prices have always been high. Recently, Finance Minister P Chidambaram spoke about the right of the farmer to earn a higher income and, therefore, justified high minimum support prices. The solution, we are told, is to increase supplies. This argument is fallacious because if we are determined to pay prices that are not market-oriented, even higher supplies will be at higher prices. It seems like we have just lost hold of this problem.

One dimension rarely looked at is how prices move when the product moves between the wholesale and retail markets. We are aware that prices vary greatly across the country due to transportation costs, taxes and cess. As there are multiple wholesale markets that the goods traverse, which elongates the value chain, there is a premium on the base farmer price which the consumer pays. Add to this the incidentals and the margins at every level, the prices look different from the farm gate. But what about movement within the same city?

The purpose here is to draw a matrix of various products for which the difference between wholesale and retail prices is expressed in terms of percentage. This gives an idea of the 'exploitative surplus' drawn at the retail levels in four cities, namely Delhi, Mumbai, Kolkata and Hyderabad. Moving from primary mandis (where the first sale takes place) and secondary mandis, there are costs involved that are unavoidable because a farmer growing onions in, say, Andhra Pradesh cannot access the customer in Delhi on his own. But the data (Click for table) asks the question: why should there be such high margins when one is moving within these cities, where typically, there will not be more than two levels of intermediation - more likely only one. The prices are from the Ministry of Consumer Affairs website for November 29, 2013 (monthly data is not available). One may assume that the one day picture is generally representative of the margins.

Some of the takeaways from the table are the following. First, the variation in prices between the wholesale and retail levels is quite astounding, crossing 100 per cent in two cities for potatoes and onions. Second, the variations are more moderate in Hyderabad and Kolkata, to a certain extent. Third, the variations are sharp for vegetables , especially in Mumbai and Delhi. Fourth, the differences between wholesale and retail prices were lower (except in Mumbai) for higher value products such as edible oils. Mumbai was an exception due to the lower wholesale prices, being a major trading centre, while retail prices tended to move towards the average levels. Last, in the case of pulses, the variations were quite high, except for Hyderabad.

What can be the reasons for such variations, given Hyderabad is an outlier? First, wholesale prices are quoted in larger quantities (normally a quintal) and, hence, retail prices will tend to be higher on a per kg basis. Second, retailers tend to exploit market conditions and, hence, charge much higher prices when there is a shortfall in production, as was the case with tomatoes, potatoes and onions. Third, in cities like Mumbai and Delhi which are more affluent and, to an extent, ostentatious, it is easier to charge a higher price and still have buyers for the product. Fourth, margins in cities such as Mumbai and Delhi, where the cost of living is higher, tend to have retailers charge higher prices to meet their own standards of living. Fifth, a part of the price differential would also be for either the rent paid for their retail outlet or, in case of unorganised vegetable retail trade, bigger bribes to policemen to remain in business. Finally, the cost of storage in Mumbai and Delhi would also tend to be higher, given the premium on space. All these reasons would contribute to the differential in prices between the wholesale and retail levels.

This is one point of intervention for state governments. While we do talk eloquently on providing support to farmers or using monetary policy to lower inflation, a lot can be gained by standardising prices across markets and lowering these inefficiencies. In case of manufactured products, it is possible to have a fixed maximum retail price across the country and include all the taxes that have to be paid in different states. The idea is to make a move on the same lines for farm products. For this, agricultural produce market committee rules will have to be changed and cartelisation at various stages will have to be diluted so that the difference between the wholesale and retail prices is minimised. This, certainly, is not easy. Quite clearly, the conventional wisdom of prices falling when there is a good harvest no longer holds.

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Evolutionary road: Book Review of Transforming India Financial Express 22nd December 2013

We all know that India is a land of contradictions. While we have sprawling complexes with luxurious amenities and the latest gadgets at our doorsteps, the level of poverty is still abysmal. Yet the country ticks, and there is some invisible hand that keeps it going. There are, however, fissures that need to be cemented with urgency, as there are serious reasons for their emergence that can be distortionary, if not checked.
Sumantra Bose in his book, Transforming India, looks at a different aspect of the country, which is contrary to what McKinsey had done in Reimagining India, which was more of corporate India’s views on new India. The latter focused more on economy, technology and social issues, with a bit of political commentary. It was based on personal impressions. But in Transforming India, Bose looks at the world’s largest democracy in a dispassionate manner. A large part of it is factual and historical, with no judgments being overtly passed. Therefore, if Indira Gandhi ruled with an iron hand and used the Emergency to thwart democracy, it has been narrated without emotion. The first part of the book takes us through the political route, elaborating on political parties and their performance. The year 1989 was probably the turning point when the first government with alliances came in and there was a change in the style of governance. The Congress was dominant otherwise and while the communist parties ruled since the 1960s and 1970s in Bengal, and the DMK parties dominated in Tamil Nadu, the first sign of regionalism in the architecture of politics in India came when NT Rama Rao and his Telugu Desam Party assumed power. Today, several regional parties dominate in Jammu and Kashmir, UP, Bihar, Maharashtra and so on. This makes governments less stable, but there are counter-checks all along the way. The only Achilles’ heel for our democracy has been J&K, where there is still alienation to a large extent. To this, we can also add the north-eastern states, which have faced similar distance due to negligence. But, fortunately, while there have been insurgencies in some states, it has not reached the same proportions as in Kashmir. The author traces the history of Kashmir and how conditions deteriorated mainly due to the machinations of Indira Gandhi, who wanted to oust Sheikh Abdullah. In fact, Bose does analyse the way in which the Congress functioned, and, in a way, shows that several divisions in the country were motivated politically by Indira Gandhi (Punjab) and Rajiv Gandhi (religion). Indira brought in Jarnail Singh Bhindranwale, who became a monster. Rajiv tried to woo Hindu voters by opening the doors of Babri Masjid and then made amends by placating Muslims by going against the Shah Bano judgment. Things, however, backfired in Sri Lanka, with the ghost returning to haunt him. While there is focus on the Congress, as it has been the dominant power over the years, there is also a prejudice shown in representing Narendra Modi when talking of the Godhra riots—typical of views expressed by English writers. Therefore, while he pins the blame on Modi even though no court has convicted him so far, he still uses the term ‘allegedly’ when referring to the train that was burnt by Muslims, which was the starting point of the supposed retaliation. But, one assumes authors have their own biases and interpretations, and hence can never be completely objective when describing events in history. While most of these moves that were invoked by rulers, though Machiavellian, can still be taken to be a part of realpolitik, two chapters do set the reader thinking. The true strength of our democracy gets questioned when we look at Bengal and the rise of Maoism. Bengal has been discussed in detail and Bose starts the chapter with Singur, where the Tata Nano car project was strongly opposed. We normally get to read about how the TMC is anti-industry and why Modi should be applauded for welcoming the Tatas. But when one reads about what went on behind the scenes, where the poor were brutally displaced with the covert support of the CPI(M), there could be another strong view here. The conflict between the capitalist and farmer was never as glaring as in this case. This also explains why Mamata Banerjee strikes the right chord when she stands up for them. It is the same when Bose talks of the rise of Maoism or the Naxalbari movement, which began in the 1960s. While it started as an ideological movement trying to ape the then-famous Mao model of China, it got transformed in the second stage to a movement that provided respect to the downtrodden—especially castes that were treated in the most inhuman manner. A movement that provides shelter and respectable living cannot be debunked as being a meaningless one. The rising support for this movement was partly on account of the failure of the state to provide the same solution to the downtrodden. Transforming India leaves the reader thinking hard about the way our democracy is running. The concept of coalition politics is here to stay and we will have to work around it to make it work smoothly. The fissures that are stratifying society have to be tackled, probably not by force, which would only exacerbate animosity, but through reconciliation and integration. Equality and development are the obvious paths to follow and that is what we should aim at accomplishing.

Getting Volcker’s Rule to India: Financial Express December 18, 2013

The implementation of the Volcker Rule, which basically ensures, or rather tries to ensure, that the taxpayer’s money is not used for speculative trading, is important for two reasons. The first is from the point of view of prudence, where the sanctity of the ethos behind intermediation needs to be preserved. The purpose of intermediation is to channel funds from savers to borrowers, and banks have superior knowledge and analytical tools to bridge information asymmetry to evaluate borrowers. As a corollary, using this money for taking calls in the market is not desirable. The way it has been so far is that when profits are made, the traders and executives reward themselves with bonuses while losses are socialised with the deposit-holders bearing the brunt.
The second is more ideological in nature—why should we stop at just trading and not look at core lending—because the genesis of Volcker was the financial crisis where the concept of sub-prime lending sparked the rot. Therefore, it was lending which started the weakening of the walls. The present Volcker rule is obviously a good move as it tries to put a halt to proprietary trading by banks which means that they cannot invest in private equity funds, stocks, hedge funds and commodity pools, etc. However, there are exceptions which are allowed that tend to dilute the rule as they are open to interpretation. First, one can trade in government bonds. The assumption is that we can never have a crisis here. But in the American context, the fears of a US default are not unreal any more. This can create chaos in terms of revaluation of bonds by banks. This is definitely a risk carried given the turbulence witnessed in the markets on account of the recent shutdown, debt ceiling crisis and tapering activities in the US. Second, banks can continue with such trade outside the American geography, which means that a GS or JPM can continue doing so through its subsidiary in the European continent. Third, banks can take positions for clients in markets but have to hedge the same by taking an opposite position. In fact, even market-making is permitted where buy and sell orders are placed simultaneously. As the ‘The Economist’ has pointed out in a lighter vein, to understand and interpret this rule, one would require the help of psychiatrists and not lawyers. How does one distinguish whether it is being done for clients or on the banks' own account as the money becomes fungible after a point of time? While these issues have to be straightened out, a more pertinent issue for India is the extension of the principle of limited risk-taking to lending. How much are banks responsible for their lending, because as NPAs build up, the brunt is being borne by the deposit holders? Banks, both private and public sector, are continuously looking at valuations in the market and are very particular about making profits to reward the shareholders—the Government of India earns a lot through dividend payments (around R10,000 crore). The Indian system is robust and chances of things going out of control are remote. This holds all the more because of deposit insurance as well as the fact that 70% of the banking system is still owned by the government. But at an ideological level, how much risk can banks take in the name of earning profits for the shareholders? Today, there is considerable concern over the build-up of NPAs. Banks have often adopted sub-prime lending to prop up home loans. Should there be a check on such lending, because while it is not an issue today, one would tend to guess that in a couple of years’ time our system too would resemble those in the West where structured products would become more prominent? Basel talks of capital and Volcker, of trading risk. But lending risk is an issue worth discussing. Looking at the banking system in India, two immediate signals of risk carried by banks on their books would be the lending to sensitive sectors and the contingent liabilities. Commodities, capital markets and real estate are deemed sensitive sectors because their very natures make them vulnerable as prices could fluctuate quite perceptibly affecting the collateral value as well as the borrowers' ability to service their debt. This ratio has been coming down, albeit, very gradually in the last 3 years from 18.6% in FY10 to 17.4% in FY13. The bulk of this is in real estate, which does signal the system to be cautious. The ratio of contingent liabilities to total liabilities has been fluctuating, from 174.7% in FY10 to 192.6% in FY11, and down to 175.9% and 138.5% respectively in FY12 and FY13. These two ratios need to be monitored more regularly by RBI at the micro level. Quite clearly, one needs to evaluate the risk being carried by banks as they become bigger and more diversified. The government too will have to, at some point of time, let go of its holding to infuse capital. The solution is really to have more transparency in the operation of banks and this is what may be suggested. Banks could provide more details on the structure of their lending which would include data on industry-wise lending, proportion of lending at various interest rate bands, lending according to their own rating bands, NPAs in different segments as well as CDRs. These would indicate to the deposit-holders the risk being taken by the banks allowing them to choose their bank accordingly. Volcker’s Rule, though not very tight in scope, should be taken in the right spirit and structures built to ensure that banking should be free from high risk-taking. Trading activity is within the preserve of fund managers, investment banks, hedge funds and the like and should not be mingled with core banking where savers put their money based on an assumed safety of principal and interest. This should never be compromised when other options are there for banks to become traders.