Growth revival is the question: Business Standard 18th Febraury 2014

Three things stand out in the interim Budget. The first is that the government can rein in the deficit at a pre-determined level, notwithstanding the challenging economic conditions. Tax revenue was lower by Rs 77,000 in FY14 from the budgeted amount. Therefore, a 4.1 per cent deficit looks achievable in FY15.

Second, the quality of this achievement provokes comment as lowering the fiscal deficit ratio to 4.6 per cent from 4.8 per cent at a time when revenues slipped could have been attained only through rigorous expenditure cuts. Non-Plan capital expenditure was lowered by Rs 30,000 crore from the budgeted amount for FY14, while Plan capital expenditure was lowered by around Rs 9,000 crore. Therefore, this cut of Rs 40,000 crore actually compensated for the Rs 48,000 crore of tax revenue loss for the central government (the balance Rs 30,000 crore would be borne by states).

Third, social expenditure continues to be a priority of the government. While there can be a debate on its merits, the position taken is that the government would keep playing the role of a welfare state.

Such a Budget raises the issue of whether the government can actually be expected to contribute to the growth revival process this year. Such an approach runs the risk of discretionary expenditure being trimmed to balance the fiscal.

A slowdown in industry affects corporate, customs and excise collections and the final picture emerges only towards the end of the year. For FY15, the initiative to bring about growth has to rest with the private sector, which will depend on consumer spending as well as investment. For the former to work, inflation should come under control, while for the latter to fructify, interest rates have to come down. In fact, the entire thrust attempted to be given in a limited way by the Budget to industry through excise and customs  cuts work on the premise that interest rates move down to help spending on automobiles. Otherwise, the Budget is more tuned to getting the arithmetic right without compromising on committed expenditure — National Rural Employment Guarantee Scheme.

How to tackle Non Performing Assets in an unconventional fashion: Economic Times 12th Febraury 2014

The problem of NPAs and restructured assets has become quite exasperating with their combined level crossing the double-digit mark. We have also identified that they reside in sectors such as infrastructure, steel, textiles, aviation and mining. The RBI has been voicing concern and has warned banks to keep them under check and has said promoters cannot get away with bad loans. Do such warnings work? If the NPAs are caused by willful defaulters, then there is a case to chastise banks for supporting them. But if it is due to conditions beyond control, which is often the way we argue these cases, then what are the options for the system?
Further, taking action against promoters is time-consuming as it can get into an elaborate legal tangle. Three slightly non-conventional ideas are discussed here to tackle NPAs. The first set of measures relates to the RBI controlling bank activity. First, can the RBI mandate that banks should not lend to companies not repaying loans? This is not possible because one has to analyze why loans go bad and whether provision of another loan would help the cause. This is the raison d'etre for a restructuring exercise. Therefore, such a ruling will not work. Besides, lending decisions are with the bank management and can at best be placed before the Board.
Second, can the RBI actually set sectoral limits for lending? Currently, the RBI has limits on company and group lending. It is possible that the RBI can identify the top five sectors periodically - either quarterly or annually - and mandate that banks cannot go beyond a limit of say 10% of incremental credit to these sectors? This, while possible, is not advisable, as the regulator cannot come in the way of the operations of the regulated. Banks must have the freedom to operate based on their own commercial judgments.
Third, RBI can ask the boards to closely monitor lending to these vulnerable sectors and insist that banks should have an internal policy on how much lending is done to such sectors. Hence, while this will not be an RBI decision, it will be in a position to know in advance how banks are lending. This, prima facie, looks feasible as there is more transparency in operations.
The second set of issues examines ways to deepen the role of the RBI as a regulator to protect the integrity of the system and eschew a systemic problem The idea is to ensure that banks have adequate buffers for such eventualities. Here are two ideas worth exploring. The first is in the area of provisioning. With Basel III being implemented in the context of capital and RBI's own policy on dynamic provisioning for NPAs, the same can be extended to the case of vulnerable industries.
Can we think of dynamic provisioning for standardized assets in potentially weak sectors that are being supported by banks? Currently, the provisioning norms on sub-standard, doubtful and loss assets are quite firm. In case of standard assets, there is a general provisioning norm of 0.4% with higher rate for specific sectors. Here, the RBI can mandate that a current standard asset in a vulnerable sector will necessitate higher provisioning which scales up as one moves along the rank. Therefore, if infra has the highest NPAs and mining the lowest, then the provisioning norm for mining can be 0.5% and can go up to say 2.5% for infra standard assets.
Recently, such norms were applied for forex exposures and, hence, can be extended to this area, too. Banks would necessarily have to pass on this cost to the borrower or take a hit on profits. Currently, there could be an incentive for banks to delay recognizing NPAs to protect the profit line. But once such a provision is imposed on even a standard asset, banks will be left with no other choice on provisioning.

 

Retail prices a poor guide to credit policy: Business Line 10th Febraury 2014

Cash, not credit, drives consumer inflation. The RBI’s reliance on consumer prices as an inflation anchor is flawed

The RBI has stirred the discussion pot by linking monetary policy action to consumer price index (CPI) inflation. Quite clearly, there has been some acceptance of the recommendations of the Urjit Patel Committee Report, which has strongly advocated this line of action.

The theoretical justification is that CPI inflation is used all across the world for targeting inflation and logically we should do the same. It is accepted that we could fine-tune the present composition of the CPI in case it does not reflect the true nature of retail inflation, but ultimately it is this index which should be the guiding factor.

It is, therefore, interesting to look at the CPI composition and see whether interest rates have a bearing on the prices of the respective components.

It is important to note that in the West households use credit cards for virtually all daily transactions and hence their cost of transactions varies with the interest rate structure. This is not the case in India.

Further, there is less distinction between wholesale and retail prices in developed markets as the value chain is truncated, unlike in India, where due to structural factors there is a gap between the two. For non-manufactured food, the value chain could be between 5-6 levels, where cumulative costs and margins get embedded. A lot of consumption takes place in rural India where cash transactions dominate.

Around 75 per cent of the CPI would generally not be associated with the use of credit. Food items, which account for nearly half the weight of the index, are daily consumables and would be driven by cash purchases.

For the same reasons, interest rate changes will not impact expenditure on fuel (9.5 per cent CPI weight), housing (9.8 per cent) and transport (7.6 per cent). Bills for fuel and lighting at home are not financed by any institution. Rentals for housing have to be from one’s income, while transport costs too cannot be leveraged.

Education and medical expenses, if backed by bank loans, are normally undertaken because they are essential. Therefore, such spending is not likely to depend on the cost of credit. For clothing, credit cards may be used, especially if it is for purchase of branded clothing.

Even purchases in malls tend to be made more on the basis of debit cards, where the question of interest payment does not arise.

Myriad forces

Prices of transport and housing have less to do with demand as fares move up when fuel prices increase. Rentals move up or down based on the price of property and general economic conditions.

In case of food, while excess demand would push up prices, such demand is normally driven by cash purchases and can be linked with increasing wages. And, there is the Veblen effect — where goods are procured to make the individual look better, higher cost of credit is unlikely to be a deterrent. For the miscellaneous category, which includes purchase of consumer goods and automobiles, interest rates could have a bearing on purchase decisions, though both these industries are witnessing de-growth.

So, even for this balance 23-25 per cent of index, which could possibly be subjected to monetary policy impact, higher interest rates may not lower demand for such funds.

There could still be a counter argument that Indian society is progressively aping the West and using cards and loans often to satisfy its needs. To check on this, the credit profile of banks can be looked at closely.

Borrowing trends

Today, the share of personal loans is around 18 per cent in gross bank credit, which includes mortgages accounting for around 9.5 per cent. The rest of the credit is to agriculture, industry and services, which cannot be related with the CPI.

Further, credit cards (0.5 per cent), loans against consumer goods (0.2), education (1.1), and automobiles (2.3), the ones that can be related to the CPI, would account for a sum of not more than 5 per cent of outstanding credit. Even if all purchase decisions in this category are being guided by monetary policy action, not more than 5 per cent of credit would be affected.

Does this mean linking interest rates to CPI is not valid? Calibrating interest rates with CPI inflation is certainly a strong line for policy action if it is defined as a tool to align nominal interest rates with positive real returns.

One of the challenges for the economy has been a decline in financial savings as negative real returns have worked against instruments such as deposits. Today, a one-year deposit gives a return of around 8.5 per cent, which adjusted for 10 per cent, CPI inflation yields a real return of negative 1.5 per cent.

This has been a concern for the RBI. Therefore, increasing interest rates to protect real rates is a logical reaction from the central bank. But using this tool to bring down CPI inflation may not quite work out.

How then are we to react to the use of CPI as a guiding milestone for monetary policy? Tuning interest rates with CPI inflation will help to a large extent to protect savings, but not perhaps in bringing down inflation.

Elements of discomfort in GDP number: Business Standard 8th February 2014

The gross domestic product (GDP) growth number for FY14, though higher than that in FY13, brings in a modicum of discomfort when the internals are looked at. The low base for FY13 provided the impetus but the good part of the story ends here. There are essentially four concerns in these numbers. The first is that manufacturing growth will be negative this year and this is quite a blow as it comes on a low base, too. More important, we have not quite looked at improving this number all through this year and the logical question is how we view prospects for this sector next year.

Second, the government's role is ambivalent. The category of social and community services is to do well which is more of non-project expenditure. Growth in construction is again only around 1.7 per cent, and this is where government's project expenditure has a role to play. Our tryst with meeting the 4.8 per cent "fiscal deficit redline" has meant some compromise here.
Third, capital formation has slowed again and this is a major setback, probably expected as interest rates were high and few new investment projects were being taken up.

Finally, the share of consumption in GDP is also lower, reflective of the impact of high inflation during the year.

Therefore, while 4.9 per cent looks good, it has been achieved through a lot of fortuitous conditions, even if one assumes there will not be a downward revision at the end of the year. Quite clearly, reviving growth has to be high on the agenda of the new government which takes over.

 

Disturbing datasets: Financial Express 8th February 2014

Two recent economic releases from the government are both encouraging and disturbing. The revision in GDP growth number for FY13 to 4.5% from 5% provides a lower base for FY14 which will provide the statistical impetus in an otherwise disappointing environment. The fact that our fiscal deficit is 95% of the targeted amount is positive for achieving the redline figure of 4.8% of the GDP for this year. But where, then, is the cause for concern?
Revisions in GDP data have become a habit in the last four years. There are significant divergences from the initial number released in May and the revised number a year later in January and the final number. In FY09, the CSO got the number right all through, at 6.7%. In case of FY10, the initial number of 7.4% went up to 8% and then 8.6%. For FY12, it moved from 8.5% to 8.4% to 8.9% while the FY12 number was scaled down from 6.5% to 6.2% but finally reverted to 6.5%. The issue is that with such revisions, the sanctity of the data gets questioned. In fact, policy decisions taken based on such numbers, in retrospect, would sound inappropriate. There are two problems here. The first is that data collation is a challenge considering that ours is a complex economy where the unorganised sector dominates real estate, retail trade, business services, eateries, etc, cannot be tracked and their output would be subject to imputations. The second issue is conceptual. Ideally, one should not be changing weights used—as has been done this time, by using ASI data instead of IIP. While the CSO release says that the changes are marginal, it still does cause confusion in interpretation of the data. Ideally, any change in methodology should be done when the basic index or variable is being benchmarked with a new base year. Carrying this problem further, we have seen substantial revisions in both, the WPI and the IIP, this year which poses a problem for RBI. When Governor Raghuram Rajan presented his first policy, he would have used the August WPI inflation figure of 6.1%—which actually is 7%—while, in the October review, he could have gotten more aggressive if he knew that the September inflation figure was not 6.5% but 7.1%. In fact, for the year so far, the standard deviation for the differences between initial and final inflation figures was 0.37 which works out to annualised monthly volatility of 1.29%. The same story holds for the IIP which had a standard deviation of 0.44. The suggestion is that it is preferable to wait before releasing data especially when there are problems with the system in terms of information flow not being robust. Therefore, instead of having a lag of 14 days for the release of WPI numbers, it should ideally be deferred to the point that we are sure of the data. The same should hold for IIP, where we should ideally present only cumulative data as monthly numbers are misleading as several industries go through phases of bunching of production—which holds for both consumer and capital goods. In fact, given the impact of inventories, the CSO should provide separate data on sales—which can be procured from the income statements of companies—which will better capture manufacturing activity. In the case of the GDP, quite clearly, the processes have to be cleansed, else the credibility of data would be at stake as critics would disparage the entire growth story based on such fickle data. The fiscal deficit data presented, which shows that 95% of the target has been attained, when combined with the news that the government borrowing programme would be lower than budgeted should normally generate enthusiasm. There are reservations here as while it would statistically be achieved; the quality of the budget would necessarily have to take a hit. On the revenue side, there are moves to get the PSUs to pay higher dividend as tax revenue would be lower due to lower growth in GDP with excise and customs unlikely to pick up in the last quarter given that industrial growth, which is negative so far, can just about move to the positive zone. The Budget also has a huge sum of R40,000 crore as non-tax income from communications and the spectrum sale, which would be critical here, along with the disinvestment amount of R54,000 crore, likely through the SUUTI sale as well as cross-holdings by other PSUs. Quite clearly, any success on the revenue side will be on the account of the PSUs providing support rather than fiscal efficiency. It may still be argued that the government would be within its rights to garner revenue through these routes. But, on the expenditure side, the slippages are more compelling. If the food, fertiliser and fuel subsidies are summed up, so far around R2 lakh crore out of budgeted R2.2 lakh crore has been consumed. With three months to go, logically, on a pro-rata basis, there should be a spillage of at least R40,000 crore (at the rate of R22,000 crore a month). If the redline is to be met, it has to be through either rolling over this amount to next year by not paying it (budgets are based on cash being paid and not on accruals) or by cuts in capex. Last year, the government had cut down on capex from R87,500 crore to R73,500 crore. This year, capex is likely to be R99,000 crore. While assuming the role of a welfare state can be justified in an economy like ours where poverty ratios could be anywhere between 25-30%, cutting down on this expenditure may not be the best way out to attain the 4.8% fiscal deficit number. More importantly it will affect GDP growth in FY15 too, and spoil the party.

Corporate checklist: Book Review of Boards That lead: Ram Charan etc Financial Express 2nd Febraury 2014

MOST BOOKS on corporate strategy focus on leadership, CEOs and innovation. Rarely does any book talk of the role played by the board of directors—something which is taken to be more of a necessity than of value. Boards That Lead is different, as it talks in great detail about the potential power of the board, which can actually make or break an organisation. It espouses the importance of the board of directors and while a lot of it deals with what directors ought to do, there are several examples to show how they have made a difference in the past. The authors—Ram Charan, Dennis Carey and Michael Useem—each an expert and practitioner in the field, throw a lot of insights on how companies can benefit from having boards that work rather than just exist.
Usually, boards are seen as being necessary and often turn out to be ornamental bodies, running through chores laid out by statute. The authors base their case on how boards function in the US. There is basically a checklist for all directors drawn by the authors on three broad areas: where they can make a difference, where they should be involved and where they should step aside. The boards should delegate, say the authors, most of the operating decisions to the top management, but should retain a guiding voice in 11 areas—directly in five ‘decision areas’ and ‘partner with the chief executive’ in six others—leaving all else to the top management. While such proactive leadership of these 11 areas is essential, knowing when to stop is equally vital because any case of micro-management could lead to strangulation and come in the way of progress. Interestingly, the authors explain how the right person should be heading the team through the unlikely example of the first successful climb of the Everest, when the leader was changed to get in the right person. Hillary and Norgay would never have been the chosen ones if Eric Shipton—who had a flair for climbing and would probably have been the first—had not been replaced at the last moment. For the climb, John Hunt was the so-called CEO, an untutored amateur and a professional manager. His strategy was to get in an army of climbers, sherpas, rations, yaks, etc, and he decided that the final climb would be by those who climbed well and were in the high camp—quite impersonal. It worked. Issues like selecting the CEO, maintenance of ethics, overseeing the compensation structure and ensuring competence of board members are necessary and every board should get involved in these. A partnership is required for strategising, setting goals, assessing risk appetite, resource allocation, talent development and creating a culture of decisiveness. Here, there has to be constant conversation with the management, especially the CEO, to ensure that the future path is known and understood. The authors, however, are quite certain that board members should stay out of execution, operations, delegation of executive authority and non-strategic decisions. This is where boards need to introspect and see whether they are doing what they are supposed to do. Quite clearly, the path laid out sounds compelling and logical. By putting them under a checklist, the authors actually lay a template, which needs to be pursued if it is not naturally imbibed by members. They also point out that the directors chosen should be those who add value and should not be there merely because of their stature—past or present. This is interesting in the context of India, as the tendency often has been for quite a number of boards to prefer to pick people who have reputed names in the industry, but may not add value, as they could be out of touch with the industry. The authors also warn against having dysfunctional directors who, at times, would tend to create disturbances in functioning to prove themselves. However, they do not quite spell out effective ways of taking them off the board. There are no solutions offered as to what should be done when things do not work. This is the problem with a number of boards of companies where directors are there to just add glamour in the annual reports, but otherwise end up toeing the line, especially when the chief executive is very strong in so-called professional companies or is the promoter who holds the reins by owning the company. Similarly, there are a lot of pages spent on the selection of CEOs. Given the recent discussion on the appointment of heads of organisations in India in both private and public sectors, one is not sure if these rules are really followed. This holds especially when an outsider is brought in through a short-listing process where there is opacity. The authors do not touch on this aspect, though they weave their story around that perscriptive. In the same vein, they tell board members to look out for a falling CEO and also work on creating a succession plan. But rarely do we have cases where CEOs are asked to leave before their tenure. And succession planning is never the priority with CEOs who are constantly looking for reappointment. We have had several reports and committees that talk of ideal rules of corporate governance and the authors here provide a checklist for these. They pose some questions at the end—which is probably the crux. The questions that have to be answered by the board would decide whether it wants to lead or just monitor operations. The latter is the easier option. Does it have the experience and diversity to put value on the table? Does it ensure careful selection of the board leader? Does it ensure that the right executives are in place? Does the board ensure a rapport between executives and directors? Does the board directly engage directors in business opportunities? And finally, does the board ensure the right tenor at the top? These are questions that have to be jointly answered by both the directors and the management. But that is possible only if both sets of professionals are genuinely concerned about the future of the company. That, in short, is the crux.

The downstream formula: Book Review of Tilt by Niraj Dawar, Financial Express 26th January 2014

NIRAJ DAWAR in his book, Tilt, strongly argues for a shift in strategy for companies, from what he calls upstream focus to downstream proclivity. Simply put, upstream strategies focus on the product. This is what the conventional textbook says and what was pursued by companies to remain ahead of competition. But with the advancement of globalisation, rival companies can catch up easily. For instance, a new flavour of chocolate or coffee can be replicated easily by competitors at a lower cost, thus reducing the novelty value of the product. Clearly, the so-called competitive advantage cannot last for long.
Therefore, CEOs must now look closely at downstream processes, which look at an issue from the point of view of a customer, and answer the question as to why a customer should come to them instead of their competitor. Answering this helps fulfill three objectives of a firm: one, it helps uncover a firm’s advantages in the eyes of a customer. Two, it identifies segments of customers who have a similar response to the question. So by grouping customers, a firm can better target its offerings to different segments. Three, it helps identify the criteria of purchase that a firm can use for positioning and, therefore, differentiating itself from competitors. Dawar presents three thoughts: first, the firm’s locus is no longer in the company per se, but resides increasingly downstream in the marketplace in interactions with customers. Second, firms should aim at not just building ‘sustainable advantage’, but also ‘accumulative competitive advantage’. Last, the skills and resources needed to move stuff can be bought, but those to engage with customers have to be ‘owned and honed’. Dawar builds his story on four themes that firms should address. The first is the identification of a company’s centre of gravity, where they need to sharpen the distinction between upstream and downstream activity. So the question shifts from ‘How much more can we sell?’ to ‘Why do customers buy from us and what more do they need?’ The second is what he calls the perch, where market networks are mapped. Here, businesses can harness and channel information flowing through marketplace networks to reduce customers’ costs and risks, and create lasting advantage. The third is called the ‘deep dive’, where the customer is the focus and the customer’s mind is the one to be leveraged. In the end, he consolidates the strategic implications of a downstream tilt and answers questions such as: are better products the better way to gain competitive advantage? Are innovation and pace of industry dictated by technology? Can you choose your competitors? More importantly, are downstream competitive advantages sustainable? This is where the concept of accumulative advantage comes in, as his belief is that such advantage accrues and hence does not diminish. The author tells companies to move from upstream to downstream, and not just look at the former, which, in essence, is the theme of the book. While Dawar does talk mostly on downstream advantages and the perils of being obsessed with upstream processes, companies must remember that upstream innovation, too, should continue. It is a necessary condition, though not sufficient to get competitive advantage. The so-called cutting-edge comes through the downstream factors. As there are no fixed templates for the latter, there can be innovation here.

Another ideal(istic) report from Mint Street: Financial Express 23rd January 2014

The Urjit Patel Committee report on monetary policy framework is voluminous and comprehensive with firm theoretical foundations. It puts forth a thought and argues the pros and cons and then takes a call, and hence looks at all aspects of the issue. It cannot be questioned for omission though the reader could have a different view. And, in economics, where several theories exist, stances are not singular.
If one asks whether the approach is monetarist, the answer is ‘yes’ as it targets inflation specifically. Is it Keynesian? The answer is ‘no’ because while it talks of the importance of growth, the focus is still on inflation-targeting. (What happens to India Inc, which is worried about interest rates coming in the way of growth?) Would it come under the rational expectations school? Yes and no. Yes, because it does prefer to give all information in advance though it leaves it to the committee to have the last word to provide the ‘surprise element’ or ‘noise’. Now, let us look at some points that provoke further thought. Targeting retail inflation, exclusively, in India is debatable. An index based on items which are not usually supported by credit like food, clothing, transport, etc, would not really be affected by policy measures, thus making it less effective. In developed countries, this makes sense as there is little difference between WPI and CPI as the system is efficient. In India, the variation could be between 2-3%. Also, credit cards are widely used to buy all goods which imply that interest rates can affect consumption, which is not the case in India. On the other hand, using CPI inflation to justify high interest rates is all right in the context of real interest rates, but policy can affect at best the WPI components. The report argues that WPI is incomplete and excludes services. But then how many prices of service products are driven by credit flows? The basis of monetary policy is excess demand driving prices a la Irving Fisher. Therefore, ideally, benchmarks should be set for both the inflation concepts. Related to CPI inflation, targeting 4%± 2 percentage points is quite ambitious. CPI normally reigns higher than WPI which could at the best of times come in this range. By targeting CPI, we run the risk of moving asymptotically towards this mark but never getting there. This will create problems for the Monetary Policy Committee (MPC) which has to justify inflation when it has little control over these components. At another point, the report argues how the government ought to keep wages in check as higher MGNREGA wages or higher MSPs have led to inflation. But rural wage hike has been linked to higher demand for food products which have not kept pace with supplies, thus leading to higher prices. Therefore, while such inflation will come in the way of monetary policy action when only CPI is targeted, policy measures per se would be impotent to influence such spending, thus blunting their efficacy. This will make it more difficult to administer policy—especially when there is a solitary goal which cannot be overridden by, say, the growth objective, something that is possible today. The second area of interest relates to monetary policy transmission. The focus seems to be more on the overall environment in which we operate rather than the direct impact, as the repo cost for any bank is very small in the calculation of the base rate. It rightly points out that banks’ decisions are affected by several other factors. Here, there are some provocative recommendations made. First, it argues that banks need support from distortions in the system caused by differential tax treatment on financial instruments such as FMP or small savings rates being fixed to G-Secs. Second, it wants a lower SLR which should be aligned with the Basel III requirements. Two points can be made here. First, as mentioned in the report, banks hold excess SLR voluntarily. Therefore, to say that private sector is crowded out is not right as banks are willing takers. Second, banks prefer SLR as the returns are good and there is no fear of NPAs. Therefore, they hold on to SLR for sound commercial reasons. Given that another arm of RBI is fretting over NPAs, lower holding of G-Secs cannot be ordained by the regulator. However, if RBI is serious and feels strongly, it should put an upper limit for SLR-holding by banks and penalise any excess investments. Is RBI willing to do this? A novel approach is to bring in-term repos aggressively which will be aligned to market conditions and will affect the base rate through deposit rates as well as help to regulate liquidity. This process has already begun and it needs to be seen how the term repo rate will replace the overnight repo rate in the medium-term. Finally, there is a tilt towards RBI having more independence. This has been an ongoing controversy where various Governors have been typecast as being independent or compliant. At a more pragmatic level, the central bank is a facilitator of transactions and should ideally be in conversation with the government. The report is aggressive in suggesting a concrete wall (the MPC may not have government representation) between the two. But, to draw an analogy, the RBI is like the CFO who should fine tune the system to meet the expectations of the CEO (government), who has to take a broader economic, social and political view. Hopefully, such a structured approach, when accepted, will address this conundrum.

Column: Almost unfree: Financial Express 18th January 2014

There have been discussions among economists, business leaders and other critics on the absence of an enabling environment in the country from the point of view of doing business. The World Bank has also rated us quite low on its scale of ease of doing business. Now, the Heritage Foundation has brought out its annual Index of Economic Freedom, which ranks India at 120 among 178 countries. Within the five broad categories of ‘free’ (score of 80-plus), ‘mostly free’ (70-80), ‘moderately free’ (60-70), ‘mostly unfree’ (50-60) and ‘repressed’ (less than 50), we fall in the ‘mostly unfree’ category, which is disturbing.
The Economic Freedom Index (EFI) works on the presumption that the best situation is where every individual has the freedom to work, invest, spend, move, own property, produce, etc, with few impediments. Governments need to create an environment that allows all this to happen by not just helping individuals but also keeping out of the way. The EFI looks at four broad factors covering 10 attributes which are evaluated to arrive at the final score. India’s score is 55.7 in 2014, and the silver lining is that it has increased from 45.1 in 1995. The earlier ranks do not quite matter as the number of countries in the set kept changing depending on the availability of data. Hong Kong leads with a score of 90. The four broad areas are ‘rule of law’, ‘limited government’, ‘regulatory efficiency’ and ‘open markets’. Out of the 10 parameters that have been evaluated, India was mostly free in 3 attributes, moderately free in 2, mostly unfree in 1 and repressed in 4. Generally speaking, this is not a good showing at all. In the ‘rule of law’ category, the EFI looks at property rights and corruption. We are at the borderline of property rights with a score of 50, which has not changed for the last 20 years or so. The issue that has been pointed out is that the protection provided to preservation of such rights is weak as the judicial system, though independent, is susceptible to prolonged processes which are expensive and also subject to political pressure. On corruption, we have always scored low and the best was 35 in 2009, against a present score of 31.5. One can hope that with this issue of governance coming up strongly in our polity, improvement could be expected in the next few years. The second area relates to ‘limited government’ where both government spending and taxation (fiscal freedom) are considered. The scores are 77.8 and 79.4, respectively, which is not bad on a relative scale too. However, government spending had scored a high of 90.6 in 1999. Quite clearly, a progressively higher deficit run by the government through spending has militated against the space to individuals. The ‘regulatory efficiency’ category is interesting, which covers business, labour and monetary freedom. The low score in business freedom (37.7) follows the World Bank Doing Business view given the challenges any entrepreneur faces. We do not do too badly when it comes to labour freedom with a score of 74 which comes under the ‘mostly free’ classification. Conditions are easier and there are exit options open for labour. But monetary freedom is low at 65.5 and has come down from a high of 77.2 in 2007. The high persistence of inflation comes in the way of efficient use of monetary tools by the central bank and this has been the case in India where an inflationary environment has made things tough for RBI. The fourth category, ‘open markets’, is where trade, investment and financial freedoms are evaluated. In terms of trade, we do not do too badly, scoring 65.6. In fact, compared to a decade back, when the score was 23.6, there has been more than doubling of the effort here. Investment freedom remains low and here the EFI looks more closely at the FDI rules, where India is not considered to be too open. For domestic investment too, the environment is not hospitable and overlaps with the business freedom index. The investment freedom score was 50.8 in 2006 and it has been downhill since then. FDI has been increasing in the country; but this index would say that if we were more open to such investment, the flows would have been larger which would have benefited growth. Last, India is again low on financial freedom, and this is more a regulatory and policy issue. With the government controlling the larger part of the financial system and having several pre-emptions under the umbrella of affirmative lending, the flexibility to operate and become more efficient is hindered considerably. The EFI is, most certainly, a wake-up call for the government to look at the faultlines and address them. These indicators comprise the economic and business environment, which has to be tuned to the requirements of accelerated growth. Almost all these indicators are within the confines of our legislative bodies and there is a pressing need to bring in the right policy framework to revive investment. Today’s economic plight is symbolic of our shortcomings in all these aspects. When we talk of policy inaction and impediments to do business, which also involves corruption, it is a grievance of almost the whole of India Inc. The limited fiscal space we have is due to high deficits and, given that we talk a lot on inflation but do little about addressing the problems, the monetary freedom level too is low. RBI’s latest group report on inclusive banking, which talks of more priority sector lending combined with the criteria of forcing banks to open branches in unbaked areas for new bank licenses, would actually bring down the level of financial freedom further. Since it is agreed by almost everybody that opening up the reforms and reducing controls helped the country to move out of the stagnant equilibrium path, it is evident that we need to do it all over again to move away from this state of ‘almost unfree’ as per the Heritage Foundation. Doing so, by addressing these five issues where we are sub-optimal, is the way ahead.

Attention, please! Book Review of Daniel Goleman: Focus Financial Express 19th January 2014

Daniel Goleman, known for his pioneering work on emotional intelligence, goes a step ahead in his latest book, Focus, in which he talks about the necessity of being focused to succeed in life. He believes that our minds tend to wander and stray almost 40% of the times, thus dissipating our efforts right from the time we start going to school. The main culprits are ‘distractions’ like email and texting.
There are two parts broadly in this work. The first includes observations and reasoning of what we do and the second is more focused on leaders and what they should be doing, but do not. Based on science and several case studies, Goleman delves into the difference between sensory and emotional distractions, as well as ‘top down’ and ‘bottom up’ attention. He believes that emotional distractions matter more than sensory ones. Being spontaneous is more important. Also, letting the mind wander can make us lose a game, as he shows in case of sportspersons (top down), who lose when their minds start thinking of others in the race. Here, he points out how marketers work on our spontaneous (bottom up) attention rather than planned reactions when creating advertisements to catch our attention. On the other hand, letting the mind wander can be constructive too if somebody suffers from attention deficit disorder. They are able to conceive new ideas—Richard Branson being a classic example here. Quite interestingly, Goleman shows that the mind tends to be the most focused when people make love, followed by exercising, talking and playing. And the mind is the least focused at the workplace, thanks to email and texting. He gives a rather interesting example of how being focused works very well in a rudimentary area: memory. Tibetan monks are able to remember pages of notes easily, as they have been trained to do so from childhood. Hence translators for Tibetan speeches are able to do their job with consummate ease and accuracy. Considerable willpower is needed to remain focused and Goleman talks of three attributes that are essential: disengagement from an object of desire, resisting distraction and staying focused on the final goal. When he moves over to leaders, he draws patterns based on studies and surveys. CEOs rarely like to be told the truth about them and do not want to see themselves as others do, which is a weakness. As leaders go up in the power echelon, they do not want to hear anything unpleasant. Creating these blind spots is a recipe for failure. Goleman gives the example of how George Bush’s inner circle kept up the belief that Iraq had weapons of mass destruction, which turned out to be an embarrassment. Also, no one questioned the wisdom of buying derivatives and it was this ‘shared deception’ that led to the financial crisis of 2007-08. Goleman confronts Malcom Gladwell’s theory of 10,000 hours to success, which, simplistically speaking, says it takes roughly 10,000 hours of practice to achieve mastery in a field. Doing things mechanically does not mean spending that much time. One needs to introspect along the way and take in feedback regularly to move ahead. This may be a lesson for several leaders, who continue in positions of power for several terms. This is pertinent in India, where several CEOs in both family- and non-family-owned businesses, including private banks, never give up their tenure. CEOs need to spend time introspecting and should ideally be not moving from one meeting to another. By doing so, they never stay focused on what has to be done for the organisation. In this light, Goleman feels that we need to map competencies to select a CEO or leader. His various interviews with CEOs show that few crossed eight competencies, while the ideal number should be 14. He ends by quoting Dalai Lama, who felt that any action taken by a leader should answer some questions: is it for me or others? Is it for few or many? Is it for now or the future? Only then will we be on the right path. Goleman’s book is extremely interesting and should be read by all leaders, including CEOs. The two key aspects of not being focused and getting involved in myriad tasks, as well as an absence of ‘self-awareness’ are the stumbling blocks for leaders and their organisations or countries. The book is easy to read and Goleman restricts the scientific jargon to a minimum so that it can be picked up by the layman.