For the love of finance: Book Review of Dominant Finance: Financial express April 20, 2014

Sunanda Sen is a name all students of economics are familiar with. Rarely does a student complete his/her course without referring to her articles. Therefore, it need not be mentioned that Sen’s book, Dominant Finance and Stagnant Economies, is brilliant. The book puts in perspective the state of finance in the world today, which is dominated by certain sections. This, in turn, has turned things upside down in developing economies like India, making them more vulnerable.
The concept of global finance has evolved over the years, from the time conditions were controlled to a present state of deregulation. In the old days, loans used to be tied. This meant that donor countries lent money on the condition that the receiver should spend it to buy goods from the donor and, finally, repay the loan in hard currency. This was a challenge for the recipients who were invariably short of foreign currency. Such loans helped speed up the growth process in donor countries, as their exports benefitted. India has gone through this phase too, with the last instance being during the time of reforms when the International Monetary Fund provided a loan to India with conditions attached. Today, even though financial markets are sophisticated, world economy remains fragile. This, says the author, is due to the prevalence of a hegemonic order of financial institutions, which has caused the financial crisis to aggrandise instability. Let us see how Sen puts together the pieces: there has been a rapid expansion of markets in goods and services, as well as financial flows over the years. But these flows do not lead to the creation of real investment, that is, physical assets. While there has been accumulation of financial assets, the same has not happened for physical assets. Further, the distribution of such benefits has been uneven and, more often than not, policies are guided by the dominant investor—the relentless call to open up emerging markets and create policies towards such enablement are manifestations of the influence of these countries. Two things have resulted from these developments. The first is the concept of derivatives, which has proliferated across the world on the premise that markets are efficient and information is available to all players, which, finally, gets reflected in the price. The second is that the concept of structured products has come in, where one multiplies assets by originating and distributing assets, which has led to the creation of higher levels of profit compared to the ‘commitment models’ run by banks traditionally. Now, the growth of credit is no longer constrained by capital and own reserves, which was the check imposed by banking systems across the world. Another point made by the author is that as growth centres emerged in developing countries, there has been, simultaneously, a considerable amount of inflow of FII funds, which have gone mainly into secondary equity markets, real estate and commodities. This has not really helped growth, as it engenders more of speculative activity and also bids up prices of commodities, especially food and fuel. In fact, Sen is quite critical of the role played by the commodity futures market in India in fuelling inflation. Additionally, governments have provided a lot of sops to these funds and markets through capital gains tax being liberalised. Consequently, there is less incentive to invest in debt, as equity, though risky, is given preferential tax treatment. The book is a collection of articles, some of which have been published earlier, but revised to fit into the current context. The view is quite pragmatic, unbiased and, more importantly, hard-hitting. Giving examples of India and China, the author proves that an overbearing sign of hegemony of finance, controlled by corporates in industrialised countries, is manifested when footloose capital has sway on policies in host countries. We can see it in India today, where policymakers are always looking to cater to the needs of developed countries, rating agencies and multilateral institutions. Quite clearly, we need to take a relook at the way in which these financial flows behave.

Which way will the two new banks IDFC, Bandhan Financial Services go? Financial express 18th April 2014

The granting of banking licences to IDFC and Bandhan Financial Services is interesting when looked at from the point of view of the character of the institutions that have been chosen by RBI. One is an MFI while the other is an infrastructure-finance company. If an NBFC was awarded this privilege, then the transition would have been relatively seamless. But once we have an infra-finance company and an MFI in the frame, the future paths become eventful. Quite evidently, both the institutions must have chalked out their plan that convinced RBI and hence there is a lot of thought that has gone into it. But it would still be compelling to conjecture on the issues on the table. Let us look at the MFI. It has a good spread across the country, and given its predilection to operate in unbanked territories and lend to the underprivileged, the priority-lending task can be met with consummate ease. Creating branches is not an issue if the circumference will be where it is. But once it decides to get into mainstream banking, then scaling would be a priority where they move from rural to urban and metro areas. When we talk of SLR, the bank has to bring in treasury and risk experts to manage the funds and meet the regulatory compliances. ALM becomes complex, unlike its MFI activity where funds received are parked for short-term across the portfolio. Therefore, to begin with, the physical space covering branches and ATMs along with human resources would be the main areas to look at. A low-cost model followed so far would not require highly-qualified staff as microfinance is more a relationship-based banking, involving gelling with the customer. While garnering deposits from the existing clientele would be easy, spreading to other regions will require banking skills, which have to be developed. Therefore, there is a huge scope for institutions like the Indian Institute of Banking and Finance (IIBF) to pitch in here. In fact, the nuances of commercial banking need to be learned and imbibed by the staff so that they are equipped to do business under the regulatory environment. As long as MFIs stick to their clients, the model works fine. Once they start transitioning to deposit-picking, their pricing model will change. First, the existing customers who pay 20-22% currently will coexist with the new ones who are financed through higher CASA deposits, which will go at a lower rate of interest. This will, however, be temporary, for once the old loans are repaid, then there would be a level-playing field for all borrowers. But again, the MFI bank will have to walk the rope on whether or not to continue with microfinance, which is less collateral based; or move fully to regular banking, which is based on collateral. There will be a dual interest rate structure and it is a matter of conjecture as to which of these business lines will be preferred by the MFI bank based on cost of funds, returns, cost of administration and, ultimately, quality of assets. They also have to touch the 18% farm loans sub-target, and while the present set of loans may largely qualify as priority-sector lending, attaining other sub-targets would require a different array of skills. The same will hold for corporate-lending as well. The IDFC case is unique because unlike the earlier DFIs that changed to universal banks, there is no case of two institutions in the same group that are merging, which was the case with ICICI and IDBI. The present structure of an infra-finance company would find the asset side easy to manage as it will be an extension of skill-set it already has. One of the two areas of difference will be on the liabilities side, where the institution has to turn to retail unless the preference is to be like foreign banks, which are more corporate. But, at some stage, the retail focus has to come in when it looks at household deposits. While creating structures would be important, given that it is starting from the beginning, it could also experiment. Novel models of transaction banking, say, an internet bank, can be established where everything happens on the net and physical brick and mortar branches are minimal. The other area that needs work would be, of course, priority-sector lending, as 25% of branches would have to be located in unbanked areas. This could be done in a scaled manner where the ratio is maintained as the plans are built. But there has to be a major scaling-up of branches and staff and this would take time. Farm-lending and SME-lending require different kinds of mindsets relative to plain vanilla corporate banking. In a way, these two entrants would quite obliquely come under an amorphous differentiated licensing system, though it has not been overtly stated. The MFI route is more a niche banking player, which has to mature and grow ‘upwards’ from this state, while an infra-finance company would be one starting off roughly as a wholesale bank and then dilute this strain and grow ‘downwards’. Both these models hold a lot of promise and are novel, unlike an NBFC that already has most of these structures and the way forward is mainly restructuring the balance sheet. There would be a lot of employment opportunities opening up at all levels as both the banks would require different skills going ahead. Two questions arise—first, whether these models will succeed, and if there is little reason to believe that they won’t, what is the future of long-term and infra-finance? One may recollect that IFCI, which remains a financial institution today, also would like to get converted into a bank. IDFC was specially set up with a purpose, but if its model is changing, we would be left with probably just IIFCL to look at the infra space. It is expected that once converted into a bank, IDFC’s roadmap may change just as it did for the two other banks, even though it could still borrow and lend for infra projects. The same holds for the MFI, if it chooses this route over a period of time as a scaled-up MFI may like to move away from risky lending towards the confines of conventional banking. The second question is while the licences will be on tap, if the other 20-odd applicants did not qualify, will there be other players in the race? While the unsuccessful applicants could reapply, one assumes that RBI would give them reasons for their falling short. Or else, the concept of licence-on-tap may only be on paper. Banking is surely poised for exciting times, and while one assumes that these two are just the beginning and there will be more to follow, competition will increase. The models adopted by them will set templates for the others to follow so that the system as such moves to a different level of sophistication.

The state within: Book Review of Good Governance in Financial Express, April 13, 2014

Good Governance: Never on India’s Radar
Madhav Godbole Rupa R500 Pp 300 THE FRUSTRATION of the common man with corruption is palpable today to the extent of despair. With the general elections underway, the issue that has dominated is governance. We tend to think of governance as a contemporary development and this is where Madhav Godbole, a former bureaucrat, strongly differs, presenting his views in the extremely engaging book, Good Governance. Having worked in the public sector and witness to various instances of corruption, Godbole provides an in-depth view of the state of affairs in the country. What is important to know is that the rot that had set in from the time of independence has accelerated in depth and width across the country over the years. This dilution in governance standards has permeated our entire political, social, judicial and business fabric. Godbole feels that we started on the wrong foot, with little obeisance being paid to governance by our first prime minister, Jawaharlal Nehru. The role and importance of the Cabinet has denuded over the years and decisions have been taken with scant respect for the body. For instance, Nehru’s wish made India give up its claim for a permanent seat at the Security Council in favour of China. Later, Rajiv Gandhi withheld the Thakkar Report without the Cabinet’s consent and so was the case with the anti-defamation bill. Even in recent controversies relating to the 2G, CWG (Commonwealth Games) or coalgate scams, all decisions were taken without consulting the Cabinet. We have tended to follow the PM’s form of governance rather than the Cabinet’s, which has made the PMO extremely powerful. We talk a lot about right to information (RTI), but even though it is path-breaking, several exclusions have been made, including Prime Minister Manmohan Singh’s refusal to allow the noting made on files open to public scrutiny. This has diluted the concept and the power bestowed to the people through this medium. Add to this the CBI’s exclusion and the idea of RTI becomes weaker. The author also quotes how the Central Vigilance Commission did not allow the documents perused by it on defence deals to be open for RTI. At the micro level, the PMO has not permitted RTI to be applied to the deals of Robert Vadra on the plea that he was holding them as trustee. On several occasions, the author talks of the three events that actually shook the concept of governance in the country: the anti-Sikh riots of 1984, Babri Masjid’s demolition in 1992 and the Gujarat riots of 2002. Many political parties were involved in different measures, but everyone got away. The PM has been quick to dismiss elected governments like those of SR Bommai in Karnataka in 1988 or Kalyan Singh in UP in 1997, but did not do so for the Gujarat government when the 2002 riots took place, reflecting fragile Centre-state relations. The culprits of the anti-Sikh riots still roam free and various reports brought out by committees and commissions on rioting that followed the demolition of the Babri Masjid have not really put anyone in the dock. The author also dwells a lot on the excesses during the Emergency. At another level, the performance of institutions has diminished, as governance issues have come into play. The judiciary has not been free from such malaises either and the author gives several instances of how judges have given questionable verdicts. Further, he writes about the escapades of some tainted judges, which could make the reader lose faith in this final authority. The fact that litigation goes on for several decades is appalling. He says as many as 30 million cases are pending in 20 courts, which are unlikely to be cleared in the lifetime of the accused. The judiciary has been misused by legal personnel to not deliver judgments with a series of adjournments, as this helps everyone make money. Interestingly, he talks about the Jharkhand Mukti Morcha bribery case where the PM was involved and bribes were offered to MPs to vote against the no-confidence motion. The court had ruled that an MP would be guilty if he took a bribe and abstained from voting, but if he did vote, then it would not be a crime! Godbole is also ultra-critical of the corporate sector, which, he says, has worked with politicians to thwart the system and to make sure that things work their way. He cites examples of how big corporates have paid for the travel of politicians—he gives names of Reliance, Vijay Mallya, the Hindujas, P Chidambaram, HD Deve Gowda, etc. The growth of crony capitalism, a term being used today too at the time of elections, has been deep rooted. He gives instances where, he says, politicians like Arun Shourie have urged the industry to break rules to get things done, revealing the close ties of the two sections. At the governance level, the IPCL deal with Reliance or the well-known Enron story cut across all governments, which steered clear of good governance for personal benefits. Even today, we have corporates fighting a regulator like Sebi. It becomes a habit to attack any stringent regulator to divert attention. This shows the high-handedness of industry, as it assumes that it can get away with anything. He does not spare the Tatas, too, and reveals how they approached the Supreme Court to ensure that the Radia tapes did not become public. He also strongly believes that any kind of industry lobbying is a plain euphemism for bribing. A major casualty of poor governance have been our institutions. In the name of secularism, we have broken the ethos behind this concept. The anti-secularism stance is argued through the government’s policy of appeasement, as evident by the Shah Bano case, absence of a uniform civil code, allowing Sharia courts, etc. The counter view is that Muslims remain disadvantaged in education, income, development, have their symbols endangered, etc. The fact that all parties keep this alive ensures that this issue can be exploited in every election. Second, the sacred fundamental right of freedom of expression has been violated repeatedly, with our judicial system not providing any recourse against violators. He gives several examples like banning of a girls’ music band in Kashmir, banning of James Laine’s book on Shivaji, the threat to Salman Rushdie and so on. Third, the post of governor of a state has been demeaned. It has now become a reward for loyalty to the realm. Fourth, the civil service has been virtually choked with regular threats of transfers if they are not subservient to the state. We have still not changed the system to provide immunity of tenure, as every party in power uses this service as a means to its own ends. While everyone likes to defend what is happening, the author laments that the external world sees us without a bias and it is not surprising that India ranks very low on human development, doing business, competitiveness, corruption, etc. Godbole does have a series of suggestions as to what can be done to reform the system. But the fact remains that we all know what has to be done, but no one wants to change things, as every ruling party in power benefits from non-governance. Godbole narrates incidents when the system has failed due to the selfishness or sheer absence of character of the protagonists. He quotes extensively from newspapers and journals, and hence steers clear of any case of defamation. He does get preachy at times, but then, as an author, he has the right to prescribe what is good for the community. The book is timely, as it coincides with elections and is an eye-opener for those who may have preferences for different parties on governance issues. But, ironically, when one reads this book, the impression received is that there may be little to choose from on this single parameter. If there is any consolation, it is that this is not something new and has been in play since independence.

Don’t blame jobs scheme for food inflation: Businessline April 12, 2014

Higher rural incomes have raised demand for non-food items. And, why grudge a general improvement in living conditions?

One of the explanations often put forward for high food inflation is an untoward increase in rural demand due to higher incomes. This has been linked with the NREGA programme which put in around ₹25,000-30,000 crore on an annual basis. The moot point is: Can ₹30,000 crore of additional purchasing power actually lead to higher demand for food?

Typically, the wage programme is provided to farmers between two seasons, which means it is not really the destitute who receive this money. Hence, it supplements or enhances existing consumption as against addressing basic needs. In fact, it is more likely that households would migrate to better living standards when incomes increase. Also, given that agricultural GDP in FY14 is expected to be around ₹20 lakh crore (at current market prices), a sum of ₹30,000 crore works out to just around 1.5 per cent. Quite clearly this cannot be a driving factor for food inflation at a time when agriculture is growing at around 3.5 per cent.

A counter argument put out is: While this ₹30,000 crore per se may not be going towards food consumption, the NREGA wage has indirectly fuelled higher food consumption by lifting all wages, particularly in the unorganised sector. This view is questionable on two grounds: First, it is the responsibility of the system to provide food to all; and second, recent NSS (National Sample Survey) data on consumption in FY12 along with the CSO (Central Statistical Organisation) consumption numbers for FY13 actually show that the demand-supply imbalance theory does not quite hold.

Income effect

NSS provides data on shares of consumption for rural and urban households from FY05 to FY12. The observations are revealing.

First, the share of food in total consumption expenditure of rural households has actually come down from 55 per cent in FY05 to 48.6 per cent in FY12. More importantly, the shares of cereals, pulses, vegetables and fruits has either not changed, or come down. The components of egg, fish and meat (3.3-3.6 per cent) and milk products (8.5-9.1 per cent) showed an increase. Given that the poultry and dairy industries have never spoken of high demand but high input costs, quite clearly the cause of inflation lies elsewhere. Among the non-primary farm products, rural households spent more on beverages, which indicates better lifestyle. But these prices have been quite stable and in the realm of ‘manufactured goods inflation’.

Second, there was an increase in the share of clothing and bedding (4.5-6.3 per cent), footwear (0.8- 1.3 per cent), durable goods (3.4-6.1 per cent) and the miscellaneous category. This is indicative of rural households preferring to spend a greater proportion of their income on lifestyle. Similar trends have been observed even in urban households.

This corresponds with the CSO data for the entire economy up to FY13. Here too the observations are similar. The shares of food, beverages and tobacco have come down from 40 per cent in FY 05 to 35.2 per cent, with food declining from 33.8 per cent to 28.6 per cent — the trends are sharper than those revealed by the NSS. Components like milk products and dairy products show a marginal decline.

These studies do indicate a migration in consumption pattern away from food to non-food items. This is but natural in the income cycle of households when they move away from conventional food items to processed foods and later to non-food goods.

Why complain?

Are there any takeaways for the policy makers here? First, we must stop attributing higher inflation to a demand-led imbalance. Second, supplies have to be augmented, and often price increases have been caused by specific crop failures. Third, the change in consumption trends is positive for the economy, as households are moving up the consumption chain.

It partly reflects the trickle down effects of growth; a larger proportion of the population is able to access goods hitherto restricted to the upper classes. The manufacturing sector is forced by circumstances to align its future strategies towards the lower income households. Customising their products to these micro requirements has actually been a win-win situation for all segments. That is the good news.

Trait forward: Book Review of Triple Package in Financial Express April 6, 2014

OFTEN, WE tend to associate certain communities with success, be it in business, politics or sports. We also say it is the inherent culture of the community that makes its members aspire for success. Such associations then become stylised facts when validated with data. This theory has been analysed in great depth in the context of the US by Amy Chua and Jed Rubenfeld in their rather fascinating book, The Triple Package. The authors identify groups in American society, which have tended to excel more than the local Americans, and draw similarities across certain attributes of their way of life that could be used as explanatory templates.
Some of the societies or races that stand out are Mormons (part of the American community), Cubans, Africans or West Indian blacks, Jews, Indians, Chinese and Koreans. But do they have something in common? Here, the authors’ research, supported by data, leads to the conclusion that there are three basic characteristics that drive these groups to succeed. The first is superiority complex. Invariably, these groups feel they are better than the rest, which makes them work harder. More importantly, this has been passed on through generations. Second, there is a feeling of insecurity, which, ironically, goes with the constant urge to remain ahead of others. The third characteristic is what the authors call impulse control. Here, basically, it is the spirit of ‘never say die’ or ‘give up’, which makes them pursue their goals relentlessly. When one looks at these three traits, it would logically follow that any successful person has to necessarily have these characteristics. However, what is interesting is that there are entire communities or groups, which work towards ingraining these values in their children, and this is what separates them from others. If we observe some of these societies and the way in which their children are brought up, we would understand this better. At a very rudimentary stage, parents are never happy with their children’s performance. This makes the children work that much harder; this holds especially in China. No level of achievement satisfies the parents. When these thought processes are ingrained along with rigorous indoctr nation, it leads to the proliferation of successful communities. Further, when these communities migrate to a new country, there is an added incentive to ‘prove’, which makes it even more challenging. Even if it is a local community, like the Mormons, for example, it is their way of life to be highly disciplined and strive harder. The authors draw some good examples of these triple-package classes and their success routes. Asians and Asian-Americans constitute some 30-50% of the student bodies that take to music in the US, with a distinct domination by the Chinese and Koreans. Chinese and Indians have had success in business as well, though, surprisingly, there are no Chinese CEOs in the Fortune 500 companies. Here, the reason attributed is that the Chinese, as a rule, show deference to authority and do little at self-promotion. While these communities in America work their way up, it does not mean others do not have these characteristics, the authors point out. They give the example of Steve Jobs, in whose case the triple advantage pervaded, even though he did not represent any typical community. Therefore, the triple advantage should be looked at as being a characteristic of successful people, which manifests itself in communities. Are there any downsides to such an approach? Yes. The authors point out the triple-advantage package has its own pathologies. Insecure people tend to get neurotic, which is a major negative outcome. Superiority can lead to arrogance and promote prejudices across society. Impulse denial can come in the way of enjoying oneself, as people become tools to an end because these cultures tend to focus on material or conventional modes of success. Having a ‘chip on the shoulder’ continuously becomes a burden, as one strives hard to prove oneself too often. Therefore, this triple package is a mixed blessing and can end up misshaping lives and breaking psyches. On deeper thought, another downside is that parents tend to see childhood as investment, training and preparation for the future. There is also the possibility of parents ‘instrumentalising’ their children to live up to this feeling of superiority. This can also lead to depressive symptoms in children. Does America have the triple package? Here, the authors blow hot and cold. The kind of crises we have witnessed in the US, be it the financial crisis of 2000 or even the savings and loan crisis of the 1980s, shows that it may have lost the plot somewhere. However, there is reason to believe the nation can rediscover this triple package. The authors feel the three ingredients hold hope even today. The US still has the superiority feeling, which should be reinforced to move ahead. On insecurity, the authors contend it has been brought back politically after the 9/11 blasts and economically with the rise of China, and, therefore, there is a realisation to do something about it. Lastly, the main driver that has to be worked upon is impulse control, so that it is back to where it was earlier. This means the pitfalls observed in communities do not necessarily hold for countries. The insights provided in the book are interesting, especially for India, where we try and map communities with success. The authors, of course, steer clear of prejudices and have strong outreach foundations for their hypotheses, especially when it comes to Africans or Asians. In India too, we tend to associate certain classes with certain activities—it could be trade, enterprise or even learning. But whichever the group, the triple package is continuously at play.

How we performed in FY14: Financial Express April 4 2014

With the fiscal year coming to an end, most of the data points are predictable, though the final numbers will be out in the next couple of months while the revisions could follow after a year or so. Can we draw a balance sheet of all that has been achieved and lost during the course of the year? In fact, being the terminal year of the government in power, it is normally judged on the most recent performance, in this case, that in FY14. How does the canvas look? As can be expected, it is a collage of different colours and images indicating a mixed picture. The achievements have been significant given that while the year began on a neutral note, things deteriorated quite fast during May-September. However, the government was able to pull things through and reverse some of these adverse conditions to ensure that we got back to the starting point at least. Four achievements stand out here. First, the fiscal deficit target has been achieved, and notwithstanding the compromises made, credibility has been restored at a time when virtually all the assumptions made when the Budget was being drafted were trashed as growth slowed down for the second successive year. Bettering the fiscal deficit target by 0.1% of GDP and keeping it at 4.6% was a positive. Second, the aggressive combat against the CAD was another breakthrough at a time when conditions looked desperate. The relentless battle against gold imports was finally won and while a lot of support came from a sluggish economy which lowered demand for ‘non-gold, non-oil’ imports, the CAD would eventually be around 2% of GDP, which is remarkable. We are in a situation today where we can seriously reconsider gradually freeing the same. As a corollary, getting in big dollars by opening the swap window on FCNR (B) deposits was a strong supporting measure. Third, the government has gradually shifted the price of diesel to near-market and more importantly, we have gotten used to it. If persevered with, we should be in a position to remove the subsidy element over a period of time. It has been done in a non-obtrusive manner which is important. Fourth, interest rates have been quite appropriately anchored around inflation to ensure that real interest rates are maintained which has been done under a lot of pressure given that the government was against such a move. RBI certainly stood firm with its consistent approach. RBI, too, has made significant advances on the policy front with various committees making their recommendations on conduct of monetary policy, inclusive banking, and NPAs and the decision on new banks is also on the anvil. Were there any misses? For sure, we had a fair share of them. To begin with, industrial stagnation continued for the second successive year which is serious because if it has to be revived, a lot remains to be done. Persistent negative manufacturing growth smacks of a recession and it appears that this trade-off has been accepted. Second, capital formation has slowed down from 30.4% in FY13 to 28.5% this year. Quite clearly, stalled infra projects, inability of the government to spend, high interest rates and reluctance of the industry to invest on account of slack demand, etc, contributed to this decline in investment. The task of the new government would be to restart the investment cycle. Third, related to capital formation, savings has taken a hit due to the prevalence of slow growth in income and high food inflation. With retail inflation being close to 10% on an average basis returns on financial instruments has been negative in real terms notwithstanding RBI’s aggressive stance. Fourth, quality of assets has taken a hit, with the sum of NPAs and restructured assets crossing 10% this year. While the right sounds have emanated from Mint Street, this problem persists and would do so as long as the economy is not chirpy. RBI has also been forced to defer the Basel III implementation by a year to provide succour to the system. Fifth, while the external account looks good today, we have added sharply to our external debt which is $ 426 billion. The debt-to-forex-reserve ratio is at an all-time high of 144% and has been climbing steadily. This money has to be serviced at a higher cost. There have been some macro indicators that declined and recovered subsequently, thanks primiarily to extraneous forces; and while everyone could have played a role, it was actually nature or sentiment that drove them. The first is inflation. Onion prices went up when the crop failed and while everyone pointed fingers at everyone else, it was entirely attributable to nature when food inflation went up prodigiously. Supplies were not augmented by the government nor did high interest rates help to bring them down, but in the last couple of months, increase in supplies restored normalcy. The second is the stock market. While one does not expect rationale to drive the indices, there has been a lot of new-found enthusiasm which is linked to the outcome of the elections to be held later this month. It has been termed the clichéd irrational exuberance so far, but the elections connection does add a bit of strength to the sentiment. Last, there has been a status quo like situation in other indicators. To begin with GDP growth is expected to be marginally higher than that of last year of 4.5% and though it is a step down from the plus 7% projected at the beginning of the year, it may have a tinge of respectability. The solace is that other economies are also struggling, including China! And FII flows which turned negative ever since Ben Bernanke spoke of tapering, have started coming back; While these inflows are not in large numbers, they certainly signal a turnaround. The same holds for forex reserves which would have returned to the $290-plus level, which looked distant when things turned adverse. Are we better off or worse off than last year? This is a tough question as it means one has to rank these variables in terms of importance. However, the ultimate vindication of the overall performance is an unchanged stance of the rating agencies—which, whether we agree or don’t, matters in the international community. If our rating has not changed despite all these factors, maybe we have done right and it is time to smile.

Paying RBI governor his due: Financial Express, 27th March 2014

significant achievement of Ben Bernanke after leaving the Federal Reserve was that he earned more in a 40-minute speech than he did while serving in the coveted position for a full year. He was paid around $250,000 for a speech in Abu Dhabi, which was at least 25% more than his Fed salary. This amount is also a reflection of the value of a central banker when he or she is out of the office.
The pay of a central banker has been controversial. Should the position be rewarded like that in the private sector or should it be aligned with any other public sector job? There are no answers here if one looks around the structures across countries. The US Fed post carries a salary of around $200,000 per annum. Now these figures are not fully transparent as the perks involved in terms of housing, cars, entertainment, travel, etc, may or may not be a part of the package. One can assume that the amount stated on the website is the cash component. Since such positions do not have bonuses as it is paid by the government directly or indirectly, there can only be tangibles that go with the job but cannot be carried after the tenure ends. Therefore, the incumbent has to think of the future based on this amount.
The Fed position is quite low down the echelon. Mark Carney of the Bank of England was higher with something close to $800,000 per annum that has been justified to an extent on the basis of high housing cost, which presumably is a part of the package. Haruhiko Kuroda of the Bank of Japan was quite low down with $235,000 in 2012, while Mario Draghi of the European Central Bank got $520,000, which again has been justified as being necessary as he serves interests of 17 nations. The highest paid governor was from Hong Kong in 2012 with a pay of $1.2 million. The Swiss National Bank chief was marginally below while the Italian head took in $700,000.
As against these numbers, the RBI governor is paid around R20 lakh (RBI website), which works out to a very low number of less than $35,000. The position is both important and critical as the entire economy functions on the basis of what this institution decides. And given the need to balance the interests of consumers (regulation & safety), banks (intermediation), corporates (lending cost & practices) and government (public debt & monetary policy), the governor has a lot on the plate. Clearly, the institution deserves higher pay structures which would traverse across all lines as it is the organisation that works to achieve these myriad objectives.
RBI should be fully autonomous in terms of pay scales so that there is commensurate reward to the staff as well as incentive for individuals to find the job attractive. Currently, given that the pay could be at 3-5 times in the private sector, it is certainly not attractive in monetary terms, though could be fulfilling otherwise. The institution does provide compensations in terms of generous housing, loans, education allowances, etc, but it does not provide a secure future beyond the public pension schemes. For a governor who has a tenure, unless there is a backup income from the past or in the future, the only motivation could be to steer the ship with limited attention to compensation.
In fact, as the central bank sets the contours for compensation, the same trickles to the public sector banks too where there are vast differences in pay between public and private banks. The top private bank CEO is paid around R5 crore per annum with some dollops of ESOPs thrown in while the average could range from R3-4 crore. But the top public sector bank chiefs who run the same business in a different environment would have a pay in the region of R16-18 lakh (based on websites of some these banks). The fault is evidently not with the private banks that are probably paying based on performance or merit. It is the linking of public sector bank salaries (which is based on running a business) to government scales (which is non-revenue earning administrative in nature) that creates this anomaly.
The result is that public sector bank chiefs have greater pressure, deal with more complex balance sheets, have to drive their staff towards achievement and still earn substantially lower packages compared with their peers in the private sector even when the performance levels are comparable. This creates uncertainty in the post-retirement scenario as the accumulated savings are not adequate. Also, these chiefs have a less glamorous profile as their living standards are more modest with caps on all expenses. Therefore, they do get less media attention and have lesser probability of becoming lifestyle icons for the glossies with less written on their families and children studying in foreign universities or doing innovative business.
The point is that what happens at the top gets translated deeply right through the organisation where there are cultural divides. Some of these banks are trying to get over this ceiling by taking in specialists on contract basis which are rolled over. This is a way out but could discourage others who could be capable but are not chosen for the same job.
There is certainly a requirement to start benchmarking compensations in the banking industry. The RBI Governor’s and hence other senior executives’ compensation packages should be revised. The physical perquisites could be compensated by being included in the salary so that the central banks do not create a ‘real estate’ structure, which is currently the case. The same thought applies for commercial banks, which should also be allowed to do the same alignment with private sector salaries to motivate and reward its own staff and link the same with performance. This would certainly bring parity as well as increase motivation levels.