Piketty in India: Financial Express 29th May 2014

Thomas Piketty has kicked up a storm with his rather well-researched view on the pitfalls of capitalism as is practised in the West. While he does not quite predict doomsday like Karl Marx did over a century ago, he shows that inequalities have widened in western society and that this could be the downfall for the system as low growth and high capital accumulation would have no room for consumption. He prescribes progressive taxation as a solution. Where would India stand in this context?
India may be described as a semi-capitalist economy where private wealth has been allowed to grow freely, while the government remains important with combined central and state government expenditure accounting for a third of GDP. With economic reforms coming in, a thrust was provided to the private sector with substantial liberalisation for both domestic and foreign investment and easing of trade restrictions. While critics have called it crony capitalism, others have argued that the rich have benefited more than the poor. What is the true picture, if such a story can be discerned? Piketty’s tenets can be examined in the Indian context. Inequality exists in terms of both wealth and income with a strong relation between the two. Forbes lists the top 100 wealthiest Indians, who are from industry, being valued at $300 billion. Given that our GDP is a little less than $2 trillion, this ratio comes to around 15%, which is high. Piketty’s argument is that most of this wealth is of the nature of ‘rent’ as it has been inherited and not earned. In terms of income, the picture is ambivalent. The Ginni coefficient for consumption in India over the last 30 years shows a mixed picture. Based on data provided by the Planning Commission, the coefficient remained virtually unchanged in rural regions but increased in urban areas. It was at 0.28 in 1973-74 and 2009-10 in rural India indicating that economic stratification is less prominent and that the government’s social and economic programmes including MGNREGA have been equalising forces. In urban India, there has been an increase from 0.30 to 0.37 indicating widening inequality. Intuitively, one can see that large-scale migration to urban areas and skewed incomes in this segment has furthered inequalities here. In corporate India, the inequalities are stark and Piketty would argue that corporate managements have tended to legitimately pay themselves higher remuneration that includes compensation through remuneration and stock options which is not equal down the line. Also, the compensation structures are different across the private and public sectors. Interestingly, the share of wages and salaries to sales for the corporate sector has remained virtually unchanged over the years. But the Ginni coefficient in India in relative terms across other emerging markets is much lower as per World Bank data. In 2009, the coefficient was 0.42 in China, 0.55 in Brazil, 0.40 in Russia and 0.63 in South Africa, while it was 0.34 in India (2010). There is, hence, some comfort to be had here that India does better on a relative scale. Piketty has the view that a warning signal is given by the relationship between return on capital and rate of growth in income. If the former grows faster than the latter, then there is a problem. This becomes serious when growth in GDP plateaus once a high level is reached. With our potential GDP growth level not yet being attained and maintained, there is still surplus space left for growth. Further, return on capital when adjusted for inflation would be around 6-8% both in terms of corporate performance over the years and stock market refunds which average between 14-18%. However, when the industrial sector and economy slow down, the return on both equities and corporate financials also decreases, thus not resembling the Piketty inequality equation. What are his solutions? He talks of a progressive tax structure on income and wealth so that the rich pay more tax, which can be used for redistribution. Now, in India, we do have a progressive tax scale for income and a tax on wealth. But the entire approach is tilted towards the rich. The long-term capital gains tax is nil, which benefits the rich, and is questionable. The rationale is that more secondary market activity helps the primary market to blossom, which leads to capital formation. But we have not seen a lot of equity being raised and it is invariably the higher net worth individuals, investment banks and brokers who benefit from such moves when gains are made on the market. Piketty is critical of such tax systems that favour the rich without bringing any value on the table. While the government has made an attempt to tax the super-rich and the DTC would try and get in some more tax revenue, the fact is that there are lots of exemptions and arbitrage opportunities provided to pay low tax. The case of using Mauritius as a tax haven is a good example of taking advantage of tax arbitrage by operating in the market by FIIs. Thus, all systems gearing towards capitalism would invariably work towards self-rewarding. Also, the prevalent mindset is pro-capitalist where the myriad benefits provided to corporates through tax breaks (valued at over R5 lakh crore in FY13 as revenue foregone by the central government) is defended vehemently while expenditures on fuel and food subsidy and the MGNREGA programme valued at around R2 lakh crore is often critically debated. Therefore, the intelligentsia is also tuned towards supporting the rich. If the Indian story does display some resemblance of capitalist tendencies, are there chances of a future crisis? Prima facie, it looks unlikely because of two reasons. One, India has still not reached a stagnant rate of growth and there is plenty of spare capacity. Two, there is a growing bourgeois class that acts as a buffer and reassures the poor that mobility is possible and hence there is hope. This ensures there is still a large market for products and consumerism. The government nonetheless needs to embark on a growth doctrine which takes along the poor to ensure that the chasm does not widen between the rich and poor.

Marx for the millennials : Book Review Business LIne 18th May 2014

Legacy money rules, inequality’s rising — and the rich need to be taxed more

How will we know when there is true capitalism? When the capitalist figures out how to make money without employing anybody! Jokes apart, there are basically two laws of capitalism. One says the ratio of capital stock to income for any country is equal to the ratio of savings to growth in income. Intuitively, if savings are high and growth low, which is the situation in several developed countries today, then the ratio of capital to income becomes very high which is around 600 per cent in most countries.

The other law defines the share of income going to capital as the product of return on capital and capital to income ratio. With the return increasing over time with access to various assets, capital will get a larger share of income. In fact, when wealth is inherited and can be diversified the returns are higher than in case of an individual who has limited wealth and prefers safer avenues which earn lower returns.

This, according to French economist Thomas Piketty, is the crux of the problem of capitalism, which creates a crisis in the long run because when we over-invest in capital, there is little left for labour which is also what Karl Marx spoke of.

Marx spoke of a revolution, but the basic issue is that if wage earners are squeezed out, who will buy the goods that the capitalist produces? Markets are not self-correcting as is made out in textbooks and hence bourgeois economics does not quite work.

Dilemma of capital

Piketty’s Capital in the twenty first century takes us through this dilemma with a modern perspective. While Marx came to the same conclusion without using any statistics, he goes through heaps of data to draw the same conclusion.

However, economists such as Simon Kuznets and Robert Solow had shown statistically that this was not the case and that inequalities came down during the mid-fifties (1913-48), and technology and competition were the equalising factors. Piketty counters this argument and shows that it was more an aberration due to the war and that such uneven distribution of income was increased subsequently and has reached the 19th century levels today.

Piketty looks at the history of developed nations to show that all measures of inequality declined during the world war but have risen once again to the early 19th century levels with structures resembling them. This holds for the capital-income ratio too.

Inequalities can be understood in terms of the gap between labour and capital incomes. While labour income varies based on education and skill, Piketty points towards exacerbation of this inequality in the modern context where there are super managers who ensure that they earn very high incomes which may not be justified on conventional grounds considering that such labour can be easily substituted.

Therefore, the schism has widened. This, he calls, a society that is hyper-meritocratic. Typically, in such societies, managers pay themselves higher compensation (including generous stock options) and defend it on grounds of superior performance. Interestingly, this has been observed more in the English speaking developed countries.

Also, there is a strong correlation between inequalities in capital distribution with those in income distribution. So typically, while the top 10 per cent of the population has access to 20 per cent of total income, they actually have access to 50 per cent of capital or wealth.

The bottom 50 per cent would own no wealth. The question really posed is that when we look forward to the next 50 or 100 years, will these inequalities increase or move down?

His key take is that as long as the return on capital is higher than the rate of growth of the economy, there would be a natural tendency for inequalities to increase.

While such economies do bring in convergence such as knowledge and skills, it leads to divergences in social and economic order which are potentially destabilising. The processes that lead to the accumulation of wealth have forces that tend to move to divergence leading to inequality.

While land and rent dominated the pre-modern society, today it is the capitalist who dominates and reaps these benefits. Wealth is inherited or acquired and here the author feels the concept of merit does not really matter.

He is probably right because when we do look at the list of the top richest persons which are put out by various journals, there is an element of ‘rent’ which comes in where one earns money from wealth that just came down the line.

Wealth is not justified almost always by sheer enterprise. In fact, even in case of self-driven enterprise he points out that there are several elements of rent which aided innovation and hence there is need to address this issue.

What are his solutions? We can invest in knowledge, education and technology but this is inadequate to really increase growth. Only the so called poor or emerging markets can grow at high rates — which is a fact today because developed countries normally cannot go beyond say 2-3 per cent. He feels that we have to impose a tax on income and wealth. But we need to bear judgment here. Too much taxation will deter enterprise which will be detrimental. Therefore, a more calibrated approach is needed.

What he suggests is the first a progressive tax on income. By taxing the top echelons at a higher rate, and using these funds to redistribute to the poor, a semblance of equality can be pursued.

Tax them more

He suggests a progressive annual tax on capital. This will lower inequality and also prevent creation of dis-incentive for investment.

For this, politics matters and the rulers who have close links with the capitalists must be willing to tighten the laws. Often, they are responsible for the creation of private wealth and he gives privatisation as one glaring example.

The author admits, of course, that to ensure that there is no regulatory arbitrage, there is need to have a high level of cooperation between various countries. Intuitively, one can see that when companies make use of tax havens like Mauritius.

His solution is quite drastic in an age where everyone is talking of lower taxation. In fact, he also argues that governments could actually tax people, read the rich, more, instead of borrowing from them and paying them interest. This is one thought that will keep the reader thinking more.

He does make the narrative interesting when he draws stories from novels of Jane Austen to drive home his point about inequalities in various ages. The book surely adds a new dimension to capitalism and its ills which will find more takers today especially in the aftermath of the financial crisis.

RBI must exit bank boards: Financial Express 16th May 2014

The issue of governance of bank boards has come to the forefront given the state of public sector banks (PSBs), in particular. The P J Nayak committee, set up by RBI to recommend a way forward, has brought out a rather interesting report. A lot of what has been said will find takers but the important question is whether or not the government would be willing to give the space that is being asked for. While the committee has spoken about all that should be done, a simpler solution would be for the government to bring down its holding in PSBs to 49%. This way, it will still have representation on the board, but the organisation would be free to operate professionally. Thus, while recommendations have been made to lower government stake which will help the fiscal balances, it presupposes that this model would not be acceptable and suggests a new governance structure. The bold assumption is that the government would be willing to change the way in which it works through the banks. The committee has made several suggestions on restructuring of PSBs’ boards. Again there are recommendations of setting up new structures to oversee existing structures. It talks of a Bank Investment Committee (BIC) to handle all government investments in PSBs. This would mean creating a company, having a CEO, a board and other office bearers subject to the same pressures as the PSBs. Further, it suggests the creation of a Bank Boards Bureau (BBB) for selection of managements of PSBs. As there is a staff structure drawn up for BBB, it would run into the same problem where the selection of personnel for this board to select members of PSB managements would be driven by vested interests. A simpler solution would be just to let the UPSC select those eligible. This way, the best would come in, instead of those who are simply close to the government. The board is a very powerful concept as it provides direction and guidance for any organisation. A recommendation made on the ‘skills’ of members of the board merits discussion considering that most of these directors are also on boards of other non-PSB companies in the private sector. The committee talks of enhancing their skills as often the quality of board deliberations was not up to the mark. This means that the committee believes that they may not be competent and could be out of touch with the latest developments in the industry. At the same time, the committee puts a maximum age of 70 years for part-time directors. The question is how do we ensure that such skill enhancement takes place for persons who have retired from active work life but have the experience to deliver value in board meetings. The committee also links this with better remuneration for directors of banks that are presently out of the ambit of the 1% sharing of profit that holds under the Companies Act. By providing a return that goes beyond the sitting fees, which is even lower for the PSBs, there would be incentive for the directors to enhance skill-sets. At another level, the committee talks of having younger persons in the management. Here it presupposes that age is superior to experience, which can be sweeping as there is little evidence here. In fact, banking is a conventional business which works on the basis of managing risk of deposit holders, and anecdotal experience shows that age and maturity work better in running commercial banking as against investment banking where there is need for more adrenalin. The committee also wants PSBs to get away from a dualistic regulatory structure, which means that the government should cease to issue any regulatory instructions to them. This creates an ideological conflict because being the majority shareholder, the government, would have the right to exercise control while the best practices of governance would not give a nod. Even in the private sector, in an owner-driven company, the owning family tends to have the last word in the operations of the company. In that case, why not the same for a PSB? The committee rightly recommends that RBI should step down from the board of banks, which makes a lot of sense. Having a regulator on the board of the regulated actually makes the regulator a part of all actions, which raises ambiguity when it comes to inspection as all decisions have implicitly been approved by the regulator. However, in the same breath, it also recommends that the directors on board of old private banks should be approved by RBI. Given that we are trying to keep the government and RBI away from the functioning of banks, this step does look a bit out of place. An innovative suggestion, though a tough one to enact, relates to punitive action for evergreening. This goes to the extent of divesting the deviants of their jobs and taking back the stock options given. The rationale is that managements evergreen to make their balance sheets look good, and then walk away with good bonuses and stock options. Two questions arise here. The first is how is one going to prove today that a restructured loan is not an act of evergreening? All such decisions go through an entire chain—the CEO, audit committee, board, auditors, etc—before being passed. Therefore, identification will always be a challenge. The second issue is that, once detected, how one could penalise someone who has retired or left the organisation. This was the main challenge during the financial crisis where the decision takers of securitisation deals were no longer a part of the organisation when the catastrophe struck. Hence, they could not be penalised. On the whole, the committee has done a fairly commendable job and stirred the pot. The options have been provided but it looks like that it is finally up to the government to take a call on how much it is willing to loosen the rope.

Friction fiction: Financial Express: 15th May 2014

A subject that was never really important but became controversial recently is the issue of independence of the central bank. This brings up the question of what should ideally be the form of functioning of the central bank.
Central banks, all over, are owned by governments as they become the monetary arm of the government which ensures that ‘money’ performs the functions it is supposed to do. The fact that the government through one of its own arms owns the central banks does inherently imply a conflict of interest because the central bank has to finally be tuned to the owner. Counter-intuitively, if the central bank is not owned by the government, then who could possibly own the same? There cannot be any private party owning the currency as it affects both domestic and international payments. Thus, the ownership structure is unavoidable. This holds for all regulators, too, as the buck finally stops at the government. That said, how should the central bank function then? There are two parts to this question. The first is the physical structure where all appointments are based on a government scale, which means that the recruitment process follows the same as in any public sector organisation, as do the pay structures and movement along the echelon. Some positions are directly appointed by the government through a set process. The other aspect is the functioning of the organisation which, prima facie, looks professional in the Indian context. This is, however, the area where the present controversy over independence emanates and the organisation structure per se has not really been part of the debate. RBI performs five major functions that are critical from the point of view of the economy which go beyond printing currency. These are areas where the wisdom of being independent can be argued. The first is acting as the facilitator of government debt. Here, there is an ongoing discussion over the extent of RBI’s support to the government’s borrowing programme. There are references made by RBI to keep this deficit under control. The government, on its part, has a fiscal programme which goes along the FRBM guidelines. Therefore, there are two responsible entities with differing views. RBI has done away with the earlier custom of directly financing the deficit and all borrowings are through the market. In the earlier days, there was the concept of private placements wherein RBI took on the debt directly. Today, banks buy these securities. But, through the backdoor, the same is absorbed by RBI through OMO or daily/term repos. This happens everywhere—the QE programme is nothing but the same, or the buyback operations of the ECB where the central bank buys government paper in the secondary market instead. The effect is the same. Are central banks being pressurised here? The answer is no, because, first, it is the function of the central bank to handle debt and, second, as banks are holding more than the stipulated level of government paper, it does not really matter. When we juxtapose the liquidity requirements of Basel III, the SLR appears to be, in retrospect, a good concept. Second, RBI is in charge of regulation of the financial system. Therefore, when we speak of inclusive banking or having new banks or structures for NBFCs and MFIs, they are meant for the financial well-being of the economy. The regulatory moves are based on well-researched papers submitted by committees comprising a cross-section of regulators, government officials and players, besides academics, and is more a consultative process with comments being taken from the public. There is unlikely to be any difference of opinion between the government and RBI and, therefore, there is little scope for controversy. Third, the supervision function of RBI is based on professional expertise rather than discretion. Supervision of various aspects of the system ensures that all of them adhere to the principles laid down formally. Here too, there is perfect harmony between the government and RBI. It appears to be more of a joint venture to ensure that the integrity of the system is preserved. Fourth, monetary policy could probably be sole the bone of contention. The government would inherently like to have lower interest rates as it keeps its own debt servicing levels down. It may also like to have low interest rates to spur growth. However, the central bank works as a professional institution and has followed the path of an economist in this respect using its own research, studies, experience and judgement to take a call. Considering that there is a tradeoff between inflation and growth going by conventional theory, RBI has sought to draw the best point here. While the government has often commented on monetary policy being one-dimensional as it tends to look at inflation, just like how RBI has expressed its own wisdom on the fiscal deficit, the final call has been taken by Mint Street. And this is best borne out by the change of guard at RBI last year, where the stance of the institution did not change, which actually shows a combination of healthy debate and judicious action. In fact, governments, which are driven by political expediency, know very well that while it is polemical to talk of lowering of interest rates, inflation is more likely to lose elections than low growth. Fifth, RBI has to control the forex reserves and hence the currency. Here as well, both, the government and RBI, are on the same wavelength as a stable currency and accretion of forex reserves are high on priority as it makes economic sense for any country. The recent episode of crisis had both the entities in sync. So, is there really a conflict of interest or forced action? Indian experience does not really highlight any of these conflicts going beyond the rhetoric. The central bank has worked like a central bank and there is little reason to believe that this would be different under any political regime. This harmonious working has ensured that we have not been in a situation like that during the Asian crisis, or the Latin American countries, Turkey or Russia, where political interference in interest and exchange rates brought about catastrophic repercussions on their economies. Therefore, independence has not been a serious issue in our context and talking of it today is probably more hype given the changing political scenario.

A head start: Book Review 11th May 2014

HOW EASY is it to start one’s own enterprise? Maybe around a decade back, it was fairly cumbersome, as it involved a long wait until plans were put together, premises obtained, resources mobilised, clearances obtained and so on. In fact, there were several barriers to starting a business, as there were too many constraints, especially for a small entrepreneur. So invariably, it was always big companies competing against each other, while small ones struggled to find their bearings. But things have changed now. If we were to go by what Scott Duffy has to say, we can actually start our business in a span of 90 days. While this sounds simple, it is not quite so, as there are lots of things to be put in order before reaching that mark. In fact, for starting a business, Duffy says, 90 days are actually the upper limit. Ironically, while things are easier now, they are also more challenging, as there is always the fear of someone getting ahead of us. This is the basic theme of Duffy’s book Launch, in which he lays down steps to be traversed to launch a business. As per Duffy, gone are the days when one could sit, think and research intensively before zeroing in on an idea and then start looking for finance, the right people and so on. Today, everything is available at the click of a mouse. With the help of the Internet and social media, we can get ideas, discuss them, communicate with the world, take inputs from others and bring the project to fruition. Almost all administrative processes can be addressed through a single click. This way, individuals score over large companies, which are more structured and process-driven. This means that they invariably take much longer to implement things. Duffy believes that when we have less time, we tend to be more focused and hence efficient. In fact, in 90 days, one can go to the market, test the efficacy of the product, take feedback and make a well-informed decision on what to do next. Launch is like a guidebook with a lot of common sense. What Duffy says is not really a revelation, but practical wisdom. He breaks up the 90 days into three phases of 30 days each. Let us look at these three phases: the first stage is what he calls a checklist for the pre-launch. Here, we need to crystallise what our big idea is and be clear about it. It needs to be broken into small pieces, so that we can take them up sequentially. Duffy’s advice is that we need to surround ourselves with the right people and, more importantly, think big. That is the only way to succeed. Among the preliminaries is that we should be clear about how much we are willing to risk. We should avoid mixing personal wealth with business capital. Duffy talks about having separate accounts and hiring a book-keeper and attorney to ensure we are on the right track. Interestingly, he also talks of the need to have a chief venting officer. This could be your spouse who hears out your frustrations with no obligation to provide solutions. Duffy gets a bit philosophical and says when things do not go well, we should learn from these experiences. We have to ensure that one’s personal risk is minimised. This way, even if things do not work out, one can come back to the starting line without much loss. The second stage is what Duffy calls fuelling the tank, where one has to put together essential resources: human and capital. Here, the suggestion is that we need to be sure of what we want and which product to sell. We need to start from the last page and identify what can possibly come in our way, so that we have an exit strategy in place before we start the enterprise. As an entrepreneur, one also has to decide which jobs are meant for us. Should we be looking at the larger picture or try to do all the jobs: being a CEO, administrator, accountant and so on. Clearly, we need to work on our strengths and let other recruited experts look after their core competencies. This way, attention is not diverted from the core objective. However, one has to keep a check on the cash box to ensure that money is spent on the right things. The last stage, which Duffy calls the countdown and blast-off, is where we take the product to the market. His suggestion is to do one thing at a time. He explains this with the example of using a hammer and nail, as opposed to using multiple hammers and nails—the latter approach doesn’t work. It is better to create a single, perfect product. For salesforce, he favours crowdsourcing. The power of social media can hardly be emphasised upon here. Launch is more of a help book on what should be done when one is planning to start a business. The stress is on the steps that need to be taken and these hold for any line of business. Most of what has been espoused in the book cannot be contested, as it is based on simple logic. More importantly, it makes sure that we work with timelines and protect our wealth by separating it from business capital. Realising our own strengths, working on them, leaving other jobs to experts and understanding the risks and potential losses will make the journey safer. That, in short, is the essence of launching a successful business.

Sowing inclusion, reaping NPAs: Financial Express 1st May 2014

An increase in NPAs is normally attributed to factors such as ownership, management, credit assessment quality, economic downturn, sectoral performance, wilful default or just bad luck. Is it possible to separate the causes that are macro in nature from the banks-specific ones? The accompanying table provides information on the NPA ratios of various banks for FY13 in different sectors based on their annual reports. The focus is on 21 public sector banks, though 5 new private banks have also been included for the purpose of comparison. The PSBs exclude the SBI associate banks as information is not uniformly available for them. It is assumed that the analysis will be the same. Agriculture has highest NPA ratio for 9 of the 21 banks. The second-highest was industry with 6, followed by personal loans and services with 3 each. Four banks had agriculture as the second-largest sector with high NPAs though services led with 10 banks, followed by industry with 6 and personal loans with 3 (adding up to 23, as two had the same level of NPAs in two sectors). What conclusions may be drawn? First, personal loans appear to be a safe avenue for lending as there is rarely a systemic risk which spreads based on non–performance of a sector like agriculture or industry. As it is well spread across individuals and the ability of an individual to service the loan is not linked with that of any general parameter, the linkage is dispersed. However, the extent to which some banks have very high ratios in this segment such as Allahabad Bank, Bank of Baroda and the Oriental Bank of Commerce, there is a need to examine which segment within this sector has not performed so that prompt action can be taken. Normally, this sector has lower delinquencies but there could be a concentration in the home loan segment where high interest rates could have affected the repayment capacity. Second, agriculture is clearly the most vulnerable sector generating NPAs.While it is puzzling as to why there should be a variation in these ratios across banks, it can be partly explained by looking at the areas where these loans are given, which would be crop-specific. However, at a more generalised level, the moral hazard in such loans is there is a propensity not to repay in the hope that these loans would be written off. In fact, even among the private banks considered here, NPAs were highest for Axis Bank, followed by ICICI Bank. Aggressive forays into this segment lead to a tendency to build up NPAs. Farm loans are a touchy issue given the sensitivity involved. It is here that we need to take a call on priority-sector lending. While inclusive banking is okay when banking has socialistic grounds, it becomes a contradiction when banks have to comply with global norms of capital adequacy and quality of assets besides being answerable to shareholders. Ideally, banks should not be forced to lend to specific sectors. But if it has to be done, then the bad assets which arise on account of, say, crop failures, should be financed through Central and state budgets. There are no easy ways to figure out what part of the NPA is due to error in judgment and what is due to climate failure. But the banks’ bearing the NPA burden in such sectors may not be a good idea, especially as it impinges on the quality of the financial system. The issue is tricky because banks are reluctant to admit that farm loans are a drag on their balance sheets as it is politically correct to say that these loans are profitable. At a broader level, RBI needs to find ways to scale down this commitment for the banks, with the government pitching in to fill the gap. We need to strike a balance here and not go overboard on inclusive lending. New entrants into this arena should keep this in mind as they would be especially vulnerable. Third, NPAs in industry are also high which can be linked to a great extent with the state of the economy and the virtual standstill of several infrastructure projects or those related to government spending where there are defaults. Also, the slowdown in consumption across the board has affected corporate profitability, something that is reflected here. As interest rates have tended to be high this year, affecting the SME segment more than the others, this could be sector-specific. However, it must also be noted that these numbers are lower in relative terms partly due to the restructuring of many such loans, pushing them out of the NPA book. The numbers would have been more prodigious in case they were included. Lastly, service sector loans also have been high for banks and they need to revisit their genesis as NBFCs, commercial real estate and trade are the dominant components here. This should be a worry, especially so since the service sector had been the best-performing sector in the GDP calculations and an increase in bad assets here would tend to reflect more on judgment and could be bank-specific. Quite clearly, while individual banks need to go back to their NPA books and make a comparison with their peers on the sectors that crowd them and the priority-sector lending issue should be reconsidered by RBI, a possible monsoon failure this time round will make these numbers look nastier.

Modi-fied for polls: Propaganda or statement of facts: Book Review 27th April 2014

AS IT is election time in India, the idea of releasing books that are political—either overtly or covertly—is a smart one. Given that there are quite a few books in this space that have caught the readers’ attention, as these have the ability to swing emotions and votes, Uday Mahurkar’s book on Narendra Modi, Centrestage, is timely and interesting. As the title, 200-odd pages of eulogies and 64 photographs suggest, it appears largely as a propaganda for the person, as well as the much-talked-about Gujarat model of governance (rarely do books these days have a plethora of photographs). If one puts the governance factor as being the differentiator between the Congress and BJP, then the way the narrative has been recited shows that the storyline also largely snatches Aam Aadmi Party’s agenda. There are actually two distinct features of book: It describes, in some detail, all the good that has been done in Gujarat, making the state a frontrunner in the story of progress. This is also reiterated independently by the economic freedom ranking carried out recently by Bibek Debroy, Swaminathan Aiyar and Laveesh Bhandari. There can be no arguments here, as the numbers speak for themselves. The fact that the industry swears by Modi’s Gujarat model bears testimony to this differentiator, as these are the people putting in their money. The other is distinct blind praise for the man and his work. This is more in the style of writing that gives the sense of an author trying to defend every action of the book’s protagonist rather than letting a reader decide for himself. This is where it smells of sycophantic hero worship or plain propaganda. The author is out to prove that Modi is not just clean and able, but also a tough taskmaster who gets things done. Modi could come across as a bit harsh, but it is because he means business. He is a tough negotiator, but then this is for the good of the nation or state. He does not compromise, but this ensures that you cannot arm-twist him. This indicates that even at the national level, Modi will have his way. He may like to be praised, but Modi feels that if he has done good work, there is nothing amiss in taking credit—something his critics should not grudge. As he does not believe in furthering his own monetary interests, he is able to drive governance issues and ensures that the cleansing process is continuous. Mahurkar also takes pains to explain that the Gujarat model is not just about capitalism, but also encompasses agriculture and social issues. This is not something that we have heard often and is hence refreshing. The author is a diehard fan of Modi and hence the story appears like a eulogy that goes on and on. The foreword is by Jagdish Bhagwati, who writes more like an amateur political writer than an economist of high calibre. He falls into the usual trap when he smacks the media for highlighting the Gujarat riots, but being silent on the anti-Sikh riots—the usual Indian response that two wrongs make a right. There is an introduction by Bakul Dholakia of the Indian Institute of Management (IIM), who gives the impression that having IIM professors on boards of PSUs is one of the better decisions taken by the government, which again looks like furthering his own institute’s agenda. But still, let us look at what Modi has achieved objectively over the decade, which cannot be disputed. First, governance has taken precedence under Modi. No freebies are doled out. Development is for all, including Muslims, which makes the model inclusive. Some interesting points made here are that the National Sample Survey data shows that Muslims have moved up the poverty line faster in Gujarat as compared to other states where a conscious ‘appeasement policy’ has been pursued by governments. Therefore, action speaks better than just promises. Further, Muslim-dominated regions like Palej, Salaya, Gandevi, etc, have witnessed sea changes in development activities like education, roads, power and jobs, and this indicates neutrality in policy. In fact, the point reinforced by Modi has been that within a radius of 20 km in any settlement, one can see a development project in place. Second, public-sector restructuring has meant that positions have been given to the deserving and not as a favour. This has turned around, in particular, the power sector. The route was to get in professionals to run the enterprises commercially. As a corollary, capital subsidies were favoured while these enterprises had to fend for themselves commercially to break even and had to buckle up their revenue and cut costs. The electricity sector is now profit-making, which is rare in our country. Third, vote-bank politics is a strict no-no. In fact, the focus has been on ensuring that farmers value the power they receive, which helps protect water table levels. During the 2007 Assembly elections, Modi refused to give freebies of free power to get votes, which does show character. As the policy has been to focus on development and keep away from vote banks, the author feels that incidents like the sacking of IAS officer Durga Shakti by the UP government would never take place in Gujarat. Fourth, the concept of bribe culture has gone. And with e-governance being pursued, there is a lot of transparency now. Land records and tax payments have been streamlined across the board, which ensures that all payments are recorded and clean. Fifth, the Gujarat model is not just concerned about the progress of industry, it is also about bringing well-spread and uniform development for the people. The Gujarat investment summits are legendary. And these have been replicated in the farming area (Krishi Mahotsav), as well as sports (Khel Mahakumbh). Gujarat has become more resilient in agriculture and things like provision of information, soil advice, cold storages, micro irrigation, etc, are examples of affirmative steps taken to help farmers. Similarly, the focus on girls’ education is a major step taken. An interesting anecdote pointed out by Mahurkar is that when Modi realised that girls did not go to school due to lack of separate toilets, action was taken in a blitzkrieg fashion to have them constructed. The government has also done a lot to promote tourism in the state, not just in big cities but also in areas like the Rann of Kutch. This is a reflection of progressive strategies being pursued. Last, and probably most importantly, the Gujarat fiscal has been reworked to make it one of the best-performing states. The focus on development expenditure has brought a change from 40-60 in favour of development in 2001 to 68-32 in 2014. Has anything ever been wrong with this model? Here, the author doles out a few failings—none really serious—at the end of every chapter to show that Modi is not quite infallible. Not able to leverage solar power and relying on temporary staff to control labour costs have been pointed out as some of the failings, but, seriously, these do not matter in the broader scheme of things. How would one judge this book? It is a book of praise, as the author talks about how a taxi driver refused to take fare from a Gujarati in Hyderabad on account of the Modi factor. If one assumes that writers have the prerogative to drive their biases, then Centrestage is passable. But it does not read professional. This is as far as the writing goes. But if we have to look at it from the point of view of content, it is clear that Modi’s model is impressive and has worked in all spheres of life. Even his detractors must agree that there is something different going on here, which is quite exemplary and should be replicated in all states. While rivals belittling the Gujarat model is understandable, as it is part of realpolitik, Modi has set a template to be followed by all states. The fact that Modi is distant and not flexible shows that things can be done effectively within our own democratic framework, provided one is not looking for vote banks and hence has to adopt placatory practices. There are hence learnings to be taken home. While Mahurkar strongly argues for Modi as PM, the approach to development and implementing his vision is certainly laudable.