RBI has taken two clues from the Union Budgetbanks should be allowed to raise long-term bonds with less regulatory encumbrance to enable them to lend to infrastructure, and differentiated banks need to be set up. While there is a strong case for the formerit is being linked to financing of infrastructure and affordable housingthe latter seems a bit odd as there are several sectors that may qualify for such treatment. There are two issues that are raised herewhether this will be a game-changer for banks and the infra sector, and whether it is prudent to make such exceptions, somewhat an ideological consideration. Banks have been allowed in the past to raise bonds that go beyond the Tier II capital. Yet, it has not been resorted to in a big way. As banks see it, it is useful to pursue the issuance of such bonds, with a maturity of over 7 years, through public issues or private placement as per RBI's directive. The prospect of regulatory benefits is quite inviting though RBI has already warned banks in its Financial Stability Report that infrastructure was a problem area when it comes to stressed assets. Each bank has to draw a trade-off here. On the demand side, there can be problems. Banks cannot have cross-holdings, which means that one side of demand has been blocked. Long-term investors like insurance and pension funds would find them attractive but will have to revisit their own investment guidelines as these bonds are unsecured. Retail interest has multiple issues. First, the returns have to be good. If a tax benefit is not provided, then a household may not be interested as there are tax-free bonds providing an 8% return. If banks offer a 12% nominal return to match this 8%, the advantage of SLR and CRR exemption may get diminished. Further, there are to be no call and put options which imply that exit can be a problem. Making them marketable is a way out; but for such bonds, there may be less liquidity, given the tenure. Even if retail interest is there, there could be substitution with deposits. Today, one does not have the option of investing in a 7-year deposit. With a 7-year bond providing acceptable yields, funds may move from long-term deposits to these bonds. Given that overall financial savings in the country have stagnated in the last couple of years, this possibility cannot be ruled out. At the ideological level, the question is whether it is prudent to make such exceptions or not. Today, all priority-sector loans are vulnerable and have a higher probability of default. Using the logic of such loans being very important, should funds earmarked for this purpose be freed from CRR and SLR? Where is one to draw the line? Also, banks are already maintaining excess SLR, of 3-5%, which indicates that such concessions may not really work when the quality of assets are under pressure. The payments bank concept is interesting because it will be a new initiative where banks take deposits and are not allowed to lend. They take zero risk and invest in government paper only. They are to harness technology but may also set up physical branches in remote areas. While risk has been reduced by not lending, they would closely resemble post offices which take in deposits and certificates which are passed on to the government with the latter paying for it. In case of the payments bank, the bank would carry the cost. This is the classic concept of narrow-banking, where banks only invest in government paper and hence avoid the pitfalls of NPAs or capital adequacy. Being driven by only technology, however, will not be feasible given the state of digital infrastructure and computer literacy in the country. In FY13, the average cost of funds was 6.12% for all banks, with the cost of deposits being 6.57% while the return on assets was 10.33% and return on investment was 7.57%. The payments banks will be holding their investments till maturity and would not have to do MTM. To that extent, there are no investment losses. Any entity going in for such an enterprise will face similar ratios. These banks will not be borrowing and hence will have only a cost of deposits. The spread between return on investment and cost of deposit would be around 100 bps which has to be managed by a bank to remain above the ground. Now, the cost of intermediation was 1.75% for the banking system, which would be lower for these banks as they would have lower expenses on most overheads given that they would be operating mostly in rural areas. Therefore, the focus has to be on cost control and this will be the challenge. Both these concepts are assuredly interesting and may be viewed as fairly innovative experiments that will be tested by the market. The success of bank bonds will provide a distinct fillip to the corporate debt market while that of a payments bank will work in furthering financial inclusion.
Monday, July 21, 2014
A development bank for developing nations: Financial Express 18th July 2014
The creation of the BRICS bank, named the New Development Bank, is good news for the developing countries which are on the lookout for funds to support their requirements. It does appear that the politics of the issue has been addressed and the task ahead is to get the enterprise moving and start operations. The need for such a bank was compelling, given the funds required by the emerging markets to support infrastructure growth. The range of funding required has been put at $1-2 trillion over a period of time; and pooling resources is the right way out. There is a feeling that the hegemony of the West came in the way of funding from institutions like the World Bank and there was a need to look at the same from the point of view of a developing economy. The issue of conditionality was controversial as, often, loans were subject to changes in the policy framework instituted to provide a safeguard against improper use of funds. This was considered to be lopsided as it represented the Western view. The concept of a bank coming from the emerging markets looks good in this context. African Development Bank and Asian Development Bank served the interests of continents but still carried forward the ethos of the West. The getting together of the five leading developing nations is attractive as they had a combined share of around 20% of the global GDP in 2013 (IMF). However, all the nations are quite different in terms of politics, economic structures and governance. The concept of BRICS is more notional as these are countries which are geographically spread out with little competitive advantage in terms of distance or physical contiguity. Hence, this experiment will set a new financial trend. The funding is to come from the initial capital of $50 billion that can be raised to $100 billion. There is the provision for a contingent reserve fund of $100 billion which will not be equally distributed among these nationshere China will contribute the largest share. This would be a funding facility analogous to IMF's, made available to deal with fundamental problems that come up like the US tapering programme. Against this capital, the New Development Bank (which can be called NDB till a formal name is accorded) can borrow multiple times from the market to shore up its funds. Intuitively, with a capital of $50 billion and a CAR of 10%, it can lend up to $500 billion which will build up until such time that the organisation earns money which is redeployed. A capital of $100 billion will mean an asset book of $1,000 billion ($1trillion) depending on the CAR adopted by the bank. Will countries or ventures come to NDB for funds? There will definitely be demand for such funds given that there are several projects that are not getting funds domestically. The NDB could also be opened to extend lending to non-member countries at a later date. Also, there will be migration of ventures which are looking at the Western multilateral agencies for funds to NDB, if the latter's terms are favourable. Today, there is the choice of using FDI, ECBs and bilateral funds for funding projects depending on the cost. The reason countries or projects approach the multilateral institutions is that the cost is lower and the payback time is much longer. While an organisational structure will have to be put in place for NDB, two issues stand out. The first is that NDB should actively tie up with regional banks. This becomes necessary for two reasons. The first is that the partner can act as a conduit for channelling funds to the ultimate borrowers. Further, there will be greater security for NDB if it is done this way rather than the bank lending directly to infra companies. Second, the role of credit rating agencies would be vital as the rating assigned to the country, channelling bank/FI entities' funds be critical for NDB. Here, the creation of alternative rating companies in the emerging markets would be important. The setting up of ARC Ratings is such an initiative. ARC Ratings is a credit ratings agency (CRA) with 5 CRAs, of which 3 are from BRICS nations (India, South Africa and Brazil), functioning as equal partners. As there has been a clamour for more competition in the rating space, such an initiative matches the needs of a development bank which is free from the influence of the developed countries. In fact, any borrowing by the NDB, which would be necessary to build volumes, should be rated by the non-Big 3 rating companies to ensure a fair assessment. Three challenges remain for NDB. First, while it is agreed that the conditions put by World Bank or IMF might be one-sided, can the NDB afford to lend without any such conditions, considering that the inherent risk is high when the economies are in the early- to middle-stages of development? Second, while the amounts disbursed would be large given the size of the projects, the monitoring mechanism has to be strong across the countries. Third, given that political ideologies are very different for the partners, will such a venture be resilient to public opinion or clash with other global institutions where these member shareholders also voice an opinion? For example, a perceived invasion of Ukraine by Russia may not be acceptable to the other partners in a UN forum and hence would create ideological differences in such a financial venture. Or for the matter, the border issues of India with China can cause friction. Also, the possibility of China, which certainly has the largest financial power, pushing its own way would have to be sorted out.While the five partners have an equal share in the equity, the reserve fund is already dominated by China whose stake stands at 41%. Given the large supply-demand gap, this venture needs to be operationalised soon, with a clear mandate. The success will lead either to more countries joining in, or similar regional development banks coming up. Whichever way it goes, more competition and more funds would always be beneficial for the system.
Way to grow: Book Reiew of Worthless, Impossible and Stupid: Financial Express 13th July 2014
HAVE YOU ever thought of creating something new—not just conjuring an idea, but also seeing it through—which society thinks is not really exciting? For a layman, it appears logical to tread the normal path and keep away from the unknown with the premise being, if it was really worth it, then someone should have been there. An entrepreneur is different because he can perceive value in things that conventional wisdom could term ‘worthless, impossible or stupid’. This is the theme of Daniel Isenberg’s latest book.
The author argues there are several cases of entrepreneurs who dared to think differently and took their chances based on conviction. The fact that others have not done it did not stop them from trying out new ventures, knowing well the risks involved. Some succeeded, while others didn’t. He gives several examples to prove his point.
Actavis in Iceland is the fourth-largest producer of generic drugs and has over 1,000 products under its name. No one believed such an idea was possible to implement. Similarly, in Tokyo, we saw the invention of the video pill, which eases the trauma of any medical insertion to check the human body for any deviations, especially in the abdomen and intestines. The idea was scoffed at on grounds of being absurd. Isenberg states that just having a perception is not adequate; one needs to create a business model where customers are willing to pay for the product.
In his theory on enterprise and entrepreneurs, Isenberg puts aside some often-held myths. The first is whether or not it is necessary to be an innovator. The answer is no. Enterprise is where we convert an idea into a workable business proposition.
Second, do you need to be an expert? Surprisingly, the answer is again no. He gives the case of Abhi Shah, who created a rage operating a legal outsourcing firm in the US, the UK and India. He was neither a lawyer nor a student of law. But he saw value in the proposal and got over 400 lawyers across these countries to run the show. Third, is there an age barrier? Normally, it is believed people who are young tend to be more adventurous. But Isenberg provides data to prove age does not matter.
Interestingly, he points out that almost half the Fortune 500 companies were launched when there was an economic downturn. There are many reasons behind this. First, only the sturdiest survive when the chips are down and this seems to be the most obvious reason. Second, it is easier to get labour and other resources such as property when there is a recession. Third, when one is unemployed, the best option is to turn entrepreneur.
The author gives examples of crazy ideas that worked well. Local Motors uses crowdsourcing for designing cars. Prima facie it looks crazy, but the public took to it at a time when the entire auto industry was sliding. Customers were allowed to come and finish manufacturing their own cars in the factory. The author also lists three areas of adversity that are common for any beginner: the first relates to intrinsic difficulties, which have to be addressed. The second revolves around customers where the challenge is to get them to buy your product. The third is to get finance, and this is where getting in investors matter.
There is extrinsic adversity over which you have even less control. This could involve the policies in the country where you reside. In Pakistan, for example, providing private courier service was not allowed and hence if one wanted to get into this venture, it was a challenge.
Isenberg states clearly in the beginning of the book that this is not a ‘how-to’ book. In fact, while he gives several examples of success, there would assuredly be more instances of failure. The clue is to think out of the box and look at areas, which are not traditionally explored by enterprises.
The author argues there are several cases of entrepreneurs who dared to think differently and took their chances based on conviction. The fact that others have not done it did not stop them from trying out new ventures, knowing well the risks involved. Some succeeded, while others didn’t. He gives several examples to prove his point.
Actavis in Iceland is the fourth-largest producer of generic drugs and has over 1,000 products under its name. No one believed such an idea was possible to implement. Similarly, in Tokyo, we saw the invention of the video pill, which eases the trauma of any medical insertion to check the human body for any deviations, especially in the abdomen and intestines. The idea was scoffed at on grounds of being absurd. Isenberg states that just having a perception is not adequate; one needs to create a business model where customers are willing to pay for the product.
In his theory on enterprise and entrepreneurs, Isenberg puts aside some often-held myths. The first is whether or not it is necessary to be an innovator. The answer is no. Enterprise is where we convert an idea into a workable business proposition.
Second, do you need to be an expert? Surprisingly, the answer is again no. He gives the case of Abhi Shah, who created a rage operating a legal outsourcing firm in the US, the UK and India. He was neither a lawyer nor a student of law. But he saw value in the proposal and got over 400 lawyers across these countries to run the show. Third, is there an age barrier? Normally, it is believed people who are young tend to be more adventurous. But Isenberg provides data to prove age does not matter.
Interestingly, he points out that almost half the Fortune 500 companies were launched when there was an economic downturn. There are many reasons behind this. First, only the sturdiest survive when the chips are down and this seems to be the most obvious reason. Second, it is easier to get labour and other resources such as property when there is a recession. Third, when one is unemployed, the best option is to turn entrepreneur.
The author gives examples of crazy ideas that worked well. Local Motors uses crowdsourcing for designing cars. Prima facie it looks crazy, but the public took to it at a time when the entire auto industry was sliding. Customers were allowed to come and finish manufacturing their own cars in the factory. The author also lists three areas of adversity that are common for any beginner: the first relates to intrinsic difficulties, which have to be addressed. The second revolves around customers where the challenge is to get them to buy your product. The third is to get finance, and this is where getting in investors matter.
There is extrinsic adversity over which you have even less control. This could involve the policies in the country where you reside. In Pakistan, for example, providing private courier service was not allowed and hence if one wanted to get into this venture, it was a challenge.
Isenberg states clearly in the beginning of the book that this is not a ‘how-to’ book. In fact, while he gives several examples of success, there would assuredly be more instances of failure. The clue is to think out of the box and look at areas, which are not traditionally explored by enterprises.
On the tried path, but practical:Business Standard 11th July 2014
The Budget is fairly conservative in approach and has tried to provide incentives for growth and investment by allocating funds in the right areas and providing investment allowance for companies to induce capital formation. The overall capex, too, has remained virtually unchanged and the much-expected Keynesian thrust is missing.
It has, however, not been able to lower the subsidy expense but capped it at the earlier level, which is reasonable, given that it could be a difficult year for farming. The incentives provided on savings may not add too much depth and would be seen as being placatory to the middle class. The most important part is that the fiscal deficit target is being retained at 4.1 per cent of the gross domestic product, which means there will not be untoward pressure on liquidity or interest rates. To that extent, it is neutral. Banks have been provided some room for divesting. But given their current state of dealing with stressed assets, they might wait and watch.
Is this the right way? Probably yes, as there are around eight months for implementation and anything drastic would require bold steps and run the risk of non-attainment.
It has, however, not been able to lower the subsidy expense but capped it at the earlier level, which is reasonable, given that it could be a difficult year for farming. The incentives provided on savings may not add too much depth and would be seen as being placatory to the middle class. The most important part is that the fiscal deficit target is being retained at 4.1 per cent of the gross domestic product, which means there will not be untoward pressure on liquidity or interest rates. To that extent, it is neutral. Banks have been provided some room for divesting. But given their current state of dealing with stressed assets, they might wait and watch.
Is this the right way? Probably yes, as there are around eight months for implementation and anything drastic would require bold steps and run the risk of non-attainment.
No new facts, but abundant caution signalled: Financial Express 10th JUly 2014
The Economic Survey, as a document, is supposed to be a round-up of all economic activity in the previous year with a prognosis of the state of things to come. Also, there are certain suggestions made on critical issues to be addressed by the government in the coming years.
Coming just before the Budget is announced, it is not supposed to speak on the content or direction, thus running the risk of sounding banal. It also has the disadvantage of narrating numbers that have been released independently by various ministries and consolidated by the RBI earlier in their monetary policy previews. It, hence, sounds like a dossier of consolidation of all pressing issues. But it is nonetheless useful.
The forecast of GDP growth has been kept at a reasonable range of 5.4-5.9% with a downward bias, which is significant because it means that the Budget will stick to this number when conjecturing tax revenues, which is pragmatic. The survey also sticks its neck out and extrapolates industrial growth in April for the entire year.
One assumes that it would be in the range of 2-3% or else we could end up overstating excise and corporate tax collections for FY15.
Concerns have been reiterated on inflation and quality of assets of the banking system, while there is a modicum of satisfaction expressed when it comes to the performance of the external sector in particular.
On the fiscal front, two issues have been highlighted, which though could be standardised statements that go with an economic policy document, could be read as being indicative of something new that could be announced in the Budget.
The first is a new FRBM rule book. So far, fiscal discipline has been restricted mainly to achieving a tolerable level of fiscal deficit to GDP ratio with 3% being targeted as an end point. Could we actually see a proposed path for revenue deficit or disinvestment or for that matter systematic reduction of the subsidy bill to a new level of say 1.5% of the GDP?
The second point is that by reiterating the composition of subsidies and their allocation, there may be an attempt to actually rework these numbers for fertilisers and also use alternative delivery systems for the food subsidy.
The survey is quite acerbic when it explains the reasons for investment slowdown which was due to bureaucratic delays, alleged corruption, policies on land acquisition, environment, and ambitious financial projections for infra projects by over-leveraged firms etc. which has led to stalled projects.
It concludes that the first wave of infra investment has been grounded due to these multiple flaws that need to be corrected. It may be assumed that this will be taken with urgency.
Quite interestingly, the survey does highlight that the stimulus oriented policies pursued by the government post financial crisis contributed to inflation – which is debatable as inflation appears to be on the supply side where shortfalls have led to price increases. But this is indicative that the Budget for FY15 will not quite look to pump priming the economy as there was an expectation that a certain amount may be earmarked for project expenditure.
This looks unlikely if the author of the document has his or her thoughts in the Budget document too.
Coming just before the Budget is announced, it is not supposed to speak on the content or direction, thus running the risk of sounding banal. It also has the disadvantage of narrating numbers that have been released independently by various ministries and consolidated by the RBI earlier in their monetary policy previews. It, hence, sounds like a dossier of consolidation of all pressing issues. But it is nonetheless useful.
The forecast of GDP growth has been kept at a reasonable range of 5.4-5.9% with a downward bias, which is significant because it means that the Budget will stick to this number when conjecturing tax revenues, which is pragmatic. The survey also sticks its neck out and extrapolates industrial growth in April for the entire year.
One assumes that it would be in the range of 2-3% or else we could end up overstating excise and corporate tax collections for FY15.
Concerns have been reiterated on inflation and quality of assets of the banking system, while there is a modicum of satisfaction expressed when it comes to the performance of the external sector in particular.
On the fiscal front, two issues have been highlighted, which though could be standardised statements that go with an economic policy document, could be read as being indicative of something new that could be announced in the Budget.
The first is a new FRBM rule book. So far, fiscal discipline has been restricted mainly to achieving a tolerable level of fiscal deficit to GDP ratio with 3% being targeted as an end point. Could we actually see a proposed path for revenue deficit or disinvestment or for that matter systematic reduction of the subsidy bill to a new level of say 1.5% of the GDP?
The second point is that by reiterating the composition of subsidies and their allocation, there may be an attempt to actually rework these numbers for fertilisers and also use alternative delivery systems for the food subsidy.
The survey is quite acerbic when it explains the reasons for investment slowdown which was due to bureaucratic delays, alleged corruption, policies on land acquisition, environment, and ambitious financial projections for infra projects by over-leveraged firms etc. which has led to stalled projects.
It concludes that the first wave of infra investment has been grounded due to these multiple flaws that need to be corrected. It may be assumed that this will be taken with urgency.
Quite interestingly, the survey does highlight that the stimulus oriented policies pursued by the government post financial crisis contributed to inflation – which is debatable as inflation appears to be on the supply side where shortfalls have led to price increases. But this is indicative that the Budget for FY15 will not quite look to pump priming the economy as there was an expectation that a certain amount may be earmarked for project expenditure.
This looks unlikely if the author of the document has his or her thoughts in the Budget document too.
The years of living dangerously: Book Review of Stress Test Hindu Business Line July 7 2014
In this autobiography , Timothy Geithner isself-effacing about his role in resolving the 2008-09 financial crisis. He talks of himself as being gauche with little gravitas to be acknowledged as someone who matters.
But for anyone who has read Andrew Ross Sorkin’s Too Big to Fail , Geithner is evidently the hero all the way.
Geithner was not quite the fancied Treasury Secretary, with a number of critics badgering him for being a man who supported banks against the people and Wall Street against Main Street.
This was the conclusion drawn by the public when any rescue plan was mooted for failed investment banks as they believed in the Old Testament’s concept of retribution. Or at a more rational level, they used the argument of moral hazard to criticise any move to resuscitate these institutions.
This was a cross that the author has had to carry — which he has done quite willingly because he truly believed that this was the lesser evil. More importantly, Geithner has never been apologetic about his stance and believes that at the end of the day these actions saved the nation from a worse catastrophe.
What lies beneath
Geithner traces the reasons behind financial crises in this period. Interestingly, he points out that the Mexican crisis of 1994 followed by the Asian crisis of 1997, which started in Thailand and spread sequentially across Indonesia, Malaysia, South Korea and later to Russia (which reneged on loans) and to Brazil before coming back to US all had the same indications.
Countries that are over-leveraged and borrow short-term to finance long-term run the risk of a bubble being created, which has to burst at some point of time. Add the icing of a fixed exchange rate and the burst of the bubble is cacophonic. But the fact that the US and IMF, where Geithner had worked a couple of years, played their role in reviving these nations created a moral hazard which was to strike a decade later.
What was the basic issue with the US financial system that led to the crisis? There was a large shadow banking system that was largely unregulated; there were rules in place to protect investors but not institutions. The logic was that when it comes to equity and there is a failure, owners who are shareholders, lose, which is a fair deal. However, when debt is involved, the same cannot be applied as it jeopardises the entire system.
Therefore, the US Fed had to bail out the institutions. While moral hazard was accepted, the view of Geithner was that not doing anything, merely to teach the failed institutions a lesson, would have affected everyone.
So the Fed stance of buyback of assets and providing funds through TARP (troubled assets relief programme) was laudable and worked finally.
The fact that no money was lost and the Big Five time bombs — Freddie Mac and Fannie Mae, Citi, AIG and Bank of America — have all turned around to return a profit to the public is a vindication of the stance taken by the government and the Fed. The author calls these institutions collateral beneficiaries.
The author points towards the clear case of regulatory arbitrage which was exploited by the players in the market. The Fed supervised holding companies of banks, while the Office of Controller of Currency supervised banks.
Market regulator SEC oversaw investment banks while everyone shared regulation with State regulators and local bodies and went across frontiers to regulators in Zurich and London.
Hence, when the crisis struck and the Fed carried out capital tests, banks were well capitalised, while investment banks had ratios of 3 per cent and players such as Freddie Mac and Fannie Mae had 1 per cent.
Money market mutual funds were regulated by SEC but they had no capital requirements. Insurance companies were regulated by state insurance departments and out of the Fed’s purview. Therefore, the real stress was getting through this mirage and getting the institutions in order.
Many dilemmas
Geithner, who headed New York Federal Reserve during 2003-2009, also takes us to the conundrums the regulators faced. First, should they be intervening or not? If they do, when should they step in? Doing so early may increase moral hazard, but doing it late may make the rescue irrelevant. Again, how much should they intervene and should it be calibrated or a one-shot business?
The logical answer is to wait and watch the response, but one would never know which the right time was. Similarly, which institutions had to be rescued? They had let Bear Sterns and Lehman go down but rescued the Big Five. These were tough decisions to take as prima facie there are no simple answers and everything depends on the situation.
When Geithner became the Treasury Secretary in 2009, the economy was already in a recession. While stimulus through fiscal and monetary policies was advocated by the Republicans, they opposed the same when in the opposition.
Similarly, the fiscal cliff and ‘shutdown’ became issues as the Republicans wanted expenditure cuts through healthcare reforms while President Barack Obama favoured tax hikes. Manoeuvring these political pressures forms another part of his interesting story line.
The author was back on the hot seat when stress tests had to be carried out for all banks. Given that the Fed structure has bank representatives on the Fed who have had strong links with investment banking, it was always a challenge to convince the people that the exercise was a fair one and that it was not being rigged.
Geithner also shares some amusing anecdotes.. He says the IMF is an organisation driven by a lot of “papers and endless discussions”. One never knew how to spend time as discussions never ended.
He also reveals that his friend, and chief economist of the IMF, Ken Rogoff, had said that being a chess buff was useful as he spent time during these meetings playing several games in his mind! His take on the Fed culture is also light-hearted where the feudal system prevailed with the chairman being served on a silver tray; he also had access to the first glass of wine at a party.
Though quite voluminous, Stress Test is an excellent read and serves as a guide on financial crises. It may not sound too fresh given that several people have written on the subject, but because Geithner is an insider, it is interesting.
Geithner does make several recommendations on the safeguards that must be applied and reiterates that while crises cannot be prevented, we can blunt the negative impact if we have our structures in place.
He takes a pride in the bailout packages pursued by the authorities and acknowledges that moral hazard is an issue to think about.
He is to the point when he says that while moral hazard is an issue (in bailouts) which increases when there is a government which will act, the question would be whether or not it is right to conclude that fires take place merely because we have fire stations.
Corporate rat race: Book Review of A Bigger Prize: Financial Express: July 6 2014
We all remember Adele for the songs she sings. But little do we realise that there are 100or maybe even 200people in the background who make these songs possible. That's the crux of anything great. Rarely do we stop to think of what lies behind success. What matters is collaboration, which takes place not just between individuals, but also organisations and countries, and takes them to higher levels of performance. This is what Margaret Heffernan argues and proves in her rather interesting book titled, A Bigger Prize. She shows how we have become too competitive in every walk of life, which has had deleterious effects on us. Right from the time we are born, we are competitive with our siblings for attention. When we go to school, grades matter the most and we are constantly striving to get ahead of others. We cannot be blamed for this attitude because the system is such that it is necessary to stay at the top, as all the good jobs go to those who perform best. Therefore, there is tremendous competition as we move into management schools to get entry into these corporations. While we are in these companies, we compete to move up the echelon. In this rat race, which is finally what happens when economic Darwinism is practised, we lose our bearings and actually move out of sync with the better things in life, which can be quality or even being in touch with our families. In fact, the author is critical of the competitiveness in sports, where there is early burnout, as everyone strives for victory and there is limited room at the top. The promise and romance for money and glory drive sportspersons really hard. Sports has lost its charm as every game has become ultra-competitive. If we look around at what happens in cricket, tennis, soccer, etc, we will see vindication of this theory. When it comes to companies, they tend to get bigger, often straying from the path and indulging in all kinds of unethical practices to maintain leadership. But we have seen people like Jack Welch admitting that there could be better ways of doing things. Therefore, what we see at an individual's level holds true for companies as well. The stress everywhere is on being the best and out-competing othersall in the name of delivering superior shareholder value. Heffernan goes through several case studies to show how the private enterprise ethic does not quite provide the best solutions and, in the end, we do realise that what we need is team effort of a collaborative approach to move ahead. A long time back, Henry Ford actually paid higher wages to his employees and compromised on profit to ensure that the labour force stayed back. He recognised that we need to pay our employees if we have to keep a consuming class. This is what several economies also experience when they follow the top-down approach and focus on making the rich richersomething Thomas Piketty has shown as being prevalent in western economies. But we need to provide equal opportunity and income to people at the lower ends to ensure that they provide the demand for capitalists. In fact, if one looks at the Indian schemes of providing income through the controversial NREGA programme, it did add to purchasing power and growth for everyone. Quite clearly, the author indicates that policymakers have to look everywhere to ensure there is prosperity or countries cannot progress. Heffernan also addresses the issue of the 'why' of competition, which is quite interesting. It could be sheer testosterone and this explains why men tend to be more competitive. But still, one does not know why some men are more competitive than others. Similarly, it has been proved through experiments that the kind of society we live in could also drive this spirit. A female-dominated society will see women being more competitive. Risk-aversion is another factor, which determines the degree of competitiveness. Power struggle or the quest for power is another factor, which has driven competition and, here, the author talks a bit on the champion of free thinking and capitalism, Ayn Rand. It all comes down to individuals, companies or societies craving for recognition, acceptance, attention and admiration, which force them to become more competitive at any cost. What have we seen in the last few years on account of unbridled competition? Dilapidated institutions and ideas have crash-landed, driven excessively by competitive spirit. We have witnessed financial corrosion, financial crashes and stalled politics, which have been a result of the competitive spirit. Companies have worked their way up by pushing employees to increase the profit lines to make investors happy. It has become a mad dog-eat-dog world and what matters is to be at the top. The quest has been for infinite efficiency, miraculous economies, endless creativity and innovation. The result has been long working hours, burnout, sweat shops and price hikes. The situation now has been described by the author as one where we are gasping for air in a sea of corruption, dysfunction, environmental degradation, waste, disenchantment and inequality. The more we compete, the more unequal our society becomes. The main takeaway is that relentless focus on winning always has costs. When siblings grow up in rivalry, they struggle to trust one another. When schools celebrate the top students of the class, they demotivate the rest. When the rich win tax cuts, inequality grows. As sports become fiercer, careers shorten and injuries abound. When executives compete for bonuses, they cheat and lose friendships and relations. Heffernan stresses that when work excludes all other aspects of life, the reality checks, questions and discontinuities that we need to test our thinking on disappear and there is no time for them. What has to change is our approach to life, which is gradually happening. The new models being used are centred on pooling resources, sharing information, organising projects, etc, which replace existing rivalries. Even at a more rudimentary level, children are looking more at education rather than having a career. A positive consequence is that they are better able to understand what they are studying. The belief in the power of collaboration now underlies some of the most successful organisations where they depend on human capacity to create together. An empowered workforce works better and crowdsourcing is generally accepted as a more effective and pragmatic way to tackle problems. This is a very thought-provoking book for us as individuals, as well as executives working in the government or any company. There are choices to make and while everyone wants to be ahead in the quest for power, money and recognition, there are strong tradeoffs along the way, which cannot be eschewed. There are alternatives but, as Heffernan shows, we need to open our minds and move out of this race and explore them. More importantly, there has to be a conscious attempt.
It’s really the real effective exchange rate:Economic Times 25th June 2014
2013-14 has been a good year for the external account and a lot has been done to straighten it after the pandemonium caused by a widening CAD and news of tapering by the Fed in May 2013. But with CAD coming down to probably less than 2% of GDP and the tapering impact receding, we are in a position where we can talk of RBI buying dollars and providing support for exports. To what extent will this work?
RBI has recently brought out indices for the nominal effective exchange rate (NEER) and export- weighted real effective exchange rate (REER) based on the CPI. So far it was based on the WPI and presented with 2004-05 as the base year. The whole idea was that when we are talking of REER, we are comparing the inflation differential between India and the trading partners, and ideally one should look at the basket of 36 currencies rather than 6. The difference this time is that since we have a new CPI number series, the same can be used for comparison purposes as all global indices are based on the CPI.
The concept of REER will actually throw some light on how responsive our exports would be to the change in exchange rate and whether there is truly a relationship between the two. The table gives the changes in the exchange rate measured in four ways. The first is the plain average exchange rate for the dollar with a positive sign, indicating appreciation and negative a depreciation of the rupee. The NEER is for the 36 country index with 2004-05 as base year. The two REERs are based on the WPI and CPI, respectively, while the growth in exports is in dollar terms.
There is a difference between the rupee value change against the dollar and NEER. As we move from the dollar rupee to the REER-CPI, the extent of change also diminishes quite sharply. In fact, in the past three years, the rupee cumulatively declined by almost 30%. Against this decline, REER shows a change of 8.5%. This indicates that high inflation in the country does, to a large extent, explain also the movement in exchange rate and, hence, the depreciation level is moderated to a large extent.
As a corollary, the potential advantage of export competitiveness also comes down sharply. Therefore, the assumption normally made that depreciation in rupee brings about this advantage does not quite look that perceptible when the REER is considered. The difference in rupee movement as shown by REER is not too stark, with FY10 being the only exception when CPI-based index showed rupee appreciation even while the NEER and REER-WPI indicated a decline in value of the rupee. In the last two years, the difference has been around 250-300 bps, which is probably not that significant.
Another observation is that there is no clear relationship between growth in exports and exchange rate. Of the five years, when exports grew by above 20% p.a, there was appreciation in rupee in three years in both real and nominal terms. Also, a sharp depreciation in nominal terms of the rupee vis-a-vis the dollar has not quite pushed up exports. A part of the explanation can be that REER does not show significant gains in terms of price advantage for our exports, thus blunting the impact.
If the rupee decline is controlled through policy measures, then after making adjustments for the REER, the cost advantage would get diluted. This means that as long as inflation is high in India relative to global prices, then one can rule out any such advantage. If this were so, then the central bank should not really think of letting the rupee slip for the sake of exports as there are several imponderables involved in this relation working out. However, if the purpose is to accumulate dollars and hold the currency steady, then it would be a different story with little expectation of exports getting a lift.
RBI has recently brought out indices for the nominal effective exchange rate (NEER) and export- weighted real effective exchange rate (REER) based on the CPI. So far it was based on the WPI and presented with 2004-05 as the base year. The whole idea was that when we are talking of REER, we are comparing the inflation differential between India and the trading partners, and ideally one should look at the basket of 36 currencies rather than 6. The difference this time is that since we have a new CPI number series, the same can be used for comparison purposes as all global indices are based on the CPI.
The concept of REER will actually throw some light on how responsive our exports would be to the change in exchange rate and whether there is truly a relationship between the two. The table gives the changes in the exchange rate measured in four ways. The first is the plain average exchange rate for the dollar with a positive sign, indicating appreciation and negative a depreciation of the rupee. The NEER is for the 36 country index with 2004-05 as base year. The two REERs are based on the WPI and CPI, respectively, while the growth in exports is in dollar terms.There is a difference between the rupee value change against the dollar and NEER. As we move from the dollar rupee to the REER-CPI, the extent of change also diminishes quite sharply. In fact, in the past three years, the rupee cumulatively declined by almost 30%. Against this decline, REER shows a change of 8.5%. This indicates that high inflation in the country does, to a large extent, explain also the movement in exchange rate and, hence, the depreciation level is moderated to a large extent.
As a corollary, the potential advantage of export competitiveness also comes down sharply. Therefore, the assumption normally made that depreciation in rupee brings about this advantage does not quite look that perceptible when the REER is considered. The difference in rupee movement as shown by REER is not too stark, with FY10 being the only exception when CPI-based index showed rupee appreciation even while the NEER and REER-WPI indicated a decline in value of the rupee. In the last two years, the difference has been around 250-300 bps, which is probably not that significant.
Another observation is that there is no clear relationship between growth in exports and exchange rate. Of the five years, when exports grew by above 20% p.a, there was appreciation in rupee in three years in both real and nominal terms. Also, a sharp depreciation in nominal terms of the rupee vis-a-vis the dollar has not quite pushed up exports. A part of the explanation can be that REER does not show significant gains in terms of price advantage for our exports, thus blunting the impact.
If the rupee decline is controlled through policy measures, then after making adjustments for the REER, the cost advantage would get diluted. This means that as long as inflation is high in India relative to global prices, then one can rule out any such advantage. If this were so, then the central bank should not really think of letting the rupee slip for the sake of exports as there are several imponderables involved in this relation working out. However, if the purpose is to accumulate dollars and hold the currency steady, then it would be a different story with little expectation of exports getting a lift.
Power of partnership: Book Review of Simply Rich in Financial Express 22nd June 2014
SIMPLY RICH by Rich DeVos is a book written in first person by the co-founder of Amway. It is the story of how Amway was created and grew to be one of the most prominent direct sales marketing companies in the world. The tale is in two parts: the first is about how the concept of direct sales came about and the second is how Amway built its model and moved forward. As it is a memoir, there is a lot of sagely advice on not just how to conduct business, but also live life.
The story of DeVos is interesting. Coming from a relatively humble background, DeVos says he learnt a lot from doing odd jobs like delivering newspapers and working as an attendant at a gas station. This was where he imbibed the basic attributes needed to do good business. His take is that there are lessons to be picked up from any job and, as a corollary, no job is demeaning.
Experimenting with various jobs, he, along with his friend and partner Jay Van Andel, started selling a product called Nutrilite, which was a vitamin supplement in the US. The model was a simple one. They bought the product from the producer and sold it directly to customers who, in turn, could also become distributors for it. The important thing here is that everything was done by word-of-mouth. It is a unique way of selling, which also made DeVos a good and effective speaker.
DeVos would gather a lot of potential customers and tell them the virtues of the product. Some would buy the product and, within this group, some would agree to be distributors. Hence they would start talking to their own set of friends and acquaintances about it. A chain was set in motion. So the product was made available through different individuals, and not at retail outlets. They ran into rough weather when the FDA created a stir about the promises made by the product. Soon, when their problems escalated, they decided to create their own company called American Way Association, or what is now known as Amway.
The route followed was the same. They started with Frisk, an all-purpose cleaner made with natural ingredients and devoid of chemicals. It became very popular. The product range was then expanded through other similar products, including detergents and soaps. As the company grew, they went on to make their own products. The logical extension was to get into manufacturing, too, with their own factories producing goods that could be sold onwards through these created channels. It was hence a case of forging forward linkages by selling other people's products followed by creating their own niche products. Advertising was done on radio to spread the word.
Amway became global, as it expanded into countries like China, Germany, the UK, France, India, etc. The pattern was to start with countries similar to the US and then move to countries with different cultures. China was a challenge, as it insisted that production facilities had to be in the country. Convincing governments was always a challenge, as some like South Korea were apprehensive that such a model would increase their trade deficit.
The novelty of this model was that it helped each and every partner down the line become an entrepreneur. The commissions given at the top percolated downwards and everyone knew what had to be done to sell the products and make money. This pass-through system was key to the business and the USP of Amway. The business could also be sold or just handed down to the next generation. It hence had ‘wealth value’.
The Amway story captures the idea of partnership and how it can be built with customers who become distributors, creating their own customer relationships that finally build the chain. A question asked often is whether Amway is a product or distributor business. It is evidently a combination of the two, which kept the business moving across towns, cities and, finally, countries.
On a different level, DeVos talks a lot about the lessons he learnt from life. He stresses on three factors that are needed for success: action, attitude and atmosphere. This sounds fairly commonsensical, but one may lose track along the way and become a dreamer or loser when things do not go our way.
The book may not be inspirational, but it tells a lot about a unique business model. Given the recent controversy in India over Amway’s operations, it should be read by all concerned to understand how things really work here. In an age where we are looking to create jobs in India, there could be a strong case for us to create similar models, which deliver both profits for the entrepreneur and gainful employment or sub-entrepreneurship for those down the line. Given the vast potential in rural areas, the government could enter into meaningful engagements with the industry to explore ways of higher peoples’ involvement.
The story of DeVos is interesting. Coming from a relatively humble background, DeVos says he learnt a lot from doing odd jobs like delivering newspapers and working as an attendant at a gas station. This was where he imbibed the basic attributes needed to do good business. His take is that there are lessons to be picked up from any job and, as a corollary, no job is demeaning.
Experimenting with various jobs, he, along with his friend and partner Jay Van Andel, started selling a product called Nutrilite, which was a vitamin supplement in the US. The model was a simple one. They bought the product from the producer and sold it directly to customers who, in turn, could also become distributors for it. The important thing here is that everything was done by word-of-mouth. It is a unique way of selling, which also made DeVos a good and effective speaker.
DeVos would gather a lot of potential customers and tell them the virtues of the product. Some would buy the product and, within this group, some would agree to be distributors. Hence they would start talking to their own set of friends and acquaintances about it. A chain was set in motion. So the product was made available through different individuals, and not at retail outlets. They ran into rough weather when the FDA created a stir about the promises made by the product. Soon, when their problems escalated, they decided to create their own company called American Way Association, or what is now known as Amway.
The route followed was the same. They started with Frisk, an all-purpose cleaner made with natural ingredients and devoid of chemicals. It became very popular. The product range was then expanded through other similar products, including detergents and soaps. As the company grew, they went on to make their own products. The logical extension was to get into manufacturing, too, with their own factories producing goods that could be sold onwards through these created channels. It was hence a case of forging forward linkages by selling other people's products followed by creating their own niche products. Advertising was done on radio to spread the word.
Amway became global, as it expanded into countries like China, Germany, the UK, France, India, etc. The pattern was to start with countries similar to the US and then move to countries with different cultures. China was a challenge, as it insisted that production facilities had to be in the country. Convincing governments was always a challenge, as some like South Korea were apprehensive that such a model would increase their trade deficit.
The novelty of this model was that it helped each and every partner down the line become an entrepreneur. The commissions given at the top percolated downwards and everyone knew what had to be done to sell the products and make money. This pass-through system was key to the business and the USP of Amway. The business could also be sold or just handed down to the next generation. It hence had ‘wealth value’.
The Amway story captures the idea of partnership and how it can be built with customers who become distributors, creating their own customer relationships that finally build the chain. A question asked often is whether Amway is a product or distributor business. It is evidently a combination of the two, which kept the business moving across towns, cities and, finally, countries.
On a different level, DeVos talks a lot about the lessons he learnt from life. He stresses on three factors that are needed for success: action, attitude and atmosphere. This sounds fairly commonsensical, but one may lose track along the way and become a dreamer or loser when things do not go our way.
The book may not be inspirational, but it tells a lot about a unique business model. Given the recent controversy in India over Amway’s operations, it should be read by all concerned to understand how things really work here. In an age where we are looking to create jobs in India, there could be a strong case for us to create similar models, which deliver both profits for the entrepreneur and gainful employment or sub-entrepreneurship for those down the line. Given the vast potential in rural areas, the government could enter into meaningful engagements with the industry to explore ways of higher peoples’ involvement.
Corporate boosters: Book Review of XLR8 Financial Express June 15,2014
The business world is a fast-changing one. Companies need to be nimble-footed to stay in the race and, in order to remain competitive, have to put in something extra in order to accelerate. If we look at some industries, like newspapers or technology, preferences are changing and so are practices. At the same time, there is an increase in competition, which makes conditions more challenging. This is where we need to change our mindset and probably go back to the basic principles when strategising for tomorrow.
XLR8: Accelerate is a book by John P Kotter and is all about knowing how to move ahead in the uncertain world of business. Let us think of a start-up company, which has commenced operations. The structure is fairly chaotic where everyone contributes to the growth of the company not through action, but through ideas. Almost everyone who wants to convey a thought is welcomed in this set-up, as the feeling is that more minds work better. Then the organisation evolves and hierarchies are created because, with size, certain structures are considered inevitable. This, as per Kotter, though necessary and inevitable, creates distances. Such hierarchies invariably leave important things to seniors. It is here that strategising is important, but it invariably tends to be confined to a fixed set of people.
Here, we need to distinguish between management and leadership, which are two different roles. It is not unusual that these roles get mixed when hierarchies, which are based normally on seniority and age, intermingle. Hence, we get stuck in the dual role taken on by the hierarchy, which does not help the organisation move ahead. The management is involved with planning, budgeting, organising, staffing, measuring, problem-solving and so on, which is done well by the established hierarchy. However, leadership requires a higher level of thinking, as it involves establishing direction, aligning people, motivating and inspiring them, and propelling the organisation to the next level.
In fact, invariably, organisations set up a strategic thinking group, which has two or three persons with the hierarchy deciding who should lead. But there are serious limitations here, as it once again boils down to the senior-junior syndrome where the senior’s view prevails based on the position. We need to differentiate between leaders who are thinkers and managers, and, while both are important, the former is more critical as organisations evolve for future growth.
Therefore, Kotter talks of creating a dual structure where both groups exist and, what he calls a network, is created laterally across the organisation. This consists of all the thinkers who do not report to the senior-most person, so that there is freedom in thinking. With a strong hierarchy in place, the execution part is addressed by the managers and hence this dual network system’s ethos would resemble the start-up company’s, and the company is able to think ahead.
In fact, a dual operating system takes in the advantages of both the sides. The management-driven hierarchy is known for reliability and efficiency, and can address issues of current importance. Hence, we are talking of an agile network-like structure that operates with the hierarchy and hence is called a dual-operating system. It is dynamic and free from bureaucratic influences.
As per the author, there are essentially five principles that have to be followed to make this happen. First, there should be many people who drive this change. Therefore, it should not be restricted to a handful of people or chosen ones, which is normally the case. They should all be able to initiate ideas and not just execute them. This is important because thinking right makes execution easier.
Second, the mindset should be ‘get-to’ rather than ‘have-to’. The latter is looked at as being a compulsion, while the former is more out of passion, which is what is required for the company to succeed. When we get stuck in hierarchies, it becomes more a case of have-to, as it lacks the same enthusiasm, which comes in when the attitude is get-to.
Third, this desire must come from the heart and not head. Therefore, it should not all be just numbers and targets. It should talk of a bigger cause of how to make the company the best or an ideal player in the business. Fourth, there should be more leadership and less management. It is a case of creating a vision, opportunity, inspired action, passion, innovation and celebration.
Last, there has to be an inseparable partnership between the network and hierarchy where there is a constant flow of information and they work as a single unit. It should lead to better integration between these two separate silos.
As per Kotter, the network’s processes resemble closely the activity, which is witnessed in any successful enterprise, especially where change is required at, what he calls, ‘bullet’s’ pace. Here, the author lists eight accelerators for leading the change, which should come from the top.
Let us look at these eight accelerators. First, there is a need to create a sense of urgency around a big opportunity. The dual system works here because those who are in a traditional organisation will think this is not possible. More importantly, one needs to realise that speed is all that matters or else organisations lose momentum. Second, one has to build a guiding coalition. These are people from all silos and levels who want to help to make the big thing happen. All of them want to lead and be change agents. They should have the drive and emotional commitment. This, as per Kotter, is actually easy. All we have to do is throw them in a room and they will create the spirit that is needed to go along.
Third, the organisation has to form a change vision that fits with the big strategic opportunity they are looking for. This may already exist, but has to be recreated and reiterated. In fact, often the management-driven hierarchy may not be equipped to handle this fast enough by itself. Fourth, one needs to enlist a volunteer army, which would be constantly communicating information about the change vision and the strategic initiatives to a larger section of the workforce. This acts as a pull factor to drag more people into the orbit.
Fifth, we need to remove barriers to allow this to function seamlessly. This is not easy, but has to be done in order to speed up the process. The sixth accelerator is to create an ongoing flow of strategically-relevant wins, both big and small. Their celebration can carry great psychological power and play a role in sustaining the dual system, as it communicates to the staff that things are working, which reinforces the common cause.
The seventh accelerator would be the sustenance of acceleration. Normally, one tends to sit back after a couple of wins. But this has to be maintained, as the momentum cannot be lost. A larger initiative loses steam unless related sub-initiatives are completed successfully. Last, we need to institute change, as this helps in consolidating wins and integrating them into the hierarchical processes, systems and procedures. As this happens, there is a cumulative effect to the point that after a couple of years, such actions drive the entire dual-operating system approach into the DNA of the organisation.
The book is largely prescriptive and more of a help-book for organisations, but not quite inspirational. It would have been a bit more interesting if examples were given of companies, which changed their approach or made use of these principles to move ahead. It may not be possible to follow everything that is written, as organisations run on impulse and the view of the CEO. But the major takeaway is to have the involvement of all when strategising for the future, as such wisdom may not necessarily lie with those in the hierarchy. That, probably, is the final takeaway from Kotter’s XLR8.
XLR8: Accelerate is a book by John P Kotter and is all about knowing how to move ahead in the uncertain world of business. Let us think of a start-up company, which has commenced operations. The structure is fairly chaotic where everyone contributes to the growth of the company not through action, but through ideas. Almost everyone who wants to convey a thought is welcomed in this set-up, as the feeling is that more minds work better. Then the organisation evolves and hierarchies are created because, with size, certain structures are considered inevitable. This, as per Kotter, though necessary and inevitable, creates distances. Such hierarchies invariably leave important things to seniors. It is here that strategising is important, but it invariably tends to be confined to a fixed set of people.
Here, we need to distinguish between management and leadership, which are two different roles. It is not unusual that these roles get mixed when hierarchies, which are based normally on seniority and age, intermingle. Hence, we get stuck in the dual role taken on by the hierarchy, which does not help the organisation move ahead. The management is involved with planning, budgeting, organising, staffing, measuring, problem-solving and so on, which is done well by the established hierarchy. However, leadership requires a higher level of thinking, as it involves establishing direction, aligning people, motivating and inspiring them, and propelling the organisation to the next level.
In fact, invariably, organisations set up a strategic thinking group, which has two or three persons with the hierarchy deciding who should lead. But there are serious limitations here, as it once again boils down to the senior-junior syndrome where the senior’s view prevails based on the position. We need to differentiate between leaders who are thinkers and managers, and, while both are important, the former is more critical as organisations evolve for future growth.
Therefore, Kotter talks of creating a dual structure where both groups exist and, what he calls a network, is created laterally across the organisation. This consists of all the thinkers who do not report to the senior-most person, so that there is freedom in thinking. With a strong hierarchy in place, the execution part is addressed by the managers and hence this dual network system’s ethos would resemble the start-up company’s, and the company is able to think ahead.
In fact, a dual operating system takes in the advantages of both the sides. The management-driven hierarchy is known for reliability and efficiency, and can address issues of current importance. Hence, we are talking of an agile network-like structure that operates with the hierarchy and hence is called a dual-operating system. It is dynamic and free from bureaucratic influences.
As per the author, there are essentially five principles that have to be followed to make this happen. First, there should be many people who drive this change. Therefore, it should not be restricted to a handful of people or chosen ones, which is normally the case. They should all be able to initiate ideas and not just execute them. This is important because thinking right makes execution easier.
Second, the mindset should be ‘get-to’ rather than ‘have-to’. The latter is looked at as being a compulsion, while the former is more out of passion, which is what is required for the company to succeed. When we get stuck in hierarchies, it becomes more a case of have-to, as it lacks the same enthusiasm, which comes in when the attitude is get-to.
Third, this desire must come from the heart and not head. Therefore, it should not all be just numbers and targets. It should talk of a bigger cause of how to make the company the best or an ideal player in the business. Fourth, there should be more leadership and less management. It is a case of creating a vision, opportunity, inspired action, passion, innovation and celebration.
Last, there has to be an inseparable partnership between the network and hierarchy where there is a constant flow of information and they work as a single unit. It should lead to better integration between these two separate silos.
As per Kotter, the network’s processes resemble closely the activity, which is witnessed in any successful enterprise, especially where change is required at, what he calls, ‘bullet’s’ pace. Here, the author lists eight accelerators for leading the change, which should come from the top.
Let us look at these eight accelerators. First, there is a need to create a sense of urgency around a big opportunity. The dual system works here because those who are in a traditional organisation will think this is not possible. More importantly, one needs to realise that speed is all that matters or else organisations lose momentum. Second, one has to build a guiding coalition. These are people from all silos and levels who want to help to make the big thing happen. All of them want to lead and be change agents. They should have the drive and emotional commitment. This, as per Kotter, is actually easy. All we have to do is throw them in a room and they will create the spirit that is needed to go along.
Third, the organisation has to form a change vision that fits with the big strategic opportunity they are looking for. This may already exist, but has to be recreated and reiterated. In fact, often the management-driven hierarchy may not be equipped to handle this fast enough by itself. Fourth, one needs to enlist a volunteer army, which would be constantly communicating information about the change vision and the strategic initiatives to a larger section of the workforce. This acts as a pull factor to drag more people into the orbit.
Fifth, we need to remove barriers to allow this to function seamlessly. This is not easy, but has to be done in order to speed up the process. The sixth accelerator is to create an ongoing flow of strategically-relevant wins, both big and small. Their celebration can carry great psychological power and play a role in sustaining the dual system, as it communicates to the staff that things are working, which reinforces the common cause.
The seventh accelerator would be the sustenance of acceleration. Normally, one tends to sit back after a couple of wins. But this has to be maintained, as the momentum cannot be lost. A larger initiative loses steam unless related sub-initiatives are completed successfully. Last, we need to institute change, as this helps in consolidating wins and integrating them into the hierarchical processes, systems and procedures. As this happens, there is a cumulative effect to the point that after a couple of years, such actions drive the entire dual-operating system approach into the DNA of the organisation.
The book is largely prescriptive and more of a help-book for organisations, but not quite inspirational. It would have been a bit more interesting if examples were given of companies, which changed their approach or made use of these principles to move ahead. It may not be possible to follow everything that is written, as organisations run on impulse and the view of the CEO. But the major takeaway is to have the involvement of all when strategising for the future, as such wisdom may not necessarily lie with those in the hierarchy. That, probably, is the final takeaway from Kotter’s XLR8.
Need a specific action plan for reforms: Financial Express JUne 10 2014
Does the Presidential address to Parliament show us the way forward? On the face of it, the speech is fully loaded, with a wish-list that closely follows the manifesto put up by the BJP before the elections with some recent developments also thrown in. Quite clearly, the direction is clear and it may be assumed that the roadmap has been put in place. How are things likely to pan out? While the government has a to-do list, the real challenge is how to start tick-marking the components in terms of getting things done. Broadly, the government is talking of poverty reduction and social welfare; investment in agriculture; speeding up infrastructure investment; controlling inflation; improving services, especially for the poor and in rural areas; e-governance; better Centre-state relationship and checking corruption. These do sound like statements which every government would like to follow. What is required is definite action points from the government for moving closer to accomplishing these goals. There are three action areas involved here. The first relates to certain affirmative action by the government through higher spending, which will kick-start the growth process. The question is whether or not the government has the money to do this. The fiscal balance appears to be quite tenuous today with little room to increase spending. The government has to take a call on whether or not it should increase the fiscal deficit and earmark this increase for specific infra projects which will help revive the economy. Alternatively, tough decisions have to be taken to lower subsidies and the two areas that come to mind are fuel and fertilisers which can bring in some savings to the government that can be channelled for infra projects. But surely the government has to evaluate the growth target for the year to figure out the impact on tax revenue too, as this can upset the fiscal arithmetic as it did in the last two years. There are, however, some pressure points, such as poverty reduction, that can act as impediments for the government. There will be pressure to expedite the implementation of the Food Security Act to ensure that the poor get foodgrains through whichever system deemed as best: PDS or cash transfers. There has been talk of investment in agriculture and rural infrastructure. Can things be done differently given that there may not be enough money to be spent on improving farm activity by way of higher allocation of funds? Similarly, for all the social services that have been spoken of, i.e., health, education, sanitation, water supply, etc, there is the Gujarat model of sustained improvement which can be referenced. However, would it be possible to replicate this paradigm across the country considering that such goals are ultimately the objectives of the state governments, which have to work towards their accomplishment? Second, there are issues where the government has to act and get things done, which has been the forte of Modi, as has been witnessed in Gujarat. Here, one can see major strides being made in the areas of reduction of corruption, bringing in e-governance, better decision-making channels which is already evident in the appointment of common ministers for multiple ministries, etc. On the two issues mentioned earlier, PDS and farm output, the government could focus on restructuring the schemes. MGNREGA will most certainly be redesigned and made more focused on asset creation while food subsidies could be better targeted by cutting down leakages. It can also be diverted to sprucing up irrigation works at a time when the monsoon may not be normal. An interesting point raised by the President, which has also been spoken of by Modi during the polls, is the concept of strengthening Centre-state relationship. He has spoken of the future growth of the country being the result of a fruitful partnership between the Centre and the states, which is what it should be for all the issues to be taken up on the socio-economic front. Also, a contentious subject like the GST will need the buy-in of individual state governments and this is why better federalism is called for. Third, the government has spoken of controlling inflation which has been the Achilles heel of the economy for the last three years. Inflation on the food side has been sharp and given that it has been due to supply-side issues, there is little scope here for direct policy action in the short run. Any policy has to be in the medium run and has to be taken along with the states. This is so because farming is more in their realm, especially when we talk of amending the APMC laws. Quite coincidentally, the Indian Met has brought out its latest forecasts and is talking of 93% median rainfall for the entire country. This is quite disturbing and throws another spanner in the growth revival that is being talked about. High food inflation has, in the past, lowered the disposable income of households which, in turn, has affected demand for non-food items that has led to stagnation in industrial growth. Quite clearly, this link needs to be severed, but the government may not be able to do much except prepare to import any product where there is perceived shortage as shown by the commodity futures market, to the extent that they are traded. The agenda for the government has been set and the level of enthusiasm and energy in all the ministries is palpable. For sure there will be several announcements made by the government with the Budget being the most crucial one. There is a lot confidence that things will start to happen and this is buttressed by the new-found interest in the stock market and the flow of foreign funds. RBI's action through its monetary policy has quelled any speculation on the difference of opinion between it and the government, which is reassuring. The only joker in the pack is a possible high inflation due to the unfavourable monsoon predicted this year. The important difference, however, is that we are aware of this possibility, unlike last year when high food inflation coexisted with peak production levels of several commodities. Hopefully, a plan will be in place to counter this possibility.
CEO chronicles: Book Review of How I did it in Financial Express JUne 8 2014
THERE ARE lots of books written on various companies and CEOs—some by the CEOs themselves and others by biographers who are given the mandate to eulogise the rise of the protagonist. These stories sound great but, at times, appear contrived to create a good impression. Also, these books have a limited audience, as internal stories rarely gel with the reader, who gets caught in the details of the person or company. In fact, often, the critical message is lost.
This is where Daniel McGinn in How I Did It provides a good collection of essays written by CEOs, who have made a difference to their organisations, and written in brief about what their challenges were and how they surmounted them. Being original publications in the Harvard Business Review, McGinn has classified the essays under six headings, which broadly cover a lot of what has to be addressed by companies to succeed. These stories are readable and could inspire as they are told in the first person, with a lot of modesty, though.
There is one section on ‘finding a strategy that works’, which will appeal to all CEOs. It tells companies how to compete and gain from their businesses. Here, the author gives the example of GE, which reversed the trend of outsourcing to investing heavily in renewing manufacturing operations internally. Prada expanded into India, China, Russia and Brazil to market luxury products, which was unheard of earlier. It was a case of identifying the potential of growing affluent markets and targeting them. One takeaway is that when one has a luxury product, the utility is not to be reasoned—one does not need to sell only flat shoes in places like Prague or Milan, where roads are laid with cobblestones. It is the brand that matters, which brings in a snob value.
Then there is the case of eBay, which got into philanthropy and actually made money from the OMIDYAR Network of microfinance. The example of Novartis is enlightening, where the company ran into the challenge of a patent cliff on its Diovan drug, which was a leading component in its sales basket. It changed strategy by directing its attention on emerging markets and further diversified into cancer drugs and diagnostic centres to retain its growth momentum. These stories are surely inspiring.
The second set of stories is centred on ‘picking of right people’, who actually make an organisation. In fact, the author believes that the main job of the CEO is to get in the right people, especially at the top. Further, references are a better way of getting the right people than interviews or CVs. Gilt Groupe believed that if one has more than 50 people, then the main job for any organisation is to use these resources optimally. The HR department’s role is as important as that of the CFO’s. CEOs also have to be selfless. There is the case of the CEO of Seventh Generation who told the board that he should be replaced because even while the company was doing very well, he felt he was not equipped for future challenges.
The CEO of Xerox spent almost a decade looking for her replacement, as the incumbent had taken over from a CEO who lasted just 13 months. A lesson drawn from this experience is that when selecting a successor, one should not have two or more candidates as, if it were so, then invariably one would leave when the other gets selected and the organisation would suffer.
Marriot went a step ahead and had a non-family member take over the company. In fact, a lawyer associated with the company was given the role of heading M&A operations and later asked to take on the role of the CFO. He was then made in-charge of overseas operations before being made the CEO. Honeywell had a policy of not firing any employee during the 2008 recession and sent staff on unpaid leave. The ideology was that if a company downsizes, it would be difficult for it to get the right staff once the cycle gets corrected. This is a lesson for all companies.
Next, the author believes that ‘building the right culture’ is important, as it affects the company’s performance. This, he believes, should be the priority of CEOs and, here, he gives several examples of what was done, which can serve as templates for other companies. ZAPPOS, for example, did not conduct its call-centre work from India because it needed people to connect with customers. An Indian sitting in Bangalore could not ask a customer personal questions like about the weather. HSN went ahead and actually repainted its offices and repaired broken furniture to provide a good working environment for employees. Tsingtao, a Chinese company, had to change its entire way of working, as the Chinese are risk-averse and getting senior officials to do business was a challenge.
At times, companies need to ‘tell the right stories’ to get the confidence of various constituencies, especially in today’s world where companies are accused of spoiling the environment or damaging local community assets. Under Armour changed its suppliers of cloth for the T-shirts produced, while Timbaland had to change its supplier’s way of producing raw materials on account of opposition from activists. Maclaren voluntarily recalled its strollers when it realised that children were getting hurt using them. These actions actually make a difference to the communities around and the companies are able to build respect.
McGinn also has a section on ‘doing smart deals’ and this, he feels, is important because very often CEOs, who do well in their own lines of business, flounder or are apprehensive when it comes to making deals or going for an IPO, as they are not sure how the company will get affected.
Finally, the author talks of how ‘companies grow around the world’. Here, there are interesting examples of how Amway had faced a problem in China when the government suddenly outlawed doing direct business. The entire business model had to change. Burberry had to dispense with several designers and keep only one across the world to keep the product unique. In fact, it went to markets, which had an appetite for luxury products. Reckitt Benckiser followed a policy of not having any of its senior executives work in the country of their origin. This way, they spread cross-cultural fertility. Genpact gave up its normal business and became a back-office for GE due to bureaucratic issues in India when regulation said banks could not lend to foreign financial firms. Heinz followed the policy of making inroads into the emerging markets based on the ‘4 As’ principle—applicability to local culture, availability in the right outlets, affordability to suit the purse and affinity to local employees and customers.
Each of these stories provides some clues to senior management of companies who would, at some time or the other, be confronted with similar conundrums and challenges. While admittedly, there are no generic solutions across the board, these experiences would serve as valuable inputs to be considered by executives for moving forward. This book is a must-read for CEOs, as it could also present the fault lines in their own way of working. And if they do recognise them and take corrective action, it would be good for all.
This is where Daniel McGinn in How I Did It provides a good collection of essays written by CEOs, who have made a difference to their organisations, and written in brief about what their challenges were and how they surmounted them. Being original publications in the Harvard Business Review, McGinn has classified the essays under six headings, which broadly cover a lot of what has to be addressed by companies to succeed. These stories are readable and could inspire as they are told in the first person, with a lot of modesty, though.
There is one section on ‘finding a strategy that works’, which will appeal to all CEOs. It tells companies how to compete and gain from their businesses. Here, the author gives the example of GE, which reversed the trend of outsourcing to investing heavily in renewing manufacturing operations internally. Prada expanded into India, China, Russia and Brazil to market luxury products, which was unheard of earlier. It was a case of identifying the potential of growing affluent markets and targeting them. One takeaway is that when one has a luxury product, the utility is not to be reasoned—one does not need to sell only flat shoes in places like Prague or Milan, where roads are laid with cobblestones. It is the brand that matters, which brings in a snob value.
Then there is the case of eBay, which got into philanthropy and actually made money from the OMIDYAR Network of microfinance. The example of Novartis is enlightening, where the company ran into the challenge of a patent cliff on its Diovan drug, which was a leading component in its sales basket. It changed strategy by directing its attention on emerging markets and further diversified into cancer drugs and diagnostic centres to retain its growth momentum. These stories are surely inspiring.
The second set of stories is centred on ‘picking of right people’, who actually make an organisation. In fact, the author believes that the main job of the CEO is to get in the right people, especially at the top. Further, references are a better way of getting the right people than interviews or CVs. Gilt Groupe believed that if one has more than 50 people, then the main job for any organisation is to use these resources optimally. The HR department’s role is as important as that of the CFO’s. CEOs also have to be selfless. There is the case of the CEO of Seventh Generation who told the board that he should be replaced because even while the company was doing very well, he felt he was not equipped for future challenges.
The CEO of Xerox spent almost a decade looking for her replacement, as the incumbent had taken over from a CEO who lasted just 13 months. A lesson drawn from this experience is that when selecting a successor, one should not have two or more candidates as, if it were so, then invariably one would leave when the other gets selected and the organisation would suffer.
Marriot went a step ahead and had a non-family member take over the company. In fact, a lawyer associated with the company was given the role of heading M&A operations and later asked to take on the role of the CFO. He was then made in-charge of overseas operations before being made the CEO. Honeywell had a policy of not firing any employee during the 2008 recession and sent staff on unpaid leave. The ideology was that if a company downsizes, it would be difficult for it to get the right staff once the cycle gets corrected. This is a lesson for all companies.
Next, the author believes that ‘building the right culture’ is important, as it affects the company’s performance. This, he believes, should be the priority of CEOs and, here, he gives several examples of what was done, which can serve as templates for other companies. ZAPPOS, for example, did not conduct its call-centre work from India because it needed people to connect with customers. An Indian sitting in Bangalore could not ask a customer personal questions like about the weather. HSN went ahead and actually repainted its offices and repaired broken furniture to provide a good working environment for employees. Tsingtao, a Chinese company, had to change its entire way of working, as the Chinese are risk-averse and getting senior officials to do business was a challenge.
At times, companies need to ‘tell the right stories’ to get the confidence of various constituencies, especially in today’s world where companies are accused of spoiling the environment or damaging local community assets. Under Armour changed its suppliers of cloth for the T-shirts produced, while Timbaland had to change its supplier’s way of producing raw materials on account of opposition from activists. Maclaren voluntarily recalled its strollers when it realised that children were getting hurt using them. These actions actually make a difference to the communities around and the companies are able to build respect.
McGinn also has a section on ‘doing smart deals’ and this, he feels, is important because very often CEOs, who do well in their own lines of business, flounder or are apprehensive when it comes to making deals or going for an IPO, as they are not sure how the company will get affected.
Finally, the author talks of how ‘companies grow around the world’. Here, there are interesting examples of how Amway had faced a problem in China when the government suddenly outlawed doing direct business. The entire business model had to change. Burberry had to dispense with several designers and keep only one across the world to keep the product unique. In fact, it went to markets, which had an appetite for luxury products. Reckitt Benckiser followed a policy of not having any of its senior executives work in the country of their origin. This way, they spread cross-cultural fertility. Genpact gave up its normal business and became a back-office for GE due to bureaucratic issues in India when regulation said banks could not lend to foreign financial firms. Heinz followed the policy of making inroads into the emerging markets based on the ‘4 As’ principle—applicability to local culture, availability in the right outlets, affordability to suit the purse and affinity to local employees and customers.
Each of these stories provides some clues to senior management of companies who would, at some time or the other, be confronted with similar conundrums and challenges. While admittedly, there are no generic solutions across the board, these experiences would serve as valuable inputs to be considered by executives for moving forward. This book is a must-read for CEOs, as it could also present the fault lines in their own way of working. And if they do recognise them and take corrective action, it would be good for all.
Does futures trading push up food prices? Financial Express June 3rd 2014
Futures trading' is based on expectations of prices to prevail at a later date which, in turn, is based largely on all available data, including expected or known fundamentals-linked demand and supply of a product. Intuitively, the price which is discovered on the futures platform reflects this equation. The fundamentals include expected supplies, arrivals, logistical bottlenecks, leftover stocks, demand, etc. Global influences would play their role in case the product is traded outside Indiaeither exported or imported. When there is enough liquidity in the contract, the price discovery process is robust and the final price traded reflects the underlying reality. The volume of trading on an exchange reflects the liquidity that is generated, indicating efficiency. The volume of trading cannot influence the price per se and what is important is the open interest which can be delivered on the exchange. Trading is also done by investors and speculators who move in and out based on minor price movements. Such trading cannot influence prices once the rules are set by the commodity exchange. Open interestthe number of contracts outstanding at the end of the day and could be potentially delivered on the platform if held to expiry of contractmatters more. If the open interest is high and accounts for a large proportion of the commodity that is produced, then it can impose on the price as this is the quantity that can potentially be bought and sold on the exchange. Futures exchanges keep this open interest under control and fix position limits to ensure that no single trader or group has a limit of more than, say, 2-3% of the available product. With these ground rules set, there has been an ongoing controversy that such trading led to high inflation, ever since futures trading was revived in 2003 . The best way to check if it so is to look at data from a time of really high inflation in India. Looking at the April 2014 inflation numbers, as per the WPI, the first impression is that the high increase in prices on a year-on-year basis was for products that were not being traded on the comexes. High inflation was witnessed in case of moong (23.7%), potato (31.6%), rice (12.8%), jowar (12.4%), masur (12.3%) and urad (11%). None of these are traded on the NCDEX, which is the leading exchange for agro commodities. In fact, the commodities which are traded relatively in high quantities on the NCDEX are: mustard, soybean, turmeric, etc. The inflation rates here low or negative: mustard (1%), chana (-14.2%), soybean (-1.2%), turmeric (0.5%). Clearly, it can't be concluded that futures trading caused prices to come down! In fact, the ratio of open interest in the near month (which is liable for delivery if maintained till expiry date) to total production was 1.1% for soybean and 1.5% for mustard. Such quantities cannot have any influence on the final price even if brokers work together. Wheat has shown an increase of 4.6% in prices and is also traded on the NCDEX (around R100 crore a day). Here, the ratio of open interest to total availability (assuming 60% marketable surplus) was just 0.01%. The answer lies in the demand-supply imbalances as well as the tendency of the government to increase MSPs which has raised the price of, say, wheat where there is procurement. Futures trading is reflective of the state of things to come as the price picks up all information as players look for signals all the time. It should be used to set policy. Intuitively, if we had trading in, say, onions, and the prices indicated a crop failure, the government could have stepped in earlier and averted a crisis by importing the same. As long as regulation is in place and exchanges have systems of market watch that work well, futures trading provides a very valuable input and should be spread across the entire farm commodity basket as it brings in efficiency. We need to get out of the mindset of whether the farmer is getting a higher price or consumer is paying a higher price. We need to get at the right price, which the market is delivering.
Tough trade-offs in inflation control: Financial Express JUne 2, 2014
One of the immediate tasks for the new government is to tackle inflation. This economic phenomenon has been the Achilles' heel for the last 4 years. Ironically, it has come at a time when we have had good harvests with price pressures being manifested in the primary and fuel articles categories. Surprisingly, inflation when viewed for only manufactured products, has been the lowest averaging around 5% going by the WPI while primary and fuel products have registered increases of 8.3% and 7.9% respectively. While there is a lot of debate on whether RBI should lower interest rates or increase them and whether the government is spending too much money which is inflationary, conventional economic theory has actually been turned around, as these hypotheses may not be holding today. First, has high government spending been responsible for inflation? Theoretically, it can be argued that when the government spends beyond a limit, there is too much liquidity in the system which drives prices up. Here the assumption is that there is excess demand for various commodities. But when inflation is on the side of food and fuel, this theory cannot be ratified. Further, RBI data shows that industry, as of December 2013, was operating with capacity utilisation levels of around 74%, which means that it could respond well to demand with the existing capacity. Further, if one looks at the inventories of the manufacturing sector, the ratio of finished goods to sales is around 18% while that of raw materials to sales is 25%. This again indicates that demand is slack and industry has the means provided someone provides demand. The problem is one of shortfall and not excess demand. Second, a counter argument put is that the MGNREGA programme put a lot of money in the hands of individuals which though serving a social objective did not make economic sense as assets were not created and money was given to be spent. As an extension, this wage drove up wages in other sectors too as the minimum wage level went up thus exacerbating demand. Looking at MGNREGA on its own, total outlay was around R30,000 crore per annum, which often turned out to be lower than budgeted. Even so, this amount is around 1.5% of GDP from agriculture or 1% of value of output. Clearly, this amount is too small to influence prices. Also, given that MGNREGA or minimum wage paid is not to the destitute but to workers between two harvests, the money would have been spent on non-food items, which also provided demand for consumer goods in rural areas and spurred industry to an extent in the good years. CSO data affirms this thought as the share of food items has fallen in the consumption basket with cereals and pulses coming down appreciably. Third, as food prices have gone up even with output touching peak levels the reason could not be on excess demand side, but higher MSPs being offered by the government relentlessly. High prices of today feed into the calculations tomorrow, thus leading to the CACP announcing high prices. This cycle needs to be moderated or else food inflation will be a continuous spiral. Fourth, the government has been caught in a dilemma on fuel prices. This is a decision taken keeping in mind fiscal prudence and is dependent on global crude oil prices and the exchange rate. With one of the two playing truant, the higher cost is being gradually shifted to the consumer with petrol being fully market-driven and diesel being calibrated steadily. This has led to this category witnessing an increase of almost 8% in the last 4 years. In FY14, fuel products with a weight of 14.9% contributed to 28% of inflation coming after primary articles with 44% (weight of 20.1%) and manufactured goods with 28% (65%). We evidently need to make a bold admission that as we strive for prudence on the fiscal side the nation has to bear up with high inflation. Fifth, RBI has been using interest rates as a tool to combat inflation. But the focus has actually changed from a tool to lower inflation to a 'reaction to inflation'. By increasing the repo rate by 75 bps last year (after starting off with a 25 bps cut), the base rate rose by just 15 bps which may have only marginally contributed to the stagnant growth in credit which was marginally higher at 14.3% in FY14. More importantly, interest rates do not affect inflation on primary or fuel items which contributed to 72% of WPI inflation and is impervious to interest rates as such purchases are not leveraged. In terms of CPI inflation in FY14, around 77% of the index (food with a share of 59% in inflation, fuel 8% and housing 10%) are not quite affected by monetary policy. Therefore, monetary policy is now more of a reaction to inflation with an eye on real interest rates which in turn probably acts as a deterrent for households to prefer financial savings to gold. Sixth, the issue of imported inflation is also a factor that the government will have to keep in mind. Last year, the rupee fell by 11% on an average basis. Imports as a proportion of GDP was about 24% which means that up to around 2.5% inflation could have been caused by the declining rupee depending on to what extent the higher cost was passed to the consumer. What does all this mean? Of the 6 factors discussed, fiscal spending or interest rate policy may not be suited to bringing down inflation which also means that turning the blame on MGNREGA is not right. Inflation on rupee movement would be external to the system. But the government finally has power over pricing of fuel and farm products, and should look seriously in these corners as it can make a difference. Assuredly, these trade-offs are not really easy. They are tough.
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