Jan Dhan is a cross for state-run banks to carry: Economic Times: 22nd October 2014

A bank is different from a company. While a company is answerable to the shareholders, a bank is to the deposit holders who have entrusted it with their funds. So when assets go bad or banks fail, we say the deposit holders have been wronged. The unfairness to customers has been questioned of late in India where deposit holders, on whose money banks make money, have become troublesome and banks want to dissuade them from using services by charging them for everything. It is only ironic that the new design — Jan Dhan — has turned the chairs.

The recent announcement of the financial inclusion policy that provides access to deposits, credit and insurance to everyone brings in a feeling of déjà vu. For those who lived through the seventies and eighties when we had the infamous loan melas, this raises a question on whether or not our mindset has changed after assiduously pursuing Narasimham I and Narasimham II. The present task set out to public sector banks to attain certain targets of opening deposits, though laudable, raises several questions. The government as an owner of public sector banks has a right to dictate terms to these banks, but given that they have all other kinds of problems, the timing of this is odd.

First, banks have been trying to close down non-viable branches where there is little business in terms of the deposit accounts being maintained or used. Having millions of additional accounts (75 million being targeted) will push up the cost of holding these deposits and pressurise their margins. Banks are already in the mood of punishing small deposit holders who do not maintain minimum balances with various hidden charges. Now for these deposit holders who probably will not be active, the costs will be high. The cost of opening a deposit ranges from Rs 80-100 with an addition of Rs 100 for the debit card, which is to be waived.

Second, to maintain these deposits, there will be costs of opening branches and staffing given the numbers. While the argument given is that technology will work, given the low level of internet penetration and the absence of electricity in most villages during the day time, will this work? Banks have already been told to start charging for excess ATM usage in metro cities. RBI data shows that on an average in a month, an ATM card rolls over just 1.4-1.5 times, which means that the usage is very low and there are several machines in non-metro cities that are hardly used (If the RBI is opening up charges for more than three ‘other bank’ ATM transactions, evidently the consumption is very high in these centres). Therefore, banks have to operate branches to be meaningful here.

Third, banks have been asked to lend Rs 5,000 as overdrafts to these customers. How does one guarantee that the amount will be repaid? Bank lending is collateral-based, and when there is no collateral, MFIs come in. Banks have eschewed this class given the risk. Now being forced to lend to such customers, there will be further jeopardy to their NPAs given the higher tendency for priority sector lending to turn into sour assets.

Fourth, while opening 15 million accounts in a day is good news, the question is, are the Know Your Customer (KYC) norms being followed? By diluting these norms to open accounts, we are actually degrading our systems. Generally to open a bank account one needs to go to a branch at least twice with a whole series of documents. Short cutting these processes will compromise on quality just like banks ran into a problem while meeting targets for credit cards by approaching every person outside an airport to subscribe to the same.

The justification given is that this will help to enable the direct cash transfer scheme. The major problem with the current system of distribution is the identification issue. With sloppy methods being used under KYC here, it is but natural that there will be replication of the same in this case too.

The challenge for banks is that out of every Rs 100 they receive, Rs 26 has to be kept aside as preemption and 40 per cent of the balance goes as priority sector lending leaving aside just Rs 44 for lending. For public sector banks, there are further pressures to be aggressive on inclusive banking and few bankers admit it is a strain as it is held to be sacrosanct. By counterintuitive logic if banks find this remunerative they should be lending more here, but they often fall short of the target. Now with this additional task being put forth, there will be several compromises that have to be made.

The fundamental problem is that conventional thinking has been turned around. While the government is supposed to be addressing social issues, we expect it to drive growth through spending on infra projects. Banks, which are commercial entities and answerable to deposit holders, have per force been compelled to carry out these social objectives, which has resulted in various issues. Also such grandiose schemes appear to be part of Indian psyche where we like to create new systems and never bother about maintenance. So we talk of smart cities, but the existing ones continue to decay. Hopefully, this grand design will not debilitate our banking system.

Payment banks - Spot the Difference: Business Standard 21st October 2014

With post office deposits and Jan Dhan already in place, is there really place for yet another
institution for banking inclusion?

The introduction of the concept of payments banks is an interesting proposition, but given that we already have similar systems, should we be duplicating them?

The idea of the payment banks is to provide access to banking for people, especially in rural areas. The bank's operations are rudimentary: funds will be invested exclusively in government securities or treasury bills with maturity of less than a year, eschewing issues such as non-performing assets and capital adequacy.

However, two competing entities already perform similar functions on a fairly large scale. First, India Post has around 1,40,000 post offices in rural areas, which have outstanding deposits of around Rs 3,70,000 crore (as on March 2013) with an annual flow of Rs 1,70,000 crore. This excludes certificates and Public Provident Fund accounts. Therefore, we do have strong structures in place that collect deposits from the public in the regular course of activity.

The business models are also almost the same. The money collected is devolved to the state and Central governments based on a formula and, since post offices are not commercial entities, they do not lend the money. The funds go towards balancing the budget, which is analogous to government securities and treasury bills.

The second area of competition for payment banks comes from the Jan Dhan scheme. This project is being executed within the existing structure of commercial banking where the public sector banks are to take the lead and open 75 million no-frills accounts by the year end. These accounts have two advantages - they have an embedded insurance product and, at a future date, could be entitled to an overdraft.

The Jan Dhan directly supersedes the payments bank objective because it has managed to include 55 million households (according to market reports) in an aggressive manner. Therefore, payment banks may not have many takers since they will be competing with post offices and the commercial banks' Jan Dhan, which goes beyond what the payments bank offers.

Prima facie, the payment bank model looks attractive - cost of deposits at four per cent, intermediation costs at 1.75 per cent and returns of seven to eight per cent, giving a net yield of 1.25 to 2.25 per cent. But there are nagging problems as revealed by the Jan Dhan experience.

The cost of opening an account is Rs 250, which includes a debit card. But 80 to 90 per cent of such accounts stay dormant forever. The numbers available from media reports on Jan Dhan indicate that for the 55 million accounts opened, the total amount mobilised was Rs 4,000 crore, which translates to roughly Rs 725 per account. The cost incurred by banks would have been Rs 1,375 crore, thus eroding a part of the deposits mobilised, hardly good economics for the payments banks.

There are other, practical issues. For instance, payment banks will entail building brick-and-mortar branches. There is a lot of talk about leveraging technology but given that most villages have limited access to power supply and knowledge of internet, physical access will be required. New ATMs have to be installed, since only 15 per cent of them are in rural areas right now.

It is generally believed that if financial inclusion is to be achieved we need an aggressive approach. In that sense, having multiple schemes to achieve the objective can really do little harm, so hence payments banks can coexist with post office savings bank and Jan Dhan. But it will be worthwhile to do an efficiency audit of the existing structures and put in place performance parameters for the new banks, so that we do not end up with a model that ends up eroding value.

Finally, we do have a proclivity for creating new institutions - the Mahila Bank is an example. This bank was set up with fanfare, even though the same objective could have been achieved by designating public sector branches exclusively for women. We have not heard much about this bank since. Is it possible that the payments banks could also reach this state?

Interpreting Tirole in the Indian context: Financial Express 14th October 2014

It appears to be quite timely and appropriate that the Nobel Prize in Economics has gone to Jean Tirole, whose major contribution has been in the area of market domination by a small set of firms and the regulatory action to be taken in this context. This has become a controversial issue in our country given the approaches taken to deal with critical resources such as mining or spectrum.

In the aftermath of the various crises in capitalism, the issue of crony capitalism has always been at the forefront where it has been argued that there are close connections between industry and the government, be it in East Asia or the USA, which indirectly encourage such market domination. Even in India, RBI has been blunt on hinting at this phenomenon.

Tirole has argued that in segments where there are monopolies or oligopolistic structures, companies tend to dominate the market and guide the prices in a desired direction given their strength. It can be through higher price or lower output, though the latter becomes difficult when there is free-trade and the product can be procured from outside. While price controls have often been spoken of, the issue is one of fixing the same and ensuring that profits are kept under check. However, with the advent of technology firms can minimise their costs and yet reap the benefits of higher profit through the fixed price. As there is no way to check the exact cost involved, monitoring the same becomes difficult.

We have seen this kind of structure in several industries like telecom, refining, banking, media, etc, where there are entry barriers in terms of costs and regulation, where market domination through alliances becomes common. Often industry associations work in this direction to ensure that this pricing power is exercised. While governments try to control cooperation between players, at times it could turn out to be counterproductive when it comes to sharing technology or patents.

There are several issues that need to be addressed. The first is to identify cases of market capture. This is important because it gets strengthened in four ways, especially when there is crony capitalism. First, markets, when dominated by a few firms, are driven by the structures of these companies and the consumer ends up paying a higher price all through. In India, we have seen how prices first come down when market share is to be increased and competition tackled and then prices start increasing once domination is reached. This has been witnessed in the electronics sector where this reverse curve has emerged.

Second, policies in the area are framed under pressure from these interest groups, which again works in maintaining this equilibrium for these firms. Often, one hears of how policies have been geared towards favoring specific companies. The issue becomes tricky, as Tirole's solution is to have in place such a framework which ensures more competition. But if this framework can be influenced by this oligopoly, then a solution will not be easily forthcoming.

Third, such domination also helps them secure a larger share of credit from the banking system. However, in our case, RBI's company and group exposure norms, which are more on the basis of prudence rather than 'credit capture', work well.

Lastly, the regulators are often pressurised to cooperate with the dominant group. Here, the political links could play a role in furthering these linkages. To ensure that such regulatory capture is not there, we need to have more transparency in the regulatory structures.

It is here that Tirole says that we need to have more regulation to control these firms. The use of competition laws comes to mind where countries need to design them to ensure that there is no misuse of the majority position. While one cannot increase the number of players by statute, there need to be adequate and empowered regulators to check the practices being pursued and ensure that there is fair play. There are however, some issues which come up here.

First, there can be several measures used to corner the market. Distribution of freebies is a way to push up sales. How does one stop this? Undercutting prices under the garb of introductory or promotional offers distorts the market place. The recent case of discounts being given in large amounts by e-commerce sites did raise a controversy as it, in a way, out-competes the other players. Clearly, there need to be rules in place to control such activity.

Second, how does one deal with patents. Here, the pharma industry would be in the frame as a lot goes into research when a patent is procured. Is it unfair play or a reward for superior knowledge?

Third, how does one deal with mergers as the raison d'etre of any takeover or buyout is to increase market share. Can we ensure that such deals do not end up giving disproportionate market power to these firms?

Fourth, what about public monopolies? Often, contracts are given by these monopolies based on the lowest-bid criteria. The bidder, who is a significant player on the buy-side, then cuts costs and quality to complete the contract. This happens often in road projects where there is an oligopolistic structure of bidders and often, they work in a manner such that they distribute the contracts between themselves. There needs to be regulation here, too, to ensure that the bidding process is transparent and that the contract is honored in true spirit.

Based on Tirole's theory, the key to having a more competitive structure is to ensure that we have regulation that cannot be influenced by industry. There is a call for transparency and fair play. Probably, in our structure the checks created by CAG in a way keeps watch on our policy approach. But this has to be done dexterously so as not to go back to the inhibitive license raj and MRTP days where enterprise was dissuaded.

10 commandments: Book review of Optimist's Diary: Financial express: 12th October 2014

An Optimist’s Diary: A Philosophical Economist Observes

Our World

Guy Sorman

Full Circle

R595

Pp 592

Madan Sabnavis

AN OPTIMIST’S Diary will certainly make champions of ‘the market’ happy. In today’s world, where we have tended to get suspicious of markets and their ability to deliver fair results, Guy Sorman offers a strong defence for capitalism. In fact, it is not so much a defence as it is a series of observations in this diary.

The basic observation is that there has been manifold increase in the standard of living of people where countries have tilted towards capitalism in various degrees. The cut-off point is the fall of the Berlin Wall, after which things have only improved. This is visible across countries in Africa, Latin America and Asia. Further, the countries that still seem to be struggling are those that have stuck to the communist or socialist dogma.

Sorman does admit that free markets failed when the financial crisis set in. The solution is not to reject it, but repair, which is being done today. He is hence critical to the point of being peevish when commenting on Joseph Stiglitz, who has launched a tirade against anything that capitalism stands for, as well as Paul Krugman, who has been critical of it too. He refers to Stiglitz’s views as ‘pop economics’. Here, he lambasts them, saying they are short-sighted and fail to offer any solutions or alternatives.

Sorman argues that capitalism runs on the Schumpeterian theory of creative destruction, where we are learning all the time. He also criticises Keynes and Marx for their philosophies, which he considers outdated. This probably is a problem with economists who are rigid in their stance and are unwilling to accept views that do not fall in line with their own. Hence, Friedman gets applause and Keynes his scorn.

In his diary, which goes chronologically from 2007 to 2012, he attacks the China story, which is thought-provoking. While lot of us like to revel in the way in which China has progressed, he shows that the double-digit growth has helped only the top 200 million while the rest of the one billion or more people live in penury. His travels and interviews reveal that a dictatorial regime that does not value human life and runs after growth numbers has literally squeezed the one billion by denying them basic facilities like health, education, water, electricity, etc, and has favoured growth of a very corrupt class. In fact, he goes on to highlight that China has nothing to say for its own production and most of what sells are foreign investment and foreign brands, which use these sweat shops to produce goods. China is more of a sub-contractor than innovator.

China on its own should be scorned for validating human rights and depriving its people of a humane living standard. He writes about how those who speak out disappear and even today, those killed during the Tiananmen massacre are unknown. Further, AIDS has spread widely in the interiors and the government is least concerned about the deaths. If what he says is true, then all those who talk of the China model should review their arguments, as no fair-minded country or government would like to do what China did to reach where it is today.

He puts forward 10 propositions for a more prosperous world. First, a market economy is the best. Even mathematical models used by economists like Gerard Debreu reinforce the claim made by Frederich Hayek in the mid-20th century that a market economy works the best. Second, free trade helps economic development. Third, good institutions are necessary for success, as there is a lot of Akerlof’s asymmetric information, which has to be corrected. Fourth, the best measure of an economy is growth and we should not try and camouflage this with abstract concepts like ‘happiness’. His stance is that even if environment has to be compromised, so be it. Fifth, creative destruction is essential, as it is the only way that innovation comes in and new enterprise emerges.

Sixth, momentary stability is essential for growth, as inflation comes in the way. Seventh, unemployment among unskilled workers is determined by the cost of labour. If we put too many restrictions like what France does for separation, then firms will employ less labour. Eight, the author believes that a welfare state does no good and once people are dependent on doles, the rot sets in. This has been argued in India too, where we have subsidy and employment programmes under which money is given out to people as part of welfare activities. This only makes people more dependent, wastes resources and leads to lower productivity. Ninth, complex financial markets have brought about economic progress. While the financial crisis was about the failure of some of them, he feels that the benefits have surpassed the cost of crisis. Derivatives have brought cheap capital everywhere around the world. Last, competition is largely desirable.

He is gung-ho about the US, which remains the leader in today’s world with a combination of private entrepreneurship and academic excellence. The dollar still remains the main anchor currency. And if one feels it is unpredictable today, the others are even more chaotic. Further, its military is the only one that can keep the global order ticking. More importantly, it is an exporter of values of democracy, individualism, gender equality and religious diversity. On this count, there will be little argument, as we have seen these values transcend all the revolutions we have witnessed in Algeria, Tunisia or Egypt. He also gives an example of how the US, its media and judicial system tackled the Dominique Kahn incident by providing justice to the coloured lady, which never happened in France where Kahn’s indiscretions were known, but protection of the elite was more important for the media.

There is also a chapter on Mahatma Gandhi, which Indians may not like. Besides Gandhi’s sexual preferences, which, he says, were a personal issue, he highlights the ambivalence in his approach to progress. Gandhi was for swaraj and asked people to burn anything foreign, yet he travelled in trains built by the British and not in an ox-cart. He also had a British surgeon when he needed an appendectomy. Sorman refers to him as the first 20th-century media-savvy political actor, as he walked briskly for the famous Dandi march when a film crew covered his steps and shifted to a leisurely pace when the cameras were turned off. But Sorman does praise him for bringing in values of hard work and honesty.

An Optimist’s Diary is a good book to read and is refreshing in this age, where we tend to be overly critical of the markets. That we have reverted to the markets after disdainful talks for five years shows that there is no alternative. It does get a bit distasteful when he attacks Stiglitz and Krugman, as it gets personal and goes beyond ideology. His revelations on China do make one think hard on whether this is the right way to go about it and if this kind of model is sustainable. A social uprising cannot be ruled out if pushed to the corner. And its economic model does not sound as alluring once we digest what goes on inside.

Crude oil prices: It’s raining goodies now: Financial Express: 9th Otober 2014

The fall in the global price of crude oil augurs well for us as it is a continuation of the positive developments that have taken place for the Indian economy, starting with higher GDP and IIP growth, and lower CAD and inflation. Higher output from North Dakota and West Texas has contributed to this downward trend, which is expected to continue till January, notwithstanding the higher demand likely to emanate in the winter.

To begin with, it must be put on record that the price of crude has actually reverted to the January situation when the West Texas Intermediate (WTI) stood at $95.14 (was $94.53 at September-end). Brent is the one which has declined sharply from $107.94 to $95.7/barrel during this period. The arbitrage on this spread has now come down with supplies increasing in the market. The ISIS threat has now taken a backseat and a stronger dollar has steadied the price at a lower level. The Indian basket price has tended to follow Brent and has now come down from $108.76 on January 2 to $95.34/barrel by September-end. The decline really started from August onwards. What does this mean for India?

First, the fact that we have moved towards marking-to-market the price of petrol and now diesel is good, as any reduction in price of crude oil actually gives us the option to either lower the consumer price and hence soothe inflation, or retain market price and use this benefit to support the subsidy on other products such as LPG and kerosene. The choice is really with the government.

Second, the trade balance is to get some support from the price movement. India's basket is different and priced higher based on the quality. Last year, the price averaged $105.52/barrel. Depending on the decline in price of our basket, the benefits can be evaluated. Demand for oil is typically fairly inelastic, and in the last two years imports of crude oil were approximately 1.354 billion and 1.390 billion barrels, respectively. Assuming this number to remain almost unchanged at, say, 1.40 billion barrels, the total savings for a dollar reduction in price will be no more than $1.4 billion or $14 billion on an annualised basis in case there is an average reduction of $10 per barrel in price. The latter looks probable if this trend continues.

Given that imports were around $450 billion last year, the savings would be just around 3% of total for FY14, and with a higher base in FY15 would be even lower at 2.8%, assuming total imports to be $500 billion. However, in terms of CAD, there will be an improvement. Last year, CAD was $32 billion and savings of, say, $14 billion on an annualised basis would reflect in a lower CAD amount and ratio. Trade deficit was $147 billion, which will improve by 10% with such savings. Therefore, the picture on the external front is positive.

Third, from the point of view of tax collections for the government, it would be a mixed picture. For the central government, the customs duty is denominated by a specific duty rate per tonne, while the excise rate is also in similar terms. Hence, a lower price will not affect the central government under ceteris paribus conditions. State governments, however, do charge sales tax, which varies between 20-28% ad valorem. A lower price would translate into a decline in revenue as the ad valorem rate is unchanged.

Fourth, the inflationary impact would depend on how we choose to regulate prices. Currently, in the WPI index, the weight of fuel products is 9.36%, of which 7.56% (including 5.87% for petrol and diesel) is marked-to-market anyway. This will lower the primary impact of inflation and 10% decline in price, which is broadly speaking $10/barrel decline in prices, will lower inflation by roughly 0.75-0.8%, provided there is 100% pass-through. However, the secondary impact is uncertain as the pass-through may not be free flowing. In case of the regulated prices under kerosene and LPG, the implied under-recovery will come down with the cost of the product coming down.

Fifth, the impact on CPI, however, looks to be more restrictive as crude oil enters the index indirectly in two forms: fuel & light and transport & communications. While the weights in the index are 10.4% and 5.83%, respectively, for the sub groups, the tendency would be that with the exception of direct consumption of petroleum for vehicles used by households, the other items are unlikely to change as transport charges never come down because taxi and bus charges move up but never down as they are adjusted to generalised inflation or subsidised. Therefore, the impact on retail inflation would be relatively muted.

Last, the government can see benefits at the margin in terms of the fuel subsidy bill, which has been an area of concern. The policy of increasing the price of diesel gradually to make it market-oriented has worked well, and with the subsidy on the other two products being lowered, the government can decide on whether or not it should let the prices of deregulated products move downwards or hold them to cross-subsidise the regulated products.

The situation of declining crude prices would also offer an opportunity to the government to start calibrating the prices of kerosene and LPG to the market gradually in a meaningful manner. The success of the diesel story should be replicated where the prices are allowed to creep upwards in a non-obtrusive manner. The current system of limiting the number of cylinders is quite inefficient and open to gaming. A more straightforward approach would be pragmatic.

A thought worth pursuing is that since one is never sure of how the crude oil prices will behave, it may be worth creating an oil stabilising fund, which can be used in times of an upward swing in global prices. This will be possible if we transfer the price advantage on account of lower current prices either fully or partly to this fund.

Keeping the dollar debt under control: Financial Express 3rd Ocotber 2014

RBI's latest release on external debt reveals some interesting developments over the years. The total external debt in June 2014 was $ 450.1 billion, around $8 billion more than in March. How is one to view this number in the context of a growing economy in a globalised world, that offers opportunities to borrowers to procure funds at a lower cost, which has to be balanced with the macro-economic strength of the economy?

A ten-year analysis reveals that between FY04 and FY09, the average annual compound growth rate was 14.7% which remained stable at 14.5% in the next five years i.e. FY09 to FY14. Assuming this number to hold for the next five years too, which cannot be ruled out considering that the ECB and NRI routes are favoured sources of debt, this number could range between $800-850 billion by FY19, which is quite startling. Also, there would be repayments of around $175 billion within a year ($55 billion could be rolled back through NRI deposits) and another $100 billion over 3 years.

A useful ratio to gauge its severity is the forex reserves to external-debt ratio. This has changed from 100.2% in FY03 to 96.5% in FY09 to 68.7% in FY14 and 70.1% in June 2014. Therefore, debt has been increasing at a higher rate than our forex reserves and if this level crosses the $800 billion mark by FY19, our forex reserves would have to increase to approximately $550 billion while maintaining the two-third cover ratio. From a policy perspective, efforts have to be on making the balance of payments more robust, especially on the CAD front, with full support from other non-debt capital inflows.

The main causes of this increase has been due to the liberalisation policies pursued by RBI where companies have been allowed to access the international markets to raise funds which have come with the benefit of a good interest rate differential given the Fed's and the European Central Bank's quantitative easing and low interest rates. This, along with a relatively stable rupee till FY14, helped companies counter high domestic interest rates. The share of external commercial borrowings (ECBs) in the total debt is now 34%, compared with 27.8% in FY04 and 27.8% in FY09.

The second factor was NRI-based deposits, which have increased from $31.2 billion in FY04 to $41.6 billion in FY09 and then to $103.8 billion in FY14. The growth in the second period was 20%, while it was just 6% in the first. We aggressively garnered these deposits in FY14 when the RBI opened the swap window on FCNR (B) deposits; This brought in over $30 billion. Once again, the interest rate differential worked for banks to draw in cheaper funds which offered better returns to the overseas deposit holders.

The third factor is trade-credit, which rose sharply in the last five years by more than double, from $43.3 billion to $89.2 billion. This is directly related to the flow of trade which has been buoyant during the period when both exports and imports grew at healthy rates, though there was a slowdown in the last year. The so-called official flow of funds, through bilateral and multilateral agencies, has actually come down in terms of share in total from 41.1% in FY04 to 17.4% in June 2014.

Therefore, ECBs, trade-credit and NRI deposits are the three components that need to be monitored regularly. The NRI boost was a one-time shot and would probably not replicated to the same extent in future. The ECBs would need to be watched as these are bound to go up sharply in the coming days. The approach would be to monitor, though not curb, this flow as, in a globalised setting, companies should have access to all sources of finance. This is important since the funding gap in the country is high, as banks are subject to limits on provision of funds and the debt market is still not very active.

To counter the growth in external debt, the focus has to be on getting in more non-debt capital inflows and the needle once again points to FDI. FII flows have been active of late with an expected $35-40 billion on an annual basis. The preference has been 'equity' though the government has been trying to open the doors for 'debt' too. However, while there have been only 2 years when these flows were negative, they would still not be regarded as a strategic source of foreign exchange. Therefore, we need to work on the FDI side and get in committed funds so that the forex position becomes stronger. The government has already started work on this aspect and, hopefully, one would get to see the opening up of the retail and insurance sectors attracting many investors.

At the same time, the CAD needs to be kept under control and not allowed to cross the 2-2.5% mark. This means that growth in import of items like gold needs to be closely watched as well as other mining products which have tended to distort the CAD in the past. Also, the uncertainty around coal needs to be dispelled soon so that domestic activity can alleviate the situation.

Lastly, the exchange rate has to remain stable and, here, the onus is on RBIa volatile rupee will increase the cost of servicing debts. Therefore, the exchange rate is also a critical part of this story.

The PM's aggressive bid to attract foreign investors is, hence, very pragmatic. To use a clich�, there is very less room for complacency.

Two’s company: Financial Express 28th September 2014: Book Review of The Alliance

The Alliance: Managing Talent in the Networked Age

Reid Hoffman,

Ben Casnocha & Chris Yeh

HBR Press

R895

Pp 193

Madan Sabnavis

THE RELATIONSHIP between an employer and employee is typically one of distrust. An employee is always told that there is a career for him when he joins a firm, provided he is good enough. No wonder employees hedge their bets by looking out for better opportunities early in their careers. This builds a unique case of reciprocal deception, as per the authors of the book The Alliance. Reid Hoffman, Ben Casnocha and Chris Yeh build a strong case for forging an alliance between these two parties, which works well for both by eliminating distrust and reposing belief in each other.

The days of keeping a position till retirement in a company are over, and the amount of distrust that has developed has increased over time. Companies do not want to invest in their staff, as they think that employees can leave at any time. On the other hand, employees do not put in their best, as they are always looking for a change. This means that companies do not want to invest in training, as they don’t want to subsidise other firms, which will eventually take their trained staff. An employee has hence become a fungible commodity. And companies feel it is easier to recruit staff with certain desired skills rather than train their own people. This is a corollary of the rise of shareholder capitalism, where managers focus on achieving short-term financial targets to boost stock prices. The best way out is to retrench employees with euphemisms such as right sizing.

In this book, the authors talk of building an alliance similar to sports teams, where there is a clearly defined path for everyone, which then runs on trust. The company tells employees to help make the organisation grow, so that they can benefit in the process, while employees ask the company to let them grow, so that the company can flourish. Hence, it is a two-way relationship, where each party appreciates the need of such an alliance. The employer has to engage the employee on a continuous conversation, so that the relationship is cemented.

Some of the questions that have to be addressed while building this alliance are: first, how does a company get the trust of an employee without guaranteeing employment, as this appears to be a pre-condition? Second, what kinds of alliances have to be built with different levels of employees? Third, how does one build a relationship when the ultimate goals and values may differ for both the sides? Fourth, what kind of networking and personal brand-building should be allowed in the workplace, as prima facie it helps both the partners? Last, how does one run effective corporate alumni, as this can be a major winner for both the company and employees?

They speak of something they call a ‘tour of duty’, which essentially is a journey that an employee and employer embark on for a specific mission. There are three kinds of tours: the first one is called ‘rotational’, where employees are allowed to try out varied roles within a certain time span—something done by LinkedIn (which is the inspiration for the book) and Facebook. This is the route offered to an employee to find the perfect fit for his or her own aspirations in the company. The other kind of tour is ‘transformational’, where it is personalised and is linked to a fixed mission. This can last for two-five years and helps the employee transform his own career, as well as that of the company. In a way, it is a tryst for finding a niche.

The third is a ‘foundational’ tour, where there is an exceptional alignment of the employer and employee. In this, an employee wants to remain in the job till the end and the firm too wants him to stay till retirement. Typically, the top executives should be on foundational tours, while entry-level ones would be on rotational or transformational tours. The authors believe that rotational tours provide scalability, transformation tours provide adaptability and foundational tours provide continuity. All three are required in the right blend for a successful organisation.

There is interesting discussion on how alignments can be built between the employer and employee. Essentially, the company needs to disseminate the values and core mission to all the employees. And this should be something that appeals to the staff. Therefore, Walmart’s motto of “saving people money so they can live better” works. However, Exxon Mobil’s “commitment to being the world’s premier petroleum company” does not sound that good. Also, the company needs to personally understand what every employee hopes to accomplish in the company in terms of goals and aspirations. Again, LinkedIn goes the additional step to bring about this kind of an alignment.

The book also talks of constant dialogue between the two protagonists, so that all the tours they talk of lead to positive results. While it will not be possible to provide plum jobs and promotions to all, one can bring about small transformations called ‘small t’. This will include gaining marketable experience, learning new skills, earning the endorsement or recommendation of others in the industry and so on. In fact, they carry this engagement to the next stage, where they argue that companies should encourage their employees to build their own brands and create a standing in the industry. Even in case they do leave, they will part on good terms and become so-called brand ambassadors for the firm. Participation in discussions and seminars is what companies should strive for, as both the company and individual profit from it.

Here, they speak of networking with others in the fraternity, which often helps the individual source advice from outsiders. The company benefits, as it can automatically use these networks for information and hints that can be used internally. Companies like HubSpot encourage their staff to have luncheon meetings with various associates of other companies and build networks, which can finally be used by both parties. A Seattle-based marketing company, Moz, also covers travel and accommodation of employees who get called to speak at any forum.

Last, the alumni network is very useful for both the partners. The employee, of course, can change jobs and move ahead on the career path, while the employer, too, can have nice words said about them and use them for furthering business relations. A happy employee who leaves a company is more likely to recommend it to others looking for employment or business partnership with the firm. Therefore, often companies keep alumni in their books and offer incentives like referral bonus or hosting events for them, so that they are constantly in touch.

The Alliance is a must-read for all CEOs, as it actually teaches one the value of an employee. Today, all companies say their employees are their strength, but rarely pay attention to them. Getting rid of mistrust and forging a meaningful partnership with an employee not only creates goodwill, but is a win-win situation for everyone.

Not yet acche din, but getting there: Financial Express 27th September 2014

The change in the India outlook of Standard & Poor's (S&P), from negative to stable, comes at the right time given we are reaching out to investors and the acche din slogan looks credible still. The Sensex has reflected the positive sentiment internally; and the change in outlook by an international credit rating agency known to be parsimonious with praise would do the same globally. The fact that the rating is still BBB�, notwithstanding the change in outlook that vindicates to some extent whatever has been done since May on the economic front, challenges us to maintain, if not better, the situation going ahead.

We have been pitching for a better rating from the rating agencies and the arguments put forward have been that the economy is looking up, the fiscal house is in order, we have established control over the exchange rate and inflation is also down to an extent. With macroeconomic stability being established and growth moving upwards, there is strong reason to change the view on economic conditions today relative to what they were last yeara time when we had probably reached the nadir.

The ratings, reviewed annually, take into account what is happening at the moment as well as future prospects. Quite evidently, S&P views things to be more positive within these time horizons. The Indian governmentboth past and presenthave repeatedly been arguing for a change in ratings on the ground that policies are in place to stabilise macroeconomic conditions and create a viable path for the future. S&P appears to be convinced, but only to an extent. It has played safe by changing the outlook but retaining the rating. The indication is that the 'bigger things' can happen in case we continue on this path.

Should a credit-rating agency's view matter for India? For the government, it really makes little difference as it does not borrow money from outside; and to the extent that debt is subscribed by FIIs, it comes in irrespective of the rating. However, from the sovereign's viewpoint, the movement of ratings is a matter of prestige. As we are in a globalised setting, such comparisons are unavoidable and while rating agencies have tended to use tinted-glasses while judging developing economies, every country nevertheless wants to be viewed positively. But this rating affects Indian companies when they borrow overseas or enter into any swap facility while borrowing in the euro-market. Here, the bank providing the swap carries less weight or higher cost if a company's home country doesn't have a good rating.

What has caused the sudden change of heart at S&P? Quite evidently, we are moving in the right direction and doing the right things. The fact that we have a strong government plays a positive part in this decision, especially as it is being associated with progressive policies for economic growth. The earlier government was viewed as a weak coalition that could not move forward with ease due to differing ideologies of allies. There also have been some policy changes on the FDI front in defence and railway equipment apart from changes in labour laws, etc, which, though not expansive, are significant.

Second, there has been an all-out campaign to woo foreign investment; this sends the signal that the government is keen on providing an enabling environment for business. Third, which is related to the second, there has been a lot of effort put to ease the processes that affect the conduct of business, evident in the clearances given to stalled projects.

Fourth, there have been improvements in various economic indicators. More importantly, the ratings agency believes that these trends will continue. Therefore, a pickup in growth, control of inflation, strengthening of balance of paymentsand, hence, increased currency stability and a pick up in infra-spending is something that would have gone into this decision.

Does this mean that the rating has changed? No. The rating remains where it was, at BBB�, which is just at the precipice of the investment-grade. The outlook has only changed which indicates that the agency is of the view that all these positives can be a reason for upgrade at a future date, provided there is continuity in policies and performance. In a way, it vindicates the government's pursuance of fiscal prudence and RBI's stance on tight monetary policy till inflation comes down.

The credit hence goes to the government and RBI for being firm on their policies, notwithstanding the detractors. In fact, RBI should be complimented for all the repair work it did on the external front where innovative measures were used to bring in dollarseasing the forex crunchand bring stability to the rupee. It is to the credit of the central bank that we have reached the stage where we are really thinking (at times) of checking the rupee appreciationsomething that has not been heard for some time now.

For a ratings upgrade, we need to move to a new level where we translate the articulation so far into concrete action so that growth takes off in the right trajectory. This is the challenge going ahead as there are concerns of the monsoon impact, inflation, imports (when growth picks up), Fed increasing rates, etc, spoiling the party.