Reading ‘ease of doing business’ rankings : Business Line July 13 2018

While they encourage States to improve governance systems, a high rank doesn’t guarantee higher investments

The ranking of States on the basis of ‘ease of doing business’ on a regular basis is a good exercise as it helps to evaluate the best practices in governance. By formally putting down the States on a scale, benchmarking becomes easier and they can work towards improving their position.

The new dimension added this time is the feedback from users. The process hence is twofold where the first step involves complying with a series of reforms in terms of changes in systems, which is easier to implement. But more important is how the stakeholders feel about the same. By giving a weighted score, both the issues are addressed.

Newer States better placed

Quite interestingly while States like Telangana and Jharkhand score 100 for ‘reform evidence’, the corresponding score on feedback was 83.95 and 81.67, respectively. In fact, the State with the top score in ‘feedback’ was AP with 86.5. Quite clearly, tick-marking a reform is easier to do as against getting it right in terms of implementation. It is not surprising that there have been indications made that in future the feedback criteria would be the more important one.

How is one to read into these numbers? Sates which are new and relatively small would be better placed to score well as those starting off would find it easier to bring in the best practices as adaptation would be easier. The larger State economies will have legacy issues and have to comply with the book gradually.

A simple thing like making applications for construction or extension of a building as a factory would have an established system that has to be disbanded before creating a new one, which will take time as old records and staffing, among other things, have to be addressed. At times bidding processes have to be invoked to choose vendors which can be time-consuming. Therefore, there would be time lags. Often a lower score here would not be because of ideological differences but operational issues.

Some surprises

A surprise element is Maharashtra, which is probably the most industrialised State and also lodging the financial hub of Mumbai, having a rank of 13. Tamil Nadu comes even lower at 15. These two are considered to be the more advanced States along with Gujarat and Karnataka. It does appear that State rankings on ‘ease of doing business’ are not a necessary condition for drawing investment.

Investment decisions are driven by factors such as: availability of power, intrinsic strengths such as being a mineral base, roads, access to ports, links with ancillary industries, availability of skilled and unskilled labour, availability of land or rentals, and access to finance. This would be on the supply side.

Also, on the demand side, linkages need to be strong and hence investment decisions are not taken solely based on ‘ease of doing business’. Large IT hubs in Bengaluru would attract all retail participants irrespective of the EODB. It would probably only be at the margin when an entrepreneur has to choose between two States other things being the same that the ranking could become decisive.

In this context, the ranking of States on these criteria of doing business can be juxtaposed with those related to IEMs filed, as this reflects investment intentions. The linkage between the two is clear as the hypothesis is that a higher rank in EODB should ideally increase investment intentions which are captured by the IEMs that are filed.

The top 10 States in terms of value of IEMs filed for 2016 and 2017 have been juxtaposed with the ‘ease of doing business’ rank to validate this hypothesis (see Table).

 

It shows that the EODB rank is not necessary to draw in large investments. Maharashtra, Odisha, Tamil Nadu, Uttar Pradesh and West Bengal have ranks in double digits. Yet, they score well in terms of investment intentions. Investors come in where there is opportunity and would probably increase their exposures when the environment is congenial. But they would not stop their investment in case it is tough to do business.

Therefore, some States with good rank are able to get the additional ‘delta’ on this score. A State like Bihar which has a low rank of 18 in EODB did well in terms of investment in 2016 with a rank of 10. When a State is rich in minerals, investment would come irrespective of whether or not the EODB is congenial. This cost of doing business would be higher and get reflected in final prices.

An analogy can be provided with the national-level EODB, where India was a preferred destination even when the World Bank rank was in the 130s. Improving the rank does bring in some additional FDI which was visible when the score improved in the last two years. But the opportunity has to be there. At a different level, the country’s credit rating at just about investment grade does not deter FPI and FDI as India has been revealed to be a preferred market for investments.

Valuable signposts

Therefore, not much should be read into the State ranking for EODB as being the be all and end all for future investment. These are valuable signposts on what should be done for better governance systems. These are absolutely essential and there can be no argument on this score.

This kind of benchmarking will encourage States to at least comply with the rules to ensure that they score well on ‘reform evidence’. But having these essentials in place does not guarantee investment and governments need to work on the other prerequisites too, such as creating infrastructure to multiply these flows.

It is, therefore, one parameter on which to judge State economies and definitely not the overriding one. This is the spirit in which the ranking must be viewed.

Conspiracy: A thrilling story of a PayPal founder: Financial express July 8 2018

onspiracy: A thrilling story of a PayPal founder

Peter Thiel (founder of PayPal), Nick Denton (owner of Gawker Media) and Hulk Hogan (the famous wrestler whose actual name is Terry Bollea) have nothing much in common for them to feature in a book that’s based on a true story. If one were to weave fiction around their lives, the normal tendency would be to link the wrestler to some kind of publicity with the media house, where PayPal could have been a sponsor.

But Ryan Holiday, in his book Conspiracy, weaves a story around how the three got intertwined in a real-life drama, which unfolds as one reads the 300-odd pages of the book. It reads like fiction and, hence, is fast-paced, but it is actually a real story involving these people and the trauma that some went through for over nine years before the episode concluded. Hence, while it may read like a storybook, it is based on intensive research and conversations with all the involved characters, which is quite remarkable.

The storyline is simple and could have been from the pen of Jeffrey Archer. Gawker used to make a profit by bringing out scandals about any celebrity—that’s why advertisers liked it because it got viewership and, hence, was value for money.

Journalists who wrote for it were not well paid and may not even have been on its rolls, but made a killing exposing anything, which individuals would deem as private. And being an online channel, it was able to get to millions of viewers.

Now, in 2007, millionaire Peter Thiel got exposed on Gawker as regards his personal sexual predilections, to which he took umbrage. But this is where there was a catch. In the US, laws on freedom are very different from those in, say, India and it’s hard to sue the media on this score. Nick Denton, who owns Gawker, was super-confident that he would get away with anything, as the courts there always support such people in the name of freedom of press. Besides, he proudly used to say that he had a great appetite for risk and loved facing odds. This is something that we, in India, can appreciate, where we hear all kinds of tales on US President Donald Trump, where the media is neither tormented by the authorities nor does it get sued. Even if there is a genuine case of infringement of privacy, it never really gets out.

Coming back to the Gawker story, Thiel started his planning in a careful way so as to ensure that he had a tight case against the media house, as he wanted to teach Denton a lesson without breaking any law. The plan was what can be called a ‘conspiracy’, where the target never suspects what’s going on and doesn’t know who is actually building the case. This, as per Holiday, is the essence of a conspiracy. The author brings in a lot of Machiavelli and the principles that must be used to lay the trap, and that’s what makes the book even more interesting.

Thiel hired an unknown person to do the job, who roped in a legal person, who, in turn, didn’t know who the client was. Interestingly, as Thiel didn’t want to reveal his name and yet the case had to be built, a third person was brought in. This is where Hulk Hogan came in and became the instrument to get after Gawker. In one of Hogan’s weaker moments, following a divorce proceeding, he had gotten filmed by his friend in a sleaze act with his wife, and this video was sent to Gawker. Such high celebrity action was of great use to improve viewership and advertising interest, and Gawker revelled in the video. Denton refused to pull it down even as a case was made that it was shot on the sly and, hence, was not permitted.

Thiel picked on this case with the argument being that an illegally recorded video is not the same as one taken with permission and, hence, the case of defamation was built on these grounds. After all the twists and turns, Denton’s empire became bankrupt, as the damages were just too high.

The story is all about the details of the case and the arguments and counter-arguments put forth in the hearings. Thiel finally won after a decade and spent millions of dollars. It was a major victory for him, as he had planned it meticulously.

Conspiracy is a tale of the use and abuse of power, where the consequences are really damaging, if not annihilating. The book is painstaking in research, as putting all the pieces together requires a lot of work. A real-life story reading as good as fiction, Conspiracy is quite enjoyable.

GST may have had an inflationary push; Financial Express July 2 2018

ST was introduced July last year.

The impact of GST on inflation is nebulous. This is so because, whenever a tax regime changes, there are myriad tax rates which undergo a change, and it is hard to figure out whether or not the consumer of a product or service is better off or not. There are always extraneous factors at work which would be affecting prices, and with the spread of globalisation, it becomes more complex. Therefore, it is interesting to try and figure out whether inflation has gone up or not since GST was introduced July last year. The government has been open to adjusting these rates which was done on a broader scale twice, based on feedback received from the market.

Normally, we tend to look at the headline inflation number and then conclude there has actually not been much change in inflation and that things are more or less neutral. The fact that both the headline CPI and WPI numbers have been at the lower end has been an argument used for claiming that GST has not impacted prices significantly. In fact, this was a convincing argument put forward regularly to call for rate cuts through the year. To the extent inflation has gone up, it is attributed to the price of fuel or food products which are called supply-side shocks over which GST has little control. But, in the period following GST, the food basket has benefited from successive good harvests which have also helped to bring down the overall inflation rates. Also, fuel prices have been stable, which, combined with a stronger rupee, has kept cost-push inflation down.

The accompanying graph provides information on the trend in inflation rates on both the relevant components of the WPI and CPI, which excludes the impact of food and fuel. The WPI is essentially a producers’ price index and excludes services, and the manufacturing index is the one most influenced by GST. Fuel is excluded as it has been deliberately kept out of the new tax system while agriculture is also out of this tax scheme by definition. The CPI is representative of the consumer basket and excludes items that do not figure in this scheme—like machines, metals, and chemicals. To get a fair idea of GST, the food products category needs to be excluded as it was stated upfront that less than half of the CPI would not be affected on account of GST.

What is interesting is that both these indices moved upwards from July onwards. Almost one year after the imposition of GST, the core CPI index, which has a weight of around 54%, increased by around 200 bps. While it would be difficult to ascribe this increase completely to GST, as there were other factors at work such as HRA, the fact that all the non-food components rose indicates that there was an upward bias. Also, the fact that services generally were under the higher tax bracket of 18% or 28%, up from the previous 15%, added to inflation. This was a period also when GDP growth, which can be a proxy for overall economic demand in the country, had slowed down from 7.1% to 6.7%. It broadly means that demand pull forces would have had a limited impact.

The WPI manufacturing index witnessed a sharper increase of 130-140 bps during this period. While an increase in global metal prices would be a contributing factor, the GST impact cannot be ignored fully. Therefore, there is some reason to believe that in net terms, the GST may have had an inflationary push.

Interestingly, the fuel index had declined almost continuously during this period which opens up the question on whether or not this complex needs to be included in the GST. The argument is that it would soon become necessary to ensure that the nation is protected against high inflation in case global oil prices shoot up, which is possible at any time. A compromise could be a special rate for fuel which would be higher than 28%, but fixed.

The GST was premised on being generally revenue and price neutral and while it is impossible to arrive at this result, efforts have been made along the way to fine tune the rates—especially in the downward direction to ensure that inflation impact is minimised. The fact that the overall environment was congenial did help, to a large extent, to keep the inflation numbers in check, even to the extent that GST has increased prices of some goods. It also can’t be said for certain if the companies had lowered prices where the net tax rate had come down as, on the consumer end, this is not too visible. For example, in restaurants, the bills have come down as the GST is now 5% compared to a double digit rate in various states. While the government earns less revenue, none of the menu cards have lowered the prices even in cases where costs came down due to a lower GST. The government, too, has expressed concern on the anti-profiteering clause which can be used to ensure that lower taxes do reach the consumer in the form of lower prices. It may be assumed that clarity on this subject will be attained in the course of time.

Implementing GST was always going to be challenging given the breadth and depth of the economy. The information provided on the GST collections has been encouraging and, notwithstanding the operational issues, especially for the SMEs, the process has been quite smooth. The major achievement has been in assimilating the unorganised segment progressively into the formal economy, which would be mutually beneficial in due course of time. There have been no serious complaints from the state on revenue shortfalls in the last year and the Union Budget was finally well balanced on the tax side. Therefore, it has been a fair enough success story.

The price effect will play out more clearly this year when the economy really picks up momentum and the larger part of the economy gets covered in this system. Given the complexity in the production processes and the varied impact of the GST on various raw materials, as well as the final product, the net impact is difficult to fathom at the ground level. It has been noticed already that companies are gradually regaining pricing power which is going to work towards keeping prices elevated. The challenge will be to keep them under control in this environment.

Double digit GDP growth is doable: Business Line 26th June 2018

But it will take 3-4 years as agriculture, industry and services need to grow at higher rates on a continuous basis

Getting GDP to grow by 10 per cent in real terms, though not impossible, is quite challenging. As a nation we need to aim for a high target and then set the house in order to enable various elements to deliver this kind of growth. This has been the goal of the government and a lot has been done to provide the right environment through a series of reforms.

Given that in the last three years growth has come down from 8 per cent to 6.7 per cent, it looks unlikely there will be big-bang growth in the next couple of years; it is more likely to be gradual.

In the absence of any major disruptive policy in the coming years, the path looks to be more like 7.5-8-8.5-9 per cent. The 10 per cent number will still be some time away.

Looking back

Interestingly, if one looks back to see whether this number has been reached, it can be observed that during 2005-08 India had recorded an average growth of around 9.5 per cent, which was just before the financial crisis.

Subsequently, the spliced series reveals that during 2009-11 growth came in at just below 9 per cent. Therefore, getting to 9 per cent does not look too ambitious, though 10 per cent would be psychologically satisfying. The situation today however is different in statistical terms as the size of the economy is quite large at around ₹130-lakh crore and a higher base makes it more challenging to record high growth numbers. But the reason for being more than sanguine is that there is plenty of spare capacity in the economy.

Spare capacity can be defined as large investment opportunities, especially in infra space where the lacunae present scope for higher doses of capital formation. Even today, the US does pump prime the economy by spending on infra, which has come down in quality and requires renewal.

If a country has perfect roads, power, water supply, telecom and ports, then there would be less scope for fresh investment. But with large gaps in most of these sectors, India has opportunity for leveraging the same to grow just like China did in the 1980s and 1990s to reach the position it is in today.

Boosting consumption

The second is consumption. Low income is still prevalent in the country and has come in the way of spending. In the last decade or so, growth has benefited households at higher income levels where consumption tends to be satiated and hence does not provide the impetus for consuming more goods, except at the margin where the households go in for higher branded products.

Therefore, if this gap can be plugged by creating more jobs and hence incomes, there is vast potential for bringing about accelerated growth in consumption which is a prerequisite to higher GDP growth.

While this sounds good, what needs to be done? Broadly speaking, there are three segments that have to grow at high rates on a continuous basis.

The first is agriculture, which has to be resilient and grow continuously to keep the economy moving in an upward trajectory. Past experience shows that high GDP growth has been associated with years when agriculture grew by 4-5 per cent.

For this to materialise farm output has to be resilient and grow in an unhindered way. Every time agriculture slips, it has a ricocheting impact on other sectors as rural spending comes to a standstill. Therefore, while agriculture has a 15 per cent share in GDP, it has to be kept moving independent of monsoons on a sustained basis.

Also, a single crop failure leads to high inflation which has an impact on overall spending, interest rates and investment ultimately. Such supply-shock led inflation has always come in the way of higher growth.

Building on industry

The second is industry, where the two building blocks would be manufacturing and construction. This segment has to register 10 per cent growth continuously for the overall growth number to clock 10 per cent. The present growth rate has been volatile with IIP growth in the sub-5 per cent category and GDP growth in the 6-8 per cent region.

This has to change for which support has to come from investment and consumption.

Also, a greater role has to be played by the private sector. But clearly we need to resolve the NPA (non-performing asset) issue and grow the bond market as funding is a major necessity for growth.

The NPA problem, along with the requisite capital requirement, will take another two years to resolve and hence achieving the 10 per cent mark is still some distance away.

Construction, which is part of industry, would however be the easier goal to achieve as the focus of all governments has been on developing infrastructure, especially roads and urban development.

Add to this the emphasis on affordable housing, and one can see acceleration in growth which will bode well to linked industries such as steel, cement, machinery and metals.

Services matter

The service sector has three parts which have to necessarily grow by over 10 per cent each, which again is not impossible given that such growth rates have been witnessed in the past.

Individually, various components such as trade, transport, finance, real estate, and public administration have registered over 10 per cent growth in different years. It is, therefore, important that all of them should be clocking this kind of growth in a year to get a headline number of above 10 per cent.

Two challenges remain on this front. The first is that the banking sector has to be in order before growth can pick up. In fact, along with real estate this segment has been an under-performer since RERA and the NPA recognition norms kicked in.

Second, the government sector has to play a progressive role on a continued basis, but this is becoming difficult given the fiscal path that has been chosen. In the past when this sector grew rapidly, growth was enabled by higher fiscal spending, which is not possible today.

The expectation of a double-digit growth rate in GDP is definitely well-founded. But it will take another three to four years to get there. The larger base will make the climb steeper.

Also, while touching 10 per cent is okay the goal must be to sustain this level for at least five years to generate jobs and move the poor out of the trap. Else, the 10 per cent number will not be meaningful.

It’s hard being a banker: The Indian banking system is probably the most pressurised system: Financial Express 22 June 2018

It’s hard being a banker

It was not too long ago when we all hailed the concept of debt restructuring on grounds that projects failed because of policy failure. The argument was that companies should not be penalised when government machinery did not move, and hence, some latitude was required. With this in the background, the logic is carried forward to the farm sector. If we are willing to restructure the loans of the rich and prepare for deep haircuts, the same logic should be applied for farmer loans because they are poor. Therefore, farm loan waivers have become a habit which cannot be criticised even by bankers. The picture is again similar when we see the urgency to push SME loans where banks have no option but to aggressively meet targets. NPA recognition norms have been made flexible to accommodate the travails of SMEs. Similarly, another big push is given for loans to the lower income groups under the umbrella of affordable housing. The threat of a potential pile up of NPAs is germinated at this stage and the blame is put on bankers for reckless lending when these numbers swell. Are we being fair to bankers?

The irony is that even the central bank is not spared. As long as NPAs increased, everyone was asking why results were not flowing in. But with the IBC in place, and RBI bringing out its notification where strict action is taken from Day 1 of failure, there is immense pressure to relax this rule, or else, it will affect corporate sentiment. It is clearly a case of being damned if one does and damned if one doesn’t.

Are bankers really responsible for these loans when they are forced to lend even if it does not make sense? Umbrage is always expressed that it is public money that is being wasted by irresponsible bankers. But the CBI, CVC and CAG do not trail government officials when, say, people perish in a stampede in a station or accidents take place on bad roads because of bad planning where public money has been incorrectly used. This is the dilemma for bankers, and it is not surprising that no one would like to be a banker in a top position—especially a public-sector bank chief.

Curiously, in almost all the high profile cases of asset failure, which involve consortium lending, it is the PSB chief who can be hounded post retirement and lives in fear, while counterparts in private sector banks are not really affected. Something is evidently amiss in this industry.

To top it all, banks are run like any commercial enterprise where, under the force of competition, growth numbers matter a lot. Targets are stretched for every aspect of business. This can be seen if one reads the transcripts of any bank after results are announced. It is always a case of saying that we grew by x% which is higher than that of the system. Targets are always high for the future, and the staff is motivated to sell more loans. This has led to compromise in quality. Unlike manufacturing, where producing 100 or 10,000 units maintains homogeneous quality as it is mechanised, for lending decisions, it is not the same given every loan is different and, hence, requires individually attention. Mechanising the same business has made it scalable, but also prone to error in judgement.

This is what is being seen today. Credit cards are sold on the telephone, and in a lighter manner, it is said that it takes lesser time to get a home loan than to pay the bill for groceries in a supermarket. In short, there seems to be an irrational push to giving loans in the name of serving shareholder interests. This has led to taking high risks, mis-selling in the guise of cross-selling and so on. With every bank talking of market share, shareholder value, etc, it is but natural that banks have reached this embarrassing situation.

The other part of the story—historical—is the role of the external environment. There is just too much interference in the banking sector, especially when it comes to PSBs. There is no gainsaying the fact that if the government is the owner, it has an inherent right to guide PSBs’ operations. But, over the years, PSBs have become a tool for implementing a political agenda, and this is not desirable.

First, since nationalisation, several appointments at the top have been motivated this way, which leads to directed lending. The culture in anything ‘government’ is obeisance and, hence, all employees get fine-tuned to obeying orders. For almost a decade-and-half, the relationship between the PSB heads and the ministry of finance has been one where there are regular conversations on how business should be conducted. Ideally, from a governance standpoint, there should be full independence as interest rate decisions should be taken based on commercial considerations.

Secondly, banks are, at times, told to lend to targeted sectors like the farm sector, SMEs or affordable housing for poor, all of which is political agendas. There are stiff targets for MUDRA loans which have to be met, which, in turn, make bankers run after the ‘target’ rather than becoming quality-oriented. All this is justified under priority sector lending, which ironically is the only part of the Narasimham Committee Report of the 1990s which has not been touched even once in the last quarter century. This creates potential bubbles.

Thirdly, even on the liability-side schemes like Jan Dhan Yojana that are intrinsically commercially non-viable have been implemented more by PSBs than private banks, which diverts important personnel time for such schemes.

Lastly, often, bankers are confused with the continued moral hazard that has been institutionalised in the system. Credit appraisal may lose its sanctity when such dictats come from above. Bankers also lose interest when appraising projects, knowing very well that there will be dictats coming from the top at some point of time. Even today, every political party is talking only of farm loan waivers at a time when the NPA issue has reached its peak.

The overall environment, thus, does breed uncertainty that makes it hard for one to do business. This is probably the most pressurised system where politics and commerce scores over economics. The fissures in the structure are out in the open. Banks should not become tools for implementing any extraneous agenda, and this is the only way in which we can have a better system. Decades of obeisance to external agendas has weakened the fabric of banking.

States’ Fiscal Care: Ratings route to make states fiscally disciplined: Financial Express June 13 2018

Bringing in fiscal discipline is good for the system, and states will have to be better geared for the same.

The credit policy announced on June 6 has brought in quite a revolutionary change in the future structure of the government debt market, in the realm of state government loans or state development loans (SDLs). As of today, all SDLs are treated alike and the market is agnostic to the issuer, and does not hence distinguish between bonds raised by different states, irrespective of how their finances are managed. Hence, if states have high debt to GDP ratio or fiscal deficit or interest payments, it does not affect the cost of funds as there is a sovereign guarantee that ensures they all borrow at the same rate. In fact, these securities are treated on a par with central government securities for inclusion under SLR. This has been useful for the states as they have been able to borrow at low rates from the market.

This situation has created some level of discontent in states which manage their budgets in a more astute manner. The grievance is that they are being painted with the same brush. Good housekeeping gets no credit in the market while recklessness is not penalised. RBI, it appears, is set to change the rules of the game. The policy announced this time does not explicitly distinguish between SDLs issued by different state governments as they still retain their SLR status in the current form. But, RBI has made two significant changes in the terms of use of SDLs at the LAF window, as well as in marking to market (MTM) this investment portfolio.

First, it has been declared that when accessing the repo window, banks which provide SDLs as collateral that are rated would have to keep a margin of less than 1% compared with bonds which are not rated. This gives an incentive to holders, especially banks, to invest in SDLs that are rated. Now, by virtue of this dispensation, states will have to get their bonds rated as banks and other subscribers would prefer to purchase those that are rated, as there is an advantage when getting finance from RBI. Alternatively, they may find it difficult to find takers.

Considering that states are dependent on such funding, as this comes at a lower cost than small savings, they would prefer to get the SDLs rated.

Once a rating is given, there would automatically be varied interest rates on different issuances, as higher rated bonds can offer lower rates. This will be decided by market forces and, automatically, states will have to work hard to manage their finances in a better manner. This will be good for the market and will provide an incentive to states to adhere to fiscal discipline because, often, states deviate from FRBM norms due to various exigencies.

Second, to drive home the point, RBI has also changed the MTM norms for valuing SDLs. Hitherto, these securities were valued at 25 bps above GSecs for all the securities, irrespective of the issuer. Now, the formula has changed wherein SDLs, which are traded on the market, would be valued at the traded price. However, if the securities are not traded, then the valuation would be at the weighted average rate at which the states raised money relative to the GSec rate. Therefore, effectively, if the rating is not good, then the valuation would be at a lower price as the yield differential will be higher.

It can be intuitively seen that all holders of SDLs will prefer rated bonds and that states have to strive to get a good rating which is possible only if their fiscal balances are well maintained. This will present an opportunity to state governments to get their acts together.

Bringing in fiscal discipline is good for the system, and states will have to be better geared for the same. States would, however, encounter quite a few challenges in this regard as budgeting is an inexact science and is often dependent on various external conditions. Based on past experiences, the following deviations have been observed across states.

First, the revenue surplus target is seldom met even while the budgeted numbers make this assumption. This happens when there are revenue shortfalls in particular, given often, the expenses tend to be fixed while revenues will fluctuate if the economy does not do well. Second, fiscal deficit slippages are common for some of them, and while some keep a margin when budgeting, others run the exercise at the threshold level, which forces them to cut discretionary expenditure to ensure that the targets are met.

Third, extraneous decisions taken at the political level, like loan waivers, can jeopardise deficits. Populist schemes could be introduced during election time—that could upset the revenue budget. Fourth, some ongoing pressures would come from periodic salary revisions that are a part of the system. State pay commissions have to keep pace with the central pay commission recommendations that tend to push up expenses periodically.

Fifth, the flow of funds from the Centre is important as, with GST now in place, it is difficult to raise tax rates in areas that were within their purview earlier. Absence of alternative streams of revenue is a challenge for the states in the new GST setup. Sixth, they may have to cut down on discretionary spending to meet targets. This is often done to ensure that the FRBM norms are being adhered to.

Seventh, the guarantees given to state PSEs will have to end, or they will put pressure on state finances. This will require some stern action. The UDAY loans have already added to the debt of state governments and with most PSUs making losses, a call needs to be taken on whether or not they should be supported by the state government through the budget. Last, the pressures from pensions that get revised at the central level, and then get replicated by state finance commissions, can put more pressure on their ability to maintain their fiscal propriety.

Therefore, there will be interesting times ahead for the states as they work towards getting rated. The FRBM norms have been fixed for states and, once the concept of rating catches on, it will get cast in stone. RBI is goading them to do so, which will have collateral benefits, such as better fiscal management. Hence, moving towards such ratings comes with distinct sops, which is a unique way of going about this exercise. This will be good for the country and will enforce discipline as lower ratings increase costs of borrowing and make fiscal indicators look less satisfactory. To avoid such ratcheting of costs, the house will have to be kept in order. The demonstration effect of better-run states will work fast on others as they keep up with the Joneses.

India’s NPAs and the global scenario: Business Line June 13 2018

hough globally India’s position is unsatisfactory, time-bound resolution of NPAs under IBC should ease banks’ burden

The non-performing asset (NPA) issue facing banks has dominated headlines for several months now and the fact that we are still unsure of whether or not all have been recognised does cause some discomfort. In this context it is compelling to see how the Indian banking system stands on a global yardstick.

This is important because NPAs have resulted due to several judgment calls made in the past, which in hindsight were incorrect. Lending operations in the banking system are linked with expectations of how the economy will behave. If the economy is growing at a fast pace, it is assumed that the same will prevail in future. The problem hence, is that there always seem to be progressive expectations when the economy does well. This is where judgement gets blurred and errors get into the system as credit evaluation goes awry.

 

Business cycles

When business cycles are buoyant and interest rates low, companies go in for big investments and banks are gung-ho as everything looks plausible. Growth in bank credit averaged 19 per cent per annum between FY08 and FY12 when the repo rate was first lowered from 7.75 per cent to 5 per cent before being increased to 8.5 per cent by FY12.

During these phases, the interest cost also ceases to matter as it is assumed that it is a small component of the cost and can be absorbed with the topline growing rapidly. Corporate sales growth in those years averaged 15-20 per cent on a recurring basis.

It is not surprising that bank credit during this period grew rapidly, by an average annual rate of 19 per cent. It was then the economy was impacted by various controversies in the natural resources sectors which, in particular, thwarted investments and led to an increase in stalled projects as bureaucrats were not willing to take decisions. Bank credit growth subsequently slowed and the average growth rate came down to 11 per cent between FY13 and FY17.

This surrealism was hence shattered as the economy moved from a canter to a trot (GDP growth also slid by around 1 per cent per annum for these two periods with different base years), leaving banks holding the rotten eggs. This does provoke a debate on whether or not we have brought about high growth by inflating investment through erroneous lending.

In several countries that saw rapid growth — starting with the East Asian Tiger economies in the 1980s and 1990s as well as China when it posted growth of over 10 per cent on a sustained basis on the back of an investment-driven model — there was reason to believe that financial decisions were fogged by a misleading futuristic windshield.

At 10 per cent, India is in the more ‘unsatisfactory’ league of nations with high NPAs.

The ones which are more problematic are Greece, Italy, Portugal, Ireland and Russia. Quite interestingly, the top four were part of the PIIGS group which epitomised the euro crisis of 2010. Spain has moved away with a ratio of 4.5 per cent, while the rest still struggle to rein them.

 

One thing that stands out is that some of the Latin American nations like Brazil and Argentina are doing much better on this front while even Turkey, which has other challenges in terms of currency and growth, has a low ratio of less than 3 per cent. India’s NPAs were also around 3 per cent when there were various camouflages available under corporate debt restructuring.

However, ever since the RBI brought about the concept of asset quality recognition in 2016, banks progressively revealed the same which has, in turn, stressed the system. The very developed nations with large economies like the US, the UK, Japan and Germany have sound banking systems with NPA ratios of less than 2 per cent, while China scores well at 1.7 per cent.

The NPA issue does not just end with an adverse portfolio. As provisions have been made on an accelerated recognition of the same, the profitability of banks has been affected.

The return on assets at 0.33 per cent for Indian banks is comparable to those of the very developed countries. However, this could lead to a misleading conclusion that Indian banking system is on par with them.

Western banks operate on smaller interest rate spreads on much larger balance sheets which lowers their return on assets. Similarly, a larger volume of capital lowers the return on net worth. This means that if the interest rate spreads were lowered by Indian banks then profitability at the present levels would not be maintained. Therefore, in a way both deposit-holders as well as borrowers are confronting unfavourable interest rate schedules.

The positive side

The good part of the story is that hopefully all the NPAs have been placed on the table. And, the IBC (Insolvency and Bankruptcy Code) has seen the first big resolution and there would be more to follow. This is critical because the recovery rates in India have been very low at 15-20 per cent while the system needs to move towards 50-75 per cent over a period of time.

Given the time-bound manner of resolution of the NPAs, there is hope that there would the proverbial light at the end of a tunnel which has a fixed length. The system may have to struggle for another year or so, but the 2019-20 fiscal could be brighter.

Selling a story: An engaging narrative makes all the difference in this book on sales: Financial Express June 10 2018

From identifying potential customers to reading the counter party’s intent, the author takes readers through myriad aspects of selling successfully.

Sales is probably the most important function of any business, because it is the front end of the company and generates revenue, which is the raison d’être of any commercial activity. There have been several books written on selling and, hence, it is a well-researched and documented activity. Subroto Bagchi adds another book to the category, but one with a difference in terms of the narrative. He looks at selling as a proportional combination of art, science and witchcraft, and gives examples along the way to show how these tags fit in with this act.

Bagchi may not be saying anything new, but he introduces the concept with a real-life story that shows how the particular trait works. Right from identifying potential customers to reading the counter party’s intent, he takes us through myriad aspects of selling successfully. Those in sales would be able to identify with situations that have been quoted, as these are everyday instances of how people buy and sell goods and services.

Some of the key takeaways are that to begin with, one should identify with the product one is selling and believe in it. Further, one has to respect the potential customer and always look at things from their perspective. He draws a comparison between two words that look the same, but are different—‘persuade’ and ‘convince’. The former is the clue to successful selling, as it looks at the issue from the other person’s point of view. This leads to the concept of respect that builds up between two parties once there is recognition of trust, and Bagchi gives several examples of how this has worked for several people and companies.

There are some interesting insights that he provides on identifying real customers and this is interesting, because one could be spending a large proportion of time and energy on following customers who will never buy because there is little desire to do so. He categorises them as ‘great givers of homework’ (who will keep asking you for various variations and patterns with no intention of buying), ‘patron saints’ (who have no power of deciding but are always on your side), ‘permanent prospects’ (who keep the conversation on, but will never close the deal) and the ‘poor Brahmin’ (who wants to buy, but does not have the funds to see the deal through). Therefore, one has to sieve through the clutter to ensure that one does not move in the wrong direction.

On making sales presentations, too, Bagchi offers advice that should reverberate within organisations. He says presentations should be made from the perspective of the client. This increases interest rather than just sell an idea where the potential buyer would need to think further. By talking of the product from the point of view of the buyer, there is a buy-in created before the discussion starts. This is a good tip that the salesforce should keep in mind.

There is, of course, the usual inspirational stuff like ‘never giving up’, ‘not taking no for an answer’, preparing for the pitch, not losing sight of purpose, etc. But one thing that will catch your attention is the strategy part, which is good to pass on to salespeople.

Here, he has an interesting theory called the ‘arctic ice’, which actually is quite practical, as it highlights that anything you put forward to a potential customer could go through several layers of scrutiny before a decision is taken. These are vendor selection experts, buyers of the product in the company, external experts or consultants, influencers, detractors, coaches, competition and lawyers. All of them would have a point of view that’s not personal, but has to be addressed by the sales team and, hence, strategising is very crucial.

This is a nice book to read, as almost every chapter has something to tell us. Almost all companies can relate to these principles, as they hold lessons for selling goods or services and are agnostic to whether the seller is a big company or a small one. The fact that the counter party changes, as does the management, means that one can’t take established relations for granted even when dealing with large firms, as policies and approaches change with regimes. Hence, every sales pitch should be well-crafted, keeping all possibilities open.