How India can gain from Brics: India can use the Brics Bank to push the rupee: Financial express 31st August 2023

India aspires to make the rupee international. Meanwhile, the talk of de-dollarisation has picked up momentum, thus fostering dialogue on use of domestic currency for bilateral trade. The recently-concluded Brics meet was the latest impetus in this direction.

The Brics concept is otherwise a failed concept. This is so because two of the member-nations are treated as a pariah and there are deep trust deficits with a few others. India stands tall here as not just the fastest-growing democracy in the world but also as a nation that retains fairly strong diplomatic ties with all other nations. But the trust deficit with China has been rising though it is a strong trade partner as a source of imports for India (the government would like to curb this).

It is against this background that one can look at the relevance of Brics. Global institutions have lost their importance with the retreat of globalisation and more inward-looking policies are being pursued by most nations. The World Trade Organization (WTO) has lost its relevance as the rules are not obeyed by member nations. The International Monetary Fund is less important today as economies have become more resilient and it is only mismanaged economies like Argentina (from among the Brics grouping) that seek its assistance. Even at the political level, the UN has failed to sort out differences between nations.

Russia has become a pariah—oil and gas are the last vestiges of its link to the world. So, countries would have issues trading with it, given payments mechanisms have been choked. China is on the decline and the China-plus-one policy is in the minds of all investors. Fissures in the model have surfaced and it is still a large player given its size; but, there is still a tendency among leading economies to feel discomfort when it comes to deeper relations with the country. A managed currency that gave it a lot of advantage on the global trade platform is no longer acceptable to others at a time when the world is stagnating for the second successive year. South Africa does not have a reputation for prudence and is too small relative to other nations to provide any pillars of support for the global economy. That leaves India and Brazil as the ones that have to drive the agenda.

It is not surprising that more countries have been seeking entry into the group and a few have already been confirmed as members and will formally join next year. Intuitively, getting more countries in as members makes decision-making difficult as there will more divergent views. Invariably, countries would look to align with one of the more powerful members—it not difficult to guess that China would enjoy the majority here too. Even if not aligned, the raison d’être of joining the group would be to draw benefits without losing much in return.

Forming such economic groups makes sense if there is openness on trade and investment apart from labour movement. Otherwise, it would just mean more meetings that do not really deliver any tangible benefits. It is true that the coming together of more nations would largely be from the emerging world and, hence, there is scope to further the talks on economic cooperation. However, it would also mean that there should be countries with economic size that can offer India something in return.

With the dedollarisation talk gathering steam, one thought is the possible acceptance of local currencies for intra-grouping trade. But, here, the biggest challenge is China which will always push the yuan. It already has such ties with other countries—trading in yuan—as it has been trying to make it a universal currency. This will not be acceptable to India for sure and has been rejected already at the conceptual stage.

One area which needs to crystallise is the flow of finance. The Brics Bank (New Development Bank) is already operational. But it needs to grow in stature at a faster pace to make a real difference. The idea behind the New Development Bank was to provide an alternative for the developing world to the World Bank, where it is believed that the Western dogma is part of the package and comes in the way of economic independence of the borrower. This can be a big advantage here when we are talking of internationalisation of the rupee—the NDB could take funds in the domestic currencies of the members and this could then be loaned to others who can use the same for buying goods from nations that accept these currencies. This will be a pragmatic way of leveraging the Bank.

While talks on trade can carry on in the normal course, compromise solutions are the best that can be expected. Without sounding pessimistic it can be said that if the five nations have not managed much so far, there is little reason to be positive with two of them under a cloud. Also, as the new potential members would be from the lower income bracket, there may not present an optimal alternative. But, the NDB route could be the way out for India. 

Central banks may need greater flexibility in targeting inflation: Mint 22 August 2023

 

Celebrating Our Economic Achievements Over 76 Years: Free Press Journal 19th August 2023

 As we celebrate our 76th Independence Day there are several things to be proud of on the economic front. India has now become one of the major economic powers that commands respect in all spheres. Earlier in the eighties and nineties, it was for software where we made a significant mark and India became known in Silicon Valley in the USA. Now it has become a super power in almost all spheres and a country that is part of all global discussions. Let us enumerate these achievements.

The first is that India is a centre piece of all global economic discussions and part of various important groups be it the Quad or G-20. Given the economic might, the influence on other economies is growing at a rapid pace. In fact in the group of BRICS nations India has clearly gone ahead in terms of being recognised as the global representative of the emerging economies.

Second, in terms of size of GDP India is now poised to be the third largest economy in the world and given the spare capacity that is there, has potential for accelerated growth in the coming years which cannot be said for other countries.

Third, the growing income in the country is seen as a door of opportunity for all global players. This is seen in the form of large foreign direct investment coming into the country. In fact the growing market is the biggest temptation for all companies to look for a slice in this story. This has been enabled in the last decade by the government through progressive policies that support such flow of funds.

Fourth, notwithstanding the size of the country and importance in the global value chains in major industries and services, India has still managed to decouple from the world. This manifests in the economy growing at a fast pace even while the world has slowed down in the last two years. This does credit for our economy as it ensures that the engine runs even when the world pushes the slowdown button.

Fifth, India has become one of the more attractive markets for foreign institutional investors and given the potential of India Inc has seen an influx of funds into the equity markets ever since they were opened up in the nineties.Sixth, the delivery system in the country has been almost perfected with the use of technology. The story starts with the Aadhar card which has given a unique identification number for all citizens. This has been useful for better targeting of public services and has been a success. Given the size of the population the credit to be accorded is even higher as this has not been done in any other country.

Seventh the financial inclusion programmes have been administered by the government mainly through the Public Sector banks which done yeoman services here. The Jan Dhan Scheme has been a direct method of ensuring that banking is available for the masses. This has been topped with special lending schemes for agriculture and SMEs (MUDRA) and hence the loop has been closed. Further for making seamless transactions, the UPI has been a model which is now being borrowed by other countries as the sheer volume has been a vindication of the success of this mode.

Eight, the governments drive to provide power, water and fuel to every household has also yielded results with data showing that the deprivation rates have come down substantially (as per the NITI Aayog Multi-dimensional poverty index). Therefore it has been proved that the push factor is possible on a large scale if there is determination which has been shown by the government.

Ninth, Indian agriculture has grown to become largely self-sufficient with specific programmes being targeted at vulnerable crops. While there is still some way to go for oilseeds, the reduction in dependence on import of pulses is a major achievement.

Last, the progress made in the infrastructure sector has been remarkable. The highways story is well known with proliferation in construction over the years. This has forged strong backward linkages with critical industries in this space like cement, steel, machinery etc. The changing face of the aviation industry including airports as well as ports is evident as things were very different at the turn of the century.

In this success story, are there any missing links? The challenge going ahead is to create more jobs at an accelerated pace. Presently growth in new job creation has not kept pace with growth. While the qualified and professional youth do find jobs in this growth environment, it is not the same for the unskilled. This is a challenge because the youth need to recognise the need for skilling and reskilling so that they get meaningful jobs. Today it is more of the blue-collar workers getting jobs which are in construction or services like retail, delivery, security etc, which are not very remunerative and do not really skill the workforce.

This is where there is need for a major change in industry which has to become the engine to growth because jobs get created that are self-sustaining. In India unfortunately the services sector has taken lead before industrialisation picked up which has come in the way of job creation. While India Inc, has done its part, most of industry remains in the SME sector that is fragmented and not run in a professional manner. While there is potential for higher employment in this segment, there is need for scalability which is absent presently.

The task is cut out for the next five years where job creation should be the focus. This will not generate output but also income which will fuel the consumption chain which in turn will spur investment. India has been used to investment rates in the region of 34-35% in the past which has to be replicated again. Covid has been a shock and been a pushback, but the prerequisites are in place to bring about the necessary acceleration.

The positive side to ‘freebies’: Business Line August 17, 2023

 The definition of poor is quite fuzzy because it can be looked at in different ways. There is a World Bank definition which says that anyone who earns less than $1.90 a day is poor. This would mean roughly ₹160 a day per head or ₹640 for a family of four. Considering that the MGNREGA wage is in a range of ₹221-357/day across States, which is given to one member of a household, this would be inadequate for a family.

There used to be a definition based on calories consumed, which could range from 2,100-2,400 per day for an individual based on residence in rural/urban areas. This was translated into monetary value using price deflators by the Planning Commission, which in 2014 arrived at a figure of ₹47 and ₹32 a day for urban and rural population, respectively, at 2011-12 prices. Since then there has been no official norm.

A criticism often levelled is that using calories or even nutrition to gauge poverty is inappropriate as one cannot live with just food and hence basic needs have to also be included when reckoning the same. This is pertinent because even if free rice/wheat is given, a person can be poor as one requires other ingredients for cooking as well as fuel, a house, etc. Also, to move out of this state of dependence, one requires minimum education to be in a position to get a job. Therefore, a larger definition is required.

This is where the multi-dimensional poverty index is relevant. Here the UNDP-OPHI (Oxford Poverty and Human Development Initiative) and NITI Aayog Surveys provide insights. Both the reports were released in the last few months and the latest period for which data is given is 2019-21. The former puts the poverty headcount at 16.4 per cent and NITI Aayog puts it at 15 per cent. The two studies make a comparison over time to show that the number of poor has come down sharply and that the proportion of population that comes under the category is low, at 15-16.5 per cent. However, anomalies surface when one looks at the different parameters that are listed under the multi-dimensional poverty index.

Ideally, the two should be synchronised, as the NITI Aayog report has these two agencies as collaborators. Yet there are differences with UNDP-OPHI having higher deprivation rates for most of them. For example, the proportion of population deprived of housing is 12 per cent for NITI Aayog against 13.6 per cent for UNDP-OPHI. Those deprived of fuel is 12.3 per cent against 13.9 per cent, water 2.2 per cent (2.7 per cent), electricity 1.8 per cent (2.1 per cent), sanitation 9.3 per cent (11.3 per cent), and so on. Their definitions for each parameter however tend to be congruent.

There is also the Global Hunger Report which was criticised quite harshly as it showed something quite different. India was ranked low down at 107, with the proportion of population being undernourished being 16.3 per cent as against 11.8 per cent by UNDP-Oxford and 11.9 per cent by NITI Aayog (criteria would vary based on internal definitions). The HDI showed 19.3 per cent of children being wasted (thin) and 35.5 per cent stunted (short).

Meanwhile, during the pandemic the government provided over 800 million people with free food on grounds of them being poor. This would mean that while the families may not have been poor in the multi-dimensional criteria, there was an aggressive policy adopted to ensure that every poor household had access to not just rice and wheat but also pulses. This means that the number of needy was still very high.

Now if these two points are combined — that is, 800 million people being needy and the fact that there has been a sharp improvement in access to fuel, electricity, water, sanitation, etc., due to various successful government policies — two implications emerge.

The first is that a lot has been accomplished by virtue of the government taking on the role of a welfare state. This is essential because waiting for individuals to have the ability to fend for themselves would have taken a long time. Therefore, providing free toilets, water, electricity, subsidised housing loans, etc., is essential for an economy like ours. The complexion of the budgets changes as they have to address these issues at both the Central and State levels. In the absence of such expenses which are also loosely called ‘freebies’ by the elites, conditions would have been adverse.

The second is that if we are to move away from this culture of freebies and subsidies there is need to create more jobs which can be done only in the private sector. For this to happen growth has to be sustained at high rates of 8 per cent plus for a prolonged period of time.

Expenditure of States

Against this background, the recent paper brought out by the RBI on expenditure of States needs to be viewed. While higher capex does have backward linkages as it creates demand for various industries, it is a slow process as has been seen.

Higher development expenditure, which includes economic, social and general services, has its set of conundrums. Higher expenditure on education and health would have salaries and pensions as a major component. The same holds for general expenditure which has allocations for law and order. Therefore, while it is commonplace to focus on the expenditure from the point of view of growth and fiscal discipline, the harsh fact is that without such freebies it may be difficult to keep a large part of the population in the non-poor echelon.

Ever since we have followed the FRBM (Fiscal Responsibility and Budget Management) norms of fiscal deficit being kept at 3 per cent for States (with relaxations over time based on the circumstances) and debt-GDP ratio at less than 25 per cent, the issue of quality of expenditure has been at the forefront. This has meant that ‘freebies’ have been scorned at. But given the level of deprivation in an emerging market, ‘freebies’ form an important form of redistribution. This can be in the form of free food which comes from the Centre or a NREGA scheme which provides sustenance to farmers. There are the myriads of State schemes on health and education which include the mid-day meal scheme which provides basic nutrition to the poor.

Hence ,the ideal situation is one where the State should focus on capex and improve the quality of expenditure. A balance has to be struck with supporting the poor with subsidies and ‘freebies’. The State governments also find it politically expedient to give free power to all or free transport for women on their transport services. A way out can be to cap all such expenses so that a balance is struck and States don’t go overboard

The global impact of policy calls may affect our rupee ambitions: Mint 9th August 2023

 

Need a Corporate Debt Security Fund to help widen the market: Financial Express 7th August 2023

 The setting up of the Corporate Debt Market Development Fund (CDMDF) by the government along with the markets regulator, the Securities and Exchange Board of India (Sebi), is a major step forward in the path to developing the corporate debt market. Rather than leaving it to the market participants to take the lead through other policy measures already implemented, the government has gone ahead with the creation of this fund. This fund would be sponsored by the government and have subscriptions from AMCs and debt funds who can then fall back on this reservoir in case they are unable to sell the securities they hold at the time of redemption. This is a major buffer provided to the mutual funds in particular.

As mutual funds are major buyers as well as traders of corporate bonds, this arrangement will boost volumes in both the primary and secondary segments of the market. MFs should now be willing to take on more risk in the debt market and probably also deal with lower-rated but investment-grade securities. In the absence of this backstop facility, there was apprehension in their minds as there are concerns on liquidity of these securities when it comes to redemption pressure. Can this concept be extended to other parts of the market to cover issues which have impeded growth?

One of the major problems of corporate debt issuances is that there is no security to the investor in case of a default. When a bank loan goes bad, the problem is really for the bank to sort out and there are structures for the same. In fact, banks evaluate project proposals and charge higher interest rates for loans which have a lower credit rating. The deposit-holder is protected from such failures, and hence, even at the peak of the NPA problem in India in the middle part of the last decade, the problem was largely faced by the banks and not the deposit-holder. However, in the case of bonds that failed, especially those issued by NBFCs, there was no fallback. The only recourse is approaching the courts, which is time-consuming. Besides, as an individual bond-holder, it is even more difficult to figure out how to seek recourse.

The CDMDF can be used to address this issue by mirroring its concept. Suppose all debt issuers have to mandatorily contribute to a CDSF (Corporate Debt Security Fund) when they are issuing debt, then a corpus can be built which can be used in times of a crisis for paying investors in case of a default. Presently, the only possible way out for the debt market is issuing CDS, which provides insurance to the investor in case of a default. But, it is a market-oriented instrument and the interest in such instruments is missing, given the cost involved. Besides, when most of the issuances are in the AAA or AA categories, there is low probability of default. Hence, the market does not see any merit in writing CDS on these instruments. The suggestion here is to make it mandatory for all issuers of debt to contribute to this fund. This will bring in a larger corpus as even lower rated investment grade bonds will find a window opening. In the case of the CDMDF, 25 bps is what has to be paid by the fund as a subscription. In case of the CDSF, the rates can be varied across the ratings. The ratings of agencies like CARE, CRISIL, ICRA, etc, can be considered for this purpose.

In fact, a dual rating can be the criteria for all issuances, with the lower rating being used to determine the subscription fee. For AAA-rated companies, for instance, it can be kept at 10 bps, and can increase down the ladder of ratings.

Will this be an added cost for companies? Definitely. Hence, it would be necessary to ensure that the charge being enforced is lower than the MCLR charged by banks; or else, there can be migration away from this market. However, for lower-rated companies, paying even 50 bps more may find acceptance as they normally tend to borrow at 100-200 bps more than the MCLR. Besides, for the issuing company, this will be a one-time charge unlike an interest cost which has to be paid on an annual basis. Therefore, for a five-year bond, the cost of 25 bps will actually work out to 5 bps per year.

A call can be taken on whether there should be an annual fee also paid to the fund as this would make using the debt market more expensive. To begin with, this may not be levied but depending on how this fund progresses along with the growth in the bond market, a much lower rate could be considered—maybe 1 bps or even lower.

The government could contribute an initial amount through the Budget and the fund can be managed by professionals. Leverage should be allowed for the fund depending on how the balance sheet builds up. Typically, the CDSF should invest their funds in government paper so that there is zero risk carried on the books. Investing typically in short term instruments like treasury bills also works as the MTM risk is eschewed. Treasury activity can also be considered based on the expertise that is built into the fund. Ideally, the fund should be exempted from paying taxes so that the income earned could fully meet the operating expenses and add to the reserves.

There is definitely a need to develop the corporate bond market. There have been several committees constituted and virtually all recommendations have been implemented. The gap that exists is getting in more buyers and sellers. Sellers are limited to highly-rated companies and buyers are more of the ‘buy and hold’ variety. There needs to be active trading, which can be done by mutual funds. With the CDMDF a reality, the area of operations of the MFs should get widened further. The CDSF is a way out, and to make it work, it should be made mandatory for all issuers. The design should be such that the pricing should continue to be of advantage for issuers relative to banks. This surely can be worked out.

Expect Status Quo From RBI This Time: Free Press Journal: 4th August 2023

 

One significant development since the last policy is that the RBI has revealed that the Rs 2000 note demonetisation has led to most of the notes being deposited with banks. This means that deposits have gotten a fillip due to exogenous reasons

The credit policy is always a closely followed event by everyone. For corporates it means the cost of borrowing for both investment as well as working capital. In case of individuals it is even more critical as their borrowing rates are directly linked with the repo rate in most cases due to the rule of linking the interest rate with external benchmark. For deposit holders, the repo rate acts as the prerequisite for banks to change their deposit rates and hence the action as well as language will be watched. For the market, the bond yields will be driven by what the RBI has to say. The government too follows the decision as the cost of borrowing in the coming months will be contingent on the action taken by the RBI. Therefore, credit policy is important for everyone in the country. 

The Monetary Policy Committee which decides on action, is to be guided by the inflation number. While they have targeted 4%, the inflation rate has tended to be higher last year. This year it came down to 4.3% in May before rising to 4.8% in June. The numbers look benign mainly due to the high base effect of last year as inflation was high. This buffer will get diluted along the way and hence the possibility of inflation rising cannot be ruled out. In fact, RBI estimates for inflation in Q3 of the year is high at 5.4%. Therefore, it is reasonable to assume that inflation cannot be assumed to having come down and the MPC will tread cautiously here. 

Growth on the other hand is expected to be better at 6.5% according to the RBI. Recently the IMF has upped its forecast for India from 5.9% to 6.1%. While this is not significant, it definitely indicates that the economy is on track and there is presently no reasons to suspect that things can go wrong. It may be recollected that the RBI had taken the view during the lockdown that it would do everything to ensure that growth was protected. This pressure is certainly not there this time.

Under these circumstances it does look like that the RBI will maintain status quo in the policy which means that the repo rate will remain at 6.5%. The stance too will continue to be ‘withdrawal of accommodation’. This can be interpreted as either there being surplus liquidity in the system that needs to be withdrawn or the fact that the real repo rate is just about right at around 1% (assuming that the inflation rate reaches 5.4% in Q3).

So what does this mean for the layman? One significant development since the last policy is that the RBI has revealed that the Rs 2000 note demonetisation has led to most of the notes being deposited with banks. This means that deposits have gotten a fillip due to exogenous reasons. Assuming that at least 80% of the Rs 4.6 lkh crore that was to be withdrawn would come in as deposits, banks really have less reason to raise rates any further. Therefore at the macro level rates on deposits will remain unchanged. At the micro level some banks may offer higher rates depending on the balancing of their asset maturities with liabilities. But in general a status quo is the best from the point of view of the deposit holder with a high probability of the deposit rates being lowered also being there. It has been seen the average deposit rates on fresh term deposits has come down in May over March and April.

How will the credit policy affect us?

The lending side however will reveal an anomaly. By regulation, loans to retail customers and MSEs (medium and small enterprises) are linked to an external benchmark. This has been the repo in most cases which means that retail loans which include mortgages are linked to this anchor rate. If the RBI maintains a status quo position, which is likely, then the lending rates cannot come down. Therefore the EMIs on home loans will continue as before.

However, for corporates who borrow based on the MCLR (marginal cost lending rate) things can be different. The MCLR is based on a cost plus formula. Hence if the cost of deposits comes down even marginally, there will be a tendency for the MCLR to also get reduced. This in turn will work to their benefit. This anomaly will remain given the way in which regulation has structured interest rates in the system.

Hence a status quo in policy will have a varied effect on customers of banks. In all likelihood this position will prevail for the rest of the year too. The rains have been good so far, but the inflation impact will be driven by how crop output and prices behave. Presently it has been seen that the prices of edible oils have started to increase. It is expected that the El Niño effect will shadow Indonesia later during the year which will pressurise prices of palm oil which India imports. Further, there has been excess rainfall in several states and there is news of rice crop being affected in the North West. Add to this the damage caused by the rains in Himachal Pradesh and parts of UP and Uttarakhand, and the horticulture crop has come under pressure with tomatoes already hurting. 

Under these conditions, the RBI will not be in a hurry to turnaround the repo rate. The status quo will carry on definitely through the calendar year. A repo rate cut can be expected probably earliest in February of 2024 provided inflation remains benign over an extended period of time. 

How the CEO moulds the culture of the company" Excerpt from my book: Corporate Quirks in Mint Lounge

 There are five buckets into which any CEO will fall. The first is the short-tempered and abusive person who moves with a scowl and does not acknowledge the presence of anyone. He is more interested in yelling at everyone in sight and believes that unless you kick the rear of his subordinates, nothing works. He also loves to put people down because no one can oppose him and such a person is also a domineering one who controls the Board. There is nothing like humiliating your seniors in public for that gives you a sense of superiority and reinforce the fact that you are the boss. Therefore, abuse on a one-on-one basis is less effective and remains a bilateral deal that no one knows. 

He will call even his senior employees ‘fools’ and ‘good for nothing’ and could slip into verbal abuse. The others do not mind because they are used to it and also know that he does not mean what he says and they are invariably rewarded by him for hearing him out. You can spot this character in your office easily. I have worked in a company where the CEO would tell all his colleagues (some of who were employees at the Board level) that they had no heads and he had to do all the thinking. But these gentlemen took it so stoically that it literally went past them like the idle wind. But all of them were rewarded with very large ESOPs and extended tenure. It is not surprising that such ill temper is well tolerated and assimilated into the system such that one becomes immune to abuse. 

Another CEO I had worked with was fond of abusing seniors to the extent that some of them quit the organization. And he had justified his foul talk by saying that he came from a region where they abused each other and also had a foreign bank lineage where swearing was as common as using a preposition.

The second type is the haughty CEO who believes in the caste system which has developed in the organization. There is a hierarchy and he is conscious of it…. Such a person will make sure that there is a separate floor where the chosen ones sit because he discusses only with this lot, who could go with fancy designations like Executive directors or Presidents or Senior General Managers or even DMD and JMD. Here it is clear that you keep reporting to the next hierarchy and as it pecks upwards, it reaches this echelon and then to him. It is only if he is very impressed that he would call an individual from below. You can again spot such a person because he will not acknowledge anyone who sits on any other floor. There will be a nod to the security and probably the receptionist – he needs to check if any visitor has come, but otherwise the others do not matter. There would be a special lift if possible for this floor which no one is allowed to use. A special dining room with expensive furnishing would also go with this behaviour. 

The CEO of an organization I worked in the financial centre of Mumbai had a lift dedicated to him and others could only look but not travel. His time was precious and saying hello to anyone who did not matter was a waste of time. There was a small group who all had similar academic backgrounds from the prestigious IIM-A who could have access to him. 

The third kind is a rarity – a friendly one who normally would be younger who mixes with everyone. Such a person would be in a flat organization where there is little distance between all the colleagues. People are junior or senior but work together like a team and their seniority is rewarded with compensation or designation, but then at the end of the day they are all equal with the CEO having the additional responsibility of owning the balance sheet. 

Fourth is the professional, who maintains fixed timings and meets everyone who he works with. Hierarchy is respected but is not the be-all and end-all. Such a person will call and talk to everyone when there is work and hear out everyone in a meeting. This man is generally liked by the staff and is fun to work with. He will not get too close but is approachable and maintains a cool head and rarely lets out steam. 

Last is the moody CEO who is doubtful about everything. He cannot take decisions and wants advice but still has to show that he is the boss and cannot ask for it. He has probably reached where he is due to reverse gravity but does not accept it. These people are hard to guess as they can blow their tops any time and make a nuisance of themselves. They do not trust anyone and will cross-question you on everything. For instance, they want to make sure that you met the person you were supposed to meet. They would like to get the details of everything that transpired in the meeting you attended instead of just the gist which is what normally CEOs have time for. In short they are insecure. 

The CEO is the centre of gravity and occupies a very important position in the organization. This character moulds the culture of the company. A tough and abusive person will make everyone behave the same way. This is so because if you are bashed up day in and day out by your boss you tend to behave the same with your subordinates to emancipate yourself from such stress. A kind-hearted and liberal CEO also makes the company a fun place to work and actually gets the staff to identify with the company and work better. A suspicious CEO will create a culture of suspicion where no one believes anything until they see it in front of themselves. 

It is not surprising that when the CEO finally leaves the organization … you can see how many remember him. Those who manage to bond are always welcomed by the staff and treated with respect. In fact, they can also have favours done by just asking and the others will be willing to oblige. The more termagant ones are never welcome and avoided even if an appearance is made. Any favour asked is normally shirked with lots of reasons given. That’s so because once you are disliked and out of office no one wants to see or speak to you. This is what all CEOs should realize and remember their term is for a fixed tenure but the relationships built or destroyed will decide whether or not the person walks the road of loneliness.

Excerpted with permission from Corporate Quirks: The Darker Side of the Sun by Madan Sabnavis, published by KBI Publishers

What the data hides and shows: Indian Express 1st August 2023

 High-frequency economic data tell us whether things are looking good or not. These indicators help us formulate opinions about what is happening in the economy. However, often, we tend to extrapolate such data to draw conclusions which may not materialise. This raises scepticism about the accuracy of these variables.

In this context, the purchasing managers indices are relevant. They tell us about the state of industry and services on a monthly basis. Such information is provided for several countries and hence is seen as adding value to economic understanding. The fact that this information is available on the first of every month is valuable as we get to know about how the sector has performed immediately. In comparison, official data on the index of industrial production is available with a lag of around 40-45 days. That’s why PMI is popular and taken to be a leading economic indicator. But, in India, these leading indicators have tended to be misleading.

The PMI manufacturing averaged above 55 last year. This was interpreted as a sign of a turnaround in the manufacturing sector. In fact, not just a turnaround but a sharp revival. But, manufacturing output as per the GDP estimates grew by just 1.3 per cent — which is very different from what the PMIs were indicating. Is there something wrong somewhere?

The National Statistical Office, which computes these numbers, provides information for May in July. Here, too, revisions are made and critics maintain that the coverage is not optimal as the unorganised sector is largely excluded. In such a situation where a large part of the output comes from the unorganised sector, it does seem a stretch to accept PMIs where the sample size is only 400. Moreover, information is collected on only five indicators. While there is value in any information — it is better than not having any data — interpreting these indices is fraught with the risk of reaching erroneous conclusions.

A similar issue crops up in GST collections data. It has been observed that over the years, tax collections have risen, implying a revival of consumption. But the same does not reflect in other data with companies lamenting about stagnant demand. Collections appear to have risen more due to higher inflation, as well as better compliance. With the growing formalisation of the economy, GST collections will increase as a larger part of the SME world will get integrated into the system. But the usefulness of this indicator ends here. Using it to assess growth may not be correct.

There are also similar issues with the index of industrial production numbers. These numbers are known for extreme volatility with a standard deviation of 3-3.5 in the pre and post-pandemic periods. This means that growth numbers are volatile.

A similar problem is encountered when single-month export data is extrapolated into the future. High commodity prices often contribute to a higher value in trade and hence, whenever exports have increased at a high rate, the same holds for imports too, resulting in a higher deficit. The timing of exports also plays a role — spikes in trade could be due to logistical issues. Single-month numbers inherently carry such biases. This also holds for investment flows. One should eschew falling into the trap of the “highest ever monthly” flows as the bunching effect is quite common.

There has also been a tendency of late to get carried away by investment announcements made by companies as it perhaps supports the belief that the capital cycle has turned. This gets magnified when one looks at the state government-sponsored investment summits, which have a large number of MoUs signed. However, these seldom materialise. Here too, the indicators are misleading.

The flow of economic data in India has definitely improved over time. Various agencies are trying to release as close to possible real-time data to provide insights on developments taking place. While there is value in these, there are deviations when the final picture emerges. This can create problems at the policy end. Therein lies the rub.

Meet the FM: An authoritative account of India’s economic and political history under finance ministers from 1947 to 1977: Financial Express: 30th July 2023

 The finance ministry occupies the most important position in the government as it also controls the funding of all ministries. It is the ministry that is closest to the prime minister and hence is the pivot for all policies. A book on finance ministers of the past, hence, is always interesting, and here AK Bhattacharya, better known as AKB, does a superb job. AKB is known not just as a seasoned journalist and editor, but also an erudite scholar with specialisation in budgets. His columns before and after budgets are always insightful and this book shows that knowing the politics behind the economics is necessary to understand how finance ministers act.

AKB takes a look at finance ministers from 1947 to 1977 and has detailed chapters on their regimes. There were 12 ministers during this period, which included two PMs. Jawaharlal Nehru was one, who had to step in when TT Krishnamachari resigned ostensibly due to a controversy. Indira Gandhi, on the other hand, took charge quite consciously when Morarji Desai resigned as FM over political differences. AKB takes us through some details of these regimes and their major achievements, as well as controversies during their tenures.

Blank vertical book template.

Being an FM is not easy as one has to balance the economics of policies with politics. The latter cannot be ignored because it is based on ideology as well as the fact that governments come to power based on certain promises that have to be delivered, and it is the FM who has to enable this. Hence, as critics, it is easy for one to be judgmental of policies, but then they cannot be dictated by pure economic rationale.

The part on Indira Gandhi stands out, recounting the time when it was decided to nationalise private banks in 1969. While the idea germinated when Morarji Desai was FM, it was not effected during his tenure as he was against it. But once the prime minister is the FM, there is less opposition. It was also in her time as FM that the highest marginal tax rate was clocked, at 93.5%, for those earning more than `2 lakh per annum. At that time, it was considered appropriate because the PM firmly believed in socialism.

Several such anecdotes dot the book based on extensive research by the author. On YB Chavan, another politician who served as FM, the author’s take was that he was not quite on good terms with the PM and hence not too aggressive. He did lower the marginal tax rate to 77%, but increased wealth tax rates. After Chavan, the job went to C Subramaniam, who held the reins from 1974 to 1977. This period was tough for various reasons. High inflation was a major blow, which was brought in by the first oil shock. There was large-scale hoarding of foodgrains, which sent inflation up to 27%, thus needing strong credit policy measures to curtail speculation. But the tougher part was aligning with the Emergency, which came down heavily on anyone who was anti-establishment at the political level. At the same time the government had to frame policies tough on smuggling, black money, foreign exchange dealings, etc.

It is also interesting to note that in the 1974-75 budget, the FM levied a tax on interest earnings received by commercial banks. This raised the cost of borrowings from banks by 1%. To correct anomalies with NBFCs, the FM allowed only 85% of interest paid by them on public deposits as expenditure for tax purposes. The reader can appreciate how different things were in those years when budgets would seem quite amateurish in retrospect. But there were not too many known templates that could have been considered. Also, then RBI governor Sarukkai Jagannathan resigned before his term ended, as he was not willing to compromise on lending standards of banks that were nudged by the government to lend to the infamous Maruti project driven by the PM’s son, Sanjay Gandhi.

AKB recounts how Sachindra Chaudhuri, who was FM for a short period of 1966-1967, also had a turbulent time as he had to engineer the big devaluation of the rupee. AKB draws a lot of views from the memoirs of former RBI governor IG Patel, who had pointed out that there was a difference of opinion over the act of devaluation between IMF and the World Bank. The latter wanted a sharp correction, while IMF was for gradualism. But the World Bank prevailed, notwithstanding the deliberations that took place. Curiously, the aid promised to India on the condition that we devalued the rupee did not quite come about. In this sense the move could be called a failure.

There are more such interesting stories in the book, such as the one involving John Mathai, who as FM was opposed to the setting up of the Planning Commission saying it undermined the power of the ministry. He went ahead with the decision, as then PM Jawaharlal Nehru wanted it, but resigned immediately after. CD Deshmukh, a career bureaucrat who had been RBI governor as well, was responsible for getting in an industrial policy as well as nationalisation of some private sector companies. But he resigned over the reorganisation of states’ policy which that Maharashtra.

Some statistical trivia on FMs provides for interesting reading. Morarji Desai had the unique record of having presented 10 budgets, including two interim ones, and served as FM under both Nehru and Indira Gandhi. Both these PMs were socialists, while he had capitalist leanings. But such contradictions, while leading to tensions, did not severely impede the development process. Also, the backgrounds of FMs were quite diverse: politicians, bureaucrats, lawyers and more.

This book is definitely a delight for the economic historian as it takes one through the details of the regimes of 10 FMs in great detail. The common thread is that all of them operated within the realm of politics. There have often been conflicts between the PM and FM, especially so when the FM is not a politician but a bureaucrat. Interestingly, Manmohan Singh as economic affairs secretary had made it clear that the credit policy of the RBI had to be discussed with the ministry before it was announced. And, importantly, it had to be a written and not oral communication. We have come quite a long way since then, where the central bank stands as an independent regulator which works well with the government.

AKB makes his narrative interesting with these vignettes and trivia that add colour to what could have been an esoteric book.

India’s Finance Ministers: From Independence to Emergency (1947-1977)

AK Bhattacharya

Penguin Random House

Pp 445, Rs 999