How worrisome is the Iran-Israel conflict: 24th April 2024 Business Line

 

A decade's data shows that India is yet to recover fully from covid: Mint 25th April 2024

 

Why does the Fed matter to all countries: Free Press Journal: 24th April 2024

 

Reviving the cycle: Indian Express 20th April 2024

 

Rain check on market cheer: Although useful, monsoon forecast does not guide us about farm sector prospects: Financial Express 17th April 2024

 The India Meteorological Department (IMDo) forecast of a normal monsoon did send cheer to the markets as it came just after Skymet made a similar projection. Often the two agencies have had differing views in the month of April. Given that agriculture did not quite perform well in FY24, this news comes as a relief. But how much attention should one pay to the statistics?

To begin with, this is just a forecast which says that this monsoon will be 106% of the normal rainfall for the season, which is 87 cm at the national level. Curiously in the last 20 years, the IMD has almost always predicted a normal monsoon. This signal was not quite right on seven occasions, which gives a success ratio of around two-thirds. Weather forecasting is more inexact than economic forecasting but is considered to be indicative nonetheless. Coming as it does around two months before the arrival of monsoon, it could be still too early to gauge what would happen down the line.

Technically, the monsoon arrives in June and departs in September. These four months are critical for the kharif crop, as on an average 60% of the cropped area is dependent on monsoon. Given that the reservoir levels today are much lower than last year and the prevalent heat wave, it is even more imperative that the rains are bountiful this season. Kharif accounts for around 50% of the crops that are grown (which excludes horticulture). The northern states are well-equipped with irrigation facilities and hence there is less of a challenge for a crop like rice. But for pulses and oilseeds, the monsoon becomes more critical as there would be limited access to alternatives given that the rivers in the southern states are rain-fed.

A few issues are important here. The first is whether a good monsoon is related to a good agricultural production (defined in terms of growth in gross value added as per the GDP calculations). In the last 10 years, agricultural growth was negative in one year while less than or just about 2% in three years. In these four years, monsoon was below normal. In the remaining six years when growth was high, there were normal monsoons. Hence there is a positive relation between good monsoon and crop output. It can be said that a normal monsoon is a necessary condition for a good agricultural output. While it directly affects the kharif crops, it also fills up the reservoirs which in turn provide water for the rabi crop besides cattle, fodder, and drinking purposes.

The second part is whether a normal monsoon and good crop leads to a decline in food inflation. This is important because while inflation has been trending downwards, food inflation remains high. In five of the last 10 years, food inflation has been above 6%. In three of these years, agricultural production was high in the range of 4-6%, but still witnessed high inflation. This is interesting because it severs the relationship between output and prices. It is this facet which lowers the efficacy of the announcement of a normal monsoon. At the same time, there are always hikes in the minimum support prices that are offered to farmers, which has an inflation potential. Even in commodities for which there is nil or limited procurement, benchmark prices tend to move up once these announcements are made.

A normal monsoon is a number for the country. It does not tell anything about the arrival or progress and spread to the rest of the country and the departure of the winds. All these elements are important. The arrival is important because it determines the sowing pattern chosen by farmers. A late arrival would mean crop switching, especially from rice to less water-consuming crops. The progress is important because it determines the spread of the rains. If not well-distributed across the country, it can lead to crop imbalance. Hence while overall production will increase, there can be shortages of some crops. In particular, pulses and oilseeds are vulnerable as they are grown in the rain shadow areas, which typically become susceptible to weakening monsoon winds.

Finally, the departure is important because if the monsoon withdraws late in October or early November it leads to destruction of the harvest. This has been seen not so much in case of crops but in horticulture. The annual onion and tomato crises are a result of the late departure of monsoon. These last two factors explain why inflation can be high even when the output is normal or registers healthy growth. Vegetables and pulses are hence critical elements of the inflation phenomenon. While India still imports over 60% of edible oils, in a way there is a buffer provided in case of a crop failure. But this does not hold for pulses where it was observed that countries in Africa hiked the export prices to India once it was found out that there was a crisis internally.

Climate change has been observed in India over the years with the season patterns being distorted. Monsoons rarely arrive in early June; often it does at the end of the month. The departure is also in October, which comes in the way of the rabi crop as farmers who grow two crops tend to go in for stubble burning, which has created other problems in northern India.

Putting all these pieces together it can be argued that monsoon forecast is a useful bit of information but does not really guide us in any way in terms of the prospects of the farm sector. Also, it cannot be indicative of future inflation. So while it can add to the feel-good factor when debating monetary policy, it cannot be taken as a serious indicator when formulating policy.

Why The Skymet Forecast Matters To Policymakers: Free Press Journal: 13th April 2024

 

News of a normal monsoon, though positive, may not bring real cheer from the point of view of the economy. There are several other elements that have to fall in place and will be known only post June when the monsoon winds arrive and progress into the interiors

Skymet has predicted a normal monsoon for this season. Coming in April, this news may be too premature for one to feel confident of a good rainfall. It is almost certain that the IMD too will have a similar forecast. In the past the IMD has always been gung-ho about such predictions while the Skymet has been cautious. This time round it would be similar views on the course of the monsoon. But is this news something to cheer about?

The news is positive to the extent that there will not be the shadow of El Nino which was responsible for a sub normal monsoon last year. But this fact was known as the La Nina (which is the opposite of El Nino) winds would dominate this time thus bringing in the cooler winds. But the concept of a normal monsoon is quite fuzzy and may not really mean much for the country until it arrives and departs.

Monsoon officially starts in the first week of June and departs by end of September. This is the critical starting point for the evaluation of a monsoon. In the last 5-6 years the arrival has been delayed and can be towards the end of June. More importantly the arrival is recorded at the first touch point which is coastal Kerala; and the progress varies depending on the intensity of the winds. It is normally only in July that the monsoon makes an appearance in the larger part of the country. The arrival time is important as the sowing pattern is driven by this factor. A delayed monsoon and uncertainty of the same can drive farmers to change their crop and in particular, rice gets affected as it requires the maximum amount of water.

The arrival becomes more important today because the reservoir levels are at a low. At 35% of full capacity it is lower than the level of 42% at the same time of last year. The IMD has already warned of extreme heat conditions in the coming months which is a concern. With high levels of evaporation lower water availability will affect all people. Water availability is important for households, cattle, horticulture crops and fodder, besides drinking purposes. Availability has already been affected by the depleting reservoir levels. It is hence critical that the monsoon arrives on time, especially in the interiors, or else there is risk of fall in production of horticulture as well as fodder which can affect food inflation including milk.

The other aspect of the concept of a normal monsoon is that it is an aggregate number where the total rainfall received is calculated. It is something like GDP growth where we get to know how the country has grown. It does not tell us about the distribution. There are technically 36 meteorological zones for the country. Each of these zones have different weather patterns and receive different amounts of rainfall. Those close to the coast tend to have better rains than those in the interiors. Some states which are landlocked would be in the rain shadow area which become vulnerable to the monsoon winds weakening. This does not come out from the normal monsoon number.

Further the concept of normal for various regions is quite vast. A normal monsoon is if the rainfall is between -19% to +19% of average when looking at the various divisions. For the country as whole the long period average is calculated over a long period of time of 30m or 50 years. Rainfall which is between 96-104% of this number is called a normal monsoon.

The inter-spatial distribution is important because it determines the crop sowing choice of farmers. This also finally determines the crop prospects. The rains are critical because even today around 60% of the kharif crops are monsoon-dependent as they do not have access to irrigation facilities. And given the depleting levels in the reservoirs, drawing water for these crops will not be possible. Last year there was a deficit of 5.6% at the aggregate level which also meant that the reservoir levels were lower than normal. The level as of October 2023 was 74% as against 89% in 2022. By December end the level came down to 60% as against 75% in 2022. This is why the monsoon prospects become even more relevant today.

It may be recollected that the advance estimates for GDP growth for FY24 does indicate that agriculture is the only sector that has underperformed with growth of 0.7%. Also there has been high food inflation with cereals, pulses, spices and vegetables witnessing double-digit numbers all through the year. Milk inflation too has ranged around 7% with higher input costs contributing to the price rise. Hence it is essential that the kharif crop — which covers rice, maize, tur, urad, moong, groundnut and soyabean among others — be normal to keep prices under control. The MSPs which will be announced are bound to be increased in the range of 4-6% which is an annual feature. A normal monsoon with uneven distribution can affect specific crops which can spook inflation. This is why policymakers are concerned about the monsoon, as kharif crops constitute roughly 50% of crop output in the country.

Therefore news of a normal monsoon, though positive, may not bring real cheer from the point of view of the economy. There are several other elements that have to fall in place and will be known only post June when the monsoon winds arrive and progress into the interiors. Meanwhile, the reservoir levels have to be monitored quite closely as the situation is turning grave.

IPL cricket is a fine example of free market capitalism: Mint 10th April 2024

 

Credit policy focuses on stability: Business Line 6th April 2024

 

The stable run for the rupee will continue: Buisness Standard April 4th 2024

 

RBI at 90: Navigation through turbulent waters: Financial Express 3rd April 2024

 

Kahneman's work served us well.....Mint 1st April 2024

 

Analysis: Water Scarcity In Bengaluru Is A Wakeup Call For All: Free Press Journal 30th March 2024

 

The creaking infrastructure of cities gets exposed as they become even more vulnerable. Water scarcity is one of the several problems that emerge

The water problem in Bengaluru is another wake up call to remind one of the bane of unplanned urbanisation. In fact, it brings to the forefront the trade-off between growth and sustainability. The west was able to grow faster than the east starting from the industrial revolution and by the time climate change has been recognised as a threat, the east faces such trade-offs. In a way when the west pontificates on the issue, it sounds unfair as these countries damaged the ecosystem over time but went ahead of the others. And now the issue is global where all nations have to cut back for the global good which can mean major compromises for the emerging nations.

Cities are known to be overcrowded as this is where opportunities reside. This has led to a big boost to the housing sector which includes also the proliferation of slums when people do not have the money to own a home. The social issues are known and open to discussion. But the creaking infrastructure of cities gets exposed as they become even more vulnerable. Water scarcity is one of the several problems that emerge.

The reservoir levels are down today to an average of about 38% of full capacity (45% last year) and with an early onset of summer, the threat of evaporation is there. This will be affecting not just the farmers but also cattle and households where water becomes scarce until the arrival of the monsoon. It has also been observed that the monsoons tend to arrive later than the scheduled time and while June 1st is officially the date, it is normally towards the end of the month and that too on the coast of Kerala.

Let us look at the issues involved. First the government has focused a lot on roads which is the pet project of all layers of the system. This has meant more concretisation of roads. The negative effect of such concretisation is that rainwater does not seep into the ground and improve the water table levels. This has affected water levels of bore wells which have run dry in Bengaluru. This problem will occur in other cities too.

Second, the thrust given to housing of all types has meant more construction of homes without any attention paid to infrastructure. This has challenged access to civic amenities like lighting, water, road connectivity and so on. But clearly the demand for water has increased. At the same time the government has provided incentives to people in the lower income groups to buy homes through the affordable housing schemes. This has led to greater demand for homes which typically are of smaller size but involve construction of a larger number of flats which houses a larger number of inhabitants. The water issue has not been considered.

Third, the concept of redevelopment in a city like Mumbai needs a deeper look. It has become a big business for housing societies to go in for redevelopment with several interested parties like the owners, developers or the builder’s lobby and politicians. Typically, a building redevelopment scheme involves the existing owners getting larger living accommodation relative to their current space depending on the bargaining power. The municipal authority grants permission for societies which are over a certain threshold number of years, which can typically be 30, to go in for such schemes. The logic is that after 30 years the building becomes weak and hence becomes viable for the scheme. Rarely is a scientific check made.

The builder gains in terms of selling a larger number of homes at commercial rates while the owners get larger accommodation free of cost with add-ons like cash compensation and advance rent for the period of construction. The municipal authority gets compensation as the land is given either outright or on long lease to the developer. Those in power, who are typically politicians, have their say by being offered some of these homes besides the ubiquitous kickbacks.

While the rationale of the scheme can be discussed, the issue which is germane here is the availability of water. In areas where several plots go for redevelopment, the challenge is how to make available water supply to everyone. A building with say 28 apartments can be scaled up to say 140. The pressure on water supply will remain given the changing pattern of weather and the access to water.

The changing pattern of weather has been witnessed across the world. USA is now under threat of forest fires in several regions while cyclones have become an annual affair. The polar ice caps are melting which can lead to flooding in adjoining countries. Europe has reported exceptional heat for which they are not really prepared. India has seen literally the crumbling of the Himalayas even as the local governments continue with the thrust on building roads up the hills for various reasons. Chennai has the paradox of water scarcity while being located along the sea coast with annual floods during the north-east monsoon. Mumbai remains on edge until the monsoon arrives as the entire water supply for the year is contingent on the lakes overflowing in October. But of late it happens in September followed by the “October heat” which causes rapid evaporation.

What are the solutions? There is evidently need to address this issue or else there will be a problem of catastrophic nature in our cities. First, there has to be control on migration and the only way to do so is to limit the amount of economic activity. Second, new cities need to be developed and the suburbs of existing cities need to be stretched with new municipal limits. The expansion of Mumbai to Navi Mumbai is a case of success in this direction. This is the concept of frontier cities really, where the relatively less developed towns can be brought to the level of metropolitan centres. It also helps in bringing about equitable distribution of growth. Third, strict monitoring of growth of slums is called for to ensure that such residual habitations do not develop. Fourth, the construction of new buildings has to be limited both in terms of new as well as redevelopment because they pressurise the municipal capabilities. Clearly we have to accept the trade-offs.

Measuring progress: Factors that can accelerate GDP growth: Financial Express 28th march 2024

 India, with a per capita income of $2,411, would be classified as a low middle-income country (LMIC). Interestingly, World Bank data shows that the per capita income for Bangladesh was $2,688. Sri Lanka, which is a very fragile economy and was on the verge of bankruptcy a couple of years ago, has a per capita income of $3,354. Something looks out of place, considering that in the past three years India has been the best performing economy in the world with growth rates upwards of 7%, while the rest of the economies had to face sharp challenges in terms of growth. Yet, there is s sharp difference once the GDP numbers are normalised by population.

The simple reason why India does very well when it comes to headline growth, which also results in high GDP numbers, is that there has been overall development across sectors. Services and manufacturing have grown at consistently steady rates, with greater formalisation leading to good overall performance. But the country scores low in terms of per capita indicators due to a very high population of 1.4 billion. This is the reason why even smaller countries like Bangladesh and Sri Lanka score better in relative terms.

Per capita income, in a way, is a measure of average productivity in the economy, which has tended to be low. While population growth has come down well below 1% per annum, there is also a need for accelerated growth of GDP while controlling the population. This is why China, which has around the same population, does much better regarding per capita. However, this has been done over a period of over three decades, with a big push being given by the government on capex. Similar is the case with countries like Argentina and Turkey, where a lower size of population allows the benefit of higher per capita income.

It is against this backdrop that one must look at the targets for a GDP of $5 trillion, $7 trillion, or $10 trillion being relevant. The size of the cake must increase so that with modest growth in population, the per capita income can also increase to higher levels. This is also why having an objective of reaching the status of an upper middle-income country is relevant. There are two issues here—increasing the size of the cake, and improving the quality or productivity of the population so that the former is achieved at an accelerated pace.

India has demonstrated that a nominal growth rate of more than 10% is achievable with real growth of 7% per annum. Assuming that India clocks 11% growth in the next few years, and population growth remains where it is today, we can reach the threshold of $4,095 per capita in the next five years (including FY24). At a conservative level, it can be six years, assuming that there can be slips along the way due to an unfavourable monsoon. If this momentum is maintained for the next 15 years, India can hit the magic number of $12,965 as per capita income, which will make us reach the league of high-income nations. Again, an allowance of another year can be made for any slippages, and the fact that the World Bank’s definition will also adjust to the inflation developments during this period.

Therefore, in the next two decades, which will be up to roughly 2045, with the present momentum being maintained, India can reach the status of a high-income nation. This leads to the second question on the quality of population. While we do talk a lot about demographic dividend, the present matrix does not ensure that the youth are well-educated and are in a position to get jobs which require an acceptable level of skillsets. While there has been a jump in employment in the last few years, it has tended to be concentrated in the construction, retail and delivery industries, which require limited skillsets. There is clearly a need to move over to higher skilled jobs, which will evolve as this pace of growth is maintained.

It must also be remembered that with the widespread use of technology in most industries, there is also a case of labour being replaced. CMIE data shows that for the age group of 15 years and above, there are around 439 million people, of which only 14% are graduates. A graduate degree is not sufficient to get a well-paying job in the private sector. Further, the labour participation rate is around 61% for graduates and 40% for all education groups. Clearly, education is the main challenge for the nation going forward.  

Therefore, there are a few elements that have to fall in place. First, the average product of the population has to increase, and this is where education and skills matter. Second, jobs have to be created at an accelerated pace in sectors which require these skills. These two factors will also help to bring in accelerated GDP growth. The comforting factor is that with the present standard and quality of labour force, the country has done well enough to clock such high GDP growth rates on a sustainable basis. The fulfillment of these two objectives will help add a delta to the growth rate.

The myth of a powerful finance ministry: Financial Express 24th March 2024

 India’s Finance Ministers: Stumbling into Reforms (1977-1998)

AK Bhattacharya

There is often debate on whether economics drives politics or politics trumps economics. The second volume on Indian finance ministers by AKB, as the author is well known as, helps one decide to some extent. While economics drives politics to an extent, the reverse relation is stronger.

A common observation that pervades both the volumes is that the FM is not an independent person or entity. Often, we tend to say that certain FMs did a better job when presenting budgets relative to others. But what AKB reveals in this book, which is as interesting as the first, is that all decisions are centralised with the prime minister. Any major move that is announced by the FM in the Budget is motivated by the PM. And the FM does not really have a choice even if there is a large amount of discomfort with the decision. Not surprisingly, H.M. Patel could do nothing on demonetisation, which then prime minister Morarji Desai was keen on.

We also get to know that RBI governor KR Puri had to quit in 1977 because he was part of the Indira Gandhi establishment and did not find favour with the new government of Morarji Desai. Hence politics had influence on the appointment and tenure of the RBI governor as far back as the Seventies. Much later in the day, governor RN Malhotra resigned in 1990 ahead of his term, as his advice against high government expenditure to the Yashwant Sinha-led finance ministry was not received favourably.

Another well-known ideological conflict was the one between deputy governor YV Reddy of RBI and FM P Chidambaram. The two differed on the pace of rupee ‘depreciation’ that was invoked by RBI, much to the chagrin of the FM during the Asian crisis in 1997. The FM had said in a peeved manner to the RBI deputy governor: “You will never be forgiven for what you have done!”

We also get to know the interference of Indira Gandhi’s sons in issues pertaining to the FM in this period. R Venkataraman did not get along with Sanjay Gandhi, while Pranab Mukherjee had a hard time with Rajiv Gandhi when they were finance ministers. Therefore, we get the message that being an FM is not easy, even though it is the most powerful ministry as this is where all revenue of the government flows in and decisions are taken on how to spend it.

Interestingly, while a lot of appreciation has gone in for the GST, which was introduced more recently, the germination was from an idea sown three decades earlier. The concept of a value-added tax had its origins in the mid-Eighties when VP Singh was FM. It came in the form of MODVAT or modified value added tax. Further, the fiscal responsibility and budget management that we talk of today had its origins in the Eighties in the form of a long term fiscal policy (LTFP), which though different in scope, had a vision for budgeting. While that could be the high point of VP Singh’s tenure, the low point was when the FM went after the industry for tax evasion. It seemed the FM was after Reliance Industries, which did not go down well with the Rajiv Gandhi government.

These anecdotes make the rather voluminous book an interesting read. There are a lot of facts placed on the table and one can get to know about all the reforms that were brought in under different regimes. Given that the period was quite tumultuous, the book also reveals the undercurrents that drove these reforms, which may not be well known to the reader.

While the normal narrative on economic reforms starts with Manmohan Singh under the leadership of Narasimha Rao, the author points out that most ideas on reforms actually prevailed in the office of Yashwant Sinha, who was the FM for a short tenure when Chandrashekhar was PM. More importantly, the reforms agenda was a fallout of the state of the economy. The near insolvency of the country drove the government to the IMF for help, and reforms were a condition placed that had to be implemented to draw the loan.

While Manmohan Singh takes credit for economic reforms, his tenure was also turbulent with the stock market scam involving Harshad Mehta. The author elaborates more on the rather infamous statement made by the FM on ‘not losing sleep’ when the stock market went down. Another clue one picks up is that once reforms were in, there was really no going back. Even while minority bubble governments came and went, the FMs concerned drove the reforms agenda, albeit at different speeds.

Hence, one can say that a series of reforms were brought in from the mid-Eighties. To begin with, they were gradual because moving from a fully regulated set up to a more liberal architecture could only be done in steps. Subsequently, the push came from what one can interpret as the IMF nudging for big bang reforms in the Nineties. Interestingly, while the author does bring out the different political ideologies in this period of almost 15 years ending 1997, alignment with progressive policies was always there. It also shows that progressive fiscal regimes can have loan waivers and cash handouts, which is due to the political economy in action.

The second volume of India’s FMs is based on a time period closer to a larger part of the population today and would be of great interest to the layman as well as researchers. The natural line of interest would be to wait for the author’s third volume, which hopefully will cover the FMs till 2023-24. The questions that would be of utmost interest would be whether FMs are more independent than their predecessors, considering that there have been several reforms undertaken like demonetisation or the Covid policies that were routed more through the monetary and not fiscal prisms. The reader would be eager to read more about these contemporary times.

Little economic basis to 'One nation, one election': Businessline 21st March 2024

 

Podcast on Business lIne with Srivats.

 https://www.thehindubusinessline.com/multimedia/audio/nda10-where-does-india-stand-on-the-economic-front-in-2024/article67967902.ece

Survey results should be taken with a pinch of caution: Mint 18th March 2024

 

Resistance to reforms: Book Review in Financial Express 17th March 2024

 Here is an omnibus on financial sector reforms that takes us through the entire process of reforms in the past three decades. Written with the finesse of an economist and expressed with the panache of a journalist, the views are frank. However, a balanced approach is taken, with extensive references and quotes by those involved in the reforms process over the years. More importantly, it hits hard.

The idea that reforms have largely been driven by the political economy after 1991 plays out through the book. In 1991, we probably did not have an option, but since then we have been vulnerable to such compulsions. The author interestingly points out that there are five stakeholders who exercise uneven power in this process of financial reforms. These are the government, financial institutions, regulators, industrial consumers and the retail segment. He refers to the financial system as one of ‘campaign finance’ where the industrial consumers with disproportionate bargaining power distort the matrix by wielding significant clout in every possible way. This is in contrast to the retail customers who hardly have any power. But once there is a crisis that can be in the banking system or capital markets, there is a major problem posed to the administration. This, in turn, leads to rapid reforms, after which it slides back to a cozy static equilibrium. Hence, the response has tended to be more reactive.

He rightly points out that the reforms that happened in 1991 were wrapped around macroeconomic adjustment and fiscal stabilisation but did not move the needle in the public sector (read government), leaving the patronage network untouched. That’s why there is constant hesitancy in bringing about reforms, which continues even after 2014 (there is a chapter on this aspect).

Four things stand out here. First is the resolution process of NPAs where Singhal is quite blunt in saying that all measures taken so far have yielded sub-optimal results because of poor design and implementation. Any new regulatory scheme that is launched with fanfare gets finessed by Indian corporates. One cannot argue with the author here as he is spot on. Second, he points out that the incentive structures in banks and NBFCs are so designed to encourage higher lending and excess risk taking. Further, as there are no incentives for early disclosures and resolution when things go awry, the repercussions are deep. Third, there is a lot of regulatory arbitrage in the system as only banks and NBFCs are subject to RBI’s regulation, while players like mutual funds, PE funds, etc, reside outside the purview of regulation. There is a need for alignment across regulators. Last, shortages in funding have forced financial players to pivot to foreign capital where PE funds invest in unlisted companies and are routed through funds in tax shelters.

The book is a breeze as Singhal takes us through different segments of the market in various chapters. The chapters make sense individually too, and hence can be read in any order. The chapter on equity markets takes us through the early days when BSE was the only exchange, to the setting up of SEBI, which became a formal regulator post reforms. The pages on the infamous scams in the market is pure déjà vu as those who lived through those years can now see the difference in not just the market but also the regulatory set-up. The stories behind the Harshad Mehta and Ketan Parikh scams are described in some detail. However, he does point out that financial scams were not really new and India has a history of such impropriety, such as the stories of Nagarwala, Mundhra, etc.

When it comes to reforms, the author points out that it can never be clear as to what is the best way out. Post 1991, there were always two views—one where critics felt that they were too gradual and should be faster. The other view is at the other end, where the policy makers felt that anything faster would lead to difficulties in absorption by the players creating disruptions. There is clearly no answer here. But often the policies or reforms turn out to be reactive as they respond to a crisis, meaning thereby that the regulator had not really thought of the same earlier. This is where there is scope for being more nimble.

The author also treads on the delicate territory of the conflicts between the government and the RBI, which are quite historical and not new. Often the government may have other motivations, as seen from the case of abandoning the ad hoc treasury bills to finance the deficit. The RBI had to fight hard to ensure that budgets were financed by borrowings in the market and the ways and means advances were used only for temporary liquidity relief. The author shows that things may not have changed significantly even today.

There is a separate chapter titled ‘Indian reforms: Event-driven, even after 2014’. Hence, longstanding reforms on privatisation of public sector banks have been held up despite several reports recommending it. This period had its share of spats between the RBI and the government, leading to the resignation of a governor. Further, demonetisation affected smaller enterprises, leading to high growth in NPAs. This was also the period of busts with IL&FS, DHFL, Yes Bank and PMC Bank. He raises some pertinent questions here on the Yes Bank issue. Was the RBI stopped from acting by politically powerful interests or was the regulator slow in reacting only when the bank had reached the edge?

The book keeps the reader engaged all through with easily understood examples to demystify some concepts. The title of ‘slip, stich and stumble’ just about summarises the author’s view of how financial reforms have evolved—we fall, stich but stumble again. Can there be a better way out from this pattern? The reader can decide on this one. This book is truly a pleasure and should be on the bookshelf.

Book: Slip, Stitch & Stumble: The Untold Story of India’s Financial Sector Reforms

Author: Rajrishi Singhal

Publisher: Penguin Random House

Analysis: EFTA Can Help Boost India’s Global Relevance: Free press Journal 16th March 2024

 

Signing of these free trade agreements can be considered as work in progress towards making India a strong global economic power

Free trade agreements (FTAs) bring a lot of value to all countries concerned as they provide mutual benefits. That is the basis of drawing up any such agreement which is supposed to be a win-win situation for everyone. The World Trade Organization (WTO) was to be the largest effective such agreement where all countries agreed to the terms of engagement. But this did not work out as there can never be common grounds for over 150 countries which want to further their interests. The reducing importance of the WTO has been accompanied by more free trade agreements being signed by nations with common interests. FTAs are more manageable as there are fewer players involved. India’s recent trade agreement with four European countries in the European Free Trade Association can be looked at against this background.

Countries like Switzerland, Iceland, Norway and Liechtenstein do not really matter much if one looks at the total trade involved with India which is between $ 20-30 bn a year with wide fluctuations. Switzerland is probably the most important one in terms of trade relations. Hence, while it is possible to say that India will gain more from imports coming in as duties would be lowered over time, there may be limited advantage when it comes to our exports given the quantity involved and the size of these economies.

The agreement however has an interesting take on foreign investment which is being targeted at $ 100 bn over 15 years. This is a goal and not commitment, as investment decisions are taken by private parties and not governments. Therefore this would be more of an aspiration number rather than a certainty. Hence there can be an upside to the overall flow of FDI to the country though the amount may not be really large to begin with. Switzerland is the biggest investor among the four nations.

If the immediate gains are minimal and the medium term flows of investment would be based on interest of private investors, how should this agreement be interpreted? This agreement along with other discussions being held on other issues with other countries should be seen as the major effort being put by the government to internationalise the country. This is a medium-term goal which has seen several steps being taken.

To begin with there was the use of rupees to settle payments for oil with Russia. This may not have taken off fully given the complexities involved when it comes to international payments system. But the first step is essential to make a start. As the economy grows in strength and becomes a vital part of global supply chains, it may be expected that there will be more acceptance of the rupee for settlement of transactions. Once accepted by a set of countries for payment of exports, these countries could use the rupee to settle other payments amongst themselves just like how the dollar and euro are used.

Second, there have been agreements signed for use of UPI in foreign countries. Countries that have embraced different forms of Indian payment systems include France, UAE, Saudi Arabia, Bahrain, Singapore, Maldives, Bhutan, and Oman. This implies that Indians will now be able to make payments through UPI, etc. in these countries. At one level it may be argued that this is no different from using debit cards that are already accepted worldwide. But the fact that an indigenously designed effective payments system is being welcomed in other countries is a major victory for our financial system. In fact, this can be one of the more positive outcomes of the various Summits like the G-20 which bring such issues to the table.

Third, the RBI has also been working towards popularising the Central Bank Digital Currency (CBDC) within the country which over a period of time can be considered for settling international transactions too. The thought is still in its infancy but the future direction is clear.

Therefore, signing of these free trade agreements can be considered as work in progress towards making India a strong global economic power. India has vindicated the inherent strengths of the economy repeatedly post covid and remains the fastest growing economy presenting a plethora of opportunity for investors. The FDI rules have been relaxed to a large extent in almost all sectors and foreign investors can take a significant (49%) if not majority stake in most industries. Hence, these free trade agreements are more effective in furthering trade and investment as it involves a closed user groups with similar interests.

Specifically the EFTA would push up exports of textiles, pharmaceuticals, chemicals, and machinery. At the micro level the companies especially in the SME segment could leverage such opportunities. In terms of imports there would be a push to luxury items from Switzerland and Norway in particular which will have good demand as tariffs are lowered and rationalised. Indian will also have more access to processed foods and beverages. The quantum of trade may not be too significant to either propel exports or increase imports to the level of concern. But this will be a good signal to other countries to also explore options of having similar arrangements with India.

Hence the EFTA has to be viewed against a broader framework of making India globally more relevant. Trade and investment is a good starting point from where there can also be exploration of acceptance of the rupee for such transactions as economic relations. Post Russia-Ukraine war there is a growing debate on the use of alternative currencies as the dollar has become politically a risky currency for some countries, which includes China. Making the rupee international will help to widen the global currency basket which is dominated by the dollar, euro, pound and yen (which cover over 90% of trade transactions and forex reserves).

It may also be expected that further deepening of such trade relations can now be established with other members of the EU as well as other Asian nations so that there are enhanced global relations.

The making of a leader: Book Review in Financial Express 10th March 2024

 

A maverick academician shares useful insights from his personal and professional journey of nearly three decades & how he transformed the education sphere.

The book is as much about leadership as it is an autobiography of an academician who transformed IIM Kozhikode from an obscure regional school to an institution of national impact and global recognition. However, the book seems to lean more towards the latter as it shares insights from Debashis Chatterjee’s personal and professional journey of nearly three decades.

As such, Leadership Chronicles is not quite a book that talks about the qualities that make a successful leader, even though this aspect, too, has been covered in a chapter. Neither does it give a plethora of examples of various leaders who made it to the top with some astounding qualities or failed for lack of them. It is more of the author’s view on how he transformed the education sphere, be it the IIMs or IMI, and how everyday life experiences of common people provide insights on what it takes to be a leader.

Chatterjee starts by saying that to know what leadership is, or rather what all should be in a leader, one does not have to look into the corporate towers. His grandmother, for instance, was less educated, but she showed some unselfish traits that were revered by the people around her. This is a clear example of what a leader should have. It is a simple and straightforward trait that rarely occurs to us. In fact, the prudence we show at home when there are limited resources is a good clue to running companies where leaders should learn how to make do with the existing resources. This trait is rarely acknowledged in leadership classes. So, there is this eternal question of whether leaders are born or is it something learnt along the way.

The author is quite spot on when he puts forward the view that the real test of any leader is when the economy is down and not up. In fact, all the stories that we read of any leader are related to doing exceptionally when the going is good. But what when the chips are down? Here, the important thing is the capability of the person that comes out in times of adversity.

Often leaders buckle under pressure and get nasty to everyone around. This is a lesson that comes from the ordinary day life experiences of even the man on the street. Here, the character that stands out is how one successfully deals with adversity. He gives the example of Panasonic where at crunch time the choice was to sell the company or pay employees half salary and ask them to turn around the company. Founder Kanosuke Matsushita offered the company to the employees and there was a remarkable transformation seen as the workers took on the challenge to bring about this change. He described this act as holding an umbrella to the employees when it was raining.

The unique way of delivering a message is the reason why this book should be read. A field like education may look like a large edifice that one cannot alter. But the author’s desire to bring about change is what he believed in and was able to implement with success—so much so that these practices are now being adopted in other institutions. He brought about gender diversity consciously in IIM-K. This was the first institution that had 54% female representation in the MBA course. These days, this is an aspiration that is being pursued by several such institutions. Even at the micro level one can make a difference as seen when the author ensured that the entire campus was clean with emphasis on the state of washrooms. Now, this is something that is rarely looked at even in the best of educational institutions.

In the course of the book, Chatterjee points out three rather repulsive behaviour traits that emanate from what he calls the ‘ego centres’ of bosses that should be avoided. These are interesting, for sure, as one can often see it in the organisation one works in. The first is flattery, which gets into the heads of leaders and often they relate the success of the company to themselves as this is how the people around interpret their glory. And such people, the author writes, are often those with a traumatic childhood that leads to this level of insecurity. The other is what he calls ‘bitchiness’, which, he says, is gender neutral. Here too, one can see such traits where the boss pries into what you do in office that can mean getting distracted by Facebook! Now that sounds quite familiar. Last is ‘cowardice’, where they would not like to take bold decisions and hide behind power games, precedent, and prejudice.

Now a rather relevant example he brings in where almost all readers who are fond of cricket will agree is the case of Virat Kohli. Everyone agrees that his contribution to cricket is overwhelming and he has been able to blow away opposition teams with his aggression. But he rightly points out that he has promoted a brand of leadership that is too intense to be sustainable. Leadership, the author points out, is about ‘taming the galloping horse of talent with the reins of temperament.’ He continues this theme when he concludes that following one’s passion without discrimination may land one in the mud with a thud, as many leaders have discovered. The message is singularly hard hitting and once can relate to several cases in the corporate world.

Chatterjee provides some useful insights on leadership, even though the chosen route is quite different from other expositions. It requires a lot of introspection for leaders to actually ask themselves whether they are on the right track. This is of importance because the author says that a leader not only grows within a culture but also carries the culture within himself. He talks of five qualities—vision, reflection of self-study, teamwork, equanimity of mind and state of being self-fulfilled. It may rather be philosophical, but it has definitely worked for the author as he has shown the transformation brought about in the education sphere. For sure, this can be carried through all other lines of business.