Wednesday, February 14, 2018

EPW reviews my book on banking crises

EPW carries a review of my latest book, Towards a safer world of banking: bank regulation after the sub-prime crisis, by Sabri Oncu, a well-known scholar and financial economist.

Thursday, February 08, 2018

Stalingrad anniversary

February 2 marked the 75th anniversary of the fall of Stalingrad. This was a big event in Russia, of course, with President Putin flying over to Volgograd (as the city is now named) to commemorate the event. But we heard nothing of this epochal event in India, partly, I guess, on account of the media's preoccupation with trivia.

Stalingrad was, perhaps, the decisive turning point of World War II. It showed that the Wehrmacht, the Germany army, was not invincible and that Hitler's opening an Eastern front could pave the way for his defeat. Following Stalingrad, the Wehrmacht lost the initiative and was mostly on the defensive on the Soviet front.

In Stalingrad, the elite Sixth Army of the Wehrmacht came to be decimated. Of around 300,000 soldiers in the city, 100,000 were captured and only around 9,000 made it back after the end of the war, the majority perishing as prisoners of war.

Much has been written about Hitler's conduct of operations in Stalingrad, whether he was right to take the city in the first place, whether the Sixth Army should have hung on after it was encircled by Soviet troops and so on.

Well, Hitler's plan was to seize the oil riches of the Caucus south of Stalingrad. The city was a key junction and supply point and hence needed to be held in order to safeguard the armies that had ventured south.

Hitler's strategy was right but it came unstuck because he had underestimated the strength of the Soviet Union. Hitler thought that once his armies tore into the Soviet Union, the government and its army would simply collapse. This did not happen. Stalin was able to throw endless numbers of troops at the Germans and Soviet industrial capacity was far greater than German intelligence had supposed.
These fundamentals could not be altered and were bound to assert themselves no matter what particular tactics Hitler followed in respect of operations in Stalingrad. The whole controversy about Hitler's ignoring the advice of his professional generals and allowing the Sixth Army to perish is  secondary to the fundamentals.

Russia Today has an interesting article on the subject.

Robert Parry, peerless journalist

Robert Parry, an outstanding American reporter, who fearlessly exposed the wrongdoings of those in authority, passed away recently. Our media is quite insular, so his passing went largely unreported in the Indian media.

Parry worked for the Associated Press and Newsweek among others. He was the man who uncovered the Iran-Contra affair in Reagan's time. This involved Israel selling arms to Iran in exchange for the release of hostages. Some of the proceeds of the sales would be diverted to the rebels fighting the Nicaraguan government. The US could not sell arms directly to arm as there was an arms embargo on Iran at the time.

Parry also exposed how Nixon had struck a deal with the Vietnamese to prolong the fighting so that Humphrey would not win the Presidential elections against him and how the Reagan administration colluded with drag traffickers (of all people). In recent times, he tenaciously questioned the Russiagate affair seeking to implicate Russia in the last US Presidential polls that saw Trump being elected as President.

Parry found himself marginalised in the mainstream US media, which, as everybody knows, works closely with the US establishment and the intelligence agencies to promote the establishment agenda. He had to start his own website in order to carry on with his work.

Here is one tribute to him and here is another.

One journalist paid him this tribute:
I would suggest that it is [an] underlying devotion to the plight of mankind which allowed Robert Parry to become Robert Parry. It wasn’t his connections, his political opinions, his ideas, or even his raw talent; it was the fact that he cared so much. The fact that he couldn’t dissociate himself from the horrors of this world, the evil things humans are doing to one another and the omnicidal trajectory we appear to be headed along. He saw it all, he felt it all, and he let it move him.
This is not typically what you hear about a journalist- from fellow journalists. 

Budget for 2018-19

The budget represents a setback to the fiscal consolidation process, something in which the NDA government has invested a lot. It isn't the revenue side that is a problem although non-tax revenue (dividends from PSUs, transfer of surplus from RBI) has disappointed. The main problem is on the revenue side. RE expenditure is 2.6% of GDP for 2017-18, higher than the projected 1.9%. Government establishment expenditure (such as pensions) is higher than expected. The compensation to states for GST loss is also imposing a large cost and this is to continue for a five year period.

At the end of the day, we are looking at a combination of  around 7% growth and a fiscal deficit of 3.5% of GDP for a three year period starting 2017-18. Not the happiest of situations to be in for the economy especially given that the world economy is buoyant. The situation could get worse if global economic growth is adversely impacted by a fall in asset markets.

So, what's the way out? Well, the budget papers provide a clue. The tax/GDP ratio of 11.6% in 2017-18 after having stagnated at around 10% of GDP since 2008. It is projected to rise to 12% and above in the coming years. Greater tax revenues provide a hope for a a turnaround in the economy- we can spend more while containing the deficit. And increased tax revenues will come not so much from growth as from tax buoyancy- better compliance, more people coming into the direct and indirect tax net, thanks to demonetisation and GST.

If this is how things play out, Modi will have been proved right in respect of both demonetisation and GST- the long-term benefits of these will have outweighed the short-term costs.

More in my article in the Hindu, Goodbye to fiscal consolidation.

Tuesday, December 19, 2017

Gujarat polls: BJP win quite remarkable

Yes, the contest has been closer than in 2012. Nevertheless, the BJP's win in Gujarat is remarkable. It comes after 22 years of BJP rule and it happened inspite of the BJP's willingness to steer clear of  assured vote-catchers such as farm loan waiver and quotas for particular groups, both of which the Congress resorted to.

There were reasons for the electorate in Gujarat to be unhappy- farmers, MSMEs, youth and others are unhappy with economic conditions. Nevertheless, they did not think it necessary to disturb the status quo. Gujarat has seen economic progress and the absence of caste and communal strife for over 15 years now, and voters seem to have judged that it's not wise to disturb this state of affairs.

More in my BS column: Gujarat and BJP: why discontent did not spell defeat

Wednesday, November 22, 2017

Moody's upgrade of India

Most analysts think that Moody's upgrade is merited by the raft of reforms we have seen under the Modi government. I disagree. It's certainly true that the reforms have improved India's economic fundamentals. They have brightened the prospects of India growing at over 7.5%. But, I would argue that, even without the reforms, India's ability to service its debt has not been in doubt. In 2007- 17, which is a period consequent to the global crisis, we have seen a decline in India's debt to GDP ratio in the face of an adverse external environment. I would, therefore, argue, that this record merited an upgrade even without the reforms we have had recently.

More in my BS article, Rating upgrade was long overdue.

Bank recapitalisation is the right fiscal stimulus at the moment

If there is one economic measure which will make a difference to India's growth prospects in the near future, it is the massive bank recapitalisation package. Demonetisation will yield results but only over a long period. GST is hugely positive but only over the medium term. With bank recapitalisation, we can almost see an "announcement effect"- an impact almost immediately after announcement. One obvious impact is the rise in the prices of public sector bank shares. But also, as the package gets finalised, we can see a little more boldness in lending on their part.

The package is indeed massive and it required guts for the Modi government to announce something of this magnitude. My only regret is that it didn't happen much earlier.

More in my article in the Hindu, A bold step in bank reform.

Interview with the Hindu on bank recapitalisation package

I return after a long time... various personal commitments have kept me away from my blog. Hope to be a little more regular hereafter.

The Hindu carried an interview with me on the bank recapitalisation package last Sunday.

Wednesday, September 20, 2017

Raghuram Rajan back in the news

Raghuram Rajan was in India recently and he hold forth on a wide range of subjects in numerous interviews. Many interviewers tried hard to to get him to say that his differences with the government on demonetisation caused his exit from RBI. Rajan didn't quite oblige.

He was also asked if he would have resigned if demonetisation had been pushed in his time as Governor. He said he could have answered the question only if he had been confronted with the proposition when he was Governor. All he could say now was that if a civil servant did not want to go along with any government measure, the only option was resignation.

I thought his views on the banking sector deserved more coverage than those on demonetisation- he didn't really have much to add to the latter.

My column on this subject in BS is reproduced below:

Rajan in the limelight again
T T Ram Mohan
Former Reserve Bank of India (RBI) governor Raghuram Rajan came, he saw, he conquered the media. For a year following his exit as RBI governor, Dr Rajan had chosen to maintain silence on the Indian economy. During his recent visit to India, it was hard to open a newspaper or switch on a channel without seeing an interview with him.

The interviews covered pretty much the same ground, with the focus always on demonetisation. Dr Rajan said many things that would have gladdened the hearts of those critical of the initiative. Yes, he had expressed his reservations when the proposal was put to him. And, yes, he thought the short-term costs were steep  he mentioned estimates in the range of 1-2 per cent of the gross domestic product (GDP). And, yes again, he wasn’t sure the long-term benefits justified the costs. It’s fair to say that Dr Rajan hasn’t added anything to the debate on the subject. We do not have a handle yet on either the costs or the benefits of demonetisation.

The focus on demonetisation was a bit unfortunate as it overshadowed some pretty strong remarks Dr Rajan made about the banking system. Dr Rajan expressed reservations about mergers of public sector banks (PSBs). He warned that it would be unwise to attempt mergers at a time when PSBs were weak and wrestling with the problem of high levels of non-performing assets. One hopes the finance ministry is listening.

Dr Rajan was equally forthright on the need to do what it takes to recapitalise PSBs. He went so far as to say that the government should provide the necessary capital to PSBs even if it meant cutting allocations on other heads. The government and the top brass at the RBI have been telling us that some PSBs are so hopelessly deficient in managerial capabilities that putting more capital into them is money down the drain. Rajan clearly doesn’t think so.

We have thus far got banks to clean up their balance sheets without providing them the necessary capital. By many estimates, PSBs would require another ~1 lakh crore in order to meet the regulatory capital requirement. The Budget for this year has provided for just ~20,000 crore. Dr Rajan believes this is a sure recipe for holding up growth in credit and private investment.

Dr Rajan’s views on reform of governance at PSBs are rather more debatable. He wants the Banks Board Bureau (BBB) to have greater autonomy from the government. He would like the Department of Financial Services (DFS), whose job is to monitor PSBs, to be closed down. He wants PSBs to be monitored entirely by independent boards, presumably appointed by a truly independent BBB.

These views have wide currency today. However, the notion that PSBs should be freed from the supposed tyranny of the DFS is conceptually flawed. It overlooks a crucial fact about the governance model that obtains in India: Ownership of enterprises, whether in the public sector or the private sector, is not widely dispersed, as it is in the Anglo-Saxon model. We have instead a dominant owner in either the government or in industrial houses.

Where there is a dominant owner, the role of the board is rather more limited than in cases where ownership is widely dispersed. It is natural for the dominant owner to call the shots. The government cannot be expected to adopt a hands-off policy towards PSBs any more than Tata, Birla or Ambani can in their enterprises.

Moreover, it is possible to overstate the effectiveness of “independent” boards. Boards the world over are notoriously ineffective, which is why corporate governance is still work in progress more than two decades after the movement began. Those familiar with the working of PSBs would know that it is the government director and the RBI director who often make the most meaningful interventions.

Leaving matters at PSBs entirely to independent directors could, therefore, create a dangerous governance vacuum. There remains a case for the DFS to play a monitoring role. What is undesirable is that the DFS should issue directives to the CEOs of PSBs. Instead, the DFS should communicate its views through its nominee directors on boards, thereby strengthening the effectiveness of boards.

What Dr Rajan did not say is also significant. Dr Rajan is no foe of the private sector. Yet he made no mention of privatising any of the PSBs. Dr Rajan’s silence on privatisation at a time when “strategic sale” is the buzzword should make the finance ministry sit up and take note.

Thursday, August 10, 2017

Foreign trained economists

Newly appointed chief of Niti Aayog Rajiv Kumar's article about foreign-trained economists exiting their plum posts in the Indian government one by one has sparked a controversy. Kumar wrote:
A key transformation taking place on the policy front in the current central government led by Narendra Modi, is that the colour of foreign influence, especially Anglo-American, on the Indian policy making establishment that came in the last few decades, is fading away. Raghuram Rajan has already left. Now, Arvind Panagariya has also announced his resignation from his post ahead of his term being completed. If Lutyen’s Delhi rumours are to be believed, more such resignations can come. In their place, we may see experts being posted who understand India’s ground realities in a much better manner, and who can commit to stay and work till their term ends.
I guess the point is not just about whether those parachuted into top positions from abroad understand the Indian ground reality well enough. There's also the question of whether they can work with the bureaucracy and Indian businesses to produce acceptable solutions to problems. Another issue is whether they have the commitment to complete their tenure. Panagariya has quite after two years because he doesn't want to lose his tenure at  Columbia. Did he not think of this when he accepted the assignment?

The problem is not confined to economists. Former IIM Bangalore director Sushil Vachani quit two years into his job when he found the ministry was not willing to relax the retirement age of 65 for him. Those hiring from abroad should make one thing clear to prospective hires: if you don't have it in you to complete your tenure, please do not accept the position.

The best part of the controversy is that it has spawned some excellent versification:

Bibek Debroy: “The foreign influence wanes, So read the weather vanes. Filthy lucre of a foreign land/ Has sullied many a hand/ And fogged the brains,” 

Sadanand Dhume: “All this is very well/ But it’s hard to sell/ as a native school/ as a gurukul/ How some manage, pray tell.”

Author Ravi Mantha, “Rushed back from distant shores / to join the rushing tide./ Stepped into manure for an uncertain tenure./ But luckily kept our foreign sinecure.”

Wednesday, July 05, 2017

Business Standard reviews my book on bank regulation

BS carries a review today of my book, Towards a safer world of banking: bank regulation after the sub-prime crisis

Options on the future of banking
Book review of 'Towards a Safer World of Banking'
Udit Misra July 04, 2017 Last Updated at 22:41 IST
Towards a Safer World of Banking
Bank Regulations after the Subprime Crisis
T T Ram Mohan
Business Expert Press
149 pages; Rs 2,396

Towards a Safer World of Banking by T T Ram Mohan, who is a professor of finance and economics at the Indian Institute of Management, Ahmedabad, is a nifty little book aimed at students of business management and bank executives. It makes sense to take a relook at the world of banking since it is almost a decade since some of the biggest banks in the financial world such as the Bank of America, the Royal Bank of Scotland, the Citigroup as well investments banks such as Bear Stearns and Lehman Brothers either failed or nearly did. Since then, governments and taxpayers have been bailing out the troubled banks in the hope that doing so would be, in the long run, cheaper than the cost of letting such entities sink. But this process has been arduous, with massive and unsavoury political and social repercussions. Not surprisingly, there is considerable interest in ensuring that
such a contagion does not recur. This book, then, is an appropriate read for anyone wanting to understand whether we have done enough to ensure that.

The book is divided into five chapters. In the first two, the author discusses the financial and banking crisis that started in 2007 and the causes for the subprime crisis. Now, there is no dearth of reasons advanced for the meltdown. In fact, depending on who you might have read and what you do for a living, you could choose from the long list of causes and not be entirely wrong. This is known as the “MurderontheOrientExpress” theory of the crisis. But therein lies a problem. Unless one can zero in on the exact problem you cannot even begin to provide a lasting policy solution. So the author helps the reader tussle with questions such as: Does an economic contraction cause a banking crisis or the other way round?

Similarly, the author analyses each of the 12 broad reasons given for the subprime crisis, such as the existence of  a housing bubble in the US and elsewhere, loose monetary policies, greedy consumers, excessive financialisation or the global macroeconomic imbalances, to name a few. But many of these factors existed in the past and in other places without causing a global crisis. For instance, there have been periods of low and falling interest rates or instances of housing bubbles in several other countries. In the end, though, the author settles for “regulatory failure” as the principal culprit. According to him, there were “serious failures in relation to banks” such as lowering of loan writing standards, a focus on trading income by holding securitised assets and low amount of equity capital in relation to assets and so on. The author takes into account the analysis by Atif Mian and Amir Sufi in their book, A House of Debt, which gives primacy to the excessive buildup of
private debt. But Professor Mohan Ram argues that this, too, only shows that the ambit of regulation should have been much broader.

The third chapter focusses on regulatory reforms since the crisis. Much has been done, from increased capital  requirements and far more stringent norms for liquidity to tighter norms for securitisation and macroprudential regulations. This has yielded results. As of 2015, in the US, for instance, the top five banks had a common equity Tier 1 ratio that was higher than that specified by Basel III and all but one bank surpassed higher  requirements imposed by the US Federal Reserve. There have been similar improvements in the Europe as well. And yet, chapter four argues, not enough has been done to deal with the key problem that still exists: Banks being too big to fail. There is growing concentration in the banking sector, which, in turn, makes the whole sector more vulnerable.

Chapter five is about solutions. The author is among those who thinks that radical and outofthebox
ideas are needed to disasterproof the banking system. Some of the ideas discussed include the “sharedresponsibility mortgages” proposed by Messrs Mian and Sufi. In such a mortgage, the lender offers downside protection to the borrower while the borrower agrees to give 5 per cent capital gain to the lender on the upside. Also discussed is the chairman of the Institute for New Economic Thinking Adair Turner’s even more radical suggestion to limit the amount of debt creation itself.

But perhaps the most unusual solution is the one proposed by the author: India’s experience with public sector banks (PSBs). These last 10 pages of the book are likely to elicit far more interest among the Indian readers who  are at present witnessing an embarrassing bloodletting in India’s PSBs. The author argues that the Indian experience, where PSBs account for 70 per cent of the banking system, as well as the Chinese setup, where similar entities account for 90 per cent of the system, are responsible for these countries being the world’s fastest growing economies.

But it is all too clear that Indian PSBs are holding back growth instead of delivering it. The author offers a spirited defence for the PSB functioning — but stops at 2013-14. That is exactly the point at which the problems starting showing up. The author’s argument that PSBs’ troubles in the past two or three years are the result of structural failings of a developing country (such as the lack of a well developed bond market) is not entirely convincing. The truth is that the deep rot in Indian PSBs highlights the risks associated with government ownership of banks.