Looking beyond Urjit Patel

Niranjan Rajadhyaksha feels that RBI’s independence from the government is worth preserving as, otherwise, it might return India to the days of directed credit, outright deficit monetisation, etc. That is his broader concern. I think his fear is legitimate.

Given that, he is more inclined to overlook RBI’s failings and turn a harsh spotlight on the government. He is right, given the line in the sand that he has drawn. I must say that if RBI headed in that direction under the new Governor, it would not be progress but regression.

But, should that come in the way of judging Urjit Patel’s tenure? Niranjan feels Urjit Patel stared down the government on more than one occasion. That may be right but a narrow consideration, in my view. I had commented on it when that happened.

He credits Urjit Patel with stabilising the inflation mandate and the new Monetary Policy Committee arrangement. R. Jagannathan of ‘Swarajya’ has different and more valid views on them. See below.

But,  there is yet another broader issue and that is one of consumer interest.  I have long opposed the formation of appellate tribunals to contest policy decisions of RBI. There is judicial redress. But, on consumer matters, perhaps, is there a need for a higher authority, above RBI, since RBI seems intent on protecting banks rather than consumer? Read Monika Halan here. I hope readers will remember the blog post I wrote on November 27 where I had linked a piece by Debashis Basu in ‘Business Standard’. Debashis Basu’s piece is well worth a read. Monika Halan links to another piece by him in her op.-ed cited above.

I have heard this from some friends who had worked for other regulators that RBI operates more as a ‘Don’ who protects his men (banks, here) rather than as a neutral regulator of the entities that come under its watch.

More narrowly, specifically with respect to Urjit Patel, R. Jagannathan minces no words in evaluating his tenure. He sheds no tears and he makes equally valid points too. Inflation forecasting failures and the consequent needlessly tight monetary policy – based on a doctrinaire adherence to their inflation targeting mandate – come under deservedly harsh scrutiny from him.

If we are keen on preserving institutions that have stood the time, as RBI undoubtedly has, we should also not hesitate to call out its mistakes and its shortcomings. No one is above or can be above criticism.  If the survival and the thriving of an institution is in national interest, then we will be failing the institution if we don’t hold it to a higher standard.

In my previous blog post on this topic, I had mentioned clearly what RBI has to do on its part. As for the government, in this blog post, I had mentioned what the Government should do, with respect to RBI.

On inflation targeting, if the new Governor revisits the 4% mid-point and redefines the range around it making it asymmetric, I will support it. See here for my column on whether inflation is really a matter for monetary policy and, see here for my views on the inflation targeting framework in India.

Lastly, I do not have a view on Mr. Shaktikanta Das. I do not wish to pre-judge him. Let us wait. What is the rush?

Natural enemies and man-made enemies

It is my piece in MINT on Tuesday. I enjoyed writing this but it was also one of the most difficult pieces to write. I spent several hours on it. But, the end result is gratifying.

A few weeks ago, I saw a news story that the eco-sensitive zone around the Bannerghatta National Park would be reduced by 100 sq km. This news was covered in a small way in the national newspapers. Since then, a campaign has been mounted to prevent this proposed reduction from happening. This story reminded me of an interaction with Meghna Krishnadas of Yale University early in November.

In the paper Weaker Plant-enemy Interactions Decrease Tree Seedling Diversity With Edge-effects In A Fragmented Tropical Forest, written with Robert Bagchi, Sachin Sridhara and Liza S. Comita (Nature Communications, Vol. (9), article number: 4523 (2018)), she tested the hypothesis that natural enemies—insect herbivores and fungal pathogens—help shape plant diversity, especially in the context of forest fragmentation. These enemy effects or their absence are more pronounced in forest edges than in the interiors.

In plain English, if some plants are not regulated by natural enemies, they will tend to grow unregulated and uninhibited. That would reduce plant diversity. So, applying pesticides and destroying insect herbivores and fungal pathogens destroy plant diversity too. In other words, the fragile balance between humans and nature has to be nurtured carefully. If we don’t, we will not be able to sustain biodiversity, especially in fragmented forests. That is why the decision to reduce the eco-sensitive zone around the Bannerghatta National Park deserves the scrutiny it is getting.

Many people feel that there is a trade-off between short-term economic growth imperatives and the need to preserve the ecology and environment. Western countries could burn hydrocarbons without a worry when they were developing countries. Developing countries have to be mindful of carbon emission and their commitments to international climate accords.

However, these commitments are not merely a case of being good global citizens. They are necessary even to maintain the health of local citizens. Without a healthy population, there is no sustained economic growth. So, sometimes, these trade-offs are more imagined than real.

The fragile balance between nature and humans was also the subject matter of the recently released Rajinikanth-starrer 2.0. After having feted technology in his earlier films, director Shankar reminds himself and his audience that technology and seeming technological progress are, more often than not, only mixed blessings. The message to be sensitive to the need for the winged population to survive is neither a luxury nor a concern of developed societies. The movie reminds the audience that by preying on insects and worms, birds maintain plant health and obviate the need for the application of pesticides.

Juxtaposing the message of the paper with the message of the movie gives us a beautiful insight. Birds are natural enemies for insects and worms. Without birds, we will have too much of them. Without them, we will have too little plant diversity. Nature has arranged itself well.

We do not understand it and frown upon any effort required to preserve its fragile balance as a hindrance. We clothe our laziness and our short-termism in intellectual terms, arguing that economic growth and poverty alleviation require relegating environmental considerations to the background. We do so at our own peril.

We cast our interference with and trampling upon natural arrangements as the triumph of human intellect. I view them with trepidation. For example, Financial Times featured an article recently on embryo selection (Profiling For IQ Opens New Uber-parenting Possibilities, 22 November 2018). The article briefly mentions personal and social costs of such embryo selection without going into details. It is fraught with immense danger.

It will be polarising at a social level. It will add yet another dimension of inequality to the ones we know. At a personal level, it will add immense stress as competition will be intense among the so-called “super kids” of which there will be plenty. There is a reason for nature’s bell curve distribution of many things. Consequences of extremely thick fat tails are unknown unknowns.

Indian cricketer Cheteshwar Pujara had said, “When you start playing shots [during a testing spell], that means your game is not capable enough to play the Test format. You are trying to survive rather than understand the situation and play accordingly.” He is right. When someone wishes to rush through a situation that requires deliberation, they are fearful and doubtful of their staying power. That is how humans are reacting to the complexities of the world, some of which may be self-inflicted. When Seth Klarman told the audience at Harvard Business School in October that one of society’s most vexing problems was its relentless short-term orientation, he was echoing Pujara. Short-termism betrays lack of confidence in long-term staying power.

Finally, the conclusion that natural enemies are useful for biodiversity is readily transferable to societies. Natural enemies are useful for diversity of opinions and ideas. So, the more we shut down opposite views (enemies), the less intellectually vibrant the society becomes. Just as biodiversity is beneficial, diversity of views is also beneficial. For that, one needs natural enemies. Therefore, common sense and self-interest dictate that we don’t smother natural enemies.

V. Anantha Nageswaran is the dean of IFMR Graduate School of Business (KREA University). These are his personal views.

Comment are welcome at views@livemint.com

RBI Governor resigns

The resignation of Dr. Urjit Patel was a surprise. The public had assumed that the risk of his mid-term resignation had passed.

It is an embarrassment to the Government that the RBI Governor resigned midway (2/3 of the way) through his term, even though officially it is for personal reasons.

Human nature – and the nature of the media – is to connect things chronologically and then call it cause and effect. A happened before B and therefore A must have caused B. That is how we (humans) make decisions.

In that sense, there was a public spat; there was a rumour of resignation linked to the public spat and then he resigned. So, the public spat was the cause of the resignation. This may or may not be true. There may be genuine personal reasons but this is how it will be perceived.

Of course, the spat became public because of DG Viral’s speech and that the speech was encouraged by the Governor, as per DG Viral’s footnote. Before that, the disagreements between GoI and RBI were rumoured or speculated upon but not officially confirmed by the Government.

DG Viral’s speech confirmed the disagreement. The government did not join the argument in public except for tweets by some in the government or close to the government.

But, the government did not deny the differences. The government was right in some of the issues it had with the central bank. The RBI Balance sheet reserves are excessive but Prompt Corrective Action and the tightened norms for ecognition of bad loans should continue. Demands to dilute them should be dropped. Structural reforms to the banking system are necessary. For public consumption, the government and RBI coud have played the good cop-bad cop routine with communication lines open on either side.

Further, the government cannot report 7.0% to 8.0% GDP growth and yet demand substantial easing of monetary policy. Either the growth numbers are wrong or that the demand is unjustified. I had mentioned this on a few occasions and more recently in last week’s column.

All that being said, as I had written in my blog, in a public dispute between politicians and so-called ‘disinterested’ technocrats, sympathies will be with the technocrats or they will be orchestrated in favour of technocrats. They will be seen as defenceless, vulnerable and hence the underdog.

Given these circumstances, the resignation of the Governor of the RBI will be viewed as the triumph of the bully, whether justified or not, whether reasonable or not and whether true or not.

The earlier Governor did not seek a second term after (not necessarily because of that) a spate of relentless criticism from leaders identified with the ruling party. Coming on top of that, this resignation, rightly or wrongly, will be viewed as the inability of the present government to handle so-called independent institutions with maturity.

Going forward, the Government has to handle the situation carefully; it should not make any defensive statements but acknowledge that the resignation of the governor of the central bank with nine months to go in term 1 is not in the best interests of macroeconomic stability of the country.

The government has to state the following:

We have worked hard to restore macroeconomic stability to the country in the last four years after the turmoil and economic mismanagement of the previous five years. We attach paramount importance to its preservation and continuity. It is critical for achieving sustained high economic growth and employment generation. We will not do anything to destroy macroeconomic stability.

We understand that the credibility and competence of the central bank are critical to the maintenance of macroeconomic and currency stability. We support unequivocally and stand for maintaining the integrity, competence and credibility of the central bank.

We will soon appoint a Governor who will enhance the well-deserved reputation of the Reserve Bank of India for competence, integrity and policy independence.

Then, it needs to make the next appointment that reinforces and vindicates the above sentiments.

John Authers

I used to read Jason Zweig regularly. I have slipped now. Have not kept up with him lately. But, I do read John Authers. He is probably the most thoughtful market commentator writing currently. He was with Financial Times and he has moved to Bloomberg.

Without exception, his columns make you think. In more recent times, I will single out two pieces:

(1) ‘Don’t discount China’s role in the stock sell-off’. He is arguing that China’s economic weakness could be one underlying factor. Perhaps, he might have contradicted himself in the following piece where he writes about investors looking for ‘excuses’. He too might be looking for ‘excuses’ when he attributes a market move of a single day to a larger issue. There is a difference between catalysts and reasons. The reason for market crash: they are too expensive. They just cannot levitate at these levels. Expectations have gotten far ahead of reality. Period. No other reason needed. Everything else is a catalyst for this cause to create the effects.

In any case, I was more impressed with his analysis of Brexit.  He is absolutely right that ‘remainers’ cannot put the genie back into the bottle. He does not say it in so many words but things can never go back to being the same, even if a second referendum were held and it results in ‘Remain’ vote winning this time:

A second referendum seems more likely than it did. A lot has happened in the last two years, and much has been learnt. It seems reasonable to put the question again. But there is a real risk that this would result in a deeper nightmare scenario.

A second referendum might be as close as the first. A narrow victory for “Remain” would leave the country in the EU and almost half of the country with a lasting sense of injustice. A repeat of the first result would leave the country no further forward. Uncertainty would rise during the process. If the polls suggested that the country had now overwhelmingly turned in favor of staying in the EU, this calculation would be different, but there is no such evidence. [Link]

This reminds me of something that I tend to forget: sometimes, we cannot reverse certain decisions, even if we technically reverse them. Once the objective conditions have changed for good, it is impossible to restore them. So, some policy decisions cannot be reversed, even if we are open-minded about evidence and are prepared to swallow pride and reverse them. That puts the onus on getting it right the first time and also teaches us to be humble about unintended consequences and uncertainty in general.

While on the topic of Brexit, you should read Mervyn King’s op.-ed. too on the topic. He asks the UK Parliament not to endorse the deal (or, no-deal) that the British PM has arrived at. He says it is a ‘heads I lose; tails you win’ deal that UK has given the EU. It is a bit hard to sympathise with the plight of the Brits. I am reading ‘The Indian summer: the secret history of the end of an empire’. What one learns makes it hard to feel sympathetic for their travails now.

Apart from that, Mervyn King states publicly what we all know about the European Economic and Monetary Union:

the political nature of the EU has changed since monetary union. The EU failed to recognize that the euro would demand fiscal and political integration if it was to succeed, and that countries outside the euro area would require a different kind of EU membership. It was inevitable, therefore, that, sooner or later, Britain would decide to withdraw from a political project in which it had little interest apart from the shared desire for free trade. [Link]

(2) The second recent John Authers’ piece that I liked is the one titled, ‘Behind the Market Turmoil Lies Nothing But Excuses’. These conclusions are valid:

My best guess is that people were in need of an excuse to buy bonds Monday, catching others in a “short squeeze,” as many had been betting on higher bond yields. Plenty of others wanted to escape the stock market with gains while they could, and that carried on until prices had fallen enough to trigger the algorithms to buy stocks.

After years of central bank quantitative easing, there are lots of positions in markets that make little sense. Their holders have been awaiting for excuses to unload them. Keep tuned to see whether there really are convincing reasons to buy bonds or stocks. This week has been a litany of excuses. [Link]

Searching for fundamental reasons for market action is futile, especially for a market that has been rising for so long on the back of enormous leverage-based stock buyback aided by extraordinary global monetary accommodation. It simply had to end.

A sloppy hatchet job

The FT View, ‘Modinomics’ is a hatchet job and a sloppily done job, at that.

(1) The GDP data revision may appear to be tactical rather than statistical; but the lower GDP growth pre-2008 are more than offset by the growth data post-2009 (and pre-2014) that mask the mess that the Congress-led government had left India with. See these detailed studies on GDP growth data between 2010 and 2014 and this op.-ed.

(2) This government has re-established macro-economic stability. Fiscal deficit (even with the possible minor slippage this year), current account deficit, inflation rate and the currency are far more stable than before.

(3) The Bullet train won’t cost Indians much, if at all. That is the most egregious claim in the article that removes any lingering doubt that it might be an objective one. The bullet train comes with a 50-year very soft loan from the Japanese government that is only earmarked for this project.

(4) Demonetisation has helped black money removal if only the Editorial Board ad bothered to read up the latest release from the Central Board of Direct Taxes on the tax collections, on the tax buoyancy rate and on the number of Indians (with an annual income of INR10.0 million or more) paying taxes. These monies would fund development expenditure that would benefit the poor. The time horizon for evaluating policy decisions such as these is not two years.

(5) On the employment front, this government has done what governments
could do. It came up with a special package for the apparel and leather sectors; it extended some of these concessions for all other sectors; it agreed to bear the payroll taxes for three years for employees with salary income below a threshold. It incentivised hiring, thus. It liberalised apprenticeship schemes.

(6) It has persisted with efforts to ensure access to working capital for small businesses for making it mandatory for corporations to use the Trade Receivables Exchange that would enable suppliers to receive their dues well before the due date.

(7) It has cut corporate income taxes for businesses with revenues below Rupees 2500 million down to 25%.

(8) The Financial Inclusion Schme – PMJDY – has been a success in that the accounts are used by the savers to undertake financial transactions (See this paper, ‘Bank Accounts for the Unbanked: Evidence from a Big Bang Experiment’ –

(9) With respect to the clashes with the Reserve Bank of India, a public spat is ungainly and does no credit to either of them. But, some (not all) of the issues that the government raised were legitimate – especially the ones pertaining to the excess capital that the central bank is holding.  It is excessive even by the standards of  other developing countries and when compared to the benchmark laid down by a Committee of the Reserve Bank of India in 2004.

(10) The demand that a central bank provides liquidity at a time when the economy suffers from a twin balance sheet problem and when the non-banking financing sector is in distress is not an unreasonable demand.

(11) The central bank has got its inflation forecast spectacularly wrong and, as a result, India’s real rate of interest has been rather high by historical standards.

(12) Dr. Y.V. Reddy, the distinguished former Governor of the Reserve Bank of India, had demanded, in a speech delivered in Feb. 2018, that the central bank release a white paper on the non-performing assets of the banking sector and the central bank’s own regulatory role in that. The central bank has not done so yet. The fraud at the Punjab National Bank and the distress (see point 13 – below) in IL&FS and later in the rest of the non-banking sector do not reflect well on the central bank’s regulatory performance.

(13) The distress in the balance sheet of the non-banking financial corporation IL&FS is with respect to the loans it had made before 2014 and not after. It is disingenuous to link this with demonetisation. The problems stem from the regulatory architecture of the sector. Pl. see this well-written piece.

Now, the readers might know why I said, at the beginning, that it was a sloppy hatchet job.

Klarman vs. Friedman

I thought I blogged on it but I had not. On November 11, I had read a good piece by Luigi Zingales in FT on maximising shareholder welfare and not shareholder value. That did appear somewhat incomplete to me. What he was trying to say was that maximising shareholder welfare over the long-run means attaching less importance to shareholder value in the short-run.

I forwarded it to the students at the IFMR B-School with the following message:

As you have access to FT and WSJ, you should read more such articles. 

In the class, you can also discuss whether what Boeing did – withholding information – is correct, even if it maximised profit and shareholder value in the short-run.

Sometimes, one does not have to change one’s goals. It can be still profit maximisation and shareholder value but having a long-enough horizon will make all the difference.

I was happy to find that Seth Klarman echoed my thoughts in his address at the Harvard Business School at the inauguration of the Klarman Hall on October 1. HBS Alumni Association carried that speech two months later in December:

Consider corporate time horizons. It’s a choice to attempt to maximize corporate results over the very short run and a different and sometimes harder decision to take a longer-term view. I’m convinced that one of society’s most vexing problems is the relentlessly short-term orientation that manifests itself in investing, in business decision-making, and in our politics. Educational and philanthropic endowments, for example, with institutional time horizons that necessarily span centuries, invest their funds with monthly performance comparisons.

This is the same as what I had told my students in my brief email to them. In fact, the running theme of Seth Klarman’s speech was about short-term vs. long-term horizons. It is short and well worth a read.

In fact, in his speech, Seth Klarman questions Milton Friedman’s credo that the social responsibility of a business was to maximise profits. Recently, I read somewhere that Milton Friedman had caveated it. But, I do not think that the caveat was adequate. This was his caveat:

I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social responsibil ity of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud.” [Link]

This is too narrow. It does not include ethics. Not to be deceptive is not the same as doing the right thing. This is almost legalese. To engage in open and free competition is not as forceful as arguing that businesses should not actively smother or kill competition by buying them out and then killing the business. Milton Friedman also did not anticipate how humans would interpret him to their convenience.

He did not have a long-enough horizon himself to think of how humans, with short-term horizons, would interpret him!

China watchers now recommend watching and other links

Visited John Pomfret twitter handle after a long time. Good harvest. Some of the harvest shared here:

China watchers recommend vigilance now. WaPo story; summary of the report here and the full original report is here.

Cornell halts China university ties over curbs on academic freedom [Link]. An important observation in the story:

Chinese regulators closed down more than a fifth of partnerships between local and foreign universities this year.

The tweet says it all:

China is loosening environmental regulations facing a weaker economy. The new policy allows a much higher PM2.5 level in northern China than announced a year ago, and heavy-polluting factories can operate again in the winter. [Link]

China shutters one of its truly independent think-tanks [Link]