The silent loser

UK agrees to ‘print’ more money. The title of this blog refers to this nation.

HSBC Flash PMI for China in June underscores the implausibility of China external trade data for May that showed exports jumping sharply in the month to the US and Europe. In the meantime, my friends in ‘Forensic Asia’ continue to pick rather big holes in Chinese corporate balance-sheets.

Three ‘poignant’ or ‘interesting’ charts on Spain in ‘Washington Post’. Courtesy, link from Reuters.

The latest US FOMC decision conveys the impression that the Federal Reserve Open Market Committee is both divided and confused.

Of course, stock markets practice ‘Hear, speak and see no evil’ rather well. Or, if we believe that they are still genuine stock markets in the conventiona lsense.

Half way through ‘Margin Call’ on the flight from Singapore to London. Not bad. One of the characters has a striking physical resemblance to Jamie Dimon 🙂 Kevin Spacey looks slightly heavy but is classy, as usual.

‘Reform-minded’ UPA

On the 17th, even as I was posting my blog on India, I had failed to take into account the crassly populist and counter-productive increase in the Minimum Support Prices (MSP) for agricultural crops by the UPA Government few days before that. The 170 Rupees per quintal (100 kgs.) increase in the MSP for paddy is a strong signal to farmers to continue to produce the water-guzzling paddy while the granaries are already overflowing with sacks of paddy, providing a ready and eternal supply of fodder for rodents. Business Standard has a good edit on the hike in MSP.

In my weekly column in MINT today, I had lauded the RBI for holding rates on Monday. It was the right thing to do under the circumstances. A rate cut would have been an attempted bailout of the Indian government with as much chance of it succeeding as bailouts in Europe are likely to. I had failed to list the hike in MSP as one of the reasons for RBI restraint. It surely must have played a role in their decision.

The clamour for a rate cut and the disappointment over the failure of the central bank to deliver it are as disappointing as they are not well thought through. The origin of India’s growth slowdown and inflation persistence clearly lies elsewhere.

One thing for sure: Surjit Bhalla now knows what to write this coming Saturday in his column for IE.

Baseline scenario

Professor Dani Rodrik has a lovely (?!) piece in ‘Project Syndicate’ on ‘The end of the world as we know it’. I only have two quibbles with it:

(1) He gives the benefit of doubt to India and Brazil because they are two countries with low public debt, have democratic institutions and limited dependence on exports and capital flows. The last point is debatable, esp. for India. But, we shall let that pass.

The main objection to his giving a relatively free pass to India comes from this: he vastly underestimates India’s ability to score self-goals. Second, if some one thought India had better prospects than China, India would make sure that they are proven wrong.

(2) The other quibble I have with his column is that he thinks that his scenario is remote. For me, it comes close to being a baseline scenario.

Whether you agree with him or not, do not miss it.

Some country this is

In its June 9th print edition, ‘Economist’ wrote a ‘farewell’ leader article to ‘Incredible India’. Even the most die-hard Indian patriot had to agree with it and not quibble with the substantive message.

For an even more forthright depiction of the Indian reality, it would be hard to surpass this blog post of Mr. Bibek Debroy.

Just a sample:

When the history of the Indian economy is written twenty years down the line, we will look back at the 2004 to 2014 decade as one that was just as damaging as mid-1960s to mid-1970s, if not worse, because the world has changed.  As was the case during that earlier decade, contrary views are not encouraged and are marginalized.  Advisers, bureaucrats and economists flow along with the tide.  That’s partly because views of many people are malleable.  That’s a requisite trait for survival.

In the ‘Banyan’ blog in the magazine that deals with Asia, I came across this blog post. It comes across as a ‘sympathetic’ blog post from the Indian perspective:

As a member of the jackass media, I left the meeting with the feeling that one part of the state machine, the politicians, was still not working. However another part, the bureaucracy, was trying to raise its game.

“At the top level the leadership understands these principles very well,” said Mr Basu. If so, what a shame the top politicians are so terrified of saying the same thing aloud. The failure of India’s leaders to advocate reform before its citizens is one reason why there is so little consensus in favour of it among the public today.

Now, this is what is frustrating about this country. So, the bureaucracy is trying to raise the game. The leadership understands issues very well. But, in reality, none of the sensible things will get done but counter-productive initiatives will, somehow, see the light of the day. The list is long: retrospective tax law amendments, meaningless and extortionist tax raids, more government handouts, rollback of sensible decisions, deferment of needed reforms. Political parties will oppose the same thing that they tried to do when they were in office.

It is hard to understand the dynamics of public policy-making in India, let alone make sense of it.

(p.s: I tried to compliment Mr. Surjit Bhalla – it is not too often that I find myself in agreement with him, esp. when it comes to his Op.-Eds. on Indian monetary policy – for this Op.-Ed. of his but I got a strong pushback from my friends. Mr. Bhalla wanted to visualise a situation where the UPA rebuffing Ms. Mamata Banerjee on the Presidential candidate proved to be a political and economic turning point for India, for the better. One of my friends wrote that it was, perhaps, possible for Mr. Bhalla to dream with eyes open.

Even the usually positive Swaminathan Aiyar had a different take on the Presidential candidate nomination drama. Nothing is ever straight in this country.)

Greece and other links

This article in New York Times makes for sad reading. It is the leaders’ (or, the so-called elites’) karma that visits all those who had no part to play in it, directly. I can understand the depression, confusion and anger. Some weeks ago, Arvind Subramanian wrote in FT that Greece might be better off exiting. Perhaps, he is not so sure now. Whichever way Greece turns, it looks like a very hard grind. Medium term might look a lot better with a Drachma and policy autonomy, but how to get THERE from HERE is a big question.  Or, will they get THERE from HERE?

I wrote in MINT two weeks ago that Germany would be brought, kicking and screaming, around to issuing common Eurozone bonds, agreeing to a fiscal and banking union, etc. I have to acknowledge that evidence since that piece appeared in MINT points in the opposite direction. But, I am not backing off from that stance, yet.

A former colleague sent me links to translated articles that suggested that Germany might wish to see Greeks exit and suffer and that such suffering would serve as a warning to the rest of the crisis-ridden countries to ‘behave’ themselves with austerity.

Here is the translation:

Angela Merkel, according to Italian newspaper Il Messaggero and  Belgian newspaper De Standaard, is delaying the adoption of a comprehensive plan to address the Eurozone crisis until Greece leaves the Euro.

The “sacrifice” of Greece came to light when Barack Obama had a telephone conversation with Angela Merkel and Italian Prime Minister Mario Monti yesterday, asking them to do more to address the crisis.

Italian Prime Minister Mario Monti repeated his established position that “Greece must remain in the euro area.” But Berlin expects Brussels (the EU) and Frankfurt (the ECB) to compel Athens to abandon the euro immediately after the Greek elections of June 17.

It would be a lesson to the other Eurozone countries to be disciplined, and would be a catalyst to accelerate a closer fiscal union.

Apparently, it is a Google translation. Does not appear bad at all. The original source is here.

There is another translated article that my former colleague had sent in the same email:

The problem in Spain is that the banks have a bunch of worthless mortgages and so huge losses. A massive capital injection is needed. And Spanish banks have a lot of Spanish bonds that they recently bought a significant portion of fresh money from the European Central Bank. A growing number of Spanish savers are aware of the situation and are leaving Spanish banks.

A European form of collectivization of public debt could be called Eurobonds, but could also be called the less controversial name of “debt service fund”. And a system is needed from a European fund to recapitalize banks. This is the minimal a fiscal union needed for the short-term survival of the Euro.

But Merkel does not want to pay for the “mistakes” of other countries. She will only help other countries if they are far-reaching reforms in labor markets along the German model, and willing to cede economic and financial sovereignty.

Here is a scenario some see as a way out of this impasse. The Greeks again cast the “wrong” vote on 17 June. The money flow to Greece closes, it leaves the Eurozone. This causes chaos in Greece and (one hopes) manageable losses in the rest of the Eurozone. The Southern European countries are brought to heel by the Greek example, experience bank runs, and a fiscal union is created from the chaos. [Original here]

As a negotiating stance, it makes sense. Of course, it goes against what I wrote in MINT. My hypothesis was that Germany and its allies would not want any country to leave the Eurozone for (a) fear of triggering a contagion and (b) for fearing of showing a path for others to follows in a year or two, should Greece eventually recover (as per Arvind Subramanian).

Juncker’s warning to Greeks not to leave the Eurozone, carried by Reuters, is consistent with my hypothesis. Further, this ‘Charlemagne’ blog post in ‘The Economist’ based on ‘deep background’ conversations in Germany also bolsters my hypothesis that there would be no deliberate attempt to push Greece out of the Eurozone.

All this confirm the preference for ‘buying time’, hoping for miracles but getting, in the end, slow death that could be substantially more painful.

One casualty of keeping our eyes on Greece and Europe is that it blinds us to what is happening elsewhere. This story in FT that Iran and Iraq might be forming an alliance inside OPEC has interesting implications for OPEC unity and for oil prices.

Thanks to ‘Marginal Revolution’ for the link to a thoughtful post at ‘Economist’ blogs. This one deals with an interview by Prof. Ben Friedman who wrote the book, ‘Moral Consequences of Economic Growth’. The post is long but well worth a read. It talks about voter attitude (negative) towards an incumbent in times of slow and low growth, towards immigration (negative) and in general, towards a civil attitude (declining) towards fellow civilians.

A rather curious article in the front page of FT in Asia on Thursday. Headlined, ‘Bankers bow to Europe over bonus limits’, the report mentions the following:

Critics, including bank lobbyists, say banks will circumvent the spirit of the changes by increasing fixed salaries or finding other methods of remunerating staff that avoid the specific wording of the new rules. “You don’t have to call everything a bonus,” said one lobbyist.

Tightening regulation has already driven up bankers’ base salaries, increasing the fixed costs of businesses even as they struggle with volatile markets.

I am still trying to make sense of this. I admit to failure. I can only conclude that bankers are on a ‘Mutually Assured Destruction’ mission to finish off their institutions, their shareholders and finally themselves. Otherwise, they would not be so self-centered and daft simultaneously.

This Belgian Green MP has identified the issue well – State collusion with or State capture by bankers:

Philippe Lamberts, the Belgian Green MEP who led calls for the bonus cap, told the Financial Times that EU member states were “getting away with acting as a trade union for top bankers without paying the political price”.

China loans – (2)

Just few days ago, TGS blogged on the news item that, by the middle of May, the four big China banks had barely lent 34 billion yuan in new loans as of May 20th. Now, we hear that total new loans in May almost touched 800 billion yuan and that the four big banks might have lent around 250 billion yuan. Go figure. Or, is it worth trying to make sense of Chinese data, EU summits, Eurozone bailouts, G20 meetings, etc.?

Sensible Rachman

Gideon Rachman makes a lot of sense when he cautions against isolating Germany. The law of unintended consequences will very much be at work, for all the wrong reasons:

As a senior Dutch politician who shares the German view, puts it: “We cannot push through a banking union when the French have just cut their retirement age to 60 and we have raised ours to 67.”

Check out the links that Tyler Cowen provides us here. To make it easy for you, here is one and here is another.

Of course, it does not prevent ‘Economist’ from writing a leader article that is marked for its intellectual laziness/sloppiness.

It is not easy to bring about fiscal, banking and political unions in Europe. Probably, Germany should choose to ‘isolate’ itself.

Walker at Wisconsin

This blog has seldom commented on US politics and US political choices for the voting public since I have believed that there is a strong current of bipartisanship and continuity on most things good and bad – mostly for the bad, of course. Ye,s once in a while, the choices become stark. Perhaps, the case of the recall ballot on the Wisconsin governor was one as was the case with New Gingrich back in 1994. However, when it comes to, say, financial sector regulation, there is hardly much of a difference between the responses of the parties from either side of the aisle. Perhaps, they talk differently but do the same thing.

David Rosenberg of Gluskin Sheff commended the article by David Brooks published in NYT on June 4th. With some qualifications, he favoured Walker retention at Wisconsin. He argued that a favourable outcome for Walker would signal that Americans were willing to tackle their problem of debt. In fact, Chris Wood of CLSA wrote something very similar in his weekly missive, ‘Greed & Fear’.

Well, I am not so sure. The decline in the household savings rate from something like 8% in 2009 to around 3.4% does not exactly suggest that. Nor have the various surveys suggest that the American public, in general, gets it. For instance, see this one. A Washington Post/ABC news survey in April 2011 showed that Americans favoured taxing the rich but resented cuts in Medicare. That is easy.

Let me be clear. I am not picking on the American public. It is the same in most countries – developing or developed. Ask Greeks, Finland (see this one too) and Bulgaria. People do not like hard choices. No politician wants to risk telling them that they have no choice. It is rational on both sides, at a narrow level. It is not, at the systemic level.

In the meantime, good friend Dr. Vidyasagar sent me this link from ‘Naked Capitalism’.

My view on these debates remains the same. In the final analysis, it would matter far little. As I wrote in MINT recently, economic ignorance and illiteracy in the US Government and Congress are bipartisan.

In a recent blog post on Jim Grant’s interview to CNBC, ZeroHedge wrote the following (emphasis mine):

He ends on a rather interesting note that the Wisconsin win and the potential for an Obama loss in November may be more of a positive driver for stocks since markets begin to revert to a free market once again – we suspect this is not the case given the donors/beneficiaries under Romney’s wing.

Well, that is what I meant by ‘bipartisanship’.

‘Lucky’ graduating classes of 2012

As one approaches the weekend, one is both physically weary and mentally weary. Stories of hatchet men, hatchet jobs, conspiracies, small minds, petty agendas and prevarications leave us feeling cynical, depressed and jaded.

At a more mundane level, as one of the two speakers below reminds us, the world wants to travel at a speed greater than the speed of thought. That too is overwhelming. But, it is important to travel at the speed of thoughtfulness, as he puts it, at least from time to time.

With that in mind, it is my abundant pleasure to blog on two great and wonderfully thoughtful graduation speeches – both delivered this year and recently.

The speakers come with contrasting backgrounds. But, I think there is more than one element of commonality in their speeches.

One is by Nipun Mehta. You can click on this link to read the speech and to understand a bit more about this amazing individual. Here are some vignettes:

true generosity doesn’t start when you have some thing to give, but rather when there’s nothing in you that’s trying to take.

don’t just go through life — grow through life. It will be easy and tempting for you to arrive at reflexive answers — but make it a point, instead, to acknowledge mystery and welcome rich questions … questions that nudge you towards a greater understanding of this world and your place in it.

As you walk on into a world that is increasingly aiming to move beyond the speed of thought, I hope you will each remember the importance of traveling at the speed of thoughtfulness.

Thanks to good friend Sushant, I read another equally thoughtful speech today. This one is by the famous author Michael Lewis (famed for Liar’s Poker, Moneyball and his columns in Bloomberg and in various other places). While Nipun spoke at the University of Pennsylvania, Michael spoke at Princeton. Here is the link to Michael’s speech.

Some vignettes:

This isn’t just false humility. It’s false humility with a point. My case illustrates how success is always rationalized. People really don’t like to hear success explained away as luck — especially successful people. As they age, and succeed, people feel their success was somehow inevitable. They don’t want to acknowledge the role played by accident in their lives. There is a reason for this: the world does not want to acknowledge it either.

Life’s outcomes, while not entirely random, have a huge amount of luck baked into them. Above all, recognize that if you have had success, you have also had luck — and with  luck comes obligation. You owe a debt, and not just to your Gods. You owe a debt to the unlucky.

you are the lucky few. Lucky in your parents, lucky in your country, lucky that a place like Princeton exists that can take in lucky people, introduce them to other lucky people, and increase their chances of becoming even luckier. Lucky that you live in the richest society the world has ever seen, in a time when no one actually expects you to sacrifice your interests to anything.

All of you have been faced with the extra cookie. All of you will be faced with many more of them. In time you will find it easy to assume that you deserve the extra cookie. For all I know, you may. But you’ll be happier, and the world will be better off, if you at least pretend that you don’t.

Never forget: In the nation’s service. In the service of all nations.

The graduating classes of UPenn 2012 and Princeton 2012 have been lucky!



What? Me? Worry? I have IPL

GDP growth in India has crawled to a 5.3% rate (real GDP; 2004 prices; seasonally adjusted) in 2011-12Q4 (Jan. – Mar. 2012). It is the lowest one has seen in several years. But, in the final quarter of 2010-11, India recorded a growth rate of 5.6%. So, actually, the base effect was in India’s favour for 2011-12Q4. But, in spite of that, the growth rate was only 5.3%. That shows how weak the underlying momentum in the economy is. There is no momentum. In the first quarter of 2009-10 (April – June), the economy recorded a growth rate of 5.47% and in the two preceding quarters, a growth rate of 3.5% and 2.7% respectively. In 2004-05Q3 (Oct. – Dec.), the growth rate was 5.15%.

So, if we exclude the crisis-induced swoon in GDP growth in 2009, this is the lowest growth rate in eight years. In his weekly Op.-Ed., Mr. Ninan tries to spread some cheer. He is right about the falling price of crude oil and the competitiveness gains induced by the weak rupee. But, they are only partial. As he himself notes, the domestic price impact of falling crude oil price has been nullified by the weak rupee. In the latest petrol price hike saga, most governments have rolled back taxes, to offset the price hike made by the government. We do not know what the fiscal consequence is.

On the rupee competitiveness, if there is no demand growth in the importing countries, cheap currency (i.e., lower export prices) matters very little. Further, he omits to mention one negative consequence of a depreciating rupee. Inward investments would be postponed in the hope of further weakness. As with inflation, there will be a case of reality reinforcing expectations and vice-versa, in a mutually reinforcing vicious cycle, unless some decisive policy signal breaks it. Business Line put out a story on how importers are asking for invoices in Indian rupees.

He is also statistically correct that the growth rate of real Gross Fixed Capital Formation (GFCF – investment spending) has ticked up. The growth rate (y/y) in 2011-12Q4 is 3.26%. The growth rate in the previous quarter was -0.39%. There are two caveats to this so-called ‘silver lining’:

(i) In 2010-11Q4, the growth rate was -3.7%. Hence, the base effect has been clearly helpful here.

(ii) In terms of levels, the fall in Gross Fixed Capital formation has not stopped. It has been declining from 4739.4 billions of rupees in 2010-11Q1 to 4517.2 (2011-12Q2) to 4364.08 (Q3) to 4326.88 (Q4). These are seasonally adjusted data. There is no silver lining here. The decline in GFCF has not stopped.

So, how did the government address this issue? It has liberalised norms for foreign individual investors to buy into Indian stocks, Indian stock mutual funds and now Indian corporate debt too. On occasions, something is better than nothing and, on other occasions, nothing is better than non-sense. Only time will tell whether this move falls into the first or second category.

The government has been unable to liberalise investment rules for foreign direct investors to invest into insurance, retail and aviation sectors. Instead, it goes out and liberalises the norms for ‘hot-money’ to flow into India.

In 2006 and 2007 and again in 2009 and in 2010, the government did not have to ‘woo’ foreign portfolio investors. They came because they believed (wrongly, as it has turned out since) in the Indian growth story. That story has run aground, for now. The answer is in reviving that story and not in making desperate gestures to fickle foreign portfolio investors in desperate times.

Ninan’s conclusion is as forthright as the conclusion in the edit of MINT.

We are paying the price for keeping a dysfunctional and seemingly clueless government in office.


The Sonia Gandhi-Manmohan Singh combination has made a mess of things. A billion Indians deserve better.

MINT got it right. They did not say that 1.21 billion Indians deserve better. The number of one billion is about right. The other 210 million is busy watching IPL. I doubt they deserve better.

If you really are looking for a silver-lining,  I will give you two. Here is one and here is the other.

One-off or scattered initiatives (second link above) cannot solve the problems of a country with 1.21 (and rising) billion people. Governments have to let communities deal with their problems. They need resources – financial and human – and they should be allowed to mobilise and acquire them. India cannot be governed from Delhi. It is impossible.

Among many of the ‘achievements’ of this government, concentration of power in its hands is another. It is using it to settle political scores. That it is shooting itself on its own political foot is another matter. Such is the power of blind, impotent (and hence, stupid) rage.

Mani Shankar Aiyar has written a well-researched piece on how the Panchayat Raj Institutions are yet to be empowered:

The critical systemic fault lies in the present practice of implementation. Over a hundred social sector and poverty alleviation Centrally Sponsored Schemes (CSS)10 are implemented by separate agencies for each scheme operating through parallel bodies set up by the Central and State government bureaucracy in collaboration with civil society organisations to perform tasks that the Eleventh Schedule of the Constitution specifies might best be entrusted to the PRIs.

In consequence, the beneficiaries remain hapless recipients of Government/NGO largesse instead of actively participating in designing the schemes, adapting them to local community priorities and being effectively in charge of supervision, guidance and disciplinary action.

This link takes you to a summary of a book that has tried to systematically track how various States have performed on the index of devolution to local governments. Only a handful of States have been sincere, despite so-called administrative incentives. Well, they are hardly a match for the personal incentives that come with centralisation and concentration of power.

No wonder some of us are left wringing our hands and tearing our hair out on how to model morality into our elegant discourses on what India lacks and the rest of us are off to watch IPL. Cricket in India is now well and truly escapist as most Indian cinema is.

Yes, that is what Indians need: escape.