The beginning of the end

China stock indices tumbled by over 6% today and I had three phone calls from Business News Channels in India within ten minutes of each other, to speak to them on it, especially since I had written about the bubble, among other things, on Tuesday in my MINT column (nice timing).

A sloppily blog post here:

(1) “Policy support, both from the government and PBOC, is underpinning the rally”

They are not two separate entities – but one.

(2) “When making your own assessment on whether or not it can continue just ask yourself this one simple question: Do you know anyone who made money betting against the Fed, ECB or BOJ in the past six years?”

This is so disappointing because markets can remain irrational longer than we can remain solvent but that does not elevate it to the level of an investment strategy.

This is a better one.

Interesting that India’s Sensex Index dropped ‘only’ 57 points on the day. Good augury.

Shaking the status quo

Today, the Modi government completes one-year in office. I had already written a blog post on the issue, ‘Preparing for the second anniversary’. Then, why am I writing one more?

Two things have prompted me to do so. One is the news-item in MINT this morning on top  that the NDA government would go slow on labour reforms. That is a pity. It is a State subject. The government should solidly stand behind States that want to take the ‘labour’ bull by the horns. It is sitting on Madhya Pradesh’ proposed labour reforms.

I mused further. This government had taken the growth pain upfront by controlling the fiscal deficit. That is under-appreciated. This government inherited a 6.0% to 6.5% fiscal deficit in reality. So, instead of the UPA’s phoney fiscal consolidation, it had to swallow the bitter pill and curtail fiscal deficit in reality. Plan expenditure came down and some subsidies had to be slashed. It announced smaller increases to Minimum Support Prices, cancelled bonus payments to States that procured excess foodgrains, etc. The deficit is now at 4.0% of GDP. In the first quarter of this year (the last quarter of Indian fiscal year), the fiscal squeeze was around 2.7% of GDP, wrote my friend Neelkanth Mishra of Credit Suisse. That the phoney fiscal reduction of UPA had to be converted into a genuine fiscal consolidation by this government in its first year is largely unappreciated.

So, having decided to take the pain upfront correctly as many are advising the government, it could have pushed through many other things that would be anti-growth short-term but pro-growth long-term. Labour reform is one. Or, it should have encouraged all BJP-ruled States to do that and recommended Presidential assent for all of them.

If Indian labour unions went on strike, it would have been a good thing, given that Indian total factor productivity growth rate is negative. India would have been better off. India and productivity appear to be poles apart.

Productivity and devolution down to the lowest level of government ought to be the priorities for the second year. India has not had much to show for 67 years of post-Independence Congress rule. It has wallowed in mediocrity. It needs a huge shaking up. This government is doing that and hence, the angst among those who are used to ‘business as usual’ – from industrialists to journalists to government employees to public sector banks, etc.

No wonder there is no sign of growth.  But, that is the way to go. Along the way, if some communication strategies and some quick and visible success initiatives too had been picked up and showcased, it would have rounded off a very good first year.

What is the second thing that provoked me to write this? Nitin Pai, my friend and co-founder of the Takshashila Institution had written a piece on on the first anniversary of the government. He has urged Modi supporters not to give up but to give feedback. It is a good advice but it takes two to complete the feedback process.

Check out this news-story and these two pieces by Brahma Chellaney. You will know what I mean.

But, here is my feedback to Modi-baiters and Modi-haters and restless Modi-bhakts: The India story will be pretty much over in 2019 if either a Third Front government or a Congress-led coalition government is voted to office. That is what their track record over much of the last 67 years tells us.

As Edward N. Luttwak notes at the beginning of Chapter Seven of his book, ‘The rise of China and the logic of strategy, the only enduring lesson of history is that no one learns from history.

D&D are the answers

Professor Bibek Debroy has written a good piece (as usual) on devolution and de-centralisation in his column for ‘Financial Express’:

In international negotiations, be it labour standards or environmental norms, our argument has been the following. Do not impose standards evolved in developed countries. Different countries are at different levels of development. By the same token, different states are at different levels of development. Their land, labour and natural resource markets differ. What’s wrong with allowing states to decide? What’s wrong with Delhi letting go? What’s wrong with labour moving to the State List? As long as the present Seventh Schedule continues, there is great temptation for Parliament to legislate on items on the Concurrent List.

The fiscal devolution isn’t only Union-State. It is also about state to local bodies and intra-state differences. Decentralization and devolution aren’t purely fiscal. The non-fiscal elements are more important and also require a change in mind-set. I don’t think that has happened. We, at least some participants in the discourse, somehow prefer central planning and direction.

I recalled the piece I wrote for the Takshashila blog, ‘Broadmind’ soon after the Takshashila-Hudson Institute conference on 1st August 2014:

Faced with a complex situation, the first step is to break it down into manageable, bite-size parts in every possible way. So, forget about tackling all things at once.

Second, devolve, devolve and devolve. India is too big and too complex to be a single administrative unit. A very loose federal setup is required. Substantial devolution of authority, responsibility and resources to the States and from the States to Corporations, to Municipalities, to Gram Panchayats and so on is urgently needed.

Third, because there are no templates and precedents for India, it is important to run multiple pilots or multiple policy experiments simultaneously. No one answer will emerge that can be applied all over India. Far from it. In fact, plurality of solutions has to be expected, encouraged and even demanded.

Fourth and finally, humility is called for – both from those who design and execute and from those criticise. We are dealing with a unique situation in many ways. Humility will make dialogue possible making it easier for a diversity of solutions to emerge. [Link]

In fact, when the idea of abandoning the old Planning Commission came up, I had written this piece for NITI Central. Before NITI Aayog was so named, I had wanted it to be called the Devolution, Decentralisation and Development Commission of India (DDDCI). The tasks I had envisaged for this institution flowed was consistent with my discussion above on the need for ‘setting million minds to work’ in contributing to India’s development challenges.

I wrote a follow-up piece on NITI Aayog in January 2015 after the Government of India announced its formation.

In the context of the 14th Finance Commission recommendations and the consequent Union-State fiscal devolution, I read three interesting pieces recently – one each by Andy Mukherjee, Subir Gokarn and Mukul Asher.

Andy felt that if States used the money to return State Electricity Boards to health, for example, it would deliver greater returns than the Union government’s fiscal spending.

Subir Gokarn wrote that States will have to learn from each other and for that, he felt that capacities will have to built up both at NITI Aayog and in States so that transfer of knowledge could take place with NITI Aayog playing the role of the interlocutor/facilitator (?), given that NITI Aayog is the knowledge and capacity-building hub for States. He also wanted inter-State mobility of civil servants rather than it happening through the Union government. He also suggested that Union Ministries become ‘thinking’ organisations rather than ‘doing’ organisations.

I like all the points he makes since they are rather close to the points I have made in my post for the ‘Broadmind’ blog above.

As Bibek Debroy above, Professor Mukul Asher also stresses devolution to urban local bodies and reactivation of State Finance Commissions. He seconds Subir Gokarn in stressing the role of NITI Aayog. He makes his own points, of course, that co-operative fiscal federalism should go hand in hand with ongoing fiscal consolidation (explicit recognition of contingent liabilities, for example), improving public expenditure management and enhancing competence in generating resources from non-conventional methods. Mukul’s piece is here.

In sum, there does not appear a better way to solve India’s development challenge than to allow, empower and facilitate million minds to work simultaneously on them. That is the message I take from Bibek Debroy’s column. If so, I second it wholeheartedly.

Harvesting China links

[Reuters] China says U.S. actions in South China Sea ‘irresponsible, dangerous’ [Link]

[Fox] US warns China not to challenge military flights over South China Sea [Link]

[Reuters] U.S. vows to continue patrols after China warns spy plane [Link]

Joe Biden, US VP, delivering the commencement address at US Naval Academy [Link]

George Soros wants America to put Yuan inside SDR; otherwise, sees risks of WW III (Link)

Significant economic reforms will have to wait until 2017 in China (Link)

“The 20th Century was the American Century. The 21st Century is just a Century.” [Link]. I like this because I wrote a piece in MINT that the 21st century might belong to nobody. [Link]

Mining stocks are down everywhere in the world because of China but mining stocks in China are booming [Link]

Tell this to those who were bullish on China in the annual Strategic Investor Conference of John Mauldin. Good summary. Ian Bremmar has given some good food for thought. Sad to see David Rosenberg flaunt his ‘bullish’ credentials. India comes in for positive mention twice in this summary put out by John Mauldin. [Link]

Good article in Vox on the drop in China’s CO2 emissions this year [Link]

It is over or is it?

This is a Reuters news-story on how five major banks would plead guilty to charges of rigging Foreign Exchange Markets.

LONDON/NEW YORK (Reuters) – Five of the world’s biggest banks are expected to be hit with a combined bill of more than $5 billion and criminal charges on Wednesday in a settlement with U.S. and British authorities over rigging of currency markets.

It will mark another dark day for an industry trying to put past sins behind it and brings the total in penalties some big banks will pay for their traders allegedly manipulating the $5-trillion-a-day foreign exchange market to about $10 billion.

U.S. banks JPMorgan and Citigroup and Britain’s Barclays and Royal Bank of Scotland are expected to plead guilty to criminal charges with the U.S. Department of Justice related to forex manipulation, people familiar with the matter said.

It would be unprecedented for the parent companies or main banking arms of so many major banks to plead guilty to criminal charges in a coordinated action. JPMorgan and Citigroup would be the first major U.S. banks to plead guilty to criminal charges in decades.

Swiss bank UBS is expected to avoid a criminal charge after getting immunity for alerting authorities to a possible problem. But it faces a criminal charge over the rigging of benchmark (Libor) interest rates, two people familiar with the matter said.

What does pleading guilty mean?

The banks are seeking assurances from U.S. regulators they will not be barred from certain businesses if they plead guilty, several sources familiar with situation said.

Or, have the banks started behaving better? Well, this news-story says NO (ht: Praveen Chakravarty). Unless compensation is tackled, these issues won’t go away. Compensation is closely linked to banks’ ability to create money. That is a separate topic.

What does PBoC do?

Remember this about the People’s Bank of China:

Lacking the degree of independence enjoyed by foreign peers, the PBOC advises on policy, manages money market operations, and takes instruction on policy moves from the State Council, the nation’s cabinet….

……. The annual money supply target, interest rate and exchange rate decisions must be approved by the State Council. [Link]

Somewhat unrelated to this and somewhat related to this news above is the news that PBoC asked banks to keep the ceiling on the deposit rate at the previous level of 3.25% (which was 130% of the benchmark deposit rate of 2.5%) and not at 3.375% (which is the ceiling at 150% of the benchmark deposit rate of 2.25%, after the rate cut on May 10).

Well, who said that managing an economic downturn in an economy used to growing at 9% to 12% will be easy?

Preparing for the second anniversary

There is no dearth of editorials, surveys, etc., on the completion of the first year of government by the NDA government led by PM Modi. Of all the evaluations, I will pick a few to highlight here.

One is by Swapan Dasgupta. I seldom find much to disagree with him. This piece is no exception. It is an easy read. He calls it a good start. I agree.

Then, there is the piece by Shankar Acharya and everyone has focused on his observation that NDA government’s first year in office has been better than any of the ten years of the previous UPA government. I am particularly delighted by that statement. I do recall the fond hope that, at least after 2009, the UPA would be more purposeful. In fact, the descent into paralysis was swifter. Of course, Dr. Baru’s book, ‘The Accidental PM’ provides more than an adequate explanation.

On balance, I would also reckon that they had done reasonably well. I wrote as much in my piece in Manushi published after ten months of the government.

There was a big graphic in ‘Financial Express’ which is also available as part of this article by Pratap Bhanu Mehta in his analysis of the first year of the NDA government.  PBM cites loosely that many projects are not stalled because of land acquisition problems. Evidently, he has not done his homework on that. We will have something more to say on the statistical sleight of hand for which he has fallen too.

Yes, oil price decline was a boost but bad monsoons and unseasonal rainfall were not. Fiscal consolidation was helped by oil prices because the budget arithmetic was a big mess that the government inherited. Not many appreciate that. It is easy to be dismissive of the time required to fix inherited mess in many areas. In reality, these things take much longer.

Let us remind ourselves again: the alternatives for this government remain utterly dismal. None of them – and esp. Rahul Gandhi – have made us wistful about what we are missing. We still remember what we are missing from the previous ten years and we are quite grateful that we are missing them.

A simple framework because policy actions and omissions affect with lags:

NDA I sowed – UPA 1 reaped (good)

UPA 1 sowed – UPA II reaped (bad)

UPA I & II sowed – NDA (II) is reaping (bad)

NDA sows  –  hope they don’t let someone else will reap as NDA I allowed.

Post-mortems are only useful up to a point. There is a surfeit of them. Hence, it makes sense to focus on what should be done in Year 2.

(1) Ministerial clusters – it does not need Rajya Sabha approval. Even, bureaucratic clusters within Ministries. One civil servant wondered as to why there were five Secretaries in the Ministry of Finance. It creates turf war and ego battles.

(2) Co-operative Federalism – there should be more credible and concrete examples of this spirit in the coming year. Letting land acquisition be done by States and let them make their own rules; Read Shankkar Aiyar here on this. Read Nitin Pai here on how army-owned land can be freed up. The Prime Minister mentioned about the land that the Railways are sitting on, in around thousands of small train stations. Why is the Federal government sitting on Madhya Pradesh labour reform proposals? If there are legal risks, let the Madhya Pradesh handle it and learn. It is part of Federalism and ‘letting go’.

(3) BJP-ruled States taking Federalism down to municipal corporations, smaller municipalities and panchayats.

(4) Genuine, credible and final end to the arbitrariness and lawlessness of Tax demands.

(5) Institutionalising ‘Swachh Bharat’

(6) The health of the banking sector – no matter whether it is through recapitalisation or through reforms by stealth

(7) Tapping good officers and learning how not to send a demoralising message. Pulling up an officer for wearing sunglasses for all newspaper to splash them is not the way to go.

(8) Induction of more talent and experience in the Cabinet; Devolution within the Cabinet

(9) Scrapping of old laws and loads of them

(10) Last and the most important of all, Making Productivity a national obsession for the next decade

(Incidentally, can something also be done about competence, arbitrariness and high-handedness in the judiciary?)

I looked back at what I wrote soon after the government took office last year. I had listed five things: a white paper on the scorched earth the UPA government had left behind, not trying too hard to win over English-speaking (self-styled) elites, pride in India’s history, tradition and culture, avoiding hubris and self-deprecating sense of humour. These five were mostly cultural shifts in deploying the language and idiom of power. I cannot find demonstrable evidence of the five. Clearly, the government did not do the first of the five. The Prime Minister has come good partially on the second one. I am not sure if there has been any specific initiative on the third one. It is hard to find conspicuous evidence of four and five.

Nonetheless, it is interesting to note that the Prime Minister has been meeting Dr. Arun Shourie regularly every month lately. Coomi Kapoor in her article in ‘Indian Express’ mentions this today. That gives a completely different meaning to the interview that Dr. Shourie gave Karan Thapar for ‘Headlines Today’. In any event, it is good news for India well-wishers that the Prime Minister engages with a sharp mind on a regular basis.

The Prime Minister promised a Congress-mukt Bharat. We are not sure if we are there yet. But, certainly, a lot more needs to be done to rid India of the Congress culture of sycophancy. After all, we have had a British-mukt India since 1947 but we would not know looking at how the Income-Tax department has behaved.