Policy tweak by Bank of Japan

Andy Mukherjee has a good piece on why BoJ might need a rethink. Its unconventional monetary policy is rendered ineffective by their effect on the banks that are supposed to implement the policy by lending aggressively! Bank profitability is at risk. They can make money only by taking on more risk in distant lands. There is simply no ‘Net Interest Margin’ at such ridiculously low interest rates. American banks’ RoA is far better, as Andy writes. Why would investors prefer Japanese banks?

Read Andy Mukherjee’s column here.

The Bank of Japan (BoJ) has released its monetary policy statement and it is here. As far as I can tell, it does not address the issue/risk raised by Andy Mukherjee. If anything, it reflects a foolhardy/brave ‘no mud on my face’ attitude after falling flat with its current policies.

It has basically tried to ‘reassure’ markets that there is no tapering of bond purchases – stealth or real. It has doubled down on its current policy stance.

That, despite all these years of powerful and persistent qualitative and quantitative easing, the inflation target remains as elusive as ever:

Prices have continued to show relatively weak developments compared to the economic and employment conditions…and it is likely to take more time than expected to achieve the price stability target of  2 per cent.

It is even possible to question if the appropriate price stability target for a population with negative demographic impulses and potential growth of 0.0% is something lower than 2.0%.

Of course, as Andy points out in a private change, there appears to be two tiny but may be significant tweaks. They may be deliberately underplaying them and overplaying continuity to ‘reassure’ markets:

(1) Yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.

(2) The Bank (BoJ),  …., will reduce the size of the ‘Policy Rate Balance in financial institutions’ current account balances at the Bank – to which a negative interest rate is applied – from the current level of about 10 trillion yen on average.

Third, it has also agreed to increase the purchases of of ETFs linked to Topix stock index than Nikkei 225.

On the announcement of BoJ monetary policy decision, the US dollar spiked against the Japanese yen. Some profit-taking has set in now. On a one-year basis, US dollar is trading at the upper end of the range; on  a two-year basis, the US dollar is trading at the upper end of the range; on a five year basis, in the middle of the range (95-125) and on a ten-year basis; closer to the upper end of the range (75-125). The risk is that the USDJPY trades closer to the upper end of recent ranges at all horizons.

That may draw Trump’s ire and he may direct it at the Federal Reserve for doing the right thing (even if only gradually and belatedly) because others are persisting with their wrong and non-working policies!

How to revise GDP and other links

(1) American economy is now USD20.0 trillion and change. The personal savings rate is 6.8%. It was 3.2% before revision. Just like that. Investments in Cloud technology were allegedly under-reported. India was one of the few countries or is it the only country that revised its GDP calculations and the base year from 2004-05 to 2011-12 and reported a lower number.

See for yourself:

India GDP

(2) I liked this article that appeared in Wall Street Journal – by one Donald Luskin. He now writes as to why China will lose the trade war. That is a far cry from what many thought when the trade war began. It is not over yet. But, clearly, people are revising their odds.

(3) China is issuing dollar denominated bonds in record amounts. Nine years ago, they called for the end of US dollar hegemony. [Link]

(4) Mark Mobius says that the bottom is not in for China stocks. I leave it to you to decide on how to play it. [Link]

(5) China’s old economy is back [Link]

(6) Which means leveraging is back too [Link]

(7) FT Editors think China will listen to their advice on how to conduct Belt and Road initiatives. I am just wondering how will they have written the Edit had Trump launched OBOR and it is courting the controversies that China is courting now. [Link]

(7) Covenant-lite Leveraged loans (double whammy) are now 78% of all leveraged loans. They were 29% in 2007. [Link]

(8) Support for Merkel’s German Conservative coalition has dwindled to a 12-year low. Wait and wathc happens by the time she leaves office. [Link]

(9) That is a nice headline that explains everything that is happening in the world:

Australia executive pay hits record as workers’ wages stagnate [Link]

(10) This is what will happen in that case:

Royal Mail faces shareholders’ pay revolt [Link] AND

Nex shareholders’ punchy payday protest [Link]

(11) This may be three weeks old but Malaysia is abandoning white elephant infrastructure projects. I must confess to being pleasantly surprised so far with Malaysia’s new government [Link]

(12) This article offers a good assessment of Pakistan even as it wonders if OBOR projects have pushed the country into a debt trap.

(13) Good to know that Australian Parliament has passed two sweeping foreign interference and anti-spying  Bills [Link]


Billionnaire Raj – a review

This was my column in MINT last week:

James Crabtree’s exertions and excursions

James Crabtree’s book, ‘The Billionaire Raj’, is a useful reminder of the challenges that India faces

Last Published: Mon, Jul 23 2018. 09 48 PM IST

V. Anantha Nageswaran

James Bond movies usually start with a car chase. James Crabtree’s book starts with a car crash. That is the big difference. One thing that is common to both, however, is that both of them maintain the tempo throughout. Crabtree came to India in 2011 and left in 2016. So, for three of the five years he spent in the country, the Congress party and its coalition partners ruled the country. But, you would not know it from reading the book. His remarkable reticence about the coalition that ran the Indian economy aground is striking because their contribution to the title of his book has been immense. If you have the Kindle version of the book, search for the word “UPA”. It appears four times in the prologue as part of the name, “Ruparel”. Similarly, in the chapter on Arnab Goswami,“Radiagate” gets only a cursory treatment.

Cronyism was the inevitable consequence of the licence-quota-permit Raj that the post-independence Congress government erected. The reforms of the 1990s and the rise of the information technology sector gave rise to the hope that a somewhat more meritocratic form of capitalism would emerge in India. But, rapid economic growth (which was expected to wash away all sins) and the return of the Congress government in a coalition arrangement ensured that cronyism resurfaced with a vengeance. Its most visible manifestation is the bad loan crisis in the Indian banking system that refuses to go away. Contrary to what Crabtree writes in his concluding chapter, its full dimension was not known in 2014 when the Bharatiya Janata Party (BJP) came to power. In Chapter 8, he writes that the then Reserve Bank of India governor Raghuram Rajan had told him that he himself did not realize the full contours of the problem until two years after he became the governor.

That the Congress seeded, nurtured and helped The Billionaire Raj to flourish is evident in the data available from the annual “Wealth Data book” compiled by the Credit Suisse Institute. The total wealth of the bottom 90% shrunk in India between 2010 and 2014 at a compound annual growth rate (CAGR) of 3.75% in dollar terms. It rose at a CAGR of 12.4% between 2014 and 2017. The wealth share of the top 1%, 5% and 10% increased between 2010 and 2014 and declined between 2014 and 2017. Median wealth per adult—a better measure of wealth inequality than mean wealth—declined between 2010 and 2014 from $1,300 to $1,006 (a big drop) and improved to $1,295 in 2017.

At the same time, cronyism became a global phenomenon, including in the West, in the new millennium. One of the reasons is the optimism on growth that felled many Indian businessmen and bankers except that it was called the “Great Moderation” in the West. Instead of the Billionaire Raj, the West had the Executive Compensation Raj. Instead of politicians favouring businessmen, it was policy elites helping corporate elites.

The chapter titled “The Tragedies of Modi” could, appropriately, have been titled “The dilemmas of Crabtree”. At heart, Crabtree seems a fair, reasonable and decent human being. At the same time, he is compelled to stick to the boilerplate template that Western journalists are expected to follow, when they report on “Hindu nationalist” politicians. He calls Narendra Modi a largely effective administrator, credits him with sincere commitment to development, with indefatigable energy committed to the cause of governance and a sense of purpose that transformed the country’s image overseas. Yet, his treatment of Modi in chapter 4 is unfair. There is no reference to the conclusions of the special investigation team that exonerated Modi from the charge of having orchestrated murderous attacks on Muslims. The investigations were conducted in the years that the Congress-led United Progressive Alliance (UPA) was in office. They did not leave too many stones unturned to paint him guilty. More disappointing is Crabtree casting doubt on the deliberateness of the event that triggered the riots in Gujarat in 2002.

Crabtree cites Mukul Kesavan distinguishing the Congress party’s opportunistic communalism from the BJP’s ideological communalism. Whether the BJP is ideologically communal or not, the question is which one is more dangerous? The one who wears his communalism on his sleeve and the one who practises it on the sly, unleashing it in unsuspecting and unexpected moments.

The political right—the BJP is allegedly in that quadrant—in India has very few core convictions, economic or sociological. In its four years in office, the BJP government has not addressed some of the legitimate demands of the Hindus. One is autonomy and freedom to manage their places of worship and the other is to be allowed to run educational institutions with the autonomy that minority-run institutions enjoy. Such bizarre reverse discriminations are rare in any society and, in the name of secularism, India practises them.

Crabtree writes well (“over-the-top wedding parties thrown by insalubrious hosts”) and two, he has not relied on his recollections of the gossip he had picked up from the cocktail circuits of Mumbai and Delhi to write the book. He has travelled widely in India. Third, he has the eye of a good journalist for details. Therefore, the book could have been a scholarly exercise even as it is an interesting read. Ultimately, the book is a useful reminder of the challenges that India faces. India is not unique in the share of those with myopic and selfish goals. India’s problem is that it has too few counterbalancing, long-term visionaries with broader perspectives.

Food Inc. and ethics in business

Morgan Housel’s twitter handle took me to a NYT article on a Mexico village that is drowning in coke because they have no water! From there, I read articles about Colombia’s fight against the soda industry , Chile’s fight against obesity, etc.

The article on Malaysia where nutritionists take money from food giants opens up interesting questions on ethics vs. prgmatism.

All the articles are brilliant fodder for B-Schools, for students of pubic policy and for the food industry practitioners.

Many questions arise in my head:

Precisely, who are the food industry leaders trying to benefit? The managers themselves? The shareholders? Who are these shareholders? Mutual Funds? Asset Management Companies? Pension Funds or managers themselves again, as shareholders?

Don’t they have children and grandchildren and do they feed them soda, burgers and sugar, regularly?

How would they like to be remembered by posterity?

What should a laissez faire government do?

Should it let the food industry do what it does while it runs educational campaigns against sugar, soda and fat? Is that feasible? Will the government do it? Are governments somehow insulated from capture, coercion and co-dependencies with the industry? In some of the cases above, even educational campaigns have been muzzled, campaigners threatened or the campaign diluted.

Do these staid campaigns run by government departments stand a chance against cartoons, animations that lure children to consume unhealthy foods?

In the world where information is available at the touch of a few key strokes or punching of buttons in the phone, can parents not do a better job of informing themselve and their children? Or, am I underestimating the seduction of ‘sins’ in these times?

What is the moral equivalent of tempting children to consumer sugar, fat and soda and luring them to smoke? I am watching the 4-hour ‘Century of the Self’ documentary that aired on BBC. I have watched two episodes. Ed Barnays, the nephew of Sigmund Freud, came up with the tactic to get women to smoke, calling it the ‘torch of freedom’! More on that later and in a separate post.

These issues and conflicts open up dilemmas for management education and educators. Multinationals and big domestic companies fund these institutions. Students there learn business ethics. They go and work for these companies too. Look how fiendishly complex all these become?

Is it possible at all for someone to reform these institutions from inside and is there a win-win solution that exists? If it does, is it grasp-able within a horizon that is relevant, meaningful and profitable for management and managers to personally gain from it? Otherwise, they have no incentive to pursue them.

Even activists who come to office promising to reform such practices and make society more humane immediately realise the gravity of the challenges and their internal contradictions. They depend on these companies for employment generation – direct and ancillary. How does one arrive at a meaningful costs and benefits? Costs are immediate – when these businesses threaten to and do close down  but benefits in terms of better health for children and citizens are more diffuse and long-term and hard to measure.

Even in Chile, where the battle appears to have been won, notice the possiblity of a reversal after the elections. Where and when does one declare victory? Or is it ephemeral? Or, are these initiatives doomed to failure and that martyrdom is the only glory? Am I being too pessimistic? Or, that some children and some parents will have irrversibly lerant their lessons for the better and they will carry on the torch and that the message will slowly diffuse? May be, it will.

Amidst all this, is the nutritionist in Malaysia, the most pragmtic where idealism might not produce results but will produce news-stories and secure martyrdom but not much else beyond that?

For his part, Dr. Tee said the obesity risk in Malaysia would be worse without companies’ help, and he couldn’t accomplish his goals without their support.

“There are some people who say that we should not accept money for projects, for research studies. I’m aware of that,” Dr. Tee said. “I have two choices: Either I don’t do anything or I work with companies.” [Link]

Parody of/on parody

If the Chennai International Airport is a parody of an international airport, what does one say about the Maharaja Lounge (AIR INDIA) in the airport? Yesterday, the door to the lounge could not be opened. It was stuck. Just as well, because if one entered the lounge, the air-conditioners were not working. Some problem with electricity supply to the lounge, I was told. By late afternoon, it would have become a sauna.


Sober Indian Edits on Khan as Pak PM

It is refreshing to see, for a change, sober Edits in Indian newspapers on the prospect of Mr. Imran Khan becoming the PM of Pakistan and what they mean for India.

Let us take ‘Business Standard’:

The turning point, however, came in 2013, following a poor showing in the elections. The rhetoric grew more strident, accompanied by a notable dialling down of the liberalism. Intelligence agencies around the world quickly attributed this abrupt change to Mr Khan’s new-found proximity to Pakistan’s military-intelligence complex.”

His fundamentalism appears to have steadily deepened over the past five years: His statements affirming the centrality of the prophet, and support for blasphemy laws imply that he is bound to toe the Army-Inter Services Intelligence line, viscerally anti-Indian and pro-jihadi, even as the country transitions its client-state status from the US to China. [Link]

From MINT:

this election has seen what has been widely called the “mainstreaming” of terrorist groups in Pakistan. A number of political parties founded by terrorists, including one by 26/11 mastermind Hafiz Saeed, have found space on the ballot papers. This could not have been possible without the approval of the army. The results so far indicate that these parties haven’t performed well but it will be important to check the final vote share figures. Irrespective of how well these parties perform, Khan himself is seen as soft on extremist groups. He has defended the controversial blasphemy laws that are used to target minorities in the country and has also attacked the vulnerable Ahmadiyyas in his speeches. So, with Khan’s ascent, Pakistan is likely to offer an even weaker resistance than before to Islamic extremism. [Link]

Aparna Pande of the Hudson Institute:

Pakistan has spent slightly less than half of the last seven decades under military rule and there have been few elections in Pakistan that have been considered truly free and fair. However, even by those standards, there is a near consensus that this has been Pakistan’s “dirtiest” election yet. …

… Under the cover of an order issued by the Election Commission of Pakistan (ECP), the military deployed three times the number of troops in this election than during the 2013 election. Notwithstanding the large military presence, ostensibly to protect Pakistanis, this election has actually been one of the bloodiest, with the independent human rights watchdog, Human Rights Commission of Pakistan, remarking that elections should be “gatherings” not “killing fields”.

… While Khan has been reticent to provide details about his domestic and foreign policies, what is clear is the alignment between his views and that of the deep state: sympathy for the Afghan Taliban and the Kashmir-focused jihadi groups, and belief that the US betrayed Pakistan and is close to India and that China is a more dependable ally. [Link]

While the newspapers have ended their op-edits with open-ended statements or questions, Ms. Pande provides her answer:

Lacking a credible mandate and absent an overhaul of Pakistan’s foreign and security policy, a government led by Khan will be unable to reassure neighbours or the international community and avoid the path of increasing isolation, economic doldrums and domestic instability.

In case you had not seen the Moody’s comments when it changed Pakistan’s rating outlook from stable to negative while reaffirming B3 credit rating, you can see it here.

Funding higher education infrastructure

A friend sent this story and asked for my views. It is about funding higher education infrastructure in India through the Board set up for the purpose. The government is raising the Board’s equity base and letting it borrow in the market to finance higher education infrastructure.

This is what I told him:

Ultimately, higher education has to be funded by the government. Especially, higher education infrastructure, even if the front-end is thrown open entirely to the private sector. That is unlikely. Even if it is thrown open to the private sector with autonomy, government-owned and created institutions will continue to exist. Therefore, infrastructure has to be created to sustain them and the Government has to fund them through its budget.

Given that ‘preamble’, it makes sense to finance it through the institution set up for the purpose where it is possible to track the sources and uses of funds better., than being funded through the government budget. Of course, the government may use the ‘sleight of hand’ for the amount spent on higher education infrastructure will not come from the budget but ‘below the line’ – the guarantee given for the principal amount.

So, market borrowing with government guarantee and with the government reimbursing the interest cost of the loans provided.

Important are these:

(1) Will government simply write IOUs for the interest amount grant and instead of actually paying cash to the Board? That would be a pity. The grant has to come in as part of the government budget and paid to the Board regularly.

(2) Will the government like the Board to lend at an interest rate above the Board’s marginal rate of borrowing? – that should be the case. That will also increase accountability and discipline at the borrowing end. Since the government is reimbursing the interest cost, the government can also hold the institutions accountable for the expenditure and usage of the borrowed funds

(3) My last point is that the loans must be disbursed with performance strings/parameters attached. I am aware that you asked me about the method of financing the Board’s corpus and therefore, sorry for throwing in this gratuitous point.

Will be happy to hear other views and learn.

Unfortunate and unnecessary comment

President Trump’s comments on the Federal Reserve monetary policy  were unfortunate and unnecessary. It also went against what he said on the campaign trail about ultra-low interest rates. Higher Federal Funds rate is overdue. It is only 0.0% in real terms. In this particular instance, political independence of the Federal Reserve goes hand in hand with independence from the financial sector. All the more reason for a President who claimed that he wanted to drain the swamp to desist from criticising the Federal Reserve.

By the same token, he was wrong to criticise the EU fine on Google. Google is not in his corner and will not be. Second, he is also forgetting the fact that the tech. sector market concentration is rather a big reality.

Those who have access should read the interview of Henry Kissinger with FT as part of  ‘Lunch with FT’. He refused to take Edward Luce’ bait to criticise President Trump or his summit with Putin. On the contrary, he thought that the summit was overdue.

What he said about Trump was rather interesting:

I think Trump may be one of those figures in history who appears from time to time to mark the end of an era and to force it to give up its old pretences.

More to ‘No confidence’ or ‘No competence’ debates than hugs and winks

It is instructive that the only two ‘No Confidence’ motions in the Indian Lower House of Parliament in the new millennium were against the NDA governments – in 2003 and in 2018. There was lot of theatre but far less substance, one can see. Rhetoric in place of rigour.

As the Congress President continues to hammer away at his theme of the Modi government, it is important to remind ourselves who the real ‘Suit boot ki Sarcar’ was. Pl. read this blog post from 18th March 2018. It is data driven.

It also appears that the French Government has backed the claim of the Defence Minister that there was indeed a confidentality agreement signed between the Governments of India and France in 2008 when UPA was in office! Homework, gentlemen, please!

AS for the real issues concerning farmers, as I checked into my room at the Della Resorts in Lonavala on Saturday (here to give a speech at the SEBI offsite later in the day), I turned on the TV and watched a fairly civilised discussion in CNBC TV 18 on the farmers’ situation featuring three people inculding a former Agriculture Secretary Siraj Husain, a farmer’s representative (did not catch his name) and a former journalist who has been covering the farming sector. Very civilised debate. Towards the end, Mr. Siraj Husain referred to the piece by Mr. Ajay Jakhar (may be, he was the farmers’ representative on the panel) in ‘Indian Express’. I immediately searched for it and located it. Two sentences towards the end of the article make it an eminently worthwhile read.

The time has finally come for the PM to declare: “I am confident Indian farmers can feed the nation, I annul the Essential Commodities Act”.

A brilliant idea. True demonstration of commitment to farmers and elimination of urban bias in policymaking. I will personally agree with this and support it.

Between inflation management and enhancing farmer’s incomes, for now and at least for a few years, it is better to err in faovur of the latter. Put the inflation target at 5% and the range as 4% to 7%. These can be revisted, re-examined and revised if necesssary, once in 3 years.

The impact on the urban poor can be attenuated if the resulting fiscal space – from having to waive loans at exchequer cost – is used to target urban poor distress pockets. Who knows, it may not happen, if rural prosperity reverse feeds into demand for goods produced in urban centres and results in a rise in urban employment (casual, informal
and formal) and incomes.

The system lacks the skill to diagnose its own incompetence.

That is an indictment worth reflecting upon. Where is the accountability for non-performance? Well, where are the criteria and where are the appraisal systems? Indeed, who defines the expectations for senior bureaucrats and how? Pity such things do not discussed in the ‘No Confidence debates’.

Lately, I have always found revisiting articles from a few years ago to be very useful. It gives us a far better grip on the rigour and logic of the arguments made. If they still made sense, then the author/writer has done well.

An article by Mr. Ajay Vir Jakhar written in July 2014 falls in that category. It is on the Minimum Export Price (MEP) slapped on potatoes. The idea of bureaucrats deciding what the MEP should be is risible to me. It is utter nonsense.

Only recently, the Government of India decided to abolish MEP for onions. I hope it endures. In January, the Ministry of Commerce, under Mr. Suresh Prabhu, made a plea to the Government to abolish MEP altogether. It has not been heeded yet.

Now, fast forward to January 2018 when Mr. Ajay Vir Jakhar wrote one more article on how much the Government of India policies on potatoes were badly mashed up:

Logically, a farmer allowed to make money in one year, would be better prepared to bear the losses on the farm in the next. If not, the farmer gets into a perpetual debt cycle and is compelled to seek “financial sops”. Consequently, most farmer organisations are content to limiting themselves to what the farmer understands — “farm loan waiver” and venture no further into the policymaking quagmire….

… The solutions to the farm crises aren’t limited to budget allocations but rooted in a system where interventions to control food inflation are not harmonised with crop-price compensation. As far as the farmer livelihoods are concerned, state governments and the Ministry of Agriculture & Farmer Welfare are becoming less relevant, as decisions of the Ministry of Food, Public Distribution & Consumer Affairs are demolishing the prime minister’s grand plan for doubling farmer incomes.

Frankly, to some extent, avoiding such big anti-farmer blunders (knee-jerk invoking of ECA and MEP) is not all that difficult. They constitute low-hanging fruits with big multiplier effects for farmers. Potatoes and onions have become such sacred cows that farmers’ lives and fortunes are so easily tossed aside. It is going to be politically very costly too.

Successive governments in India have  done the input parts to farmers reasonably well – free pricing of power, water, susbidised fertiliser and no agricultural income tax. It has not done much work in relieving stress in production – monsoon vagaries. Irrigation potential remains high and actual irrigation cover has stagnated. Farmer education through agricultural extension workers used to be a big thing but I am not sure it is pursed with the same vigour as it used to be in the days of the ‘Green Revolution’.

It is in the front-end, the marketing end, where governments have failed through utter lack of sensitivity to and understanding of farmer issues, crop-price cycles as he put it. Allowing markets to work for farmers, not interfering with market signals and expending some political capital in tackling intermediaries and their commissions that gnaw away at the final price for farmers are the things to be done at the  front end.

Simultaneously, India’s inflation target has to be tweaked. Urban media will squeal when prices rise. Most have no perspective or comprehension of issues, of costs-benefits and of feedback loops. Let them protest and holler. The government has to focus and prioritise.  Perhaps, it is all too late for 2019. As Ajay Jakhar writes,

Farmers could change fortunes in the Rajasthan and Madhya Pradesh assembly elections, allowing the Opposition to bask in the farmers’ misery.

I think the PM has to worry deeply about how badly they have let themselves down by letting down farmers by not tackling the institutional memory, history and inertia in the in the bureaucracy and the entrenched urban bias in policymaking.

(p.s: Came across this interesting article about Mr. Siraj Hussain’s wife and her brother too. Nice stuff)

That is the word

Tucker stopped short of advocating the BoE be brought back under Treasury control. But beneath the bonhomie with governor Mark Carney and his old BoE colleagues, was there a hint of critique? Late on, Tucker pointed to the front row, where Carney and three deputies (Ben Broadbent, Sir Jon Cunliffe and Sir Dave Ramsden) sat next to chief cashier Victoria Cleland, and joked: “I’ve just noticed: this is the politburo.” The front row, Soviet-style, did not smile. [Link]

I am reading ‘Unelected Power’.