Four pieces to wake you up on a Sunday morning

(1) In a hard-hitting piece – peppered with cushioning and placatory statements, Mohandas Pai and his co-author – blast the government for failure to tackle tax terrorism. The truth is that the NDA government had taken greater recourse to it.

(2) My batch-mate, N. Jayakumar of Prime Securities, had given an interview to ET. It is worth reading. I had shared it with a bureaucrat in Delhi whom I have come to know recently and whom I admire for his clarity of thought and plain-speaking. His reaction to the article was as disturbing as it was revealing.

My friend focused on this sentence in Jayakumar’s interview, in particular:

Is there something that the government can do? I go back to another comment that I have actually made which is that no favours, no hand me downs. Can the government merely instruct every single government agency that deals with a private sector party to make their payments on time? That means state electricity boards, the NHAI, the various tax refunds. Tax refunds by the way is a huge amount. Even if that amount came back without the kind of loops that one has to…

The reference to loops by Jayakumar is also consistent with Mohandas Pai has written. 

(3) Shankkar Aiyar’s two recent pieces – one as part of his regular columns for ‘New Indian Express’ and one, also part of his regular columns for Bloomberg Quint – are, as always, worth reading.

Two important points he makes in the piece on BJP’s Socialist Conservatism are these:

In 2014, the Modi government promised expenditure management, and in 2019 the debate is about extracting resources from the RBI’s contingency reserves. The Securities and Exchange Board of India is estimated to have reserves of about `3,800 crore. The finance Bill seeks transfer of 75 per cent of SEBI’s general reserves of `3,800 crore to the consolidated fund of India. The government also wants 15 per cent of the unspent CSR funds with companies.

The following line is consistent with what Mr. Pai and his co-author had written:

“Socialistic conservatism is also about taxation—an 18 per cent GST on small service providers flies in the face of the rhetoric on creating job providers, as does tax on start-up investors.

Note the following for it is an interesting revelation (for me):

During NDA I, BJP ministers ensured the burial of the most comprehensive expenditure management exercise.

(4) On raising dollar resources through issuance of sovereign dollar bonds, Shankkar suggests alternatives:

Yes, India must raise additional resources and in dollars to finance the aspiration for high growth. Why not raise dollar resources by listing LIC? Why not aggregate surplus land with government into a land bank and call for bids? Why not transfer government ownership of public sector banks and enterprises into an exchange-traded sovereign fund?  The yen to dollarise government debt with sovereign bonds instead of monetising assets is perplexing, to say the least. It is what Adam Smith would characterise as a case where imagination is baffled by facts.

Just wondering if it is possible for a democratically re-elected government with a better majority to become a lame-duck administration in less than two months? Searching for that imagination, innovation and boldness in governance that went into the re-election campaign.

Sovereign dollar bonds

Many of you might have noticed that the Indian government announced a plan to borrow in dollars in international capital markets. It will be India’s first foreign currency sovereign borrowing from capital markets.

In one short sentence, it is ill-advised. If you thought that the issue of ‘Masala’ bonds (rupee bonds issued for foreigners to subscribe) were safer, that is wrong too. Happy to elucidate. Have done so here.

I wrote about it in my column on the budget published the day after the budget was presented:

One headline that grabbed attention pertains to the government announcing its intention of issuing sovereign debt in foreign currencies. Apparently, India thought of it in 2013 but did not go ahead as the macro fundamentals were deemed dodgy then. But, probably the best time to borrow would be when the domestic currency is undervalued. The Indian rupee in the second half of 2013 was close to being undervalued. Right now, India’s macro fundamentals are not weak, although big question marks remain over the economy’s growth rate, its sustainability and vulnerability to a global stock market correction. In other words, the risk is tilted towards further weakness of the Indian rupee. In 2013, it was tilted towards its strengthening after a hefty correction.

On the other hand, the timing is opportune in another sense because global central banks are back to considering further crazy monetary easing moves. To that extent, raising foreign currency borrowing now is a case of good timing. Another upside is that the government would not be crowding out domestic savings, which have declined in recent years and show no signs of reviving. That is a good thing. [Link]

The above two paragraphs only focused on the micro issue of timing the bond issuance in foreign currency. But, the argument in favour of issuing foreign currency denominated bonds in terms of it not crowding out domestic borrowers is not entirely correct, I admit, because Dr. Y.V. Reddy had pointed out lucidly as to why it is no help to domestic non-sovereign (private sector borrowers).

The argument is this: if India’s safe current account deficit is 2% of GDP and if Government of India borrows from foreigners (it is part financing of the CAD), then the amount available for other domestic borrowers in foreign currency is going to be reduced by that amount. The ‘ceiling’ is unofficially set by the ‘safe’ current account deficit for the country.

Then, on July 9, I wrote more extensively for MINT on the dangers of the Indian government borrowing in foreign currency. [Link]. It might open the door, together with other measures announced in the budget, for greater financialisation of the economy at a time, when its macro-economic health and performance are brittle.

Besides Dr. Y.V. Reddy’s piece, one of the best comments on this subject came from Sanjaya Baru. It is well worth a read.

In this piece, Shankkar Aiyar suggests alternatives to raising dollar resources through sale of sovereign bonds:

Yes, India must raise additional resources and in dollars to finance the aspiration for high growth. Why not raise dollar resources by listing LIC? Why not aggregate surplus land with government into a land bank and call for bids? Why not transfer government ownership of public sector banks and enterprises into an exchange-traded sovereign fund?

The broken world of finance or Does Capitalism need enemies?

I was startled to read these two stories and contrast them with the picture below.

This image file came via courtesy of this website.

This article in Bloomberg gamely tries but fails to make sense of the craze for negative yielding bonds.

Wework floated a debt before filing for IPO! It has been losing money ever since it was founded and it is valued at USD47.0bn!

In contrast,

Regus owner IWG , founded in 1989, has a similar business. It booked revenue nearly twice as high as WeWork did last year yet it has an enterprise value a bit above $4 billion. [Link]

Wework co-founder has reportedly cashed out US$700 million from the company through stock sale and borrowings against shares of Wework. JP Morgan advised him on his sales and it is also advising the company on its debt offering. His shares hold 10 times the voting rights of standard shares. He has properties that are leased back to Wework and he collects millions in rent from Wework! Source: Link

Evidently, he could cash out so much because the company had the chutzpah to issue USD4.0 billion of debt

What a model of ethical capitalism!

It is into this loss-making company with co-founder cashing out such a large sum before IPO that Softbank decided to invest USD 16.0 billion including USD 6.0 billion of new money! The amount was eventually scaled back after partners opposed it.

Blame central banks and their policies for money losing its value and investors losing their heads and eventually, their shirts and trousers.

Did cricket really win on the 14th July 2019?

My good friend Dakshinamurthy Venkatesh Babu (‘Babu’ for short) is an avid fan of sports and films. That is an understatement because I cannot capture in words his intensity, energy and enthusiasm for both. So, I am not trying. He loves Roger Federer so much that neither Federer himself nor Federer’s wife would be able to match him. It takes longer for Babu to recover from the losses suffered by Federer on tennis courts than for Federer himself.

You can imagine what he must have been going through sitting in the upper half of the Edrich stand at Lord’s cricket ground on the 14th of July with the rest of us when his heart and mind were in the Centre Court at Wimbledon. This is where technology failed Venkatesh Babu and the sport-loving humanity. It has not progressed to a point where they could be at two different places at the same time. Many cricket-tennis enthusiasts would have loved to be at Lord’s and at the Wimbledon Centre Court on the afternoon of the 14th July. They could not. So, they watched history being made in one place while they heard of history being made in another.

Roger Federer lost a match that he, for all practical purposes, had won. He was serving for his 9th Wimbledon title and could not hold serve. Federer had won more games in the match and hence scored more points than Djokovic in that match but, in the end, it was Djokovic who was crowned the Wimbledon champion for the fifth time. Federer’s reactions were as impressive and inspiring as the man and his craft are.

May be, some spiritual practitioners who know how to do these things and even teach a select few might become a little more sought-after for this specific purpose, after the events of Sunday, the 14th July 2019.

On my part, I was happy to be at the Upper Edrich Stand at Lord’s in Row J in seat number 67 to witness the bizarre ways in which life unfolded on the 14th of July for cricket players of England and New Zealand. Again, it was due to Babu who had taken the initiative to organise this visit for the rest of the nine of us. Left to myself, I would have watched it in the sweltering sauna-like living room of my apartment in Sri City (IFMR Business School campus) in Andhra Pradesh or, with some luck and planning, in the more comfortable environs of my apartment in Singapore, with my wife and son.

My bragging rights to future generations that I was present at the ‘one and only cricket match that could ever end like this’ is dedicated to Babu!

We watched a cricket match at Lord’s on Sunday that may never again be repeated. Perhaps, the way it was concluded should not be repeated at all. That would be better for the game.

Osman Samiuddin writes in Cricinfo that if ever a proof was needed that life was random, the Cricket World Cup final match of 2019 served it up. One should not be surprised that an outcome like this forces humans to dig deeper and wider into philosophical realms to make sense of it all.

For the record, I had come to a different conclusion. Both Kane Williamson and Roger Federer were born on the 8th August, nine years apart, and they both had a heart-breaking day. It is equally true that both of them are the finest blokes you could find, not just in their respective sporting arenas, but outside of them too.

Many things that happened on the 14th July at Lord’s were not random. No, I am not saying that there was a conspiracy to make England win. Far from it.

Martin Guptill reviewed the ‘LBW’ decision against him. The review went against him, denying Ross Taylor a review when the umpire was clearly in the wrong. Some of us who had a direct view – as I had – felt that the ball had hit him high up, on the thigh.

Martin Guptill ran out M.S. Dhoni with a brilliant throw in a crunch situation in the semi-final but he, inadvertently, ended up conceding 4 overthrows, in a most bizarre and cruel twist to the game when New Zealand had almost put the match out of England’s reach.

Then, Martin Guptill was run out himself, inches from the crease, sprawling, almost like Dhoni was, in the semi-final.

Technology helped New Zealand when it failed to overturn an umpire’s decision that went against Virat Kohli in the semi-final. Technology did not help New Zealand when it failed to conclusively establish that Jason Roy was out the first ball he faced from Trent Boult.

There were other minor-major errors. Quite what Santner was thinking on the last ball of the innings he faced is unclear to us. He not only failed to make any attempt to make meaningful contact with the ball but also failed to take a run off it. It mattered in the end. In a big way.

The big difference, for the worse, on the day, was Trent Boult himself. He was at his best against India. He was well below par on this day, conceding at least one boundary per over.

As for England, did they deserve to win the tournament? I wish I had no doubt in my mind that they deserved. They found a very purposeful and effective bowler in Chris Woakes and Ben Stokes, born in New Zealand, had carried their hopes alive in many matches. He is world class. Jofra Archer, a Barbadian import, is a bowler to watch. But, the more impressive teams in the league phase were India and Australia. England, except on placid tracks, came up short.

Finally, about the rule book. Simon Taufel, a former respected umpire, notes that England should have gotten only five runs off the overthrow rather than six. The specific rule is written clumsily but its intent seems clear as its application. The two umpires on the ground – Erasmus and Dharmasena – missed it. But, that was not the only thing they missed on that day. Playing teams, despite the help or hindrance of technology, must include umpires as part of their team or as part of their opposing team, depending on the day.

Thank Goodness for them that the team that faced most of their errors on 14th July at Lord’s was New Zealand and not India at Eden Gardens, Kolkata.

The most important rule of the day was something that no one had paid attention, probably, including the players and the managements of the teams: if the match was tied, there would be a super over and if the super over was tied as well, the team that scored the most boundaries in the match would be declared victors. It is as daft as it could get.

It is not that we are criticising it now, after remaining silent when it was being drafted. The rule was not crowd-sourced and ICC did not invite suggestions from cricket fans, administrators, et al., to come up with a better rule.

Cricket is about runs and wickets. How you score them is less important. In theory, a team can take singles and twos and score 300 runs in a 50-over match. Possible. Another team can do it differently. Merely because another team scores the same number of runs with 30 boundaries and five sixes plus singles and twos, does not make it a superior team. Arguably, it is a riskier, less athletic and less efficient approach.

Since cricket is about runs and wickets, if the runs are tied, the next important thing is wickets. Since New Zealand scored the runs for the loss of eight wickets and England were all out, New Zealand should have been the winner.

If that too was inconclusive, then one can look at either of the two:

(1) The difference in the net run rate for the entire tournament between the teams or

(2) Difference in the number of runs scored per wicket lost between the two teams in the entire tournament

The only rationale for determining the outcome on the basis of the number of boundaries is that the team that provided the most entertainment to the crowd in terms of boundaries wins! Well, even that may not be correct for it takes no account of how the boundaries were scored.

It privileges batsmen over bowlers. It is flawed.

Why not the team with the most economical bowler wins?

The point here is not to come up with another unilateral (and unfair and unreasonable) rule but to indicate things that administrators needed to think through the signal that they are sending to cricket players.

The ICC has to be indifferent or neutral between batsmen and bowlers. Administrators in combination with Television channels or because of revenues from television rights have put a premium on big-hitting batsmen.

The message of the (second) tie-breaker rule is that technique be damned, bowling be damned and fielding be damned.

That is not cricket. That is not good for cricket either.

(Cross-posted at

Government stake in Public Sector enterprises

The Finance Minister said the following in her budget speech on government stake in Central Public Sector Enterprises:

Government has been following the policy of disinvestment in non-financial public sector undertakings maintaining Government stake not to go below 51%. Government is considering, in case where the Undertaking is still to be retained in Government control, to go below 51% to an appropriate level on case to case basis. Government has also decided to modify present policy of  retaining 51% Government stake to retaining 51% stake inclusive of the stake of Government controlled institutions.

In order to improve the capital flows into the Indian economy, it is important to align domestic corporate systems and practices with global ones. It is also appreciated that global finance movement in equity uses certain parameters to evaluate the stocks in which they choose to invest. Government intends to further encourage retail participation in CPSEs which, of late has shown very encouraging upward trend. In order to provide additional investment space, the Government would realign its holding in CPSEs, including Banks to permit greater availability of its shares and to improve depth of its market.

Strategic disinvestment of select CPSEs would continue to remain a priority of this Government. In view of current macro-economic parameters, Government would not only reinitiate the process of strategic disinvestment of Air India, but would offer more CPSEs for strategic participation by the private sector.

Government is setting an enhanced target of `1,05,000 crore of disinvestment receipts for the financial year 2019-20. The Government will undertake strategic sale of PSUs. The Government will also continue to do consolidation of PSUs in the non-financial space as well.

ETFs have proved to be an important investment opportunity for retail investors and has turned out to be a good instrument for Government of India’s divestment programme. To expand this further, Government will offer an investment option in ETFs on the lines of Equity Linked Savings Scheme (ELSS). This would also encourage long term investment in CPSEs.

For bringing better public ownership of the PSUs and also bring greater commercial and market orientation of the listed PSUs, the Government will take all necessary steps to meet public shareholding norms of 25% for all listed PSUs and raise the foreign shareholding limits to maximum permissible sector limits for all PSU companies which are part of Emerging Market Index.

The highlighted portions above were significant and I had singled them out for praise in my comment on the budget I wrote for MINT on Saturday.

As per ‘India Today’, the Finance Minister has issued the following clarification:

Talking to media persons, Sitharaman said: “51 per cent control assumes that there is a company where the government directly holds 51 per cent and there are also government-run institutions holding additional stake (say 10 per cent).

If the government intends to eventually seek more retail participation where employees of the company can purchase the shares, then even as the government retains 51 per cent, the extra holding through the government-run institutions can be released for employees who want to possess shares, by which the government control is not diluted. [Link]


Non-economists at central banks

I am not sure whether my friend Amol Agrawal’s piece in Business Standard is a lament or praise for the fading of economists from high seats in the world of central banking. It seems to be a factual article leaving much unsaid. Perhaps, he is training to become a central banker!

I do feel, for the record, that governments should allow independent institutions to exist within the government framework. But, they cannot become alternative power centres and be vocal about their differences with the government. But, they should be voices of conscience and they should focus on the long-term objectives of governance which can be different from the short-run goals of those who govern. Therein lies the tension. On those occasions, they must speak out with restraint, firmness, confidence and politeness but must avoid grandstanding. If they fail, they should leave, rather than make the situation worse for the country with a messy fight.

Paul Volcker had his run-ins with James Baker, Treasury Secretary under Ronald Reagan in his second term. He mentions the post-Plaza Hotel Accord incidents. The communication committing the G-5 (Canada and Italy were added later to become G-7) to monetary easing was opposed by Volcker. Soon, he faced an insurrection inside the Federal Reserve Board. He did not resign nor did he do grandstanding then. He left at the end of his second term although originally he had planned to serve only two years of his second term. That seems like a better way of handling differences. (Source: ‘Keeping at it’ by Paul Volcker)

We rent digital books and don’t buy them

Katharina Pistor rightly raises the alarm on Facebook’s cryptocurrency. Central bankers’ silence is, one hopes, a sign that they are studying it deeply.

Yanis Varoufakis (May 2019) writes that the stellar returns achieved by Greece’ stocks and bonds since 2012 are part of the problem. He is right. There is a gap between economic reality and financial returns. Greece is not the only place it is happening. But, it could be one of the more extreme examples. He forgot to zero in on the principal source of the problem: reckless monetary policy pursued by the developed world.

Wall Street Journal comment on the appointment of Christine Lagarde is a very good read. It is politicisation of the European Central Bank. Not that Draghi was much different. The comment notes that markets are cheering her appointment but that markets would regret it. Well said. The cheer is because it means continuation of reckless monetary policies.

Adam Tooze’ review of the book, ‘1931’ by Tobias Straumann made for very interesting reading. My friend Ajit Ranade suggested that I read a blog post by his friend on the book. I did so. It is well written. The post makes a good point about how Jews were made the scapegoats by the Nazi party when they were actually in the forefront of defending Germany’s interests in the peace conference and that the German foreign minister was Jewish, etc.

As to the take-aways from the book, I am not sure that there are neat answers to avoid a certain march of history, except in hindsight. Colour me sceptical on humans’ ability to solve the problems they create. They are good at creating problems but not that good at solving them. Most of the time they solve themselves or plain luck and humans take credit.

It is hard to quarrel with the motherhood statement made by the blogger here:

Economic orthodoxy must always take second place to the need to make sure individuals, communities and businesses are able to work and earn a decent return on their investment (labour in the case of individuals, capital in the case of businesses).  [Link]

One important take-away from Adam Tooze’ review is that democratic politics (local politics) can come in the way of doing the right thing in terms of global obligations. This is but a variant of Dani Rodrik’s ‘Inescapable Trilemma’. The review also reminded me of what I had not read yet: John Kenneth Galbraith’s account of the Great Depression.

This FT Edit made for very disturbing reading, especially for someone like me who has gotten used to reading stuff on the Kindle App in my iPad. I did not know that I am renting books and not buying them outright. As the Edit says, this is duplicitous. The Edit says that, in this regard, the revival of paper-based books is a good thing. I have to agree.

Sucheta Dalal in Moneylife has a good article on the corporate cleanup underway in India. She thinks it has been overdue. I hope she is right that it is being pursued with earnestness.