A forensic farewell to Andrew Haldane

Andrew Haldane, after more than three decades at the Bank of England, is going to foray into the world of art. His ‘goodbye’ speech delivered on the 30th June is as impressive as the man’s three-decade experience has been. His career is the dream of many who aspire to be in public policy. He has played a hand in monetary policy, in regulation, in forecasting. His speeches, particularly after the 2008 financial crisis, touched upon all aspects of modern finance and banking. His speeches were the equivalent of well-researched papers with lots of references, charts and data tables.

He also covered a wide array of topics in his speeches. Also, he made it a point to speak at many forums within the UK – from professional bodies to schools to colleges to labour union forums. He supported the initiative of students at the University of Manchester to refashion the economics curriculum. It did not bear fruit. But, he saw the need for addressing the problem at its roots – namely, economics education.

My disappointment – and it is a big one – with him is with respect to his attitude towards the ultra-loose monetary policy post-2008, especially its prolonged application, unmindful of effects, costs and unintended consequences. At the minimum, these needed to be assessed, estimated, discussed, considered and then accepted as premises for policy changes or continuity. Nothing of that sort was done in the UK or in the US. Considering how thoughtful he has been in many other areas, his failure reflected a stubborn and somewhat inexplicable blindspot, as far as I am concerned. Unfortunately, that comes through in the farewell speech as well. But, there are many, many useful elements as well.

I will copy and paste the interesting and controversial portions (in my view) with my comments below them:

At the end of this exhaustive process, the forecasts were sent around the Bank, as well as to HM Treasury.

There, I have it on good authority, they quickly became landfill (as recycling wasn’t an option at the time). Like the UK’s entry at Eurovision, the Bank economists’ contribution was spirited but ultimately pointless. The Bank’s analytical brain did not connect to any hands. John Kenneth Galbraith said that economics was extremely useful as a form of employment for economists. At the time, that was the Bank’s view too.

He is describing the process and the conclusion of the exercise of forecasting M4, money supply, for the UK. This is quite realistic and down-to-earth with a good touch of humour.

With my bag of nerves now full to overflowing, I peered through the fog of Rothmans to see Eddie staring back at me. Both eyebrows were raised. This was bad news. In central bank circles at the time, the double eyebrows was career-defining for all of the wrong reasons. Most of my subsequent 25-years has been managing that decline as gracefully as possible.

That is typical classic British understatement and humour combined. He is referring to the technological glitch that greeted his first presentation to the Bank of England’s monetary policy committee – the pre-MPC presentation made by the Economics Department. Eddie George was the Governor and smoking cigars in closed rooms was then permitted. Of course, Haldane’s career was anything but managing a graceful decline over a quarter century.

On the nominal anchor for monetary policy:

It is no coincidence that durability in monetary policy processes has been accompanied by improved
macro-economic outcomes. Since 1992, inflation has averaged 2% – exactly in line with target (to one decimal place) and 6 percentage points lower than in the preceding 25 years. The volatility of output has fallen by around half over the same period.footnote[6] Contrary to everyone’s expectations, inflation-targeting has lasted and delivered a twin-win, with greater stability on both the nominal and real sides of the economy.footnote[7] Given the UK’s previously chequered monetary history, this truly is a transformation.

Of course, there is a question about how much of this improved performance reflects good luck rather than good monetary management.

This is a huge disappointment although there is a small concession to honesty and intellectual openness in his contemplation of a possible role for good luck in ensuring ‘good macro-economic outcomes’. Second, what are good ‘macro-economic outcomes’. Is it just low and stable inflation rate? Did he not find out enough in the post-2008 research of the role played by leverage accumulated by financial institutions in precipitating and aggravating the crisis? If post-crisis efforts have attenuated the leverage in regulated entities (as he points out later), does it mean that the problem has been solved?

He, of all people, should know that if the price of debt is kept too low for too long, taking out all considerations of risk, the leverage does not vanish but goes elsewhere and possibly hidden, just as it was the case with financial institutions pre-2008 through opaque structures. Now, it must be hidden in some other crevices. Lack of acknowledgement of that possibility – a very high likelihood, in fact – is puzzling, to say the least.

In the next two pages (text of his speech), he details his concerns and reservations over the current monetary policy accommodation, post-Covid. Again, he states his concerns with inflation turning out to be higher and persistent. For a man who was the director in charge of financial stability, his apparent lack of concern over financial stability risks is remarkable. Perhaps, he knows more than I do about the state of play on financial stability in England and that he is very confident about it not being an issue. Perhaps. Nonetheless, it strikes me as odd and as a serious omission.

In any case, his inflationary concerns were well documented in his article for the ‘New Statesman’. See here.

He gets closer to the real risks in this paragraph but not quite:

A dependency culture around cheap money has emerged over the past decade. Only a minority of those with mortgages have ever experienced a rise in borrowing costs. Fewer still have significant inflation in their lived experience. Easy money is always an easier decision than tight money. But an asymmetric monetary policy reaction function is a recipe for a Minsky mistake. Having followed the right script on the way in, central banks now need to follow a different script on the way out to avoid putting 30 years of progress at risk.

The reason why he is not where he should be is because of this: what is happening now with the post-Covid response is a logical culmination of what was done post-2008. He should have seen this coming. The lesson that policymakers have drawn from the post-2008 policy response is that it was not enough. The dosage was weak, in their assessment. So, now they have upped it massively. They never have bothered to contemplate if it was the right medicine at all and if it was right to administer it for more than short-term demand management and to facilitate immediate recovery. Andy Haldane does not contemplate this question seriously either.

On financial stability:

I wrote a note and sent it to the Governors in 2005. It was titled “Public Policy in an Era of Super-Systemic Risk”. It made some bold claims about financial system resilience, most of which jarred with the prevailing orthodoxy…..I am still waiting for comments on my 2005 memo. With hindsight, one of my career regrets was not to make more of the results until it was too late. …As best I can tell, no-one got the crisis completely right, despite a number of people subsequently exhibiting supernatural powers of hindsight. Rather, the crisis illustrated the limits of our collective knowledge, our collective lack of imagination. It demonstrated that, in a world of uncertainty as distinct from risk, it is better to be super-safe ex-ante than super-sorry ex-post, better to be roughly right than precisely wrong.

Nice touch again on people with super-natural powers of hindsight. That apart, the certitude with respect to the application of post-2008 crisis monetary accommodation is at odds with the ‘limits of our collective knowledge’.

Recapitalising banks:

When UK banks were finally recapitalised that Autumn, around £65 billion was injected into them by the UK Government. Our calculations had been roughly right, good enough to save the ship. To this day, I believe that if greater amounts had been injected then – perhaps £100 billion? – UK banks would have been more willing to lend and the recovery would have been less anaemic. It would have been better to be super-safe ex-ante than super-sorry ex-post.

I wonder if this lesson has been lost on India since it continues to grapple with anaemic credit growth.

On Macro-prudential regulation:

The macro signalled two important ideological shifts from the past. First, banking needed to be managed at the level of the system as a whole, like any other eco-system. Second, as important as the resilience of the financial system was its interaction with the macro-economy to avoid adverse feedback effects between the two, such as credit crunches. Finance was to be servant of the economy, not master. This, truly, was a regulatory revolution.

He is making some important points. Finance sector interaction with the macroeconomy has been ignored for the better part of the last four decades. Before that it did not matter because finance was mostly bank-driven and banks were tightly regulated. But, once the underlying arrangement changed, regulation was far too slow to catch up. Indeed, the zeitgeist, 1980s onwards was no-or-lite regulation as the markets knew best. So, there was no question of regulation catching up at all. It was simply not in the race.

But, interaction with the macroeconomy is not just about credit crunches but also about credit excesses. Indeed, the latter has been a bigger problem leading to instability. Credit crunch is about risk aversion on the part of lenders and borrowers. Time overcomes them or higher bank capital or both. His omission of ‘credit excesses’ is conspicuous. It is very important that he mentions that finance has to be the servant of the economy and not the other way around. He deserves a shout-out for that. But, is it? To what extent post-2008 policies achieved that? Even if regulatory policy tried to establish that order, to what extent did monetary policy undermine that? Not only he does not pose those questions here but he has avoided them for the most part or, as far as I can remember, throughout the last decade.

I wonder whether central banks ignoring the quantity of money since the Eighties has also contributed to the problem of ignoring the feedback role of credit for the macroeconomy.

As you did not fight fire with fire, you did not fight financial complexity with regulatory complexity. That risked making a bad situation worse, a complexity problem squared rather than halved.

As a matter of principle, this is an important one to keep in mind. But, the devil is in the details or that the satan is in the specifics.

In the UK, the Vickers Commission reforms created a fire-break between banks’ services to the domestic economy and their other activities.

This too deserves praise. The UK might have done better than the USA in this regard.

The Global Financial Crisis had laid bare the costs of separating finance and the economy, the micro and macro – a separation that had also been a feature of the Bank in the past. Crisis needed to be the catalyst for change, forging a link between the Bank’s analytical brain and its regulatory hands.

The Financial Stability reports that many central banks are an acknowledgement of the financial and macro linkages. To the extent that central banks have dedicated brains and hands examining financial stability, it can only be a good thing. But, to what extent do they inform policy or if it is a case of form over substance, judgement has to be reserved until the blowback from the recent combined monetary and fiscal stimulus is felt and played out. In other words, the tide has to go out for us to spot those swimming naked. That might include the central banks too.

Crucial for the success of both the FPC and PRC is operational independence of decision-making, set in statute. Independence for financial regulation and supervision has received far less attention, analytically and practically, than on the monetary policy side. But, for me, the case for independence is at least as strong as for monetary policy.footnote[23] If anything, decisions on withdrawing the punchbowl are harder, and even more important, during raucous credit parties.

Andy Haldane does well to lay out the case for independence of the Financial Policy Committee and the Prudential Regulation Committee. But, withdrawing the punchbowl has to be done in a coordinated manner. It cannot be the case that the FPC and the PRC withdraw the punchbowl and the MPC puts it back. Again, strange that someone as experienced and as perceptive as Haldane is does not see the connection between the two.

Mission accomplished?

More than a decade on from the crisis, the financial system is a fundamentally different animal – leverage far lower, liquidity far higher.footnote[24] The UK’s largest banks’ activities are protected, additionally, by a ring-fence and systemic surcharges. While I still doubt big banks can fail safely, they are far less likely to inflict collateral damage on depositors and the wider financial system. In all of these respects, the regulatory reform agenda of the past decade has been strikingly successful.

And the benefits of this have already been felt. During the Covid crisis, the global banking system has lived up to the expectations set for them by Mark Carney at its start: they have been part of the solution, not the problem.

These observations are striking for they confirm the failure to connect monetary policy to financial stability. Indeed, if the earlier failure was one of refusing to see the feedback from finance to economics, now it seems to be the other way around.

Lending to real businesses:

Constrained credit to companies was, in turn, a potent factor behind the UK’s anaemic subsequent recovery….

These same fault-lines were re-exposed during the Covid crisis. The good news, this time around, was that large numbers of loans – in excess of one and a half million of them – were made to UK businesses by UK banks in the space of a few months. The bad news is that the vast majority of these loans would not have been made at that speed without a 100% guarantee from Government. Only by effectively nationalising SME lending were the Macmillan gaps bridged in crisis….

To my mind, what is needed to bridge the Macmillan gaps, durably and comprehensively, is the equivalent of a UK Development Bank, operating on a decentralised basis. As other countries have found, the scale and scope created by a Development Bank is necessary to reach SME start-ups and scale-ups across all sectors and all regions. The best time to have put in place a UK Development Bank would have been 1929. The second best time is now.

Many important points are made here. There are important omissions too. We will start with the latter. What was the point of ultra-loose monetary policies including QE if lending to businesses did not pick up, post-2008 and that the recovery was anaemic subsequently? What is the policy audit here? Should it not be done?

If, post-Covid, lending picked up only because there was 100% State guarantee – effective nationalisation of SME lending as he puts it, – to what extent did low interest rates play a role and if they did so at all?

Put differently, one of the ‘excuses’ for monetary policy to have played such a big role post-2008 was that fiscal policy did not step up to the plate. But, post-Covid, with fiscal policy kicking in big time, is there a need for monetary policy to be as big as well?

If the response is that borrowing cost would have risen too much without monetary policy underwriting the fiscal expansion, then does it not confirm the failure of the monetary policy post-2008 to create a durable recovery with productive asset creation? Indeed, the above extract is the most severest indictment of the post-2008 monetary policy. It also constitutes the biggest disappointment with Haldane’s personal failure to hold the post-2008 monetary policy accountable for its failure to achieve the economic goals which were never clearly spelt out in the first place.

It appears that it has been left to the Economic Affairs Committee of the UK House of Lords to ask some of the fundamental questions that one would have expected a man of Haldane’s experience and erudition to pose, at least now. I am yet to read the report. FT reports on it here and here.

[Somewhat independently, in the Indian context, there has been a development bank to cater to small businesses. That is the Small Industries Development Bank of India (SIDBI). But, has it accomplished its mission or does it continue to accomplish its mission? How should the mission be defined in the first place? Just amount of borrowing facilitated or refinanced? In quantitative terms, as a percentage of GDP and as a percentage of overall credit? Or, should it be about the number of micro enterprises that became small, medium or large, the number of small enterprises that became medium or large and the number of medium enterprises that became large, before and after the advent of SIDBI?]

On digital currency and its benefits

On financial stability, a widely-used digital currency could change the topology of banking fundamentally. It could result in something akin to narrow banking, with safe, payments-based activities segregated from banks’ riskier credit-provision activities. In other words, the traditional model of banking familiar for over 800 years could be disrupted…. Specifically, this could lead to a closer alignment of risk for those institutions, new and old, offering these services – narrow banking for payments (money backed by safe assets) and limited purpose banking for lending (risky assets backed by risky liabilities).

While this sounds reasonable, he proceeds to (deliberately) obfuscate the issue of negative interest rates on Central Bank Digital Currencies (CBDC). Read the following:

At root, the ZLB arises from a technological constraint – the inability to pay or receive interest on physical cash. This is a technological constraint that every form of money, other than cash, has long since side-stepped…. In principle, a widely-used digital currency could mitigate, perhaps even eliminate, this technological constraint. Specifically, CBDC would enable interest to be levied on central bank issued monetary assets or digital cash. The extent to which this relaxed the ZLB constraint depends, in addition, on the elasticity with which physical cash is provided to the public alongside CBDC. Access to physical cash is an issue well above the pay grade of central bank technicians; it is a political-cum-social issue…..

Nonetheless, the potential macro-economic benefits of easing the ZLB constraint are large and have grown over time. Studies suggest the ZLB constraint can result in significant shortfalls in output relative to potential (of around 2%) and inflation relative to target (of as much as 2 percentage points).footnote[31] These are potentially enormous gains in macro-economic terms. To those benefits needs to be added the gains to digital cash users of holding a remunerated instrument, helping protect their purchasing power.

He is conflating issues. Negative interest rates are about charging the lender. In physical cash, a central bank issues a zero coupon bond. The so-called ZLB is the inability of the central bank to charge the public an interest rate for issuing them physical cash even though cash is a central bank liability! What he is hinting at and not stating openly is that with digital currencies, he thinks that the issuance of currency notes can be done at negative rates of interest. In other words, public pays interest to hold paper currency in its wallets! Otherwise, it will all be CBDC. They can choose.

This brings to my mind the comment I posted on the article by Ken Rogoff in FT on negative rates. Brilliant minds are captivated by their own intellectual acrobatics. They lose sight of the forest for the mastery of the details of growing different trees. What is the tree for? What economic purpose does it serve? That too, after acknowledging that post-2008 policies did not lead to higher lending to businesses and that it was a government guarantee – effective nationalisation – that made the difference, post-Covid. Who benefits from negative interest rates? How big is the ‘cost of capital’ constraint?

On communication and transparency, Haldane deserves much credit for taking the Bank to the public and in de-mystifying it. He also rightly takes credit for bringing people with diverse backgrounds, experiences, etc., to the bank. Those are positives. But, on the issue of transparency which he does not go into, central banks have not struck the right balance between being transparent and non-transparent to financial markets. Again, like with many things, there is no discussion and there is no accountability, hence. Why is transparency needed? What public purpose does it serve? What are the costs? Is it still worth it, after considering the costs? There has never been an open and honest discussion of these questions.

To some extent, Haldane addresses the question of ‘transparency’ with a discussion on forward guidance:

The provision of public policy signals may dampen incentives among market participants to invest themselves in understanding the economy. These risks have I think been realised in practice, with forward guidance encouraging too much poring over central banks’ words and too little poring over the data on which monetary policy decisions are based. That is the wrong way around.

I think the drawback of ‘forward guidance’ or ‘policy transparency’ is not just one of dumbing market participants down. They seem to need not much incentive to do so, these days. It is also about encouraging excessive risk-taking which is what Alan Greenspan’s gradual normalisation of monetary policy achieved between 2004 and 2006. To a considerable extent, it played a role in fomenting capital market risk.

On ‘Forward Guidance’, Haldane concludes with the right advice:

My takeaway for forward guidance from this experience echoes my takeaway for the Bank’s approach to communications generally. Where possible, keep it short and simple. And focus the message on the needs of those shaping our economy, companies and households, not those trading financial instruments. [Emphasis mine].

He is heading over to head the Royal Society of Arts. As I stated at the beginning, there is much to envy in the career trajectory of Andrew Haldane. He steered clear of politics and did not conflate his policy competence with political ambitions. By all accounts, he has achieved a lot. There is much to admire and much to applaud. But, equally, there is much to criticise too for a fair and objective assessment of a man’s contribution to public policy has to encompass a much longer time line since policy itself makes its presence felt with a long and variable lag.

CEO longevity, corruption in China – Monday morning academics

(1) The NBER monthly digest for June 2021 has an article on how CEOs in stressful situations die younger than those. On the face of it, sounds obvious. Specifically, they focus on hostile takeover and the challenges of a financial downturn. Their conclusions?

(1) Working an additional year in a legal environment with greater takeover protection lowered the annual mortality rate by about 5 percent for a typical CEO, increasing his or her lifespan by just over two years. (2) CEOs who were in office during industry-wide distress, on average, died 1.4 years earlier than those who did not experience such shocks. (3) The apparent age of CEOs in industries that suffered the most during the crisis (of 2008) rose by about 1.2 years more than that of the CEOs in non-distressed businesses.

So, more broadly, “stricter governance and economic downturns constitute a substantial personal cost for CEOs in terms of their health and life expectancy.” The paper summary is here.

(2) Considering this, it is not a surprise that decision-making skills are more rewarded in the corporate world. But, is the reward worth it, in the light of the above? Another summary in the same June 2021 NBER Digest says, “Employers have become more willing to pay a premium for experienced, higher-skilled employees with greater cognitive ability because jobs now require more, and more accurate, decisions.”

As automation has improved, machines increasingly have substituted for workers in jobs involving routine tasks predictable enough to be scripted ahead of time. The tasks required of those in the remaining jobs are increasingly open-ended, and doing good work requires the ability to make good decisions. In The Growing Importance of Decision-Making on the Job (NBER Working Paper 28733), David J. Deming calculates that the share of jobs requiring employees to be able to make these good decisions rose from 6 percent in 1960 to 34 percent in 2018. Nearly half of the increase occurred after 2007. [Link]

Making decisions is stressful, however. That may reduce their longevity as per the research cited in (1) above.

(3) I was searching for a recent article in the newspapers on the renewed corruption-related purge in China. I came across an article in Nikkei Asia dated 26th May 2021:

The number of government officials involved in corruption cases who turned themselves in jumped by half in 2020 to 16,000, apparently in an effort to demonstrate President Xi Jinping’s ability to project authority throughout the Communist Party hierarchy ahead of the 2022 edition of the twice-a-decade party congress. [Link]

While searching for this link, came across a useful article in WSJ published on the 1st November 2019 by Nathaniel Taplin. It cited some good academic studies done in China on how corruption did facilitate economic growth in China. One is a NBER paper titled, ‘Special Deals with Chinese characteristics‘ published in May 2019. It is available here. There was also a reference to another interesting paper, ‘Beyond Weber: Conceptualizing an alternative ideal type of bureaucracy in developing contexts‘ published in September 2017. The abstract does make for interesting reading:

The study of public administration in developing countries requires that we look beyond the Weberian model as the only ideal type of bureaucracy. When we assume that there exists only one gold standard of public administration, all other organizational forms that do not conform to the Weberian ideal are dismissed as corrupt or failed. Drawing on neo‐institutional economics, I introduce an alternative ideal type of bureaucracy found in contemporary China. This model, which I call bureau‐franchising, combines the hierarchical structure of bureaucracy with the high‐powered incentives of franchising. In this system, public agencies can rightfully claim a share of income earned to finance and reward themselves, like entrepreneurial franchisees. Yet distinct from lawless corruption, this self‐financing (or prebendal) behavior is sanctioned and even deliberately incentivized by state rules. Although such a model violates several Weberian tenets of “good” bureaucracy, it harnesses and regulates the high‐powered incentives of prebendalism to ameliorate budgetary and capacity constraints that are common in developing countries like China. [Link]

(4) In a way, it makes us reflect on the puritanical approach that India has adopted or is unable to shed. In 2018, the Supreme Court had extended the application of the ‘Prevention of Corruption’ Act to private banks too. Already, Dr. Y.V. Reddy had made a case for exempting public sector banks from its purview way back in 2002. Now, we have a case of ‘Not only not but also’. Aankhi Ghosh and I wrote in Mint recently that this needs to be removed and that bank officials must be exempt from the application of the provisions of PoC Act. They must be subject to the provisions of the Indian Penal Code alone for acts of corruption.

Therefore, it was a nice coincidence that veteran journalist TCA Srinivasa Raghavan had shared a column he had written in 2013 on this very issue: whether tighter bank supervision by the regulator helped reduce frauds or corruption in bank lending. The conclusion was NO. He had cited a study that made the argument. It is from 2005. The authors favour more disclosure and ‘market discipline’ or private discipline. I do recall that more disclosure is what Deep Narain Mukherjee too called for, in one of his columns, whether for Mint or for BloombergQuint. I cannot locate it.

TCA (SR) had also cited a work of Banerjee, Duflo and Cole (2004) on whether the vigilantism of the Central Vigilance Commission in India was helpful or detrimental. Well, it surely was detrimental to credit creation. TCA’s column can be found here. The two citations are mentioned in his column.

The de-emphasising of bank supervision in one of the papers that TCA (SR) had cited then helps to put the article in ET on RBI’s human resource challenge in strengthening the bank supervision department in perspective. As per the article, RBI employees are reluctant to opt for this department lest they are ‘stuck’ there. But, without getting stuck for a number of years, one does not become a specialist. Clearly, there is a trade-off.

The common sense of TT Ram Mohan and Deep Mukherjee

I am sharing here the recent pieces (if they are behind paywall, my apologies) written by TT Ram Mohan in Business Standard and by Deep Mukherjee in Mint.

TT Ram Mohan is a Professor at IIM, Ahmedabad. He always has a flair for and the courage to go off the mainstream media commentary. TT Ram Mohan from IIM-A is one person who should always be consulted by the Government. Eminently sensible, rock-solid in his arguments and does not hesitate to swim against the (often sloppy) conventional wisdom that is paraded in mainstream media where no one does homework and each one quotes the other in a remarkable display of noises and voices in an echo chamber. His piece today in ‘Business Standard’ is no exception.

He argues correctly that the second wave was not really anticipated by anyone and that the arguments that blame the government are redolent with hindsight bias and lack rigour. Quite.

It was sad to see some scientists parade their sloppiness in front of the cameras claiming that they sent this warning or that warning without a shred of evidence. This article that was sent to me just as I am writing this is a perfect example.

We have the Centre for Disease Control in America now encouraging people who are fully vaccinated to walk around without masks, do not need to physically distance and can participate in activities – large or small gatherings – indoors. Almost back to normal. But, given the large number of people who are yet to be vaccinated and who do not wish to take the vaccine, how can the CDC verify that they are vaccinated except through random checks or regular checks. How will that play out?

The truth is that everyone is so tired. So, some authorities are caving in, now. They could have been far more measured before. That would have kept the resentment at mindless restrictions in check. The authorities went overboard and were not nuanced. What they knew permitted such nuances. But, they took relish in exercising their arbitrary powers. Hence, the backlash. Now, they are forced to yield. We would not know whether it would backfire or not.

Something similar happened in India too. People were tired of being held back for ten to eleven months. So, they went full throttle when there was a ‘all clear’ from many scientists, businesses and the government. No point in finger pointing as to the second wave emergence.

What got exposed was the lack of infrastructure – always a long-standing issue. As I have written elsewhere, India’s chronic deficiencies met an acute shock. Then, there was lack of civility, decency in communication, lack of visible presence and communication and, above all, snafus in the vaccine procurement and vaccination strategy.

So, now back to TT Ram Mohan. He says,

many of the criticisms of the government’s handling of the pandemic are strictly hindsight or lack a rigorous foundation. The particular course that the government adopted did not seem unreasonable, given the inputs it received from experts and the conditions obtaining then. For all the advances in science, human systems seem unequal to natural disasters of colossal magnitudes — witness the tsunami in Thailand or Hurricane Katrina in New Orleans. [Link]

His fear is the Indian banking system and the possibility of the Federal Reserve raising interest rates. He cites the remarks of Ms. Janet Yellen, Treasury Secretary, who said that interest rates may have to go up. She backtracked on it. I believe that the Fed would try to whistle through the spike in the inflation rate. Headline inflation rate for April came in at 4.2% (y/y), core inflation was at 3.0% but the inflation rate (m/m) was 0.8% and core was 0.9%. That is big. I still believe that the Fed would ignore this. They are actively seeking inflation to reduce the real value of debt accumulated.

That said, the Fed might be persuaded by the pressure – provided stock markets don’t fall – of raising long-term interest rates and the pressure of informed opinion (rare these days) to reverse course. I would put the probability at between 20% and 30%.

So, he is worried about the banking system for 2021-22. RBI took precautionary and pre-emptive action last week. Good thing. It extended the restructuring plans that were put in place last year. Proactive thinking. See here and here.

That the second wave has come even as the effects of the first wave on the banking system had not manifested should still remain a source of risk. That is what Deep Narain Mukherjee wrote in his article in March for Mint. He breaks it down very well to show how the strain on the banking system was likely to show up in 2022-23. Worth reading his columns. They are pointed, purposeful and specific and do not stay at the stratosphere.

The first-half of 2021-22 may see some weak signals on true credit quality, but the second half would be when a large number of borrowers may have to start bearing their full debt-servicing burden. In 2021-22, however, the reported NPA numbers may be closer to the market’s expectations than RBI’s.

Fiscal year 2022-23 is when banks are finally likely to show symptoms of the covid crisis. That is when a larger number of restructured accounts will start bearing their full debt-servicing burden; credit-infused liquidity may also thin out. While rapid gross domestic product (GDP) growth expected in 2021-22 will support business recoveries, NPA levels after that will likely rise. In 2019-20, the median interest coverage ratio, a measure of debt serviceability, was around 2.0. The ratio is earnings before interest, tax, depreciation and amortization (EBITDA) by Interest expense. EBITDA tends to bear a close correlation with nominal GDP, which is projected to reach ₹210 trillion in 2021-22, up from ₹203 trillion in 2019-20. If earnings follow a similar trajectory, then an EBITBA of ₹200 in 2019-20 will become, say, ₹210 in 2021-22. Interest expenses, however, will grow at a faster clip because of pent up debt servicing and credit build up. The system-wide coverage ratio will go below its pre-covid level, suggesting higher default risk in 2022-23 than in 2019-20.

Only if the growth momentum of 2021-22 is maintained the year after can the situation be saved. Else, the ravages of covid will show on the health of our banks in 2022-23. [Link]

I would also strongly recommend reading his article, ‘Corporate lending awaits its Moneyball moment’ published on the 1st April in Mint. Some of the references given therein are interesting and the points he raises make a lot of sense.

Licensing of banks to companies

Experts might be right on bank licensing even if their logic isn’t
1st December 2020

(https://www.livemint.com/opinion/columns/experts-might-be-right-on-bank-licensing-even-if-their-logic-isn-t-11606752078516.html)

V. Anantha Nageswaran

Their objections may seem muddled but India’s economy is too fragile right now to risk instability

Timing is everything. Whether one is executing a cover drive on the cricket field or making an investment decision. Or, if one is releasing an internal working group (IWG) report on corporate groups being eligible to apply for bank licences. The IWG of the Reserve Bank of India (RBI) had done good work, but its report was released before news of the failure of Lakshmi Vilas Bank had faded from memory. Coincidentally, within days of the report being placed in the public domain, came news that General Motors Company had decided to apply for an industrial bank charter in the US. This is distinct from a bank charter. Loosely put, it can be thought of as an “augmented NBFC” licence. There is no bar on such licensees accepting deposits from the public.

When RBI allowed large corporate groups to apply for bank licences in 2013, there was no major backlash. But, in the last two years, several institutions—financial and non-financial—have failed. Concerns have arisen over the security of bank deposits. Further, the resolution process proposed for winding up banks sowed doubts in depositors’ minds about the safety of their deposits. Also, RBI’s supervision capabilities appear inadequate.

Of all the experts who the IWG consulted, only one did not find anything wrong with the idea of corporate groups promoting banks. But the experts contradicted themselves. They proposed lame safeguards when confronted with the prospect of a non-banking finance company (NBFC) promoted by a corporate entity applying for a bank licence. They did not suggest that a corporate promoter must fully divest its stake before it could apply for such a licence. That would have been consistent. Further, it’s puzzling that a foreign shareholding cap of 74% in banks went unquestioned.

If the concern is diversion of depositors’ funds to connected entities, then corporate promoters can do it even now through the NBFCs that they promote. NBFCs are refinanced by banks, which are funded by depositors. Deposits are thus in play in any case. If anything, it may be more difficult to ‘rob’ individual depositors than faceless taxpayers.

As Shankkar Aiyar noted in a recent column, corporates have promoted NBFCs, mutual funds and insurance companies. What is the incremental damage, especially since RBI has recently decreed that large borrowings must be from capital markets and not from banks? The IWG notes that RBI has the flexibility to impose additional rules to assess an applicant’s “fit and proper” status. The criteria appear robust, and in future, should cover qualitative inputs gleaned from surveys of stakeholders like employees, suppliers and even family members. In 2013, no corporate applicant for a bank licence met the ‘fit and proper’ test.

In general, while raising objections to any new proposal, two things must be considered. One is the worst case scenario and the other is the cost of persisting with the status quo. Amol Agrawal has correctly pointed out in an article in the Hindustan Times that “out of the six failed/merged/troubled banks, four were run by professionals, one by a financial institution and one by a corporate. Clearly, professionals have not fared on expected lines.” Whether it is demonetization, tax collection or bank licensing, public policy cannot be a morality play.

The timing of the proposal, however, is an issue. India’s economy is still fragile. Potential incremental instability, even if deemed remote, seems unavoidable over the next two to three years. Proposals to strengthen bank supervision are theoretically elegant but practically impossible for now. Internal resistance will likely make RBI hiring qualified supervisors at market salaries a non-starter. Further, constructing a scheme for rewarding loss prevention presents a ‘wicked problem’. If deposit insurance premiums are set higher for new promoters for a few years, it would not be a level playing field, and there could be adverse selection as well.

India’s public sector banks (PSBs) have lent vigorously in the past. Total non-food bank credit rose from ₹6.8 trillion in 2002-03 to ₹51.6 trillion by 2012-13. Credit growth is anaemic now due to weak demand. If the appetite for loans improves, banks will step up and capital can be mobilized from the public by diluting the government’s stake. Underlying conditions (e.g., procurement and distribution of electricity) that generate bad loans should be fixed first. PSB employees can be brought on a level regulatory field with their private sector counterparts. That would improve risk appetite for lending, and banks might be permitted to offer market salaries for key functions. Easing the department of financial services’ chokehold might see PSBs step up their game in both lending and capital raising. Separately, the central bank can proceed with augmenting its supervisory skills and resources at its own pace.

Once the economy has regained its footing and achieved a certain heft (say, a gross domestic product of ₹300 trillion), then corporate houses promoting banks may not be a systemic risk, as currently feared. Even though the objections of experts are muddled, their caution is worth heeding. For now.

The Street has not changed its colours

Reproducing Felix Salmon’s blog post verbatim below:

Recent headlines will have you convinced that Wall Street is hell-bent on living up to all of its stereotypes.

Driving the news: Goldman Sachs is the biggest and the boldest, paying more than $5 billion in fines in the wake of the 1MDB scandal, in which billions were stolen from the people of Malaysia.

  • Goldman Sachs pleaded guilty to bribing Malaysian officials, among others, a total of $1.6 billion in order to get deal mandates in the bond and stock markets.
  • That’s the largest set of bribes ever prosecuted under the Foreign Corrupt Practices Act.
  • In a very Goldman twist, the $1.6 billion was not paid from Goldman’s own funds. Instead it came out of other people’s money — it was skimmed off of bond-issue proceeds that were supposed to belong to the Malaysian people.
  • Gary Cohn, who was Goldman’s chief operating officer when the bribes were paid, cashed out all of his bonuses when he joined the Trump administration in 2017. He’s the one former Goldman official who hasn’t agreed to repay a chunk of his 2011 bonus, as the board has requested.

Wells Fargo paid a $3 billion fine for taking advantage of millions of customers by opening accounts in their names that they weren’t even aware of.

JPMorgan, which lost billions in the “London whale” trading scandal, paid $920 million in fines to settle charges that it manipulated futures markets in Chicago.

Citigroup, which has been considered “too big to manage” since at least the financial crisis, was fined $400 million for its management’s failure to effectively stay on top of its operations.

Morgan Stanley paid a relatively modest $60 million fine for failing to protect its customers’ data. According to a pair of lawsuits, the bank failed to remove sensitive data from computers it decommissioned — including Social Security numbers, passport numbers, and account numbers.

Bank of America has kept its nose relatively clean of late, although Waqas Ali, who worked as a client relationship manager for the bank in Boston, did plead guilty to embezzling $1.5 million from one of his Texan clients.

  • According to the complaint, Ali said that he targeted the family in question because they hadn’t pressed charges when they were stolen from in the past.

The bottom line: In a sign of how deep the rot runs, hundreds of bank employees have been fired from Wells Fargo and JPMorgan Chase for abusing the government’s coronavirus relief programs. So far, there’s little sign that banks are shedding their reputation for being greedy to the point of criminality.

India and S. Korea in the same boat

This is from a long article in Nikkei Asia Review on the pros and cons of different big cities in Asia vying to attract the global financial business trying to find alternate homes after Hong Kong came under China’s security law:

Seoul’s main advantage is its location, with convenient short flights to Tokyo, Beijing, Shanghai, Taipei and relative proximity to Singapore, said Tom Coyner, a consultant with decades of experience advising international companies in South Korea. “There is a ready supply of local talent that has been educated and worked in the West, most of whom are bilingual.”

However, he added, inflexible labor markets and high wages may be a deterrent. Meanwhile, those fleeing Hong Kong’s excessive political risk may not find tranquility in a city within howitzer range of the North Korean army.

But stifling economic regulation is the main reason that foreign investment has steered clear. When the Hong Kong protests started last year, the Ministry of Economy and Finance surveyed international finance offices to gauge their willingness to relocate to Seoul. The responses they received were so negative that the ministry gave up any efforts to attract companies, according to the JoongAng Ilbo, a pro-business, center-right newspaper, quoting anonymous government officials. A big deterrent was South Korea’s weekly work hour limit of 52 hours, implemented in 2018.

Even Eun Sung-soo, chairman of South Korea’s Financial Services Commission, found it hard to be enthusiastic. At a public event on July 16, he cited high corporate and income tax rates, lack of flexibility in labor markets and transparency in financial regulations as obstacles for South Korea becoming a major financial center in the region. “From the perspective of macroeconomic management, the government’s capacity to change its tax or employment rules just for the purpose of advancing its financial hub policy will be limited,” he said. [Link]

Just substitute ‘Delhi’ for ‘Seoul’ and ‘Pakistan/China’ for ‘North Korea’, then it would fit very well for India too. So, does it mean that India should not waste its time vying to be a financial services centre in Asia or try and use the opportunity to bring about or shake up the domestic situation?

I am inclined towards the latter but I realise the opportunity cost of effort and money, especially in these times.

Should industrial houses be allowed to start banks?

My co-authored piece with Mr. T.V. Mohandas Pai on letting industrial houses start banks had attracted some criticism. Our piece was triggered by a report that Reserve Bank of India had set its face against it.

Once our piece appeared, the few messages I had received were only about criticisms. Did not receive any message that praised the op.ed. That is par for the course. Opinion pieces must provoke discussion and thinking. That purpose has been served.

My friend and author Shankkar Aiyar sent extracts from his book, ‘The Accidental India’ on bank nationalisation:

Young Turk Chandra Shekhar exasperated with Morarji Desai commissioned four economists to undertake a study of banking operations in India. The economists were H. K. Manmohan Singh from Punjab University, V. B. Singh of Lucknow University, S. C. Gupta of Delhi University and S. K. Goyal of the Indian Institute of Public Administration, New Delhi. Their report was scathing. The committee found that bank credit, rather than being utilised for projects, was being used for low-priority sectors and that ‘between 1953 and 1965, loans to agriculture declined in absolute and proportionate terms’.

The panel  uncovered the extent of the consanguineous relationship between owners, directors, banks and borrowing companies. The panel reported that 188 persons who served as directors in twenty leading banks held 1,452 directorships of other companies besides controlling 1,100 companies. Through common directors these five banks were connected with thirty-three insurance companies, six financial institutions, twenty-five investment centres, 584 manufacturing companies, twenty-six trading companies and fifteen not-for-profit organisations.

Close on the heels of this report, Chandra Shekhar and his group received support from an unexpected quarter. A committee appointed to look into the industrial licensing policy came up with a startling observation. The report authored by R. K. Hazari, a professor of economics at Bombay University, said: ‘I should express my doubts about the viability of suggestions [on industrial licensing] so long as many of the major credit institutions are under the direct control or influence of those who might suffer under the suggested arrangements. It would be difficult to undertake credit planning unless the link to control of industry and banks in the same hands is snapped by the nationalisation of banks.’

Indeed, I remembered his chapter on bank nationalisation vividly and had included some of the information in the first draft of our column. Had to drop them for reasons of length. But, the facts of ‘related party transactions’ or of ‘incestuous relationships’ strongly underpinned bank nationalisation in 1969.

In my bilateral conversations with Shankkar, I had indeed conceded that the experience of nationalised banks for about two decades was a net positive one. Post-liberalisation, the weaknesses of the model was exposed and the last three decades, it has been a net negative experience.

I would definitely mention that the demonetisation experience of where all the cancelled High Denomination Notes came back (or even more?) was as important and as flagrant a manifestation of the insidious nexus between banks’ staff and clients. This may not qualify as a ‘related party transaction’ (RPT) under legal definition but clearly, relationships were amply on display here 🙂

Not to mention the six-fold jump in bank fraud (amount involved) in the last decade or so. Our column provides the reference.

So, clearly, one has to think about the proportion of private ownership and public ownership of banks. I still think there is a case for some government-owned banks. Mixed model is fine but the proportion can be reviewed.

As my friend Srini Thiruvadanthai remarked, one could be in agreement with bank nationalisation then and being open to a bigger proportion for private capital-owned banks now.

Yes, privately owned banks brought down the world almost in 2008. But, some countries (like Canada) did better. It is not impossible. 

Dr. Y.V. Reddy, in a speech in Feb. 2018, had expressed grave reservations against foreign banks being dominant. I agree with him. If you had not read the transcript of that speech, it is good to make amends now.

That leaves us with the question of who brings in the capital to start banks given that credit/GDP ratio is roughly 50%. With due respect to Manish Sabharwal who, in a recent article in ‘Indian Express’ talked about raising the ratio to 100%, I think that is no different from ‘credit mela’ target. With public sector banks dominating the sector, such a target of raising the credit/GDP ratio to 100% in a reasonably short time-frame is a recipe for more Non-Performing Assets.

Interesting that TCA Srinivasa Raghavan called for the re-privatisation of RBI itself. The quote in the end is brilliant. In a way, it is against deficit monetisation. I shall use it. But, as another friend (R. Jagannathan of Swarajaya) noted, the ‘RPT’ between the Union Government and the central bank might be more destabilising to the economy than the other RPT that we are worried about.

The licensing authority has the right to attach conditions that it wishes to the license and to reject applications. Yes, I am aware that certain applicants will come with political pressure to be approved. But, how different is that from the current reality?

On the conditions to be attached to approval, just thinking aloud here: 
one can always start with a higher capital adequacy ratio (including a simple leverage ratio) and relaxing them over time based on record.

The worry should be about depositors and not about bank failures because failures are part of the nature of banking. So, we contemplated adding a sentence or two about moving from fractional reserve banking to full reserve banking (or a higher percentage than what is in vogue) as the proportion of pvt. owned banks in the system rises. We had to drop it due to considerations of length.

Harikiran Vadlamani (founder-promoter of Indic Academy) frames the debate well here:

One thing that struck me was in another financial business we had business houses managing other peoples money- mutual funds. I was trying to think why we did not have any problem with that.

Transparency has a big role to play. Investors in a fund know exactly where their money has gone on instantaneous basis. But, in the case of banks such transparency is not easily possible. So business houses managing peoples money is okay with instantaneous transparency but not with a lag.

So the question is how can we increase the transparency levels using AI/ML etc in a manner that it is next to impossible for any RP transactions? Most banks already have some form of tech that flags unusual transactions. Should not policymakers invest in this so that moral hazards are reduced to a greater extent?

Finally, op.-ed.s are expected to trigger discussions. From the argument against interest deduction from taxable income, to proposing that wealthy individuals consider a voluntary social compact with the State, to calling for doing away with Income Tax assessment, to recommending (a one-time) monetisation of fiscal deficit and now with the case being made for pvt. sector industrial promoters for banks, Bare talk is doing the job of provoking thinking and discussion.

Public indifference to public property

Second, we started auctioning properties charged to us in a big way on a monthly basis. Once this process started, the borrowers became alert and they came and regularised the loans. So, that way some NPAs have come down. [Link]

It made me think. One of the reasons – among many – that public sector banks end up with NPA problems at the end of every economic expansion cycle is that the borrowers probably consider a public sector bank as the ownership of no one in particular but of everyone, in general.

So, I hypothesise that there is relatively less compunction in defaulting on a loan to a public sector bank than to a private sector bank.

I am in no way minimising the other reasons – lack of risk management (evaluating the business prospects of the borrower and thus assessing the riskiness of a loan better), performance culture, political influence, outright collusion (between bank staff and the borrowing clients, etc.).

Apart from these, I think the carelessness and indifference to public assets (spitting and littering and damaging public property during agitations) and the consequent lack of accountability to public assets is a factor.

If so, does it make the case for a better mix of privately owned and government-owned banking system?

What is the connection?

The FT has a long article on the demands bankers are making of regulators.

Let us see the demands in one place:

(1) “One executive said banks were pushing for an extension of the implementation of Basel IV — which is due to come into full effect by 2027 — to prevent banks having to build up capital levels by 2021.  

(2) “Lenders in the UK have written to the Bank of England to demand that the transition to the new accounting rules — which are due to come into full effect by 2023 — is extended, said several people who have seen the letter. ” 

(3) “Several executives said the industry was also asking supervisors to take a “best efforts” approach to money laundering and market abuse, whereby banks would avoid punishment as long as they had tried to do the right thing — even if they had technically breached rules.” 

(4) “Executives have also asked that the transition from the discredited Libor rate to new interest benchmarks be delayed from its current hard deadline of 2022 to free up employees to work on more pressing matters.” 

(5) In the UK, banks are also pushing for the BoE to delay climate change stress tests. “Steps on the whole green debate have put an additional onus on banks,” said the executive. “We’ve got to be pragmatic.” 

FT can hold a contest among its readers to guess the most egregious demand of the five listed above. Personally, my vote is for no. (3).

Regulations that are to come into effect at least two years from now are being asked to be suspended for banks to lend now!

What is their record on lending for productive purposes, to small and medium businesses and to low income households?

How much of their earnings they derive from these relative to the monies they make from lending to capital market participants and from proprietary trading?

Articles galore on how much humans are going to change for the better on account of the crisis – sustainable living, respect for climate change, respect for the environment, cooperation over conflicts, etc. 

Most of us know, from past evidence, that such behaviour tend to be fleeting. They occurred during the previous WW II (see this: https://www.collaborativefund.com/blog/common-enemies/). That is why they are called fleeting social utopia. But, at least, they instil some hope and make for good reading.

Stories such as these bring us down to earth and keep us grounded in a way. We must be grateful to the bankers for reminding us of the inherently self-destructive nature of Sapiens.

Preliminary thoughts on the evolving situation surrounding YES Bank

This was inevitable. Andy Mukherjee of Bloomberg had suggested on 13th January that the Government of India (GoI) and the Reserve Bank of India (RBI) must bite the bullet but budget time-table came in the way, I guess. Even then another month had elapsed.

Hence, some are concerned that there could still be a big contagion like it happened in the case of the collapse of IL&FS in October 2018. Possible. One can never say never to things in fluid and rapidly evolving local and global situations.

However, there is an important difference between October 2018 and now. Then, RBI leadership took a rigid, uncompromising and doctrinaire approach to both liquidity provision and inflation targeting. Monetary policy was restrictive and liquidity provision was inadequate. Indeed, RBI had an important role to play in precipitating India’s economic slowdown in 2018.

The current RBI leadership is more pragmatic and less academic. Hence, the hope is that the repeat of the ripple effects of the collapse of IL&FS would be avoided now.

What follows are my (current) take-aways and the situation could evolve differently. I am aware.

(1) Since the financial system was already largely impaired and credit to non-financial industry was growing at below 5%, there cannot be a big incremental damage.

(2) Lenders to YES Bank and investors in YES Bank would take a hit. Mutual funds list is there. But, most of them have already marked down their exposure to zero value (see https://www.bloombergquint.com/business/heres-how-much-mutual-funds-are-exposed-to-yes-bank-debt)

(3) State Bank of India (SBI) has assets ten time (10.3x) the size of YES Bank (Ref: https://www.bloombergquint.com/global-economics/india-must-end-yes-bank-s-theater-of-the-absurd). Together, the Life Insurance Corporation of India (LIC) and SBI can absorb this. 

Pl. read the excellent article by Aarati Krishnan of ‘BusinessLine’ on the portfolio of LIC and how secure it is.

(4) Some market commentators point to potential contagion effects. At this stage, the analysis is largely speculative. Withdrawal limit of Rupees 50,000.00 is reasonable for retail depositors and, in any case, and curbs on depositors’ withdrawals will likely go well before April 3.

As for loans to small and medium enterprises, as noted earlier, loans have already dried up and, hence, the incremental impact will be negligible, if at all.

Settlement of derivatives positions has to be clarified. I have no doubt that, before too long, RBI will issue necessary clarifications.

As for the impact on stock markets, they were unsettled even before this development, by global developments. One should not be worried by potential action in stock markets and further declines. Stock prices will become cheaper for long-term investors.

The real issue is how the clients of YES Bank would fund themselves going forward. While most of them would have made or attempted to make alternative arrangements in the last few months, this space has to be watched. Incremental credit crunch needs to be avoided.

(5) There is also a view circulating that meaningful reforms would happen in India only with personnel and leadership change in the Ministry of Finance. That is mischievous.

There have been corporate and personal income tax cuts; consolidation of public sector banks; government’s intent to get out of IDBI has been announced; the Finance Minister has followed through on de-criminalising many of the violations of the provisions of the Companies Act; the budget has improved transparency of the fiscal arithmetic, etc.

India’s economic growth slowdown is due to the financial sector crisis and history has it that all economies experience a deep and prolonged slowdown when the slowdown is set off by banking and financial sector crises. India is not experiencing uniquely severe slowdown. 

Yes, this is an opportunity for meaningful reforms. Yes, it is an opportunity to redefine the balance between government-owned and privately owned commercial banks. But, the solution to all problems is not privatisation and privately-owned banks in advanced economies nearly collapsed the world economy in 2008 and might do so again. Indeed, the collapse of the YES Bank is a cautionary tale of the so-called superiority of the model of private ownership in financial institutions.

That said, the opportunity to improve the resilience of India’s financial system as much as possible remains to be grasped.

Availability of liquidity for Small and Medium Enterprises (SME) is largely a working capital issue and that is as much a failure of banks to make risk-based lending as it is that of large buyers of MSME supplies not paying on time – both government and non-government buyers. That is a systemic change and change in MoF leadership will not solve the issue.

(6) Covid-19, as of now, has had limited impact on India’s health system and the number of infections is exceedingly low, for a large country. India escaped SARS because, by February, India turns warm. It is no exception this time. I expect India to be less affected than most countries.

Covid-19 might also end up contributing to an improvement in India’s bilateral trade deficit with China. See the positive Cummins India story, for example. It could be repeated in other cases.

Overall balance of payments would be less affected as reduced investment flows would be offset by improved trade balance and I don’t see the current account deficit worsening, because of still-weak economic growth impulses and further likely delays in the recovery of investment demand. Further, crude oil prices will remain depressed for the year, helping keep India’s import bill under check. Recent rupee weakness is not a cause for worry and perhaps is, on balance, a good thing.

There will be supply chain disruptions to some industries. Some analysts wonder whether the impact of Covid-19 would be inflationary or deflationary in India. I think it would be mostly deflationary rather than inflationary and hence, allowing RBI room to continue to ease policy conventionally and unconventionally.

India’s economic growth rate for 2020-21 could be 5.5% (my personal central case) with downside risk all the way to 5%. That is the current estimated growth rate for 2019-20.

By the time the dust settles on Covid-19, it might turn out to have done a good deed for India for some of the migration of global supply chain out of China would not be easily reversed. For example, see this riveting story on how the incidence of swine flu conitnues to be suppressed in China. By now, it is common knowledge that the outbreak of Covid 19 had happened a month before the world came to know of it.

It is significant that a cross-party group of twenty senators has urged the UK government to reconsider granting Huawei a role in the country’s 5G telephone network.

(7) Finally, visible leadership from the very top and communication are essential. Such communication too should be non-defensive and non-reactive. They should merely aim to reassure and soothe rather than refute genuine or exaggerated criticisms. 

Being a commentator in these times is far easier than to be a decision-maker. Arm-chair wisdom is relatively intellectually undemanding and most of it is with the benefit of hindsight too. In the rush to get their story out, commentators make big errors. Imagine how difficult it must be to make decisions in real-time under uncertainty often with imperfect and inadequate information?!

Decision-makers should ignore commentators and simply focus on communicating and taking decisions with only one consideration:

Help, if and only if possible, in the short-term, without sacrificing the medium to long-term growth prospects.

Overall, it is possible for India to end the year with a stronger and better base for faster growth with some reasonable steps combined with a calming and reassuring communication. Noise can and should be ignored.