Status update on UDAY

Our estimates reveal that the financial and operational efficiency parameters envisaged in UDAY tripartite MoUs – between DISCOMs, the State Governments and the Ministry of Power, Government of India have not been met by many States. Using UDAY portal data, we find that the average AT&C (Aggre-gate Technical and Commercial) losses that should have been 15% for all the partic-ipating states by 2018-19, presently, on average, stand at 25.41%. Yet another financial indicator, ACS-ARR gap (the gap between Average Cost and Average Revenue) has also widened for many UDAY participating states. The power tariff revisions have also not been implemented in the States – due to political economy reasons – and the operational parameters in our analysis indicate widening inefficiencies across States in power infrastructure.

Source: UDAY Power Debt in Retrospect and Prospects: Analyzing the Efficiency Parameters by Amandeep Kauri & Lekha Chakraborty, WP No. 244, 22nd November 2018. [Link]

There should be a meeting of State CMs to discuss several issues that fall in their domain. This is clearly one of them.  AT&C losses and the gap betwen ACS and ARR are quite high for Punjab and Haryana. They deplete the weater table through cheap power, cultivate paddy and wheat and the stubble burning that follows leads to Delhi-ites gasping for breath and much worse stuff.

Looks like an all-party consensus in just these two States could do wonders for India’s agriculture sector, power and water problems and external image as well.

Independent Directors

More than six months ago, I wrote in my regular weekly column in Mint that independent directors were an endangered species. Looks like it was not an overstatement.

On Dec. 25, the ‘Business Standard’ carried a story on independent directors leaving in droves this year. Net of appointments, the exit was high at 282 in 2019. The article provides data for the last seven years including in 2019. This is the highest net exit rate for independent directors. In fact, in many years, it is the net entry rate that is positive.

The government has to be aware of this. Well-meaning rules and regulations requiring independent directors to exercise due diligence on the companies in whose Boards they are appointed might end up driving sincere independent directors out of Boards. Corporate governance will be the poorer for it.

That is why what R. Gopalakrishnan wants – good people on the Board – may become more difficult:

Real (You) + managerial experience + active listening + welcoming diverse viewpoints, and you get the job description for a wise director. It is demanding, but worthy as an aspiration.

Once again, a lesson in the law of unintended consequences for policymakers.

Investment and not consumption

It is interesting that TCA Srinivasa Raghavan has followed up his column on Dec. 5 in which he advises India’s Finance Minister to focus on reviving investment rather than consumption with another column on Dec. 7 in which he questions the usefulness of ‘backseat drivers’.

But, this delightful irony apart, his column on Dec. 5 is a useful read because it highlights how India’s growth experience has always been a case of ‘stop-and-go’.

STCMA 8th December 2019

It has been two weeks since I blogged here. I have not lived off suitcases before but that has happened since late October or at least since mid-November. While I have been reading reasonably widely, I have not been able to translate them into posts. I did finish reading ‘The road less travelled’ by Scott M. Peck. A very good book. A good recommendation by my friend Balaji Ethirajan, Head of Human Resources at TVS Supply Chain Solutions. I have been wanting to post some key extracts from the book. But, have not found sit-down time to do so.

Anyway, here goes some key readings:

This long story in Nikkei Asia Review about Softbank’s investments in India and their mixed performance is a good reminder of how chasing growth at all costs always comes a cropper and yet investors keep repeating the same mistakes.

Raghuram Rajan’s long article in ‘India Today’ on the prescriptions for the Indian economy is about as objective and as balanced as he could be, considering his recent presentations and op.-eds., on this matter.

The story about how the keyword, ‘Mike’ in Bloomberg Terminals took terminal users to the campaign page of Michael Bloomberg is delightful.

A tongue-in-cheek story about riots boosting GDP in France is short and useful too because the riots caused France to increase public spending and the country’s Purchasing Managers’ index is doing better than that of the rest of the Eurozone.

On November 22, China’s National Bureau of Statistics quietly revised the GDP for 2018 upward by 2.1%. That it makes it easier for the country to achieve its goal of doubling GDP in a decade from 2010 to 2010 is incidental, I suppose.

Blackstone’s Private Wealth Management Division calls negative yields on sovereign debt the mother of all bubbles. Quite.

Amundi Asset Management’s Survey of pension managers on the impact of QE on their pension assets is featured in FT here. For those who want the full story, it is available in Amundi website. A few keystrokes would help you find it.

On California Forest Fires and risks of flooding in the US, check this link. The article also says that the Netherlands has addressed flooding risks well. The FT story on Sydney bushfires is worth a read. Delhi feels like a anti-haze haven! Actually, when I landed in Delhi on 3rd December evening, I was very pleasantly surprised to see how clear Delhi was from the sky. I had not experienced such a sight in several years.

If you want to see photos of the damage wrought by Australian bushfires, click this link. Apparently, Australia is experiencing one of its worst droughts in decades.

The White House has opposed a USD1 bn bank loan to China. Should not be surprised.

Martin Sandbu’s long read on how the Euro is taking on the US dollar is more a story of hope than promise or substantive reality. American Treasury officials would not spend sleepless night after reading this story.

I must learn this practice of how not to have to read books in full.

The Indian Government on overdrive now

On July 8, 2019, I had done this blog post when the Finance Minister appeared to walk back on her silently profound announcement in the budget that the government, going forward, would maintain its stake in central public sector undertakings at 51% taking into account the stake held by goverment-owned financial institutions. Now, few months later, she has managed to get it cleared by the Cabinet Committee. See the press release here. Kudos for her persistence.

Then, the government had announced strategic sale in select public sector enterprises. See press release here.

The Cabinet has approved the Taxation Laws (Amendment) Bill 2019.

Last week, the government had announced a resolution mechanism for financial service providers. Dewan Housing Finance will be a test case. Andy Mukherjee wonders if it might work. Reading between the lines, he is not sure that it would not.

Together with the Supreme Court decision on the sale of Essar Steel to Mittal Steel, it has been a good week for the government and for the Finance Minister.

The demons of fiscal deficit and goverment borrowing for the reminder of 2019-20 and that of government data are the two big ones that remain be slayed.

The many fountainheads of India’s economic malaise

An opinion piece written by Dr. Manmohan Singh has justifiably attracted a lot of eyeballs and nods of approval. Written by a ‘student of economics’ as he describes himself, it is a well written essay. He has also zeroed in on some answers. Restore trust and confidence in administration, in the institutions and unleash massive fiscal stimulus.

He is right to call for an elimination of the atmosphere of fear. Some of us had written about it much earlier. See here and here. The government too has recognised the problem. That is why the Finance Minister recently announced a remote system for the issuing of notices and summons. She said that permission from a two-member collegium was necessary to prosecute tax defaults below Rupees 25.0 lakhs. To be sure, Revenue might resist and is resisting the changes. That behavioural issue transcends this government. On its part, the government has recognised the problem. The government-constituted panel has proposed decriminalizing many of the offences under the Company Law. The sooner its recommendations are implemented the better.

More importantly, the reposing of trust in industry was exemplified by the new corporate income tax regime the Finance Minister announced in September. It provided for low tax rates with fewer exemptions and announced a very low rate of 15% for new manufacturing oriented companies commencing production from 2023. Yours truly wrote that the significance of that measure was not the measure itself but the signal it sent. The government was no longer bogged down by the ‘Suit boot ki Sarcar’ jibe. Indeed, that jibe should remind Dr. Manmohan Singh as to the role of the Congress Party in creating an atmosphere of distrust between the government and the industry. That deserves some further explanation.

As a student of economics, Dr. Singh should note that economies and societies rarely settle at an equilibrium and stay there for extended periods. Humans, societies and economies, more often than not, swing between extremes. In that sense, he should reflect on the factors that created the atmosphere of distrust. What role did his government play and the industry play in engendering an atmosphere of distrust?

The Supreme Court took the extreme step of cancelling the coal mining licenses and the telecom spectrum licenses. It was probably too extreme but, perhaps, the Court thought that it was necessary because of the extreme breach of trust, good governance and probity in the award of such licenses. The economy is still hurting from both the action and the reaction.

An excellent article by Aarati Krishnan for BusinessLine documents the failure of many private sector agencies leading to retail and institutional creditors incurring losses on their loans to Dewan Housing Finance Limited (DHFL). After reading the article, I asked another journalist-friend as to whom he would consider responsible for India’s economic slowdown, he said he would place promoters of India Inc., on top of the list.

Abheek Bhattacharya has a review of ‘Bottle of lies’ and calls an Indian pharma company the ‘Theranos before Theranos’. It is useful to reflect on why it had taken 3 years for the acquisition of Essar Steel by the Mittal group. Is it the flaw of the Insolvency and Bankruptcy code or is it the disruptive behaviour code of promoters.

Internationally, in Financial Times today, there is a report on whistleblowers in the ‘Big Four’ audit companies facing a ‘disturbing pattern’ of harassment, bullying and discrimination.

The purpose of pointing out these is not to suggest that one mistake or one wrong justifies another mistake or wrong but to remind ourselves that backlashes inevitably follow egregious behaviour and the longer the original behaviour lasted, the reaction tends to last as long. Nonetheless, it is good to recall that the government is walking back on some of the measures, even if well-intended, that have proven to be inimical to legitimate economic activity.

Dr. Singh does not train his spotlight on the Reserve Bank of India, an institution that he once headed. RBI introduced inflation targeting in 2015, through an agreement with the Government of India. Let us not forget that it was a response to five years of double-digit retail price inflation under the government led by Dr. Singh. Unfortunately, for a better period of the last four+ years since the inflation targeting regime came into existence, the central bank has been more religious rather than pragmatic in its adherence to the inflation targeting regime. It has forgotten that all economics is about context.

Many theories that policymakers from developing countries at the feet of their Gurus in American Universities are abandoned by them before they start implementing them here. Inflation targeting of 2% is open to review there. It might even be replaced with nominal GDP targeting which is nothing but targeting a cumulative inflation rate rather than an annual rate of 2%. Central bank printing money to fund government deficits is now going mainstream. Since negative interest rates are not working to boost economic activity, economists call upon Western governments to splurge borrowing at low interest rates at which markets are willing to lend to fiscally insolvent governments.

In India, whether or not demonetisation of high-denomination notes was a sound or an unsound decision, the textbook response of a central bank to the sudden withdrawal of massive liquidity would be to lower rates. In 2017, RBI cut rates only once and that too in August. Then, in 2018, partly due to international pressure, it raised rates twice and has liberalized external commercial borrowings instead of lowering cost of capital at home.

More recently, it has not unequivocally reassured markets and Non-Banking Finance Corporations with liquidity backstops. It has allowed uncertainty to linger and the problems to fester. Its record in preventing frauds in banks has been spotty at best and sloppy, at worst. Its blanket and indiscriminate adoption of norms for recognition of non-performing loans was struck down by the Supreme Court.

I hope that when future students of economics write the history of India’s economic performance in the second decade of the millennium, they will subject the central bank to far greater scrutiny than current and former students of economics have done. Janmejaya Sinha of the Boston Consulting Group has been an exception. His critique of the Indian central bank can be found here and here.

Dr. Singh has called for a fiscal boost to the economy. He is right. There again, advisors to the government – from within RBI and outside – have made fiscal prudence a cult or a religion. That is why the NDA government of 2014-19 had to undertake a pro-cyclical fiscal tightening when it came to office. It did not demand a longer time frame to set right the fiscal imbalance it inherited from Dr. Singh’s government. Now, when the same advisors turn around and demand fiscal pump-priming, politicians are confused legitimately.

Students of economics should resist and challenge economic theories from becoming creeds if they want governments not to stand in the way of economic activity.

He writes that India is at risk of stagflation. He is partially right. India is at risk of economic stagnation. That said, considering the economic growth rates in many emerging economies, it does not seem to be the only country facing that risk. That is no consolation but it helps to remind ourselves that India’s economic growth troubles are not unique to India. There could be other forces at work. As for inflation risk lurking always in the corner, he may have been prompted by the most recent consumer price inflation rate. However, the core inflation rate is plumbing new lows and monetary dynamics are so poor that the inflation genie might stay in the bottle after popping its head for a few months.

Finally, he says that India has to grasp the opportunity of lower oil prices and a higher domestic political capital. Again, he is partly right. The considerable political capital that the government has accumulated has to be deployed to set the economy on a sustainable and slightly higher growth path than what obtains now. The government is beginning to do the right things but more can be done and faster too. But, will lower oil prices really help? It is not that easy to burn fossil fuels anymore.

The European Investment Bank has announced that it would stop funding fossil fuel companies. That also means that projects that depend on fossil fuels will find it tough to be financed in the years to come. This is a new instalment of ‘kicking the ladder’ that keeps divergence in economic attainments between the developed and developing nations from closing. Be that as it may, it is a growth hurdle that needs to be recognised by policymakers and commentators in India. Climate change and extreme weather events are becoming more frequent in India. That too is not growth-friendly development.

The high growth years of 2004-08 coincided with rising oil prices and were due to global economic boom that boosted India’s export growth. Global demand has languished since then and so has India’s export performance. This is not to deny the abundant scope that exists in India for improving productivity and export competitiveness. Unsustainable capital inflows and malformation of capital were short-term contributors to economic growth in that era. They are now headwinds.

In short, India faces newer growth challenges on top of the ones that have existed. It might have missed the low-hanging growth that was available in the last century.

Finally, Dr. Singh has done a useful service to the nation in reminding us all that economic activity is founded on trust between all participants. Yours truly had written a fortnight ago that restoring trust could be an effective economic stimulus. Hence, I agree with Dr. Singh that trust and confidence are central to economic activity. Further, the weight he has thrown behind fiscal expansion is doubly welcome.

In this essay, he has focused on what the government should do. Given his vast experience, his observations should not be ignored. At the same time, as a keen and perceptive student of economics, he should know that there are other stakeholders in the economic system. If he subjects them to as much scrutiny as he has done the government, the economy would benefit. At a minimum, he should write on the many acts of omission and commission on the part of the central bank in the last five years. Then, he should exhort India’s corporate leaders to reflect on their contribution to India’s economic malaise. That would be a useful service to the country which he has served with distinction in many capacities in the years gone by.

(These are my personal views)

Swedish Riksbank and poverty

The 2019 Swedish Riksbank prize for three economists who have done extensive work on poverty and how to deliver poor out of poverty has attracted a lot of attention, pride and noise in India because one of them is an Indian-American. One understands from newspaper reports that he is an American citizen.

This blog has never really commented on the annual prizes awarded to economists every year. It is not mandatory. The only time I had a strong feeling against the award was when Eugene Fama was given the prize in 2013 for his work on (financial) market efficiency.

These prizes are judgements of people in a committee. So, disagreements of outsiders with the committee’s judgement, on occasions, should not be a big surprise nor a source of disappointment or anger on the part of those who happen to agree with the Committee’s decisions.

Those who disagree have no reason, however, to conclude that the committee made incompetent decisions because the committee, arguably, pores over far greater information and spends a lot more time deliberating than those who take to twitter to vent their disagreement and even anger at the choices. That is unhelpful.

Much of the anger stems from the political stances taken by some of the recipients. But, the Riksbank Committee does not give them awards or deny them awards for their political views. So, questioning the decision because the recipients hold different political views is unreasonable. 

Some of the past awardees, on their part, have ‘monetised’ their award by espousing strong political views. The moment they enter the political boxing ring (or, the cesspool), then they should be willing to trade blows The discourse is not often civil in such spaces. But, they cannot complain because they chose to enter that arena.

As for the awardees this year, I have not followed their work that closely to make rigorous observations. Interested readers should refer to the ‘Urbanomics’ blog of my coauthor Gulzar Natarajan. You can sample this blog post of his. 

The quote attributed to Arvind Subramanian by Devesh Kapur (ht: Gulzar’s post above) in this article is worth recalling:

When asked how many of these expensive RCTs had moved the policy needle in India, Arvind Subramanian, Chief Economic Advisor, GOI, was hard pressed to find a single one that had been helpful to him in addressing the dozens of pressing policy questions that came across his table. By contrast, the compiling of just some key facts on learning outcomes by Indian NGO, Pratham, has had a big impact on policy discussions in education, because it is backed by a degree of specific knowledge and engagement that is more credible and persuasive. [Link]

On my part, I will simply use the occasion to highlight some other related issues which may or may not be directly relevant to their work.

At the core of the Randomised Controlled Trials (RCT) is the belief that, somehow, it is possible to make Economics a physical science by following the controlled experiments that are eminently doable in physical sciences. But, facts and behaviour in social science are embedded in contexts. They are inherently not falsifiable. Hence, not sure if RCT could capture all the nuances. Consequently, the reliability of the conclusions drawn from such experiments might be suspect.

The second point is that most economists do not keep in mind the asymmetric and non-linear nature of the relationships between economic variables and between causes and effects are asymmetric. That gives rise to the law of unintended consequences (=road to hell being paved with good intentions). For example, see this story on microlending in Sri Lanka gone awry. 

While the story of microlending in Sri Lanka need not be a case of the law of unintended consequences, it is a case of the gap that exists between goals/intentions and real-life outcomes.

It is useful to ask why economic relationships are asymmetric and non-linear? Because, humans are. Loss aversion is a classic example. We value what we don’t have and once we have it, its value goes down. That is asymmetry. This has implications for policymaking.

When folks tell surveyors that they value something and would be happy and better-off if provided, one can never be sure that they would value it as much if given and, hence,  the effect may not be what policymakers expected.

Reason why economic relationships are asymmetric and non-linear is that there are only few positive factors but several hygiene factors that influence human behaviour. Hygiene factors matter only in one direction. Positive factors do in both directions. But, hygiene factors far outnumber positive factors in our lives.

However, on balance, any research or methodology that challenges conventional wisdom on an important topic such as human impoverishment and raises fresh set of question must be deemed useful. The work of the three winners of the Swedish Riksbank prize for economics in 2019 passes that test.

Postscript: The World Bank published a report called ‘Voices of the Poor’ in 1999-2000 that simply listened to them. You can find it here.