Monetary policy transmission in India

In its monetary policy meeting last week, the Reserve Bank of India’s Monetary Policy Committee cut the policy rate – the repo rate – by 25 basis points. This is its third rate cut since December 2018 and it was unanimous. The Committee also unanimously decided to move to an ‘accommodative’ stance indicating further easing down the road. So far, so good.

Transmission from RBI policy rate to the lending rates fo banks remains the big challenge in India. See this article in ‘Business Line’, for example. Some banks have even increased their lending rate since the last RBI policy rate cut!

Everyone – including my friend Gulzar Natarajan – points out that Indian banks have a much higher share of their liabilities in bank deposits. These deposits are fixed in nature. Therefore, interest rates on them are payable at a fixed rate regardless of the movements in the policy rate. Since they cannot come down with cuts in the policy rate, the lending rates too cannot be lowered. Ergo, there is no transmission.

Gulzar even shared a chart with me that showed that Indian banks’ deposits as a % of overall liabilities is higher compared to other developing nations.

But, the truth is that Current and Savings Accounts (CASA) are more than 40% of overall deposits. 41.3% to be precise. The last data point available – in a easy to retrieve manner, that is – is from February 2019. See here.

Current accounts pay no interest and the interest payable on savings accounts is 4% – at the lowest balance between the 11th and the end of the month. That is as low as one can get, in terms of savings account balances. In the first ten days, the balance could be higher due to salary deposits. That is why they are excluded!

Therefore, the argument is somewhat unconvincing. Not untrue but not the total explanation.

The explanation lies in lack of competition with the central bank prescribing a floor for lending rates via its formulaic Marginal Cost of Deposits based Lending Rate (MCLR). I wrote about it in my MINT column last Tuesday.

If one went through the RBI Internal Working Group Report on the MCLR and the previous base rate, published in October 2017, one would realise that these are not MCLR (i.e., not marginal) but that they are also binding floors for lending rates.

Note a key sentence in the report:

One bank included a negative spread under business strategy due to market competition, which was in contravention to regulatory guidelines. (PAGE 47)

Indeed, that should be the case. Banks should have the freedom to take the basic of decisions for a commercial entity – the pricing decision. But, they do not.

India needs genuine competition in lending rates between banks. Neither the owner nor the regulator must intervene. It will also enable the owners to figure out which of them are worthy of further capital infusion, growth and which of them deserve to be merged, consolidated or weeded out.

Of course, the second thing is the Small Savings Interest Rate. Check out the table in page 26 of the said report (Table II.8).

Interest rates offered on bank deposits are lower than that of the interest rates on small savings and these interest incomes are tax-free too. The Government-announced interest rates on these Small Savings Schemes are higher than that of the rates that would be offered if the government sticks to the formula that it promised – linking the interest rate to the 10-year Government bond yield. It has not. On top of it, there are tax benefits.

That is the second (or, even the first) biggest hindrance to transmission. That is why I felt that the usually meticulous Indira Rajaraman quite did not get it right in her column on the topic of transmission. She is right with her conclusion, of course. The multiple strands that link the funding of government budgets (of the States and the Union) to the National Small Savings Fund (NSSF) need to be broken. She is right on that one.

But, more than that, the idea of offering a higher interest rate on a product that is even safer than a bank deposit and with tax benefits is a sure-fire killer of the banking system profitability and of transmission of monetary policy.

Some politically unpopular decisions need to be taken. They will be unpopular in the short-term. But, a government with its back to the wall on the banking system and with such low actual economic growth (more on that in a separate blog post) has to take some decisions and face up to the tradeoffs. There are no costless choices here.

Surjit Bhalla had got this one right. One of the most important decisions ever taken by a FM was taken by Yashwant Sinha when he lowered the interest rate on Small Savings Deposits. That did play a big role – among many other things – in India’s post-2002 economic boom.

Surjit Bhalla had got this one right. One of the most important decisions ever taken by a FM was taken by Yashwant Sinha when he lowered the interest rate on Small Savings Deposits. That did play a big role – among many other things – in India’s post-2002 economic boom.

Employment creation in India

Apparently, Surjit Bhalla and his co-author (Tirthatanmoy Das) have put up a paper on the website of the Economic Advisory Council of the Government of India on job creation in India in 2017. They estimate it to be 22 million jobs. That seems to be on the high side. Commentators have their knives out to attack the estimates. The protagonists and the antagonists are politically motivated. I am yet to read their paper. But, I have seen two critiques. One by Professor R. Nagaraj and the other in Hindustan Times which was supposedly second of a five-part serial on Indian labour market.

Professor Nagaraj analyses the claims of Bhalla and Das in four dimensions. The third dimension is that of generating formal employment estimates from the data provided by the Employee Provident Funds Organisation (EPFO). Prof. Nagaraj’ critique is stale and wrong because of the work of Pulak Ghosh and Soumya Kanti Ghosh had taken them into consideration in coming up with their conservative estimates of formal job creation from EPFO data. They have excluded EPFO enrolment through amnesty. They have excluded those who were above 25 years of age. They have dropped those where even one contribution was missed. I have written about their work here and here. That Prof. Nagaraj rehashes the same critique is a reflection of both sloppiness and bias.

Key sentences in this piece tell me that the authors are offering opinion and not analysis. Pulak Ghosh & Soumya Kanti Ghosh’ estimates based on EPFO were conservative and passed the test of rigour. These authors, when discussing their work, say that Ghosh & Ghosh were criticised. They leave it at that. Criticised by whom? For what? and how rigorously? Were the criticisms correct and reasonable?

That throwaway line dilutes the seriousness with which one should take the entire piece although one cannot and does not rule out political and, otherwise,upward bias in the work of Bhalla +1.

The first part is here (can be safely skipped) and the third part is by Manish Sabharwal. Those who have not read Manish’s articles on Indian labour market before can find them all neatly recapitulated in that piece.

Demonetisation update 38 – pre-dispositions

Prasanna Viswanathan of Swarajya had shared a good article from Economic & Political Weekly (December 30, 2017) on the impact of demonetisation in rural Tamil Nadu. It was a survey based article. What came out well was the fact that people found a way around the cash ban and yet stuck to cash. That came out well. The second thing is that informal networks got strengthened. The authors strangely note that as a failure of the demonetisation exercise. Far from it. The authors of the demonetisation exercise in the government did not wish to disturb social networks in India!

The other thing that came out – the authors mention it twice – is that there was widespread support for demonetisation. That makes us wonder if the inconveniences and difficulties faced by the public are exaggerated by those who were not well disposed towards the government. If it had caused huge hardship to people, the measure could not have remained popular for too long.

The paper is ‘Insights on demonetisation from rural Tamil Nadu’ – understanding social networks and social protection, Economic and Political Weekly, December 30, 2017, Volume 52.

If the authors of the article were not pre-disposed towards judging the demonetisation as a failure, it would have made for a scholarly article. Pre-disposition makes scholars look silly.

You do not have to look far from this FT article by Larry Summers on the American economy for a classic example of pre-disposition or prejudice making for poor scholarship. If my students had written it, they would have scored very low marks indeed. Just one example: for America, a weak currency is not a reflection of its economic weakness at all. Mr. Summers knows it well but mentions it all the same as reflecting economic fragility because he cannot get himself to say something good about the U.S. economy under President Trump.

While on the subject of the U.S. economy, it was amusing to read that President Obama was claiming credit for the improved performance of the economy in 2017. Well, debatable but would he then take the blame for its sluggishness up to 2016 in almost all parameters of the economy?

Coming back to pre-dispositions, we had one on the other side – this time from Surjit Bhalla. He wrote in ‘Indian Express’ that tax buoyancy had picked up in the current financial year 2017-18, despite the demonetisation. Well, he says, it was because of the demonetisation’s impact on black money that tax buoyancy (more like elasticity- % change in tax collection for a % change in GDP) picked up.

This is problematic. GDP growth slowed down in the first three quarters following demonetisation. That does not establish causality but it is reasonable to think that demonetisation had at least a partial impact on economic growth. If, on top of the growth slowdown, there was increased tax collection, then one has to wonder if it was a good or bad thing. Vigorous tax collection in the middle of an economic growth slowdown might have aggravated the slowdown.

So, I am not sure if improved tax buoyancy in the context of an economic growth slowdown that might possibly have been aggravated by demonetisation (if not caused by it) is cause for celebration.

Fanciful, Mr. Bhalla

Mr. Surjit Bhalla concludes his piece (‘An easy win for Hillary Clinton’, IE Nov. 5, 2016)  with these words:

 If it turns out as predicted, the election will likely provide a much-needed boost to those who believe in trade, open borders, and the traditional “American way”. The anti-trade, anti-immigration wave around the Western world will at least be halted, if not reversed, with a large Clinton victory. The recent high court judgment in England (parliament must vote on Brexit) has already provided the basis for the beginning of the retreat of anti-globalisation forces.

It appears that he has plenty of catching up to do with what is going on in the Democratic Party and what has been happening under this administration for the last eight years. For starters, he can visit the website of the National Federation of Independent Businesses and he can read up the references cited in my blog post written in response to the 370 academics who urged Americans to vote against Trump.

The anti-globalisation movement has its origins in the fantastic success of globalisation except that it was not widely shared. Second, the current Democratic Party rising stars are Elizabeth Warren and scores of other anti-free traders.

If the Democratic Party takes the Presidency and the Congress, it will veer too far to the Left of Centre. Ms. Clinton has disavowed the TPP.  Elizabeth Warren drove the resignation of Jon Stumpf of Wells Fargo -correctly so, in this case. But, the truth is that it would be a party of anti-globalisation.

So, what is he talking about?  He has written a fanciful piece as he does, from time to time. The rise of anti-globalisation is, in large measure, due to its success and those who benefitted from its success kept the benefits for themselves and thus imperilled globalisation. They are the reason for the rise of anti-globalisation and it is not going away.

Sorry, Mr. Bhalla. You have your arguments very wrong and, I hope, your prediction too.

Weekend Reading Links – 16.04.2016


A ‘Chinafile’ conversation on the Panama papers and China

A North Korea think tank referred to China as “a vanity-driven nation bowing down to the US” at the cost of losing a precious friendship forged in blood.

This movie has played out elsewhere in the world and in China too again. But, it has returned to China: “Trying to reduce housing inventory by encouraging individuals to increase borrowing is a dangerous experiment.”

Martin Feldstein abandons his critical faculties too and falls for the charms of China.

South China Morning Post reports that Vincent Chan, head of China research at Credit Suisse, is worried about the China economy in the medium-run and long run. How short is his short run?

China’s Xinjiang province signs deals worth USD2.0bn with Pakistan.


UK Government opens probe into Tata Steel ‘fraud’. A rather strange ‘China-like’ response.

Moody’s said rising FDI inflows continue to narrow India’s external financing needs and mitigate the risk of a potential widening of the current account deficit related to weakening remittances.

India could be sitting on a gold mine, and not even know it.

This article in Swarajya believes that India can eliminate poverty but does not mention ‘income’ or ‘employment’.

Surjit Bhalla, citing mainly inflation statistics, argues that NDA-2 is not UPA-3

SEBI publishes new rules requiring transparency from fund houses on how they remunerate their executives and their financial advisors who sell their fund to retail investors.

Bloomberg discusses the potential of Unified Payments Interface in India. Leapfrogging conventional banking with digital technology.

A must-read piece by Tamal Bandyopadhyay on the changing landscape in Indian banking.

India could potentially invest more than 130,000 crores of Rupees in Iran. Are we sure of the numbers?

Royal Bank of Scotland to close its India operations.

Do not let the somewhat overdramatized header dissuade you from reading this piece on the importance of de-risking Indian farming for which the crop insurance scheme unveiled by the government earlier in the year is an important first step. There needs to be a constant and continuous empirical evaluation of the scheme to iron out wrinkles from time to time.

Comprehensive remarks by Indian FM Arun Jaitley on the Indian economy.

A good article (book excerpt) on the role of MIT in IITs.


Prithwis Mukherjee’s lucid article on Blockchain and cryptocurrency

A massive trawl of Northern Hemisphere rainfall data for the last 1,200 years revealed there had been more dramatic wet-dry weather extremes in earlier, cooler centuries before humans set off fossil fuel-driven global warming.

France ‘Up All Night’ protests entered 12th night; started out as a protest against a draft labour bill but extended to other issues.

Accuity is a firm is in the business of selling database to banks of people and entities to avoid. It has more than a million entries.

Market inefficiency and Stephen Curry of Golden State Warriors.

Dan Lyons would rather work for an old-fashioned furniture maker than in a tech. start-up.

Will be useful to know how much (if) Dubai has changed since this article was written in 2009.


Puerto Rico declares bank emergency

Mario Longhi, head of US Steel, blames Europe and US for being complacent towards the threat from China on steel dumping. China says that its overcapacity problems in steel won’t go away soon.

Where they live matters a lot for the poor in the US for their life expectancy. New and interesting research.

A small problem with the acronym for the name Antonin Scalia School of Law at the George Mason University.

An index of confidence among small businesses in America hit a 2-year low.

Financial Markets

In a desperate bid to be listened to or in a case of successful wooing or lobbying, Mark Mobius bats for the inclusion of China A-shares in MSCI Index.

If this FT news story is anything to go by, Blackrock’s Larry Fink gets it, on negative rates.

Woodford Investment Management in the UK would disclose all costs of running its funds, including ‘hidden’ costs. Just six months ago, asset managers were accused of ousting the chief of the Investment Association in the UK because he pushed for greater disclosure of costs and charges to clients. Nor are asset managers willing to discuss executive pay excesses in their own midst.

To succeed in investing, start reading.

Easwar Prasad and Karim Foda are not sure if global recovery would be fleeting and fragile.

This FAQ on negative interest rates in Wall Street Journal (from Feb. 28, 2016) is useful.


Normally, whose fingerprints the police would look for, in a crime scene?

Andy Mukherjee has a great column on Singapore Corporate Boards of Directors

It might be too early to tell, though. Australia new home sales dropped 5.3% in February.

Japan to print additional ¥10,000 bills as more people stash their cash at home

Data vs. perception

This is what Surjit Bhalla wrote some ten days ago, on 28 November 2015

There’s consistent talk that over the last year or so, communal tensions and intolerance have increased. Although data on communal violence doesn’t support this inference, it would be wrong to infer that intolerance in India is not at its peak today, a year after Modi and the BJP assumed power.  [Link]

A day earlier, on November 27, 2015, Pratap Bhanu Mehta had written this:

It is then countered with the false scienticism — look, the number of violent incidents has not risen dramatically, and so forth. As a piece of social science, this can be important. But data often tells yesterday’s story. We forget that averages are not helpful in assessing specific threats and experiences, and there is no data that can capture the suffocation that discourse can produce. [Link]

What both of them – they are researchers/social scientists – fail to appreciate is that it is objectively impossible to prove that the perception was not the manifestation of living inside a self-feeding echo chamber.

In other words, they may be having that perception now. So, what they write may be really what they are feeling and not are faking it. But, it will be impossible to separate, objectively, the causes of the perception.

For example, they cannot say if their perception of fear and insecurity would have been formed even if the media had not spun every attack on the Church as the doing of the ‘mad, intolerant goons of the Hindu Right’.

Ms. Barkha Dutt ‘confessed’ in a town-hall discussion in May 2015 that the media did not do a proper job of its investigations of attacks on the churches before the elections to the Delhi Assembly and that it jumped to conclusions. Here is the link and watch the ‘confession’ at 23:50. Almost all of the attacks on Churches had motives other than intolerance or communal motives. That the retraction or confession was made rather quietly and in a wholly disproportionately insignificant manner relative to the original reports is one point to note and the second is to acknowledge the self-feeding frenzy that it created with people like Julio Ribeiro, Errol D’Souza – just two names that came to my mind – expressing a sense of insecurity as members of ‘minority’ community.

Neither Mr. Bhalla nor Mr. Mehta – or, for that matter, any one  – can say that exaggerated news-reports and articles which were based on those news-reports did not influence their perceptions. It is impossible to prove that their perceptions were independently formed. It is a cognitive impossibility.


Do interest rates matter?

In my post on the Indian data deficit, I had cited the Op.-Ed by Sajjid Chinoy on how the GDP deflator subtracted too much from nominal GDP growth to produce a real GDP growth estimate of 7% (y/y) in India in the Quarter ending June 2015. The piece by Surjit Bhalla in ‘Financial Express’ completes our understanding. It is well worth a read.

Towards the end of the piece, Mr. Bhalla reverts to his familiar slogan of interest rate cuts:

When and how will India see a GDP growth close to its potential of 8-10%? Of course, I mean real GDP growth of 9%, one accompanied by growth in jobs, and economy-wide growth—and not by manna-from-heaven decline in the price of oil. There are no magic wands available, but there is a time-tested policy: Make real policy rates competitive with the rest of the world. And 25 bps will just not do it. It is now over to RBI. [Link]

International evidence is very much against his near-religious belief that interest rates are the only thing that matters.

(1) This quasi-academic note in FT about how Quantitative Easing by the European Central Bank has failed to revive investment spending has two important quotes from corporations who are supposed to benefit from the QE programme and invest:

If the cost of capital reflects the low interest rate environment, then so will the cash flows

The problem in a world of zero interest rates is that it’s very difficult to find projects where you can still earn the WACC within a foreseeable future [Link]

(2) There is a Federal Reserve Board Discussion Paper that the Federal Reserve itself does not seem to have read. It was published in December 2013. The paper is titled, ‘The Insensitivity of Investment to Interest Rates: Evidence from a Survey of CFOs’. [Link]. Their conclusions are profound:

Firms expected to be somewhat more sensitive to interest rate increases than decreases, but for the most part the interest rate increases required to elicit adjustments to investment plans are generally quite large.

… in contrast to steeply declining interest rates, average hurdle rates have remained elevated and quite steady over that period. This seems to corroborate our main finding that investment plans tend to be quite insensitive to interest rates.

Still, the findings from the special questions in the Duke CFO survey about the interest rate sensitivity of investment, together with the evidence on consistently elevated investment hurdle rates in several prior studies, arguably provide some support for the view that investment is not as tightly linked to interest rates as traditional theory would suggest.

Clearly, this explains why QE has done everything else except to boost capital spending and hiring. On the latter, check out this note by the ‘Employment Law Project’ in the United States. U.S. has created low-wages paying jobs and they are losing out to inflation – whatever little there is, in the U.S.

What is fascinating in the Federal Reserve Board discussion paper is the section on hurdle rate. That requires a separate behavioural investigation in itself. Corporations seldom lower their hurdle rate, no matter what happens to interest rates! Well, almost. It does look like that the response of companies to interest rates is rather asymmetric. Much higher interest rates make them raise their hurdle rate and thus can crimp investment spending. But, lower rates do not seem to matter much at all.

If all that low and lower interest rates do is to boost asset prices and causes bubbles, one really wonders about the role of and the need for a centrally planned monetary policy!

Perhaps, low interest rates boost consumption and residential real-estate investment. So, there might still be a case for cutting interest rates in India. But, that is a separate topic for a separate occasion.

Surjit answers Shekhar

Shekhar Gupta has written that PM Modi and his government have made some pragmatic U-Turns in the first year and have adopted UPA positions. May be, may not be. We do not know. But, I would advise the Prime Minister not to fall into the trap of trying to look more and more like UPA, intended or otherwise. He is not in the business of winning endorsements from those who would like him to be like UPA. He is in the business of running the country, according to his policies and priorities. That is why he was elected with a majority. UPA ran India aground in many ways. This blog has not shied away from documenting the processes and the outcomes of the 10-years of UPA governance. Here and there, despite themselves, they might have done some good things. But, the balance of bad over good things that UPA contributed to India’s macro-economic slump (still ongoing) is overwhelming.

So, the praise won by the NDA government from Shekhar Gupta for being ‘pragmatic’ is actually a warning. It is a trap. In fact, Surjit Bhalla provides a direct and forthright ‘response’ to Shekhar Gupta, in his column:

The best and only way for the Congress to get an inch back is to make people believe there is no difference between it and Modi. “The more things change, the more they remain the same” is the repetitive mantra you hear from the ConBhakts. [Link]

Indeed, Surjit Bhalla had written about the Indian media in an earlier column (MUST READ) on the Land Acquisition Bill and now, he had written on why the NDA government foisted the Minimum Alternate Tax (MAT) on Foreign Institutional Investors (FII). After all, they only had a ruling from an ‘Authority on Advanced Ruling’ (AAR). Such rulings are non-judicial and, second, AAR rulings on this matter have been inconsistent. There is a court case pending against the AAR ruling on the application of MAT on foreign investors. At the least, the Government should have waited for the court ruling to be out. Even if the Supreme Court ruled in favour of the ruling of the AAR and it had to become policy, the government still had the option to change the policy, after weighing costs and benefits of levying MAT on FIIs since MAT was not meant to be levied on foreign business establishments.

Then, why did the Income-Tax department send out MAT notices to FIIs? A lot of damage has been done. Surjit Bhalla offers an explanation or two and I agree with them:

The Congress has ruled India for nearly 60 of the last sixty-eight years. That is legacy. What that means is that most, if not all, of the Indian industrialists are beholden to them. What that means is that most, if not all, of the senior Indian bureaucracy is obligated to the Congress for their career path. I should add the “obligation” of mainstream media as well but I already discussed that in my article Time to bash the media, April 25, 2015, FE…..

So, the cabal gets together and drafts the policy. Start with MAT; continue with land acquisition; who knows, soon the bureaucracy will be recommending to reinforce NREGA, and an even more enhanced “food security” bill, and while Sonia Gandhi lamentably could not bring into law the Right to Happiness, the BJP will. At least, that is what the bureaucracy would recommend.

Assume I am right about there being Congress moles in various layers of the Indian system….

……….. And certainly Modi and the BJP benefited enormously from the Congress’s operation of this terror. But continuing to do the same—is that even logical, or is it beyond stupid? [Link]

I am very pleased that both Shekhar Gupta and Surjit Bhalla, in their own ways, have vindicated the arguments I have made in my lengthy piece, ‘The Enemy at the Gate’ (title not mine) published in Swarajya. Of course, you have to read the article to understand how both of them do so.

The piece came out of the pay wall. It can be freely accessed now.

The Shourie show

The interview given by Dr. Arun Shourie to Karan Thapar (of all people) must have been one of the most widely discussed interviews in India in a long time. I watched the interview fully. About 45 minutes or so. Most people have focused on the negative comments he made but not on many positive things he said about the government, about the PM. Further, he said that all political parties were guilty of being managed by a small coterie and he ridiculed Kapil Sibal’s zero revenue loss estimate. No one discusses that.

In fact, Dr. Arun Shourie had given another interview after this to the ‘Indian Express’ due to the impending visit of the Indian PM to China. That was a gem and there were plenty of useful insights and advice for the PM. Delightful vignettes of Pandit Nehru’s personality after his visit to China:

Let’s talk about the PM’s visit. What do you think he should bear in mind?

First and foremost, he must bear in mind how the Chinese swept Panditji off his feet. They zeroed in on his intense desire to be a world leader. Remember how Chou En-lai — one of the 20th Century’s great masters of diplomacy — dissimulated as an eager student: asking Panditji about Indochina, about world affairs. Soon, Panditji was asking him whether, in addition to what Chou had asked, he would not also like to know about the Arabs, about U Nu, about the difference between the two types of Buddhism… The next day, Panditji wrote to Krishna Menon that he had found Chou to be not well informed about world affairs, but that after their meeting he was better equipped! And how the Chinese completely bowled him over during his visit to China — with uncountable crowds, and the rest. So much so that, after a strenuous day, Panditji was writing a long letter to Edwina Mountbatten: a wave of freedom has swept over China because of my visit, he wrote . . . What a tragedy.

Actually, Pandit Jawaharlal Nehru would have been a better candidate for analysis by the Daedalus Trust. More on that later, perhaps in another post. Let us get back to the ‘famous’ interview.

OpIndia.Com has a post that says that the ‘India Today’ group has spun the interview with mischief. I think they are on a strong wicket. I listened to the segment on the use of the phrase, ‘Trimurti’. Dr. Shourie does not use that word. In fact, he dismisses the use of that word, ‘Trimurti’ by Karan Thapar calling it a big word. But, this is what India Today’s ‘full text’ of the interview does.

Here you go, on ‘Trimurti’:

Q:You mean Mr Modi’s nature.

A: I don’t know. There is a wonderful phrase of David Hume that you and I should also remember that he said Who is it who has not been ruined by his own nature. That is not just Modi, I think, today the government of India and the party (BJP) consists of three persons. That’s all. They are Modi, Jaitley and Amit Shah. These three, they work as a team and you can’t just blame Modi or anybody else but the problem is this ‘trimurti’ is not getting feedback from elsewhere. They have frightened not only their allies but their own party me. [Link]

What ‘India Today’ has done is to put the word, ‘Trimurti’ in Dr. Shourie’s mouth. But, the interview which is still there on the Internet (and accessed at around 4:55 PM Singapore time on 5th May 2015) does not confirm this transcript. Dr. Shourie does not use that word himself. Karan Thapar does and then you see the scrolling ticker liberally using that word, ‘Trimurti’ and attributing it to Dr. Shourie, slyly.

Also, Dr. Shourie reiterates the relevance of David Hume’s quote twice for all persons and not just PM Modi. The transcript omits that reiteration. That omission is crucial because Dr. Shourie’s reiteration was a signal to his audience that he was not singling the PM out. The omission of that reiteration in the transcription is mischievous too.

We should also remember that Dr. Shourie had given an interview to ‘Indian Express’ in December 2014 under the ‘Ideas Exchange’ programme of that newspaper. It is interesting that that interview contains not that many positive references to the Government or to the Prime Minister as this one did. Yet, if I am not mistaken, that interview did not get so much attention as this one. That should tell us something. Notwithstanding the spin of ‘India Today’ (it reflects rather poorly on their journalistic ethics or rather well on the lack of them), this interview had touched many raw nerves. That is a matter for reflection for the BJP, for the government and for the personalities involved.

For me, the disappointing things about the interview were two or three things. One is the comment on the investment cycle. That is not a problem of the present government. It is trying hard to revive it. The blame for it must lie with the corporates themselves, in the aggregate. Their balance sheets are bloated with debt. They overinvested and in the wrong places. The previous government forced banks to lend to its cronies. The UPA government practised myopic socialism and crony capitalism with equal felicity and comfort. Hence, reviving the investment cycle with the private corporate sector is a non-starter until they got rid of their debt. That is what the tough money policy of 1996-98 did. Corporates trimmed their balance sheets in 1999-2001. They were battle ready for 2002 expansion. They have to do it again. I am not sure about his observation that credit growth was only around 3 to 3.5%. The latest figure is around 8 to 9% (y/y growth rate for non-food credit). This is undoubtedly a multi-year low as newspapers are screaming but it is not around 3% to 3.5%.

This government is actually advocating tough love for public sector banks. Initially, I was also struck by the government not capitalising public sector banks and not making adequate provision for it in the budget. I even mentioned it in my comment on the budget for MINT. But, it is such an obvious thing that they could not have missed it. There must be other explanations. I figured that they were trying to wean the public sector banks off government capital quietly. I mentioned it in an interview I did for Bloomberg in India on March 13. My good friend Neelkanth Mishra corroborated my hunch over lunch the next day. In fact, I was pleased to note that he elaborated on it in his comprehensive interview to ‘Business Standard’. Here is the relevant portion:

That said, the government is doing much better than we expected. On banking, the refusal to recapitalize PSU banks shows a strong intent to reform. People question why government entities like Air India get allocations in the budget. But no one questions why PSU banks need to get Rs15-20,000 crore every year. If the banks were performing efficiently, they should have been able to raise capital from the market: for most of them, the government holding limit is not a constraint. This is the first government to be raising the issue of moral hazard of recapitalizing banks that misuse capital. Letting them lose market share improves the efficiency of capital allocation in the economy. We had not expected this to happen, and it has been a welcome surprise. [Link]

The full interview of Neelkanth Mishra is worth going through. It addresses many (not all) issues that Dr. Shourie raises in his interview with Karan Thapar.

Also, on fiscal consolidation, this government might have done the right thing by accepting the UPA government’s impossible budget deficit target of 4.1% for 2014-15. I was critical of the government accepting that target because the ‘true’ budget deficit was around 6% of GDP. This required a massive fiscal consolidation which was anti-growth. I would have liked the government to have issued a white paper on the colossal economic (only economic?) mess that it had inherited from the previous government. Further, the Prime Minister had given rise to extraordinary expectations in his campaign. Therefore, the government going in for fiscal consolidation in its first year in office, I hope that it was a conscious decision and that it did not sleepwalk into it. But, perhaps, by doing so, it had done a good thing by taking economic pain upfront. Perhaps, lady luck would smile on them in the next 3-4 years for some of the hard decisions they had taken. May be, they are doing it without fanfare and, may be, that is deliberate. We need to concede that possibility. That is why I wrote the piece, ‘Slogan Murugan or Action Murugan’ for Manushi. I d oot think that this  government has been about all talk and no action. I firmly reject it.

The mess it inherited was huge. Probably, it underestimated it. Alternatively, it might have overestimated its ability to fix the mess in quick time. Indeed, it is quite possible that this government works hard and cleans up the mess in the five years and then some other government reaps the benefits as the UPA government did in 2004. It was the lucky beneficiary of NDA’ economic reforms and the favourable global economic cycle.

Hence, a lot of the economic stupor that we witness in India now is due to the fact that the government was also trying to make good the previous government’s fiscal chicanery, in the face of the private corporate sector’s debt binging and cronyism. Therefore, Dr. Shourie came up short on providing the full perspective on the so-called ‘industrial cycle’.

The second issue for me was his comments on the insecurity of the minorities were most unfortunate and ill-timed, especially with respect to the Op.-Ed that Mr. Julio Ribeiro wrote. It was a badly written piece and that several Christians themselves had taken exception to his piece. Further, subsequent investigations have revealed that some of the so-called Church attacks were due to specific causes and were not part of any systematic targeting on the part of any Hindu group.

Even on ‘Ghar Waapsi’, Dr. Shourie should have corrected Karan Thapar and said that religious re-conversions were par for the course if religious conversions were. In any case, Ghar Waapsi or comments of some of the so-called Hindu leaders that Karan Thapar mentioned, were not part of the government. The comments made by Mr. Giriraj Singh pertaining to the attitude of the Congressmen and women towards Ms. Sonia Gandhi was not a comment on her but on Indians’ attitudes to skin colour. It was a statement of fact.  Perhaps, Dr. Shourie was right on ‘love jihad’ and on the risk of the disaffected Muslim youth becoming ISIS recruits.

Third, Dr. Shourie took exception to the Prime Minister’s silence on these matters. Here, I disagree with him. The Prime Minister is right to remain silent and not give importance to the intemperate observations made by some who were barely known to India until a few months ago. Why elevate them from insignificance and irrelevance to importance?

Sadguru Jaggi Vasudev had given an exceptionally brilliant interview to ‘Economic Times’. It was published on March 27. Despite his admonition and advice, the newspaper captioned his interview deliberately wrongly. This is what he had to say on Ghar Waapsi and on the PM’s silence:

What is happening as a reaction to a certain political and cultural and other situations and what is the ethos of the land are two different things. These things are coming up for the first time because for the first time probably…Though when sword was put to our throats we didn’t change, when gun was put to our throats, we were tied us to the cannons, we didn’t change. But now we see that money and other kinds of inducements are taking a population away. People have started reacting because of insecurity, more because this threatens them, because they see a huge percentage of the population has moved on, and once they move on they think like they do not belong to this nation, they act in a different way.

I am not saying somebody cannot be a Christian or a Muslim and be in this country, they must be. I am telling you if there is a remote place in the country that has not heard of Jesus, go give a family there a photo of Jesus and tell them he is a wonderful guy…they will worship him without knowing his name. And whatever Islam is talking about, the formless worship…We have Nirgun, the yogic system is all about that. These things are not new. We have no conflict with them at all. But when it is being used as a political force and you can win an election by being this or that, these things begin. Don’t mistake political manoeuvring for religious process. But we must understand, all religions across the world are only thinking about numbers. So if you don’t think about numbers, you will lose yours, so that is the simple logic they have arrived at and they are trying to do whatever, not very successfully of course. [Link]

On the silence of the Prime Minister:

See from what I heard internally, wherever possible the PM is putting brakes on all these things. But he doesn’t want to comment on that probably… I wouldn’t have commented if I was in that position, because you are giving it still more national stage. The moment the PM comments on these things, the more it becomes a national stage for these jokers.

I think he is refusing to give that stage to them but internally he is taking steps to handle them. But he cannot handle them because he has no authority over them. If 10 people are there it is a party of itself. Most of them don’t have 10 people in their party. Many of these groups are 8-10 people. They just blab and then media cameras zoom in on them for the next three days. I am sure the media is not that unwise, they know who these people are and that they are of no consequence. They are inconsequential and we are raising them in their stature unnecessarily. And we are asking the PM to comment. I am happy the PM has the wisdom to not comment about it because if I were in such a position I wouldn’t do so. [Link]

On the rest of the interview, I have little to disagree with. Some quibbles, yes, I have. For example, the government wants to make India an easier place to do business. That is the big picture theme. Most of the decisions it has taken fit into that framework except for the sudden mindless demands on Foreign Institutional Investors to pay Minimum Alternate Tax. That was a very bad self-goal for a government even as the Prime Minister was exhorting investors in Germany, France and Canada to come to India. Extremely sloppy or malicious or both. I do not know whether the Income-Tax department is the Trojan Horse for the Ministry of Finance or that the Ministry of Finance is the Trojan Horse for the government. I shall leave that question to the government to answer, for itself.

In the final analysis, many are questioning Dr. Shourie’s judgement in giving the interview to an Indian media outlet. Well, what I have done in this blog post is to provide a perspective. This is not an isolated comment on Dr. Shourie’s part. It is part of the continuum of public comments he has been making. If not to the Indian media, should he have spoken to a foreign media outlet? Hardly. As to the spin and distortion of his comments, there are very few English-language media outlets in the country that would have refrained from such behaviour.

I guess Dr. Shourie is old enough to know what he was doing, why he was doing and to accept the consequences. As to whether he has unjustly criticised the government, the answer is: ‘partly yes; largely not’. But, the government should listen because there is much to listen, in that interview and in his interview on China. Pity if the government closes ranks and gangs up on Dr. Shourie and ignore the wisdom in his interview to Karan Thapar and in his remarks on dealing with China to ‘Indian Express’.

On their part, the critics of this government – I am referring to the well-meaning ones – should visualise the counterfactual scenario. Rahul Gandhi’s Congress Party or Janata Parivar with Sitaram Yechury supporting them from the outside? That is the question that Surjit Bhalla posed in his brilliant column on the debate on the farmer’s suicide in Delhi and that is the question that well-meaning critics like Dr. Shourie too should keep in mind.

A lot in a fortnight

Realised that it has been two weeks since I did my last post. The world does not stop for us. Sometimes, it moves at breakneck speed. So much happened. Indian Space Scientists sent a mission successfully to Mars on first attempt. It cost less than an autorickshaw ride in India per km. Gurcharan Das understood the importance of the success. Professor Vijay Govindarajan wrote a blog post in HBR. The Indian PM hosted the Chinese President (did the visit go off really well?) and then took off for the United States. What did the Indian PM and the US President agree on? He wowed the audience at the Madison Square Garden and spoke at the UN General Assembly. Both were good speeches. Even the Congress MP Sashi Tharoor gave a A grade to the PM’s speech at the UN General Assembly. Sadanand Dhume of AEI wrote an interesting comment for India’s ‘Economic Times’. A shocking blog post in ‘The Economist’ on the Indian PM’s speech at Madison Square Garden. A feisty response from the old-new Indian magazine, ‘Swarajya’.

Ebola has arrived on the other side of the Atlantic. Youngsters are protesting in Hong Kong at having to choose one from among the candidates approved by China.

PIMCO and Bill Gross were synonymous. They parted ways. Gilian Tett wrote a perceptive comment on why Bill Gross’ gloss had worn off in the last three years. I could sympathise and even empathise. Wolfgang Muenchau wrote on the emergence of the Eurosceptic Alternative fuer Deutschland and the pressure it is exerting on the German Chancellor to be aggressive against fellow European nations. Vaclav Klaus’ interview to ‘The Spectator’ was a good read too. European Commission’s Commissioners’ portfolios do smack of a Soviet era cabinet. Gilian Tett wrote another post on how hubris invariably sets in, for all successful people. I used to think that I was advocating something novel – for CEOs to hire devil’s advocates to keep them grounded. Looks like Roman Generals used to have slaves walking next to their chariots telling them that they were mortal. Gilian Tett recommends hiring the modern-day equivalent of such slaves! Exactly, the point I made to a CEO at a meeting in Mumbai last week.

In Indian politics, the Congress and the National Congress Party of Sharad Pawar parted ways in Maharashtra as did the BJP and Shiv Sena. There will be a four-way contest in Maharashtra now!

I found myself agreeing with Surjit Bhalla on the cancellation of coal block licenses going all the way back to 1993 by the Supreme Court. The Chief Minister of Tamil Nadu, Ms. Jayalalitha, was arrested on a case of disproportionate assets filed against her eighteen years ago! An article that appeared in ‘India Today’ in 1996 on her arrest the first time around still looks largely relevant.

I gave an interview to Bloomberg TV in India on Sept. 26 in anticipation of RBI’s monetary policy meeting on Sept. 30.

Indian men’s hockey team beat Pakistan to win the gold medal in Asian Games. Indian team’s goalkeeper is now a national hero and why not? The men and women’s Kabaddi teams of India won gold too at the Asian Games. One Indian woman boxer was so blatantly deprived of a medal that she refused to accept it.

Oh! Yes! I forgot about the IPO of Alibaba.