Saturday, January 19, 2019

Rafale and Chidambaram

P.Chidambaram has questioned the purchase of Rafale on two vital issues. 1) Why did the government settle for 36 fighter jets instead of 126 and thereby jeopardise our security and 2) Since payment is made over 3 years instead of 10 years the net present value of money received by Dassault is higher and therefore they are 'laughing all the way to the bank'.

Both are good questions, but not good enough to come from a former Finance Minister.

1) The relevant comparison is not between 36 jets and 126 jets. There was no contract for 126. The UPA government lost 10 years dillydallying on the proposal and never reached any finality. The government was comatose. So the comparison is between 36 jets and 0 jet. The answer is obvious.

2) Fixed cost incurred by the supplier has to be recovered through pricing. If more jets are bought, fixed cost per jet will obviously come down. One may argue that if we buy 252 jets instead of 126 jets, price per jet will come down further. But the moot question is how much money can we afford to pay. The trade-off between security needs and cost affordability has been struck at 36 aircraft. Chidambaram's argument is the present value of money given in the 10th year is less than the same money given in the third year. Up to this point the argument is genuine. But we also should take into account the fact that in one case we will receive the jet only in the 10th year whereas in the other case the product is received in the 3rd year itself. These are actually 'forward' transactions and money is paid when supply of jet is made. Comparison is not between money paid in the tenth year and the one paid in the third year. The composite comparison is between the jet received and money paid both in the tenth year on the one hand and the jet received and money paid both in the third year on the other. Obviously getting the jet in the third year is better than getting it in the tenth year. If we calculate the present value of price paid, we must also calculate the present value of the aircraft received. Going further, the risk of the product becoming obsolete is much more in the tenth year than in the third year. Therefore the 3-year contract is better than the 10-year contract.

The honourable former minister may also fallaciously argue that the forward price for a 10-year transaction is cheaper than the same forward price for a 3-year transaction assuming there is no further premium for the intervening 7 years. But actually there is a huge premium paid by the purchaser because of product obsolescence risk in the intervening 7 years.

Chidambaram is too smart to be ignorant of these simple principles. But he is under political compulsions to make unprincipled and dubious arguments. Intellectual integrity has never ever suffered such a sharp debasement..

Thursday, January 17, 2019

Rafale and Ram

Only yesterday Arun Jaitley posted his highly readable "Compulsive Contrarians" in Facebook. As if to lend more credibility to Jaitley's view, N.Ram has written in his newspaper today on "Modi's decision to buy 36 Rafales shot the price of each jet up by 41%" in an accusatory tone. He has converted a simple Accounting Principle into an allegation.

Fixed cost incurred by Rafale to design and develop the jet for India is slated to be Euro 1.3 billion. As we all know, total fixed cost remains the same irrespective of levels of production. Fixed cost per unit is higher when sales are low and it is lower when sales are more. If 126 aircraft are purchased / made as per UPA's original plan, fixed cost per aircraft would be Euro 10.32 million (but shown as Euro 11.11 million in Ram's report). If 36 aircraft are bought as envisaged now, fixed cost per aircraft is Euro 36.11 million. Any seller has to recover its total fixed cost as well as variable cost. This is simple business logic. There is no scam in this.

Ram compares Rafale acquisition with Bofors purchase. He claims, "The process of decision-making on a vital defence acquisition in 2015-16 does bear an eerie resemblance to how decisions were made in 1985-86; but unlike Bofors, where journalistic investigation was able to uncover corruption disguised as 'commissions' paid secretly into Swiss bank accounts, no money trail has been discovered so far in the current case." Therefore, should not the likes of Ram wait till some money trails, if at all,  are spotted instead of jumping the gun and thus proving that they are 'compulsive contrarians'?

The basic difference between the Bofors journalism and Rafale journalism is that in the former case, evidence was painstakingly discovered bit by bit and then conclusions arrived at. In the case of Rafale, the compulsively contrarian journalists have concluded that there is corruption and are now desperately looking for evidence of possibly non-existent corruption.

Of course, we cannot blame Ram. In 1985, the spade work for him was done by Chitra Subramaniam, an analytical journalist who values objectivity. Now, Ram is probably assisted by his sycophants who feed him with whatever views he likes. However, as an experienced journalist, Ram is expected not to let his morbid dislike for Modi run riot and mislead his readers.

Thursday, December 27, 2018

Bancroft's dilemma

"In March 2018, the Australian cricket team was involved in a ball-tampering scandal during the third Test match against South Africa in Cape Town when Cameron Bancroft was caught by television cameras trying to rough up one side of the ball to make it swing in flight. Captain Steve Smith and vice-captain David Warner were found to be involved and all three received unprecedented sanctions from Cricket Australia."

Bancroft used sandpaper to rough up the ball. He was banned from international and domestic cricket for nine months.

Bancroft has now admitted that he acted on the suggestion of David Warner and that he made 'a massive mistake' in implementing the suggestion. Sequence of events up to this is understandable. Aussies are reportedly not known for their cricketing ethics and they go for the kill in every match. They seem to claim "all is fair in cricket." But what unfolds after this intrigues any logical mind.

Bancroft accepts that he had a choice. He could have ignored Warner's plea and avoided the public infamy that caught up with Australian cricket. He regrets complying with Warner's suggestion. Therefore, it is reasonable to believe that he would have been happier if he had not tampered with the ball.

But alas, no !  Bancroft says he would have felt bad for letting his team down ! He has painted this as a catch-22 situation of damned if you do and damned if you don't.

How do we explain Bancroft's dilemma? Though he admits that he was not a 'victim' of Warner's plan in the sense that he could have decided not to comply with the latter's suggestion, if the plan proposed to him was actually a Morton's fork as he claims, then he was really a victim of Warner's game plan. If Warner had not made this proposition, Bancroft would not have been in this pickle.

Why did Bancroft take the huge risk of getting caught indulging in an unethical act? If he had underestimated the risk of exposure, he is downright stupid. If he had thought that the act was not unfair given the circumstances of defeat glaring at the Australian team, he must have philosophised that "end justified the means".

Does one's opinion on one's choice depend on whether the (im)morality of the choice is found out by others or not? In case the TVs had not captured Bancroft's disgraceful act, would he have felt any pang at all or would he have been disconsolate nonetheless? Is every dirty trick OK as long as it is not found out?

Does an unethical act become less so if it is done for the sake of one's team and not for personal benefit?

Thursday, December 20, 2018

Why Kamal Haasan cannot succeed in politics

Success in one field does not guarantee success in other fields. Expertise in one vocation cannot automatically become expertise in another. Despite this truism, many successful actors in Tamil Nadu drift into politics optimistically.

Kamal Haasan has done the same thing. Does he have what it takes to excel in politics? I was listening to his debate with Smriti Irani in a television channel yesterday and got convinced that the probability of his success in his new avatar as a politician is almost zero.

Binary rules do not operate in the political jungle. Successful politicians do not give a definitive yes or no answer to any question. They are required to provide convoluted and long answers even to simple questions. This unfailingly provides an opportunity to wriggle out of any unforeseen contretemps. Yes or no answer does not enable one to come up with statements like 'this is not what I meant' or 'the media misreported what I said' if and when subsequent circumstances demand backtracking. Such circumstances are very common in politics.

In a way, Kamal Haasan was unlucky to be pitted against Smriti Irani who is a seasoned politician with a masterful play on words. She is capable of saying something and immediately thereafter proving that she never said such a thing. In contrast, Kamal Haasan came out as a babe in the political woods.

The actor has another problem. Oral articulation helps in politics. Somehow he is very economical with words in political conversations and is unable to put across his ideas convincingly and with clarity. Perhaps clarity of expression is constrained by inadequate clarity of thought.

Tuesday, December 11, 2018

RBI Governor

Appointment of Shaktikanta Das, a retired IAS official, has predictably attracted a lot of criticism. There are three main layers of criticism. One is that he is not a hardcore economist. Second, he was supportive of demonetisation which 'failed to deliver intended results'. Last, his integrity is suspect.

He is the 25th Governor. Among these 25, only six have been 'economists'. RBI was established in 1935. The first economist to become a Governor was B.N.Adarkar. He was a stopgap pending appointment of a new Governor. He was earlier a Deputy Governor. He remained as Governor only for 42 days till he was replaced by S.Jagannathan, a career civil servant. This happened in 1970. (The Governor with the shortest tenure was Amitav Ghosh for 20 days in 1985 pending assumption of office by R.N.Malhotra., a bureaucrat. Ghosh was a commercial banker and then a Deputy Governor of RBI.)

There have so far been only six economists donning the mantle of RBI Governorship, namely Adarkar, I.G.Patel, Manmohan Singh, C.Rangarajan, Raghuram Rajan and Urjit Patel. There is no study to indicate that economist-Governors performed better than others.

P.Chidambaram has argued that Das was an advocate of demonetisation and that his appointment comes so soon after the appointment of another proponent of demonetisation, Krishnamurthy Subramanian, as the Chief Economic Adviser to GOI. Chidambaram argues that this means the government appoints only those who are favourably disposed towards government decisions. Politically this is what all governments do. Which government would want an ideologically inconvenient person in a key position? Chidambaram's alleged role in appointment of chairmen of various banks makes one wonder if this is not a case of the pot calling the kettle black.

The third criticism is voiced by Subramanian Swamy. He doubts Das's integrity in the light of his alleged complicity in and connivance at Chidambaram's various alleged misdemeanours.

These are controversial times. Therefore, each and every proposal is likely to be viewed as a colourable exercise.

Monday, December 10, 2018

Saving Economics from Politics

An editorial appeared in The Hindu on November 30th which is reproduced here.

                                                                   Number Theory

"The larger lessons from the GDP back series must not be clouded by a political slugfest"

"Backcasting, or reworking past national accounts statistics based on the latest base year, is a regular exercise that governments carry out. Mainly done to enable precise comparison and analysis, it is a difficult exercise prone to contestation as it involves the inclusion of newer data sources, exclusion of outdated ones and making some subjective assumptions in the process. Throw in the political element, and GDP backcasting can become a controversial exercise, as it has now become in the case of the release of back series data from 2005-06 to 2011-12, the new base year. The data computed by the Central Statistics Office (CSO) and released by the Niti Aayog show that India never really grew in double-digits in 2010-11, nor was it the high-growth economy in the five years preceding this as earlier thought to be. It so happens that this period covers the two terms of the Congress-led United Progressive Alliance government, and the new data have predictably set off a political storm. The Congress may feel aggrieved as its biggest achievement, of taking India on the high GDP growth path, has come under question. During earlier instances of backcasting of GDP data, the political environment was not as deeply polarised as it is now, and so the exercise remained more academic.
The danger in the political slugfest now is that the many valuable insights that can be gleaned from the data will be lost sight of. The biggest of these is that India never really decoupled from the global economy during the years of the financial crisis (2008-10), unlike what was earlier believed. The new back series data show a much lower growth rate. This is an important learning for policymakers, going forward. Any criticism of the data has to take into account the fact that it has been generated by a thoroughly professional organisation, the CSO, and the methods have been scrutinised by experts, including past chief statisticians, and the Advisory Committee on National Accounts Statistics. Certainly, the release of the back series by the Niti Aayog goes against convention and is bad in optics. But this should not be reason to contest its integrity. The method of computation reflects the latest United Nations System of National Accounts; it also captures changes in the economy since 2004-05. Data sources have also been updated. Experts had testified to the robustness of the method when it was introduced in 2015, even while underlining that the availability of reliable data was crucial to arrive at the correct overall picture. There is little doubt that India needs to invest more in data collection and integration and do informal sector surveys more frequently. Robust, updated data are, in fact, insurance against politicians hijacking what is essentially an economic exercise."

    Comment on this editorial by the Readers' Editor of The Hindu on December 3rd is reproduced below:

"There were problems with the fundamental assumptions of a recent editorial on the new GDP back series

I generally refrain from commenting on editorials and opinion pieces. I recognise that there are points of convergence as much as there are points of divergence between the newspaper and its myriad readers, and even within the newspaper itself. These conversations lend plurality to the newspaper and they should not be viewed from any narrow ideological prism. However, I have to break from this norm to discuss the editorial “Number theory” (Nov. 30), which generated some sharp and divergent reactions.

Independence of the editorial

The arguments against the editorial were varied. Some took an ideological standpoint, while others interpreted the events that led to the release of the GDP back series. I would like to reiterate that my role as the Readers’ Editor is not that of a pre-publication censor, but of a post-publication evaluator. I do get complaints about The Hindu’s editorial policy, which is defined by the editor and his editorial team. I can explain the policy but I cannot interfere with it. It is vital to support the independence of the editorial. The acid test for the Readers’ Editor is how he conducts himself when his own opinion is at variance with that of the paper. Can he be an effective advocate for free speech, tolerance and plurality if he lacks these democratic traits? Hence, the issue I am discussing is not about the ideological thrust of the editorial but its fundamental assumptions.
The assertion of the editorial that “robust, updated data are, in fact, insurance against politicians hijacking what is essentially an economic exercise” seems like a statement yearning for an ideal reality rather than one that is based on reality. The sequence of events since the creation of Niti Aayog seems to point at a complete politicisation of numbers. Some facts lend credence to the criticism of the numbers put out by Niti Aayog. One, the government had failed to appoint a Chief Statistician for nearly eight months after the retirement of T.C.A. Anant in January. Two, it has had a tense relationship with the Reserve Bank of India. Three, a set of data presented by the committee set up by the National Statistical Commission was withdrawn. Four, the Agriculture Ministry backtracked on a report showing the adverse effects of demonetisation on farmers. Five, there’s the timing of the new data, which many see as a desperate ploy to distract people’s attention from the trenchant criticism of demonetisation by the former Chief Economic Adviser. The line between the Central Statistics Office and Niti Aayog is blurred, thereby lending a political colour to an essential economic exercise.

The practice of data torture

If the editorial is read along with the explainer “What’s with the back series GDP data?” (December 1), it is clear that the editorial jumped the gun to grant the benefit of doubt to the latest exercise and suspended essential journalistic curiosity. The explainer deals with the problem of finding matching data for the older series to the present MCA-21, which is available only since 2011-2012. As a journalist, my entry points for understanding a range of subjects have been science and literature. About pure qualitative methods and number crunching, one of the finest historians of science, Thomas Kuhn, observed that “nature undoubtedly responds to the theoretical predispositions with which she is approached by the measuring scientist.” The Anglo-American economist, Ronald Coase, gave an interesting economic reading of this statement: “If you torture the data long enough, it will confess to anything.” It is true that governments and institutions do indulge in data torture, a practice of repeatedly interpreting source data until it reveals a desired result.
The editorial seems to be oblivious to this caution from the Nobel laureate. Its statement that “during earlier instances of backcasting of GDP data, the political environment was not as deeply polarised as it is now, and so the exercise remained more academic” fails to capture the full picture. In all the earlier changes, the methodology was not only robust but also transparent, and incomparable parameters were hardly used to deduct a number to understand macroeconomic reality. This was an editorial of forking paths, for how do we reconcile the assertion that “the release of the back series by the Niti Aayog goes against convention and is bad in optics” with the conclusion that “this should not be reason to contest the integrity of the new numbers”?"

           My response to the comment of the Readers' Editor
Dear Sir,

I refer to your column in The Hindu today.

Though you are hesitant to comment on editorials, I think you have every right and perhaps even duty to make objective observations on anything that concerns readers. Readers do read, nay even study, the editorials in a newspaper like ours.

As a former banker, I have very often observed that a manager averse to lending ultimately selects a wrong borrower to lend.  In a similar way, though you are averse to comment on an editorial, you have finally chosen a wrong editorial to criticise.

You have noted the assertion that "robust, updated data are , in fact, insurance against politicians hijacking what is essentially an economic exercise" is a statement yearning for an ideal reality (sic) rather than one that is based on reality. In the process, you have ignored the presence among readers of those who look forward to The Hindu to play an effective role in shaping the tone and tenor of economic discussions. Freeing economic discussions from political prejudices is not only desirable but also essential to promote economic development. That The Hindu has done this in the editorial under reference despite the newspaper's proclivity to be harsh on the present powers-that-be is welcome. Please don't dissuade the editors from objective analyses.

The editorial has rightly drawn distinctions between who prepared the data and who communicated them to the wider populace. We should not stigmatise the data because the communicator (Niti Aayog) is allegedly political. The leader has correctly referred to the "fact that it has been generated by a thoroughly professional organisation , the CSO, and the methods have been scrutinised by experts ------". What else do you desire?

I salute The Hindu for its brave attempt to elevate economic discussion from the cesspool of dirty and partisan politics. I hope that the newspaper will continue this crusade despite the dominant presence of carping critics with a hidden political agenda.


Urjit Patel

The resignation of Urjit Patel is not surprising though the timing certainly is unexpected. It has robbed the London court ruling on Mallya extradition of its due share of discussion and limelight. Our exhilaration over India's victory in the Adelaide cricket test has been subdued thanks to this untimely development.

Urjit Patel has politely attributed his resignation to personal reasons. But the former Governor, Raghuram Rajan, has not been polite enough. In an interview to CNBC, he has characterised the departure as 'a statement of dissent'. When reminded that Urjit Patel has quoted personal reasons, Rajan remarked, 'You have to read between the lines'. Apparently the mental scar that Rajan suffered over the way he was treated by the government has not yet healed. However, one expected a little more finesse from Raghuram Rajan.

Narendra Modi's reaction is intriguing.  " He steered the banking system from chaos to order and ensured discipline. Under his leadership, the RBI brought financial stability."

Does the prime minister imply that Raghuram Rajan left the banking system in chaos? Was the financial system unstable under Rajan? Is Narendra Modi praising Patel or blaming Rajan?