UBI CMD resigns

According to moneycontrol.com,

"Bhargava reportedly had a stormy stint at the bank after she brought up several issues of accounting malpractices before the central bank and was said to have had a run-in with other top employees at the state-run lender."

Archana Bhargava was the CMD of the public sector bank, United Bank of India. The view expressed by moneycontrol.com is the generally held opinion on what has happened in the bank. It is unfortunate that an executive who preferred to share the ills of the bank with RBI has had to quit. 

This is not a healthy situation. If bankmen begin to feel that careers are not sustainable sans compromise, it only means that the rot has gone deep. This is a real test for Raghuram Rajan's integrity.

Update as on 9th March:

Some insiders say that AB united all executives of the bank and made them into a team. She made them united against her!

How not to reduce the fiscal deficit

It is true that sound economics dictates that fiscal deficit should not be allowed to surge. Is it OK for the Finance Ministry to adopt any method in order to achieve this laudable goal?

GOI is adopting dirty tricks in the process. Tax refunds are delayed. Genuine payments to contractors and others are postponed to the next financial year. And now comes the news in Economic Times that even the usually mollycoddled exporters are not spared. Duty refunds are delayed by months.

The government should play the rules of budget in a fair manner. Any attempt to hoodwink any section of the public will misfire.

Raghuram Rajan's maiden policy review

Raghuram Rajan looked much less sure of himself today (20th Sept.) while addressing the media after the mid-quarter review of monetary policy than he was immediately after taking over as Governor of RBI. Has the responsibility of the post mellowed him already? Has he started feeling the pressure of the Finance Ministry?

Wit and cheerfulness associated with him were absent though the FED has postponed the much feared tapering. In the event, he has played rather safe. He has reduced one rate (MSF / Bank Rate) and hiked another (Repo). The CRR daily maintenance by banks has been reduced from 99% to 95%

BSE Sensex has dived. Rajan's brief honeymoon is probably over. Rupee was less reactive. We will have to wait and watch.

The Governor seems to depend on one Deputy Governor (Urjit Patel) more than on other three DGs. Perhaps not a very sound policy! Indications are that he defers to Finance Ministry more than what independence of central bank can accommodate.

NewYork Times on Indian economy

Following analysis of the recent Indian official report on 1st quarter growth is not encouraging:

http://www.nytimes.com/2013/08/31/business/global/forecast-darkens-for-indian-economy.html?ref=opinion

Prime Minister's flawed logic

At last the Hon.PM has condescended to speak out on the falling rupee. Economic Times quotes him as telling the Parliament, "To some extent, depreciation of the rupee can be good for the economy, as it helps to increase export-competitiveness and discourage imports. Inflation in India has been much higher compared to advanced economies, and therefore, it is natural that there has to be correction in the exchange rates to account for this difference".

Apparently, a statement of fact. This is like a surgeon justifying death of a patient on the operation table, saying that the unhygienic environment in the operation theatre has naturally resulted in the tragedy. Does this factually correct reason free the surgeon from his responsibility? Should he not ensure cleanliness?

Does the prime minister think he is not responsible for the galloping inflation? Yes, he thinks so because in the same statement he has also claimed he is not the custodian of files (and therefore he is not answerable for the missing files relating to coal allocation!). A very responsible prime minister, indeed!

Prime Minister's job is not to explain the cause-consequence relationship. Everyone knows the relationship. His mandate is to remove the causes that lead to adverse consequences like what has befallen our currency now.

We may expect the economist-prime minister to educate us anytime soon that uncontrolled inflation is good to some extent because we will then learn to live with greater challenges.

Ratan Tata has recently observed that India has lost the respect of other nations. When the opposition parties in the parliament lamented that Singh has lost the confidence of both domestic and global investors because of policy paralysis, the prime minister claimed he commanded respect of his ministerial colleagues. This fatuous response is incredible and makes us speechless.

Are we talking about "Prime minister's flawed logic" or "Flawed Prime Minister's logic"?

Chidambaram's plight

India's Finance Minister must be having sleepless nights, his brave statements notwithstanding. All said and done, economic management is a game of musical chairs. If you are in charge when the economy goes for a toss, the blame is on you although you might have skillfully mitigated the adverse consequences of economic downturn. In the other extreme situation, if the economy prospers despite one's lack of any special skills, the minister's stock goes up.

There is no doubt that Chidambaram is adroit. Initially he noted wrongly (deliberately?) that India's present mess was made in USA or rather precipitated by our interpretation of what the Fed Chairman was saying. Now he has concluded that we have also contributed to our crisis. When he says that the economic decisions which we took in 2009-11 (he could have added 'the economic decisions which we failed to take in 2009-11') are partly responsible, he is only stating the obvious.

One may wonder why Chidambaram is more uncomfortable now than Manmohan Singh was (when Singh was Finance Minister) in the crucial year 1991. Singh was fortunate to have a shrewd Prime Minister in Narasimha Rao. Chidambaram is not so lucky. PC is also constrained by economically unwise commands from Sonia Gandhi. Incidentally, Manmohan Singh would not have been sleep-deprived even at the height of 1991 crisis as he is normally asleep even at the wheel.

Cyprus has cracked; will India implode?

It is odd to compare India and Cyprus. Cyprus is a small Mediterranean country with a currency common with 16 other nations. Its banks unwisely (in hindsight) over-invested in Greek sovereign bonds and suffered huge haircuts. Laiki Bank is being wound up. Bank of Cyprus is getting restructured. Cyprus would have become bankrupt but for bail-out by the troika of  European Central Bank, IMF and European Union.

India's Current Account Deficit in the latest quarter was ominously high at 6.7% of GDP. CAD and Fiscal Deficit are our Achilles' heels as of now. Our CAD at present is higher than what it was in 1991 when India was on the brink, about to default.

In World Bank's 2013 "Doing Business" Rankings, Cyprus is 36th out of 185 economies. India is 132nd ! (Pakistan is better placed at 107.) In 'ease of enforcing contracts', India is 184 i.e. last but one!

In World Economic Forum's competitiveness table for 2012-13, Cyprus is ranked 58th out of 144 nations. India is 59th, so ominously close to Cyprus!

Of course, India is totally dissimilar to Cyprus in terms of per-capita income and corruption levels. According to WEF, India's per capita PPP GDP is US $ 3,400 as against Cyprus' US $ 29,000. 15.8% of respondents feel India is characteristically corrupt whereas the figure for Cyprus is 3.4%

India's penury is so deep and widespread that any incremental economic misery makes no difference. It is this dubious advantage that keeps India afloat.

Has RBI started blinking?

It appears that many banks are having a free run in facilitating money-laundering. HDFC Bank, ICICI Bank and Axis Bank are the recent ones whose feet of clay have been exposed.

Is RBI really unaware of this pernicious practice or is it turning a Nelson's eye? It is either inefficient or lacking in ethical standards. This is a far cry from the reputation garnered by this regulator in the tumultuous days following the American sub-prime crisis. It may also mean that we gave too much credit for the capacity of RBI whereas events were working out serendipitously in favour of the sheltered Indian economy.

The RBI Governor has recently shifted his stand on interest rate reduction. It seems that the Finance Minister has forced the Governor to discover the salubrious impact of interest rate reduction. Drop in interest rates will no more aggravate inflation! Demand side pressures will be adequately taken care of by supply side enhancement!

It is a revelation to know that economic consequences are thought to be guided by Finance Minister's optimism and RBI Governor's meek submission! We are in for more economic shocks.

Where is Rs.1,76,000 crore?

Government of India was hoping to raise Rs.40,000 crore from the present round of 2G spectrum auction. But it could mobilise only around Rs.9,200 crore because of the present state of the economy, credibility of government and other adverse factors. Consequently, government's anxiety to contain fiscal deficit is under further strain.

It is shocking that the government is desperately trying to fish in its own troubled waters. Manish Tewari who is unreasonableness personified has unabashedly raised the question, "Mr.CAG, Where is Rs.1,76,000 crore?" If the CAG is bold enough to respond truthfully, he may say, "Mr.Tewari , search the pockets of your allies and leaders."

Does not Tewari know that the auction proceeds are a function of the shape of the economy? Prices are determined by market forces which constantly change. To equate 2008 with 2012 amounts to fooling the public.

The economist-prime minister as usual observes his maun vrat and thereby insults the nation.

India: A Breakout Nation or a Broken Nation?

In his bestselling book "Breakout Nations", Ruchir Sharma of Morgan Stanley Investment Management makes a thoughtful analysis of economic potential of various nations.

His observation on India is not encouraging. He says,"Under the current regime of drift, crony capitalism has become a real worry. Widespread corruption is an old problem, but the situation has now reached a stage where the decisive factor in any business deal is the right government connection. When I made this observation in a September 2010 Newsweek International cover story titled 'India's fatal flaw', I was greeted as a party spoiler. Top government officials told me that such cronyism is just a normal step in development, citing the example of the robber barons of nineteenth-century America. Prime Minister Singh, asked privately about the corruption problem, supposedly told people not to spoil India's image by going on and on about this."

In other words, don't keep telling the truth.

What happened in other countries ought to be a warning to us so that we will not replicate their mistake. Instead to consider such experience to be inevitable betrays our intellectual bankruptcy and moral waywardness.

Cliff effect of a possible downgrade of India's credit

In the month of June, 2012 global rating agency Standard and Poor's (S&P) threatened to downgrade India's sovereign credit rating to ‘speculative' from the lowest notch of ‘investment' grade. The report containing the threat was sensationally titled ‘Will India be the first BRIC fallen angel ?' Predictably, this warning was a red rag to bullish ministers in Indian government and they characterised the report as whimsical, tendentious and mischievous. It was argued that Indian economy was the second fastest growing among large countries (next only to China) and that India was capable of springing pleasant surprises.


Earlier in April, 2012, Standard & Poor's scaled down India's credit rating outlook from ‘stable' to ‘negative' with a warning of a downgrade if there is no improvement in the fiscal situation and political climate.

This chronology of events shows that deterioration in the state of Indian economy as reflected in economic data released during the April – June quarter was quite palpable. If India’s rating is downgraded (from the present BBB-) to BB+ or any rating below (also known as ‘junk’ rating), the economic consequences will be horrendous.

Many otherwise knowledgeable people criticize rating agencies for rating countries like Spain and Italy which are reeling under severe economic pain, higher than India. The reason for this apparent paradox is the disparity in their per-capita incomes. Whereas Spain and Italy have per-capita annual incomes of $ 31,550 and $ 31,090 respectively, India’s is only $ 3,560 according to World Bank’s assessment for the year 2010 under ‘Purchasing Power Parity’ principle. India is ranked 153 out of 215 nations. It is logical to assume that an economy with higher per-capita income can withstand economic shocks better. Spain is rated BBB+ and so is Italy.

If we look at the methodology adopted by S & P to award sovereign ratings, we will realize how shockingly imminent our downgrade is. S & P factors in political, economic, external, fiscal and monetary profiles of the country. Crucial determinants for political score are dynamics of policymaking and transparency of institutions. Who can deny that these are our Achilles’ heel now? It is interesting to note that when S & P downgraded USA from AAA to AA+ in August, 2011, it presented the following reason:

“the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”

Economic score is determined, inter alia, by assessing income levels, growth prospects and volatility. India’s performance is poor on income levels; volatility is unfavourably high on account of continued dependence on monsoon and uncertain availability of infrastructural facilities like power.

Status of currency and external indebtedness are taken into consideration for external score whereas sustainability of fiscal deficit determines fiscal score. India’s fiscal position continues to deteriorate on account of government’s inability to optimize management of subsidies owing to political compulsions. Monetary score varies with credible monetary measures to tackle inflation. So whichever way you look, the chances for a downgrade in our rating are uncomfortably high.

Why Cliff Effect? : In economics, if the effect of an action is disproportionately high either positively or negatively, the effect is christened as “cliff effect”. If India is downgraded from BBB- to BB+, the consequential adverse impact will be immense. Though downgrade by a notch is normally not a significant development, fall from investment grade to speculative grade is considered as calamitously precipitous (and hence the cliff effect).

Many international investors detest funding speculative investments. Even those who are ready to lend will charge higher rates of interest. Generally, corporates will not get a better rating than the country’s sovereign rating. Therefore, even major Indian banks will face higher interest burden for funds sourced abroad. For instance, as on 31st March, 2012, SBI had deposits worth Rs.61,433 crore in its foreign branches and borrowings outside India equivalent to Rs.78,127 crore. SBI had also raised capital funds abroad in the form of innovative perpetual debt instruments equivalent to Rs.3,179 crore. Interest rates on these funds raised abroad will go up if India’s rating is junked. ICICI Bank’s deposits in foreign branches on 31st March, 2012 was equivalent to Rs.13,128 crore and borrowings outside India Rs.84,509 crore. Indian banks and other corporate will face two consequences: 1)Raising funds abroad will become more difficult and 2)whatever funds are available will attract higher interest costs.

Sharp differences in credit qualities of investment-grade and speculative-grade sovereigns are brought out by the following observation of S & P: “An average of 1% of investment-grade sovereigns have defaulted on their foreign-currency debt within 15 years, compared with 30% of those in the speculative-grade category. All sovereigns that have defaulted since 1975 had speculative-grade ratings at least one year before default.” These facts are chilling and one hopes that Government of India will do all it can to stave off a ratings downgrade instead of shooting the messenger (rating agency) when it is too late.

Eighth Wonder: Manmohan Singh addresses the nation

The prime minister took the nation by surprise by addressing it on Doordarshan. Earlier he had said that his silence was meant to protect dignity of the questions (whatever it had meant). So dignity of the questions was ripped apart in a brief 15-minute talk.

"I would be failing in my duty if I do not carry the reforms forward like was done in the year 1991." It is great that he has realised his duty. If only he had realised it earlier, scams might not have devastated the country.

"The world is not kind to those who do not tackle their own problems." That is why he allowed his ministers to feather their own nests.

"Much of the diesel is used by big cars and SUVs owned by the rich and by factories and businesses. Should government run large fiscal deficits to subsidise them?" Very interesting 'eureka' moment! Why did it take so long for the illustrious economist to realise this?

"The decision on LPG was based on a study that almost half of our people , who need our help the most, actually use only 6 cylinders or less." Which study? The so-called finding is very cleverly worded. More than 40% of our people do not use LPG.  This 40% is included in "almost half of our people".

"Taxes on petrol were reduced for the crores of middle class people who drive (sic) scooters and motor cycles." But the net prices are retained. If the concern is real, tax-reduction would have been higher.

"In a growing economy, there is enough space for the big and small to grow. The fear that FDI in multi-brand retail would hit small traders is unwarranted." Nice to hear. Is retail a win-win game where every small trader can grow his business even if a big fish enters the fray? Walmart's retail sales in America is in excess of $1 billion every day. Such a big player may enter India and yet the economist-prime minister thinks this development will not affect small traders? We cannot have a more optimistic CEO for the nation.

The prime minister is confident that FDI in multi-brand retail will reduce prices for consumers and increase realisation for the farmers' produce. He stopped short of saying how much different ministers will gain.

Argentina copies India

Montek Singh Ahluwalia forgot to copyright his intellectual thesis on poverty lines. His discovery that per-capita per-diem expenditure of Rs.28 in urban areas and Rs.22.50 in rural areas uplifts an Indian from poverty is too phenomenal to be forgotten ever.

Argentina has now stolen his magnum-opus and has stealthily declared that a six-peso food bill per day is all that is necessary to enable an Argentine to escape poverty. According to Economist, six Argentine pesos can fetch only one sweet biscuit.

We urge M.S.Ahluwalia to copyright his concept before other economies rush to banish poverty without acknowledging his contribution.

Banking bandits

Who are the more notorious banker-bandits, Americans or the British? I am confused because the cover story in the Time magazine dated 23rd July reasons "why London breeds financial scandals" and claims that the Barclays' scandal is just the beginning. The Economist dated July 14th-20th sarcastically responds saying, "America has its scandals as well" and goes on to narrate a string of American bankers' shenanigans.

Updated on 9th Aug: The tussle between Britain and America has taken a more bitter turn after the NewYork regulators came up with a startling finding that Standard Chartered Bank had enabled unlawful movement of more than $250 billion to Iran. They have also threatened to cancel the bank's licence for its NewYork branch.

Time magazine's canard

Time has called our prime minister an underachiever. No report can be more false than this. Manmohan Singh is a non-achiever.

Sumantra Ghosal used to refer to "satisfactory underperformance". Had he witnessed Singh's style, Ghosal would have called it "satisfactory non-performance". If a nation's leader lets the corrupt thrive and refuses to open his mouth except at the dentist's, would you smugly call him an underachiever? I would call him a destroyer of the nation.

Tamil Nadu's Vision

Ms.Jayalalithaa has unveiled "Vision Tamil Nadu 2023" detailing the three outcomes to be achieved by 2023 namely the percapita income to reach Rs.4,50,000 per annum (at 2010 prices), the state's Human Development Index to match those of developed countries and high quality infrastructure comparable with the best in the world to be available throughout the state.

The aim is admirable. But given the propensity of the Dravidian parties to indulge in mutual destruction, do these plans have a chance?

Budget 2012-13

Pranab Mukherjee, one of the few seasoned ministers we still have, presented the Central Budget for the year 2012-13 on 16th March. Economic requirements are at present overshadowed by political constraints. Thus the Finance Minister's job was unenviable. 
The imminent need to raise more revenue to meet ever-escalating expenditure is obvious. Mukherjee has chosen to enhance excise and service duties by 2% across the board. He has not dared to face the media-assisted criticism from voluble sections that would have ensued any increase in income tax rates. It is old hat that indirect levies like service tax and excise tax are more regressive and unfavourably impact the real "aam aadhmi". The Finance Minister however is in no mood to bite the bullet. This is simply bad ethics. This move by itself guarantees nearly 2% jump in inflation rate much to the consternation of the economically challenged.

Proposal to retrospectively amend the Income Tax Act to nullify the Supreme Court's decision on the Vodafone case is further evidence that the government cares two hoots for ethics. Public trust in GOI is vanishing fast. Fiscal deficit and ethical deficit are uncomfortably high.

LIBOR under a cloud?

London Inter-Bank Offer Rate is one of the few universally accepted benchmarks in the financial market. Most financial derivatives, nicknamed 'financial weapons of mass destruction' by Warren Buffett recognise the sanctity of LIBOR under the assumption that no party can manipulate this rate. The premise that LIBOR is an unassailable neutral benchmark is now under a threat.

A Bloomberg report datelined Zurich puts us on notice that Comco, the Swiss watchdog is presently probing allegations of collusive manipulation among derivative traders including UBS, Credit Suisse, Bank of Tokyo-Mitsubishi, Citigroup, Deutsche Bank, SocGen and many other worthies.

If the allegations are proved, it may be the end of financial market as we know of. Compulsory dissolution of any institution that is proven to have indulged in this ultimate malpractice is the only reasonable deterrent to such an obnoxious behaviour. Are we prepared to face this reality?

S&P impoverishes America

At last the Rubicon has been crossed. Standard & Poor's has downgraded the American sovereign long term rating from AAA to AA+ and as if to add insult to injury has placed the rating in negative watch ( sorry, it is not negative watch; it is negative outlook  :  corrected after seeing the comment below) which means further downgrading is not ruled out.  China which is rated two notches below i.e. AA- has advised the American government to give up its addiction to debt and to learn to live within means. China, a communist country wants America, a capitalist nation to trim its bloated "social welfare" expenses. It is difficult to come across a greater irony.

Has S&P jumped the gun in an attempt to undo the damage that resulted from its inability to foresee the subprime crisis? In case this interpretation is correct, we need to appreciate that two wrongs do not make a right.

Moody's and Fitch have not downgraded America for the present. Is S&P trying to prove its leadership among ratings companies once again?

Whatever be the reason for this epochal decision, members of American treasury and Congress have only betrayed their boorishness by criticising S&P for its weighty decision. At present India is rated BBB- and any downgrade will mean slippage into speculative zone with all its attendant negative consequences. You can trust our politicians to test that possibility any time soon.

Chinese credibility (contd.)

In the post dated 1st May a comment was made on Chinese government's unwillingness to subscribe to universally accepted ethical system. Thomas Friedman in his column titled "A question from Lydia" appearing in The Hindu Business Line dated 18th May has opined that "our values and ethical systems eventually have to be harmonised as much as our markets". This column ofcourse is not a reference to China in particular.

In an adverse report on quality of Chinese products, AFP states that 2.2 m young Chinese die every year from health problems related to indoor air pollution. The study released by the China Centre for Disease Control and Prevention traces this malady to dangerous indoor pollutants including formaldehyde, benzene, ammonia and radon used indiscriminately by local manufacturers of furniture and building materials.