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.

FSLRC's Recommendations

The Financial Sector Legislative Reforms Commission headed by Justice B.N.Srikrishna has submitted its report after working on it for about two years.

The Commission has made a far-reaching recommendation to clip the powers of RBI and to further empower Finance Ministry. "The rules on capital account transactions for all inward flows will be made by the central government in consultation with the regulator. The rules on capital account transactions for all outward flows will be made by RBI in consultation with the central government."

This nefarious recommendation has attracted notes of dissent by three eminent members who perhaps are the only ones in the Commission who understand its implications! Y.H.Malegam, K.J.Udeshi and Dr.P.J.Nayak have disassociated themselves from this recommendation; it is unfortunate that in a Commission of this importance, knowledgeable members are unable to prevail upon others. This perhaps indicates the existence of some external influence.

Y.H.Malegam argues forcefully that Finance Ministry must take decisions only on FDI-related inward flows and that other inflows be they portfolio ones or ECBs or NRI investments should be subject to RBI's control.

Malegam also dissents from the Commission's proposal that NBFCs and Housing Finance Companies should be regulated by the proposed Unified Financial Agency and not by RBI. The proposal is very retrogressive.

The Commission has proposed dismantling of SEBI, IRDA and PFRDA. P.J.Nayak reminisces correctly that when the Finance Ministry was administering through Controller of Capital Issues or the Stock Exchange Division of the Finance Ministry, new capital issues were continually grossly mis-priced and malpractices in the functioning of brokerage firms were commonplace. Therefore SEBI etc. were formed. As Nayak wisely asserts, "The Commission now arrests and partly reverses the directional movement and it is with this apprehension that one must view the very substantial statutory powers recommended to be moved from the regulator (primarily RBI) to the Finance Ministry."

It is a pity that members who are in the know of things can only whistle in the dark while the Commission carries out its assigned job of enfeebling the regulators and empowering the Finance Ministry.

Levy on bank deposits

Cyprus, a tiny Mediterranean island is in throes of a serious financial crisis. It is nicknamed Eurogeddon because it poses a threat to faith in a common currency like the Euro.

If Cyprus had a currency of its own, it could have depreciated the currency and improved its balance of payments and recovered from the crisis. The only solution now is tightening of its domestic belt and to look for aid from the European Central Bank and IMF.

It is estimated that Cyprus needs Euro 17 billion to get bailed out of the crisis. Germany, the most potent Euro power, resists outside assistance more than Euro 10 billion for its own political reasons. This means that Cyprus needs to generate savings to the extent of Euro 7 billion.

This is a tough call. It is proposed to impose a one-time levy of 9.9% and 6.75% on bank deposits depending on their size. More than 40% of bank deposits are held by Russians. Difficult situations may call for difficult solutions. But the problem here is that such a remedy may become a precedent and may discourage bank deposits not only in Cyprus but elsewhere too.

Subversion of justice

Justice Chandru of the Madras High Court in a recent judgement admonished Justice S.Mohan, a former judge of the Supreme Court for taking up an assignment which a retired judge of the SC was not expected to handle. Chandru's courage and passion to uphold law deserve commendation.

When a retired judge of the highest court in the land keeps commenting on judgements and intervenes in the execution of the sentence pronounced by the court, it is a cause for serious concern. If, in addition, there is no justification for what the former judge demands, it becomes the duty of the judiciary to silence the loose cannon. Justice Katju is one such former judge.

Katju wants Sanjay Dutt to be pardoned by the governor of Maharashtra. Reasons? He has two young children. He has suffered a lot in the last 20 years attending the courts. He is connected with films on Mahatma Gandhi. His parents were 'patriots'. These reasons are as puerile as you can get.

Justice Katju cannot be unaware that the Supreme Court has held Sanjay Dutt guilty of a 'very serious crime' including possessing huge arms and ammunition without licence. It cannot be the case of any prudent person that such a crime which facilitated serial bomb blasts is pardonable. Demented judges, retired or otherwise, are dangerous to society.

Book review oddly timed

The Hindu has published today a flattering review of the book authored by Tamal Bandyopadhyay on HDFC Bank. The book is titled "Bank for the Buck". The review is written by N.S.Vageesh who heads the Mumbai bureau of Business Line.

The book is in total praise of Deepak Parekh and Aditya Puri. The hagiographic book creates a false impression in the minds of readers that these two leaders can do no wrong. This was taken as an acceptable exaggeration till the Cobrapost revelations about HDFC Bank (and two others of lesser repute) became public. Not any longer!

The Hindu could not have chosen a more inappropriate time for publishing this "you scratch my back, I will scratch yours" review. The writer seems to be in total awe of the author of the book.

Bankers have started renaming the book as "Bank for the false Buck". Unbounded flattery usually backfires.

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.

Italian politics

Instability is commonplace in Italian politics. Predictably the recent election did not throw up any party with working majority.

Beppe Grillo, a comedian, however caused a surprise emerging as a popular leader who garnered 26% of total votes for the party that he leads, namely Five Star Movement referred to as M5S. What is even more surprising is that he himself could not contest in the elections as his own party does not allow candidates with criminal record.

Grillo is fond of walking barefoot. Occasionally he wears a T-shirt that proclaims Mahatma Gandhi's words "Be the change you wish to see in the world". Signs of hope?