A NEW administration is taking shape in the US. One of its first tasks will be to find ways of tackling the economic slowdown and ensuring the long-term survival of its financial system. Some of the steps taken so far by the current administration, represented by treasury secretary Henry Paulson, have come in for criticism for providing a lifeline to unrepentant and spendthrift financial institutions. So, what will the new administration do that’s going to be drastically different?
For one, do not expect anything radical too soon. The US system works in curious ways, but cuts across party lines when it comes to confronting national crises. Therefore, the Obama government is sure to continue with the work of implementing and monitoring Paulson’s $700-billion TARP package. But—and this is the best part—do not for a moment think that the Dick Fulds of this world have been forgotten or pardoned. Once the new administration feels the time for crisis management is over, it will go after all the people it thinks are responsible for the current meltdown—the guys who sold the mortgages to families that clearly did not have the capacity to repay, banks which then created virtual pyramids out of these simple loans, rating agencies that put their seal of approval on these instruments, bank CEOs who lulled shareholders into a false sense of comfort by repeatedly lying to them about their company’s failing health and impending demise. The compelling imagery of once-powerful CEOs in handcuffs (a la Enron, Boesky, et al) is all too potent and depicts in a single, two-dimensional frame the robustness of the American judicial system.
This kind of action will not only be expected but demanded from the Obama administration. There will be tremendous political pressure to go after the Wall Street villains because of two over-riding reasons. One, the popular vote seems to have communicated resoundingly that it does not view the Republican Party’s close links with the financial buccaneers too kindly. And, two, it does not like being weighed down by the uncomfortable burden of having to bail out their derring-do. Plus, and this is important, there is this uncomfortable vision of many CEOs landing safely with multi-million-dollar bonus parachutes while middle America hunkers down for an extended period of unemployment and lost wages.
Here is the most unsettling image: Lehman CEO Richard Fuld picked up a $22-million bonus in March 2008 even as the firm was struggling to stay afloat and would eventually go bankrupt six months later. There are some other CEOs who could be in the firing line too. Merrill Lynch CEO John Thain, who merged his bank with Bank of America, received a $15-million cash bonus on joining the bank in November 2007. Goldman Sachs showed $20.2 billion as payroll costs in 2007! Goldman Sachs chief Lloyd Blanfein earned about $68 million bonus in 2007, of which about $27 million was hard cash. Some CEOs read the writing early enough to forsake their bonus - Bear Stearns CEO James Cayne gave up his months before the firm was absorbed by JP Morgan Chase and Deutsche Bank CEO Josef Ackermann has also publicly declared that all top executives of the bank were surrendering their bonuses.
This could also lead the new administration down another possible, and interesting, path. There is already growing demand that the government re-examine the salaries of its regulators, who are supposed to keep a hawk-eye on the multi-million-dollar baggers. Part of the reason behind this call is that these lower salaries keeps the talent away from the regulators — guys who will be able to recognise a scam or a notice a danger signal before it becomes manifest to everybody else. Or, somebody who can understand the arcane and complicated instruments conjured up by highly-paid quants in banks and hedge funds. There is the also the question of motivation. A columnist recently wrote about how junior level officers from the US central bank (Federal Reserve Bank) and the markets watchdog (Securities and Exchanges Commission) would be completely overwhelmed by the complexity of the instruments they routinely had to vet and approve.
Some of the inequities come through when you juxtapose Fuld’s bonus with the salary earned by, say, Fed boss Ben Bernanke. According to a copy filed by news agency Reuters in October: “Ben Bernanke may be one of the most influential people on the planet right now as he heads the US Federal Reserve’s efforts to contain the crisis. But his $191,300 a year looks like loose change when compared with the near $500 million earned by Richard Fuld in his eight years in charge at Lehman.” The other powerful central bank in the world - European Central Bank - does not pay its top man Jean-Claude Trichet more than 350,000 euros (close to $440,965). And, at that, his salary is not necessarily the highest among all the European central banks. For instance, the Italian and Belgian central bankers earn more than Trichet. Even Bank of England’s Mervyn King probably earns just marginally more than Trichet.
One can only hope that some ripple waves from that action also wash up on Indian shores.
Tuesday, November 18, 2008
Wednesday, June 18, 2008
Path to nowhere leads to success...
I was a gung-ho liberaliser when economic reforms began in 1991. At the time, a sceptical politician asked me which sectors would benefit most. I replied it was not possible to predict the winners. In that case, he sneered, why embark on a path with no destination.
The answer is clear today, now that India has averaged almost 9% economic growth for several years. This success required a path which, by design, had no destination. The reforms tore down the planned road and opened entry into a million possible roads, facilitating ideas that no planner had dreamed of.
Before 1991, no planner visualised a future economy excelling in computer software, business process outsourcing (BPO), R&D, or brain-intensive manufacturing. But deregulation plus global connectivity created a million new possibilities, and innovative risk-takers did the rest.
India is globally famous for computer software. Yet government policy hobbled this industry for decades. Narayana Murthy of Infosys says it took almost two years in the 1980s to get a telephone connection and a licence to import a computer. Politicians and trade unions opposed computerisation as a threat to jobs. The 1993 bank-union agreement, two full years after liberalisation, nevertheless provided for bank branch computerisation at just 0.5-1% per year, meaning full computerisation would take 200 years!
Without widespread computerisation, software engineers could not develop high skills locally. But Indians who went to the US became the whizz kids of Silicon Valley. “Body shopping” followed — foreigners hired Indians to work on software projects in the US. India’s software skills were honed in Silicon Valley and then shipped back. No planner could have planned this: it was the spontaneous outcome of enterprise and global connectivity
Similarly, no planner could have created BPO. Nobody predicted in 1990 that thousands of foreign companies would move back-office and technical services to India. General Electric was the first to experiment with the idea. It succeeded so well that MNCs galore followed suit.
Initially, companies thought only low-tech jobs could be outsourced, but Indians quickly graduated to the most skilled tasks. Moody’s and Standard and Poor’s took a long time to upgrade India’s credit rating to investment grade, yet have shifted some of their own rating operations to India.
India has become a global R&D hub. Here too, General Electric led the pack. Renault-Nissan is partnering Bajaj to make a small car that can beat Tata’s Nano. The R&D has been entrusted by the Franco-Japanese giant to Bajaj. India’s boom in brain-intensive manufacturing was unplanned. Most people thought India would follow the path of labour-intensive exports pioneered by East and South-East Asia. India failed dismally here, thanks mainly to rigid labour laws. But, to everyone’s surprise, India became world class in brain-intensive industries like pharma and automobiles.
Indian pharma is now a global player, and all top companies have become MNCs, acquiring companies across continents. This was made possible after India agreed to international patent rules, something the government opposed tooth and nail and was finally forced to accept in the Uruguay Round of 1995. This failure of planned strategy was the beginning of Indian success. Indian pharma companies initially feared they would be wiped out, but soon found that integrating with the global economy was an opportunity, not a threat.
The auto industry has become world-class. Why? Auto companies need constant new models and improvements to compete. Auto MNCs in India found that Indian engineers could do this quickly and cheaply. An auto component giant like Delphi takes three months to go from a new concept to prototype to commercial production. Bharat Forge claims it can do this in one month. Such skills have made it global No 2 in auto forgings.
When the economy opened up in 1991, many predicted that Indian companies would go bust or be taken over by MNCs. Nobody dreamed that one day Tata Steel would take over Corus, which was six times as big; or that Tata Motors would acquire Jaguar and Land Rover; or that Hindalco would take over Novellis, which was several times its size.
How did Indian minnows take over global whales? By borrowing massively from abroad. But such massive borrowing was prohibited by government policy till recently. The curbs aimed to thwart irresponsible borrowing. No planner realised that the curbs also thwarted Indian takeovers of global giants. The government has long discouraged private initiatives in education, and education for profit is banned. Supposedly non-profit private engineering colleges have come up, often owned by politicians, and often collecting illegal fees under the table. Their educational standards are spotty at best. Yet, these unplanned colleges, warts and all, have driven brain-intensive manufacturing. Government colleges produce only 45,000 engineers a year. Private colleges produce nine times as many. For decades, telecom was a government monopoly. In the 1980s, the government vetoed proposals for cellphones, saying they were a rich man’s toy. No planner anticipated that after liberalisation in the 1990s, cellphones would be bought by everybody from rural shopkeepers to urban carpenters. Nobody foresaw that Indian companies would create the cheapest calls in the world, attracting 8-10 million new subscribers per month. No planner saw any comparative advantage in wind energy. Indian wind speeds are generally low. Yet Tulsi Tanti, a textile manufacturer, launched Suzlon to make windmills. He is now world No 5 in windmills. Essel Propack has become the world’s top producer of laminated plastic tubes (for toothpaste, drugs and cosmetics). Nobody planned this. Subhash Chandra, a rice merchant, was looking at an international fair for plastic packaging for rice. The plastics dealers told him, by the way, that laminated plastics were replacing aluminium tubes for toothpaste. This accidental discovery helped transform Chandra from humble rice trader to world No 1 in laminated tubes.
One of my favourite posters says, “Some people look at things as they are, and ask why. But I dream of things that never were, and ask why not.” India has succeeded by becoming a place where people can think of things that never were, ask why not, and then just do it...
Cheers till next time !
The answer is clear today, now that India has averaged almost 9% economic growth for several years. This success required a path which, by design, had no destination. The reforms tore down the planned road and opened entry into a million possible roads, facilitating ideas that no planner had dreamed of.
Before 1991, no planner visualised a future economy excelling in computer software, business process outsourcing (BPO), R&D, or brain-intensive manufacturing. But deregulation plus global connectivity created a million new possibilities, and innovative risk-takers did the rest.
India is globally famous for computer software. Yet government policy hobbled this industry for decades. Narayana Murthy of Infosys says it took almost two years in the 1980s to get a telephone connection and a licence to import a computer. Politicians and trade unions opposed computerisation as a threat to jobs. The 1993 bank-union agreement, two full years after liberalisation, nevertheless provided for bank branch computerisation at just 0.5-1% per year, meaning full computerisation would take 200 years!
Without widespread computerisation, software engineers could not develop high skills locally. But Indians who went to the US became the whizz kids of Silicon Valley. “Body shopping” followed — foreigners hired Indians to work on software projects in the US. India’s software skills were honed in Silicon Valley and then shipped back. No planner could have planned this: it was the spontaneous outcome of enterprise and global connectivity
Similarly, no planner could have created BPO. Nobody predicted in 1990 that thousands of foreign companies would move back-office and technical services to India. General Electric was the first to experiment with the idea. It succeeded so well that MNCs galore followed suit.
Initially, companies thought only low-tech jobs could be outsourced, but Indians quickly graduated to the most skilled tasks. Moody’s and Standard and Poor’s took a long time to upgrade India’s credit rating to investment grade, yet have shifted some of their own rating operations to India.
India has become a global R&D hub. Here too, General Electric led the pack. Renault-Nissan is partnering Bajaj to make a small car that can beat Tata’s Nano. The R&D has been entrusted by the Franco-Japanese giant to Bajaj. India’s boom in brain-intensive manufacturing was unplanned. Most people thought India would follow the path of labour-intensive exports pioneered by East and South-East Asia. India failed dismally here, thanks mainly to rigid labour laws. But, to everyone’s surprise, India became world class in brain-intensive industries like pharma and automobiles.
Indian pharma is now a global player, and all top companies have become MNCs, acquiring companies across continents. This was made possible after India agreed to international patent rules, something the government opposed tooth and nail and was finally forced to accept in the Uruguay Round of 1995. This failure of planned strategy was the beginning of Indian success. Indian pharma companies initially feared they would be wiped out, but soon found that integrating with the global economy was an opportunity, not a threat.
The auto industry has become world-class. Why? Auto companies need constant new models and improvements to compete. Auto MNCs in India found that Indian engineers could do this quickly and cheaply. An auto component giant like Delphi takes three months to go from a new concept to prototype to commercial production. Bharat Forge claims it can do this in one month. Such skills have made it global No 2 in auto forgings.
When the economy opened up in 1991, many predicted that Indian companies would go bust or be taken over by MNCs. Nobody dreamed that one day Tata Steel would take over Corus, which was six times as big; or that Tata Motors would acquire Jaguar and Land Rover; or that Hindalco would take over Novellis, which was several times its size.
How did Indian minnows take over global whales? By borrowing massively from abroad. But such massive borrowing was prohibited by government policy till recently. The curbs aimed to thwart irresponsible borrowing. No planner realised that the curbs also thwarted Indian takeovers of global giants. The government has long discouraged private initiatives in education, and education for profit is banned. Supposedly non-profit private engineering colleges have come up, often owned by politicians, and often collecting illegal fees under the table. Their educational standards are spotty at best. Yet, these unplanned colleges, warts and all, have driven brain-intensive manufacturing. Government colleges produce only 45,000 engineers a year. Private colleges produce nine times as many. For decades, telecom was a government monopoly. In the 1980s, the government vetoed proposals for cellphones, saying they were a rich man’s toy. No planner anticipated that after liberalisation in the 1990s, cellphones would be bought by everybody from rural shopkeepers to urban carpenters. Nobody foresaw that Indian companies would create the cheapest calls in the world, attracting 8-10 million new subscribers per month. No planner saw any comparative advantage in wind energy. Indian wind speeds are generally low. Yet Tulsi Tanti, a textile manufacturer, launched Suzlon to make windmills. He is now world No 5 in windmills. Essel Propack has become the world’s top producer of laminated plastic tubes (for toothpaste, drugs and cosmetics). Nobody planned this. Subhash Chandra, a rice merchant, was looking at an international fair for plastic packaging for rice. The plastics dealers told him, by the way, that laminated plastics were replacing aluminium tubes for toothpaste. This accidental discovery helped transform Chandra from humble rice trader to world No 1 in laminated tubes.
One of my favourite posters says, “Some people look at things as they are, and ask why. But I dream of things that never were, and ask why not.” India has succeeded by becoming a place where people can think of things that never were, ask why not, and then just do it...
Cheers till next time !
Sunday, June 15, 2008
Upsetting Oil Pricing Conundrum in India
Indian Oil Corporation (IOC) calculates inter alia the landed import duty paid price of petrol and diesel every fortnight. This calculation is based on a formula that is linked to international prices. IOC’s landed price of petrol in Mumbai for the second fortnight of May was, for instance, Rs 38.1 per litre and for diesel Rs 48.8 per litre. The marketing companies had to, in other words, pay this amount to the refiners to buy the products. Next, the Central government imposes an excise and educational cess on the purchase cost. In May, this was Rs 14.4 per litre and Rs 0.4 per litre for petrol and Rs 4.6 per litre and Rs 0.1 per litre for diesel respectively. The total cash required by the marketing companies to purchase petrol and diesel in May was, therefore, Rs 52.9 per litre for petrol and Rs 53.6 per litre for diesel. The companies then sell these products at the ministry of petroleum mandated price of Rs 49.7 per litre for petrol and Rs 35.6 per litre for diesel (Mumbai prices). As such, they lose Rs 3.2 and Rs 18 for every litre of petrol and diesel sold respectively.
That, however, is not their total loss. They have to also pay sales tax to the state governments. In Mumbai, this tax is Rs 10.6 per litre and Rs 7.1 per litre for petrol and diesel respectively. Thus, the total cash loss suffered on account of the sale of 1 litre in Mumbai is Rs 13.7 and Rs 25.1 for petrol and diesel respectively. This is, in other words, the amount by which prices would have to be increased at the retail outlet for the companies to simply break even on a cash basis. Such a hike is, of course, out of the question.
Many in the public domain believe that the imbalance can be redressed by reducing the central and local taxes to make the public sector oil companies profitable. However, it is actually not about reducing the taxes to bring the prices down. That is just an indirect way of maintaining the subsidies. On one hand, the balance sheets of the oil companies might look healthier and higher profits might allow theme to disburse handsome dividends. On the other hand, the government revenues would come down and higher revenue deficits will bring the finance ministry into the FRBM dragnet. It is not a Morton’s fork but a Hobson’s choice for the government — to link the retail rates of petroleum products with the market rates.
In case of most other commodities, the high consumer price checks demand. This helps restore the supply-demand balance. As prices are not linked to the rising market rates, oil demand is not checked commensurate with the price change. It obviously creates an asymmetry in the supply-demand balance and can be only restored at much higher prices. By then, it might be already too late for the Indian economy.
Now let us look at two sensible, yet asynchronous, viewpoints on resolving this pricing conundrum. In the same piece, I prescribe the policy framework for a comprehensive petroleum policy. First, we should accept that high oil prices are here to stay. This does not mean we will not see sharp declines from present levels. What it does mean is that we will not see prices stabilising at levels significantly below a triple digit number. Second, we must create a mechanism that leads to a ‘graduated’ reduction in subsidies, an orderly alignment of domestic prices to international levels and a more efficient disbursement of financial support to the poor. Third, we must reverse ‘dieselisation’. And finally, we must recognise that the sine qua non of energy security is a robust and competitive domestic petroleum and energy sector.
One can only wonder if Rs 200,000 crore in oil subsidies, nearly 2% of India’s GDP, is not alarming enough for the government to pay heed to such sensible opinions.
Till next time, I better fuel up my tank before another bombshell price hike occurs !!!
That, however, is not their total loss. They have to also pay sales tax to the state governments. In Mumbai, this tax is Rs 10.6 per litre and Rs 7.1 per litre for petrol and diesel respectively. Thus, the total cash loss suffered on account of the sale of 1 litre in Mumbai is Rs 13.7 and Rs 25.1 for petrol and diesel respectively. This is, in other words, the amount by which prices would have to be increased at the retail outlet for the companies to simply break even on a cash basis. Such a hike is, of course, out of the question.
Many in the public domain believe that the imbalance can be redressed by reducing the central and local taxes to make the public sector oil companies profitable. However, it is actually not about reducing the taxes to bring the prices down. That is just an indirect way of maintaining the subsidies. On one hand, the balance sheets of the oil companies might look healthier and higher profits might allow theme to disburse handsome dividends. On the other hand, the government revenues would come down and higher revenue deficits will bring the finance ministry into the FRBM dragnet. It is not a Morton’s fork but a Hobson’s choice for the government — to link the retail rates of petroleum products with the market rates.
In case of most other commodities, the high consumer price checks demand. This helps restore the supply-demand balance. As prices are not linked to the rising market rates, oil demand is not checked commensurate with the price change. It obviously creates an asymmetry in the supply-demand balance and can be only restored at much higher prices. By then, it might be already too late for the Indian economy.
Now let us look at two sensible, yet asynchronous, viewpoints on resolving this pricing conundrum. In the same piece, I prescribe the policy framework for a comprehensive petroleum policy. First, we should accept that high oil prices are here to stay. This does not mean we will not see sharp declines from present levels. What it does mean is that we will not see prices stabilising at levels significantly below a triple digit number. Second, we must create a mechanism that leads to a ‘graduated’ reduction in subsidies, an orderly alignment of domestic prices to international levels and a more efficient disbursement of financial support to the poor. Third, we must reverse ‘dieselisation’. And finally, we must recognise that the sine qua non of energy security is a robust and competitive domestic petroleum and energy sector.
One can only wonder if Rs 200,000 crore in oil subsidies, nearly 2% of India’s GDP, is not alarming enough for the government to pay heed to such sensible opinions.
Till next time, I better fuel up my tank before another bombshell price hike occurs !!!
Subscribe to:
Posts (Atom)
Posts
