Getting the RBI elephant to dance
The New Year missive sent by Reserve Bank of India (RBI) governor Raghuram Rajan to the employees of the central bank is an overdue call for organizational change. Rajan has mentioned the presence of time servers who barely do what is expected of them as well as the general lack of curiosity among many members of the staff. He has also said that a culture of complacency and self-satisfaction will lead to a slow descent into mediocrity.
These words should not come as a complete surprise. Rajan has been talking for quite some time about how the internal culture of the central bank needs to be overhauled. He lost his initial battle to appoint a chief operating officer who would pull the organization up by its socks. But he has since then reorganized his staff into five clusters: monetary policy and research; regulation and risk management; supervision and inclusion; financial markets and infrastructure; human resources and operations. Such clusters need to be necessarily manned by trained specialists if they are to succeed.
Few realize that the RBI is far slimmer than it was at the peak of Indian regulatory socialism. Its headcount has come down from 35,500 in 1981 to 16,700 today. But this slimmed-down RBI needs to become a place where talent is nurtured, knowledge is advanced and capabilities are strengthened. It is now operating in an environment that it cannot tightly control as in the past. Most interest rates have been decontrolled, the exchange rate is no longer fixed by fiat, global events have deep effects on India, financial market innovations are one step ahead of regulations, the tools of risk assessment have become more sophisticated, financial inclusion is a big challenge, and new developments such as the growth of digital money are on the horizon.
One example of what all this means is seen in the field of monetary policy. The RBI has now switched to a new inflation targeting framework. It needs to develop new macroeconomic models to help it forecast inflation with more precision. It needs to better understand the process by which inflation expectations are formed. Its survey methods are crying for change. It needs to develop a better understanding of the feedbacks from the financial markets into the real economy.
The central bank has a talented bunch of economists doing monetary policy, but there is no doubt that it needs more intellectual capital. The RBI has had two major episodes when its economic research was bolstered: first in the late 1940s when C.D. Deshmukh was governor and then in the mid-1980s when C. Rangarajan was the deputy governor in charge of monetary policy. The bar needs to be raised in the other clusters that Rajan has created within the central bank.
It is by no means an easy task. Most organizations fall prey to inertia as the decades go by. The private sector is disciplined by the market. Regulatory organizations have to create their own internal discipline. Rajan should by now be aware of the power of public sector unions, so he will have to manage the transition carefully. In this context, there is still a strong case for bringing in a chief operating officer, but being ready with the legal requirements this time around, compared to the strategic blunder made last time.
The RBI insiders say that a lot of bright young people who join the central bank tend to leave it in a few years as they realize that promotion is not linked with capabilities. On the other hand, getting in lateral entries is a massive battle even at the best of times. That leaves an organization where talent is scarce. There is good reason for Rajan to be worried.
The RBI continues to be one of our most credible public institutions. The central bank has been attacked over the past few years for its failure to keep a lid on inflation even as there have been attempts to whittle down its powers. Successive governors have fought to defend the RBI’s turf and reputation. But its best defence would be to emerge as a meritocratic organization that does its job well—and more.
Bankruptcy law: key to tackling the burgeoning NPA issue
The Reserve Bank of India (RBI) started a process whereby all new restructured loans are classified as bad loans. A restructured loan is one for which the borrower has renegotiated the terms of repayment, while a bad loan is where the borrower has not made payments for a certain period and there is risk of default. Effective 1 April 2015, all restructured loans have to be classified as non-performing assets (NPAs), with provisioning of 15% of the outstanding versus the earlier requirement of 5% for restructured loans.
The idea is to disincentivise banks from opting to restructure loans on the slightest pretext to prevent them from qualifying as NPAs. The new rule is expected to force banks to recall loans, take early recovery action or sell NPAs to asset restructuring companies. However, after the new provisioning norms were introduced, no new case was referred for restructuring in either the June or September quarter. This is a surprise given that the weak economic conditions have not improved materially. While it is difficult to arrive at a meaningful conclusion, there is a sense that there could be under-reporting to prevent bloating of NPA levels.
In India, a loan turns into an NPA if interest repayments remain due on the 91st day. Of late, there has been a sharp spurt in loans for which repayment is due for more than 60 days. These are termed Special Mention Accounts-2 (SMA-2). Anecdotal evidence suggests that the amount of loans that are on the verge of turning bad has risen substantially. But it’s difficult to get an exact sense as RBI doesn’t require banks to publicly report this data.
Available evidence suggests that India’s NPA situation is likely to worsen further before it starts to improve. While the economy has bottomed out, the process of recovery will be slow. With a more proactive RBI now, the situation is likely to improve. Banks have started to convert their loans to equity, especially of the wilful defaulters. The key to success of this programme lies in the banks’ ability to dispose the newly acquired businesses within a reasonable time-frame, failing which they would be saddled with businesses that they don’t have the management competency to run.
While economic growth remains the immediate solution to this problem, India is in desperate need of an appropriate bankruptcy law to help tackle the NPA problem in a more meaningful way.
India’s existing corporate insolvency resolution framework fares poorly in terms of both timeliness and cost of proceedings. Problem is, longer the time taken, greater is the probability of erosion in realisable value of assets and, hence, lower the recovery rate. Not surprisingly, despite a one place improvement in ranking in terms of resolving insolvencies (within the Doing Business Index of the World Bank), India still ranks a poor 136 out of 189 countries and the last among the BRICS countries (Brazil, Russia, India, China and South Africa). The average time taken for insolvency proceedings in India (according to the report) is about 4.3 years, while it is only 1.7 years in the high-income member countries of the Organisation for Economic Co-operation and Development. More importantly, lenders tend to recover just about 20% of their loans when businesses go bust compared to the over 70% recovery in developed countries.
Reforms in bankruptcy laws can play a crucial role in economic growth and financial stability. An effective insolvency framework can offer huge economic benefits like ensuring maximisation of value of creditor’s claim by rehabilitating the ailing debtor company or through an effective liquidation framework if rehabilitation is not achievable. Absence of a rational and efficient process of corporate insolvency has inhibited development of a vibrant corporate bond market. Large amounts of capital and assets have been locked up in enterprises that have gone under with little prospect of revival.
Unfortunately, at this point in time, there is no comprehensive and integrated policy on corporate bankruptcy in India. Multiple agencies are involved in the process, whose jurisdictions often overlap. This can create systemic delays and complexities. Keeping this in mind, the Bankruptcy Law Reform Committee (BLRC) was set up, which submitted the draft of its proposed Insolvency and Bankruptcy Code. Among other issues, this draft addresses the timeline issue by stipulating a strict timeline of 180 days for insolvency resolution and limiting judicial determination at the trigger stage and thereby help de-clogging of judicial bandwidth. Also, even operational creditors such as employees and utilities with dues can initiate insolvency proceedings when the borrower defaults.
If the government is successful in passing the relevant bill, this will not only be a big confidence booster for investors, but India’s ranking in the Doing Business Index will see a big improvement.
Start-ups and think tanks are game-changers
Human development indicators improve rapidly when countries learn to provide health, education and financial inclusion more effectively. Incremental increases in expenditure on welfare schemes and subsidies do not bring about this change. Plugging the leakages in government distribution helps, but it is not a panacea. What we need are game-changing innovations that can tackle India-scale challenges.
In the past 30 years, it has become clear that game-changing solutions do not follow a prescribed path to discovery. Instead, they are born out of hundreds of experiments. These experiments can’t be limited to the labs of a few resource-rich incumbents.
We need to widen the funnel to include the new-age entrepreneurs and innovators. To do this, the government needs to adopt and evangelize pro-challenger tools and policies that reduce barriers to experimentation, create level playing fields and encourage innovating around national issues.
There is some good news on this front. In the past few years, a collaborative effort between several government agencies and the Indian Software Products Industry Round Table (iSPIRT), a non-profit think tank, have helped create key enablers for hundreds of experiments.
A digital infrastructure for cashless, paperless and presence-less (on smartphone) service delivery is now in place. It is colloquially called the India Stack. It offers all the building blocks that are needed as public goods. And the rapid adoption of Jan Dhan Yojana, Aadhaar and mobile numbers (JAM) has created a ready pool of citizens to try out these services.
This enables new-age start-ups to do more complex things than they could do before, making them transformation agents for real India.
These new-age start-ups will deliver 10x gains that we need in health, education and financial inclusion to make India successful.
But we must think beyond start-ups. The Indian state must evolve too. It must learn faster, change faster and implement faster.
A 2013 paper by Luke Jordan of the World Bank and Sebastien Turban and Laurence Wilse-Samson of Columbia University shows that the Indian state performs poorly on these dimensions compared to the Chinese state. They identify many factors for this.
For instance, China has undertaken reform once every five years since 1978, while India has only attempted it twice in 65 years. Therefore, China has been continuously tuning up its capacity to learn and deliver.
In India, substantial administrative reforms are overdue. (The reforms recommended by the Second Administrative Reforms Commission still remain unimplemented.)
It turns out that think tanks have an important role to play too. A dense network of think tanks is necessary to conduct and spread research.
Indian think tanks are mostly central or foreign, with only a few having strong links into the policy system. China has think tanks observing and explaining change. This is a structural gap.
Because of this, the Indian state is conspicuously lacking in its capacity to generate new knowledge, transmit it across the system and act on that.
It is time for us to embrace the two new players—new-age start-ups and local think tanks—for India to prosper. Only then will we able to break free from our current trajectory to meet the aspirations of our young citizens.
The return of public investment
The idea that public investment in infrastructure—roads, dams, power plants, and so forth—is an indispensable driver of economic growth has always held powerful sway over the minds of policymakers in poor countries. It also lay behind early development assistance programmes following World War II, when the World Bank and bilateral donors funnelled resources to newly independent countries to finance large-scale projects. And it motivates the new China-led Asian Infrastructure Investment Bank (AIIB), which aims to fill the region’s supposed $8 trillion infrastructure gap.
But this kind of public investment-driven growth model—often derisively called “capital fundamentalism”—has long been out of fashion among development experts. Since the 1970s, economists have been advising policymakers to de-emphasize the public sector, physical capital and infrastructure, and to prioritize private markets, human capital (skills and training) and reforms in governance and institutions. From all appearances, development strategies have been transformed wholesale as a result.
It may be time to reconsider that change. If one looks at the countries that, despite strengthening global economic headwinds, are still growing very rapidly, one will find public investment is doing a lot of the work.
In Africa, Ethiopia is the most astounding success story of the past decade. Its economy has grown at an average annual rate exceeding 10% since 2004, which has translated into significant poverty reduction and improved health outcomes. The country is resource-poor and did not benefit from commodity booms, unlike many of its continental peers. Nor did economic liberalization and structural reforms of the type typically recommended by the World Bank and other donors play much of a role.
Rapid growth was the result, instead, of a massive increase in public investment, from 5% of GDP (gross domestic product) in the early 1990s to 19% in 2011—the third highest rate in the world. The government went on a spending spree, building roads, railways, power plants and an agricultural extension system that significantly enhanced productivity in rural areas where most of the poor reside. Expenditures were financed partly by foreign aid and partly by heterodox policies (such as financial repression) that channelled private savings to the government.
In India, rapid growth is also underpinned by a substantial increase in investment, which now stands at around one-third of GDP. Much of this increase has come from private sources, reflecting gradual relaxation of the shackles on the business sector since the early 1980s. But the public sector continues to play an important role. The government has had to step in as both private investment and total factor productivity growth have faltered in recent years.
These days, it is public infrastructure investment that helps maintain India’s growth momentum. “I think two sectors holding back the economy are private investments and exports,” says the government’s chief economic adviser, Arvind Subramanian. “That is why... public investment is going to fill in the gap.”
Turning to Latin America, Bolivia is one of the rare mineral exporters that has managed to avoid others’ fate in the current commodity-price downturn. Annual GDP growth is expected to remain above 4% in 2015, in a region where overall output is shrinking (by 0.3%, according to the International Monetary Fund’s latest projections). Much of that has to do with public investment, which President Evo Morales regards as the engine of the Bolivian economy. From 2005 to 2014, total public investment has more than doubled relative to national income, from 6% to 13%, and the government intends to push the ratio even higher in coming years.
We know that hikes in public investment, just like commodity booms, all too often end in tears. The economic and social returns decline and money dries up, setting the stage for a debt crisis. A recent IMF study finds that, after some early positive effects, most public investment drives falter.
But much depends on local conditions. Public investment can enhance an economy’s productivity for a substantial period of time, even a decade or more, as it clearly has done in Ethiopia. It can also catalyze private investment, and there is some evidence that this has happened in India in recent years.
The potential benefits of public investment are not limited to developing countries. In fact, today it may be the advanced economies of North America and Western Europe that stand to gain the most from ramping up domestic public investment. In the aftermath of the great recession, there are many ways in which these economies could put additional public spending to good use: to increase demand and employment, restore crumbling infrastructure, and boost research and development, particularly in green technologies.
Such arguments are typically countered in policy debates by objections related to fiscal balance and macroeconomic stability. But public investment is different from other types of official outlays, such as expenditures on public-sector wages or social transfers. Public investment serves to accumulate assets, rather than consume them. So long as the return on those assets exceeds the cost of funds, public investment in fact strengthens the government’s balance sheet.
We do not know how the experiments in Ethiopia, India or Bolivia will eventually turn out; caution is warranted before one extrapolates from these to other cases. Nonetheless, all three are examples that other countries, including developed ones, should watch closely as they search for viable growth strategies in an increasingly hostile global economic environment.
Bangladesh’s radical problem
Be safe and very vigilant,” Elite Force, a Dhaka, Bangladesh-based security firm posted on its Facebook page about a countrywide strike on 7 January. “Keep track on news, but don’t let silly rumours panic you. Take care.”
If ever there was a message for the country with which India shares its longest border, and which remains its security, trade and energy pivot in this populous eastern arc of South Asia, that was it.
The country was locked down on account of a strike called by Bangladesh Jamaat-e-Islami. The radical organization was protesting the confirmation by that country’s Supreme Court on 6 January of the death penalty given to a Jamaat leader, Motiur Rahman Nizami.
He stands convicted of counselling the killing of several hundred innocents during the war of 1971, in particular the massacre of intellectuals towards the end. Nizami was at the time chief of the Al Badr Bahini, a militia that stands accused of assisting Pakistan’s army in genocide.
The Jamaat is livid; last November, its leader Ali Ahsan Mohammad Mojaheed was executed for war crimes.
Some portray what is going on in Bangladesh as a fight of good against evil. A young Bangladeshi businessman with excellent access to that country’s prime minister’s office went as far as to tell me: “We keep telling you (India) we need 10 more years. We’ll finish them off.”
The gentleman reflects the point of view of several loyalists of the Awami League party, which has ruled since 2009—and practically unopposed since 2014, as major opponents such as Bangladesh Nationalist Party (BNP) boycotted general elections to the national assembly that year.
Basically, it’s the diminishing of ultra-conservative Islamist forces in the country. This list begins with the opposition BNP, its ally Jamaat (Nizami was a minister in a BNP-led government between 2001 and 2006), those accused of war crimes, relatively more recent extremist coalitions like Hefazat-e-Islam, and organizations like Ansarullah Bangla Team that have openly threatened and killed liberal bloggers these past three years. (In end-December a special tribunal in the capital Dhaka sentenced two Bangla Team members to death for the killing of blogger Ahmed Rajib Haider in February 2013.)
These days, in-your-face extremism across the country is Bangladesh’s headlining global news alongside robust socio-economic growth, booming trade and worker remittances, and among the most successful rural credit networks in the world. Impetus to the latter aspects is the declared goal of Prime Minister Sheikh Hasina. She has also assiduously networked with India on a number of matters ranging from cross-border terrorism, trade and sharing of river waters, to settling long-pending disputes such as the agreement last May to swap 160 enclaves.
The spread and cultivated fury of extremism in Bangladesh is a subject that Dhaka liberals and Awami League stalwarts—not always the same species—prefer to downplay. The editor of a major Dhaka-based newspaper bemoaned to me the fact that his country’s critics are fond of highlighting the growth of madrasas, or Islamic seminaries—a recent article in the New York Times cited estimates that mapped an increase from 4,100 madrasas in 1986 to 14,000 in 2015, at any time schooling in excess of one million. Such critics rarely highlight that many times that number attend state- and privately-run schools in villages and cities that impart secular education.
While I agreed with the editor, I also suggested that we may need to recognize a shift: for the generations radicalized since 1971, sentencing their leadership for past crimes, even heinous ones, may amount today to sentencing Islam. For so many millions today, a future for Bangladesh is also a future for securing Islam. This may seem superfluous in a country where the state religion is Islam, but extremism follows its own distorted logic.
Ironically, Awami League may be adding to the distortion. Cronyism is rampant. Awami League cleaned up at the recently concluded countrywide mayoral elections, but its overall victory over BNP and others—the first time the parties have electorally faced off after the boycotted national elections of 2014—were replete with reports of stuffing of ballots. The government’s critics point to centralization of power, in some ways reminiscent of 1975, the year Hasina’s father, Sheikh Mujibur Rahman, was assassinated in a plot led by army officers.
Thereafter, development arrived with large doses of state-mandated conservatism, including a pardoning of war criminals. For India, it meant two decades of diplomatic chill.
Something has to give, or radical forces may take more than what Bangladesh bargained for.
Indian retail seen doubling by 2020: CII-BCG study
India’s retail sector will double to $1.1-1.2 trillion by 2020 from $630 billion in 2015, riding on income growth, rapid urbanisation and more nuclear families leading to higher per capita consumption, says a new study.
The overall growth will be driven by key demographic changes. By 2020, there will be a 70% rise in the income level and 100 million more youths will enter the workforce, says the study titled ‘Retail transformation: Changing Your Performance Trajectory’ conducted by industry lobby Confederation of Indian Industry (CII) and consulting firm The Boston Consulting Group.
Nearly 35% of Indians will be living in urban areas and there will be a rapid rise in the number of nuclear families by 2020, says the report which will be officially launched on Friday.
While the overall retail market is likely to grow at an annual rate of about 12%, organized retail is projected to grow at 20% and e-commerce at 40-50%, the study said. Organized retail will account for about 12% of the retail market and e-commerce will constitute about 5% by 2020, it said.
An earlier BCG report, released in February 2015, said that average household income will increase three times to $18,448 by 2020 from $6393 in 2010.
Also, urbanization will increase to 40% in 2020 from 31% in 2015 and more than 200 million households will be nuclear, representing a 25-50% higher consumption per capita spend, the February report said.
By 2020, according to the latest report, about 650 million consumers will be online, of which 350-400 million would be “digitally influenced”, helping e-commerce to grow to $45-50 billion from $8-12 billion in 2015.
The study says that smaller towns will play a key role in the growth of e-commerce. In tier-II towns, the relevance of variety would increase, driven by lack of options in organized retail, it added.
Retailer will have to adapt to changes to integrate digitally influenced consumers in a better way, says the report adding that companies will have to build capabilities in omnichannel retailing, big data and analytics, information technology and supply chain. The study calls upon Indian retailers to take a strategic view of their opportunities and be clear about their aspirations. “With organized retail having potential to be close to 12-15% of the retail opportunity and e-commerce being $45-50 billion and potentially higher, Indian retailers would need to transform themselves to capture the massive opportunity,” said Abheek Singhi, senior partner and director at BCG India.
In the past few quarters, most brick and mortar retailers, such as Croma, Future Group, which runs chains like Central and Big Bazaar, and brands such as Nike, Puma, Catwalk, Mango and Vero Moda have gone online through marketplaces like Flipkart, Amazon India and Snapdeal. At present, most brick-and-mortar retailers don’t have a good multichannel offering.
“With the expected exponential increase in digitally savvy consumers over the next decade, technology will play a key role in the development of the Indian retail sector. Retailers will have to adopt technology in both back-end and front-end, to bring the digitally savvy consumer into the mainstream retail fold,” said Shashwat Goenka, sector head, Spencer’s Retail Ltd, RP Sanjiv Goenka Group.
With more disposable income, Indians are also likely to spend more on premium products, says Shailesh Chaturvedi, chief executive and managing director at Tommy Hilfiger Apparels India. “While e-commerce may be a ready answer, premiumization and upgradation of consumption may also be a very strong force going forward. With growth of the Indian economy, discretionary spends will rise faster and premium product will gain share, as seen in other emerging markets of Russia and China. Indian consumers will become more sophisticated, discerning and demanding and will be ready to pay bit more for their choices,” he said.
The report also talks about the challenges ahead for brick and mortar retail. They include price sensitiveness of online consumers, steep competition with e-commerce, and lower bargaining power against suppliers and regulatory barriers. These factors may lead to lower profitability and return on capital for such retailers when compared with other sectors and global retailers, it added.
BCG, in its February 2015 report, had said that sales per square foot at Indian retail stores at Rs.1,500-2,000 per square foot is much lower than the international average of Rs.8,000-12,000 per sq.ft Even the gross margins are lower in India by 7-8% than the international standards and the rentals are higher by 1.5-3% on an average.
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