Archive for November, 2007

Talent shortage in India is artificially created

November 30, 2007

I was just discussing with a colleague who had been to the BANCON-2007 (Banker’s Annual Conference in India). I was discussing the proceedings of the conference and how it was etc. (You can see the presentations here)

I was told that in one of the panel discussions (the entire program is here) the speakers (most top executives at various organisations)  lamented shortage of talent in the country. This shortage of talent is emerging as another paradox in the country. In a country with huge population, demographic dividend(having a higher younger population compared to old) etc. how do we explain the shortage of talent problem?

Immediately we would blame the government. They have spent most on their own salaries, own constituencies etc etc. I agree govt. is to be blamed. But I think corporate sector can do quite a bit in education as well.

Opening a school is very difficult in the country so we really cannot solve the problem bottom -up. But how about a top-down approach? There are many private engineering/management colleges in India which are churning out graduates in plenty.

Why can’t the top executives start looking at making the private colleges better instead of plain lamenting? There are few who have taken up but most still prefer to be associated with top colleges. And even those who are on boards seldom are very proactive. They find it difficult to even get basic jobs but only thing media wants to talk about is rising salaries at select colleges.

Another point is the corporate sector believes that most that graduate are unemployable (and hence a shortage of talent) and there is always a beeline for the top engineering/management colleges.

I don’t really agree. I think one learns most at work. Most of the theories we study in colleges are not really used in practice. Even the top grads need training and they dont start making strategies from day one. Infact if recruited for marketing department, you are often sent to far flung areas to learn more about India as they know Kotler’s theories do not work as taught in textbooks.

I agree there is a difference in learning levels but that does not mean they are not employable. Even the top schools were once given an opportunity and that is how they became good. It is only when you give people opportunities can one grow. Like every year we have a big press release in all papers that following students have been selected for AV Birla scholarship. On a close look they are all from top colleges. I agree they deserve to be credited, but I guess such a big business group could help people from other colleges as well. I am sure they must be even doing it, but somehow it is not covered as well. The encouragement has to come from all angles.

Another thing I do not understand is the hue and cry we make in India over which college are you from? It irritates you more weight is given to the college than the individual. I agree colleges shape individuals but it is not a necessary and a sufficient condition.

Another issue is the discrimination issue- better jobs are mostly kept for those who have graduated from such and such place. Why should that be so? However, most corporates have a statement like”we are fair employers” but they don’t really practice it. They discriminate on the basis of colleges. I don’t have statistics but one keeps hearing many a stories where 2 freshers (no work experience) with everything similar except their colleges, are employed at a similar firm at same position but at different levels (in terms of pay, grade etc.) . Even promotion path is different with the one from a better college slated for promotion much earlier.

People might say well that is the reward one gets from passing out from a better college. I think they are already rewarded as they have got better education, better teachers which will help them in future. They should rise on the basis of their education and not based on discrimination. The competition should prevail.

India is a huge population and we can’t adopt exclusive policies elsewhere. Time to act not plain talk.

Assorted Links

November 30, 2007

1. WSJ Blog pointsto another recession story. This time it looks at the way we calculate GDP. It says a slowdown looks likely if we look at GDP based on Income (GDI). GDI comes with a lag and there are differences if we look at GDP based on expenditure and income. GDP says things looks fine but GDI says it is slowing down.

The differences between the two are quite big even in US. I had posted a similar story about India sometime back

2. WSJ Blog points to Roubini’s pessimistic outlook on US equity markets.

3. Fin Prof on Private Placements

4. ESAP Blog is a refresher. It has brought many ideas which make you think. The latest post says why health ministries continue to focus on health issues despite the fact that good health is linked to many other variables

5. Econbrowser updateswhether Euro is rising as a forex reserve

Assorted Links

November 29, 2007

1. TTR on Private equity disclosures

2. Ajay Shah points that Outlook Money has given Dr. RH Patil (NSE founder) hall of fame award. Some might not agree as the mandate given to RH Patil was to develop NSE as a corporate bond market and not equity.

3. MR asks whether Banks need to be regulated more. Also read the China and Zimbabwe story.

Zimbabwe’s chief statistician says he cannot work out the rate of inflation because of the lack of goods in shops.

4. WSJ Blog summarisesthe Beige Book released y’day (most regions are slowing down)

5. Mahalonobis points to OECD quiz.

6. PSD Blog points to a new study on tax systems in the world.

7. JR Varma points to an interesting piece – UK govt. lost personal data of 25 million people! He adds a scary thought as well.

Criticising regulators is easy

November 28, 2007

ET edit page responds to V.Leeladhar’s speech which I coveredyesterday. It criticises RBI saying RBI has gone back to the 1970’s. RBI allowed Banks to set up ATMs without any permissions but now requires them to do so. It also says authorisations are similar to licences; word changes doesn’t matter.

ET misses the stronger point- despite so many licences being given (in ET’s language), why haven’t banks utilised the licences and opened up branches? Liberalisation doesn’t mean a straight path as usually advocated. There are lots of learnings on the way and the regulators need to change as they move along the path.

The criticism for 1970’s policy is valid but if RBI did not push banks in opening up branches in semi-urban/ rural centres, I am sure most  part of India’s rural population would be unbanked. Still large numbers are excluded but atleast some inclusion has happened. There are many a places in India where you find a SBI but to imagine a private and foreign bank is a far fetched idea. The Private Banks only picked up activity in rural sector when scholars like CK Prahlad said money could be made from bottom of pyramid as well.

The idea is not to criticise private banks as most are answerable to shareholders and have to create profits. The idea is that criticism should be balanced. One shouldn’t just take a one sided view.

Assorted Links

November 28, 2007

1. WSJ Blog points to 2 Fed speeches, here and here.  It also points to a study that estimates of whether things have become more expensive this Xmas.

2. Goldman Sachs expects Fed Funds rate to be 3% by Q2 next year.

3. Rodrik defends

4. Fin Prof points that Fed would inject $ 8 billion in economy during the holiday season.

5. PSD Blog has 2 interesting posts one on Islamic Car and two on Sachs vs Easterly.

6. ESAP Blog has another guest blogger- Praful Patel. His first post is here

7. Economist Blog on why drycleaning women’s shirts costs more.

8. Ajay Shah points to some developments on New Pension System of India

9. This is actually a surprise from an economic think-tank. ICRIER supports capital controls when most have been talking about let capital come and let exchange rate appreciate.

4 theories of capital flows

November 27, 2007

I have written a number of posts on the capital flows (the allocation puzzle, capital controls, IMF’s analysis, Rogoff’s view etc). These papers have a single viewpoint and they provide evidence on the same.

However, this excellent paper from Barry Eichengreen summarises all on capital flows in form of 4 schools:

1. Neoclassical school: It believes in basic economics argument that capital flows from low return avenues to high returns. However, what we find is opposite as capital flows from emerging markets (where returns are high) to developed (where returns are low)? So, people believing/criticising this school explain why this happens.

2. Corollary School: It believes capital flows may not have direct benefits but indirect ones like it leads to better corporate governance, deepening of financial markets, better institutions etc. I have discussed this view here.

3. Anti capital Flows: This believes capital flows are damaging to an economy and should at best be restricted. The other way of looking at this school is that it is important to get the sequencing of reforms in fin sector right

4. Asian view:This school believes managing capital flows is tough and looks at possible ways to minimise the problems from capital flows.

He then summarises the key findings in each school and suggests policies for Asian countries that are experiencing huge capital flows. The advice is common – get sequencing right, flexible exchange rates, fiscal prudence etc.

Overall a very good read.

Trichet disappoints

November 27, 2007

I was keenly looking forward to this year’s LK Jha memorial lecture. After all, the lecture was to be delivered by Jean Claude Trichet (President, ECB). The lecture was held y’day and was a sheer disappointment.

The title was pretty good – “The growing importance of emerging economies in the globalised world and its implications for the international financial architecture” and I was expecting some insights from the great speaker. He does not offer any different insights and simply speaks on predicted patterns- Emerging economies are important, their role is expanding etc etc.

Anyways, let’s wait for his future speeches.

Why are foreign banks in India unhappy?

November 27, 2007

Today’s newspapers are buzzing with the speech given by RBI’s Deputy Governor, Mr. V. Leeladhar ( his brief profile is here). He gave the speech at BANCON-2007 (Annual Banker’s Conference in India).

It is an excellent speech and seldom you come across a speech where a Central banker clarifies the position of the Central Bank so clearly.

The speech begins with an excellent history of Indian Banking system and the reasons for  their establishment.

The three Presidency Banks, as these were then known, were amalgamated in January 1921 to form the Imperial Bank of India, which acquired the three-fold role: of a commercial bank, of a banker’s bank and of a banker to the government.

Then he discusses how Commercial banks came under RBI’s purview and why banks are special entities that need to be regulated properly.

However, it is towards the middle the speech gets really interesting where he says the thought that branch expansion and foreign ownership of Banks in India is basically a myth.

He points out to evidence that RBI has been granting higher permissions to set up branches every year compared to previous year but the banks are not utilising their permissions

For instance, as against the a total of 881, 1125 and 1259 authorisations given by the RBI under the old policy regime during 2003-04, 2004-05 and 2005-06, respectively, the number of authorisations issued under the new policy during 2006-07 was 2028.

Even though the banks were granted authorisations to the extent of 97 per cent and 62 per cent of the authorisations sought by them for the years 2004-05 (April-March) and 2005-06, respectively, as at end-March 2007, as much as 30 per cent and 38 per cent of the authorisations granted for those years had still not been utilised, even after more than a year or two of grant of the authorisations. As on that date, the extent of non-utilisation for the year 2006-07 was much higher at 61 per cent when only 69 per cent of the authorisations sought had been granted.

His take on foreign banks ownership is even more interesting. He says that foreign banks enjoy all the privileges which Indian banks enjoy (deposit insurance cover etc) unlike many other countries which discriminate against foreign banks.

Infact, some Indian banks contend that certain amount of positive discrimination exists in favour of foreign banks by way of lower Priority Sector lending requirement at 32 per cent of the adjusted net bank credit as against a level of 40 per cent required for the Indian banks.

He adds under WTO agreements:

licences for new foreign banks may be denied when the share of foreign banks’ assets in India, including both on- as well as off-balance-sheet items, in the total assets (including both on- and off-balance-sheet items) of the banking system exceeds 15 per cent

And in India the share of foreign banks in on and off balance sheet activities is 49%!! This one adds cream to the cake:

Besides the foreign banks, there are also two large Indian private sector banks in which the non-resident ownership is very close to 74 per cent permitted, which could, therefore, be considered as incorporated in India but predominantly foreign owned banks. These banks together with the foreign banks, have a combined market share in the country in the deposits, advances and off-balance-sheet business of 17.46, 18.65 and 76.63 per cent, respectively, which, by no means, are insignificant levels.

He doesn’t name the two banks but media is intelligent and has already analysed (check this and this). He mentions foreign banks have been making more money than the Indian Banks. He also points that foreign trade in goods and services is based on reciprocity and foreign shores have not been very kind to Indian Banks despite well-proven expertise. So why do foreign bankers continue to complaint?

He then also speaks on securitization norms (which most believe has not kicked off in India because of RBI) and principles based regulation. All points are well debated.

I am sure there would be some counter-views from the foreign bankers in some days to come. Keep posted for further developments.

Update: ET Edit criticises RBI after the sppech. I have covered it in seperate post here

Assorted Links

November 27, 2007

1. WSJ Blog says ECB might lower its growth forecasts for next year.

2. Rodrik writes to economics of sweatshops.

3. MR looks at possible reasons on why American kids don’t respect their parents more.

The world’s worst airports

November 26, 2007

I just got this update from Foreign Policy listing the world’s 5 worst airports. As the link was just opening, I was actually wondering whether we have any of India’s airports in the list?

I was not disappointed as Delhi’s international airport (Indira Gandhi International Airport) features in the list. I cannot comment on the authenticity of the list but still to be in worst five is quite a thing. I keep hearing about the problems on airports and flights from colleagues, news channels etc. but never thought it to be so bad.

Both Delhi and Mumbai airports are partly privatized and Delhi airport is being revamped by a consortium led by GMR, a Hyderabad based infrastructure company. I hope we see some major improvements in years to come.

Pakistan’s leadership woes

November 26, 2007

I don’t like to comment on politics as I never really understand it. On watching Pakistan’s former Prime Minister- Nawaz Sharif return amidst much fanfare yesterday, I was slightly perplexed.

Most political commentators have said that Musharraf’s regime was not wanted, he was a dictator, ran the government as per US wishes etc. Empirical research still does not agree to whether democracy matters for growth or not (see this excellent debate). But still there is a broad consensus that democracy matters for the general well-being.

Democracy has been a problem for Pakistan for ages now. All they have is two leaders to choose from- Benazir Bhutto and Nawaz Sharif. Both had numerous corruption charges against them and still kept making a comeback and have made one again now.

I don’t know whether their return would help at all. Knowing the politicians once they are elected, they would be busy just making charges against the opponent and trying to absolve themselves of all charges made against them. And then the next one comes and the circle goes on.

This brings me to the  main question and what made me write this post- How can Pakistan be made a better democracy? Would Raghuram Rajan’s solution help?

Let a foreigner (a trained bureaucrat) run the country alongwith his team for a while till he cleans the system and warlords are not as powerful.

I don’t really know. I am not aware of any country where this has been tried. It could be tried though may be with some changes. 

Another thing is why do people keep electing these tried leaders? Would Lant Pritchett’s idea of letting people from developing world migrate to developed help? This way they can earn their livelihood and also learn how democracies actually work. They can then go back and help their countries do better.

Again, all these are questions. I don’t know what the right answer is. If you (the reader) have some ideas do let me know.

Assorted Links

November 26, 2007

1. Ajay Shah points to a piece  from Michael Lewis (the Liar Poker guy).

2. MR points to 8 reasons to be optimistic about today’s economy

3. WSJ Blog making sense of falling dollar.

4. Mankiw points to a Larry Summers’ article who says odds favor a US recession.

5. Econbrowser onwhy economists blog and on relationship between oil and dollar

Forecasting is difficult even in US

November 23, 2007

Due to considerable hype around the minutes (For the first time, the minutes  would include projections from all the FOMC members on macro variables) of the FOMC meeting held on October 30-31, this wonderful paper didn’t get as much coverage as it should have.

The paper was mentioned in Bernanke’s last speech (check footnote no. 7) where he explained the importance of communications in setting Monetary Policy and the rationale for the same.

The paper has looked at previous forecasts and analyses how much projections differ from actuals. The abstract says it all:

Participants in meetings of the Federal Open Market Committee (FOMC) regularly produce individual projections of real activity and inflation that are published in summary form. These summaries indicate participants’ views about the most likely course for the macroeconomy but, by themselves, are not enough to gauge the full range of possible outcomes — that is, the uncertainty surrounding the outlook. To this end, FOMC participants will now provide qualitative assessments of how they view the degree of current uncertainty relative to that which prevailed on average in the past. This paper discusses a method for gauging the average magnitude of historical uncertainty using information on the predictive accuracy of a number of private and government forecasters. The results suggest that, if past performance is a reasonable guide to the accuracy of future forecasts, considerable uncertainty surrounds all macroeconomic projections, including those of FOMC participants.

It basically says there are many errors and past information may not be good enough to make future projections. There is a lot of uncertainly involved. The results would surely bring smile to Fama and his followers/fans.

This comes from US markets which is a well-developed economy where we have number of data sets across categories and time. If there is so much difference between actual and forecast in US economy, we can well understand the problems with forecasting in other economies.

What is a CDO?

November 23, 2007

The hybrid, hi-fi finance is something I always struggle with. I understand the basics but if asked to put it in word would struggle quite a bit. It is much easier to write on basic economics and finance issues.

For instance what is Collateralized Debt Obligations or CDO? I know it but cannot explain.

Susan Black and Alan Rai of Reserve Bank of Australia have written an excellent primeron CDO which is a must read. They start with how it is structured (also show the balance sheet of a CDO), explain the differences between the various types and the Australian market for the same.

Excellent stuff.

Assorted Links

November 23, 2007

1. WSJ Blog points to nine things for which we need to bethankful. I liked the 9th one quite a bit 🙂

2. New Economist points to Hufei- the Chinese Silicon Valley.

3. Ajay Shah points to the first conference of NIPFP-DEA research program.

Case studies on infrastructure in India

November 22, 2007

There are some nice papers/case studies on infrastructure related issues on the Committee of Infrastructure website. Scroll down on the website and in lower middle section there are 3 case studies:

  1. Crash Programme for Power Generation 
  2. Concession for the Delhi Noida Bridge
  3. Concession for Port Terminal at JNPT

They look good. I have seen the Noida-Toll bridge study sometime back. Nice way to understand the infrastructure puzzle in the country.

Assorted Links

November 22, 2007

1. WSJ Blog points to the richest countries in the world.

2. I like this Rodrik paper on growth quite a bit which has a neat way of analysing the factors hindering growth. Rodrik shares some ways in which we could get the framework right and some case studies as well.

3. Econbrowser has an excellent post on working of Freddie Mac and Fannie Mae.

4. ET edit says Indian markets are not as risky as Economist thinks.

5. Mukesh Kacker points to a reality check on infrastructure.

Shortage of small denomination currency

November 21, 2007

Despite assurances from RBI that there is no shortage of coins (small denominated currency) (See google search results for more news on the same), the problem continues.

One often ends up with shampoo sachets, toffees, some shops even give credit notes, and so on. I keep wondering what happens to the coins? Where do they go? There is a storyon B’desh using coins for some other purposes, is it creating shortage?

Another problem is most shopkeepers do not accept 25 paise, 50 paise coins. Why should that be a case? I can understand if they are not legal tender, but they are. Then why the refusal? Something should be done to address these 2 problems.

Assorted Links

November 21, 2007

1. Fed released its much-anticipated FOMC minutes that include Fed projections,outlook etc. WSJ Blog points to initial thoughts (more here), economists’ reactions.

 

Econbrowser as usual has interesting thoughts on the same.

 

2. MR points that according to latest data analysis, number of AIDS patients in the world has been revised much lower.

 

3. Mankiw points to Milton Friedman Choir.

 

4. Fin Prof providessome relief to all those people employed at securities firms who would be worried about year-end bonuses 🙂

 

5. Ajay Shah on 13th finance commission. He also saystime to move on MIFC project before Qatar and Dubai catch-up. I still maintain my reservations on MIFC.

 

6. TTR feels banking sector would continue to be healthy despite sub-prime mess.

How to set-up a Currency Futures market in India?

November 20, 2007

RBI has released a very nicely done report on starting a Currency Futures Market in India. The press release is here and the report is here.

Incidentally SEBI proposed (SEBI press release is here) launching certain derivatives in India. The release also mentioned about currency futures. Now currency is in the domain of RBI and stock exchanges under SEBI, so in case currency futures are going to be launched on existing stock exchanges, it would have been interesting.

But this RBI report has put a stop on all the possible speculations and the report suggests that RBI is going to be the sole of regulator of currency futures.

I was also wondering whether RBI rushed the report after SEBI’s initiative. But RBI had already mentioned in the Mid-term Monetary Policy 2007 that RBI would put the report on currency futures in public domain on Nov., 15, 2007. So, no problems there as well.

Ok, now to the main point. I have just taken a quick glance of the report and it looks like a very good one. It explains the working of currency futures market and the nitty grtitties in a very simple language. The experts would be out with the criticisms on the report and I am no expert on the subject. I will try and post their comments if any.

But, the report definitely gives you a format for such kinds of  studies. Highly recommended reading.