Archive for November 21st, 2018

Redesign Institute of Chartered Accountants of India for today (lessons from NSE)

November 21, 2018

Prof R Narayanaswamy of IIM Bangalore in this piece argues for revamping ICAI:

Those who midwifed the Institute of Chartered Accountants of India in 1949 would hardly recognise it in 2018: deficient self-regulation, riddled with conflict of interest, churlish election campaigns… They could not have imagined 2.5 lakh members being ruled by 40 mostly unexceptional people filling as many committees. Unquestionably, the ICAI needs fixing. The recent report of a committee of experts is a reality check on the state of affairs and the future of the audit profession.

The committee has concluded that the term ‘multinational accounting firm’ is a “misnomer”. Indian chartered accountant firms that are part of the Big Four and other international networks are registered in India and staffed by members of the ICAI. Big firms spend more on technology and training and pay higher salaries. Medium and small firms should merge in order to compete with them. Many CA firms are family outfits, regarded as heirlooms to be inherited. If they want to grow, they should become professional enterprises. Concerns about anti-competitive conduct are best handled by the Competition Commission of India.

That said, there are questions about a Big Four affiliation. Audit firms, especially the too-big-to-fail ones, should improve their governance by having independent supervisory boards.

…….

ICAI’s governing council is fraught with conflict. First, CAs elect the council members, who are expected to discipline them.

Second, council members compete with other CAs for business, but their office and contacts give them an unfair advantage. There is a high risk of self-dealing with no effective safeguards.

Third, council members give opinions on matters that may be later examined by the council. Finally, council members prescribe the CA curriculum and set the examination, and concurrently run coaching shops. Ominously, the number of such ‘edupreneur-CAs’ appears to be increasing over the years.

He suggests to revamp the whole thing:

 

Two radical changes are required.

First, the ICAI should be restructured as a demutualised organisation. An independent board should govern the ICAI. The board may comprise professionals selected by a nomination committee appointed by those who have a stake in financial reporting, including accountants, investors, bankers, lawyers, insurers, government, and regulators. A team of professionals should manage the organisation and report to the board. Education, training, examination, and research can be managed by autonomous divisions. The National Medical Commission which has recently replaced the Medical Council of India can be the model.

Second, the government should introduce competition in the grant of accounting credentials. The monopoly of the ICAI should be ended by setting up a new, demutualised organisation, called The Institute of Certified Public Accountants of India. Many countries, like Australia, Brazil, France, Germany, Indonesia, Iran, Ireland, Malaysia, and the U.K., have more than one recognised accountancy body.

The National Stock Exchange is an example of how demutualisation and competition can transform a disgraced trade. In the 1990s, it was set up as an alternative to the broker-owned, conflict-ridden Bombay Stock Exchange. For much of its existence, the NSE has led in market capitalisation, trading volume, new products, technology, and investor trust.

The ICAI faces the worst crisis of credibility in its history. “You never want a serious crisis go to waste,” said Rahm Emmanuel, who served as Chief of Staff to U.S. President Barack Obama. There can be no better way to benefit from the crisis than making sure the accounting profession is fit for purpose.

Hmm..

India’s institutions of yore are all leaking. We need fixes for several of them including ICAI..

 

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World War I: a turning point for the Indian economy (100 years of India Industrial report)

November 21, 2018

Another fascinating piece by Niranjan:

World War I also proved to be a turning point for the Indian economy. The economic historian Tirthankar Roy has explained in his work how the British engagement in World War I had a complicated impact on India. There was a sharp increase in demand for Indian goods in Britain as production capabilities in Britain itself were diverted to the war effort. However, the disruption in shipping lanes because of the war also meant that Indian industry faced dislocations because of the shortage of inputs that were earlier imported from Britain and Germany. There was excess demand as well as supply bottlenecks.

One result was inflation. Industrial prices nearly doubled in the six years after 1914. Accelerating prices benefitted Indian industry, as was also the case during World War II a few decades later. Farm prices rose as well, but at a slower pace than industrial prices. The internal terms of trade moved against agriculture. This trend continued for most of the next few decades, and especially during the collapse in global commodity prices during the Great Depression. The rapid rise in industrial prices as well as improving internal terms of trade for Indian industry benefitted industrial enterprises.

However, that was not the entire story. The war years also saw a shift in colonial policy away from laissez faire to a more interventionist approach—a shift that had a profound effect on the subsequent policy framework.

First, the British realised that their most important colony needed strategic industrial depth if it had to be successfully held during disruptions such as a world war. Second, the long nationalist campaign for the state to support Indian industrialization began to bear fruit. The colonial state finally accepted the need for a specific policy framework to support industrial investment in India.

In March 1916, Ibrahim Rahimtoola proposed in the Imperial Legislative Council that a committee should be appointed to examine what policies were needed to promote industrial development in India. The Viceroy accepted the proposal. There were four Indian members in the group that wrote the Indian Industrial Report that was made public in 1918, or 100 years ago. These Indian members were Fazulbhoy Currimbhoy, R.N. Mookerjee, D.J. Tata and Madan Mohan Malaviya.

Hmm… He even points to this dissent note by Mr. Malaviya:

(more…)

Monetary and Fiscal History of Peru 1960-2010: Radical Policy Experiments, Inflation and Stabilization

November 21, 2018

César Martinelli (of GMU)  and Marco Vega (Central Bank of Peru) in this paper review the economic history of Peru:

Peruvian recent economic history is marked by an ambitious attempt to refashion the economy of the country through command-and-control policies adopted by a left-wing military dictatorship from 1968 to 1975. After the military returned to the barracks, they left as a legacy an expansive state, precariously financed through debt accumulation and inflation tax. The hyperinflation of the second half of the 1980s occurred in the midst of another radical policy experiment. The policies adopted by the populist administration then in office, such as pervasive price and exchange controls, were counter productive by and large. These policies also made it hard or impossible for the following administration to rely on a exchange rate peg to anchor expectations as part of the stabilization policies.

Looking back, it is hard to miss the fundamental mistrust in market allocations by economic and political actors in the run-up to hyperinflation.26 Mistrust was compounded by wishful thinking by government authorities, in particular during the episodes of 1968-1975 and 1985- 1990. Remarkably, a radical policy gamble attempted in the latter experiment was stopped by popular protest. In a way, society learnt faster than the political elites, and popular repulse of
arbitrary government intervention in the economy preceded the stabilization of 1990.

The stabilization of 1990 was preceded by other attempts that looked ex ante similar. The question arises as to why this particular attempt was successful, leading to a persistent change in policy regime. Moreover, why did the same, or very similar, politicians behave more responsibly in fiscal and monetary matters after stabilization? The recent history suggests a process of social learning.

From this viewpoint, the credibility of policy regime change in the 1990s may be linked ultimately to the change in public opinion giving proper incentives to politicians. Both the dollarization of the economy and the respect for central bank independence which are currently characteristic features of Peru’s economics and politics, can be traced back to some extent to the effect of the traumatic events of the 1980s. Borrowing the phrase of Malmendier and Nagel (2011), those who lived through those events are “hyperinflation babies.”

History matters. Wherever you are…

Climate change: The next agenda for central banks?

November 21, 2018

My recent article in Moneycontrol.

I argue how climate change is going to pose a serious and stiff challenge to central banks/monetary policy.

Trust in financial services in Australia and last bank failure in Australia was in 1931…

November 21, 2018

I had written a  piece on how culture/ethics/trust is becoming one of the main talking points amidst central banks.

Philip Lowe, Governor Reserve Bank of Australia, joins in with this speech. Australia is going through its own sets of troubles with bankers found to be mis-selling financial products and services.

What I found more interesting was his mention of this bank failure in Australia:

Finance is all about trust. When a deposit is placed in a bank, we trust it will be repaid. We also trust financial institutions to invest our hard-earned savings for us. And we trust them to provide us with sound advice. Without this trust, the financial system cannot operate properly and the economy cannot prosper. As the first line of the Banking and Finance Oath says: ‘Trust is the foundation of my profession’.[1] I encourage everybody in the finance sector to read this oath regularly and to live by it.

Australia’s banks have a strong record of being worthy of the trust that is placed in them to repay deposits. The last bank failure in Australia that resulted in a loss to depositors was almost 90 years ago, back in 1931, and it was a very small bank and depositors lost only a small fraction of their deposits.

This is a positive record that few countries can match. This strength was apparent during the financial crisis a decade ago and has served Australia well. The Australian banks are strongly capitalised and have considerable liquidity buffers. On the whole, they have also managed credit risk effectively, reporting few problem loans by global standards. This means that we can have a high level of trust in the ability of Australia’s banks to repay depositors. Indeed, our strong and stable banking system is one of the Australian economy’s strengths.

It is in other areas, though, where trust has been strained. It is clear that the behaviours highlighted by the Royal Commission have dented the community’s trust in parts of our financial sector.

It is quite a record really.

This paper further explains:

Only three banks failed during the 1930s ñ two small trading banks (the Primary Producers Bank and the Federal Deposit Bank) and the Government
Savings Bank of NSW. The Government Savings Bank was brought down by political turbulence as much as the economic conditions. While the
Commonwealth Bank provided some limited support to two of these banks, it was later criticised for not taking a more active role, particularly since two of the banks were solvent when they suspended payment.

In 1930, the Primary Producers Bank of Australia accounted for less than 0.5 per cent of Australian banksí deposits. Most of its customers were farmers, and
as the prices of primary produce fell the bank suffered a steady drain on its resources. Over the 18 months prior to the bankís closure, it lost 40 per cent of its
deposits.

In April 1931, the bank sought the assistance of the Commonwealth Bank in anticipation of a run following the suspension of the Government Savings Bank.
The Commonwealth Bank provided an unsecured overdraft of £100 000 and a loan of £295 000 secured by government bonds, a fixed deposit at another bank
and the bankís premises. The Primary Producers Bank actively sought amalgamation with the other trading banks and overseas financial groups. While
the Commonwealth Bank considered arranging joint action with the trading banks to avoid closure of the Primary Producers Bank, the other banks decided against the proposal. In the wind-up of the bank depositors were not quite fully paid, losing just 1.25 per cent of the value of their deposits (Royal Commission into the Monetary and Banking Systems 1937).

Need to read more amd more about different banking systems across the world….


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