14 ISSUES AND INSIGHTS

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MUMBAI | MONDAY, 15 JULY 2013

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well-publicised need for early release of licences for new banks. He is not in the same mould as Reddy or Subbarao, and is more like Malhotra or Venkitaramanan. But should that be held against Mayaram? Rajan, too, is in the finance ministry and is an accomplished economist. But his limited experience in the government may go against him. Chaudhuri, an economist, has never been in the finance ministry and his experience in the government is also limited only to his stint in the Planning Commission. If the government finally chooses Mayaram, it would be clear that it has chosen not to deviate from the past pattern of preferring the civil servants in steering monetary policy. And if you see either Rajan or Chaudhuri at Mint Road, make no mistake in concluding that the choice is more a comment on Mayaram than on the suitability of either of the two economists.

The next RBI governor

If the past is any guide, Arvind Mayaram is the front runner among the three reported candidates for central bank governorship
Saumitra Chaudhuri, Economic Affairs Secretary Arvind Mayaram and Chief Economic Advisor Raghuram Rajan. All the names, according to newspaper reports, have strong backers. Any one of them could be named the 23rd governor of the RBI. There is yet another theoretical possibility, though. If there is no consensus on any one of these three names, the government may well consider the option of giving Subbarao a years extension, so that the next government after the elections could take a considered view on the matter. But that option is not likely to be exercised as the finance ministrys relations with the current governor have not been smooth. So, what are the chances of the three candidates in the race? It is difficult to predict at this stage who among them will make the grade. But the past is often a good indicator of the future. Of the 22 RBI governors (including the present incumbent), as many as 14 had a civil services background, although, that is not how the central bank began its journey in 1935. Sir Osborne Smith, the RBIs first governor, was a professional banker. Smith did not complete his tenure of three and a half years and left the RBI at the end of June 1937, paving the way for a long list of civil servants to succeed him at Mint Road, headquarters of the central bank. From 1937 to 1975, 10 civil servants were at the helm of the RBI.

RAISINA HILL
A K BHATTACHARYA
ho will be the next governor of the Reserve Bank of India (RBI)? The search is on as the present governor, Duvvuri Subbarao, will complete his tenure in about eight weeks from now. Three names that appear to be under consideration are: Planning Commission Member

Of these, seven were members of the elite Indian Civil Services (ICS), two had long stints in different departments of the government including those in the ministries of finance, commerce and industry, and one (P C Bhattacharya) belonged to the Indian Audit and Account Service. Although the Indian Administrative Services (IAS) was formed in 1946, no officer from this cadre became an RBI governor in this period. Indeed, the wait for an RBI governor from the IAS would continue a little longer as the 10year period from 1975 to 1985 belonged to the economists and bankers. This was the time when I G Patel and Manmohan Singh (who had worked in the government but were better known as economists) were at the helm of the RBI. This was also the time when M Narasimham became the governor the first and the only officer from the RBI cadre to have so far occupied that post. The first IAS officer to take

charge of the RBI was R N Malhotra chance. Consider the statistics. Of in 1985, followed by the 22 RBI governors, as many as S Venkitaramanan. C Rangarajan 12 worked in the finance ministry and Bimal Jalan gave a short break before they moved to Mint Road. of about 10 years when the RBI These included all the four IAS went under economists once again. officers, two ICS officers, two nonThe IAS returned with IAS civil servants, two economists Y V Reddy and (Patel and Singh) Subbarao, and the lone RBI although it could Of the 22 Reserve Bank of cadre officer be argued that India governors (including (Narasimham), Reddy had joined the present incumbent), who all later the RBI having dis- as many as 14 had a civil became RBI govcarded his IAS tag services background. If the ernors. Three, a few years ago. government finally chooses only two of the So, what does Economic Affairs Secretary governors have the past tell us Arvind Mayaram, it would had a stint with about the chances be clear that it has chosen the Planning of Chaudhuri, not to deviate from the past Commission. Mayaram and pattern of preferring the Going by this, Rajan? One, a civ- civil servants in steering Mayaram is il servant is more monetary policy clearly the front likely to be prerunner. He is a ferred for the RBI civil servant and governors job. It, of course, helps has the experience of having the civil servant if he is also an worked in the finance ministry. economist. Two, experience of More importantly, he understands having worked in the Union the present finance ministers finance ministry improves that mind on monetary policy and his

Dancing to the Feds music

Fundamentals and valuations of Indian assets are distinctly out of tune with the QE-led sentiments of investors MARKING TIME
Breakout on Fed assurances

> CHINESE

WHISPERS

Rising imports? Who cares!

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FRONT RUNNING
DEVANGSHU DATTA
n July 2007, Chuck Prince of Citigroup justified punters contributing to the build up of a huge financial bubble, when he said, As long as the music is playing, youve got to get up and dance. Were still dancing. Six years later, traders still espouse the same philosophy for the same reasons. One difference is that the current bubble has been deliberately created and it has a regulatory cut-off switch. Come September, the US Federal Reserve may tighten its Quantitative Easing Programme (QE3). If it does, traders will dump risky assets, like rupee debt and equity. Alternatively, the Fed may let QE3 run at the same expansion rate, if targets in terms of US reflation and employment are not met. The latest statement by Fed Chairman Ben Bernanke suggests that he would like to let the Fed continue being accommodative but several of his colleagues are more hawkish. One issue with artificial bubbles is that they create liquidity traps. Spearheaded by the Fed, most central banks have pumped out easy money. This has held interest rates low. But it hasnt stimulated economic growth as desired. Instead of investing in real activity, traders have parked excess cash in financial assets. Hence, bubbly asset values that contrast with low aggregate demand. Weve seen early warning signs in India of what could happen as the Fed cutbacks. In June, the foreign institutional investors (FIIs) sold over $7 billion in rupee assets and the dollar dipped to record levels in early July while the stock market slid. Bernankes statement led to a qualified change of stance with FIIs buying

Value
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Nifty value Index PE Index dividend yield Index Book value USD INR (RBI Ref rate) FII net buys/ sales(July 1-12)# DII net buys/ sales(July 1-12))#
AJAY MOHANTY
# ~crore, * June 1-30 net buys/ sales

June28 Current (July 12 ) 5,842.20 6009.00 17.76 18.31 1.43 1.38 3.04 3.08 59.70 59.90 11,425.41* -856.88 8,427.42* -1.87

% change 2.86 3.10 -3.50 1.32 0.34

In a departure from standard practice, only Director General of Foreign Trade (DGFT) Anup K Pujari (pictured) released the trade data for June. Commerce Secretary S R Rao also usually attends these routine press conferences, and Pujari must have sorely missed him this time. Thats because he had to face persistent questions on rising imports to which he struggled to find answers. Eventually, he returned a reply to the effect that he is Director General of Foreign Trade and not Director General Exports, so the rise in imports does not matter to me, which is surely a risky statement at a time like this.

Data bites
rupee equity worth ~645 crore last rise of 11.8 per cent in net profits. Friday. While the FIIs are net sellers in Operating margins are expected to July, local operators have gone long bet- decline. Eleven of Indias 50 largest ting that the change of attitude will last. companies are expected to see doubleIn a thin market, this has pushed the digit earning per share growth while as many as 26 are expected to see declinNifty past the 6,000-level. The bubbly nature of Indian equity ing earnings or losses. There seems to have been no revival assets is marked with fundamentals and in activity in Q1, going by valuations looking disthe latest macroeconomic tinctly out of line. The Q1, The Reserve Bank of data. The Index of 2013-14 results season has India has a tricky task. Industrial Production kicked off. Infosys climbed Does it cut policy rates (IIP) shows 1.6 per cent 11 per cent on Friday after at end-July with due year-on-year contraction it declared lower sequen- regard to the weak in May 2014, and April tial net profits, single-dig- demand? Or, does it 2014 IIP growth was it year-on-year earnings hold rates, or even revised down to 1.9 per growth, flat operating raise them, for fear of cent from the preliminary margins and left FY2013- inflation going out of 2.3 per cent. 14 revenue estimates control and the rupee Consumer inflation unchanged. spiralling down if FIIs climbed in June 2013 to The 50-stock premier continue to exit? 9.9 per cent from 9.3 per index is now traded at a trailing four-quarter price-to-earnings cent in May, if one believes the (P/E) of 18-plus. A report in this paper Consumer Price Index. The Wholesale on July 8 (Profit boom amidst sales Price Index (WPI) numbers are expectgloom) presented averaged estimates ed on Monday and most analysts expect about Nifty Q1 earnings from seven bro- WPI to up by more than 5 per cent as kerages. The consensus is a fall of 0.4 well. Some of the rise may be attributed per cent in combined sales for the Nifty to the weaker rupee but food inflation 50 (excluding Coal India), along with a also remains very high at 11-plus. Private sector data suggests poor sentiment. Automobile sales contracted in June, for the eighth month in a row. The Purchasing Managers Index stood at 50.1 which is on the verge on contraction (50 equals to no change and below 50 is contraction). Poor sentiment, high inflation, low or negative earnings, industrial contraction, etc., makes for an ugly picture, especially when one factors in the record current account deficit, the record fiscal deficit, and a very real chance of further deep currency depreciation and defaults on overseas corporate debt. The Reserve Bank of India has a tricky task. Does it cut policy rates at end-July with due regard to the weak demand? Or, does it hold rates, or even raise them, for fear of inflation going out of control and the rupee spiralling down if FIIs continue to exit? The central bank will probably hold or hike because of the fear of a balance of payments crisis. Against this backdrop can assets be reasonably valued at 18-plus P/E ? This will last, at best, only so long as the FIIs have loose change to spare. Since Q1 projections are low, as cited above, its quite likely that some big companies will beat earnings consensus. We could well have a situation where valuations rise even further in the short term. This might enable long trades in the information technology sector and maybe, in other export-oriented industries. Instead of squaring up to the structural issues that are so glaringly apparent, the government is trying palliative measures to induce further portfolio inflows. It is also trying to prevent Indians from hedging or speculating on the rupee weakening more. At the same time, measures like the Food Security Ordinance are likely to bloat the fiscal deficit even further. In August, or September, or whenever the Fed cuts back, there is likely to be a serious crash in equity values. Unless the economy makes a miraculous turnaround of course, and maybe, even then. Until theres clarity on the Fed action, theres likely to be continuous volatility with big swings in either direction on temporary news flow. Holding deep puts on the Nifty at say, 5,500-level may be a good idea until September, at least. The pessimist could even make a case for long December 5,000 puts. Releasing the data entailed more drama. Pujari called the conference, briefed the media, gave numbers and stood for camera bytes. But wire reporters soon realised that there was a difference in the numbers he gave out and what was given in the press release. Realising the mistake, Pujari asked the media to wait for a clarification. After almost half an hour, an email and SMS came from a Press Information Bureau Director saying the data on the official press release was correct. Now, the DGFT had briefed the media along with two junior colleagues, of whom one is the commerce ministrys financial advisor and the other is from the Central Statistical Organisation. Yet, none of the three appeared to be sure of the numbers. But of course, the confusion did not surprise reporters covering the ministry of commerce and industry. This is the same ministry that goofed up in 2011-12 by overstating exports by $9 billion.

Labour ministry pains

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> LETTERS

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political bosses want a system based on subsidy, they will sing songs in favour of it. Sukumar Mukhopadhyay New Delhi

Give microfinance a chance

This refers to the report Only Andhra govt can rectify the situation in state (July 10). Livelihood financial services group Basix founder and chairman Vijay Mahajan is right in expressing his anguish that owing to the absence of microfinance institutions (MFIs), borrowers in Andhra Pradesh are forced to approach money lenders who charge annual interest as high as 120 per cent against the 26 per cent that MFIs charge under the Reserve Bank of India directives. As a result of the ban, ~7,000 crore worth of microloans have turned bad in the state, giving it the dubious distinction of having the largest number of borrowers branded as defaulters in a particular geographical area in the world. Pakistan has 10 microfinance banks, and Nigeria opened 37 banks in one state on a single day in January 2013. China is also promoting microfinance, recognising it as an important element in the strategy to reduce poverty. India refuses to recognise the fact that the families below the poverty line need help to become productive components of society. What better reason than the reluctance of the authorities concerned to recognise microfinance as an important segment of the economic ecosystem? B Vithal Rao Hyderabad

Sen: Academic vs populist

Arvind Subramanians factual and well-written article The economic consequences of Prof Amartya Sen (July 10), knocks the bottom out of Sens Nobel Prize-winning theory of Redistribution through Rights and Entitlements (RRE). It shows that RRE was about the importance of broad purchasing power rather than the narrow physical availability of food. It is mystifying to see Sen forcefully arguing now, through morbidity-laden polemic, for the physical provision for one type of food, cereals. Sens other major insight was that development was about the freedom to exercise choice. RRE is, on the other hand, privileged paternalism. Amartya Sen, the academic, has been eclipsed by Amartya Sen, the populist advocate. My considered opinion is that the present Food Security Bill is an example of gargantuan populism that will bring economic disaster to the country. It also shows that when economists come to the government both as economic advisors or as ministers, their economics knowledge takes leave of them. Left to themselves, they will write chapter and verse against subsidies but when the

commission has some merit since the government has not been able to control prices. The Railway Vision Document 2020 concedes that the Indian Railways has the most bloated labour force in the world. Successive Railway ministers have paid little or no attention to over staffing. All the promises about improving safety, training and finances have taken a back seat. In a country beset with a serious power problem, the switch from diesel to electric locomotive is debatable. A diesel locomotive does not draw an iota of electric energy and is a virtual power house on wheels, converting fossil fuel directly, eliminating the transmission losses involved in electric traction which can be as high as 30 per cent. M M Gurbaxani Bangalore
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The Congress may have had an eye to elections by appointing the 85-year-old Sis Ram Ola (pictured) as labour minister but neither bureaucrats in Shram Shakti Bhavan nor the media appreciate his replacing the energetic Mallikarjun Kharge in the last reshuffle. Officials complain he treats them like children. As for journalists well, they are flummoxed. Last week Ola called a press conference to talk of the initiative to begin online transfer of Provident Fund for workers. Instead, he devoted the entire speech to the Uttarakhand floods and then left the conference room abruptly without bothering to take questions. Ministry officials also quietly followed Ola, leaving the media high and dry.

> HAMBONE

BY MIKE FLANAGAN

Faulty tracks
This refers to the editorial Red Signals. (July 12). The Railway Unions demand for a new pay