Manmohan Singh finally takes charge

In a column for Yahoo India, I wrote in October last year that the empowerment of Jairam Ramesh’ Environment Ministry was a proxy play for the empowerment of 10 Janpath*. Since then, one headline project, by Korean steel behemoth POSCO, has been cleared by Jairam’s MOEF. This should hardly surprise one: the Central Government badly needs economic growth  foreign direct investment (FDI) to fuel our growing import needs. And, if Jairam’s red flag has directed the traffic of large projects to the address in Delhi where the buck stops, there is no reason why the clearances should be long coming.

What is a lot more surprising is that, ten days ago, Prime Minister Manmohan Singh should warn against the danger of environmental laws becoming like the licence permit raj**.

In other words, what Manmohan Singh seemed to be saying in early February was that he didn’t like the new game his own minister was getting up to. I find this fascinating: why did he need to make a public statement about this? As the head of the council of ministers, couldn’t – in fact, shouldn’t – it have been enough for him to tell his junior colleague off? That it wasn’t suggests to me that the PM was using the media to address someone whom he can’t direct. This could be Jairam, or the person Jairam takes his orders from. In my reckoning, this could only be Sonia Gandhi.

The Prime Minister has become increasingly visible, and audible, in the aftermath of the corruption scandals that have grabbed Indian headlines since September 2010. ‘Der aaye, durrust aaye’, better late than never: his acknowledgment of corruption in high places is a signal development. But distancing himself from the new decision-making paradigms of his own government is an even more arresting development. To me, it seems like a warning shot across the bows of the Congress ship of state.

This may be wishful thinking on my part, but it seems to me that our Prime Minister has realized his political career is coming to an end. It is extremely unlikely that he has more than 3 years of power left. If the current political turmoil deepens, it may even be less, as a successful vote of no-confidence after the 2011 elections could send the nation into mid-term elections. If he is to hang up his boots with any sense of achievement, visibly combating corruption could be his chance to go down in history. Even if he doesn’t achieve significant progress, “He died trying” would be a better epitaph than, “An honest man who led a corrupt government”.

If my speculations are correct, then Manmohan Singh  has sent word out that the fight is joined. 10 Janpath has been warned. There is little Sonia can do but back him. She has no power to restrain him; the worst she can do is sack him. Since he has no political dynasty to perpetuate, and no skeletons in his cupboard, she has no hold over him. However, his departure at this time would threaten the stability of her government. And, if he is as determined to combat corruption as he seems, he could make an unwelcome departure extremely embarrassing for senior leaders in the UPA.

The departure from the cabinet of Murli Deora, known to be close to the richest Indian, Mukesh Ambani, was the first sign that the Prime Minister is going to distance his government from powerful industrialists. Now, we hear that SEBI (Securities and Exchange Board of India) is going to fine the Ambani flagship, Reliance Industries, for insider trading. This is a grave charge, especially against a man who seemed so far to have inherited his father’s ability to make every government of the day bend to his will.

From the perspective of my musings, the action against RIL is extremely significant, especially against the backdrop of the firing of Raja. In relatively quick succession, Manmohan Singh has  slapped down a critical ally of the UPA government, warned off the woman seen as his boss, and let the regulatory hounds loose on the richest and most influential industrialist in the country.

His intent is clear. Expect the headlines to be roiled by highly visible action against corruption. 2011 will be the year of an honest man cleaning out his corrupt government.

*The emergence, in recent times, of powerful Chief Ministers owing little or no allegiance to the Center, had allowed promoters of large industrial projects to obtain political clearance at the state level, with little or no reference to the Center. The threat of more stringent perusal of the environmental laws by the Ministry of Environment and Forests (MOEF) at the Center would bring these promoters to Delhi.

**In the language of those familiar with Indian political economy, this refers to the absolute control over fresh industrial activity exercised by Indian politicians and bureaucrats prior to the liberalization of 1991. Licences, or permissions to industrials to set up new projects, or expand existing ones, were – it is widely accepted – granted in exchange for large sums of money or other considerations paid to the gatekeepers of the Indian economy.

The Truth will out

When my sister and brother-in-law bought a new apartment in mid-2010, they were told that the apartment directly above them belonged to a well-connected Member of Parliament, one of the HMPs, so called by Patrick French in his biography of India. The MP lively in far more spacious lodgings in Lutyen's Delhi; French tenants had occupied this home, which was now vacant.

A few months later, my sister noticed seepage into her apartment, from the HMP's real estate. She found his residential number off the net, and asked to speak to the HMP's spouse. She was told the lady, herself of illustrious stock, was preoccupied, but my sister is nothing if not persistent, and on her third call, she was told somebody would address the problem. Early the next morning, an 'advocate' landed up with the keys to the home, left my sister with the card of a real estate management company, and assured my sister that the problem would be addressed.

It wasn't, but by one of those coincidences that characterises Delhi's 'one-and-a-half degrees of  separation', my brother-in-law was at a dinner where said HMP was the chief guest and speaker. After the speech, my brother-in-law sauntered up to HMP, complimented him on his talk, and by way of small talk, said, "Oh, by the way, we are neighbours.' HMP looked at him quizically, and my brother-in-law elaborated. The HMP's face turned stone cold, and he flatly denied knowledge of any such apartment.

Now it was my brother-in-law's turn to turn quizzical - the broker had told him the apartment belong to the great soul, a phone call to his household had produced an advocate with a brief to manage plumbing problems: he was genuinely confused. Recating to this confusion, the HMP went 'Our family owned the apartment, but we sold it.'

We just keep tabs on it, and send our minions around to manage it out of a sense of loyalty and attachment Right

Investor view of Anil Ambani's shares revealed

A company in the business of share trading is investigated by regulatory authorities, and reaches a 'voluntary agreement' to suspend its activities for a year. Once the news breaks, its shares tank.


This is logical. But why should the shares of companies in the business of infrastructure, natural resources, telecommunications, and power get hammered when they and their promoters are restrained from trading in shares?

On Monday, January 17th, shares in Anil Ambani's companies came under severe selling pressure, following SEBI's consent order, under the terms of which RIIL, RNRL, Anil Ambani, and 4 other directors will not trade in secondary markets.
http://www.livemint.com/2011/01/17125111/Reliance-Group-shares-tank-fol.html?h=B

Such a development suggests that - in the view of the market - the value of these companies derived substantially from their trading in shares. This is quite unfortunate, as it lends no stability to the valuation of such companies. When an equity analyst tries to get at the value of, say, a telecom business, he looks at its market share, its Average Revenue Per User (ARPU), and trends in customer acquisition to project the company's earnings over subsequent quarters. The analyst might get the numbers right, or not, but he has a logical basis for proceeding. If, in addition, he has to build in a premium for the value the market places on the supposed ability of the company and its promoters to profit from moving money into and out of shares, this makes the entire valuation exercise fraught.

This is unfortunate for the analalyst, who is now more likely to get it wrong. It is even more unfortunate for the retail investor who bought the stock based on a flawed prediction. And, if the company, or companies, involved are substantial ones, it is unfortunate for the equity culture in the country.

Inflation and the mosque

Like the demolition of the mosque in Delhi's Jangpura area, inflation in India has developed into a major political crisis.

The first has brought into play local politicians - the employed, like Sheila Dikshit, as well as the unemployed,  like Amar Singh and Jayaprada, not to mention hundreds of hangers-on. Their reaction to the scene makes me think of ambulance chasers, carrion who descend on a scene of devastation to see what mileage they can wring out of it - lawyers' fees, or political capital.

Carrion are a fact of life, so the essential question should relate to why the devastation was necessary. In a word,  non-governance. If you walk in a city, you can see the way in shrines are grown on public land. They are not built in the way we construct legitimate buildings on land acquired or allotted for the purpose. They begin as tiny, temporary shrines, a stone idol at the base of a peepul tree, on a pavement. Their promoters watch, often for years, to see how much public support they are gathering, on the one hand; on the other, they look for the willingness of enforcement agencies to turn a blind eye to the expropriation of public property. When they find the balance is in their favour, they bump up the permanence of the structure by an order of magnitude. The stone idol now has a home - a few square feet of masonry, clad in the tiles with which we lined our bathrooms, before they came to be seen as down-market.

The expanded shrine now forces pedestrians to climb down from the pavement; not a big deal: you need to do that every few yards for the minister's security chowky, a paanwallah, or a hole in the ground.

The next time the shrine expands, it is done after serious risk assessment - major sums of money are put into it, and political backing is imperative. Without the right backers, your effort would go the way of the first Kochi IPL bid. In its final avatar, the shrine is virtually unassailable. In my view, the court order against the Jangpura masjid is a major triumph of civil activism, of  public action seeking to reclaim public land from private capture.

Politicians have long been used to being the sole adjudicators of such capture - a fact which Sonia Gandhi acknowledged when she asked Chief Ministers to give up their 'discretionary' powers in land allotment. To have their power taken away by the litigation of a pesky residents' welfare association (RWA) is a slap in the face, even if you are Chief Minister who has long preached the value of 'bhagidaari' between her government and RWAs. That's a relationship that is fine and dandy if it relates to removing garbage and cleaning drains, tasks her administration will not perform. But if not if it cuts at land, a major source of her political patronage. In which case, she is willing to jump into the fray, announce that she will have the mosque reconstructed, and risk contempt of court.

And inflation? The seeds were planted a long time ago, and have been continuously watered, by fiscal deficits, populist expenditure, and a lack of political will to adjust prices of fuels, fertiliser and power as their costs rose. By repeatedly misreading economic signals, and deliberately misleading the public about where prices were heading. Small steps taken early in the cycle could have prevented inflationary tendencies from becoming a monster which the government now admits it has no tools to defeat - just as the local policeman could have prevented the first bathroom tiles from being cemented into a structure on which the High Court needs to rule.

Fed Jokes

From a Fed Meeting in 2005*


Planning:
That mixed message reminded me of a story told by Nobel laureate Ken Arrow. During World War II, Arrow was assigned to a team of statisticians to produce long-range weather forecasts. After a time, Arrow and his team determined that their forecasts were not much better than pulling predictions out of a hat. They wrote their superiors, asking to be relieved of the duty. They received the following reply, and I quote “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”


Spending:
MR. FISHER. I’m reminded of a story that George Shultz told me about his time working under President Reagan, who was very frustrated about spending. George picked up the phone and called I think it was Sam Cohen and said, “Tell me, Sam, is there really any difference between Republicans and Democrats when it comes to spending?” And Cohen said, “I want to think about it, do some research, and give you a serious answer.” He called back the next morning and said, “Yes, George, there is. Democrats enjoy it more.” [Laughter] “But otherwise there doesn’t appear to be any difference.”


*http://blogs.wsj.com/economics/2011/01/14/fed-laugh-track-can-we-borrow-from-the-greeks/

The Precautionary principle in finance

Neil Barofsky, appointed to investigate TARP (Troubled Asset Relief Program),said “The conclusion of the various government actors that Citigroup had to be saved was strikingly ad hoc.”


http://www.bloomberg.com/news/2011-01-13/citigroup-45-billion-rescue-based-on-fear-of-the-unknown-barofsky-says.html
 
This is an application of the precautionary principle, that applies government fiat against technical progress that might upset the status quo - whether in medicine, genetics or aviation. While US entrepreneurs and innovators are the world's most prolific, the US government is moving in the opposite direction, spending huge sums of tax payers money on trying to preserve the status quo.
 
In the Citibank case, this consisted of 45 bn of emergency infusions, plus government backing of 300 bn. of Citi assets.
 
Putting such enormous sums behind an organisation that had clearly taken excessive risk creates "moral hazard";  as Barofsky said,  "the prospect of additional government relief may encourage excessive risk-taking by executives".
 
Ironically, the same desire to be precuationary has the oppostie effect on technology - discouraging risk taking. This is a perverse outcome of conservatism in government- encourage risk in financial bets, discourage innovation in technology!
 

Dumb bricks or intelligent governments?

A gold bar is no more intelligent than Bernanke, but it tells no lies. It should be apparent by now that George Bernard Shaw was right: "You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect to those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold."