How high Real Interest Rates can trip Modi in 2019

this artcile of mine has appeared in Financial express today (29/sept, 2017). Link below.

Unedited Version:

RBI’s Interest Rates can trip Modi in 2019

V Kumaraswamy 

Ask any shop keeper, or the lonely looking private security guards, unemployed youth in urban slums or interior towns, or the taxi drivers as to what their main issue today is and pat comes the reply: be rozgari

Not many expected Vajpayee to lose 2004 with the groundswell of national passion over Kargil, Golden Quadrilateral, relative peace and quiet in domestic scenario, great government finances and the political networking he cultivated.  Yet he lost.

The voter at the booth is not going to be thankful for how much wholesale corruption has come down (retail is still alive and throbbing), degree of digitisation India has achieved, how benign inflation is, etc. These are at best hygiene factors which can easily be washed away if joblessness persists. Without a job, a stable one at that, he can’t proposer.

High Manufacturing Real Interest Rates (RIRs).

If more people have to be converted from being losers during the on-going reforms to gainers, we need rapid job creation. Services sector (IT, BPOs, Call Centres, and Telecom) created jobs by the buckets till about 2011-12 but have reached stagnation now and have even started becoming uncompetitive now threatening imminent job losses.  Agri sector is just incapable of creating further jobs; rather it would release lots that need to be absorbed.

Employment should come from only manufacturing and here is where the real interest rates facing Indian industry is proving an insurmountable barrier not just a hurdle. The accompanying chart compares the Real Interest Rates (RIRs) between China and RIRs facing Indian manufacturing.  Manufacturing RIRs are  derived by deducting manufacturing inflation from the nominal interests facing manufacturing sector. For the last over a decade Indian Mfg RIR is about 7.21% versus China’s 2.92% – (i.e 4.29% over China’s) a huge hole for anyone to be interested in investing in Indian manufacturing.

It is a mistake to compare the general RIR which is just 2.04% over China, the country with which we have maximum non-oil trade deficit. The General inflation is contaminated by Fuel oil, Food which have no bearing whatsoever for studying manufacturing investment competitiveness.

Why has it become important now?

Just but for one year, Indian Manufacturing RIRs have been higher than China since 1991. So why has it started affecting investment sentiments now. Starting Jan 2014, duties for imports from ASEAN has become Zero virtually (S Korea is not far behind) making India’s trade borders completely open. China (even with import duties) has cost structures lower than ASEAN for several commodities.

India’s capital account has also been steadily opening up and for practical purposes it is completely open. Even the per annum limits on debt are periodically reviewed and enhanced without even waiting for the year turns.

With open trade and capital flows one has to be more sharply competitive. Added to this is the 25-30% overall surplus capacity in Industry. Who would dare to invest with a huge handicap on interest rates and surplus capacities. It is better to source goods from China or set up facilities there and sell in India, which exports jobs.

Sources of competitiveness

As mentioned earlier, agriculture and services look spent forces as far as employment creation goes.  It rests on manufacturing to create jobs, for which it needs to be competitive, which has to come from any of the 4 factors of production or natural resource endowments (part of Land).

India has tied itself up in knots where land is concerned.  Our socialistic mindset has made a grand backdoor re-entry through LARR and a plethora of court rulings, restriction on land transfer and change in usage, etc. Any acquisition takes 5 years – far beyond the patience time for an entrepreneur to keeping waiting with his ideas.  India has 375 people per sqkm where China has 142 (2015), increasing the pressure on land. So land as a source of competitive strength is ruled out.

Labour can be a source of strength given the wage levels now. But for that to happen we need to repurpose our education. Instead of (or perhaps alongwith)  BE(Mechanical) and B Tech (Chemical) we need 8th Std (textile printing), 10th std (BPO assistant), 12th std (Source coders), etc. i.e. fit for purpose specialisation kicking in at far younger ages. This can perhaps reduce capital invested for turning an unemployed into productive force as well supply the skills that would increase productivity. Such increased productivity can make the labour cheap per output unit.

That leaves Interest rates. Even enterprise is a function of interest rates beyond a point, where it translates entrepreneurism into investments. With excess capacities and high RIRs in Manufacturing, no one will feel tempted to invest in India.

High real interest rates (when the whole of rest of world is underperforming) and an increasingly politically stable India is attracting excess of $s, that cannot be absorbed by a stalling investment economy. Oversupply / unutilised $s in the forex market causes its prices to decrease. With it, it brings down import prices and makes our exports un-remunerative. This causes imports to flare up. Sure we are also gaining in petrol, prices of Chinese goods, goods from ASEAN, etc. But then the jobs in making them is happening overseas. What’s more important now  – employment or lower inflation? People who are gloating at low inflation are looking at just one side of the equation

In the last 6-7 years our Monetary economists have been failing their equilibrium mathematics exams, with their highly out of context imported monetary theories. But the political student to be detained may be Modi’s Government in 2019.

(The writer is the Author of Making Growth Happen in India (Sage Publications))









Responsible Recovery of NPAs

Treating all debtors the same, including those with scope for turnaround, is bad for banks and the economy

There can be no doubt that banks need to go after the non-performing assets (NPA) vigorously so that the moral hazard of wilful default does not get hard-coded into the DNA of borrowers.

Banking thrives on the delicate psychological infrastructure of public confidence. One should also bear in mind that one of the most essential ingredient of growth is risk-taking capacity and entrepreneurial zeal.

The current hysteria being created by media and the sudden near-choking actions of the RBI towards NPA recovery seem to overlook the fact that we need a balanced approach to recovery even while preserving the above two.

Reasons for bad loans

The current stock of NPAs is the result of court actions of cancellation of licences, government not keeping its word on contractual obligations, global commodity price movements, low equity base in India, irrational exuberance in sanctions and a lackadaisical approach in the past, free-trade agreements (FTA), a sudden sinking of the growth table from 8-9 per cent to 6-7 per cent with services taking a greater share, etc.

Of these, the Asean FTAs have played a large part in pushing many units to involuntary defaults. According to one estimate, when all ASEAN countries implement their FTA commitments with India, India’s exports to them are supposed to increase by 21 per cent while India’s imports from them was slated to increase by 59 per cent (C.Sikdar and B. Nag, 2011,Impact of India-ASEAN FTA).

Surprisingly, Asean FTA, effective January 2010, remained largely unnoticed till the last leg. When the import duties on many end products became zero per cent from 2.5 per cent in 2014, it became a tipping point for the media, traders, and even the overseas exporters.

The cumulative lag in its impact weighed in heavily all too suddenly. This put the domestic manufacturing industry’s prices on import parity and several industries became uncompetitive or saw their margins shrink. In any case their ability to pass on input cost inflation became restricted. Due to this, the growth rate in several Indian manufacturing sector has sharply come down from 7-9 per cent to 3-4 per cent. This has elongated the pay back of several projects from 6-7 years to 10-12 years.

A moderated approach

Banks should carefully segregate stressed credits into (a) where Return on Capital Employed (ROCE) is still more than Cost of Capital (COC). This would indicate that the credit is still viable but less liquid than earlier planned, and (b) where ROCE is less than COC, where the feasibility itself in question.

In case of (a) the RBI should allow one-time re-scheduling of loans in line with the revised economic assumptions and the elongated paybacks, with adjustments in credit spreads, but without strangulating either the clients or banks by provisioning.

Such cases should not be reckoned as NPA in view of the general objective of maintaining a conducive atmosphere for investment. They should not be allowed to erode the confidence in our banking system and preserve the capital base of banks.

Most of current stipulations seem more appropriate for Type (b) cases. The combined might of the legal system (with its slothful, apologetic approach) and existing regulations is the weakest in cases involving immoral and wilful defaults. Immediately after the crisis of 2008, it was found that the CEOs and traders of investment banks had appropriated for themselves huge bonuses from questionable practices and structures.

The Swiss and the Swedish authorities, instead of protracted legal battles, arm twisted them to pay up a substantial part of their ill gotten gains, threatening them with the might of the State which yielded optimum and quick results.

Given that the top 60-70 cases would cover nearly 80-85 per cent of our current NPAs, the regulator, the government and the banks might do well to take lessons from such an approach and jointly ‘arm twist’ a settlement.

This approach might involve transfer of ownership in Type (b) cases to others in the industry who have competitive strengths in manufacturing, technology or distribution to make a less viable unit to fully viable one. Central Banker should have ideally asked for easy exit norms including the court procedures, automatic transfer of licences and permits instead of just concentrating on provisioning alone.

Banks should also agree on norms for lending for takeovers and mergers which is taboo as of now at least for cases involving share purchase, even if the acquirer has to pay for liabilities simultaneously.

Overly cautious approach

The contrasting approaches of the Fed to 2008 crisis as against the current scene in India is interesting. The 2008 crisis was caused by individual excesses and born of instruments created by outlandish models.

Professional excesses were writ all over and unjustified transfers of wealth humongous. Yet their approach was to save the system and public confidence and many of the sins were forgiven or forgotten, despite the effectiveness of their legal system.

Our strangulating approach of ‘one prescription whatever the diagnosis’ seems destined to manufacture a crisis out of what is at worst a matter of serious concern. This, when an accommodative monetary policy is the need of the hour, with the bulk of the economy and manufacturing sector struggling and growth and employment addition far below potential.

The excesses of strangulation can be gauged in the light of the equity that RBI holds in relation to its total balance sheet size. RBI’s ratio in this regard is the second highest in the World at 32 per cent (next only to Norway at more than 40 per cent).

The same stands at a mere 2 per cent for the US and UK. There is a clear case for a more nuanced and segmented approach, appropriate solutions for each class of cases, besides of course a re-look at the real interest rates which are at historic highs for many sectors, stubbing out any entrepreneurial spurs in the affected sectors. The high equity component in the balance sheet should be a source of comfort and assurance of the system; unfortunately RBI does not seem to know its strengths.

An edited version of this was published on March 28, 2016 in The Hindu Businessline. Link:



Rats and the Bureauc’rats’

Rats and the Bureauc’rats’

This is not a fib. Shows me in an awkward light. But it is OK.

I have been living in a flat in the 4th floor which belongs to a MP, in a fairly decent locality of East Delhi for the last almost 10 years now. His wife in whose name the flat stands has visited our house 3-4 times in the last 10 years and he – never. I have attended his Iftars a couple of times and met him once in his office. Very decently behaved.

The first 9 years we have not had much problems with the flat – no problems from cockroaches and other insects or rats. In the last year or so a lot of people have started remodeling their kitchen or bed or toilets and have had to work upon the pipelines and drainages. And suddenly rats started invading our house about 4-5 months ago. From being an occasional visitor to weekly to daily their familiarity with us seemed to improve with time.

My wife is mortally afraid of them and exhibits a near phobic reaction seeing them. The store is somewhat tucked in and I don’t need to go there for my daily routines. So whenever my wife used to complain or start discussing their presence or disgust I will simply bark back at her and put her down or somehow make it out that she is more of a problem than the rats. From being a weekly routine, it sort of became a daily scene – with the watchman coming to take the trap and leave them in the nearby park. The more frequent their visits, the more frequent my wife’s screams for help and more intense my reaction. But apart from the occasional help with setting the trap – grumpy and grumbling – not much of an intervention from me -at least they were not crawling on our dining table or bed or drawing room.

And suddenly one Wednesday about a month ago my wife had to leave for Chennai for some urgent work.

I prefer to cook my own food whenever she is out. I sort of like it for its meditative value. I need to concentrate to get it right, mixing or clubbing various activities so as to optimize time, scheduling them etc. and during that time, normally I don’t think of thinking about my boss or meddlesome colleagues or irksome tax authorities or Kejriwals or Arnab Goswami or the plethora of scarecrows and demons in our daily life. The 40-45 minutes is a pure yoga for me.

I was greeted by our esteemed visitor when I was preparing to cook that evening. Seeing one run to hiding in the store …I was overtaken by a sort of hesitation… in opening the doors or store, drawers or even the Microwave as if one will jump out at me. From thinking of my cooking routine most of my time went in thinking about my ‘athithi’. After dinner, set the trap and caught one and handed it to the watchmen. Not that they fall for whatever you bait. They have their own taste (hope it does not differ from one to the next) and are highly choosy. But from my wife’s harangues I had learnt some tricks about what gels with them.

The overhang of thoughts about coming face to face him made me lose some sleep. And it sort of visited my thoughts during the office hours next day. Thursday the problem persisted … looming larger. Half the sleep gone and torments from pure imagination invaded me during much of those wakeful hours in bed. Rats had become my new source of meditation.

Friday morning … and evening… it was sort of I had to do something about it kind of situation. I called my driver and society’s plumber on Saturday morning to see how to resolve the issue. Both of them were kind of amused, suppressed though since they may have learnt to live with the problem.

We searched all the possible openings in the house, the drains, the inlets of water, the electrical lines, those which had been recently re-done by others… The plumber was smirking half the time. My driver is a sort of serious but irresponsible kind of fellow. No smirks from him but blindly followed instructions…the plumber became an expert of sorts offering his own logic (mostly counters) to whatever I suggested. He kept saying where there are no droppings there is least likelihood that it may have been a point of entry. (makes sense but to me it did only in retrospect; not then). ‘Do as you are told’ was my shout and refrain and insisted on his plastering or filling whatever it was under scanner. I guess both of them must have been pretty exasperated with me.

My driver pointed to a small gap in the junction box of electricals high in the dining area. There indeed was a gap of may be one cm – good enough for a cockroach I thought but hardly could agree that a rat would be able to squeeze through. But not having made much headway, I told him to get the ladder, open it and see. He did and also saw their droppings. The ply board used as cover to the JB had wilted due to age and bent creating some gaps. I told him to put brown tape around its borders. I sealed the electrical switch box as well which was right inside the store.

Phew! For the rest of the day no rattling noise form kitchen store. Not in the night either. Not the whole of Sunday … and then Monday. I asked the plumber to seal and do up all the damage done during our investigation. And there has been no visitor since then…in fact for the last whole month.


My wife of last 25 years was not able to get my attention at such close quarters what a 48 hrs direct encounter did. I am sure most men of my age around the world would behave similarly (at least to their wives I guess!). Unless regulated by rules, social values, culture, policing and punishment, peer pressure, etc. our reaction to others problems are likely to be equally lethargic and insensitive.

Given the current level of insensitivity to others (my neighbors park their car sometimes in mine, in Delhi the whole road however wide is a parking lot, rickshaws can drop or pick up passengers any place – right in the middle of a road busy with vehicular traffic), moral degradation, lack of work and duty consciousness, dilution of values at least in India, our model of bureaucracy perhaps has run out of context.

I don’t see similar degradation in many other democracies, some military regime and communist countries. May be this is representative of countries where corruption is high or they are both two sides of the same coin. May be around independence our Bureaucratic model of governance was appropriate but the background assumptions have so changed that it no longer looks appropriate.

So you have a defence secretary who denies snow boots to Siachen soldiers, bullet proof vests to frontline armymen, and now a massive cumulative deficit of even basic ammunition; Judges and your own lawyer least concerned about administering justice in a hurry, regulators not deciding on price hikes for Delhi Metro (actually problem I am told is a little deeper) for the last 6 years.

Given this should we not insist that for anyone to be eligible to be defence secretary s/he should have spent at least one stint of 4 months in Nathu La pass eyeball to eyeball with Chinese soldiers, one winter in Siachen and at least 3 years with other stations taken together.

I am sure if a son or daughter of the then Cabinet Secretary was in IC 183, we would not have wasted precious 2 hours at Amritsar Airport and we may all be talking of a different scenario than Kandahar.

We should also provide for 10-15% lateral entry into our bureaucracy from end users so that they can sensitize our system.

People say that we should impose a hefty fine on people asking for stay orders in Courts. But me thinks it is a waste of time. People who can pay (the rich) will impose it on the other unfortunate side pining for justice. I think it is the decider whose shoes should be made to pinch. The decider of stay orders is the Judge and we should impose a fine (or fees) on him. Even in a corruption free environment, the day we say that judges will be allowed a quota of 12 in a year and every additional grant will come at the cost of his promotion and increments, he will think deeply before granting one. (or may be he will trade his quota also).

Laws of Volutary Disclosure of Black Money, 2015 – too very Limp

The anti money laundering laws have come into effect. The voluntary period of compliance is set at 30th September. Those desirous of escaping punishment and prosecution have to declare their income, pay 30% as tax and a further 30% as penalty in return for immunity.

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Air India, the wonderfully adorable rogue

Air India’s (AI) FPlight

I prefer Air India whenever I go abroad if there is a direct flight. I don’t go anywhere near it on domestic routes. Generally they are on time on overseas trips. This time however was different. There was a 3 hour delay – 45 minutes before check in, Continue reading

Land Acquisition – breaking the deadlock

For a more productive land acquisition law V Kumaraswamy A storm of sorts seems to be brewing in the capital on the land acquisition bill. The fundamental features of the recent laws as well the current bill are cash compensation, higher % of consent required, and many resettlement obligations on the acquirer. Land is in short supply, since the population especially of those who are poor and skill deficient dependent on land is increasing fast. Neither side of the political spectrum seems to have got the situation facing the farmer correct and tried to evolve more appropriate solutions and compensation structures. Continue reading

Correcting Distortions in Education Market


The Hindu BusinessLine

There is perhaps no other market in India today that so completely marginalises the consumer and producer interest as much as that for higher education To correct the aberrations in the market, it is necessary to channelise the huge amounts spent by society on intermediary coaching classes for financing the actual end-education. Read on…