Understanding policy through politics

3df4ad3In 1977 when Janata government first came to power on the back of a majority it messed the plot in about two and a half years. As heartwarming its success was (if the defeat of Indira Gandhi was considered the defeat of civil right suppression), its failure was not a surprise. It was the first time India had a non Congress government at the center. It was also the first time coalition politics came up. As much deft governing a country like India requires, so much more skill managing a boat running on coalition fuel demands.

At the backdrop of this, it is not surprising that Janata government had little to no institutional memory to draw its lessons from. It had no reservoir of prior experience and thus no skills in managing the country.

In 2011 Trinamool Congress(TMC) swept the Bengal Assembly elections. Poriborton or “a structural change” became the rallying war cry of TMC. Hopes of better governance and a steering away from leftist politics inspired the masses, on the back of which TMC registered its first assembly victory. It was the first time in 25 years Bengal had a non Leftist government. It was also the first time a non-Congress, non Left party won. It was the first time TMC had a major role to play in state politics. As much intellectual capital steering Bengal away from the embraces of leftism requires, even more so forging new policies (in a new political paradigm of cooperative federalism) demands.

Cut it any way which, TMC had a patchy record at best in governance.Ranging from  Ambika Mohapatro case to delaying of Teesta accord- spanning from refusal of FDI in retail and insurance to a general breakdown in civil rights in the state- TMC remains an immature political party at its best.

And it is not surprising because like Janata government- it is the first time for TMC- and it has no organisational knowledge to build upon.

In 2013 December, Aam Aadmi Party poised a significant challenge in the assembly elections with a stunning 28 out of 70 seats in its pocket. It was the first time a political party was handed the mandate to rule within a year of formation. Not only was it a 1 year old party but had no “repository” of politics and political management to draw from. It was an empty reservoir in terms of organisational knowledge.

And no doubt, that its failures were stark and serious- from its numerous skirmishes with the Centre to its abdication of Delhi on drop of a hat it was an unmitigated disaster in governance.Its janata durbars, a much touted governance measure on the lines of direct democracy had to be kept aside because of mismanagement; Somnath Bharti’s vigilantism to dharna politics – all were the hallmarks of a party wonderfully bereft of ideas.

However AAP defying history (abdications have very low success rate when judged by history) came to power in 2015 assembly elections with 67 seats. This time the general expectation was even a prodigal son should be given a second chance. But AAP has bungled and in large measure the last 5 months have ranged high on decibals low on intent.

Modi government is in many ways straddling the mean between these failures. BJP government in general has a reservoir of experience in administration. Modi himself has administered a state. But then their strengths are also their weaknesses. It has been 10 years that BJP administered country last and like anything time also depreciates experience by removing able hands from the gene pool/ service pool (e.g. Vajpayee, Shourie etc)

So if Modi government has had successes it was because of this past experience and its failures nevertheless are undoubtedly in areas where it never had new ideas in its repository and those areas which are uniquely belonging to Centre- “civil rights”, “education” etc (nitpickers may find fault in me classifying them as Central subjects while they are concurrent but think of crowding out effect- Centre’s precense renders state inconsequential)

It is not a surprise that in large measure knowledge acts like a muscle. And soft skills/managerial skills are even more so. Lets call them managerial muscle in short.

What are the areas where India has developed managerial muscle?

1. We are slowly learning to tackle public health – we have learned to tackle and eradicate polio- a big milestone in my dictionary. I believe in the next 10 years a lot of other public health mess will get taken care of : TB for example.

Just to think in 2009 we had the highest burden of polio victims. In 2012 we were polio free!

2. Learning mountain warfare- we have a big advantage over China in the sense that our defence forces have a much deeper experience of combat while China doesnt have it.

3. Disaster management- no explanations needed. Very strong and deep managerial skills and organisational knowledge here.

The deepest of social understandings should be fertile. And it is no different in this case. The idea of knowledge muscle can be very well built inside the framework of capitalism as well.

An entrepreneur who learns by successive failures  is a prime example of this- the same reason why venture capitalist firms discount first time entrepreneurs more aggressively than seasoned ones. A CEO who has gone through at least one trough in a business cycle also falls into this category.

And finally when Sanjay Bakshi mentioned that one of the causes of market myopia is a higher discounting of past managerial setbacks (Point 5 )- he was bang on because market is unable to tease out the nuances between corporate misgovernance and genuine setback.

Strangely this very same “mental model” can be used to separate the wheat from the chaff. Judge the man based on his access to “managerial muscle”.

Case in point will be to study the potential turnarounds:

1. Eicher Ltd.

In 1994 Eicher bought out Royal Enfield (RE), a high end motorbike maker and yet till 2000 Eicher continued to bleed in this segment. For an annual capacity of 6000, Eicher continued to churn out barely 2000 bikes.

Faced with a question of coast or shut, the iconic motorbike maker received a shot in its arm in the form of Siddharth Lal. A 26 year old die hard fan of Bullet (the iconic range of bikes from RE)  with substantial backing from the promoter family.

You see, he was a young scion of the promoter family.

He realised one thing very quickly. Tractor makers will have very low “knowledge/managerial muscle” to turnaround an iconic bike brand. He roped in R.L. Ravichandran- an able hand with deep experience in bike segment (earlier experience in Bajaj Auto and TVS Motors)

Reference: Business Today profile of the Eicher Turnaround

2. Ajay Piramal 

Ajay Piramal was a man who is the epitome of a managerial learning machine. His knowledge muscle got honed by repeatedly engaging in tough business situations- of management buy in, industrial conflict resolution and the works. Today he uses it to his advantage in solving simpler but more rewarding problems – like how to buy companies with able management.


I wanted to add a third and fourth and fifth example to the list. But I am tempted to turn the mic towards you.

Where all, have you come across examples of “knowledge muscle” working its charm?


Why I am against any rate cuts at this moment?

There has been a lot of chatter, pleading, begging, hectoring, bullying and also inane hoping in favour of a rate cut by our RBI governor. Each fortnight every man on the street confidently predicts that there will be a rate cut. I am reminded of my father who predicted each years school exam question papers by pointing out each question as likely and very important.

However, I being the dogmatic and the contrarian stand firmly against any rate cut at this moment. However fortunately I do have some reasons in support of my stand, other than the usual one being “copper the crowd”.
Before I go forward, let me explore the various reasons the cut-mongers are forwarding. One of the most vocal and loud voices is from the government itself. It argues that a rate cut will inject liquidity into the economy, fuel credit expansion and bolster growth. Another section, equally astute argue that a rate cut will have the added implication of “rationalising” the cost of capital. In turn it will make many, now distressed borrowers into prime assets, reducing NPA of the PSU banks and improving hold your breath, credit expansion.

Another class argues that this will again bring in the risk taking animal spirits back into the economy. For good measures it will also improve infrastructure spending for the private players. Needless to say, many of the infrastructure contractors are having a tough time maintaining their cash flow on one hand and juggling the bureaucratic maze, fogginess in regulations etc on the other. All in all, the argument is broadly in line with the benefits of credit expansion.

What are the biggest problems staring ahead of us, right now? The biggest problem is a lack of economic growth. But this is also a very limiting answer. What kind of growth do we really need? Does the growth of 2003-2008 sound extremely desirable, especially in the wake of the cockroaches that are coming out of the various closets?

Let me offer an answer. We need growth, no doubt. Let that be a two digit growth- I will be the first person to call for policies which drive them. But definitely a mindless credit expansion is not the way to go forward. Let us tease out the various ideas here. Growth and its nature needs to be determined going forward for our policymakers. What do we really desire. I cannot say I have all of its facets down pat, but I definitely have some ideas:

1. We need a high technology driven growth. A growth which is fuelled by genuine innovation improving the efficiency of Indians and others. Our incremental capital output ratio since 2003 to 2011 has hovered around 4. This implies that Rupees 4 of capital was required to drive the output of 1 Rupee. Not a great number, but it looks stellar when compared to the ICOR of 2014. It is at a dismal 7. This ratio has to be reduced and this is only possible when real innovation comes through. A higher or lower cost of capital is not going to prove any difference here purely because the real engines of innovation- our MSMEs are anyway not considered credit worthy by our banks. What is needed is to encourage more venture capitalists, angel investors etc.

2. Any country can post stellar growth numbers if reported in a currency which is depreciating fast. Let us report our numbers in Zimbabwean dollars, we can have a mind boggling growth rate. This growth rate however is not because we Indians suddenly stopped reproducing and started producing more. This growth rate will look enormous simply because the “unit” which we have chosen to express ourselves itself is falling at a high rate. To rationalise the perspective, would we want an inflation-driven growth?

When I term a growth as inflation driven, it effectively implies that the total economic value added in the country is consistently and far less than the reported gross domestic product of the country. This is because GDP of a country is expected to reflect the total economic value added at the first place. If it is consistently beating the real fundamental then definitely it’s the inflation which is bufferring up the ship .

What about the usual adage that a little bit of inflation is always a positive thing for the economy?, you may ask. Sure enough, but we have so much in our country right now that we can happily export some of it and yet have more than we need.

3. The most sanest of ideas in favour of a rate cut is that of infrastructure boost. The current cost of capital is definitely a death bugle for many of our fine(and often fine paying) infrastructure companies. They were squeezed by a lethargic government and high cost of capital. Project overruns and fast deteriorating balance sheets are the welcome boards which greet any infrastructure CEO each morning.

However the bigger question is, is this a band aid on the problem or a real excision of the cancer? I argue that the real problem is not high cost of capital but the lack of capital. Each infrastructure project has a horizon of 20-25 years in the books of the companies. Bridges etc can be included as 40 years assets. However a bank financing these projects invariably has to match the asset and liability duration for prudential loan servicing. However by the norms of RBI long duration loans are not allowed to be issued by the banks. The logic goes that the banks are not financing or venture capital institutions but rather short term financing businesses.

In these contexts of numerous paradoxes and the proverbial chicken and egg situation- lowering the cost of capital wont be as helpful as opening up the entire bond market will be.

Asset-Liability mismatch is a clear problem and its only solution is financing has to move away from banks to properly functioning bond markets.

4. One of the biggest issue which compelled me to write this article is the problem of inflation. As individual investors the greatest problem we have is not lack of growth. It is inflation. Every dollar you earn from your paycheque or your investments is subjected to the swords of taxation. However taxation like all matters of devil need not be always visible, tangible and directly observable. You can have invisible, intangible and indirectly observable taxation as well. We know it by the name of inflation. To understand the implication of the same, consider the usual discounted cash flow mechanism to calculate the net present value of any investment avenue. At 8% real growth rate and another 8% long term historical inflation rate. This makes our index return a 16% compounded growth rate over the long term. This in essence brings a benchmark on all other investments we make. 16% in index will be our opportunity cost. This renders anything less than 24-25% less than desirable. An owner-manager with such business dynamics will find doing business tantamount to running on a treadmill. Lots of huffing and puffing but zero displacement. And needless to say a vast majority of our equity markets and ergo a common investors portfolio will consist of the businesses with their return on capital ranging from 18-25%.

Is it any surprise that in spite of capital markets having a history of more than 100 years in India we Indians still buy gold and not businesses? We have the answer even if we don’t know it. Between government and inflation nothing is left for us.

As in biology, survival first- growth next: similarly purchasing power survival first, hence the predilection of Indians towards purchase of hard assets: gold, silver, real estate etc.

Coming back to our original point if owner manager finds running a treadmill at 24-25% return on capital then surely the minority shareholders will find his capital not sweating enough for him. He may feel rich but he definitely wont be rich.

RBI thankfully has for the first time inflation targetting its core concern(which should be). I salute and thank Urjit Patel and Raghuram Rajan for bringing this pragmatism. There has been quite a bit of chatter and I hope a chatter rooted in genuinity, that Finance Ministry too supports inflation targeting and intends to make it a statutory responsibility. If that is so then it will be necessary to stick to the goals of 6% inflation by Jan 2015 (which seems to be slightly challenging) and 4% inflation by Jan 2016 (which seems to be genuinely difficult to achieve) which Dr Rajan earlier in December 2013 announced. In that light, the cuts should be indefinitely postponed; reforms of bond markets, capital markets, infrastructure norms accelerated and FDI norms relaxed.

Rate cut is no solution. At least I fail to see it as one of any of the problems we Indians are facing.

How do you ruin a great country?

How do you eat an elephant? One bite at a time.
And how do you ruin a great country? One easy solution at a time.

It is very easy for us to get seduced by easy solutions . It draws from our  innate “do something” psychological bias. Just because a complex problem can’t be solved easily we settle for doing something in the name of appearing busy, involved and at the top of things. Part of the reason we settle for this is because we are pushed by our society, by our families and by stakeholders to do something! So what we settle for are easy solutions to tough complex problems.

I have always considered history to be the most powerful tool in a thinking man’s toolbox.  And it is important for us to train our eyes towards one of the most prosperous states at the turn of 20th century-Argentina. Argentina is a text book case of what can happen when a country is seduced by ideas and dreams of easy solutions and utopia. But before that, lets get some background.

Argentina in 1910: The centenary fair

Lets kill the golden goose!

Argentina in the beginning of 20th century was a haven of free market economics. It was the first South American country with its own democratic government, urban transportation system, lighting system. In a few years it will have its own telegraph system. This is remarkable because outside the richest few countries of Europe this was unheard of. People were entrepreneurial and business was strong. However at the turn of 1930s decade, things started sliding. The reason is interesting. Any capitalist economy will always have its own share of inequality, disenfranchised and people who have lost out in competition. You will have to handle it in different ways if you are government. For disenfranchised the government has to enable them to increase their capabilities. For the unequals, you will have to protect them through institutions like law and order, policing and to some extent proper targeting of affirmative action. For the last section, you have to do nothing.

The marching of military and the silent coup of 1930s: Notice the popular support

Easy solutions

However, the role of government in those days was hazy and not much thought was given. What resulted was the degeneration of the politics to demogoguery. What does this mean? Demogoguery means policy making by the masses. Unfortunately, how much ever romantic our notions of democracy be, if anything we have learned from history is that masses are poor choicemakers. People just can’t forego short term gains for long term solutions. As a result Hipolito , the then President of Argentina was deposed by military junta and one of the shining beacons of democracy got extinguished. The military junta soon consolidated power by mobilising on demogoguery and denouncing democracy. People started believing in the power of easy solutions.

The Perons basking in the glory of popularity: Socialism makes you popular in the short term, and hated in the long term

The Perons basking in the glory of popularity: Socialism makes you popular in the short term, and hated in the long term

Soon thereafter Juan Peron a mercurial man with fortunes swaying wildly, rose to the scene. Peron was initially thrown behind the bars by the military. His charming wife Evita Peron intrigued to get him released and finally capture power. Evita was perhaps the most charming woman in Argentina at that time and masses were in love with her. In psychology there is a bias called the halo effect. Beautiful people can do no wrong! Evita was beautiful and she was considered to be intelligent.

As a result she and her husband persued some of the most reckless socialistic, populist policies in its history ruining the economy, industry and society of Argentina completely. Today, Argentina is still struggling to achieve its potential.

Why am I narrating this?

India now, Argentina then

Its simple. One man’s demogoguery is ruining the polity. One party’s demogoguery is polluting the waters. One ideology’s influence is affecting the future. Arvind Kejriwal has promised 700 ltrs of free water to Delhi citizens. The question here is, why did Aam Aadmi Party need to announce this? Which problem were they trying to solve.


But why Delhi has a water scarcity when areas around it doesn’t have the said problem in the same intensity. A slight amount of investigation tell us the Delhi JAL board just doesn’t have the means, abilities, capabilities and the knowledge to serve its core purpose. To gain an understanding how deep the problem is, imagine this:

Imagine you are the CEO of Delhi Jal Board. You know that you need to provide water to all the households of Delhi. BUT, you don’t even know how many households you are providing to today! No one in DJB keeps a proper record of water supplied and the number of households. No one has a quantitative idea of leakage.

Furthermore, the water sources you tap to extract water is fast shrinking in quantity and quality. Partly because the demand is very very high,  secondly because the water sources are turning increasingly polluted.

Who pays?

But why are they turning polluted? The answer: the reckless, callous and careless apathy of Municipality.  The sewage treatment facility of Delhi is working below capacity, the rivers, the lakes and the landfill sites are strewn with garbage and garbage incinerators are just not working.

The result: Every pond, lake, rivulets is turning like Yamuna!

This is the state of every water body in and around Delhi.

This is the state of every water body in and around Delhi.

Solving the water problem will take long institutional reforms. Capability building has to be at the core of such reforms. However lets imagine what will happen if the government of the day settles for such knee jerk solutions.

Delhi is a city where a large number of IT professionals work. They work in Gurgaon, Noida and the NCR region. Most of them are members of nuclear families and bachelors. The average members in a household will not be far from 1.8. 700 ltrs per day to such households is clearly an overkill. What happens?

One short answer: Wastage!
Long Answer: Collosal Wastage.

Who pays for this? Mother Nature.

Is it any wonder why our lakes, rivulets and ponds are drying up extremely fast?

Just because nature can’t sue doesn’t mean nature can pay. And just because Arvind Kejriwal can order so, doesn’t mean Arvind Kejriwal has the moral authority to do so.