Friday, September 20, 2019

The Sinistry of Utmost Sappiness

There is a particular kind of breathless, self-congratulatory posturing that occurs when an author who spent two decades dining out on a wildly praised 1997 debut, finally returns — not merely to tell a story, but to stage a political intervention. And so it was when Arundhati Roy delivered The Ministry of Utmost Happiness: the global literary establishment tripped over itself to praise its lush prose. As if further proof was required, it demonstrated once again that if you package Indian realities as a pained, exoticised plea for Western salvation, the international prize circuit will happily lap it up.

Before we get deeper, I must confess that I read her first almost a decade after its release. By then, there was enough of Ms Roy in the public domain to invite incision, but one had to look closely at The God of Small Things to discern that it was a stylistic exercise tailor-made to flatter the White Man’s Burden. To read her second last week — a bloated, 450-page political scrapbook — was to go from an undercurrent suspected to an undeniable shriek. Indeed, the high priestess of elite radicalism has gifted us something quite rare — a novel that manages to be simultaneously exhausting and hilarious in its unearned self-seriousness.

At one level, the arclight only serves to highlight the failings of the much-hyped, damp squib of a novel. Take, for instance, Ms Roy’s Endlösung for the staggering, blood-soaked complexities of South Asian history. Don't fall off the chair, but it appears that multi-generational border wars, deep-seated caste friction, and nuclear brinkmanship can be neatly resolved if everyone simply were to move into a Delhi graveyard, build a bohemian guest house among the tombstones, and adopt a stray dog. It is the ultimate elite, left-liberal fantasy: suggesting that opting out of the state and joining a universal commune of collective empathy is still an option, despite what the world has seen of regimes in various shades of red over the last century. This provides the moral bedrock to pass off a literal dead-end as a profound geopolitical alternative — an Aman-ki-Asha peace-piping wrapped in an expensive erudite cloak.

Ms Roy shifts her gaze to the valleys of Kashmir too, only to throw historical and strategic accountability out the window to create a comforting morality play. The state is flattened into pure villainy — an omnipotent, cartoonishly cruel machine of pure oppression — while the insurgent factions are given a tragically romantic, poetic sheen. By erasing the grinding, asymmetric realities of state-sponsored proxy warfare, cross-border terrorist networks, and the logistical nightmares of maintaining sovereign borders, she hands the reader a broken compass. The volatile geopolitical chessboard is reduced to a simplistic black-and-white melodrama designed only for Western literary prize juries to swoon in solemn approval.

The fact remains that Roy writes from the absolute pinnacle of global bourgeois privilege, and it shows in how the novel treats human misery as decorative wallpaper. It reads like a chaotic kitchen-sink catalogue of every socio-political crisis available — religious riots, environmental collapse, caste violence, military occupation — all thrown into a blender not for rigorous structural analysis, but to serve as a gritty, aesthetic backdrop for her characters' tortured emotional awakenings. The whole point is to gloss over policy mechanics and turn real-world trauma into a voyeuristic safari for the global metropolitan elite.

All told, the novel is no more than a vehicle for Ms Roy's barely-disguised political vanity. She has spent years courting controversy in the media, frequently getting into trouble for inflammatory stances and wearing it like a badge of honour. The Ministry of Utmost Happiness reflects this exact posture, with no attempt to actually interrogate how power works or how institutions function. It is a performance of moral superiority dressed up as fiction: a protracted, high-brow manifesto that offers zero answers, preferring instead to preach with theatrics. This is Brand Arundhati — courting perpetual controversy, aestheticising suffering, and revelling in classic left-liberal snobbery — who needs a plot?

In the end, there is nothing wrong with writing fairy tales, but beware this megaphone that only sits in shrill judgement, pillorying the messy machinery of statecraft and governance, and achieving little save vacuous sanctimony. Pick this one if you, like the author, can retreat into a fantasy kitchen in a graveyard, feel beautifully enlightened over sips of social justice, and pretend you have rescued the republic.

Friday, August 30, 2019

Welcome to the Machine: America and Money

I wrote a while ago of my first brush with America's financial system as a fresh-off-the-boat expat applying for a credit card. Thanks to a career mostly pivoted on financial services, however, my experiences with the world's largest economy run broader. These have only deepened in the last couple of years building a life in the country, but continue to leave me perplexed on more than one count.

Of my subsequent wanderings, I find the average American's attitude vis-à-vis the stock market the most peculiar. One might verily imagine investors lining up outside the door given its extraordinary breadth (in offerings), depth (of liquidity) and information access (implying transparency). Yet, in reality, retail participation in the NYSE-Nasdaq is unlikely to make India's NSE jealous. Broader still, it appears linked to the outlook around Money.

Some facts for starters. Wealth-accumulation is, in many ways, an inveterate part of the 'American dream'. Next, unlike the land of my birth, inflation has mostly been in check since the Supply Shocks of the 70s. Finally, median incomes have almost doubled in the period. Statistics, therefore, point to significant investible surpluses. Yet, reams can rightly be written about burgeoning US household debt as much as the general disaffection of its populace in matters financial. It takes us back squarely to saving discipline.

To unravel this, consider an analogy from another bane of modern human existence, namely lack of fitness. Be it a shudh desi tond or American overweight, we know that exercise is key. Indeed, that rush of endorphins at the end of a workout is the glow of champions. Watch what happens next, as the hungry, proud-as-Punch body heads out to eat. How often do we overestimate calories burned; gorge on 2X the amount we typically need; and feel no qualms therefrom? And then we bemoan fitness levels, go jumping from one fancy exercise plan or fad diet to another, and hurtle towards the eventuality of a large medical bill.

Just as the gap between calories burned and replenished drives success in a weight-loss regimen, so a saving habit determines financial well-being. So why the proclivity for conspicuous consumption that fells the average American? Answers are at hand. Akin to the rush post a rigorous workout, income growth also stokes an increased propensity to spend. Cast under its 'have-earned-this' spell, Americans splurge guiltlessly on indulgences. Luxuries of today turn into necessities of tomorrow, and wallets continuously seek new extravagances to feed the sense of entitlement. A social-media-centric existence plays no small part in this frenzy, with lifestyle expectations driven by peer benchmarks, resulting in a vicious dance of debt.

Culturally overindexed on wealth, America can only be happy when the cycle of overcompensating rising income with indiscriminate consumption breaks. The solution is obvious, but fundamental. From chasing the tangible and easy (spending), the Average Joe or Jane needs to be inspired towards the intangible and difficult (saving, directed towards goal-focused investment). Apps that demystify wealth by making its creation and tracking ubiquitous shall pave the way. Celebrate, therefore, the tingle of income more than the whoosh of the credit card, virgin or otherwise, as the real money machine. Godspeed.

Saturday, September 9, 2017

Cards, Cars and Gold Czars

"Lucky you; a Credit Card in hand fresh off the boat!" or words to that effect. Thus went the refrain, notably from friends having made a similar India-to-US move mid-career; and thereafter grappled with the task of rebuilding a financial profile from scratch.

Fact is that, absent a Bureau score, many of us who wash ashore have to face the rather mortifying experience of credit denial(s). Some are forced to resort to Secured cards to build payment history. Therefore, the modest $1500 limit from BofA (I had higher in my first credit card as a mere student graduating from IIFT 20 years ago) felt like an occasion to celebrate!

Part of the distress, to be fair, comes from the dissonance between the erstwhile financial standing in India (while no HNW, one had the pick of financial products; and a feeling of being chased rather than chasing) to newbie status in the US of A. Mind you, this would be equally true even with a global bank; one you had used in India for years; and carried some priority status. Your creditworthiness is reset perforce.

So, with prospective landlords looking askance and utilities insisting on bank auto-debit of monthly bills, a credit card felt much like being granted the Moon. Why not use your India plastic, you ask? Unfortunately, that would be akin to kicking the can down the road. Even if you found a way past the international usage surcharge with an appropriate card, it would still not solve for the need to have usage and payment history domestically to build your credit profile (circular logic, did you say?).

Thankfully, there is a potential hack, and a doubly sweet one at that. AMEX, as I found out last week, could give you a charge card based mostly on your India relationship (albeit driven more by their customer service ethic than hyper-connectedness of the world)! Equally, this 'no limit' card saves me from needing to pre-pay my original credit card multiple times intra-month (when paltry limits meet large household set-up expenses). Note, therefore, my unequivocal endorsement for the 'Gold' in its name!

Next pit-stop in the finanical reset journey, is a car. Once again, as I shortlist, it is evident that usurious rates of interest await me on the loan. Neither will the humbling experience end quite there. Given recency of relocation, a lack of intimacy with domestic stocks is only to be expected. Ergo, I have miles to go to attain the next goal (of high-conviction stockpicking ideas). Till then, we soldier on, as we must.

Thursday, November 5, 2015

Teesri Kasam

Investing as a theme pops up periodically here, a testament to my abiding interest therein. Success here can have a fairly direct correlation with material well-being. That said, in matters financial, it matters more what not to do than otherwise. In this, I am reminded of Teesri Kasam and its quintessential Bihari ethos.

Flashback 1966. Mare Gaye Gulfam, penned by the indomitable Phanishwarnath Renu, was turned to a film by some of Indian cinema's tallest. On camera were Raj Kapoor and Waheeda Rehman, but also Iftekhar, Keshto Mukherjee, AK Hangal and Asit Sen: names that veritably lit up the silver screen much as they did the faces of cinemagoers for generations. Rest of the crew was no less luminous: Renu himself, Basu Bhattacharya, Shankar-Jaikishan, Lata Mangeshkar, Manna Dey, Asha Bhosle, Mukesh etc. Perhaps above all was Shailendra, this being the only movie the lyricist extraordinaire ever produced. Thus, we got Teesri Kasam.

So how does Teesri Kasam connect to my investing experience, personal or observed? Simply that Hiraman, its bullock-cart-driving protagonist — idealist yet unafraid to try the new — makes mistakes in his pursuit of life's affairs, swearing each time never to repeat them. And in a fashion, his three blunders, which lead to the eponymous three vows, mirror my view of the most common slips in financial matters.

Perhaps unsurprisingly, Hiraman stumbles first in ignoring the risk-reward equation. His simpleton character tries to make a fast buck ferrying smuggled goods, managing only to land a brush with the police, and promising himself a long-term focus thereafter. Many of us, myself included, start life at the other end, content with managing money near-term and confusing a bank balance for financial security. We fret about market risk but assume inflation immunity. Consequently, savings go to FDs, PF contributions stay at a minimum, and equity action is confined to a rushed, year-end Sec 80 investment at most. Thus, the power of compounding is missed for years.

Hiraman's second folly is not planning for oversized loads. He picks up a consignment of bamboo, and — being inexperienced — rams it into a horse-cart, earning a royal thrashing. His kasam: avoid 'long poles'. Of such cargo, real estate is the most ubiquitous in our lives and the cause of much financial misery. I didn't buy my first until 12 years into my career (missing two Gurgaon booms); yet others buy too early, or too much, and some simply a 2BHK that they outgrow in no time. A similar case could be made for Insurance. The point is to tackle the big rocks as soon as one is able, which requires a financial plan.

Twice singed, Hiraman is then felled by the most confounding folly of 'em all. Tasked to transport Hirabai, a performer in the Great Bharat Nautanki Company, to the village fair, he is smitten by her beauty and (in his eyes) apparent virtue, during the course of their day-long journey. His consequent conflict with zaalim zamana and zamindar is typical filmi (the denouement is anything but), culminating in his third and final vow: say no to nautanki-walis. Cut to our financial lives; and how often have we similarly lost when appearances and emotions outbid logic and facts?

A tad more on that last-named. Its typical setting, interestingly, involves folks who spend a lifetime mistaking investing to be a spectator sport. They watch the market ceaselessly, debate it tirelessly, and wait for the 'right level' endlessly. Then suddenly one day, armed with an ostensibly hot tip (delivered over sips of 'Glen' perhaps), they rush in to bet the ranch. They may get lucky, but mostly they don't, only to slink back into the corner, cursing their luck, the market, or both.

Be it rooted in any of these mistakes, it is the dud that we carry too long that has the biggest bite (I have never lost as much money as I have selling late). Through pigheadedness, optimism, or sloth, we only invite peril home when the basic principle of stop-loss goes amiss.

These experiences aside, like most walks of life, success in investing must rest on the bedrock of hard-won lessons. "The four most dangerous words in investing are — this time it’s different", as one of the greats so adroitly put it. It remains a game where discipline and math plainly trump creativity and chance. Ignore this, and one is left to rue mare gaye gulfam.

Saturday, September 12, 2015

OROP: No Silver Bullet

Emotions have run amok on One Rank One Pension since the governmental baton passed to the NDA last year. In a fashion, this is actually a compliment to the PM's leadership. After all, expectations are sky-high in light of the ruling party's widely perceived fauji-friendly tilt, made even more striking given the UPA's characteristic somnolence (that election-eve accpetance of OROP was disingenuous, if not downright dishonest).

Imagination need not be stretched to understand why OROP demands find widespread support. Naturally, the nation's heartstrings tug easily for those that guard her borders. Our Forces' stellar record of support in times of calamity or strife comes in handy too, no doubt. To top it all, the institution enjoys a moral high ground, thanks to a reputation unsullied barring an occasional blemish, standing tall amidst a general decline in standards of public life (which plumbed new depths in the UPA years).

So why the delay? The ask itself is clear: to index pensions to benefits for currently serving personnel. In other words, the Government must implement a system of 'defined benefits' (percentage of last salary; with math around years worked), paying uniform pensions to retirees in the same rank. Yet, simple as it may be, the commitment is not sans ramifications. It is a multi-dimensional issue, wherein the crux is money.

For starters, a bitter pill must be swallowed immediately. In short, funds are needed to bring legacy pensions on par with recent retirements. Unfortunately, this hit isn't a mere one-off either. The GoI's pension bill inflates considerably in each pay revision cycle (roughly every decade), going forward. With our economic planning often a precarious balancing act, this has been a dealbreaker hitherto.

Additionally, there is a clear-and-present danger that OROP for the fauj opens a Pandora's box and demands of a similar nature could emerge from other service groups. This includes the police and para-military, but could cross over to non-uniformed personnel too. Rail-karmis appear to be first off the block here (with noises around 'essential lifeline of the country' etc) but others may well follow suit. It is this deluge of politico-legal and economic tangles that worries the government.

The fact is that defined benefit pension programmes always run the risk of unsustainability. Many countries have junked such plans on account of the rising burden on declining (productive) populations to support a growing number of retirees. Granted we aren't there today, but what is to suggest that we never will be?

As conundrums go, this is hardly unsolvable. One need look no further than our Central Government employees who have been on a defined contribution — versus defined benefit — programme for over a decade. In fact, the National Pension System is class-leading, with multiple low-cost, managed-risk product options (especially those that enable qualified equity exposure) and offers an excellent alternative. Migrating to the NPS, however, would be no cakewalk — demanding more of a cultural mindset shift than routine policy tweak.

Parsing through all this requires time: a commodity the Modi Govt may not have. It is an inescapable fact that the UPA's wanton profligacy in the name of social inclusion has pushed India close to the edge of a fiscal precipice. An ill-conceived or reckless OROP implementation must not become another nail in this coffin-in-the-making. That is a prospect our fauji brethren would certainly wish to avoid.

Saturday, April 4, 2015

Investor as a Split Personality

"Be ye of reasonable means, with intent to secure thy future, thou canst afford nought to be in stocks." There, I quote myself (Shakespearean merely for effect)! Truly, the merits of equity investing are beyond doubt. Even more certain is that they are ill-understood. "The real key to making money in stocks is not to get scared out of them" is how Peter Lynch, one of the gurus of the craft, put it admirably.

So why this reticence that, in the face of voluminous data on the benefits of stock-picking, makes even the well-heeled go weak in the knees? Market evidence shows that the issue is not opportunity. Nor is it barriers to entry, lack of visibility, or absence of ambition. And very rarely, contrary to popular belief, is it ability. For today, let us dwell on that last-named, for it is the one I find most difficult to fathom.

In context, ability could be thought of in two ways: the capacity to invest; and skill therein. Not that I choose my company specially, but enough investible surpluses (after emergency cash or fixed income commitments) exist around me. However, they find their way into real estate, almost without exception. I don't discount residential or commercial realty being part of a well-designed financial plan (though my personal experience of returns isn't much to write home about). However, I do take issue with overexposure to this asset class, notably when at the expense of equity.

Nothing brings this better to light (to the mythical point on ability) than the dramatically different approaches folks follow while investing in stocks versus real estate. Most realty shopping, perhaps on account of packet size, is backed by effort, discipline and rules. However, the same individuals behave in a diametrically opposite manner when picking stocks. For instance:
  • Look before you leap?: You buy an apartment in DLF after arduous research, talking to the world and their mother before you commit. Stocks you buy because you got a hot tip with a shot of Jack Daniels last night!
  • Shylock or Great Gatsby?: You bargain down to the last thousand, even hundred, in buying property: negotiating terms, comparing freebies and so on. Stocks you buy in a bull market, when the local barber is dispensing investment advice, with nary a care about valuation!
  • Till Debt do us part?: You negotiate mortgage rates down to the last bp, manage monthly EMIs with an appropriate down payment, and pre-pay whenever you can through the tenure — all to keep debt under control. Stocks you rush headlong into F&O or complex margin positions with little regard for complexity or leverage?
  • Ain't it a team sport, baby?: You are happy to employ and pay for real estate expertise with agents, lawyers, architects, interior designers etc — anything to ensure asset acquisition and management are optimal. Stocks you trash financial planners and avoid research advice, preferring hunches and going solo?
  • Time in market vs timing the market?: You invest in property for the long term, commitments that typically last years; and exit only when goals are met, or as a last resort (if faced with hardship). Stocks you look for upsides in days or weeks, often selling for small profits in a bull market, or a huge loss when bears rule.
I will not even start the argument that disciplined equity investing can bear returns superior to real estate. Or that the property market is far less transparent and much more illiquid. Least of all that smaller packet size and SIP possibilities make equity an easier option to manage risk through market cycles. All of these are true; yet they are just facts. The crux here is behaviour. And hence another homily with a touch of of Will Shak: "Stay ye considered, consistent, and committed; and abiding wealth shall be thine." Amen!

Saturday, January 17, 2015

Torches and Snow Houses

A few weeks ago, after a high-heat session hashing out a data governance/ lineage offering at work, a teammate shared material from Edward Snowden's interview by Prof Lawrence Lessig with me. It made for truly sombre reading. Watching the documentary Citizenfour (which premiered in the same month) yesterday was a grim reminder not merely of the profound moral-legal issues involved, but also of the question of what, if anything, has society learned from the sordid disclosures and consequent debate.

First off, public memory is arguably impaired by information gaps regarding what Snowden actually exposed. Mainstream media mostly reduced the 2013 leaks to personal gossip, political theatre, and character assassination. Its occasional stirring into thriller-like coverage of Snowden's whereabouts or asylum attempts was also as predictable as it was puerile. The terrifying reality of mass citizen surveillance, which was core to the episode, was almost entirely ignored.

The fact remains that l' affaire Snowden deserves examination through multiple lenses. The legal, moral, political, and organizational perspectives are obvious, but the precipitating action was technological. In fact, advances in information technology enabled the Orwellian surveillance just as much as they paved the path for its eventual exposure. Furthermore, this was not an isolated example: infotech advancements have dramatically outpaced our legal and ethical framework in the last few years. No lesson is enough, for we continue to lack the muscle to foresee and mitigate the risks of such revolutions.

Going back to Snowden, it must be acknowledged that there are two fundamental dilemmas (lines of morality and legality blur here) at play. First, at a policy level, is the balancing act between prevention of public harm and invasion of privacy. The vision of Big Brother run amok is not just conspiracy theory fodder. Equally, it is difficult to guarantee civil liberty without the protective cover of public policy, which almost directly implies the enforcement power of a benign regime. As such, a balance is expected to be provided by internal checks, legislative oversight, judicial review, and Fourth Estate scrutiny. This framework assumes no information asymmetry, however, and is increasingly strained by an inherent bias, namely, one that results from a sustained global rise in threat frequency, disruption severity, and adversarial sophistication.

The second ethical conundrum is personal and, one would think, integral to whistleblowing. Many would find no fault in the NSA's use of PRISM under a means-justify-ends logic. For them, loyalty to one's employer and commitment to a hallowed mandate (perhaps even a premonition of vituperative consequences), should have weighed heavily against Snowden. Yet, he acted under an overriding, good-faith obligation to shine a light on these surveillance practices. He evidently recognized his duty as being beholden to the nation at large, not merely to its instruments of state. Defining the 'common good' is a slippery slope, of course, and causes one to pause before becoming overly celebratory of Snowden's stance.

Finally, there is the perspective of consequences. If one were to characterize Snowden's actions as Gandhian civil disobedience (conscience-driven, non-violent, public action), then he undeniably shook the State out of its complacency. From Obama on down, the polity was compelled to attend to policy deficiencies, including reform at the NSA itself. As for Snowden, the price of valuing integrity and a high sense of morality, enormous as it may be, was only waiting to be paid. History will be the eventual arbiter, but this is the seeming cost to keep the spirit of deliberative democracy alive.

Saturday, November 22, 2014

Bigger, Better CIRcle

One of the more fulfilling assignments in my career was in a role managing consumer debt in the Indian banking and financial services industry. I had started in mid-2007, when signals of stress were unmistakable in our portfolio, and were enough to discern similar trends across the sector. They were the direct consequence of indiscriminate lending and immature borrowing practices that had been rampant earlier in the decade. Naturally, the resultant losses led to tighter credit policies and general house-cleaning, with varying degrees of success, across all players.

Though mandarins at FinMin and the RBI downplayed it, this improved hygiene had a major hand in ensuring that our country emerged from the 2008 GFC relatively unscathed. Thus, while capital flows and liquidity hit a reset globally, one of its key facets, namely burgeoning consumer debt and subsequent borrower impact, largely gave India a miss. I argued too, with a ringside view, that the rise of credit bureaus was one of our most far-reaching gains from this period ("CIRcle of Life"). They emerged from the shadows in those days beset by uncertainty and churn, and have remained a vital cog in the industry’s wheel ever since.

The GFC is now but a distant memory (save for some of us). Credit offtake has reached or exceeded pre-crisis levels in most economies globally. Consumer indebtedness is not yet a concern, including in India. Everything points to business-as-usual. Hence, it is vital that we address any gaps in credit management before the lessons of 2008 and its aftermath are entirely forgotten.

The most visible of these is our weak credit reporting framework. Despite having moved marginally away from Indian consumer finance (in a work sense), I still hear enough stories of inaccurate reporting of defaults, especially around old write-offs that have simply been misrecorded. A chunk of these are false positives from identity mix-ups by CIBIL and/or the lender in question. Equally, there are instances of bad data like closed credit card annual fees, collection agency fraud, and disputed charge write-offs etc.

No less worrisome is the imbalance of power that puts the onus for data clean-up entirely on the consumer. Processes to do so in a few banks are reasonably unfriendly too. Most important, though, is the opportunity cost. Almost all cases I know come to light when the consumer applies for fresh credit, often for big life events like a home purchase. In at least a couple of cases (till my advice to the contrary), folks were even willing to honour an incorrect demand in order to get a “clean CIBIL” (motivated by the math of the charge being in the hundreds versus a credit need that is much larger). This is hardly kosher.

It goes without saying that the issue needs a fix at source. Banks must be taken to task for irresponsible reporting, with a threat of monetary compensation to disincentivise laxity. In most mature markets, this is secured by legislation (FCRA. CCA, Privacy Act, etc). If needed, the government must consider similar consumer protection laws in India as well.

This brings us to the issue of coverage, notably the recurring demand to expand consumer behaviour monitoring to telecom and other utility payments. The rise of wallets and payment solutions is blurring the lines here in any case. Yet, this could well be an après moi, le déluge moment. The dimensionality of credit data — volume, churn, nature of disputes, etc — would multiply overnight were this to happen. This makes it incumbent to establish firm ground rules now, with a sharply defined financial services scope.

Crises, as students of economics know, are cyclical by their very nature. Hence, we must act now, so as to be better prepared when the next unforeseen one strikes. Lest history judge us differently.

Friday, February 28, 2014

A House Divided: The Script of AP

Andhra looms large in my Weltanschauung. Notably, I lived in Hyderabad back in 2005-07, making many friends for a lifetime (in one case, hopefully longer) during my sojourn. Scores more over the years have hailed from Telugu-land. Rare among this breed, however, were those who believed possible what shall become a reality later this year (having lived through BR turning BR + JH, I was much more sanguine). Erstwhile AP shall split, and Telangana shall be State #29 of the Union, come June 2!

Much ink has been expended on the why. Of these reasons, none is cited with more vehemence or consistency than historicity. Indeed, the idea harks back to the India of sixteen mahajanapadas in the form of Assaka. Yet, through the Satavahana, Vakataka, Chalukya, Rashtrakuta, and Kakatiya periods, the borderlines remain fluid. Come the Nizams and the 1799 alliance (which gifts Rayalaseema and Coastal Andhra to the British while retaining Telangana within Hyderabad) and the map starts to take shape. Then, of course, comes the Telangana rebellion against the Nizam and the Doras, building the groundswell for Hyderabad's merger with India and culminating in Operation Polo on September 17, 1948.

Enter Potti Sreeramulu. Overcoming Prime Minister Jawaharlal Nehru's long-held opposition, a language-based Andhra state comes into being in October 1953—almost directly in consequence of Amarajeevi's sacrifice—comprising seven Coastal region districts along with four from Rayalaseema (and no Telangana!), with Kurnool as capital. Genie out of the bottle, demands to redraw the map of India on a linguistic-regional basis proliferate across the country, forcing Nehru to appoint a States Re-organisation Commission. This is where it turns into a veritable political thriller.

The SRC, headed by the PM's beloved Fazl Ali (and including the venerable KM Panikkar, HN Kunzru et al), recommends in 1955 the formation of separate Andhra and Hyderabad states, considering economic disparity and relative misalignment in public opinion with respect to unification. Note that this is entirely in line with Nehru's concerns around the “tint of expansionist imperialism” in the Telangana-Andhra merger, with the PM going so far as to compare it to a matrimonial alliance needing “provisions for divorce” if the partners cannot get on well. At the very least, the SRC indicates a five-to-six-year cooling period before considering Vishalandhra. In a strange u-turn, a forever-sceptical PM now overrides his own SRC, not to mention earlier JVP and Dar commissions, to deliver a unified Andhra Pradesh in 1956!

Much has been speculated about Nehru's rather uncharacteristic volte-face—whether driven by blackmail by Andhra elites, the spectre of a communist Telangana, threat of royalist-Muslim revival of Azad Hyderabad dream, or a Soviet-influenced vision of mega-states. Or, perhaps more characteristically, the idealist in him was taken in by the 'Gentlemen’s Agreement' (in the main for political power sharing with a CM/Deputy CM split, a 60:40 Cabinet composition, job protections via Mulki rules, no revenue surplus diversion, and oversight via a Regional Committee as a special legislative body). Regardless, Nehru wilted, and in so doing, virtually wrote the exact script of the subsequent movement and eventual division.

Of course, in the typical arc of history, it took a few years for the union to entirely unravel. The Agreement itself was violated almost at once: Deputy CM post frequently left vacant or abolished; job quotas bypassed; Telangana surplus diverted to fund major irrigation projects in coastal Andhra etc. The ground continued to simmer: over 350 students lost their lives in 1969's First Telangana Movement; TPS won 10 of 14 seats in 1971 only to be co-opted into the Congress ranks in true Indira style; the 1973 Jai Andhra counter-movement that led to abolition of Mulki protection; and NTR's 1985 Government Order 610 to repatriate non-local appointments etc. Much was promised, little delivered, and for an illusory period of peace, it appeared that the demand for separate Telangana had petered out.

Cut to 2000. Chandrababu Naidu was at the peak of his political prowess. Having secured a crushing victory to enter his second term in 1999 and deeply allied with the ruling NDA at the center, he was internationally celebrated as a tech-savvy "CEO" Chief Minister. The Congress, led by the feisty Y.S. Rajasekhara Reddy, was entirely unable to breach Naidu’s development-focused narrative. Against this backdrop, a certain K. Chandrashekar Rao, then Deputy Speaker of the Assembly and disgruntled at being denied a cabinet post, sensed a massive blind spot in Naidu's Vision-2020 plan: the severe agrarian distress and deep feelings of neglect in the Telangana region. He walked out of the TDP and formed the Telangana Rashtra Samithi. There has been no looking back since, and in just over a decade, the statehood demand has fructified.

Naturally, as clear catalysts, KCR-TRS are being feted for their contribution toward the realization of the Telangana dream. What is less obvious, and arguably more pivotal, has been the Congress's strategic role. India's GOP may or may not have orchestrated his exit from the TDP, but they intentionally elevated KCR to legitimacy, forming an alliance in 2004, and including a promise for the reorganisation of states in their common manifesto. With this, they fractured TDP’s Telangana vote bank, sending Naidu into political wilderness for the last decade. What's more, when in power, the Congress carefully sustained the Telangana issue on a slow burner to keep the TDP perpetually at loggerheads internally, utilizing this friction to encourage a steady stream of desertions that have severely hollowed out Naidu’s regional leadership. For now, at least in Telangana, it appears bye-bye TDP.

Where does that leave the Congress? The bifurcation has obviously been inspired by massive anti-incumbency both nationally and regionally. Fact is that much of their woes are the outcome of a sense of entitlement and being too smart for their own good. This move appears no different. Thus, in the Congress high command's calculation, the division finishes Naidu off forever, checkmates a rising Jagan Mohan Reddy, and hopefully gains KCR as a long-term ally (for an eventual merger). I would be surprised by either outcome. Naidu will now double down on residual Andhra, and it is likely to be a two-way fight between him and Jagan for the foreseeable future. And KCR is unlikely to share power when he can reign absolutely. Eventually, the plan backfires on the Congress itself.

In summary, yes, one must justifiably expect celebrations galore in Telangana and KCR-mahal come June 2. And yet again, the fortunes of the country and its states have been held hostage to the Congress's partisan machinations and short-termist outlook. Chacha Nehru then, Sonia Gandhi now. Here's to hoping that this script changes nationally soon...

Saturday, December 7, 2013

Inflation Bonds: Flatter to Deceive

Months in the making, the Reserve Bank of India has finally launched consumer inflation-linked bonds. Going under the moniker of 'Inflation Indexed National Saving Securities - Cumulative' (a mouthful, if ever), these bonds have been the subject of much anticipation. Alas, the fine print finds them coming up woefully short.

The biggest stumbling block lies in the product design and its consequent tax treatment. In most countries with such bonds, the formulation goes broadly thus: pay the investor a nominal interest rate on Face Value while letting the FV float in line with the linked inflation index. It is a simple structure that pivots on gains from the inflation-driven FV increases, which are treated as capital gains in the eyes of the taxman.

To take a line from the fabled Maggi sauce commercial, the IINSS is different. It has been structured as a bond paying interest, the rate of which is pegged to the Consumer Price Index. By implication, the entire interest earned qualifies as income, to be taxed at the marginal rate. To be fair, if only the inflation-compensating portion had been subject to capital gains, it could have benefited from indexation. Clearly, the powers-that-be at FinMin and RBI thought otherwise.

Several sticky points other than taxation come up too. The typical desi fixed-income investor, mostly given to income, may not line up in droves for the compulsorily cumulative IINSS. To boot, the lock-in period itself is rather long at 10 years. Such an extended tenor may only accentuate inflation and interest rate uncertainties that scare away investors. Early exit is possible, but only after 3 years, and with a penalty. Finally, there is an unfathomable ₹5-lakh investment cap. All told, I don't see investors being inexorably drawn to IINSS (versus, say, infrastructure bonds with a friendlier format and better post-tax returns).

Be that as it may, one could still have rooted for distribution success. We know only too well that, in the Indian context, financial products need to be actively sold (occasionally with little correlation to merit, ULIPs being a case in point). I wouldn't hold my breath for this though — these bonds are to be sold only via banks, and their low commission structure is unlikely to be incentive enough for them.

Perhaps I am being overly cynical. Maybe IINSS is a step forward, but it could have been so much more. Certainly, days into his tenure, our rockstar RBI Governor had himself talked a big game as to its market-making potential. At least on that count, if not more, this is an ahem.

Wednesday, September 18, 2013

Raja Beta Banega Neta!

No, this is not a rant against dynastic politics. Only an ostrich, or your average Congressi blessed with archetypal thick skin, would have missed its disastrous limitations. The fact is that present-day India pretty much makes the case for the misfortunes that result when power is thrust into the hands of those whose credentials begin and end with parentage. Thankfully, although General Elections are a year away, the writing seems to be on the wall for sundry dynasts and their brazen sense of entitlement.

My pitch today is almost the opposite. For our polity to step up, more of our bright young things ought to be encouraged to don the political mantle. This, however, is a long walk from current reality. Quiz any Indian schoolgoing child about career ambitions, and it is difficult to transcend the familiar doctor-engineer-civil servant territory. Yes, an MBA has gained some coinage as a livelihood option in the last decade or so; and there will be the occasional interest in bijness (often running in the family); but you can bet the barn against finding anything more than the odd aspirant for public life.

Yet, at many levels, politics is at the top of the pyramid. Take a country like ours, and it is easy to argue that professionals of all ilks actually have to defer to the neta class more often than any other. Apart from an undeniable power to do good, it is not as if there is no economic upside either (and that is without perforce descending, UPA style, into my-kursi-is-my-ATM moral degeneracy). Despite this, politics as a career somehow continues to be considered lowly and fit only for 'the scoundrel'.

Of course, this is in stark contrast to democracies housed in the more developed nations of the West. Politics is right up there with medicine and law as career choices for the nation's bright minds. Sure, there are jokes on the neta as much as, say, on a banker, lawyer, movie star, or any other. However, there is no sustained scorn or uniform vilification of the kind we see locally. Thus, talent does enter, and often from the unlikeliest of quarters. In the US, for instance, from a Lincoln to an Obama, politics has accorded means for the proverbial outsider to rise to the very top by dint of merit (and some timing; but such is true in all walks of life). Must we be so very different?

The most commonly profferred hypothesis for this dichotomy seems to be the vintage of those democracies. Somehow, barriers to entry are lowered as the democratic model matures over time; and (eventually) the cesspool of politics becomes less murky. However, in this respect, our record of the last few years has been rather uninspiring. One does not have to look further than the principles that were IAC, to the compromise that is Kejriwal, in order to understand this gap.

To that extent, the AAP's apparent descent from the promise of breathtaking change may have ramifications beyond the obvious. Will similar future efforts be equally torn asunder by the fallibility of a few? Were they felled in trying to do too much too soon; and is that all we must guard against? Or must we be willing to tread the longer path by galvanising from within, centred around the two national parties? With the Congress seemingly intent on self-destruction, at least part of the answer is clear. The time is now.

Saturday, May 25, 2013

Karnataka 2013: What Next?

It may not have made a monumental difference to the result, but I did not enjoy being forced to watch the recent state elections in Karnataka entirely from the sidelines. I had little choice though. Our move to India's IT capital was far too recent for us to have a vote, and I got a taste of what it feels like to be among the disenfranchised.

As it turned out, the contest was even more one-sided than expected. The incumbent BJP dispensation, battling misgovernance and corruption charges as much as a widely perceived disconnect with the electorate, was always facing an uphill task. Perhaps it could have weathered the storm better; a three-way split in its vote left it with no chance. A beleaguered Congress, stung nationally by a second summer of scandal (and an intervening winter of discontent), had some reason to cheer with a clear mandate in the state.

I don't know if many in the BJP were truly surprised by the result. Sure, India's principal opposition party would have been happier had it not been pipped to #2 by an HDK-led JD-S. Equally, they rightly worry about the ground ceded, not only to a resurgent Congress but even to the JD-S, in the usually more discerning urban vote. Yet, the saffron dream had gone sour in their fabled 'Gateway to the South' a lot earlier. Naturally, their spokespersons tried their feisty best to minimise airtime on Karnataka results, and focus debate in national media on the scam-battered Centre. (That a bumbling UPA-2 continues to provide grist to these windmills has more to it than meets the eye, perhaps; but that is another story.)

Does the Congress have enough to rejoice in its Vidhan Soudha victory? I would call it a mixed bag. Faced with a possible rout in Andhra and expected reverses in TN, the UPA is desperately looking at states to make up its losses. As things stand, it comes up woefully short. That, incidentally is the reason behind the unashamed wooing of a Nitish in Bihar despite a 'committed' Laloo ji who remains perpetually Barkis-is-willin'. One hears of a personal subtext too in Shri Chidambaram's new-found bonhomie with the Bihar CM; a fact that the Congress High Command may be unwilling to admit publicly. At any rate, gains in Karnataka help, but must be seen in the context of its relatively small 28-MP size in Lok Sabha arithmetic.

How does that leave the BJP (in itself a complicated call; it seems too much to prognosticate on the NDA overall) in the 2014 battle stakes? It is clear that they have their work cut out. For starters, this fixation with prime ministerial ambition is almost reminiscent of the erstwhile Janata Party — counting chickens long before the electoral eggs have hatched.

At one level, the BJP's predicament is understandable. It is difficult to see the party cross the 200 mark minus Narendra Modi at the helm (so the cadre believes). Truly, no figure polarises the debate in India today more than he. That so few folks in our polity tread the middle ground when it comes to NaMo must count as a significant (and hilariously unintended) achievement of post-2002 Congress strategy. Of course, a wide section of the media sympathetic either directly to it or to the 'secular' cause, has willingly played ball. The last word on this remains to be said though; I am sure this will occupy centre-stage over the next few months.

Coming back to Karnataka, it is do-or-die for the new regime to consolidate the vote ahead of LS elections next year. The fact is that 2014 remains a tough call. Can the UPA get its governance mechanism back together enough to perform an unlikely hat-trick? Will the BJP or the NDA get its house in order, politically and electorally, to be third time lucky? Or will an unfortunate nation be subject to a post-poll Third Front-led ragtag coalition as many pundits currently postulate? Let's keep watching.

Sunday, January 27, 2013

Corruption: Obelix and the Magic Potion

There is much in R-Day celebrations to tug at the heartstrings. Its crowning moment is the parade: rich in nationalistic appeal, celebration of valour, and pride in the achievements of a republic but a few score years old, and a culture thousands of years young.

In addition to patriotic fervour, R-Day is also fitting occasion for solemn contemplation. In thus ruminating over the state of the nation, one can't help but rue what ails its fortunes. Today, the most prominent such malaise is corruption. The affliction is hardly new, but has become so endemic at the top, so brazen in its extent, that it is morale-sapping and threatens the very fabric of our motherland.

This is not scare-mongering. Take black money, which has a deeply symbiotic relationship with corruption. A few years ago, the Swiss Banking Association reported that banks in Switzerland had around $1.5 trillion in deposits from Indian nationals. Compare this illicit stash to the size of our formal economy, especially one that is strapped for investment to spur growth, and you wonder at the possibilities.

Of course corruption is hardly the preserve of those with access to the Confoederatio Helvetica (or the Bahamas, Caymans, BVI, or other similar global money-laundering havens). Enough exists around us, in the form of you friendly neighbourhood policeman, sarkari babu, driving licence agent, and so on. However, when the Central Govt gets as mired in it as UPA-2 has, then the nation starts to lose its moral compass. After all, what deterrence is to be expected when not a day goes by without headlines screaming obscene amounts and prominent names neck deep in graft. It appears that almost no part of Dilli sarkar is left untouched.

With the stench in Raisina Hill reaching unimaginable proportions, one looks for answers. The mind goes back to a UPA-2 corruption headline of a different kind. A year or so ago, then CEA Kaushik Basu, had offered a striking formulation (endorsed amongst others, interestingly, by INFY co-founder Narayana Murthy). Shri Basu advocated legalising bribe-giving so as to encourage reporting, thereby improving incidence capture.

As solutions go, perhaps we need something similarly drastic to shake us off our slumber. This idea though, however innovative, is a slippery slope. It can easily degenerate from honest reporting, to wilful entrapment (lessons from news channel 'sting operations' that have bred their own format of corruption). Stretch the point and one could start offering bribes by default. If caught, you claim immunity as a public-spirited citizen merely unearthing the corrupt. Rinse, repeat, till a pliable babu is found. Voilà.

My other bone with such legalisation is how it shifts the onus of catching the corrupt to whistleblowers, thereby diluting the ownership of the relevant authorities. Like it or not, it is the government's job to identify and nab the dishonest. Outsourcing it to sundry 'citizen journalists' of potentially dubious intent and zero oversight, sounds ominous to say the least.

Much as the heart would wish otherwise, here is no magical solution. Very little in the proclivities of the current government thus far suggest that a different, deep-rooted attempt to counter corruoption is imminent. It may take a regime change for the requisite political will to surface, and perhaps thats what one must pin hopes on, this 26 January.

Saturday, January 19, 2013

Shape-shifting Monster

Being a toddler-parent means toys of assorted shapes and sizes are an inescapable part of existence. I have one of either gender, and would like to believe that neither is overly pampered. Yet, there are moments when I am at wit's end as to how so many trinkets make their way into the house — my childhood benchmarks clearly don't apply, outnumbered 1:16 or so. Equally, I cannot help but marvel at the ingenuity and imagination that power many of these. Colour-changing cars and shape-shifting beasts fall into this category.

It was such an object of fantasy that offered the perfect metaphor during a fevered discussion the other day. The conversation went somewhat like this: my friend, part of the domestic insurance industry, was trying to argue for more institutional indulgence — government, courts, banks etc — to support the fledgling sector. At some point in the evening, the conversation turned to ULIPs, one of my pet peeves, thereby prompting the monster reference. I don't know how the tête-à-tête ended (some Dalmore was involved!), but perhaps a few notes from it bear repetition.

In a nutshell, that India is under-insured is beyond doubt, but there is more to the picture. We ought to know that, second only to bank deposits, insurance is the most popular financial product in town. It has a legacy that goes back decades: LIC itself in its present avatar is over half a century old, National started in 1906, and there were companies in this business even in the 1800s. So the industry is no babe in the woods.

Cut to the present, and data shows 20% of household savings going into insurance — while all of equity inflows, including mutual funds, hover around a paltry 5%. Likewise, consider AUM: insurance is 10 times the size of equity MF, with ULIPs alone being more than double at last count. Insurance, therefore, can hardly claim not to have had enough of show-me-the-money.

This brings us back to the point on ULIPs. Just the last decade saw the industry peddle them aggressively to a gullible public, backed by disingenuous advertising and aggressive distributor incentives. The opaque nature of ULIP performance reporting and high exit costs were common knowledge — perhaps even deliberate. Certainly they did not speak to any genuine effort to serve the Great Unwashed.

The IRDA did — belatedly; and perhaps only spurred on by the SEBI turf war — attempt to rein in the monster. Fee structures and rudimentary visibility parameters were mandated. Yet, even after 2010, the messaging was around ‘new, improved’ plans accompanied by significant switching costs. Shape-shifting right there.

In truth, glancing beyond ULIPs at traditional plans too shows up the industry as pretty lazy. Despite lofty goals of serving under-insured India etc, these products (term cover is a particularly glaring need) are sold with terms mired in complicated legalese, unfriendly surrenders and claims, and overly high sales commissions. Once again, the IRDA has attempted a few fixes, but these are arguably half-hearted or too late.

Summarising, it is not difficult to posit that the insurance industry has itself to blame for much of its ills. If only the Indian investor was a tad more discerning (and not perplexingly averse to equity), the heat on insurers could, in fact, have been worse. For now though, the monster lives to see another day.

Sunday, September 16, 2012

The Son of Cash

Cash is King. Or, in the context of our Government's benefits structure, "cash is leaking". This has long been understood: I vividly recall dissecting the ills of India's subsidy framework as part of the Economics curriculum in college in the 1990s; it was a well-worn fact even then. Commentary focused on flaws in the mechanism and the mushrooming of vested interests that were bleeding the system dry. Indeed, the latter had grown so well entrenched, and critical voices so muted, that the infirmities had become part of the accepted, expected ways of working of mai-baap sarkar.

Little wonder then that, far from being shown the door, the subsidy framework has continued to flourish to this day. Consider the math: the GOI spends an estimated ₹3.65 for every rupee of benefit to reach its intended recipient. The resultant fiscal burden across the 3Fs — food, fuel and fertilizer — is clearly already unsustainable. Yet, there is every indication that the Government, reeling under the influence of NAC-chhaap Welfare State model, will escalate these economic costs further.

Before turning our attention to the future, it may be instructive to examine the design and delivery challenges that plague our distribution architecture today. First, the design itself is inherently faulty. For instance, food subsidies are funneled through the PDS, pivoted on the identification of the Below-Poverty-Line population. This tagging has been a corruption magnet. An inability to pay bribes for BPL ration cards means large swathes of genuine beneficiaries remain denied benefits, even as the state's subsidy bill continues to burgeon.

Next, lets talk about the delivery architecture. Staying with the food example, there is little control over the diversion of subsidised grain meant for BPL households to the open market by avaricious ration shop owners profiting off the price differential. Likewise, practices like adulteration, ghost BPL cards, and deliberate stockpiling lead to rampant leakages. Upstream too, we have distribution losses in acquisition, storage, and transport due to inadequate infrastructure and systemic corruption. Finally, the state is drained by an ever-increasing administrative overhead merely to keep this unwieldy apparatus afloat.

Now, the mammaries of our welfare state are expected to grow further (the GOI seems serious about the Food Security Bill). This makes the case to overhaul the entire benefit distribution process even more compelling. Simply put, the need of the hour is to replace the corrupt and convoluted PDS with direct cash transfers to the target population. Life changes dramatically at the consumption end, with a promise to empower the needy, bid goodbye to the ration-wallah's corruption and coercive power, and incentivise quality supply. Likewise, the state's unproductive subsidy burden shrinks by dismantling the PDS and leveraging technology to plan, monitor and reduce sourcing and storage expenses.

One cannot, of course, expect it to be a walk in the park. The most critical element is target identification. UID is trying to solve this tagging problem multi-dimensionally across technology, process, controls, and change management. Helmed by Nandan Nilekani since last year, one can expect a good outcome here. Next, the farmer lobby must be managed: anything seen as encroaching on the MSP and GOI's grain offtake is a political hot potato. It remains to be seen how much political will UPA-2 possesses to tackle this. At another level, the availability of cash in a lump sum has been flagged as a potential hazard. Fears are that menfolk would drink the 'windfall' away. Not for this reason alone, but as a broader social empowerment and financial inclusion measure, the GOI would do well to channel Lakshmi directly to the Lakshmi instead.

Cash, in any event, is likely to make a return, if only in a new avatar. Even if not perfect — and we do not yet know all the questions, let alone the answers — it cannot fail to be an improvement on the mess we have today. Much of this will play out at the level of policy, even more in execution; we have seen the UPA botch both on numerous occasions. Yet, given the high stakes here, let us remain hopeful.

Tuesday, June 5, 2012

2B Or Nought 2B

A degree in Economics and early years trading commodities mean that the markets hold me in an enduring thrall. I mostly restrict my passion to delivery trades, though; F&O action is rare. Equally, those with whom I talk equities classify more as investors than traders. This means margin speculation resides around the fringes of my stock-picking existence.

I was, however, greatly intrigued by JP Morgan Chase's massive derivative trading losses last quarter. For one, the initially reported figure was an obscene $2B (frankly, my imagination runs short when faced with such astronomical sums, for reasons not entirely unrelated to my humble circumstances)! Rumours abound, too, that the actual hole to be at least twice that ungodly number (phew).

Of course, financial markets are replete with instances of mind-numbing losses. I was in college when Nick "I'm Sorry" Leeson brought down Barings. He was neither the first nor last in a long line of market operators whose avarice or ambition — though rarely outright ineptitude — delivered similar rude shocks. Indeed, the trail of destruction in their wake invariably claimed more than a fair share of humble retail investors alongside the institutions themselves.

Naturally, it raises the question of how organizations of considerable repute come to such massive grief. These failures are difficult to reconcile with the high calibre of internal talent on display (for instance, Jamie Dimon himself has long been a star in an industry under intense public scrutiny). Equally, we ought to understand the process or technical inadequacies that led to a failure to detect and correct the exposure in time.

In the current instance, we can rule out derivatives themselves as the primary culprit. Targeting the financial instrument is like blaming steel for knife-wounds in street crime. That out of the way, the picture is no less turbid, with mismanaged hedges at JPMC's London Treasury at its core. The sequence unfolded as follows:

JPMC, like any commercial bank holding vast client deposits, must balance returns (by investing in long-term, high-quality bonds) against liquidity (through the overnight money market, yielding near zero in a QE regime). Excessive liquidity lowers the net interest margin; holding too little invites cash shortfalls. Moreover, bond portfolios need protection, since prices vary inversely with interest rates. When rates rise, the bank faces a double whammy: its bond portfolio suffers capital losses while funding costs escalate due to higher deposit payouts. Banks routinely hedge this exposure, including through Credit Default Swaps.

By all accounts, JPMC's Treasury in London was running huge positions. This forced them to trade aggressively in a relatively small, illiquid CDS market as a hedge strategy. This created price distortions that drew hedge funds and institutional traders seeking arbitrage opportunities. Continued pressure from the 'London Whale', however, meant that the pricing skews grew larger — spread valuations swung an unprecedented 50% in three months. Stresses on CDS market players mounted: the game was becoming relentlessly capital-intensive. They were squeezed, but could do little in an unregulated market with the Whale running amok.

If this were bad, it soon turned worse. Perhaps realizing the limitations of the original CDS hedge strategy, Whale & Co devised new plans. Defying all logic, they pivoted into related but riskier instruments, escalating their exposure to volatility. Hedge funds started to sense the desperation and waited for the position to crack.

Meanwhile, this had rung alarm bells within JPMC too. Reinforcements from the core i-banking unit were sent to the London Treasury. It did not take them long to figure out how untenable and inherently risky JPMC's position was. They wanted out, presenting the perfect revenge opportunity to hedge funds and CDS market punters. To liquidate the trades, these players wanted their price. $2B, or more, was this pound of flesh.

Perhaps I am guilty of over-simplification (for more gory details, refer to an excellent article on the Whale at Seeking Alpha). Regardless, the episode yields several striking conclusions. The most critical is the imperative for oversight across bespoke, illiquid derivatives markets. Another lesson is the limitations of relying on rigid, narrowly defined quantitative models to mitigate risk.

In an 'Occupy Wall St' backdrop, it is worth noting that this was not a case of i-banking excesses that have fired up public imagination and invited lawmaker attention lately. In fact, the scene of crime at Chase commercial bank Treasury in London is far removed from JP Morgan i-bank. Of course, the starring role for CDSs is a familiar echo of the GFC, but other than an 'ought-to-regulate', that is where the parallel ends.

Unless you own JPMC stock, therefore, the pall of gloom and hyper-suspicion is somewhat ill-founded. A sigh of relief may not be out of line either. Until, of course, the next quake strikes.
(bankruptcy-protection instruments)

Sunday, February 26, 2012

NCTC - Intel Inside

By all accounts, Shri P Chidambaram, our Home Minister, does not take kindly to fools. Nor, can the stakes be higher than on terror, with multiple strikes over the last few years highlighting our extraordinarily vulnerable national security status. Yet, when GOI shared a "50 Most Wanted" dossier with Pakistan a few months ago, it was a disgrace (two on the list were in India). In that very fortnight, CBI's pursuit of Kim Davy — of Purulia arms drop notoriety — in Denmark ended with egg on its face owing to an "expired" extradition notice.

Those 'bureaucratic gaffes' were, of course, only the latest in a long history of ignominy (Kargil, 26/11, David Headley, and the Red Corridor being but a few of its more sordid recent chapters). Questions were asked of Indian intelligence, or the lack of it. In response we were told to think beyond the CBI, NIA, IB, and RAW, all under our venerable Home Minister's charge, to NATGRID, his new pet project. NATGRID would allow 11 security agencies access to 21 linked databases covering financial, travel, immigration, asset ownership, telephone, and internet usage information for individuals and entities in the country.

Arguments had been made against a NATGRID-style response. There were concerns around diffusing focus away from building good ol' Hum-Int with a grandiose but potentially ineffective programme. For instance, it may not raise any alert for an American citizen with Caucasian looks and no cellphone or financial records in his name (save, perhaps, every itinerary with return via Pakistan — potentially indicative of an ISI-LeT nexus but equally high volume, Type I error risk) thereby missing a Headley entirely. Furthermore, the potential for an assault on personal liberty and data privacy with the Government's power to obtain sensitive information without warrant or consent, bred its own share of D Thomases.

Resolution to these concerns, naturally, lay in a fully thought-through approach. Last week's order notifying the creation of NCTC, alas, displays none of this sure-footedness. In typical PC fashion, it managed to raise hackles all over instead. Opposition-ruled states are up in arms, for one, when Center-State cooperation is vital for seamless execution. Likewise, we have conflicts within GOI's own framework with RAW (external intel), NTRO (collection & analysis), and NIA (investigation & prosecution) — all with mandates broader than counter-terrorism. Nesting NCTC under the IB, a body sans parliamentary sanction or oversight, too reeks of shoddy legal formulation, if not downright empire-building on part of the Home Min.

PC apologists may point out that feedback has gone into the current notification vis-à-vis his original plan (the IB centenary endowment lecture, Dec 2009). That vision subsumed the NIA, NTRO, NCRB, and NSG under the NCTC, along with counter-terror operations of RAW and the CBI. Yet, even if watered-down, NCTC remains deeply flawed, most notably in its lack of separation between analytical and operative powers. Add lack of due governance to that, and we can put the famed US military-industrial complex to shame in its reach. I hope sense prevails soon, with a better design that helps our counter-terror effort acquire effective teeth. No terrorism-frontline State (for we are unmistakably one) worth its salt should settle for any less.

Friday, July 29, 2011

Bihar: A New State of Mind

I have been meaning to stay a lot more connected to my hometown. Despite intentions though, physical visits have been few and far between. Thus, it was a direct call to action when the W alerted me to my expected housebound status for the next few weeks. I planned a trip in a jiffy, managing to cover Patna, Muzaffarpur, and our ancestral village — all in the space of one weekend.

Hurried as it was, the trip's mood was ponderous, and overall much upbeat. In fact, I came away with my intent to travel Patna-wards markedly stronger. This reinforcement, admittedly, is partly on emotional counts. Yet, Bihar's near-unique socioeconomic theatre too contributes to my renewed resolve.

For the record, I have long believed my beloved native state (often including Jharkhand in the bargain) to be a microcosm of India at large. Indeed, its fertile Gangetic plains or mineral-rich badlands present, firsthand, a quintessential paradox: penury amidst plenty. Of late, in Bihar, like in India, nature's bounty has fought and lost a daily battle with the grime and toil of life in poverty. Equally (and perhaps inevitably), beyond the obvious despondency and squalor, a subterranean strife constantly tested the overt social détente, the undercurrents often erupting in murderous class wars.

Talk history, and the microcosm argument is actually an understatement. Bihar's leadership — in thought or worldly terms — is sans parallel. Yet, some years ago, an otherwise discerning (non-Bihari) friend had scoffed at my assertion that Patna (Patliputra) was the capital of 'India' longer than any city but Delhi. For Doubting Thomases such as he, try googling the following to get a sense of what I say: the Buddha, Mahavir, or Guru Gonind Singh; Balmiki, Vishwamitra, Aryabhatt, Panini, Gargi, Maitreyi, Vatsyayan, Banabhatt, or Chanakya; and certainly the Guptas, Mauryas, Ashoka, or Sher Shah (the list is by no means exhaustive.)

I believe too that there was more to my aforementioned friend's mirth. The unfortunate, but undeniable, truth was that Bihar had simply lost the plot over the years. Always in the news for the wrong reasons, it was tough to associate glory or excellence with the state. Appreciate too that through the 90s and this millennium's first few years, the Indian nation was burying its Nehruvian policy overhang in favour of globalisation and the free market. As sarkari sloth made way for private enterprise, the air was rich with the promise of prosperity, not hollow socialist shibboleths. In this period, the land of Nalanda and the Lichchhavi republic — which gave India its first coinage, trade arteries, and Arthashastra — was going the other way. As if under a sorcerer's spell, Bihar turned into a family's fiefdom, discovering new heights of lawlessness, negative growth rates, and wanton polarisation of an already fractious society.

At another level, with liberalisation, cable TV came to town. Likely looking for comic appeal, the media lapped up Shri Laloo Prasad and his country bumpkin caricature. Bihar's strongman readily obliged, with bytes or antics more befitting a Bollywood comic than otherwise. Arguably, this was deliberate: playing up his rustic roots for lowest common denominator appeal. Regardless, he made a virtue of the ludicrous. With a clear development-is-anathema stance (discordant with the rest of India) and longevity in power, this perpetuated a rather sorry image of Biharis: buffoons who wouldn't know (or didn't deserve) any better.

For most of this period, I was still deeply rooted in Bihar, yet spent significant time outside the state. At its worst, I felt my compatriots had given up hope; that the pithy but patently unfair caricature had grown larger than life. Bihar had gone from being a state to becoming a state of mind.

I hoped, too, that some day, regardless of the dispensation's colour, my home state's fortunes would rest with a believer in a progressive political agenda. Bihar would then feel the difference, reward the change, and break the defeatist psyche. On this trip, driving on a new rural road as an alternative route to my village, I felt my idea's time had come (much better than merely talking of Nitish Kumar and Elections 2010; equally hoping that having reaped benefits, the NDA regime will push for more in Round 2). Its zindagi mili hai dobara!

Sunday, July 17, 2011

Cinema Cinema

I love movies. At the risk of jeopardising domestic bliss, I can add that I haven’t seen enough lately. Lest I be misunderstood — IPTV is a godsend — but in a weekend I'm perfectly capable of watching two to four, maybe more — a prospect at which the W isn't exactly chuffed. Again, it is not as if good cinema is my sole preserve in the household. The difference lies entirely in my preference for remote control-driven (some may aver it’s the couch) variety versus the more social cinematic experience in a theatre.

Interestingly, I grew up to almost no moviegoing, nor much interest in films. Through school, cinema was regulated like fresh air on a chilly winter night — kept out if possible, or heavily rationed at least. I reckon this was mostly in keeping with a general bias towards discipline in our upbringing (to which I owe a number of my latter-day milestones). Economics may have played a part too (thrift is good); concern over my grades most likely did. Thus, I averaged less than two films a year in the 'hall' (as we called them) in this period. These too were mostly thanks to a friend who consistently planned one as his birthday outing; and the rare parentally endorsed gems (Dweep Ka Rahasya was one such — I loved it).

Of course, I caught a few on TV (courtesy neighbours, till we acquired our own in '84) but this too was not without a twist. Given that staying out late was not an option, several of these films were incomplete, missing the 'climax'! I vividly remember the festive air in our middle-class community too, when Doordarshan decided to telecast movies on Thursday evenings, thus doubling frequency to a joyous twice weekly (the first such offering was Vachan, and I believe I have good reason to forget all about it, save the name). In short, the uninspired offerings and fragmented viewership did little to stoke my cinegoer buds — though an ill-understood Achanak and half-seen Ittefaq did plant seeds of love for the crime-mystery-thriller genre that I have been unable to shake off since.

Later, the VCR came to town. It brought with it a rudimentary element of choice. Grainy picture quality (not that DD was much different) was a small price to pay for the ability to watch what you wanted, when you wanted, and how you wanted. Naturally, video libraries, parlours etc mushroomed all over town. At home, the Pater made decisions of his own though (likely inspired by my not-always-inspiring scholastic record) and this contraption only entered the Jha household once the son had been packed off to college!

Most of my movie-on-video, thus, was with friends. I emerged much enlightened from these soirees (I can hear your wicked smile, reader!) not the least of which was exposure to cinema beyond mainstream Hindi (a Khamosh or Prahar amidst The Godfather and The Medusa Touch). Not entirely unrelated, this included QSQT, a milestone in the sense that I saw it and understood it (ah those vague, innocent, vicarious pleasures)!

Come college. My means stayed modest but the joys of freedom more than made up for it, strained only by early stirrings of a sense of responsibility. Films played a part in this general process of self-discovery as always — occasionally as input, but often as a companion in the journey. The plot stayed true at B-School too, save for a mild sharpening of the pen.

The intervening years have taught me how much I delight in having (almost one too) many balls in the air. As in life, so in movies — or literature and friendships — eclecticism reigns supreme. Yet, I can watch almost any film once, and a few many times, to this day. And hence, the sovereign power of the remote control.

Saturday, July 2, 2011

Asleep at the Wheel

One of the most telling descriptions of the bureaucracy in the 1970s went thus: "if you can, don't move; if you must, move slowly; if pushed, move in circles; if cornered, appoint a committee!" One can say this most certainly of our economic policy. Despite years of evidence, governments in India hung on to an anachronistic Nehruvian model, mouthing hollow garibi-hatao type slogans, till being forced off our backs two decades ago. Few know this better than our venerable PM. As a key apparatchik in the erstwhile growth-sapping regime — something Congress propagandists wantonly gloss over — Dr Manmohan Singh wilfully fashioned policies that eventually had us staring down the barrel of a gun in 1991.

Should it, therefore, surprise us that, when the bottom falls off the Rupee, or GDP growth plummets to its lowest in almost a decade as it has today, the GOI is a deer caught in the headlights? Dr Singh would have us believe this is all thanks to the global economic slowdown or Eurozone woes (external locus of control; not leadership). Notably he calls out the RBI's tight-fisted monetary stance even though structural problems need a fiscal and not monetary response. Indeed, the central bank has little elbow room in the face of oil price risks or the current account gap (widest since 1980). I would argue, on the other hand, that the RBI is doing its damnedest to keep inflation in check.

In context, it is important to peel the onion (!) on our inflation problem. Food is a structural shortage story. Agricultural growth at 4-5% is simply inadequate to meet the demands of a burgeoning 1.2B population with real incomes rising 5%. Next, MNREGA pushes up rural wages (10% YOY in Jan 2010, accelerated to 14% now) to unprecedented levels as GOI continues to dole out money with low to no link to productive use. Then the government raises MSP adding further fuel to the fire. Consequent rise in rural wages soon translates to urban wage inflation — via construction and informal workers.

This cycle of food and wage inflation combining to increase input costs for goods has turned our inflation into a structural one. It can, of course, be tackled. The path lies through supply chain efficiency and productivity. These, however, need a strong policy response, not today's status-quoist bias that is happier with incremental versus exponential change. Likewise, the GOI cannot print its way out of the quagmire, continuing to push populist policies in the run up to elections in 2014. With fiscal deficit spiralling out of control, there is only so much the RBI can do. If he is half the economic genius he is touted to be, then Dr Manmohan Singh knows this. The real question is will he act — will he bell the cat?