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 by 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 heart-strings tug easily for those that guard her borders. Our Forces' stellar record of aid 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 occasional blemish, standing tall amidst a general decline in standards of public life (that plumbed new depths in 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 implement a system of 'defined benefits' (percentage of last salary; with math around years worked), paying uniform pension to retirees in the same rank. Yet, be simple as it may, the commitment is not sans ramification. It is a multi-dimensional issue, wherein the crux is money.

For starters, a bitter pill must be swallowed immediately. In other words, funds are needed to bring pensions of old retired on par with new. Unfortunately, this hit isn't merely one-time, but inflates GOI's pension bill considerably in each pay revision cycle (roughly every decade) going forward. With our economic planning often a precarious balanacing act, this has been a deal-breaker hitherto.

Additonally, there is 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 Police and para-military, but could cross over to non-uniformed personnel too. Railwaymen appear to be first off the mark here (we hear 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.

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?

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. Switch to NPS, however, shall be no cakewalk and would entail a mindset shift than mere policy change.

Parsing through all these requires time: a commodity the Modi Govt may not have. It remains true 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 brethern would certainly wish to avoid.

Investor as a Split Personality

"Be ye of reasonable means, with intent to secure thy future, thee cannot afford naught to be in stocks." There, I quote myself (Shakespeare 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 face of volumnious data on stock-picking benefits, makes even the well-heeled go weak in the knee? Market evidence shows that the issue is not opportunity. Nor is it barriers of 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 over-exposure to this asset class, and 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 diametrically opposite 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 appropriate down payment, pre-pay whenever 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 is optimal. Stocks you trash financial planners, 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 last resort (if faced with hardship). Stocks you look for upsides in days or weeks, often selling for small profits in bull market, or 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. Crux here is behaviour. And hence another homily with a touch of of Shak: "stay ye considered, consistent, and committed; and long term wealth shalt be thine." Amen!

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.

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 signs of stress were unmistakable in our portfolio, and 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 housecleaning, with varying degrees of success, across all players.

Though mandarins at FinMin and RBI downplayed it, but this improved hygiene had a major hand in ensuring that our country emerged from GFC 2008 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 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.

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 lessons of 2008 are entirely forgotten.

The most visible of these is our weak credit reporting framework. Despite having moved away from Indian consumer finance (in a work sense) I still hear enough stories around inaccurate reporting of defaults, especially around old write-offs that have simply been mis-recorded. 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, disputed charge write-off 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 came to light when the consumer has applied for fresh credit, often for big life events like 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 charge being in hundreds versus 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 disincentivize 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.

The other issue with credit reporting is coverage. There is a strong argument to expand consumer behaviour monitoring, in the Indian context, to telecom payments. The rise of wallets and payment solutions are blurring the lines here in any case. Yet, this could well be an apres moi le deluge moment. Dimensionality of credit data would multiply (volume, churn, nature of disputes etc) were this to happen. It makes it incumbent to establish the ground rules now, with a much better 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 strikes. Lest history judge us differently.

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...

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 had been the subject of much anticipation. Alas, the fine print finds them come up woefully short.

The biggest stumbling block is 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 the linked inflation index. It is a simple structure that pivots on gains from the inflation-driven FV increases, which are accounted as capital gains from the taxman's lens.

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 Inflation 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 been subject to capital gains, it could have benefited from indexation. Clearly Fin Min and or 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 possiblle, but only after 3 years, and with a penalty. Finally, there is an unfathomable 500K investment cap. All told, I don't see investors being inexorably drawn to IIMSS (versus, say, infrastructure bonds with friendlier format and better post-tax return.)

Be those as they may, one could still have rooted for distribution success. We know only too well that, in the Indian context, financial products need to be activey sold (occasionally with little correlation to merit, ULIP being 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 there.

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 the big game as to it's market-making potential. At least on that count, if not more, this is an ahem.

Raja Beta Banega Neta!

No, this is not a rant against dynastic politics. Only an ostrich, or your Congressi blessed with archetypal thick skin, would have missed its disastrous limitations. Fact is that India of the present pretty much makes the case for misfortunes that result when power is thrust in the hands of those with credentials mostly limited to parentage. Thankfully, though General Elections are a year away, but 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 would be difficult to transcend familiar doctor-engineer-civil servant territory. Yes, MBA has gained some coinage as a livelihood option in the last decade or so; and there will 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 the top of the pyramid. Take a country like ours, and it is easy to argue that professionals of all ilk 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 resorting to UPA my-kursi-is-my-ATM style 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 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 mostly 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 farther than the principles that were IAC, to the compromise that is Kejriwal, in order to understand this gap.

Thus, 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 much too soon; and is that all we must guard against? Or must we be willing to tread the longer path by galvanizing from within, centred around the two national parties? With the Congress seemingly intent on self-destruction, at least part of the answer is clear. That time is now.