Politics

Market Microstructure and Monetary Policy

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Conventional wisdom holds that the monetary transmission mechanism (MTM)– a collection of pathways that connect the central bank actions such as increasing repo rate to real economic decisions such as taking a home loan–is quite weak in India. In theory, MTM is supposed to act in two separate legs. After the monetary policy committee decides to change policy rate, the RBI conducts liquidity management operations to bring overnight interest rate which happens to be operating target–the weighted average call rate (WACR)–within the policy rate corridor.

Since WACR, at the margin, determines the funding cost to the banking sector, it should ultimately change banks’ benchmark lending rates and affect economic variables like investment and savings etc.

But there is theory and there is practice. Recent repo rate hike by the RBI has been a very different story altogether. After the hike, there seems to be plenty of liquidity in the system. RBI is still conducting reverse repo operations to mop up excessive liquidity.

On the other hand, even before the hike was announced, a number of banks led by the State Bank of India and ICICI, had already increased their lending rates, increasing the borrowing cost both for prospective and existing borrowers.

Rather than the textbook monetary mechanism, interest rates seem determined by the market leader and imitated by other banks. There are striking similarities with  the Stackelberg market leadership model. The bottom line is that market microstructure is an important part of the price formation in Indian banking sector.

In this respect, Urjit Patel committee’s observations about the India-specific peculiarities of the MTM may be recalled:

Significant asymmetry is observed in the transmission of policy rates changes between surplus and deficit modes suggesting that maintaining suitable liquidity environment is critical to yielding improved pass-through.

Could it be that the ‘significant asymmetry’ is less due to liquidity environment and more due to market structure? The hypothesis can not be ruled out.

 

Advantage China after Trump-Kim summit

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For all the talk about China being insecure with regard to potential Donald Trump-Kim Jong Un bonhomie, Beijing is likely to be rather pleased with the events that transpired in Singapore today.

First, soon after the early reports of the agreement came from Singapore, China called for easing sanctions and “establishing a peace mechanism.” The US-DPRK statement also envisions something similar, i.e., the “building of a lasting and robust peace regime.”

Such a framework places Beijing directly at the negotiating table. Foreign Minister Wang Yi underscored this today, saying China had and continues to play a “unique and important role” in the Korean Peninsula issue. The fact that Kim flew on an Air China jet shows Beijing’s continuing influence over Pyongyang.

Second, the formulation of the DPRK committing to work towards complete denuclearisation, while Trump describes US-South Korea drills as “provocative” and talks about ending US force presence in South Korea also works for Beijing in more ways than one. This is essentially what Beijing had been seeking for months, via its double freeze proposal. Moreover, Trump’s characterisation of US force presence in the region isn’t likely to have gone unnoticed in other regional capitals.

For one, the South Korean administration appeared to have been caught off guard with Trump offering the drills as a bargaining chip. The presidency and military both issued statements saying that clarity was needed on “the meaning and intention” of Trump’s remarks.

But more broadly, if US-South Korea military ties and exercises are “provocative,” would Washington under Trump be a reliable partner for states involved in the South China Sea dispute or even Taiwan, irrespective of the Indo-Pacific strategy and Defence Secretary James Mattis’ tough words at the Shangri-La Dialogue.

Also, Trump’s remarks about the cost of military exercises are very damaging. It’s one thing to want allies to carry their weight. But the repeated counting of costs is incredibly short-sighted and likely to raise questions about the costs that the US will be willing to incur to challenge an assertive China in the region.

After today, it appears that for all the rhetoric, Trump is uninterested in incurring those costs. Trump might have sought history in Singapore. But today’s developments mean it’s advantage Beijing.

The Ocean of Humanity

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Ex-President Pranab Mukherjee’s speech at the Rashtriya Swayamsevak Sangha (RSS) headquarter has stirred up the proverbial hornets’ nest.

The RSS is not an academic institution. It is a cadre-based organisation with strong ideological moorings. Certitudes are important both for it’s existence and survival. Despite this, they invited probably the most cerebral and scholarly ideological opponent to address their valediction. It shows a certain confidence and suppleness that must be appreciated.

As for the citizen Mukherjee’s speech, it was impressive to say the least. The central feature of his speech was neither the invocation of Jawaharlal Nehru nor of the constitutional patriotism. For me, it was the reference to Tagore’s celebrated poem ‘Bharat Tirtha’. Tagore’s formulations on the nationalism and patriotism are important and have a contemporary resonance for a variety of reasons.

Tagore was in the search of an authentic Indianness. He expressed his vision lyrically in a number of poems and more concretely in the form of Shantiniketan, the institution he established and nurtured. His vision was rooted, yet cosmopolitan; traditional yet modern. Synthesis and reconciliation, and not recrimination, was it’s essence. Tagore was also the most important spokesperson of the Indian version of liberalism. His ‘Ekla chalo re’ is possibly the best articulation of an individual spirit unafraid of the collective tyranny and his ‘Chitto jetha bhayashunyo’ the most appropriate translation of the Kant’s Sapere Aude.

Needless to say, Tagore’s vision of India is very different from the ethnicity and identity centric versions of nationalism. If the subsequent discussions of Mukherjee’s provocative speech can bring out those nuances and rescue the richness of Tagore’s message from the collective amnesia, it will have served it’s purpose.

What is China’s perspective on the rules-based order?

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The concept of a rules-based order has become part of common diplomatic parlance of late. This framework roughly refers to a common set of rules or norms of engagement in the international arena that have been mutually agreed upon among states.

The recent debate around a rules-based order, in large part, is a product of changes taking place in the world order, owing to America’s relative decline and China’s rise. For instance, the idea of the importance of preserving the rules-based order is repeatedly invoked in connection with China’s island-building in the South China Sea and its rejection of the 2016 Hague tribunal’s verdict following a case by the Philippines. In this perspective, Beijing is seen as undermining the rules-based order.

At the recent Shangri-La Dialogue, US Defence Secretary James Mattis and Indian Prime Minister Narendra Modi both referred to the importance of a rules-based order in the Indo-Pacific. A South China Morning Post round-up of the event quotes Yao Yunzhu, a retired PLA major general and a delegate at the SLD, as saying: “The US has created a grand narrative consisting of keywords including ‘rule-based order’, ‘freedom of navigation and overflight’, and ‘militarisation’ – once you hear these words, you know it’s a criticism targeting China.”

So what exactly is Beijing’s position on such a framework? Do Chinese policies disregard the rules of the road internationally or is there is a specific Chinese conceptualisation of a rules-based order?

The answer to these questions lies in the Chinese elite’s perception of their country’s international role based on an assessment of power. For instance, Xi Jinping’s articulation of “major power” or “big country” diplomacy implies that China does believe in different rules for different players. Intuitively, such a framework undermines the idea of a common framework for all states irrespective of size or power. It implies a difference in the rights and responsibilities of big and small countries.

That, nevertheless, does not imply an outright rejection of international institutions or norms. For instance, building a multilateral and multipolar world order remains a key Chinese objective. In such a framework, Beijing views institutions such as the UN and WTO as critical players. Its actions, for now, do not indicate a desire to upend the system. Rather, they reflect a wish to expand China’s authority within the system. Beijing, in fact, views the US, particularly under Donald Trump, as undermining this order with its America First policy.

Also, Chinese diplomacy has historically and ideologically been wedded to the primacy of the institution of sovereignty and thereby non-interference as the defining principle of the international order. Beijing’s repeated criticism of the West, particularly America, in terms of the doctrines of humanitarian intervention (Libya) and pre-emptive strike (Iraq) are rooted in this framework. This was also one of Beijing’s arguments against the Hague tribunal.

Sovereignty also forms the fundamental premise for Xi’s vision for building a community with shared future with mankind. For instance, on issues of economic development, human rights, political systems and so on, Beijing rejects the applicability of universal notions. Instead, it argues in favour of taking into consideration national conditions.

So, China is clearly articulating a vision for a rules-based order, albeit one premised on realpolitik and sovereignty.

The Art of Letting Go

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It shouldn’t be a surprise that Air India, one of the most beloved public enterprises, is not finding any buyers. The government owned enterprise has been a cause for major concern for the union government with the size of its losses increasing over the past few years. Although, the proposal to sell the government owned airline has been put into action, it is evident that the appropriate desire has not followed.

The airline had opened up the offers for two months and did not see a single buyer concert. As per the reports,

“While the Rs 33,000-crore debt that was to be bundled with the airline was initially seen to be a major hurdle, industry analysts believe it was the government’s decision to retain 24% stake that ultimately proved to be the big deterrent.”

This is not the first time the proposal to sell the government enterprise has been brought to notice. Twice before, in 1996 and again in 2000, much more feasible plans to sell the airline, then in much better health than now, were scuttled. The problem is much deeper than this non-viable auction. The problem lies at the core strategy towards divestment.

Government with all its units and resources is still a limited body that has various responsibilities to fulfil with scare resources. Keeping this in mind, it is important to consider the sectors or firms in which the government invests, in order to ensure that the resources are being put to the best use. On of the first litmus test for this would be to see if the good or service being provided can be provided more viably by a private body. If yes, there is no reason for the government to enter the sector as the player. If not, government can either regulate it to make it feasible or provide the good or service itself to ensure their provision. This simple test helps limiting the number resources being directed to ineffective causes.

If we put Air India into this consideration, it is evident that in the current set-up there are enough players in the sector to ensure competition and air travel is increasingly becoming viable. Hence, there is no role for a government enterprise to exist in this space. Knowing this, it would be best for the government to sell all its ownership claims towards the loss making government unit. Government needs to instead invest more in strategic sectors such as defence, healthcare and education.

Even though the argument for strategic divestment have been made in previous occasions, it is quite clear that the lack of focus has made it difficult for the union government to let go of the age old air line.

Farm Loan Waiver in Karnataka – A Crisis and an Opportunity?

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The Karnataka Chief Minister made a statement on May 30th that the newly elected government will come up with a policy to waive farmer loans worth ₹53,000 crores within 15 days. Given this policy context where some form of a waiver looks imminent, the question that confronts us is this: can this waiver be used as an opportunity to bring in structural reforms?

I spoke on this topic to Anusha Ravi of The New Indian Express. The newspaper report is here. These are the questions and my responses to them:

Are politicians compromising on the economic health of Karnataka with the commitment of such a waiver? 

Helping distressed farmers is a political imperative that finds resonance across the board. Especially so because Karnataka has been facing drought over three successive 3 years. At the same time, this immediate crisis gives a golden opportunity for the state to take up structural reforms that will help raise revenues.

Can a state with budget outlay of Rs 2,09,181 crore afford a farm loan waiver of Rs 53,000 crore? 

The total expenditure budget estimated for 2018-19 is 1,98,095 crores. Given that the total loan waiver amounts to nearly one-fourth of the budget size, the government will have to spread its liabilities over multiple years. At the same time, the government will have to mobilise additional sources of revenue to be able to pay off these liabilities.

Where can the state raise revenue to implement such a waiver?

The government has the opportunity to use this crisis as an opportunity for structural reforms. There are several opportunities available. Reforming the electricity sector by making consumers pay the actual cost of power is one such move. Power subsidies currently amount to a whopping 9250 cr per year. The Karnataka government also runs a total of 93 PSUs. 12 are in a non-working state and government must speeded up the divestment of such firms. Better land use, monetising parking in city areas, and improving property tax collections are some other areas the government can think of. States such as Kerala, Punjab, and Sikkim allow lottery schemes to function to raise revenues – this should also be considered.

Would such an implementation mean cutting back allocation for other sectors? 

If this policy announcement of assisting distressed farmers is not simultaneously backed by structural reforms  to raise revenues, the government will be left with no other option but to cut down expenditure in other areas.

How did China fare at the Shangri-La Dialogue?

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In many ways, the IISS Shangri-La Dialogue (SLD) in Singapore over the weekend played pretty much as per the script. Going into the event, the Chinese side was acutely aware that it would come in for criticism, with US Defence Secretary James Mattis likely to lead the charge. Before arriving in Singapore, Mattis had already warned of increased US action in the South China Sea.

Beijing, therefore, sought to define the event an “academic exchange” as opposed to a policy-level dialogue. That didn’t, however, dampen the combative tone of the Chinese side. So while Mattis lashed out at Chinese “coercion” in the South China Sea, Lieutenant General He Lei, vice-president of the Academy of Military Science, charged the US with militarising the region, adding that stationing of Chinese soldiers and weaponry was a symbol of sovereignty.

The question that remains is whether the US is willing to do more that Freedom of Navigation operations to counter China’s growing power in the disputed waters? Perhaps sanctions against Chinese companies involved in island building or expanding military to military cooperation?

Despite that and much to Beijing’s chagrin, the Indo-Pacific narrative appears to be gathering steam. French Defence Minister Florence Parly has indicated that Paris and London will be coordinating their vision on Asian affairs, sailing together across “certain seas.” Japan, Australia and the US also reportedly agreed to work together to deal with any attempt to change the status quo in the South China Sea unilaterally.

Chinese state media, however, has churned out a rather glowing appraisal of the Chinese delegation’s efforts in Singapore, stating that “China has played a crucial role by upholding its concept of a comprehensive, cooperative and sustainable security.” One of the highlights for state media was Indian Prime Minister Narendra Modi’s comments about the need for “strong and stable” Sino-India ties. Chinese analysts have also welcomed Modi’s remarks. Unsurprisingly, there has been no mention of Modi’s language on the Indo-Pacific, rules-based order and ties with the US.

The Xinhua report after SLD also lashed out at “participants from some Western countries” who “tried to create tensions in the South China Sea, issuing false statements.” That’s becoming a bit of a theme in state media. Take this Global Times piece, which essentially cautions India from falling into a competition trap defined by the West.

The Politics of Last Resort

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The recent assembly elections in Karnataka presented yet another display of resort politics, of elected politicians being herded off to swanky resorts to isolate them from the attention of opposing parties and prevent them from defecting. This charade, though common, never fails to make for a viewing that is both amusing and cringe-inducing. It also struck me as a uniquely Indian phenomenon. Until, that is, I came across this incident that happened in the US a few years ago.

The facts are reminiscent of a Hollywood caper. In 2003, after Republicans in Texas tried to take gerrymandering too far, more than fifty Democrats decided to abscond to ensure that a quorum would not be formed in the House. A hunt for the missing legislators soon followed, with a toll-free number set up and the Texas Rangers roped in. Finally, in a hilarious passage sprinkled with mundane details and deadpan in its delivery, the report says:

On Monday night, the delinquent Democrats were found at a Denny’s restaurant in Ardmore, Okla., 30 miles north of the Texas border. They were holed up at a nearby Holiday Inn, where they said they were discussing strategy.

It is fascinating to see political actors displaying such similar behaviour, of bunching together and jumping ship, in two very different jurisdictions. The US case also shows that this may even be necessary at times, if it is done for a just cause and where no other alternatives are available. Finding a case like that in India would go some way towards tempering the disappointment brought by the current version of resort politics in the country.

Choosing from the Only Option

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Transparency Maldives, an NGO based on the island released its pre-Presidential election survey on Sunday. Since I couldn’t read the original report (written in Dhivehi) this piece in the Maldives Independent provided a good summary.

According to the piece, the Maldivian people interviewed in the survey are sceptical of the fairness of the upcoming Presidential elections. This after the Maldives Election Commission on 20 May announced that candidates convicted with criminal offences were barred from contesting in the primary round of the elections thereby, making it illegal for President Yameen’s rivals to participate in the election primaries.

In response to the EC’s directive, the Joint Opposition called for a press conference on the following day. MP Mohamed Ameeth told reporters that the EC has no legal authority to meddle with internal matters and dictate terms on conducting primaries. The Joint Opposition also accused the Commission of being  “little more than a mouthpiece for President Yameen.” The Maldivian Democratic Party and the Jumhooree Party have announced their candidates and begun campaigning, openly disregarding the directive.

What remains to be seen is how South Block will react to the political developments in the archipelago.

Modi and the Politics of Inauguration

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Can you inaugurate something that’s not ready?

If you’re Prime Minister Modi, you can. You parade yourself in an open top jeep, with scores of security guards and attendants, and inaugurate 9 km of a proposed 96 km expressway, that was first proposed in 1999.

The next morning, your followers wake to full-page announcements where your Union Minister of ‘Road Transport & Highways…’ proclaims:

“Congratulations to NHAI and Welspun Group for completing the green and sustainable Delhi Meerut Expressway in record time”.

For a government perpetually in PR and campaign mode, why bother with the details, namely that only one tiny phase of the project is ready?

Talking of campaign mode, it doesn’t harm the party that a by-election is around the corner, and it just happens to be a stone’s throw away from the expressway. Campaigning inside the constituency would be a violation of EC norms, so let’s find a new way of fingering these outmoded pseudo-democratic traditions.

Seizing share of voice in the political marketplace is Modi’s forte, and he leaves the opposition flat-footed several times a week. Every institution – governmental, corporate, or non-governmental is recruited for the purpose.

Opponents can cavil, but the moment is passed.

Finicky folk can point at the facts, but this is a post-truth world.

There is a larger issue with public projects. In our country, especially, large projects span several governments, as they go from conception, through planning, to debate, costing, land acquisition, tendering, and execution. The Delhi-Meerut Expressway was first mooted in 1999. The idea was written into the NCR Transport Plan 2021 in 2005. Chidambaram announced it in his 2006 Budget speech. At one stage, it was to be built by the UP state government; in 2013, it was confirmed that the central government would be responsible for the project.

Given these massive gestation periods, infra-success has many fathers. What matters is who proclaims paternity loudest. Right now. Modi is doing that.

 

Chanakya is not a synonym for amoral politics

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The name “Chanakya” is a favourite with political enthusiasts, who appropriate it as a nickname for themselves, and with political commentators who anoint the latest big fish in the political arena as “Chanakya”. The modern history of the use of the term perhaps dates back to Jawaharlal Nehru who adopted the pseudonym in a 1937 essay criticising himself. Today it is being used to describe the current BJP president, Amit Shah, for his leave-no-prisoners style of politics.

It is wrong to confuse Chanakya with amoral domestic politics. Not because ancient Indian political philosophy is irrelevant to contemporary politics — it is not — but because there is a difference between international and domestic politics. To read Chanakya out of context would be to arrive at erroneous conclusions. All politics may be about power but there are important moral differences between its use in international relations and domestic politics.

Chanakya’s proposals for amoral politics properly applies to international relations: to relations among sovereigns in his time, and among sovereign states today. Because there is no overarching world government, it is consistent with raja dharma to take the amoral route to power. Maximising one’s own power with respect to other (sovereigns) is the ultimate goal, because that is the surest way to protect one’s own independence, values and way of life. This is similar to what modern-day realists believe and practice.

However, when it comes to politics within a country, use of power is circumscribed by morality. Even in Chanakya’s days, a king could not violate raja dharma, nor could his subjects violate their common and specific dharmas. The Shanti Parva of the Mahabharata — where Bhishma does an AMA with the Pandavas while lying on his deathbed of arrows— goes into great detail on raja dharma, and how a king must rule. There was no written constitution then, but constitutional morality existed and bound the king (and his government) in the form of raja dharma and the dharma shastras.

We should not expect twenty-first century moral values in ancient moral codes, but the point is that moral codes existed and placed normative bounds on the actions of the king and government. In other words, in the domestic context, Chanakya’s prescriptions were and must be read within the constraints of a constitutional morality. Furthermore, to apply Chanakya’s strategies in business management and interpersonal relations would be wrong except where the law of the jungle prevails.

Raja dharma today is to be found in the written Constitution of India and the legal framework it has created.

People who breach this dharma cannot be called Chanakya. To do so would be to profoundly misunderstand a very sophisticated political philosophy.

Aftertaste. Both Voldemort and Vijay Dinanath Chauhan make the same mistake, as I wrote in my Pax Indica column some years ago. My Reading the Arthashastra archive has a few posts on how to relate Chanakya’s philosophy to modern times.

How effective is China’s media management abroad?

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Over the past year, there has been increasing reportage on China’s efforts at influencing public discourse in other countries. The so-called sharp power debate has been most acute in countries like Australia, New Zealand, the US and parts of western Europe.

A key component of discourse management for Beijing is influencing media coverage in different countries in order to shape favourable attitudes towards China. Two recent reports offer fresh insight into this.

The first is a study led by the Prague-based Association for International Affairs, which outlines media coverage concerning China in the Czech Republic, Slovakia and Hungary from mid-2010 to 2017.

The study finds that the coverage in each country differs based on interests and domestic political and economic landscape. For instance, while media in the Czech Republic is “often openly critical” of China, this is not the case in Hungary and Slovakia.

Moreover, the sustainability of critical coverage is doubtful, given that cultivation of political elite, expanding economic linkages and Chinese investment in local media coincide with positive coverage. The study also finds that primarily it is economics that dominates the coverage of China, with issues of security, domestic politics in China, social issues and human rights taking a backseat.

Another interesting point to note is that generally the public in Hungary and Slovakia “is relegated to information mostly imported from foreign news agencies or English-speaking media sources.” This is deeply problematic in that it tends to lead to half-baked and potentially prejudiced coverage, which is unlikely to resonate with local concerns or facilitate informed debate.

The other study along similar lines assesses the media discourse around China in Canada over a 16-year period, starting from 2000. The authors find that over the years, print media coverage of China has turned slightly positive.

However, what’s fascinating about this paper is that it reveals the divergence between the Canadian public’s perception of China and media coverage. For instance, it cites polls, which indicate that the Canadian public remains deeply skeptical of the economic and political relationship with China.

Canadians apparently view the political rights situation in China as having deteriorated over the years and have grown more pessimistic about the benefits of deepening economic cooperation. And this, while the media coverage has focussed on economic relations with rights issues being marginalised.