David Cameron's visit to Jaffna. A significant step

The displaced Lankan Tamils have clearly understood that there is no point in expecting sensible assistance of any kind from the political parties in the land less than a 100 km from their land, with whom they share a common language, a common culture and even familial ties....These fellows in Tamilnadu have never shown consistency ....or to put it otherwise, they have been very consistent in exploiting the sorrow of the Lankan Tamils for their political purposes. Some of us in this state are so noble that we think it is an internal affair of  Srilanka. 

Nor can the Tamils expect support from the Indian Central government - and people who control it's levers . They have other personal, political, regional and commercial interests (euphemistically called strategic interests) in playing ball with the current Lankan regime. There are several reports of Indian military, intelligence and logistic assistance to the Lankan army during the last stages of the war - which saw thousands of unarmed Tamils getting killed. Rajapaksa , told The Week , immediately after the end of the war  "By eliminating the LTTE (Liberation Tigers of Tamil Eelam) militarily, I have fought India's war." He then said "Nothing is more important for me than what India thinks, I thank Prime Minister (Manmohan Singh), Congress president Sonia Gandhi and the Indian people for the support to Sri Lanka during the war." So we know why Mr Singh will never exert any pressure on the current regime ...irrespective of what the local parties in TN do , or whatever resolutions the assembly passes. And when Ms Sushma Swaraj was there, she had a perfect meeting with Rajapakse and spoke his script ....so , even if the regime changes here , it will make no difference. 

No wonder the Tamils have been far more effective in getting their message across to the Canadians and the British. They must have spent quite a bit of effort and money in buying a lot of the trophy videos that the Lankan army personnel shot during the last stages of the war, and through Channel 4, 
effectively canvassed public and political opinion to pressurize the Lankan government. The 
Canadian boycott and Cameron's visit to Jaffna are hence significant achievements for these Tamils ....and hopefully will be a significant step in hauling the current  Lankan regime for human rights violations. History shows that consistent efforts at international fora particularly the UN , to get justice for human rights violations have resulted in regime changes and resulted in displaced communities getting political and social rights. As mere mortals in this unfair system, we can just hope that the Lankan Tamils succeed in getting justice and a fair chance to live an equal life in Lanka. 

Thiruvananthapuram : First impressions of a second visit

A pretty serene capital city with quite a bit of  greenery still around.

Men comfortably sported Veshtis (or Mundus) with bright and black borders, and most middle aged ones sported thick, jet black moustaches and full sleeved shirts rolled up to the elbow.  Almost all women sported long and mildly curled hair – yes – not one of them  I saw had straightened hair ( I guess the women here are either sensible or they have better things to do – or both); and sported long gold chains . A small streak of sandal was seen on several foreheads …and the ‘ohs’ and ‘gna’s and several nasal tones made me feel that the mallus never speak their language – they just sing it. 

Auto drivers were courteous – but I guess some infection from the Chennai autowallas has spread to that city…. Meters were seldom used and if they were , then the charges were rounded off to the higher tens or fives : / .  I had assumed that this place would also be like Kozhikode – where the auto drivers charged only by the meter. 

In the  Chalai market , crowded , small shops  continued to give the city a lovely ‘rustic’ ambience . And inspite of the Bhimas , the Alukkas and the Malabar golds …a lot of small well stocked shops selling finely made and classic jewelry was surprising …In other cities like Madurai, the small ones have not been able to hold their ground.  My friend helpfully told me that folks there stored their wealth in gold….

Gold – that takes me to the Ananthapadmanabhaswamy temple …where Padmanabhaswamy has demonstrated (with amply evidence indeed ) that any one who diligently worships Lord Siva is bound to get a lot of wealth !. Nothing about the temple indicated the ‘discovery’ of the treasure though …and the place was amazing – just like it was when I saw it some years back. And unlike the khaki clad, rough looking and tough speaking policemen who come in large numbers to guard temples and temple festivals in TN , the security force was mild, all clad in dhotis and towel , sported sandal on their forehead and spoke gently.  The free meals ( or Vilai illa unavu as the ruling party in TN would love to call) was ‘divine’.. the samba rice, sambar , pumpkin kootu, buttermilk , pickle and the unforgettable paal payasam – served in clean plates ; and the water boiled with pathimugham ….wow ! And the interesting part – once one is thru with the lunch , she/he has to wash the plates and tumblers clean  - ( there are folks who check it  !!) .  

The Pazhvangaadi Ganapathi temple was small, typically clean and well maintained. Amazing to see the sacks of coconuts that were broken in front of the small diety. The Attukal Devi temple was another example of ‘murthi siridhu – keerthi peridhu’. One could easily feel the divinity in the temple – and no wonder that temple draws the largest number of women on a single day in the entire world. 

Two other things that stuck me were – the large number of shops that sold ayurvedic medicines ( It appears that their numbers were more than – if not equal to – the number shops selling allopathic medicines ) and the number of book shops. 

One visit to Karaalkada ( a bit expensive) and one to Somasundaram Pillay’s ( more reasonable) made me fall in love with the fine handloom dhotis yet again and resulted in me contributing significantly to Kerala’s economy…and that was besides the rather exorbitant tax that the hotel charged.

No wonder , my folks several years back thought that they should settle in this city post retirement :)

அவர்களைச் சொல்லிக் குற்றமில்லை...

என்னைப் பொறுத்தவரை,  சுமார் இரண்டு தலைமுறைகள் சரியாக இல்லை .....உம்ம்ம் , இப்படி சொல்வதைவிட, இரண்டு தலைமுறைகளாக வளர்ப்பு  சரியில்லை என்று சொல்லவேண்டும்...

பிள்ளைகளை படி படி என்றும் , முதல் மதிப்பெண் வாங்கவேண்டும் என்றும், போட்டி போடவேண்டும் என்றும், ஆங்கிலத்தில் பேசவேண்டும் என்றும், convent இல் படிக்க வேண்டும் என்றும்,  IIT க்கு போகவேண்டும் என்றும், அமெரிக்கா போகவேண்டும் என்றும், infosys இல் வேலை வாங்க வேண்டும் என்றும், வீடு வாங்க வேண்டும் என்றும், car  வாங்க வேண்டும் என்றும், எதிர் வீட்டுக்காரன் பிள்ளையை விடவும், உடன் வேலை செய்வோரின் பிள்ளையை விடவும் , ...முக்கியமாக உறவுக்காரன் - அதிலும் பங்காளியின் பிள்ளையைவிடவும் நிறைய சம்பாதிக்கவும் - மிடுக்காக இருக்கவும் கற்றுத்தந்த பெற்றோர், மனித உறவுகளை கற்றுத்தர தவறிவிட்டனர்...

நெருங்கிய உறவுங்களின் இல்ல இன்பத்துன்ப  நிகழ்வுகளுக்கு பிள்ளைகள்  வருவதில்லை ...மாமன் யார், சித்தப்பன் யார் , பெரியப்பன் யார் , உடன் வேலை செய்பவன் யார் என்றெல்லாம் தெரியாது.. எல்லாம் uncle கள். அவர்களும் ஞாயிற்று கிழமைகளில் அமையும் ஏதோ ஓரிரு  நிகழ்வில் பார்ப்பது...

பாசம் பந்தம் எல்லாம் கடந்த இந்த ஞானிகள், படித்து முடித்ததும் பெட்டியை கட்டிக்கொண்டு 'திரவியம் தேட ' , இரண்டாம் தரக்குடிமகனாக வாழ மேலைநாடு செல்கிறார்கள்...திரவியம் திரவியம் ..திரவியம் ..அதை எதற்கு தேடுகிறோம் என்று தான் புரியாது ...

இங்கு பெற்றோர், தம் பிள்ளைகளின் ஜகதலபிரதாப சாதனைகளை பறைசாற்றிக்கொண்டு ...இவன் california வில் இருக்கிறான், அவன் Detroit இல் இருக்கிறான் என்று சில நாட்கள் சொல்வார்கள் ...பின் தவம் நிறைய செய்திருப்பின் , நம்ம ஊர் வரன் பார்த்து திருமணம் ..அப்புறம் baby sitting க்கு 6 மாதம் பயணம்....

பின் மூப்பு ...மூட்டு வலி , நோய். அப்போதுவேண்டுவது அன்பும் ஆதரவும் ...பிள்ளைகளோ தயை மிகுந்தவரானால் கோவையிலும் புதுவையிலும் old age acco வில் தங்க ஏற்ப்பாடு ..ஆனால் அவர்களை வைத்துப் பார்ப்பதோ,  வந்துப்  பார்ப்பதோ இல்லை. ஒருமுறை வந்தால் என்ன என்று ஏங்கும் பெற்றோர் பலர் ..ஏங்கியே மறைவோரும் உளர்

.....ஆனால் அவர்கள் தான் திரவியம் தேடுவதில் மும்முரமாக இருக்கிறார்களே ! அவர்களைச்  சொல்லிக் குற்றமில்லை ..உறவுகளைவிட பொருளும் , மிடுக்கும் தான் முக்கியம் என்று வளர்த்தவர்  இவர்கள் தானே !
 

Poor Standard and pretty Moody !

Last week, the US Department of Justice charged Standard and Poors of intentional fraud - of making 'limited, adjusted and delayed updates' to its rating criteria resulting in the agency giving favourable ratings to several structured finance papers , leading to massive losses to investors.

S&P and their ilk do not give recommendations - they just give 'opinions', and hence they have always claimed constitutional protection for freedom of speech....and so, they cannot be just pulled up for. Some argue that what happened was essentially a mistake on the part of the investor.... caveat emptor ( buyer beware !) -nothing prevented the investor from doing his own due deligence.

While this does appear to be a strong point for the agencies, there is a catch. Regulators across most countries, insist that investments made by banks and financial institutions have to be rated and they also specify acceptable rating agencies and S&P , Moodys and Fitch surely figure in most of these lists. (While rating agencies do a lot of things these days, I am not sure if the agencies would be in the pure ratings business if regulators do not insist on investments being rated). This means, they 'enjoy' a quasi-official status. Investors hence rely on their ratings to invest. There hence is a fiduciary responsibility that agencies owe - to protect investors by giving a true and objective assessment. So, while one should not take away the responsiblity of an investor to look with care before he invests, one should not also take away the responsibility of the agency to be true - particularly as the investor is directed to take the view into consideration, by regulators. And the standard of work by the agencies in discharging this responsibility has been pretty poor.

The other way of looking at this is that a seller is responsible for ensuring that his product performs to standards that it claims to have. Agencies, certify the level of standard and get paid for it. So, when the product fails to meet the standards, the seller has to be pulled up - and with him the Agency which abetted in the sale.

Any which way one sees this, the agencies need to be made accountable. Ever since the financial crisis, there have been several attempts to pull up the agencies for their flawed ratings and to regulate them. And frankly, I am happy that S&P is being hauled to courts - and irrespective of the final judgment ( or settlement), there are two possible gains :

1) Investors will not rely on these ratings beyond a point (infact, investors of sovereign debt market have begun to repudiate rating actions.
2) Agencies will hopefully become more responsible in their job.

The move by the US Gov is however surprising - why is there a case against only S&P ?... Moodys and Fitch too played their part in the crisis. Is it because the US Gov is still in a bad mood after the S&P downgrade in August 2011 ?

Increased dependence on the Public Distribution Scheme

The recent NSSO survey results of the PDS and other sources of household consumption, done in with over a lakh households in 7428 villages and 5263 blocks across the country shows an increased dependence of households on the PDS. Some of the salient points in the survey are
a) Rice purchase under PDS had increased to 23.5% in rural areas ( compared to 13% in 2004-05) and to 18% in urban areas (compared to 11% in 2004-05)
b) Wheat / Aatta purchase had increased to 14.6% in rural areas ( compared to 7.3% in 2004-05) and to 9% in urban areas (compared to 3.8% in 2004-05)
c) Sugar purchase had increased to 14.7 % and 10.3% in rural and urban areas ( compared to 10.3% and 6.6% respectively in 2004-05)

And 39% of rural households and 20.5% of urban households depend on the PDS. While some of us would possibly become happy and think that the figures show an increase in the efficiency of the PDS, the results are disturbing considering that , this dependance is because,

a) Survey results show a reduction in levels of employment. The labour force fell from 496.4 M in 2005 to 487.6 M in 2011. Of the employable population, 9.8 % is unemployed, clearly indicating that growth is not leading to increased employment.

b) Food prices have grown manifold in the last few years. Rice price had increased from about 12,890 per MT in 04-05 to 32,320 per MT now ( reaching a peak of about 42,500 per MT in 2008), for a 10 year period the increase is around 222 %. Sugar prices have gone up by around 177%.

These can then only mean that they are signs of growing distress at the lower strata of the population. Possible reasons why we have not seen any major upheaval till now could be the combination of the MNREGS and the PD System. But these cannot be long term solutions. A major rethink on the structure of the economic growth model is needed, with a clear focus on making it truly inclusive - and unless that is firmly in place, any move to cut down subsidies would result in major social upheavals. The doubt is whether, given their firm western schooling, people at the helm have the willingness and capability to come out with economic models for growth that suits this country and its citizens who have become more dependent on subsidies for survival.

IMF's comments on the Indian Regulatory System

The IMF has recently released the India: Financial System Stability Update. While commending on the fact that the system has a tightly controlled regulatory and supervisory regime and is reasonably resilient with no likelihood of near time stress recommends certain actions, some of which merit some thought - while others are merely incremental in nature.

a) That the regime for large exposures and connected lending needs tightening in line with good international practice. The report points to the fact that the maximum level permissible at a group level including lending for infrastructure is high at 50% of bank's capital and that it needs to be reduced to 10-25% in line with international practises. While this can be a goal post over a long time period, reducing the limit steeply will reduce availability of finance to some sectors. The solution to this could be development of alternate markets for financing which will temper , if not reduce significantly , the requirement of bank finance.

b) Reducing SLR holding limits : While appreciating the fact that CRR and SLR requirements help ensure liquidity availability during crises, IMF recommends reduction in SLR holdings in Goverment Securities. The recommendation, to my mind, comes from IMF's observation of the unsavory experience with the European banks which have held large investments in Government Bonds. This recommendation fails to take into cognizance the fact in general the G Sec investment holdings in most banks is significantly higher than the mandated requirement, which in any case is being lowered in a slow manner. This also fails to take into consideration that what is held by Indian Banks is national debt ( not international debt as in the case of most European banks)and the Debt to GDP ratio of India is better than its European counterparts. Any risk of sovereign default is hence far fetched. There is also no reason to believe that reduction in SLR norms will lead to improvement in the Corporate bond market (which acceptably has to develop in the country), as what matters is the levels of government borrowings.

c) RBI nominees on PSB Boards may lead to conflict of interest: While the recommendation in theory is probably correct, the fact is that the presence of a RBI nominee helps the regulator to get information on a real time basis and thus help in supervision. It also helps act as a deterrent , preventing activities that may be inimical to the bank and the system at large. Considering the pros and cons, RBI would do well to retain this system or retain the right to use this option.

d)Insolvency framework businesses and more particularly for proprietorship firms - which are the majority businesses in the country. The amendments to the Company's Act, which provide for OPC (One Person Company) will largely address this issue.

e) International and domestic supervisory information sharing : This is being addressed by RBI considering supervisory colleges for particularly large banking organizations. RBI has already set up supervisory colleges for SBI and ICICI Bank which have significant international presence.

The report indicates that the Indian regulatory system is clearly in good shape and while being structured to suit Indian needs meets international requirements in most cases - and what will work is independent and tight regulation. 'Gaps' (if one may say so) which are there are either by design or are already being worked on. The recent crisis has exposed the weaknesses of the neo-liberal light regulatory framework that was championed by developed nations and the Bretton Wood Twins. And as they say, it is only when the tide goes down, that we know who has been swimming naked. IMF's commendation is this context is hence an interesting development.

Bending back to please - Deferring the GAAR

As expected, the Government has deferred implementing the General Anti Avoidance Rules by two years - in a bid to 'allay fears of foreign investors and boost sagging FDI inflows'. The Deputy Chairman of the Planning Commission says that this 'will boost the investment climate'

The implication is that FDI inflows have been / are structured to avoid tax payments. It also implies that tax avoidance - the Mauritius route etc is viewed in a benign fashion , while the honest tax payer is penalized. This kind of economic policy making hurts.

Justice J S Verma's observation on the SC judgement in the Vodafone case clearly stresses this point . He says "The effect of benefiting a corporate is to cast a higher tax burden on the common man and when you uphold an illegal tax avoidance, then you cast a higher tax burden on the honest tax payer". True.

While the markets gave a thumbs up with the Sensex gaining 240 points, what is still not clear is how postponement of GAAR will boost sagging FDI inflows. It is not that there is a long queue of investors dying to invest in India and wanting only this change to be done. And notwithstanding what the western schooled economists say, it is plain common sense that FDI is no panacea for economic evils in this country and so, the question is whether the Government needs to bend back to please.

What Price - Price WaterHouse ?

About a decade back, Global Trust Bank used to be audited by Lovelock and Lewes (L&L). The audit firm declared the bank a going concern and raised no objection to the (gross under) reporting of NPAs by the bank. Following the aborted attempt to merge with the then UTI Bank ( now Axis Bank), media was awash with the terrible state of GTB's asset book. On RBI's diktat, GTB changed its auditors .... it took PWC as its auditors. Some how, everybody missed the fact that L&L and PWC were just two arms of the same group. L&L was PWC's sister concern...they call it 'network firm'. And what happened to GTB is something we know.

About half a decade back, Satyam Computers used to be audited by PWC...( well... Ramesh Rajan from PWC says it was Lovelock and Lewes and that the fee deposited by Satyam Computers to PWC was transferred to L&L !) ...the creative internal accounting these firms follow is immaterial. What happened in Satyam Computers is something we know.

And now, PWC is back in the news. The IT Dept says, the firm advised Nokia on what it considers a Rs 2500 Cr tax evasion. They have 'missed' claiming TDS on their payments to their parent company.

It is PWC again and again. In the first two cases the shareholders lost heavily and in the third - the Government has (atleast till now). PWC is still a 'respected international audit firm'.

The problems are basic and pertain to conflict of interest.

a) The audit firm also doubles up as a tax consultant ( Well, some of them don't do it directly - they have 'network' firms to do it for them ).

b) The audit firm is supposed to give an opinion on the accounts of a company - basically the results of performance of the managers and promoters to the shareholders - but are paid by the managers.

And till we resolve these issues, there will be managers in firms who will be willing to pay a price and price waterhouses which will sell themselves...

Forcing policy changes by threat

Fitch Ratings , the international rating agency has reiterated its negative outlook for India and has warned of a downgrade. The agency complains that structural reform process is sluggish. This is the era of policy making by threat. The agency is concerned over
a)India's economic and fiscal outlook
b)Sharp slowdown in growth
c)persistent inflationary pressures
d)weaker public finances.

Probably these are concerns, but should the government choose to cut back spending to ensure that the fiscal deficit is contained, it will impact the already fragile recovery , and should the central bank increase rates to cut out inflation, it will affect growth. Less taxes may help growth, but will increase the deficit. Cut rates to spur growth and you have the threat of inflation picking up again. Look anywhich way, the Goverment cannot really do much. And this is after the spate of 'actions' taken by the Government.The fact is that we will need to live with this situation till global growth rates pick up. What the agencies would desire is a cut in subsidies (which is only huge in absolute amounts - in relative terms it is not really as big a problem as it is potrayed to be), lowering of taxes and a cut in rates. They forget that this country has a population of 1.2 billion and all that we have been taking in terms of growth has not been very inclusive. NSSO data clearly shows that the growth has not resulted in increased employment - it is a jobless growth.These policy prescriptions by Fitch or S&P will only aggrevate the problem. Running a country is not like running a company. And that is where the problem is.

Ratings are statements of opinions and the track record of thees agencies in rating corporate bonds is decent. What is questionable is their ability to rate other issues (their track record in rating mortgage backed securities is disastrous) and sovereigns. Sovereign debt rating is almost entirely unsolicited and the ratings and policy prescriptions of the three big agencies Fitch Ratings, S&P and Moodys has played a major role in accentuating the EU crisis, forcing governments to consider placing curbs on the timings of release of such un-solicited ratings and curbing ownerships. There is nothing to prove that these agencies have been successful in predicting crises.

What happens is that rating changes affects the ownership pattern of sovereign bonds - as most institutions. Because most institutions have allocations for bond holdings based on the ratings of the bonds, when a downgrade happens, it results in a huge sell off.... well that is what is supposed to happen in theory. But when US had its AAA ratings stripped, its bonds rallied ! Bloomberg reports that 'Predicting the consequences of a rating change by S&P or Moody’s may be little better than flipping a coin, with yields moving in the opposite direction than suggested 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974'....

So should the Government worry ? Reforms are required. But we should make haste slowly. Policy should not be made under threat.