A LESSON IN 'SPIN'

A story doing the rounds on the internet goes:
Judy Wallman, a professional genealogical researcher, discovered that Hillary Clinton's great-great uncle, Remus Rodham, was hanged for horse stealing and train robbery in Montana in 1889.

The only known photograph of Remus shows him standing on the gallows. On the back of the picture is this inscription: 'Remus Rodham; horse thief, sent to Montana Territorial Prison 1885, escaped 1887, robbed the Montana Flyer six times. Caught by Pinkerton detectives, convicted and hanged in 1889.'

Judy e-mailed Hillary Clinton for information about her great-great uncle. Hillary's staff sent back the following biographical sketch: 'Remus Rodham was a famous cowboy in the Montana Territory. His business empire grew to include acquisition of valuable equestrian assets and intimate dealings with the Montana railroad. Beginning in 1883, he devoted several years of his life to government service, finally taking leave to resume his dealings with the railroad. In 1887, he was a key player in a vital investigation run by the renowned Pinkerton Detective Agency. In 1889, Remus passed away during an important civic function held in his honor when the platform upon which he was standing collapsed.'

The story is false. But, it does serve to illustrate the role of spin doctors – something the Indian political parties desperately need. Most key parties in India are struggling to re-invent themselves, and in the process, creating a web of lies to entice new, first time, voters. Mid month will reveal who succeeds. Till then, we have to remember Churchill’s definition of a parliamentary candidate “He is asked to stand, he wants to sit, he is expected to lie”

Regulating the regulators

Imagine a school with a strict teacher in every class. In one such class, are a bunch of kids playing with fire. While the teacher watches, the kids set fire to the window curtains. The fire spreads, and engulfs the school and burns down most of the infrastructure. It then spreads to the neighbourhood and affects the nearby buildings. While trying to bring the fire under control, and examining the cause of the fire, the school principle suggests that one way to prevent another such occurrence would be to appoint the errant teacher as the fire warden for the neighbourhood.

Sounds like a fantasy out of Alice in Wonderland? Welcome to the real world – this is how the financial system of the world operates cica 2009. Gordon Brown, in preparation of the G20 summit on the financial crisis, exported to the world by the USA and UK, writes

“I have learned from this financial crisis that the disciplines we expect of markets cannot be guaranteed without strengthened supervision. “

Uh? Let’s see which part of the financial system that caused the breakdown was unsupervised. The most maligned are the hedge funds. Did these loathed vehicles need a bail-out – not really – for the most part, they just quietly wound down and exited. However, we have had multi-billion (totaling trillions of dollars) of bailout for supervised entities - banks, insurance companies, and investment banks. So don’t you see, the solution to the problem must be more supervision!

Having efficiently “supervised” an excellent problem situation, the regulators in the US have now suggested a Geithner plan to fix it. The plan involves a “put” to investors of banks and distressed asset funds, while transferring the entire risk to the tax payers. As Paul Krugman writes,

"Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard."

Mark Twain could have been speaking about regulators when he wrote

"All you need in this life is ignorance and confidence then success is sure"

especially if success is measured by negating the principles of free markets, and forcible propping up defunct organizations.

What’s with this “political uncertainty”?

Most market commentators. when asked about the possible direction of the market in the near term, hide behind the excuse that “political uncertainty” leading up to the general elections will lead to subdued market performance. Almost as if it was not the job of the market to deal with uncertainty and make decisions in the absence of perfect information.

In any case, it appears that we are headed for another government comprising several political parties. Should an investor worry?



A look at the graph above indicates that the Indian economy left its earlier slower growth trajectory and embarked on a higher growth path somewhere in the decade of the 1980’s. This coincided with a drop in the vote share of the Congress – till then the single largest party with a dominant share of Parliamentary seats. The 1977 experiment at coalition was a miserable failure and led to a resurgence of the Congress. But only for a few years. For the last almost two decades, we have had minority governments ruling India. Over the same period, we have sustained a new and higher growth trajectory.





In fact, it would almost suggest, that the emergence of regional parties helped to increase the growth rate for the nation. A research paper on the “Politics of Infrastructure Spending” by Wilkinson 2006 mentions the following

“Experience since the late 1980s has shown that coalition governments are formed and held together by the judicious spreading around of loans, grants and subsidies, which obviously limits the resources available to be spent on other projects. .. For example from 1999-2002 Andhra Pradesh got $763 million in “additional central assistance for externally aided projects in state plans” because of the influence of its governing Telegu Desam Party, the single most important coalition partner in the national NDA coalition government in new Delhi. The opposition controlled state of Bihar got only a tenth as much, despite a greater population and much worst absolute levels of poverty. However when a Congress-coalition replaced the NDA in 2004, it was Bihar’s turn to benefit from electing large numbers of MPs to a key coalition party, the RJD”

What does this mean for the investor? Clearly, the election process cannot be blamed for uncertainty (it is certain that we will have a coalition government), nor for lower growth. The moot point though is whether growth is in itself needed for stock market performance. A paper by Prof Prabirjit Sarkar of Jadavpur University titled “Stock Market Development, Capital Accumulation and Growth in India since 1950” has this as its abstract:

“This study examines whether there exists a long-term relationship between Indian share price movements and growth through capital accumulation over more than half a century period since 1951. Using the Autoregressive Distributive Lag (ARDL) approach to cointegration developed by Pesaran and Shin, our study shows that no long-term relationship exists between the gross-fixed capital formation (total as well as private) as percentage of GDP and nominal or real share price. There is also no relationship between the growth rate and share prices (both nominal and real). There is also no relationship if we consider the growth rates in share price.”

Now that is a different existential question we need to confront!

Caesar's wife should be above suspicion - or perhaps not ?

The story so far - The election commissioner, Mr. Navin Chawla, attracted opposition from 205 members of Parliament when appointed. It was alleged that he could not be non-partisan. The Times of India carried a report:

A Times Now investigation has... found that two trusts floated by Navin Chawla, a member of the Election Commission, received funding of lakhs of rupees under MPLADS from various Congress MPs.

A petition, seeking his removal, addressed to the then President APJ Abdul Kalam, was not acted on. This led to the petitioners approaching the Supreme Court seeking a direction that the petition be forwarded to the CEC. This petition was subsequently withdrawn on the basis of an affidavit filed by the Chief Election Commissioner (CEC) in the Supreme Court. In the affidavit, the CEC claimed that he had authority to, suo moto, recommend the removal of the election commissioner. He quoted the unanimous decision of a Constitution Bench of the Supreme Court of 14th July 1995 (4 SCC 611) where the Judges stated :

That the Election Commissioners could be removed on the recommendation of the Chief Election Commissioner did not make them subordinate to him but only ensured their independence of the political Executive. The Chief Election Commissioner, in any case, could not recommend their removal out of whim or caprice and had to exercise his power with reason and responsibility.

At that time, the Additional Solicitor-General had objected to the statement of the CEC and contended that only the Centre could take action against the election commissioner. The Supreme court reserved judgement on the correctness of the CEC's position. A report on the events is here.

The CEC has, after due process, now recommended the removal of the election commissioner. The government has rejected the recommendation. This now leads to a constitutional impasse. Clearly, this needs to be referred to another Constitution Bench. This goes against the earlier order which seemed to indicate an interpretation favouring the reverse.

At a time like this, when serious efforts need to be made to protect the integrity of the constitutional intent, we have the leading English newspaper in the country worried about the "timing" of the action of the CEC. Ignoring its own coverage, and missing the point of constitutional impropriety - the editorial does not once refer to validity or otherwise of the arguments made by the CEC for the recommendations - the editorial laments the timing of the report in the light of the forthcoming elections.

It seems that a society gets not only the politicians it deserves, but also the newspapers it deserves.

Celebrating the Republic

On the 60th anniversary of our Republic Day, my greetings. On this occasion, it is worth spending a few minutes to review the structure of the State that is India - a federal democratic republic.

The word "Republic" originates from the Latin Res Publica meaning "thing" "appertaining to the people". It originally meant the equivalent of the term "commonwealth", but by the time of the late Roman Republics, had come to mean a state in which power was exercised in accordance with a constitution, and was divided among duly constituted offices of the state. Both these factors are important.

Political thinkers have long understood that democracy ("demos" - the people, "kratein" - to rule) by itself may not be able to do both - represent the will of the people, and do what is right. Democracy is meant to prevent concentration of power in the hands of one or a few, and ensure that "bad" government can be deposed peacefully. However, the potential threat of coercive power by a tyrannical majority remains - if a majority is in agreement, is it legitimate to harm the minority? This led Winston Churchill to remark "Democracy is the worst form of government except for all those others that have been tried".

The Founding Fathers of America were seized of this issue.

“When a majority is included in a faction, the form of popular government, on the other hand, enables it to sacrifice to its ruling passion or interest both the public good and the rights of other citizens. To secure the public good and private rights against the danger of such a faction, and at the same time to preserve the spirit and the form of popular government, is then the great object to which our inquiries are directed.”

They therefore constructed a "representative democracy", with a separation of power between organs of the state...

“In a single republic all the power surrendered by the people is submitted to the administration of a single government; and the usurpations are guarded against by a division of the government into distinct and separate departments. In the compound republic of America, the power surrendered by the people is first divided between two distinct governments, and then the portion allotted to each subdivided among distinct and separate departments. Hence a double security arises to the rights of the people. The different governments will control each other, at the same time that each will be controlled by itself.”

India followed a similar system, with state and central governments' controlling different aspects of state policy. At each level, the control is further divided amongst the three pillars of government - the legislature, the executive and the judiciary.

It has become fashionable to condemn Indian democracy as divisive, with regional parties dominating at the state level and national parties at the Centre - often working at cross purposes. It is worthwhile to remember though that, as articulated above, the construct of our constitution was to create a mechanism of mutual restraint, with each arm of the government working together, yet watching over the other, in protecting the interests of the citizens.

If, after six decades of independence, we see regional aspirations dominating national debate, it is indeed a reflection of how deep-rooted our democratic institutions have become. This internal churn will undoubtedly throw up new leaders who appeal to a larger audience. Alternately, regional leaders have to take up issues that reflect the aspirations of more of the citizens of this country.

Better the jostling and conflict of a working republic than the neatness and placidity of a dead one.

The price of courage and the cost of cowardice

A friend send me a link to a letter made more poignant because it was published posthumously. Lasantha Wickrematunge, the author, and editor of The Sunday Reader, was shot on his way to work on Jan 8, 2009 in Sri Lanka. It describes his resolve to express his opinion on the politics of Sri Lanka, while being aware of the risks to his life. His death, establishes once again the cost that "freedom" often demands from men - the supreme sacrifice. It is men like him that the rest of us have to thank for our freedom, the existence of which we often take for granted.

In contrast, our feckless prime minister and spineless bureaucracy have scored a self-goal with regard to the handling of the post-mumbai-attack situation. Pakistan has now won the game, set and match. From being on the run, they have turned the tables completely - with the latest "umpire" of India's choice (remember, we have chosen to outsource our defence to other countries) David Miliband, the British foreign secretary, hectoring our PM and foreign minister on the need to resolve the "core issues" of Kashmir - a connection which even the Pakistanis have not insisted on making with any degree of conviction. Two interesting view points emerge - one where the UK position is sought to be explained in terms of their own domestic compulsions  and another, which takes a more robust view of how India (mis) handles its strategic goals.

In any case, with the new US president having signalled his willingness to interecede in Kashmir, we can only hope that we have an early election. At least there will be a chance that the democratic process will result in giving the "old bones" some rest. 

Today, the color of hope is black

The crown was missing, but not much else. Pomp and ceremony surrounded the "crowning" of "emperor" Barack Hussein Obama as commander-in-chief of the most powerful army in the world. 

When the speaker introducing the new President emphasised the "peaceful transfer of power", I'm sure many wondered why it should be any different. However, we must not forget how rare it is even in this age in the world to have a leader of a powerful nation handing over power through the ballot rather than the bullet. More so, when the new leader represents a race, that less than eighty years ago, was the target of "white supremacy" groups like the Ku Klux Klan. 

Change induces hope, and the inauguration of the new President of the USA brings hope to more people in the world than can be counted - that the country which, till the previous administration, represented leadership of the "free, democratic" world, would live up to the ideals of freedom and democracy rather than inflict arbitrary suffering on the rest of the world. I join most such in wishing that such hope is not misplaced. Now, however is the time for optimism, not cynicism.

Post the recent attacks on Mumbai, many young Indians decried the Indian democracy, its politicians, and demanded martial law. I hope that this inauguration will inspire people to introspect about the miracle that is the Indian democratic system. A country as poor as India, as diverse as this nation is, regularly elects to the highest offices - people belonging to different minority segments - by religion, caste, and sex. The "inauguration" process does not include praying to the "gods" of one religion only. We can be truely proud of being a secular, democratic republic - the biggest and the best - make no mistake. Lets keep it that way

Jai hind.

Deja Vu.. more words, no action

As I write in the new year, I hoped to start on positive note, reflecting hope of a more secure India. Instead, realization strikes that a mere change in the calendar changes nothing. 

The home minister also pointed out that it was up to Pakistan to ensure that such terror acts were never repeated by its citizens against India. "The price they will pay if this is repeated will be enormous," he warned.

This was Mr. Chidambaram on NDTV last evening, but could easily have been any other incumbent over the past two decades. I can imagine the snickers of derision this would have invoked across the border. What, can I ask, has the "price" been for all the attacks inflicted on us. The attack on Mumbai came not six months after the Indian embassy in Kabul was attacked. We used the same words, the same empty promises of retribution, the same attempt at "building international opinion" against such attacks. Yet, Mumbai was attacked, as it seems now, with impunity. 

In the same interview, the home minister was asked about what India was looking for, and his response was - that India seeks a "guarantee from Pakistan" that such attacks will not be repeated. Haven't we been there before? What guarantees and from whom. Importantly WHAT will we do if such a guarantee is flouted. In fact, WHY are we NOT taking those steps TODAY?

In the past, all that the perpetrators of such crimes had to do was to wait for a change of political guard. In fact, with the present spineless dispensation, the attackers do not even have to bother for a change. Mumbai alone has been targetted twice in the past 2 years, and other Indian cities have been brought into the fold of such attacks with impunity.

We are admonished that "war is not a solution". The question is - are we not already at war for the past two decades? What will it require to call India at war - an attack on parliament ... er.. that already happened. What about an attack on India's key economic structures, the stock exchanges, the business districts in metros et al .... er... tick that off too. Well, I guess an attack on Indian property overseas would be an act of war... that too! I guess, since we have geriatrics ruling the country, the only definition of war would be an invasion across the border - but you know what - that happened too...

I recommend that we disband the Indian Army. After all what we need is a National Relief Force - that will take care of people in the event of a natural disaster (currently the most active use of the Indian National Army). As for guarding the borders, or taking on hostile neighbours, we have already exported that task to the "international community". I wonder if there is anyone who can put out a set of condition under which the Indian armed forces will be called upon to act - I doubt it will ever happen despite the need and the provocation. What, therefore I ask, is the need to incur the cost to maintain such a huge force - much better to divert the resources into policing and other activities which we can do within our borders.

The cold war did not ignite into a nuclear war simply because of the doctrine of MAD (mutually assured destruction). The simple construct behind that was the willingness and ability to use WMD's if required. Once one party to a conflict knows that the other is not willing to escalate it no matter what the provocation, simple game theory will suggest that there is no protection against attack. India has repeatedly shown itself unwilling to escalate. Therefore, the enemy can chose its time, place and method of attack, and we have to defend (if that) from a position of weakness. The fact that this simple principle is ignored by the powers-that-be smacks of complete pussilanimity at best and treachery at worst. 

"Fear has its use, but cowardice has none. ... The trouble is that we often die many times before death overtakes us." - Mahatma Gandhi

A recent article from Brahma Chellany in the Hindustan Times, makes some interesting points. 

As our home minister jets to the US to seek to provide "proof" of the source of attacks, some questions come to mind - 

1) What if the US continues to do what it has done so far (provided the ISI funding for creating taliban, ignore the proliferation of AQ Khan, and even now - paid to Pak over $10bn under G W Bush) - which is, to look at it the "evidence" from its own perspective and tell India to go sit at a negotiating table. 

2) Assume that for a change, we have US support - what if the Pakis do not respond to US "pressure"? As soon as pressure built up post the Mumbai attack, transport vehicles headed for Afghanistan from the US were burnt up - underlining US dependence on Pakistan for logistics support. What is the next step if they just ignore US pressure?

3) What if China (who we are now approaching, much like we are the US) assures support, but tacitly continues to provide succour to the Pakis

Finally, some of the prescriptions to India are already in - this article by a UK professor tells its own story...

Finally, India should also reach out to ... work with the US to provide assurance to Pakistan which can undercut the paranoia of the Pakistan Army and ISI, not least with respect to India’s role in Afghanistan. 

So now, we are to assuage the feelings of the ISI too.

In the meanwhile, the Israeli attack on Hamas continues, and, as the US puts it, Hamas should behave itself.

Have a great 2009

Amen

Pakistan's dodge seem to be working

Yet again it seems that India is going to miss the wood for the trees. I am watching a vocal but to my mind, meaningless debate, on TV on whether we should free up some police personnel from guarding politicians and move them to guarding train stations.

What happened to the need to take action against Pakistan?

Any strategy novice will realise that the ISI has just executed a fantastically planned and timed operation.

The situation was slipping : the Kashmir election was proving a great success, with more than 60% voter turnout. The LeT was losing morale, and the Pak army was being forced by the US to fight against their kin in the Al Queda.

At one go, the tables have turned. India is seething, but a toothless PM is not in a position to respond. Elections are round the corner, and with the ruling party on the back foot, the willingness to go on the offensive is low. The typical response of the Indian leadership is to "put Pak on the mat" by offering proof to the US authorities of Pak's involvement and hope that the US will force Pak to take action. Unfortunately, it misses the point completely. The USA is NOT going to do anything for India, only what is in its own interest. They have only partially de-hyphenated India-Pak relations. Incident such as the mumbai attacks help to strengthen this hyphenation to the detriment of India. The US Secretary of States statements in her visit to India, and subsequently Pak, make this clear to any but the blind. Zardari threatened to pull troops from the Afghan border, and that was enough for the USA to stop its sabre rattling.

India is therefore left with some exhortations to act "responsibly". The Pak government is busily repeating the line that our beloved PM gave them - that Pak is also a victim of terrorism - and therefore cannot be blamed for the attack.

So what happens next - we act "responsibly", do nothing and wait for the next attack. Musharraf has gone so far as to suggest that India should be sympathetic towards Pakistan, should appreciate the problems of Pakistan!

So is there an alternate plan?

There are some key issues we need to understand:
1. A country like India with a long border and unfriendly/non-cooperative neighours cannot be converted into a fortress. The only way to defend its citizens is to ensure that the cost of attack is unacceptably high for its enemies. This means that ALL attacks MUST be met with overwhelming force as a response
2. Pakistan, in its current political form and geography, is not going to allow peace with India. As has been pointed out in one of the article I have earlier bookmarked, the economic power (70% of market cap) and the military power (the N-bomb) is in the control of the Pak army, NOT its civilian government. We cannot therefore deal with the Pak govt. as if they are driven by the same factors as a govt. in India. They are powerless to decide anything. The Army, on the other hand, derives its power from its unceasing animosity towards India.
3. The Indian government has to tune its foreign policy and its list of "friends" to suit its own needs, not that of others. If that means that some are upset, so be it.

Once these are accepted, the only clear path is to figure out a way to put pressure on Pakistan to clean up its act. This requires a two pronged approach.
1. Economic - India needs to impose an unacceptable economic cost on Pakistan of continuing its proxy war. Ideally, this can be in the form of UN sanctions. However, given the presence of China in the UN Security Council, such a resolution cannot be passed. The next alternative is to try and enforce and economic blockade by itself. An interesting suggestion made in an article I read on this subject, was that India should insist on all products carrying a notice that they werre being made by a company having associates operating in Pakistan, and then build Indian public opinion to boycott those goods. The idea was that this may force these companies to withdraw from Pakistan rather than give up the Indian market, and this would put enormous pressure on the Pak industry. I am not sure how much this would effect Pakistan, but it is definitely an interesting idea.
2. Military - here the options are few. The first would be to take out the terrorist camps through air strikes and commando operations. The next would be a bigger operation - barricade the sea route to the Pakistan ports, and involve Israel and US - the first to help with taking out the nuclear assets of the Pak army, and the latter to help with the intelligence. (Why should they help - we are solving their problem as well, and are supplying the foot soldiers. Otherwise, the nuclear deal with the US need not be activated i.e we do not buy their military hardware). The second step would be to move in physically, and divide the country into Baluchistan, NWFP and Punjab-Sindh. The exit option would be to dismantle the financing structures of the ISI and then allow elections etc.

If either of these seem to radical, then we should hunker down and prepare for the next bomb blast - because that is what we will get.

Yet another instance of shirking a tough job

The hapless home minister had to make way for his handling of the security situation. Completely ignoring the concept of collective responsibility, the PM let the home minister go, as if the man had made some policies on his own. When it came to reallocating the tough portfolio, the PM chose to hand it to Chidambaram.

The key ability of a leader is to be able to lead from the front. At the current moment, the most important need was to provide the country and the security apparatus, a clear and focused direction, with authority flowing from the highest political office - that of the PM. Instead, the PM, yet again, elected to hide behind his colleagues and revert to a job which he is comfortable with - that of the FM !

Just goes to show that there is a difference between a leader and a bureaucrat !

The cost of attack

Any response to the terrorist attack has to focus on only one issue - how to increase the cost of further such attacks for the perpetrators. Assuming that the agency responsible for this attack is a state sponsored agency, in this case the Pak ISI, the issue becomes more complex - are we to attack the country or the agency.

The ISI thinks it is in win-win situation. Assuming that India were to increase the pressure on Pak borders, it would be legitimate for the Pak army to move from its western borders (where it "fights" that so called war-on-terror at the behest of the USA) to the eastern border. The ground is already being prepared for this. This will not be acceptable to the USA - and the expectation is that this will lead to greater pressure from the USA on India to "act in a restrained manner". President-elect Obama has already indicated that he will want to get involved in Kashmir. The ISI would have killed two birds with one stone - get the USA involved in keeping India on a leash, and get USA involved in Kashmir (especially in the background of a hugely successful election in Kashmir - ignore the title of the linked article - a 50% plus turnout has to mean something in the context of violence threatened by the separatists).

On the other hand, the best that the US and Indian govts can do, is to pressure Zardari to change the ISI chief. This has already happened in the recent past, but with General Kiyani himself of ISI vintage, does that really mean anything?

To break this logjam, India therefore has to figure out a means of increasing the cost for ISI to go about its business. The debate in India has to move towards this ...