A few observations on India's banking crisis

Good Budget or not, there is nothing to suggest a change from the view, consistently held by this blog for nearly two years now, that the biggest immediate challenge facing the Indian economy is the resolution of its banking crisis. And yes, it is an as yet unrecognized crisis, not a mere problem. Fundamentally, India's banking sector is clearly in the red, with negative equity. And without addressing this, all other efforts are only tilting at the windmills. 

Consider four graphics from Credit Suisse, the go-to source on banking sector problems. The first shows the latest on all types of stressed loans, an estimated 13.4% of all loans.

The second is a table which captures the acuteness of stress, with stressed loans at 230% of public sector banks' capital and stress asset cover of just 16%,

The third one estimates the capital infusion requirements till 2018-19 to be in the range of $34-53 bn, of which just $8 bn is budgeted,

And the final graphic appears to indicate that things may worsen still, given the rising corporate indebtedness. It finds that, among its sample of 3700 listed non-financial companies with cumulative debt over $500bn, the share of companies having interest coverage ratio less than one rose to 41% of the sample companies debt at the end of Q3 2016. 

Five observations below.

1. All these problems were no secret to keen observers of the economy, and therefore, it is indeed surprising that the banking regulator has chosen to act with the current alacrity only now. The banking regulator was behind the curve both in preventing the problem and its recognition, and is now behind in its redressal too. 

2. A far higher magnitude of recognition and haircuts may be required, especially in some sectors. And this may need to happen fairly quickly, or risk increasing the scale of the insolvency and raise the resultant resoluction costs. In such cases, there is no point in waiting in the hope that market prices will rise and demand will improve, since the scale of indebtedness is so high that there cannot be any light at the end of the tunnel. The Credit Suisse, for example, estimates that many of the largest steel firms have debt per tonne of production which is many times more than their replacement cost or unit EBITDA even with the minimum import prices. In fact, almost 86% of steel sector debt is stressed, against just 10-20% currently recognized as NPAs.  

3. This requires "deep surgery" that goes beyond asset disposals and recapitalization. It involves governance reforms to public sector banks, revisiting infrastructure contracting assumptions and principles, and anchoring growth expectations at realistic levels. It demands hunkered down growth targets and strategies. 

4. In an eco-system where fraud and malfeasance are never far away, and which is also gripped by decision paralysis, the regulator needs to be wary of the potential incentive distortions associated with such resolution activity. For example, currently, apart from the direct recognition process, the RBI already has the Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR), and the 5-25 takeout financing schemes. In both the latter two, the banks have been using Security Receipts (SRs), issued by Asset Reconstruction Companies (ARCs) in return for stakes in assets disposed as part of SDRs, and covertible preferential shares (CPS) that banks take in regular bilateral restructuring and SDR process. There is the very strong risk that SRs and CPSs could end up becoming the parking grounds for hiding bad assets within bank balance sheets, instead of their recognition, haircuts, and disposal. 

It is no surprise that the RBI recently warned banks about the possibility of promoters of companies establishing shell companies to repurchase their assets which are auctioned off at much lower prices.

5. What complicates the problem is the unique nature of the sector, where information failures can play havoc. While the true extent of the problem needs steps for immediate recognition, its resolution may have to be prudently phased over time. A shock therapy of sudden disclosure, disposals, restructuring, provisioning, and recapitalization will most certainly parlayze the credit markets and even bring down many banks. Instead, recognition has to be followed by a clear (to the extent possible) and predictable reform path that reassures the markets. All along, once recognized, the RBI needs to put in place stringent information reporting requirements, and have the information rigorously scrutinized by its forensics and analytics division. All this requires credible and far-sighted leadership at multiple levels.  

Weekend reading links

1. In the context of the Jat agitation, Christophe Jaffrelot makes the argument that it is a reflection of the inadequacy of private sector employment opportunities and the relatively high wages in public sector, 

In the private sector, the average daily earnings of the workers was Rs 249 in 2011-12, according to the Labour Bureau, and those of the employees at large, Rs 388. By contrast, in the public sector, the figures were respectively almost three times more at Rs 679 and Rs 945... Understandably, the young Jats, Patels, Kapus and Marathas who do not find good jobs in the private sector fall back on the government. The search for government jobs among these castes is also influenced by their particularly skewed sex ratio... With fewer girls compared to boys in these castes, there is competition in the marriage market. However, there are fewer government jobs these days. There were 19.5 million jobs in the public sector in 1992-93 when India’s population was 839 million. While there are 1.2 billion Indians now, the number of jobs in the public sector has shrunk to 17.6 million. In states that have aggressively implemented the liberalisation policy, government jobs have almost disappeared. For instance, the government’s share in employment in Gujarat is only 1.18 per cent whereas it is 16 per cent in Kerala.

2. Livemint has six graphics drawn from IMF data illustrating how badly India fares on general public finance indicators and expenditures on health and education in comparison to other far less developed countries. General government revenues as a share of GDP is the lowest among the comparison group,

3. The second consecutive weak monsoon and declining farm prices mean that rural distress is compounding general economic woes. Rural incomes have been falling, as reflected in the declining tractor sales,

4. The latest addition to the very large body of evidence that India's middle class is disturbingly small comes from Livemint - just 51 million households with annual income above $10000 out of 267 m families, with the vast majority living at extremely vulnerable income levels. 

And as a reminder to those constantly playing the China theme, the contrast is night and day,

5. Livemint reports that the experiment of having an exclusive tax bench in the Supreme Court, hearing only tax matters, appears to have been a success. The two-judge bench disposed-off 170 cases, a four-fold increase over previous years. 

6. Business Standard draws attention to the just released data on investment proposals, which at Rs 3.11 trillion for 2015, touched an 11 year low. Actual investments too were down from Rs 787.47 bn in 2014 to Rs 779.72 bn in 2015. 

As the Livemint grahic below shows, while the metrics are smaller in investment proposals, the actuals materialized have stayed the same over the past four years. Further, ten industries accounted for 65% of all investment implemented and 10 states for 80% of all proposals. 

The most worrying sign is about the level of investment proposals. Given the aggressive courting of investors and the widespread euphoria, coupled with economic weakness across the world, it was only to be expected that the investment proposals increase. This would especially be so given the low base effects legacy from a weak economy and decision-paralysed governance of 2012-14. But even here, the decline in investment proposals over 2012-15 has been about 40%. 

7. Distressed corporate balance sheets and rising bank NPAs have created a self-reinforcing downward spiral of bank credit squeeze to private firms, especially those outside the larger corporates

8. While capital investment as a share of total central government expenditure has been rising slowly to nearly a fifth, its distribution has increasingly been towards social services - housing, labor welfare, and rural works - whereas the share of transportation has declined sharply.

Interestingly, and underlining the importance of co-operative federalism, just a third of the capital expenditure of the central government is executed by itself, with the major share being transfers and loans to state and local governments. 

In fact, in 2014-15, the central government's capital expenditure was 1.78% of GDP or Rs 1.92 trillion, to the state government's 3.54% of GDP or over Rs 4 trillion.

9. Interesting observation on the changes in India's tax-to-GDP ratio over time,

In the 25-year period from 1965 to 1990, India’s tax-to-GDP increased steadily from 10% to 16% while GDP increased 2.8-fold. In the subsequent 25-year period from 1991 to 2014, India’s tax-to-GDP stayed roughly constant between 16% and 17% while GDP increased 4.5-fold. It is puzzling to us that just as India broke away from its clichéd Hindu rate of growth post the 1991 economic reforms to grow much more rapidly, its tax-to-GDP ratio stayed constant, belying those who would have predicted an increase. That, curiously, India’s rate of tax revenues did not grow commensurate with its GDP growth post the 1991 reforms is inexplicable.

What could possibly be the reason? Given that direct taxes at 2-3% of GDP is marginal, most of the changes would have revolved around indirect taxes. Evidently, in the 1965-90 period, state expanded its indirect tax base, while in the 1990-2014 period, it did little to expand the direct tax base. The later is difficult to rationalize, given the massive income growth, concentrated especially at the top of the income ladder, both individuals and corporates, who, in any case, form the lion's share of direct taxation. In other words, these incomes at the top may have grown much faster than the proportionate rise in their income tax payments. Among all public policy priorities, this demands an urgent examination by the government.    

10. The positive side of the high inflation was that it kept the tax revenues high and ensured that the debt-to-GDP ratio was kept under control. Now with low inflation, nominal GDP growth has fallen, even touching the government's average interest cost, thereby raising questions about the country's debt sustainability.

11. While this is well-known within the government, but rigorous evidence has been scarce,

Since 2009, Accountability Initiative’s PAISA study (Planning, Allocations and Expenditures, Institutions: Studies in Accountability) has been tracking money flows in elementary education. In not one of the eight districts across six states that we have studied did we find a district that received its entire allocated budget within the financial year. For the money that does reach, much of it makes its way to the district half way through the financial year. Even districts in well-functioning states like Maharashtra and Himachal Pradesh face this unpredictability. Once money reaches the district, it can take two to six months to travel from the district bank account to the schools, where expenditure actually takes place... for over 50% schools in India, even small grants that schools are expected to receive annually for essential purchases, are credited to their bank accounts somewhere between November and December, well over halfway into the school year. 

12. For all talk of decentralization, local governments share of revenues and expenditures, on a variety of metrics, remain marginal.

13. This analysis of the CAG report, which paints a very dismal picture of Indian Railways,

As of March 2014, the Indian Railways had spent around Rs.92,000 crore on 479 projects, including some dating back to the 1970s and 80s. But due to shoddy contract and project management, costs have more than doubled, and the Railways needs an additional Rs.183,000 crore just to finish these ongoing projects.

And this analysis of the ticket prices,

The Indian Railways' average revenue per passenger km for ordinary second class is a mere 13.80 paise, 14.54 paise for suburban trains, 27.47 paise for second class mail and express trains, and 109.47 paise for upper class, making it possibly the cheapest rail transport system in the world.

The assumptions underlying the optimism presented in the Railways Budget may not exactly be forthcoming. 

14. Finally, in order to relieve crowding, and boost revenues, Disney introduces surge pricing in its Florida and California theme parks during holidays and some weekends, raising prices by about 20%, 

At Disneyland, located in Anaheim, Calif., which attracts roughly 17 million visitors annually, single-day tickets now cost $99... “Value” tickets, for Mondays through Thursdays during weeks when most schools are in session, will drop to $95. “Regular” tickets (most weekends and many summertime weeks) will climb to $105. “Peak” tickets (most of December, spring break weeks, July weekends) will cost $119. At Disney World in Orlando, Fla., which includes four major theme parks, the price changes are more complex, because they vary by park. At the most popular Disney World park, the Magic Kingdom, which handles nearly 20 million visitors annually, single-day prices will remain at the current level, $105, for value periods. Prices will rise to $110 for regular periods, and to $124 for peak... The largest proportion of days at both Disneyland (46 percent) and Disney World (49 percent) fall in periods designated as regular; peak days account for 27 percent of the year at Disneyland and 29 percent at Disney World.

State capability 3.0 - The Finance Ministry veto?

In addition to the standard examples of state capability weakness, reflected in weak public service delivery, there are atleast two other far less discussed forms. One is decision paralysis due to excesses by judges, RTI activists, auditors, and vigilance officials. The second, barely discussed contributor to state capability weakness is the de-facto veto exercised by Finance Ministries. 

Consider the example of financial inclusion. Business Correspondents (BCs) were introduced with the intention of expanding access by taking banking services to the customer's door-step in remote rural areas. Its success was evidently contingent on the commercial viability of the business model as reflected in the income earned by the BCs. But as Sumita Kale points out, this may have been compromised by the hard charging Finance Ministry,

While the Report of the Task Force on an Aadhaar-Enabled Unified Payment Infrastructure had recommended a 3.14% transaction processing charge to the banks, in reality the rates allowed by the central and state governments have been 1-2%. In January 2015, the finance ministry fixed DBT commissions for banks: for urban schemes, at the National Electronic Funds Transfer/Aadhaar Payment Bridge rate; but for rural schemes, the rate was fixed at 1%, subject to an upper limit of Rs.10 per transaction. Detailed costing analysis fromconsulting firm MicroSave in May 2015 shows that 2.63% is the break-even charge: the break-up of this across the three main constituents in the disbursement chain came to about 0.96% for business correspondent (BC) network managers, 0.85% for business correspondent agents, and about 0.82% for the banks. The analysis also revealed that the savings to the government through lower administrative costs and leakages are significant. Clearly, the government can well afford adequate compensation to the banks and agent networks for their role in the disbursements.

The story is the same everywhere, across programs, both in central and state governments. Ministries formulate schemes and proposals after elaborate stakeholder consultations, with detailed costing taking into consideration program sustainability and commercial viability factors, and run them through Finance Ministry to the approving authority (Cabinet or Chief Ministers). As would be expected given the scarce resources and large competing demands, the Finance Ministry cuts down on program allocations. It would have been perfectly fine, indeed necessary, if this was all. 

Unfortunately, in most cases, the Ministry goes far beyond and offers its wisdom on program commercials (a unit rate compensation of Rs x instead of Rs y), procurements (why not through the local government agency or SHGs), financials (why not leverage resources from Corporate Social Responsibility funds or PPP), contracting strategies (one model of PPP over another), and even on manpower deployment (one administrative structure over another, x number of people to do a task instead of y). And each of these prescriptions are drawn from mindless generalization of outlier and misleading thumb-rules and 'best practices'. 

If it were only offering suggestions, the implementing Ministry could have examined and taken necessary action. But in India's bureaucratic rules of the game, such prescriptions assume the force of a veto. This is all the more so since Finance Ministry's recommendations are invariably in line with the bureacratically correct practice of lowering public expenditure. Disagreement with it runs the future risk of a malicious complaint or a RTI query or an adverse audit comment and a potential vigilance investigation with its public humiliation.  

Its manifestations are felt across programs, especially at the last-mile of implementation, and become the difference between success and failure. The commonest form of veto is by way of skimping on transaction costs (transportation and storage charges for PDS), remunerations (mid-day meal workers), construction costs (unit costs for ), operation and maintenance expenditures (school and toilet maintenance in SSA, hospital maintenance in NHM), leverage from other sources (CSR, NREGS etc), and so on. Doubtless some of these are unavoidable, forced down by the acute scarcity of resources and political economy considerations that demand the butter be spread evenly and universally. But many others like the one for BCs are plain arbitrary and flippant. 

At a very objective level this is as much a transgression of jurisdiction as kritarchy or tyranny of presumptive valuation. Consider this. A professionally competent agency (the Ministry concerned), with the responsibility of implementation, and democratically empowered, formulates a program following the due process, and circulates for approval. En-route, another Ministry, with neither the contextual knowledge nor the professional competence, and at best, with accounting and budgeting competence, picks apart program components and details, and that too in a manner that seriously undermines its successful implementation prospects. Where else can you have this except in a 'flailing' state! 

An update on DISCOM Bonds

As part of the UDAY scheme, the state governments across India will assume three-quarters of discom debts over the next two years. Apart from significantly lowering their borrowing cost (current cost of 12-14% to 8-9%), it is hoped that this would relieve the discoms off the crippling debt burden. As part of the scheme, the state governments are expected to issue bonds worth about Rs 3.2 trillion (75% of Rs 4.3 trillion total discom debt) over the coming two fiscal years, with two-thirds in the first year.

In this context, Andy Mukherjee pointed to the $48 bn challenge of markets ability to absorb these bonds. Consider this. The total net market borrowings of the central and state governments for 2014-15 were Rs 4.53 trillion and Rs 2.07 trillion respectively, and Rs 4.4 trillion and Rs 2.2 trillion respectively till February 12, 2016. In other words, if all state governments join, and most the largest have already done so, the cumulative UDAY bond issuance in 2016-17 would, at Rs 2.15 trillion, be larger than the state government issuance for 2014-15.

This coupled with a higher fiscal deficit could put a massive strain on the bond markets and quickly drive up the yields on these bonds. In fact, in the first round of auctions for Rs 21,445 Cr worth 10 year State Development Loans (SDLs), yields touched 8.88%, higher than expected, and indicative of the strains likely as more bonds flow into the market. As a reflection of the widening spreads, 

The SDL auction found takers at yields between 8.63-8.88% for 10-year maturity bonds. The 10-year benchmark G-sec (central government bond) yield is currently hovering around 7.82%, indicating a spread of 80-105 basis points. The spreads are sharply higher than the average spread of 39-45 basis points at the start of 2016.

One way around this, and not a very desirable one, is to summon the perennial buyer of last resort in India's financial markets, LIC. And unsurprisingly, Livemint reports that LIC and EPFO have been asked to assist in mopping up the restructuring bonds that will be issued. 

The mixed story with school choice and vouchers

Free-marketers hail school choice through vouchers as the most effective strategy to foster competition and improve school standards. However, the evidence on school vouchers has been, at best, mixed. I have blogged earlier, using the logic of Schelling's chessboard experiment, to argue that school choice is likely to lead to 'emergent outcomes' that may be far less benign than expected. 

The Economist draws attention to a study of a very large school voucher program initiated in New Orleans in the aftermath of Hurricane Katrina whose findings its describes as "underwhelming". In 2014, the Louisiana School Program (LSP) assigned more than 6000 students from low-income families from 12000 applicants to 126 private schools through a lottery system. The study by Atila Abdulkadiroglu, Parag Pathak, and Christopher Walters compared learning outcomes for lottery winners and losers in the first year after the program's statewide expansion and find,

This comparison reveals that LSP participation substantially reduces academic achievement. Attendance at an LSP-eligible private school lowers math scores by 0.4 standard deviations and increases the likelihood of a failing score by 50 percent. Voucher effects for reading, science and social studies are also negative and large. The negative impacts of vouchers are consistent across income groups, geographic areas, and private school characteristics, and are larger for younger children. These effects are not explained by the quality of fallback public schools for LSP applicants: students lotteried out of the program attend public schools with scores below the Louisiana average. Survey data show that LSP-eligible private schools experience rapid enrollment declines prior to entering the program, indicating that the LSP may attract private schools struggling to maintain enrollment. These results suggest caution in the design of voucher systems aimed at expanding school choice for disadvantaged students.

Admittedly the results ought to be read with caution and need to be observed over the coming years. But it cannot be denied that the reality with vouchers is at least far more nuanced. Incidentally, the Economist report also points out that post-Katrina, New Orleans' public schools improved dramatically on the back of enlightened leadership.

That scarce trait is more likely than fancy innovations to improve school education in countries like India. Further, in its absence, even innovations are likely to flounder during implementation. Delegating powers to district and local governments, despite all its concerns, is one way to facilitate the emergence of such bright spots. 

Weekend reading links

1. The banking sector and corporate balance sheets constitute the Indian economy's two biggest immediate problems. The ebitda-to-interest ratio of the median company with market capitalization of more than $100 m four years ago is lowest for Indian corporates.

2. This blog has held the view that Indian economy is currently investment demand constrained, and, therefore, unlikely to respond to supply-side measures. In this context, Jahangir Aziz highlights the challenge,

Ask any corporate (entity), and in private they will all tell you the reason to have shelved their expansion plans is not because they can’t get land, or that labour reforms have not been implemented or that cost of capital is high—instead, they will all say there is no visibility of demand, and until there is visibility of sustained demand over the medium term, regardless of reforms on the cost side, it is very difficult for them to invest.

About the priorities for public policy to re-ignite demand,

You will need to now start spending on restructuring and reforming the areas where Indians save the most—for their children’s education, housing, daughter’s wedding and healthcare. If you look at out-of-pocket expenses on health and education, they are astronomically high in India. The government needs to start attacking the areas where precautionary savings are the highest. Education and health are readily and easily observable areas where people put in massive amounts of savings and, therefore, the government should be putting in money here, rather than infrastructure. We need a better balance between infrastructure and pushing money into education and health. The biggest expenses are for higher education and not for 12 years of schooling—where you spend ridiculous amounts for private colleges and universities. This is because the centre has not met its responsibilities of building places of higher education.

And why the current priorities, even in infrastructure may be off the mark,

If you look at infrastructure design in India, we are expanding ports and connecting them to hinterlands, we are expanding airports, we are connecting the metros by expanding the Golden Quadrilateral. But no one talks about, say a 10-lane highway from Kanpur to Coimbatore. There is no way I can go from Kanpur to Coimbatore without going through either East Coast or West Coast. These large investments make sense only if we believe that the export-led model of growth that we had in the early part of 2000s will come back. But if exports won’t come back, why are we even bothering with new ports.? From infrastructure design to mindsets, all has to be changed if we need to find new sources of demand, and this new source is domestic consumption. This new demand will get me the corpus to start investing, and that will generate growth.

3. A fascinating feature on how baseball has become the ultimate socio-economic mobility ladder in the Dominican Republic. As of opening day 2015, Dominicans made up 83 of US major league baseball’s 868 players.

4. Thanks to tax inversions, the Tiebout theory would bind even more strongly for corporate tax in the years ahead. Nice article in the Times on the recent spate of tax inversions in the US. Addressing the issue of tax arbitraging should top any multilateral agenda. By the way, it is surprising why the beggar-thy-neighbor, low-tax policies of countries like Ireland does not attract the same level of indignation that currency manipulation does. 

5. Martin Wolf analyzes Japan's problem as fundamentally one of weak demand - an aging population and declining demand shrinks investment opportunities, leaving corporates with growing surpluses. In this, as has often been said, Japan may be a portend for many developed economies in the years ahead. But despite this serious headwind, the Japanese economy has done remarkably well, having the highest growth rate of GDP per working person for the 2000-15 period among all G-7 economies.

Martin Wolf's prescription is for policies to slash corporate surpluses by encouraging them to raise wages (to boost demand) and impose taxes. I am not sure. This works under the presumption that demand is currently suppressed. A country with worsening demographic balance needs a little less of everything each passing year. Higher wages are therefore only likely to be saved. A more compelling suggestion would be to ease immigration and activate that demand channel.

6. Japan may also be in the vanguard of secular stagnation trends, of which Larry Summers is ever more convinced,

With appropriate caveats about the complexities of drawing inferences from indexed bond markets, it is fair to say that inflation for the entire industrial world is expected to be close to one percent for another decade and that real interest rates are expected to be around zero over that time frame. In other words, nearly seven years into the U.S. recovery, markets are not expecting “normal” conditions to return anytime soon.

Apart from cheap capital goods, this explanation for investment demand being constrained is interesting,

The new economy tends to conserve capital. Apple and Google, for example, are the two largest U.S. companies and are eager to push the frontiers of technology forward, yet both are awash in cash and are under pressure to distribute more of it to their shareholders. Think about Airbnb’s impact on hotel construction, Uber’s impact on automobile demand, Amazon’s impact on the construction of malls, or the more general impact of information technology on the demand for copiers, printers, and office space. And in a period of rapid technological change, it can make sense to defer investment lest new technology soon make the old obsolete.

Having said all this, Summers appears to refute his original assertion and claim that it is, after all, possible to get back on the previous growth path,

Although developments in China and elsewhere raise the risks that global economic conditions will deteriorate, an expansionary fiscal policy by the U.S. government can help overcome the secular stagnation problem and get growth back on track... An expansionary fiscal policy can reduce national savings, raise neutral real interest rates, and stimulate growth.

This argument is surprising and runs contrary to his own argument about investment demand being constrained. How would fiscal policy address the headwinds of technology and capital conservation? As Japan has been finding out over nearly a quarter century, public investments in infrastructure can only get you so far. It can, at best, ameliorate some of the pains of a secular stagnation.

7. A very good exploration of the divide in the Keynesian camp between those advocating continuation of monetary accommodation (Krugman, Summers, De Long) and those (Fed insiders) preferring to proceed with raising rates.  

Resolving bad loans and reconstructing assets

I had blogged earlier that addressing India's banking crisis would require both resolving bad loans and reconstructing assets. And both would have to be complemented with devolving complete operational autonomy and massive recapitalization. 

The first step would be to classify stressed assets into completed infrastructure projects, ongoing projects, and all remaining retail, credit card, and commercial loans. In the case of the last category, equity holders should be stripped and assets auctioned off to private Asset Reconstruction Companies (ARCs). 

As regards completed infrastructure projects, where it is possible to monetize the revenue stream, the current Strategic Debt Restructuring (SDR) may be the best course of action. But banks ability to dispose-off these assets remains questionable. An alternative, therefore, may be to auction them off to ARCs, stripping equity holders and with haircuts on banks, with a cascaded and backend clawback of some share of future revenues to the banks and equity holders. This could avoid the political backlash likely in case the asset generates windfall revenues once the economy recovers. 

Finally, ongoing projects would need financial reconstruction. A vast majority of them are likely to be commercially viable once completed, but may require further equity infusion. Further, the construction risks associated with them make them less attractive for long-term investors like infrastructure debt and equity funds. And, in any case, such risks are best borne by the government. In the circumstances, a preferable strategy would be to value them and sell off to a public entity like the IIFCL. The IIFCL, by itself or through the newly created National Infrastructure and Investment Fund (NIIF), can raise three or four dedicated infrastructure debt funds, leveraging long-term foreign patient capital, to finance these purchases. These funds, with professional project management units, should manage the completion of these projects. The financing patterns can even be restructured once the construction is completed. A distinction may have to be made between public good assets like roads and private assets like power and steel plants, in terms of the extent of public financing. 

All this would have to be done quickly and simultaneously. The entire process may be concurrently audited and all requisite clearances taken to pre-empt post-facto audit and vigilance objections. As aforementioned, it would have to go with clearly defined operational autonomy as well as an equally clear recapitalization schedule. The operational autonomy would have to include eschewing the urge to saddle banks with various social obligations without sufficiently compensating them. 

The biggest uncertainty with this approach rests on the supply side. Does India's credit and capital markets have the capacity to absorb such scale of transactions? Will there be enough buyers for these assets? The gross NPAs are estimated to reach Rs 5.5 trillion by end-March 2016, and maybe double that by including all the other badly stressed assets. To put that in context, the total incremental non-food bank credit in 2014-15 was Rs 5.46 trillion, new bond and equity issuances Rs 0.17 trillion, new PSU bond issuance Rs 0.38 trillion, net CP issuance Rs 0.87 trillion, and all disbursements by public financial institutions Rs 1.03 trillion.

Update 1 (22.02.2016)

Links to articles that explain how an ARC works, problems faced by ARCs, more on problems, high ARC asset acquisition costs and banks' risk aversion, systemic problems, and disturbing relationships between bankers, promoters and ARCs.

Update 2 (26.02.2016)

Corruption is never far away with such deals. Livemint reports of a circular by the RBI on,

... fears that promoters of companies acquired by banks after they failed to repay loans may be using shell entities, in India and elsewhere, to buy back these assets at much lower prices... If that is the case, it would also allow unaccounted-for or black money stashed by Indian businessmen overseas to come back into India.

And on the progress with the Strategic Debt Restructuring (SDR) scheme,

Since June 2015, when SDR rules were introduced, lenders have converted debt to equity in a number of firms including Electrosteel Steels Ltd, Ankit Metal and Power Ltd, Rohit Ferro-Tech Ltd, IVRCL Ltd, Gammon India Ltd, Monnet Ispat and Energy Ltd, VISA Steel Ltd, Lanco Teesta Hydro Power Pvt. Ltd, Jyoti Structures Ltd and Alok Industries Ltd. Of these, the only known case where lenders are closing in on a sale is Electrosteel Steels.

Crony capitalism, kritarchy, and India's banking sector

Livemint has a good summary of the problems facing India's banks,

Collectively, 39 listed banks have posted a profit of Rs.307 crore in the December quarter against Rs.16,807 crore in the year earlier and Rs.17,411 crore in the three months ended 30 September 2015... For the entire banking system, provisions rose from Rs.23,646 crore to Rs.49,017 crore. State-run banks... gross non-performing assets (NPAs) rose close to Rs.1.3 trillion in just one quarter, between September and December—from Rs.2.62 trillion to Rs.3.93 trillion. For all publicly traded banks, the rise has been close to a trillion in a quarter—from Rs.3.4 trillion to Rs.4.38 trillion. If we compare this with the year-ago period, then the gross NPAs have risen by almost 50% for the industry, from Rs.2.92 trillion in December 2014. After provisions, net NPAs of the Indian banking industry in the December quarter crossed Rs.2.5 trillion, about 48% higher over December 2014. The state-run banks account for more than 90% of this—Rs.2.31 trillion... Fifteen Indian banks now have at least 7% and up to 12.64% gross NPAs and only one of them is from the private sector (Dhanlaxmi Bank Ltd, 9.69%). 

The aggregate solvency ratio, net NPA to net worth, of 19 public sector banks rose from 35.8% to 45.3% from the first to third quarter of 2015-16 fiscal year, far below the 15-20% acceptable rates. The provision coverage ratio has slipped to 43% and the Credit Suisse estimates the gross NPAs to rise to 6.6% by March 2016. The RBI has given banks two quarters to recognize and provision for all their NPAs. It is being estimated that the gross NPAs could rise to about Rs 5.5 lakh Cr from Rs 3.5 lakh Cr at the end of second quarter of 2015-16. All this is apart from the problem of disposing off the assets taken up under the Strategic Debt Restructuring (SDR) by 31st March 2017, and the potential losses in the 5:25 takeout scheme.

As banking sector woes mount in India, the Indian Express writes,

According to RBI estimates, the top 30 loan defaulters currently account for one-third of the total gross NPAs of PSBs. Till March 31, 2015, the country’s top five PSBs had outstandings of Rs 4.87 lakh crore to just 44 borrowers, if borrowers were to be categorised in terms of those having outstandings of over Rs 5,000 crore

The RBI Deputy Governor SS Mundra made a presentation on the mounting NPA problem, which had the graphic below on the distribution of bad loans based on category of borrowers,

It is clear that India's banks have a problem with lending and recovering from its largest clients. That the banks are able to efficiently manage operations with its 'riskiest' and largest group of borrowers (agriculture and micro enterprises) bears some testament to the strength of its general due-diligence and recovery mechanisms. But somehow, this systemic strength breaks down with its largest clients. It is hard to not avoid coming away with the impression that crony capitalism is the contributor. Or is it so that the small borrowers are more credit-worthy (or less unscrupulous) than the bigger ones in India's context!

And in the latest example of cowboy justice, the Supreme Court, taking cognizance of newspaper reports, expanded the scope of an ongoing PIL and directed the RBI to furnish the list of all defaulters with due more than Rs 500 Cr. Now, this is not as cut and dry a case as it would appear to those newspapers. When markets are spooked, it may not exactly be a good idea to go the full hog with transparency and reveal all the bad news, especially if the firm faces a liquidity, and not solvency, problem (as would be the case with a delayed project, which has soaked up debt and is not generating cashflow). 

It is for this reason that TARP in the US was implemented without disclosing information on which bank was accessing various credit windows. In fact, even revealing information about which bank was getting assistance from the Treasury or the Federal Reserve was considered systemically unhealthy. The results of the stress tests done at the height of the sub-prime crisis, which are otherwise on the public domain, were not disclosed. Such information have the potential to trigger runs on financial institutions and contagion on the financial market itself, with the effect of turning a liquidity problem into a solvency crisis. 

It is surely beyond the Honorable Supreme Court's competence to adjudicate on such decisions. And, unlike a few recent cases, it cannot withdraw its orders without having caused considerable economic damage. 

State capability 2.0 - How much transparency and accountability is too much?

In 2009, the Harvard Law School Professor, Lawrence Lessig authored a provocative article titled 'Against transparency: The perils of openness in government'. In the context of disclosure requirements on campaign donations, he describes the difficulty of not falling into the trap of attributing causality to every political decision if the decision-maker accepted some form of donations from those who benefited from the decision. He writes,

The point is salience, and the assumptions of our political culture. At this time the judgment that Washington is all about money is so wide and so deep that among all the possible reasons to explain something puzzling, money is the first, and most likely the last, explanation that will be given. It sets the default against which anything different must fight. And this default, this unexamined assumption of causality, will only be reinforced by the naked transparency movement and its correlations. What we believe will be confirmed, again and again.

But will not this supposed salience of money simply inspire more debate about whether in fact money buys results in Congress? Won’t more people enter to negate the default... This is the problem of attention-span. To understand something--an essay, an argument, a proof of innocence-- requires a certain amount of attention. But on many issues, the average, or even rational, amount of attention given to understand many of these correlations, and their defamatory implications, is almost always less than the amount of time required. The result is a systemic misunderstanding--at least if the story is reported in a context, or in a manner, that does not neutralize such misunderstanding. The listing and correlating of data hardly qualifies as such a context. Understanding how and why some stories will be understood, or not understood, provides the key to grasping what is wrong with the tyranny of transparency.

Once we have named it, you will begin to see the attention-span problem everywhere, in public and private life. Think of politics, increasingly the art of exploiting attention-span problems--tagging your opponent with barbs that no one has time to understand, let alone analyze. Think of any complex public policy issue, from the economy to debates about levels of foreign aid.

This insight carries great significance in the context of recent trends on transparency and accountability that has swept public affairs in India. Over the past decade, led by the Right to Information (RTI) Act 2005, crusading information activists, auditors, investigators, and judges have sought to shine light on political corruption and bureaucratic complicity and cleanse public life. This, coupled with the explosive growth of 24X7 electronic news media channels, has shifted the benchmarks on transparency and accountability towards the other extreme. While largely welcome, this transformation has not been without its debilitating effects.

The most damaging effect has been its contribution to shrinking the decision-making space available and inducing a 'decision-paralysis' at the highest level of the state and central bureaucracy. It has made officials reluctant to exercise their judgement and take decisions, for fear of being accused post-facto, several years later, even after retirement, of having caused presumptive loss to public exchequer. This has seriously undermined state capability at policy formulation level and in the execution of large infrastructure projects. The growing pile of stalled projects and decision-making delays at higher levels are just two manifestations.

All these changes have to overcome strongly held conventional wisdom and political correctness. They need to be done with great care and tact so as to not upset the delicate institutional balance that is critical to India’s vibrant democracy. They have no quick-fix solutions. No extent of lateral entry is going to resolve this. Not even change in governments and a strong commitment to good governance can easily correct the incentive distortions created by these trends. It requires introspection, foresight and leadership of an exceptional nature from all institutional stakeholders. An acknowledgement of the problem is, therefore, an essential first step to address this deep-rooted institutional incentives problem.

China, rest of the world, and free-trade

This blog has consistently argued that it is sound economic and, even more, sound politics to satisfactorily compensate the victims of international trade. A couple of weeks back, I had blogged about the need to acknowledge the legitimate concerns of the victims of global trends like trade and globalization. Dani Rodrik makes the same point here in the context of the debate on Trans-Pacific Partnership (TPP). 

The Economist points to a new paper by David Autor, David Dorn, and Gordon Hanson which finds damaging effects on the US labor market from the massive growth of Chinese exports over the past two decades,

China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize. 

The effects of the Chinese job sucking machine has been in line with the logic of Samuelson-Stolper hypothesis in depressing the wages of less-skilled workers in developed countries. For sure, over time the labor market adjustments will happen, but not before inflicting considerable pain and social instability in localized pockets. The costs have been enormous,

The authors found in a 2013 paper, competition from Chinese imports explains 44% of the decline in employment in manufacturing in America between 1990 and 2007. For any given industry, an increase in Chinese imports of $1,000 per worker per year led to a total reduction in annual income of about $500 per worker in the places where that industry was concentrated. The offsetting rise in government benefits was only $58 per worker. In a paper from 2014... focusing on America’s “employment sag” in the 2000s, the authors calculate that Chinese import competition reduced employment across the American economy as a whole by 2.4m jobs relative to the level it otherwise would have enjoyed.

 For China though, the gains from trade have been remarkable, even unprecedented,

From 1991 to 2013 its share of global exports of manufactured goods rocketed from 2.3% to 18.8%... Average real income rose from 4% of the American level in 1990 to 25% today. Hundreds of millions of Chinese have moved out of poverty thanks to trade.

In this context, though not well documented, it is most likely that the Chinese imports have had a similar immiserating impact on labor markets across developing countries as it had on the US labor market. India's current Chief Economic Advisor Arvind Subramanian has been among those who have described "China’s exchange rate regime as a mercantilist trade policy whose costs are mainly borne by other developing and emerging market countries". Strip China out from the globalization balance sheet and the net effect may even be a slight negative.

It has therefore been one of the most unheralded Chinese foreign policy coups that it has managed to deflect attention from this profound reality and prevent the formation of any coalition of developing countries against its beggar-thy-neighbor trade practices. In some ways, Beijing's checkbook diplomacy has been spectacularly successful.

Update 1 (24.03.2016)
Eduardo Porter urges a more nuanced view on free trade and an acknowledgement of its distributional consequences. 

Weekend reading links

1. The difference a century makes! Tim Taylor has this snapshot of the life of an average American worker from 1915,

Whether or not your abode was a single-family home or a crowded tenement, it probably was heated by a potbelly stove or by a coal furnace in the basement. It wasn’t until the coal shortage during World War I that oil or gas-powered central heating became a popular replacement for the hand-fired coal furnaces and stoves. Your home probably wasn’t yet wired for electricity; less than a third of homes had electric lights rather than gas or kerosene lamps. However, electricity was the byword of new middle-class homes, which sported electric toasters and coffee pots... Telephones could be found in at least a few million homes. However, direct dialing did not exist until the 1920s. If your home had an indoor toilet, the toilet likely was located in a closet or a storage area. It would be a few more years until it was common for toilets, sinks, and bathtubs to share a room... Although some households had running water in 1915, many rural families and city dwellers did not. Less affluent residents still heated a boiler full of water on a coal or wood range, rubbed clothes on a washboard, used a hand ringer, and hung clothes to dry. Homes without gas or electric heat were harder to clean because of soot from the fireplace or wood stove.

2. Election cycles affect Padma Awards too. The Times of India reports that 30% more awards were given during election years compared to the average of the preceding four years.

3. After nuclear weapons and stealth technologies and precision guided missiles, US military is embracing robotics in its attempt to stay ahead of rivals. "Swarming, unmanned, autonomous vehicles" have become the priority. Like with all previous endeavors, this time too, the field of robotics will benefit immensely from this focus. It is most likely that most of the major advances in robotics related technologies and its civilian applications will have its origins in US military. 

4. Amidst all talk of declining China, its firms appear well-positioned to play a dominant role in the  global telecoms, search, email, social media and e-commerce markets,

(After Samsung and Apple) the next three biggest smartphone makers are all from China: Huawei, Xiaomi and Lenovo... Alibaba has greater reach than Amazon... Ecommerce accounts for about one-tenth of all retail sales in China compared with about 7 per cent in the US. Tencent’s WeChat messaging and calling app has more than 650m active monthly users and is catching up rapidly with Facebook’s WhatsApp, which has just passed the billion-user mark... Google, Apple, Facebook and Amazon, the big four tech companies, may soon be competing more directly with Chinese companies — Baidu, Huawei, Sina and Alibaba, to name a few.

5. In December 2014, Rajasthan passed legislation that mandated functional toilets and minimum educational qualifications (Class X for Zilla Parishad and Panchayat Samiti, Class VIII for Sarpanch, and Class V for Schedule areas) to stand in local body elections. Haryana followed suit for Panchayat elections. The Supreme Court, in another example of kritarchy, upheld the legislations mandating minimum educational qualifications to stand in local government elections. The implications are profound,

The conditions have resulted in the shrinking of the pool of candidates who are eligible to contest. In Haryana, the education requirements—matriculation for the general candidates, Class VIII for women and Scheduled Caste men and Class V for Scheduled Caste women—has disenfranchised 78% of all men, 89.1% of all women and 62.1% and 67.5% of Scheduled Caste men and women, respectively, according to Census 2011 data... Of the 6,207 sarpanch elections across Haryana, 274 were won unopposed and 22 went vacant. It’s more or less the same story in Rajasthan where the January-February 2015 election saw 260 sarpanchs getting elected unopposed, compared to 35 in 2010.

The level of political participation fell across a range of parameters.

6. The day of reckoning for India's start-ups may be soon coming. After nearly $9 bn poured into startups over the past two years, Livemint reports that funding has dried up and firms are hiring investment banks to secure new funds or find buyers. In another manifestation of an impending disruption, FT reports that the investors in the larger ones are getting impatient and are demanding returns on their investments.

In this context, apart from the obviously inflated valuations, it is most likely that all the e-commerce firms may have over-estimated the size of the country's consuming class and their price elasticity of demand. Like with post-liberalization consumer durables market, which initially pointed to decades of China-like very high growth rates, it is likely that the initial growth spurt of e-commerce captured the pent-up demand and the market may now be settling down to more realistic levels of growth.

7. Interesting comparison in Mint about horticulture and foodgrains cultivation. Though its share of cropped area is miniscule, vegetables and fruits have overtaken foodgrains in production.

In terms of irrigated area, 87-90% of fruits and vegetable cultivation is in irrigated areas to just under half for foodgrains.

8. The Masala Bonds were always likely to be exactly that, masala, more garnish than substance. And the reluctance of corporates to go ahead only confirms it. Even with the removal of the with-holding tax and even if the Government of India takes the lead with direct issuances, it is most unlikely to take off. Apart from the well documented historically persistent and pervasive original sin hypothesis (developing countries cannot borrow abroad in their domestic currencies), the global economic uncertainties make it pretty much a non-starter. The comparison with Chinese 'dim-sum' bonds was plain misleading, as would be with most such things Chinese. In any case now, India is more investment demand constrained than capital constrained - decreasing overseas bond issuances (a five year low of $9 bn in 2015 against $19.2 bn in 2014) and ECBs, declining domestic corporate bond yields, lower credit off-take, and falling investment intentions. 

9. Negative interest rates and record low Baltic dry index portends dismal prospects for the world economy. Sweden's Riksbank cut its key short-term interest rate by 15 basis points to minus 0.5 per cent. Rates for dry bulk carriers, including container ships, have fallen below break-even prices, on the back of large capacity expansion over the past decade, in turn motivated by a 7% increase in global trade in the decade to 2008.  

10. India's banking sector appears to be gripped by a reflexive downward spiral of rising non-performing assets (NPAs), dragging down equity markets. Indian Express reports that the provisioning coverage ratio (total provisions to gross NPAs) of 20 public sector banks fell over the 2011-15 period and are all below the RBI mandated 70 per cent. Indian banks have written off Rs 2.77 trillion over the past ten years, more than half happening in the last three years, and gross NPAs are estimated to jump to Rs 4.26 trillion by March 2016, an increase of 32% over the year. 

Faced with a systemic bad asset problem, regulators face the classic dilemma. Clean up too fast and run the risk of individual bank runs and systemic contagion. Cleaning up too slowly runs the risk of prolonging the misery, even exacerbating it, and encouraging bankers to hide bad assets. 

11. Finally, Ricardo Hausmann makes a compelling case that Venezuela will be the first oil exporting domino to fall and predicts a disorderly sovereign default this year, 

While most other oil exporters used the boom to put some money aside, former president Hugo Chávez, who died in 2013, used it to quadruple the foreign debt. This allowed him to spend as if the average price of a barrel of oil was $197 in 2012, when in fact it was only $111. He also used it to maim the private sector through nationalisations and import controls. With the end of the boom, the country was put in a hopeless situation. The year 2015 was an annus horribilis in Venezuela with a 10 per cent decline in gross domestic product, following a 4 per cent fall in 2014. Inflation reached over 200 per cent. The fiscal deficit ballooned to 20 per cent of GDP, funded mainly by the printing press. In the free market, the bolivar has lost 92 per cent of its value in the past 24 months, with the dollar costing 150 times the official rate: the largest exchange rate differential ever registered...

As bad as these numbers are, 2016 looks dramatically worse. Imports, which had already been compressed by 20 per cent in 2015 to $37bn, would have to fall by over 40 per cent, even if the country stopped servicing its debt. Why? If oil prices remain at January’s average levels, exports in 2016 will be less than $18bn, while servicing the debt will cost over $10bn. This leaves less than $8bn of current income to pay for imports, a fraction of the $37bn imported in 2015. Net reserves are less than $10bn and the country, trading as the riskiest in the world, has no access to financial markets.

The importance of urban leadership

This blog has consistently held that Indian cities lack visionary leadership of the kind that is necessary to shape their long-term development. Municipal Commissioners, with their limited tenures and misaligned incentives, cannot be expected to provide the sort of leadership that a city resident with a five-year tenure and long-term political aspirations can potentially do.

Fernanado Haddad, the mayor of the 20 million Sao Paolo metropolis, is only the latest example of such leadership, challenging the "supremacy of the automobile" to ease congestion and improve commutes,

Drawing inspiration from policies in New York, Bogotá, Paris and other cities, Mr. Haddad has embarked on the construction of hundreds of miles of bicycle lanes and corridors for buses to blaze past slow-moving cars, while expanding sidewalks, lowering speed limits, limiting public parking and occasionally shutting down prominent avenues entirely to cars... surveys show relatively high lvels of support for his policies.

Such paradigm redefining policy mutations are most unlikely to come from bureaucrats. They are most likely to originate from political leadership. But critics point to its pitfalls. And they merit serious consideration. It may be true that three out of five (or four out of five) leaders may turn out to be less than benign, even venal.

But, given the institutional checks and balances, in the long run, we are likely to be none the worse off. In fact, the positive deviants alone may be enough to unsettle the bad equilibrium our cities are currently entrapped in. In any case, when this is the norm in pretty much all major developing countries, with equally corrupt and short-sighted political eco-system, and many of their cities have done far better than ours, it is not clear why we should be different.

Weekend reading links

1. Tyler Cowen points to the stark contrast in night-time ariel photographs of South and North Koreas to highlight the importance of institutions.

2. The US LNG exports, which just began, have already triggered off speculation of price wars in Europe. Like Saudi Arabia in oil, Gazprom has the potential to become the swing gas producer since it has the largest spare capacity and is also the lowest cost gas producer in the world. In the context of rising US exports and liquefaction terminal construction, the FT reports that Gazprom may be encouraged to increase production to push prices down lower to keep out the shale imports. 

It is only a matter of time before these forces reach the East Asian markets, keeping gas prices there contained. A truly integrated global natural gas market may be only a couple of years away. It is all the more important that India's policy makers keep this in mind while formulating gas pricing policies for the new production sharing contracts. 

3.  A good summary of research on the impact of MGNRES in Livemint. One thing that is clear from recent events is that the program is good politics.

4. In addition to the conventional indicators of economic weakness, consider these trends. Corporate investment intentions hit all-time lows; external commercial borrowings decline; investment commitments by China, Japan, UAE etc fail to materialize; the same Indian corporates who hesitate to invest in India are doing so abroad etc. 

It appears that, at this point in time, India is investment-demand constrained. Public investment should undoubtedly become the engine to revive investment cycle. But, at about 1.72% of GDP for 2015-16 and a high fiscal deficit, there is only so much that is possible with this strategy.

5. Following the 20% import duty on hot-rolled coils imposed in September for 200 days, the Government of India has imposed a minimum import price on different categories of steel products for a period of 6 months. These measures are aimed at protecting a bruised steel industry. It comes even as the industry is floating on excess capacity, and steel makers across the world are fighting sharply falling demand and thereby prices. 

This is certain to invite action against India before the WTO's Dispute Settlement Board and most likely to be untenable. Further, it is not clear whether this is going to improve the prospects of most Indian steel producers whose competitiveness have been seriously hurt by their very large debt-servicing costs, which alone in some cases is more than the import price of Chinese and Russian steel. Finally, the biggest losers will be the country's manufacturing industry, for whom steel is an important intermediate, and the consumers. 

6. The Citylab writes that 2015 was a bumper year for skyscrapers (more than 200 m high), with the highest ever completions. Interestingly, Jakarta had the largest number of skyscrapers completed in 2015, at seven. As a comparison, Mumbai had one.

It is surprising that India, where A-grade commercial real estate has been frothing, does not figure anywhere. Interestingly, while Mumbai has 14 skyscrapers, all but one are residential. This is in stark contrast to global trends, where office and mixed-use dominate and residential is a very small share. Why doesn't India's office space developers go vertical?

7. The Business Standard argues that the Vijay Kelkar report recommendations would go a long way towards reviving PPPs in infrastructure. In particular, this caught attention,

The most path-breaking suggestion is a two-tier framework of dispute resolution with Infrastructure PPP Project Review Committee and Infrastructure PPP Adjudicatory Tribunal. Once a stakeholder files a reference before the tribunal, and it takes cognisance of it, no party or stakeholder would be allowed to approach any court of law, and all courts shall refrain from adjudicating upon any proceedings initiated that are related to the project in question.

The committee has proposed enactment of a law under Article 323B of the Constitution under which Infrastructure PPP Project Review Committee and Infrastructure PPP Adjudicatory Tribunal should be empowered to determine whether there is such a change in the economic foundation or economic viability of a project which requires any intervention amongst options contemplated in that statute. The law will also lay down the guiding principles on the basis of which Infrastructure PPP Project Review Committee and Infrastructure PPP Adjudicatory Tribunal will exercise their functions. In case a substantial question of law is involved, the matter should be directly heard by the tribunal.

I am not that optimistic. There is nothing different here than with all the other Tribunals. In other words, there is nothing that prevents the disgruntled party from approaching the Courts at the drop of a hat and the latter from entertaining their pleas. All such talk of "independent mechanism for speedy redressal of disputes" appears logically and academically great, but have limited real-world basis in India's messy decision-making systems.

8. Are cows and buffaloes substitute goods? The Maharashtra government's ban on cow slaughter appears to have unintended consequences. The prices of cows, even good milch ones, have fallen sharply, just as those of buffaloes have risen.