#
Can you be at war with someone when you think you're friends with them?
#
This is not a question I ask with regard to the personal, when we may have conflicting
#
emotions towards a person and some self-delusion, but about the world at large.
#
One of my favourite books about media is a 1922 classic Public Opinion by Walter Lippmann.
#
The first chapter in that book is called The World Outside and the Picture in Our Heads.
#
What are the first few lines of that?
#
Quote, There is an island in the ocean where in 1914 a few Englishmen, Frenchmen and Germans
#
No cable reaches that island and the British mail steamer comes but once in 60 days.
#
In September it had not yet come, and the islanders were still talking about the latest
#
newspaper which told about the approaching trial of Madame Kelo for the shooting of Gaston
#
It was, therefore, with more than usual eagerness that the whole colony assembled at the Quay
#
on a day in mid-September to hear from the captain who the verdict had been.
#
They learned that over six weeks now, those of them who were English and those of them
#
who were French had been fighting in behalf of the sanctity of treaties against those
#
of them who were Germans.
#
For six strange weeks, they had acted as if they were friends when in fact they were enemies.
#
But their plight was not so different from that of most of the population of Europe.
#
They had been mistaken for six weeks.
#
On the continent, the interval may have been only six days or six hours.
#
There was a moment when the picture of Europe on which men were conducting their business
#
as usual did not in any way correspond to the Europe which was about to make a jumble
#
Now, a similar lag happens after the war when the war is over but people continue fighting
#
for a while because they haven't heard the news.
#
A startling example of this is Hiro Onada, a Japanese soldier who keeps fighting the
#
Second World War till 1974 on a small island in the Philippines because he thinks the war
#
is still going on and his orders are to keep fighting.
#
But these are stories of older times, right?
#
Technology has advanced, news travels at lightning pace, and this is never again possible, right?
#
Well, fine, information spreads fast now.
#
But what if the world changes even faster?
#
What if massive tectonic changes happen at such speed that there is still a lag in understanding
#
and we can't grok what has happened until it is over?
#
Welcome to The Scene and The Unseen, our weekly podcast on economics, politics and behavioural
#
Please welcome your host, Amit Verma.
#
Welcome to The Scene and The Unseen.
#
My guests today are my dear friends Ajay Shah and Mohit Satyanand and I asked them to join
#
me to discuss the fall of Silicon Valley Bank and our plan was to talk about what happened
#
at SVB and why it happened and then to zoom out to the world of banking today and then
#
to zoom out further and talk about the world of banking in general terms, thinking outside
#
the box of central banks and fiat money and finally we spoke about both the world economy
#
I have done many episodes with both Ajay and Mohit so there is no biography here.
#
We dive straight into the subject.
#
And by the way, one announcement.
#
Registration has begun for the April cohort of my online course.
#
The Art of Clear Writing.
#
I have taught 27 cohorts so far with over 2000 participants.
#
Head on over to IndiaUncut.com slash Clear Writing to sign up.
#
IndiaUncut.com slash Clear Writing.
#
And now, before we get to the conversation, let's take a quick commercial break.
#
Have you always wanted to be a writer but never quite gotten down to it?
#
Well, I'd love to help you.
#
Since April 2020, I've enjoyed teaching 27 cohorts of my online course.
#
The Art of Clear Writing.
#
And an online community has now sprung up of all my past students.
#
We have workshops, a newsletter to showcase the work of students and vibrant community
#
In the course itself, through four webinars spread over four weekends, I share all I know
#
about the craft and practice of Clear Writing.
#
There are many exercises, much interaction and a lovely and lively community at the end
#
The course costs rupees 10,000 plus GST or about $150.
#
If you're interested, head on over to Registration.com slash Clear Writing.
#
If you're interested, head on over to Register at IndiaUncut.com slash Clear Writing.
#
That's IndiaUncut.com slash Clear Writing.
#
Being a good writer doesn't require God-given talent.
#
Just a willingness to work hard and a clear idea of what you need to do to refine your
#
Mohit and Ajay, welcome to The Scene and The Unseen.
#
I'm always happy to be here.
#
Amit, I have been hearing rumors you and Ajay are starting on your show.
#
But these rumors have been around for a long time, where I think we started talking about
#
it perhaps a year back.
#
And we thought we'll do a nice little show where we talk to each other for half an hour
#
about different things, not just boring stuff like policy and economics.
#
So, of course, those also, but other stuff that interests us because all our mutual conversations
#
are actually incredibly interesting and wide ranging.
#
And it felt like a good idea to capture them.
#
But then we thought, we'll try a 40-50 minute show.
#
We'll try a sort of a video episode.
#
And that's what has actually taken so much time because audio, I'm like a pro.
#
I can hit a button and start a podcast video.
#
We took some time agitating over it.
#
And I finally came to the realization that my own advice, which I give all creators,
#
is so correct that it is more important to get it done than to get it right.
#
So, you know, don't let perfection be the enemy of production.
#
Just get out there, get it done.
#
We've shot our first episode, but because I've come to Delhi to record all these episodes,
#
I haven't had time to edit and release it yet.
#
But, you know, this episode releases on April 3rd.
#
And sometime in this week, if not already, our first YouTube episode should kind of come out.
#
What are you going to call it?
#
So we have two options for it.
#
And we've chosen one, but we have two options we really liked.
#
And we asked the whole damn world which one they prefer.
#
And it'll be interesting to get your opinion on it because they're both inspired by music.
#
One is Watching the Wheels, Lennon.
#
And the other is Everything is Everything from the Springsteen song.
#
Let me guess which one you chose.
#
Actually, what we chose was...
#
Everything is Everything.
#
We chose Watching the Wheels.
#
So we both love Everything is Everything, but we worry that it is too obscure.
#
And they're both alliterative.
#
Well, yeah, I mean, great songwriters.
#
So they're going to get shit, right?
#
Let me ask you a quick quiz question before we get down to the thing.
#
And I've been asking a couple of people this, Ajay.
#
We're going to have chapters in our show and the second chapter.
#
And what is going to happen in each show is he's going to pick one subject to talk about,
#
though I will also banter with him on it.
#
And I will pick one subject and he'll also have his thoughts.
#
So chapter two is his subject and the chapter title has three words.
#
And the third of those words is bastards.
#
So what are we talking about?
#
And it's fairly obvious it isn't people because neither of us would speak about somebody like that.
#
Okay, I won't reveal it.
#
We'll just leave it for the show.
#
So, you know, so the reason I wanted to do this episode was really because there is so
#
much talk around us of banking and finance and what just happened with Silicon Valley
#
And I get the sense that most people are incredibly confused about what the hell is
#
There are all kinds of narratives around this, especially with SVB, that you'll have one
#
group of people saying, oh, tech bros have fucked up and why are we bailing them out?
#
You'll have another group of people saying, oh, Biden, Biden, Biden.
#
You'll have a third group of people saying that, you know, this is a bank's fault why
#
they're raising interest rates like this and blah, blah, blah.
#
Hazard narratives, all necessarily simplistic, all have different grains of truth in them.
#
And even for somebody like me, who's relatively well read up on the subject and all of that,
#
it can sometimes get a bit confusing unless you actually make an effort to find out what
#
So I want to begin by talking about that.
#
And of course, I also want to then make this a state of the economy kind of episode.
#
Let's talk about banking and finance in general.
#
Let's talk about the world economy.
#
Let's talk about India's economy.
#
But let's, you know, begin by zooming into this specific issue of Silicon Valley Bank.
#
You know, talk about what happened here, like just to break it down at a simple level of
#
You know, who would like to take up?
#
This was a bank with about 200 billion dollars in deposits.
#
It was an unusual environment in that they were getting deposits from people with unusually
#
They were individuals and firms in Silicon Valley who were holding money with Silicon
#
And it was an environment where in that world, in that locale, in that community, there was
#
not a whole lot waiting to be done by way of giving loans.
#
So Silicon Valley Bank embarked on the strategy of investing in long dated bonds.
#
So their portfolio was that they had deposits and they had long dated bonds.
#
Then the United States Fed started hiking.
#
So by 2021, there was a great debate around United States monetary policy.
#
And in February 2022, the US Fed started raising rates after a debate that had taken place
#
for six months prior to that.
#
And the rate hikes of 2022 were pretty dramatic.
#
Now, this did many, many things to this one bank.
#
SVB got hit in multiple ways because they were holding long bonds and those bonds suffered
#
To make things worse, this was an unusually sophisticated group of depositors.
#
So your mental model of depositors is often grandmothers and dentists, and people who
#
don't think in financial ways and are extremely stable in their behavior.
#
Silicon Valley Bank had depositors who were an unusually sophisticated bunch.
#
So when the rates started going up from zero, these are people who started thinking,
#
hey, I can get a little bit of return by holding a money market mutual fund
#
or by going back into some securities.
#
And so there was a significant exit of deposits from Silicon Valley Bank.
#
That's, of course, entirely true.
#
But I think there was a third issue, which is that these are people who,
#
especially if you look at, so there's two groups involved over here.
#
One is the venture capitalists and the other is the companies which they funded.
#
Now, when you have companies which are funded, they're not looking to optimally
#
deploy their cash because their mental energy is elsewhere.
#
It's about using that cash for business and they don't really look at,
#
they typically don't have a treasury operation.
#
But the other thing that happened while all of these issues around interest rates
#
were happening was that the funding environment was also slowing down.
#
So their balances started going down at a rate which is very unusual for a large bank.
#
So there were firms who structurally were funded by the venture capitalists
#
who were holding cash with SVB as long as the times were good.
#
But precisely when the Fed started raising, the times became bad
#
and then companies were more in drawdown mode.
#
The rate of new successful fundraisers went down.
#
Absolutely. So all these things came together and you had a bank
#
where money was being pulled out from deposits for these two reasons.
#
And on the other side, they were burning mark to market losses on their assets,
#
which were long dated bonds.
#
And it started looking increasingly wobbly.
#
And then the end game happened because in this modern world of electronics
#
and social media, it's important to remember how primitive 2008 was.
#
In the modern world of electronics and social media,
#
word got around in the blink of an eye
#
where a couple of people got nervous and said,
#
hey, we should yank our money from Silicon Valley Bank.
#
And I seem to think on the peak day, which I think was 9th March,
#
something like $42 billion were withdrawn from the bank in one day.
#
And that's just the worst run on a bank that has ever been recorded in human history.
#
This was a Twitter run.
#
And I think this underlines a profound shift
#
in the way we need to look at the possibilities of economic and finance.
#
Because in a sense, you had a big Twitter moment in finance a couple of years earlier.
#
When you had this company again in the US, GameStop,
#
was it GameStop? GameStop.
#
Where all the big money had decided that there was no future left in this company.
#
You had a group of people who for no particular reason
#
decided that no, this company was their hero.
#
And they were going to defeat the shorts on the market,
#
those people who were selling the stock, by bidding up the price.
#
And so there was a Twitter war.
#
And guess who joined that Twitter war?
#
And the day Elon Musk tweeted that I'm going to take the price of this company up,
#
the game was over for the short sellers.
#
The short sellers got squeezed again.
#
And again, the speed at which these things are happening now
#
make conventional models of looking at the way finance operates,
#
news spreads, etc., completely out.
#
I want to put the number $42 billion in perspective.
#
It's a bank of about $200 billion.
#
So $40 billion was like 20% of the bank assets vanishing in one day.
#
In fact, Ajay, I think it was higher because $200 billion was their peak value.
#
I think by now it was down to 140.
#
Another number I want to put on the table for our listeners in India
#
is that $40 billion is about 3.2 trillion rupees
#
or 3,20,000 crore in Indian units.
#
And that's a lot of money.
#
That's depositors leaving a bank in one day.
#
That's an unimaginable event.
#
So I think that for all of us, people with white hair,
#
we need to rethink the stability of bank deposits
#
in what you think of as a boring checking account environment.
#
So all our traditional conceptions about the stability of bank deposits
#
need to be revisited in this world.
#
Similarly, what happened with First Republic over not the last weekend
#
but the previous weekend was that all weekend long
#
electronic systems were being used by customers to move money out.
#
Again, your mental model of a bank run is on Friday evening at 5pm
#
the damn thing stops and you get a weekend to mount a response.
#
So the bank management gets that breather for the weekend to figure out what to do.
#
No, in this electronic age you don't get that breather
#
because money is flying out relentlessly all weekend long.
#
Before we get into that, I just want to point how deep the concentration was.
#
So as somebody who has invested in start-ups
#
and a few of the start-ups that I've invested in
#
are US companies, what is called LOSC Corp.
#
for ease of fundraising from the US and so on.
#
All four of them had their primary balances in Silicon Valley Bank.
#
I think that concentration in Silicon Valley Bank
#
also fuelled the speed at which it came out
#
because you had a VC who up till now is a great supporter of SVB
#
and the fact that it was part of this whole ecosystem
#
the tropical rainforest as that strategy article talked about
#
they were supporting it.
#
They were the people who said it shouldn't be regulated.
#
These were the same guys who on Thursday
#
got on calls with 200 of their investing companies
#
and said take the money out.
#
So let me try and take a slight step back also to something really fundamental
#
because many of the listeners may not even be familiar with some of the terms
#
that we're talking about.
#
So I just want to really break it down
#
and who better than a dummy like me to do a little bit of a potted dummies guide
#
you can tell me if I'm summarizing it correctly.
#
Basically how a bank works is that it borrows short and lends long.
#
So you deposit money into a bank, you can take it out anytime
#
there's a particular interest rate for that
#
and what the bank is doing with the money
#
is that it is essentially lending long
#
in this case there were no loans
#
so you're buying bonds, you're doing all of that
#
and in this case what they ended up doing is
#
that in 2021 they shifted to longer term securities
#
instead of shorter term securities
#
they took a duration risk
#
and what happened here was that as the interest raised
#
it just became a very bad bet
#
because the market value of the securities had just crashed
#
because why is anyone going to buy those
#
at 3% when they can get it at 3%.
#
Now what a bank run typically again
#
is that a bank will never have the money that is deposited in it
#
that money is out, in fact multiples of that money is out.
#
So inevitably if everyone in a bank decides
#
they're going to withdraw their money
#
the bank goes under because the money simply isn't there
#
and obviously the people who withdraw first
#
and the people who are late don't get anything
#
even before the modern age
#
and this can in a sense become contagious
#
in the sense that it's not just about one bank
#
if depositors hear that there's a run in one particular bank
#
they might say hey let me take money out from my own bank
#
and put it in a bigger bank
#
take it out and keep the cash, who knows
#
and this in fact led to the massacre in the Great Depression
#
in 1929, 650 banks went under
#
over 9000 banks went under
#
if you look at this model of what happens
#
it's really a typical bank run
#
structurally it's a typical bank run
#
that a lot of this money
#
came from the startup ecosystem
#
venture capital is directing the startups
#
and then beginning to take it out
#
as the supply of money gets less
#
either because you're losing money in crypto somewhere else
#
and that's affecting them
#
I want to add one facet of what you just said
#
your sentence is correct but it has a consequence
#
that directly feeds into the generation of the run
#
which is that because these are
#
more, I call them professional players
#
their balances were about 250k USD
#
so the deposit insurance
#
so again if you had a large diversified base
#
of grandmothers and dentists
#
then these would be holding
#
modest amounts of money and they'd be protected
#
then their inclination to run is not there
#
here you had a peculiar concentration
#
in deposits that ran to dollar values
#
so they were not protected by
#
so it's a peculiar combination
#
in fact let's double click on the deposit insurance
#
that we see in a banking system
#
is met by regulation which is necessarily reactive
#
at the time of the great depression you had the
#
FDIC the federal deposit insurance
#
corporation coming up in 1933
#
for precisely this and at that point
#
they were insuring accounts at 2500 dollars
#
now over time has gone to
#
250,000 dollars which would have been adequate
#
to protect say your dentists
#
and your grandmothers and all of that
#
but in this particular case with the concentrations
#
of money the fact that these start-ups did not
#
diversify as everyone should
#
everything kind of went to hell
#
can you paint a picture for me of
#
a how has regulation kept pace
#
with you know what's been
#
happening in the banking world
#
Mohit you were talking about how
#
today everything is different because contagion
#
at lightning speed or rather shit can happen
#
at a speed which is you know unforeseeable
#
whereas earlier you could chill out over a weekend
#
and have a couple of whiskeys and figure out
#
ok what do we do about this
#
so take me through this state
#
sort of this sort of game
#
that as the banking system gets
#
more and more complicated as more and more rides
#
on it regulations keep evolving
#
along with it until at this moment
#
in time we seem to have reached a stage
#
where for various reasons the whole system
#
is in doubt before we go there I just want
#
you sort of hinted at and what is
#
very clear to us but I think bears
#
innate nature of banking
#
which is what we call fractional reserve banking
#
fraction of the money that you
#
owe to your depositors and there's
#
an inherent risk in this
#
because the reason you're making money is that you're
#
lending long you can't call that money back
#
borrowing short in the sense that
#
you're borrowing money from the depositor
#
just to make sure that people understand
#
is effectively somebody you're borrowing from
#
and he can call that money in any day
#
unless it's a fixed deposit
#
so there's an inherent instability in this
#
and the glue that keeps
#
the system normally working is trust
#
a very small percentage of people are going to want
#
their money on a particular day
#
you want your money whether it's
#
the largest depositor had 400 million
#
they're going to get it
#
it's only when that trust breaks down
#
typically trust breaks down
#
in something as venerable as a bank
#
very very slowly it requires a lot
#
of shit to accumulate and work to go around
#
for that trust to break down
#
and what we are underlining now is the fact that
#
trust can break down very rapidly
#
now the question is regulation apart
#
what do you do systemically
#
because the speed at which
#
mistrust can build has now
#
fractional banking does that need to be expanded
#
to my mind that is the bigger
#
question what regulation comes in
#
can I propose a classification
#
scheme that we should use
#
the paradigm project saying
#
we are more or less fine with banking as it
#
works we learn from each
#
episode and we keep on refining
#
banking regulation done over the years
#
and the alternative view is that
#
this edifice is fundamentally
#
faulty even more so in modern
#
and there is a case for rethinking
#
the paradigm so I think that
#
within the paradigm and outside the paradigm
#
both are interesting discussions
#
in a sense what I wanted to say let's not
#
just get stuck in the paradigm
#
because that's what governments are going to do
#
what I want to do is I want to question the paradigm
#
inside the paradigm and then let's expand
#
outside the paradigm because
#
can I do a quick summary of
#
as it has applied to banks
#
over the years so as you correctly said
#
there was a wake up call around the Great Depression
#
in the UK actually many of these things
#
had been figured out before and
#
the Bank of England is a venerable old
#
institution the modern strategy
#
and coerces the bank into
#
double quotes acceptable levels of risk
#
how much is an acceptable level
#
advanced economies banks
#
are supposed to have a BBB
#
rating and that's a failure
#
rate of about 1 to 1.5%
#
their failure rate is capped
#
just to underline this to
#
our Indian audiences there is a misconception
#
we sometimes see in India
#
which is the idea that banks are infinitely
#
safe that's just not true banks are highly
#
leveraged highly failure prone institutions
#
the point is you want to put a cap on it
#
and the purpose of prudential
#
coercive power of the state and force
#
banks to behave in certain ways
#
that delivers this desired outcome
#
so you must have enough portfolio
#
diversification and enough equity capital
#
enough loss absorbing buffers
#
on a 5 year horizon this is called
#
prudential regulation so in every country
#
that establishes a prudential
#
regulation agency and gives
#
it certain coercive powers through which
#
it is able to force banks
#
to behave in certain ways
#
the policy strategy towards banking
#
which is prudential regulation
#
and then there is pillar 2 because
#
with the best of prudential
#
regulation as I said the objective
#
of prudential regulation
#
is never to bring bank failure
#
rates down to 0 that would be dumb
#
then you would just be having banks that take
#
live in the modern world is to take control
#
risks and sometimes things will go wrong
#
statistically out of a thousand banks
#
15 banks will go belly up
#
in the next 5 years it's just a fact
#
so sometimes banks will go bad
#
runs on banks can develop so
#
to solve these problems there
#
is a 2 part arrangement one
#
is that central banks the world over
#
that is called the lender
#
of the last resort L-O-L-R
#
implementing an intuition
#
called Lombard Street where
#
government should lend freely
#
to a bank that is facing a run
#
against good collateral
#
the 3 pieces of the insight
#
are beautiful and merit emphasis
#
point 1 lend freely to a bank when it's
#
in trouble when it's in trouble don't
#
be niggardly don't say I will think about it
#
don't say I will come back to you next week
#
because the run is now you need the money now
#
so you need to lend freely to the bank
#
when it faces the slightest
#
good collateral only so if you are going
#
to hold some crazy assets sorry
#
they are not repoable you cannot
#
use them to get loans against
#
a certain amount of very safe
#
assets which are readily pledgeable
#
and against them you can get collateral
#
from a government institution in the olden
#
days the bank of England was a private institution
#
so it's possible to conceive of these
#
things as coming out of modern repo
#
markets as well so just to clarify these
#
assets would for example include that if
#
a bank has lent long then all
#
of those loans are if they are
#
reliable are effectively assets which are
#
loans are useless you need securities
#
so it's got to be a bond
#
so it's a tradable transaction
#
that can be liquidated so you see
#
a market price then there's no
#
complexity so loans are opaque
#
banks have to do loans as a side business
#
they have to hold a core that is
#
securities for this reason
#
and the third piece of the
#
sentence at P&L rates meaning
#
it should be punishing for the P&L of the bank
#
when a bank runs into this
#
we as society should have mechanisms
#
through which it can be protected and the run
#
is averted but it should be costly
#
for the bank so the bank should
#
burn up one or two years of profit in
#
the process of going out
#
putting its securities out it should get
#
those loans the temporary
#
liquidity at a P&L price
#
so that it becomes unpleasant nobody should
#
use it as a first recourse
#
they should use it as a last recourse
#
so this is one part that you are fundamentally
#
sound bank you have good assets
#
and there is a run against the bank
#
and you are able to that weekend
#
process of getting truckloads of cash
#
and then the lines in front of the bank melt away
#
link to the modern age we need to
#
find the metaphorical equivalence of those
#
truckloads of cash being
#
the live video appearing on twitter
#
from the bank can melt away part two is deposit
#
insurance banks can fail banks
#
will fail banks everywhere in the world
#
fail the great economist Merton
#
Miller has a beautiful line he describes
#
get you to reduce your bank balances
#
banks will fail so all over the world
#
instead of having a disruptive mess
#
a normal bankruptcy code
#
apply so the bank goes bad
#
we've got the whole machinery of a bankruptcy
#
code you could save your IBC for the banks
#
the trouble is that the
#
individual grandmother and the
#
dentist is not effective
#
at participating in that
#
bankruptcy process which really
#
requires a small group of professional
#
lenders who will decide
#
on how to dispose of the failed
#
institution you can't expect individuals
#
and retail participation in the
#
bankruptcy process also the
#
bankruptcy process can take six months it can take
#
one year the bankruptcy of Lehman took
#
something that is quick so the
#
bureaucratic dream is that
#
you build a state organization
#
like the United States FDIC
#
which will preemptively
#
walk into a stressed institution on a Friday
#
clean up its affairs over the weekend
#
and be ready to pay deposit
#
it is an ambitious dream
#
and in developed markets
#
this actually works reasonably well
#
when I look at these kinds of things I get
#
terrified like by god how are we ever going to do this
#
but it has been done in many
#
but this raises one fundamental
#
issue which is that in this particular
#
we'll come to that in a moment right now I'm just summarizing
#
the paradigm so the prevailing paradigm
#
policy and government intervention in
#
banks comprises these pillars
#
regulator that will coerce
#
in a way that is consistent
#
with the target failure rate
#
which in a developed economy is between
#
1 to 1.5% on a 5 year horizon
#
second that there is a mechanism for
#
lender of the last resort which is generally
#
run by the central bank where you
#
lend freely against good collateral at penal rates
#
and third you stabilize
#
the grandmothers and dentists
#
using deposit insurance this is
#
with this paradigm would view
#
bug report that look the world changed
#
there are various features of the world
#
that changed or that the world
#
revealed failures of our
#
mental models upon us and now we'll go
#
fix it up so there is an endless process
#
of the technical details
#
will sit with their statistical models
#
and devise the next design
#
LOLR lender of the last resort
#
work better how I can make
#
deposit insurance work better how I can make banking
#
relation work better and
#
many of the responses that have
#
taken place after SVB are from
#
people within the paradigm who
#
would say we just need to
#
intensify our work of refining
#
the paradigm and I would be
#
the kind of criticisms that are being made
#
in the world that look failure is a part of
#
life if you have created
#
banks that are so safe that these disasters don't
#
happen you're doing something wrong for society
#
and we should keep on learning the world will change
#
who could have predicted that
#
42 billion dollars will run in one day
#
so the world will keep on changing
#
and a good technical response
#
catching up with the developments of the world
#
so this is an optimistic statement
#
over there is that you know whenever
#
is managed there is a cost to managing
#
so far that was predicated on the fact
#
that the grandmothers and the dentists would be
#
protected at 250,000 dollars
#
suddenly you had a situation where everybody
#
is protected including the person who had
#
million dollars out there
#
has a cost to it firstly it has an
#
obviously the word bailout
#
I think there was a statement saying that
#
there will be an assessed charge
#
failure that's just a euphemism right
#
that means a tax somewhere
#
other banks are paying for this bank's failure
#
they're paying for the failure of this bank
#
or depending on how you look at it
#
they're paying for the failure
#
of uninsured depositors
#
to insure their risk in some other manner
#
because the FDIC is not supposed to insure
#
the risk of somebody who has 400 million dollars
#
in the bank so there is
#
over the fact that there is a cost
#
to this and to my mind this is a recurring
#
theme when we talk about
#
reducing risk in the system
#
which is that there's a cost to it
#
let me add to this question a bit like
#
there's been I mean there are actually
#
already developing two schools of thought on the moral
#
hazard involved here now just to break it down
#
you know moral hazard typically is that
#
someone does something wrong but you bail them out
#
and that creates a moral hazard in the sense
#
it creates bad incentives because they will continue
#
behaving badly realizing that
#
they will be bailed out in the future
#
you know one phrase used for this is privatizing
#
profit socializing losses that if you
#
profit you take the money if you
#
lose you know the state
#
bails you out taxpayers bail you
#
out and this makes you take
#
more risks than you would otherwise take
#
and imperils everybody now in this
#
particular case what has happened is that
#
there is an argument about
#
whether the term applies at all because
#
the shareholders and the executives
#
of Silicon Valley bank were not bailed out
#
they've lost everything they are the
#
guys who made the putative mistakes
#
now how charitable we can be is a different
#
matter but they are the guys who made the decisions
#
that brought the bank here they have not been
#
bailed out the incentives for future executives
#
and shareholders therefore is clearly watch
#
out you're going to get wiped out if something happens
#
the depositors have been bailed out
#
now should this be called a bailout at all
#
and does it change their incentives
#
and this would depend then
#
the task of the depositor as
#
being that does caveat emptor by a
#
beware come into play like Matt
#
Levine's view and I'll just quote Matt Levine
#
because he sums it up so well where he says
#
I think a modern bank regulatory view is
#
that the point of a bank deposit is
#
that you shouldn't have to worry about it and
#
that it is a failure of bank regulation
#
if depositors of any size
#
have to actually give a moment's thought to the
#
riskiness of a bank bank deposits are
#
meant to be information insensitive
#
last two words he puts court marks over them
#
then he continues there are vast areas
#
of life where we don't worry about moral hazard
#
we don't say things like the moral hazard
#
of food safety regulation is that we
#
greatly reduce the incentive for consumers
#
to give a moment's thought to the riskiness of the
#
supermarket supply chain and he stops his internal
#
court that's not a thing you're
#
supposed to think about stop court
#
this statement I'll tell you why
#
it seems a perfectly acceptable
#
but let's look at it in a little bit of detail
#
which is that banks are always
#
so you have had a scenario in the last
#
market leader like HDFC
#
bank for example is offering three and a half
#
percent on your savings
#
accounts a new bank comes
#
in and is offering seven percent
#
that offering of a higher
#
interest on your deposit
#
is already an element of risk
#
so bank has taken on more risk
#
by reducing its spread when you
#
reduce your spread you're taking on more risk
#
two banks in exactly the same way
#
should I guarantee the depositors of both
#
same way if another bank
#
was to come in and offer fifteen percent
#
this to happen it can go anywhere right
#
and the depositors said I'll take that
#
fifteen percent because my money is guaranteed in any case
#
very bland statement but
#
I don't think it's taken all of these complexities
#
and another danger there
#
would be if for example
#
you say that look in all other things
#
right there is a market at play
#
competition is the best regulation
#
I can be confident of any
#
foodstuff I buy at the supermarket because
#
these are brands competing with each other and
#
anyone who messes up will pay a
#
large price for that automatically
#
now the other argument is if you allow
#
that to happen in banking
#
their deposits aren't insured and they have to
#
weigh their own risks and say in this case
#
the depositors weren't bailed out
#
then the point is that the burden on the depositors
#
to do that kind of due diligence
#
and figure out where to put their money
#
because I work hard enough as it is here I'm not going to
#
now look at bank balance sheets and understand
#
banking to figure out where to put the money
#
so my default move will be to only
#
go to the biggest banks
#
which affects competition
#
which affects innovation
#
a bank which is say increasing their
#
own efficiencies and saying okay I'll give
#
I'll give a higher interest rate to the depositor
#
they no longer have an incentive to do that
#
in India it would further mean
#
in our context I'm guessing
#
that then your temptation is to just bank
#
with a PSB because you know that taxpayer
#
will always bail you out that also
#
something I don't have an answer to I don't have a position on
#
this because I'm just trying to figure this out
#
see Amit there are no easy answers but I think
#
to some extent some of this
#
I'm sure Ajay would have a view on it
#
would have been thought through when you
#
far as the grandmother or the retired
#
we don't want them to have to be
#
thinking about all of these things
#
and therefore we're going to guarantee up to a certain
#
amount now there'll always
#
be gray areas in terms of the sums
#
of money but in this particular
#
on that one number just as you talked about
#
42 million I'm taking this 400
#
million I forget the name of the company
#
there was a company which had 400 million in
#
this bank surely they had the
#
the ability I would say
#
that it would be a primary task
#
of the chief financial officer
#
of that company to understand the balance
#
sheet of the bank he was investing in
#
I would say that even someone like
#
me who's not tasked with managing
#
400 million dollars would be
#
really surprised if I found
#
out that in an environment
#
low interest rate was certainly
#
you could have a debate about it how
#
low for how long which is linked to that
#
whole issue of is inflation transitory
#
or not there were clearly more than one
#
view on it right and so
#
the interest rate is very much linked up with that
#
point that surely somebody who's
#
put 400 million dollars in a bank
#
should be thinking about these things
#
and if he isn't he needs to be penalized
#
for not thinking about them
#
and the people who employed him meaning
#
they should also be penalized for putting
#
a person like that in charge
#
there's got to be some level
#
6 year olds but do you need a nanny
#
for 24 year olds? So if I
#
may summarize what you're saying and tell me if I've read it correctly
#
system where you're setting a limit
#
say it's 250k deposit insurance
#
that's it's good to have
#
a limit like that forget the specific one
#
because you're you know protecting
#
the grandmothers and the retired teachers
#
and all of that but anything beyond that
#
surely it's caveat emptor whatever
#
in which case the question that
#
is what are your banking regulators
#
to do if they're looking at a bank like SVB
#
and an argument that was made before everything
#
happened is that there is
#
quote unquote systemic risk
#
in the sense that too much of the startup
#
ecosystem is here there were even threads in India
#
about how so much of the funding is
#
you know with SVB if it fails everything
#
collapses there's a you know huge
#
negative externality because just because
#
of this unusual circumstance of
#
the concentration of the startup
#
how seriously do we take it how
#
do we define it because into the
#
moral hazard one way or the other I think
#
the only argument is about whether it was
#
justified and people set systemic risk
#
and all of that now I don't really
#
but there was clearly moral hazard now whether
#
risk was you know big enough that
#
you did it anyway because hey
#
we had to do it otherwise everything would collapse
#
that also brings me to the side question
#
of you know Ajay you pointed out that okay
#
if you have 10,000 banks 150 of them will fail
#
every five years and it's just something that happens
#
but how do you decide when to
#
intervene and when to not do anything and
#
let them go belly up because in a good free market
#
you allow companies to fail and all of that
#
you've got the deposit insurance you're taking care
#
of the grandmothers but otherwise
#
when do you let them go belly up and
#
when do you just come in with a rescue like you
#
let me bring a few facts that add to
#
this financial resolution corporation so
#
what is called the FDIC
#
in the United States in the Indian
#
policy literature is called the
#
it's analogous to the IBC except that it is
#
run by a bunch of civil servants and
#
it gets to preemptively determine
#
which financial firms shall
#
die and it preemptively
#
but at a time when its net worth
#
is still positive so it walks in
#
on a Friday and says to the
#
and from Monday morning it's paying out
#
on deposits so it's a very high
#
level of power that is sought to
#
be given to a new bureaucracy
#
you it should because it's very difficult
#
to make these things work correctly
#
thing I just want to come back to
#
these things are controlled by law
#
the limit shall be $250,000
#
so it's a very awkward position
#
United States policy makers because they have
#
not gone back to the legislature
#
and said we want to change to $50,000
#
another question so Janet Yellen has been very clear
#
to say that this is the decision of the legislature
#
would ask her that are all deposits at
#
all banks protected she
#
is legally obliged to say
#
the law says to $50,000
#
and she's not the lawmaker
#
so until you carry it through the legislature
#
the executive has no power
#
to change that law so that
#
it may be a nicety but it is a very important
#
the present environment in the United States
#
that there can be other
#
fiddly ways of mounting a
#
rescue but you can definitely not
#
that everything is protected until
#
has been passed and the appropriate law
#
is never going to say $500 million
#
well so now let me tell stories
#
a long time there was a very strong belief
#
that you know all of us would respect
#
of deposit insurance is an unacceptable
#
the distress in their bank
#
this was a view for a long long time
#
the UK worked without a formal
#
deposit insurance so there was
#
this interesting tension between
#
the thinking in the United States where
#
they built the FDIC and the thinking
#
in the UK was no these things happen
#
banks blow up people lose their money
#
it will teach them a lesson to husband
#
all this came to a head
#
when Northern Rock failed in 2008
#
decided that they are going to set up a resolution
#
look at the incredible UK state capacity
#
Rock took place the law was
#
enacted and the agency was
#
resolved banks bigger than Northern Rock
#
this is just incredible watching these feats
#
in the public policy system
#
level of insurance that the UK had
#
debate around should there
#
reached a turning point in
#
when Northern Rock failed
#
now I want to come to the failures of
#
Lehman Brothers of General Motors
#
and of the Silicon Valley
#
ecosystem so Lehman Brothers
#
that by now it has been fairly
#
established that policy makers had
#
the tools to save Lehman Brothers
#
and chose not to based on
#
arguments both around moral hazard
#
and how it will seem in the political
#
should come back to the politics later
#
for financial firms as being
#
synonymous with helping rich people
#
which is not entirely true but that's
#
both in politics and on questions
#
of moral hazard Lehman Brothers was
#
allowed to fail and many people today
#
believe that with the benefit of hindsight
#
that was a mistake that maybe that
#
kind of tornado that blew through the
#
world when Lehman Brothers failed was
#
something that could have been avoided
#
through so many events that happened
#
in the years after 2009
#
you can see a causal chain to
#
the failure of Lehman Brothers
#
but you can examine another causal
#
chain as well which is something that we've not
#
talked about now which is
#
failure and this failure came
#
at the end of very very very long periods
#
of very low interest rates
#
pithily good times make for
#
bad loans, good times being defined as low
#
interest rates so this is the underlying
#
but I'm on the narrow question that
#
should you have let Lehman fail or not
#
they chose to let Lehman fail
#
I think it is reasonably well established today
#
that there were mechanisms
#
policy makers chose to let Lehman fail
#
I'm just saying that there's an
#
original sin in the background over here
#
which at some point in time
#
we'll come to that I think in this episode
#
we are zooming out one step at a time
#
and now I want to talk about the
#
government rescue of General Motors
#
and the government rescue of Silicon Valley Bank
#
again first let me just put up
#
the proposition and I'm not saying I necessarily agree
#
with it but some very smart people
#
government involvement and a little
#
bit of money to protect General
#
Motors because if General
#
Motors failed there would practically be no
#
United States automobile
#
industry and you know there is
#
a part of my mind where this
#
kind of involvement by the government
#
but I can see the agony
#
around those decisions and
#
that same kind of argument was made around
#
Silicon Valley Bank it was argued
#
and I don't understand the Silicon Valley
#
it was argued that you know probably
#
start ups will get disrupted out
#
Silicon Valley Bank was only a little bit
#
to quote Donald Trump bigly bankrupt
#
amount of the hole in the balance sheet
#
that needed to be filled was reasonably modest
#
and then they came up with this fiction
#
that there is no taxpayer money
#
involved it was money inside the FDIC
#
a fudge because ultimately FDIC
#
is a public institution and this is
#
money that is collected from other
#
banks and as a public finance
#
economist I would always say that
#
in fact it's a greater cost to society
#
when you do a narrow tax
#
upon one industry that it's always better
#
to have a wide tax base rather than
#
a narrow tax on one industry so
#
I feel that's more of a cover story
#
but these are the interesting
#
should there have been a government rescue of Northern
#
Rock or not they chose to let it go
#
should the UK government have introduced
#
a deposit insurance system
#
or not they chose to launch
#
a deposit insurance system
#
and they built it out at amazing
#
UK levels of state capability
#
should General Motors have been allowed to go or not
#
Bank have been allowed to
#
interesting start ups or not
#
and that will inevitably
#
bring us to an India discussion
#
around how to think about bank failure
#
So let's stay within the paradigm
#
but zoom out a bit and let's now talk
#
about interest rates and
#
you know we've done an episode called
#
Two Financial Crisis 2008-2019
#
and we did this in 2019
#
obviously and you kind of foresaw that
#
okay we have this era of low interest rates
#
at some point is going to end, something's
#
got to give and the party's over, it's going to hurt
#
when the party's over and it's hurting
#
so you were sort of bang on
#
you know outside the paradigm we don't
#
need to talk about this but inside this paradigm
#
we do. So tell me about
#
conventional thinking on
#
how much of the central control by
#
central banks by setting the interest rate
#
can work, what are the problems with it
#
if you were a central banker
#
within this paradigm let's assume that there is
#
a central bank it is setting interest rates
#
if you were a central banker
#
how would you kind of look at it and also
#
just to summarize for those of my
#
listeners who may not know anything about
#
banking and finance what interest rates
#
do is when you have low interest rates
#
you are effectively increasing
#
the supply of money in the economy
#
and you typically you do this when
#
you want more money in the economy because
#
either you're doing badly and you want to do better or
#
you just want boom times and you want more money
#
to get in there and one of the
#
typical effects of this which I've spoken
#
about in the show before is called the Cantillon effect
#
which essentially all this
#
easy money that is created as it were
#
the big institutions and you
#
know those kind of folks it doesn't percolate down
#
which is why typically when you when the money supply
#
goes up when you have more money and
#
your goods and services stay the same
#
inflation is what should happen
#
and often there is a lag because
#
this inflation in a sense is happening in the
#
stock markets where the easy money goes first
#
you'll have stock markets
#
booming you'll have land go up you'll have asset prices
#
boom up but the common guy will still
#
said everything else being equal not see
#
the price of tomatoes go up yet
#
that comes later so that is sort of
#
an unfairness in the Cantillon effect that
#
low interest rates are leading to in
#
a sense a redistribution of wealth from
#
the poor to the rich in this way
#
a lot of this easy money then floods in
#
into places with not enough diligence
#
because the money is there or the money
#
that has flooded into the unicorns in India
#
for example you know people talk about
#
hey if our economy is so bad why is the stock
#
market doing well why do we have unicorns
#
a lot of this is because of the lowering of interest
#
Fed and is flooding into India and
#
there's little diligence even a lot of
#
Adani share price going up was just
#
people saying we have money let's invest
#
in infrastructure who is the biggest
#
player usko though so it's not necessarily
#
even manipulation he kind of benefited
#
that was going on and now
#
the party's kind of over
#
and in a sense like you said the 2008
#
crash also happened in a similar kind
#
my summary for the layman broadly
#
correct and what what would
#
you you know what would you add to it
#
what would you do differently so
#
broadly yeah absolutely
#
your summary is bang on I think
#
there are two parts to it
#
the first part I'm qualified to answer
#
the second part I'm not really sure how to
#
answer it the first part is that I think
#
to be out there warning people
#
that interest rates cannot remain
#
long they need to have a broader sense of
#
history than the average person does
#
you know when I look around
#
me in the Indian ecosystem
#
people as to what interest rates have
#
been in India in the past
#
we began to see low interest rates
#
for the first time in 2003
#
I remember that personally because
#
that's the time when I said my god
#
interest rates have never been so low in
#
India this is the time to invest in
#
stock markets and that's when
#
20 years is a hell of a long time
#
so if you have people who are 45
#
practice they've practiced
#
finance they've practiced investment
#
throughout a period when interest
#
rates have been really low
#
and I think it is a responsibility of
#
central bankers at the very least to remind
#
people look parties like this don't
#
go on for longer and if they did
#
that the CFO or whoever
#
is in charge of treasury operations at
#
Silicon Valley Bank would not have made
#
money for 10 years at 1%
#
I mean that's inconceivable
#
to me that somebody would do it
#
and this was the CFO of a bank with
#
200 billion dollars at its peak
#
making a mistake like that
#
part of my answer that it is the
#
responsibility of policy makers
#
and central bankers to remind
#
cannot go on for longer instead
#
not exactly the same statement
#
statement which is inflation
#
we are not bothered about interest rates
#
interest rates can remain low
#
so this I am very clear about
#
I mean I would just caveat that by saying that
#
you and I and Ajay and pretty much
#
anyone listening to this even if they are not into
#
business and finance they must have heard the term
#
they know it's out there why do they need to be
#
if you are investing money it falls upon
#
you to understand that this is the biggest
#
thing that kind of factors into it
#
Just that because you have seen
#
14 years that doesn't mean that they
#
can continue 14 years is a long
#
it's more than the half life of a finance
#
half of your finance professionals out there
#
have actually never operated in an environment
#
of rising interest rates
#
and at some point in time somebody needs
#
to be educating them about
#
that so that's the first
#
part and I'm you know I think there's
#
as to the second part you know
#
you have to keep going back in
#
go back further in history
#
the failure of LTCM and
#
the savings and loan crisis we're going
#
back to 1990 and every time
#
the only solution seem to be to lower
#
interest rates that's a really bad
#
works it works really fast and
#
it cudgels everybody into submission
#
nobody dares raise their
#
and it's like the only weapon in town
#
did the central banks at
#
each point in time you could say
#
we rescued the financial
#
system from disaster in 1990
#
we rescued the financial system
#
from disaster in after the dot com
#
bust we rescued the financial
#
system from disaster in 2008
#
yeah it does but each time it brings a huge
#
sitting in a situation where I think
#
because the other side of it
#
raises a huge question who's going to pay these
#
debts at some point in time they come
#
due and if they don't you're going to have
#
perhaps I'm sure Ajay has a view on this
#
alternative actions that central banks
#
and other economic policy makers
#
considered and or brought into
#
play a little earlier it just
#
created this vast room for
#
everybody to feel happy on this
#
cheap drug of cheap money
#
and that's an addiction
#
and we keep seeing the pain
#
of it when is it going to stop
#
so I want to say two three things
#
characterization needs to be
#
located in my opinion in
#
a larger story my larger
#
economist I wear many hats
#
as a monetary economist I will
#
the well-being of society
#
stable and predictable inflation
#
a 20 year old can be told
#
per year on average peering
#
into the next 100 years
#
planning horizon whereas
#
before we got to inflation targeting
#
central banks inflation was a wild card
#
around a 30 year financing for
#
a highway could just go berserk because
#
there is inflation and then
#
consequentially the interest rates go mad
#
you can't plan a 30 year highway and even
#
more importantly you can't plan a 100
#
year life okay and I would like
#
to say to every listener
#
of this show that if you are
#
wake up and plan that you're going to live to
#
120 because longevity is going
#
planning horizon of 100 years
#
is an unbelievable challenge
#
for each individual and
#
that central banks can make
#
is to deliver a public good
#
which is called low and stable inflation
#
okay now how do they do that
#
this is where two parts
#
the monetary policy committee which is supposed
#
to be dominated by independent
#
experts not by professional
#
civil servants it's supposed to be
#
filled with people like Mohit
#
they're supposed to forecast
#
that over the next one two years
#
what is going to happen to the economy
#
and based on that they're supposed to
#
raise the rate and lower the rate
#
so as to hit the target so it's part
#
one that the rate hikes
#
and the rate cuts are supposed to be done
#
of one to two years inflation
#
will come back to the target because
#
when you raise rates today it has no impact
#
on inflation in the next three months
#
it has an impact over 12 to 18 months
#
so that's why you're necessarily forecasting
#
bird will be 12 months out
#
and 18 months out and then you fire a shot
#
based on that and this requires
#
institution of the monetary policy committee
#
and the essence of the monetary policy committee
#
is that you bring in people
#
with real world knowledge
#
and academic knowledge and not career civil servants
#
because it's a different level
#
of capability and expertise. You also
#
get more diversity. Civil servants
#
towards supporting a government's election
#
independent citizens, honorable
#
gentlemen like Mohit will
#
not be so concerned about helping
#
the incumbent win the next
#
election. Especially senile as you called me
#
before we started recording. Before this recording
#
Ajay called Mohit senile it's very sad very sad
#
now when you raise rates and lower rates
#
first of all I just want to be instrumental
#
and I want to say I don't give a damn. Like get me
#
that glory of low and stable
#
yes we can have a reasonable debate that
#
this person will be adversely affected
#
this person will not be adversely affected
#
see a whole lot of give in changing
#
economy the effects go all around the country
#
so yeah you could say rich people benefit on
#
the way up rich people suffer on the way down
#
so in a way they're bearing the brunt of the adjustment
#
which is not so bad because you know adjusting
#
is very costly so if you ask
#
the middle class or poor people to adjust it's
#
very costly so asking rich people to
#
suffer fluctuations of their wealth
#
and for it to filter through to
#
changes of their consumption through a wealth effect
#
seems like not a bad idea to me
#
but I just want to emphasize that
#
useful to turn this into class
#
warfare. What we should
#
focus on is that technical
#
capacity of establishing
#
the correct committee which will vote
#
and will make the correct
#
movements of the rate up and the rate
#
down so that you get to deliver
#
on the inflation target and this is where
#
Mohit's point comes that
#
with the benefit of hindsight
#
I think it is clear that in 2020
#
on fiscal and monetary stimulus
#
in the aftermath of the pandemic
#
we're saying this with the benefit of
#
hindsight so I think we should
#
do some of these recordings and challenges
#
to each other when the events
#
we may have thought differently
#
apply 2020 hindsight to
#
what they did to poo poo them
#
I'm just saying that with the benefit of hindsight
#
it appears clear today that
#
the fiscal and monetary policy
#
responses of developed markets
#
extremely large and were bigger
#
than what was required to
#
macroeconomic stability in those economies
#
and as a consequence inflation
#
went out of control and the Fed
#
from February 2022 it started
#
hiking it started signaling
#
maybe by August September 2021
#
only by November by November
#
2021 so the Fed was late to
#
this story so with 2020
#
hindsight I think all of us will agree
#
did the stimulus at the time of the pandemic
#
alongside United States
#
fiscal policy and alongside every developed
#
have been similar in most
#
DMs both monetary and fiscal and
#
the Fed woke up late that they are stuck
#
with a difficult and intractable
#
inflation in the United States it's not
#
just a matter of getting the supply chain
#
to work again where their predictions
#
about the healing of the supply chain proved to be
#
broadly okay but something had changed
#
in labor supply in the United States
#
and that inflation has proved to be much
#
more stubborn and then they started
#
raising rates quite dramatically
#
in ways that were not anticipated by many
#
and then again I come back
#
that monetary policy works by
#
I'm unembarrassed to say that
#
when monetary policy hikes why
#
did you hike monetary policy because you wanted
#
to bring down inflation so you've
#
got to bring down aggregate demand in the economy
#
economy have to change course have
#
to change their behavior some people
#
might have been yearning to take a home
#
loan and they will figure that no but this
#
AMI is so high I can't take a home loan
#
yes there is a pathir panchali there
#
in a reasonable debate around the pain
#
and the pain will always be
#
distributed unevenly and you
#
know there is a human interest story
#
decision makers either firms
#
or individuals who make
#
the monetary policy transmission
#
and bone of monetary policy
#
the human unpleasantness
#
of individuals and firms
#
and it's easy to focus on that
#
and say that this is a bad thing
#
but I just like to step back and be abstract
#
and say look one way or the other
#
why did you hike rates in the first
#
place because you wanted to pull back aggregate
#
demand and thus get inflation
#
under control all of us will agree with
#
those lofty goals now when
#
you open the box and look at how the sausage
#
is made there is bound to be unhappiness
#
in it now we're debating
#
the second order story about
#
do you make it but I want to say in an ironic
#
way that the difficulties
#
in Silicon Valley bank and its ilk
#
are actually consistent
#
with the war on inflation by the
#
fed because when all these bad things happen
#
people pull back there are
#
individuals who will choose to not buy the next new
#
car and that is called monetary
#
let me ask a sort of a basic question and
#
I'm kind of thinking aloud and this is sort of about
#
the political incentives
#
because it seems to me that
#
politicians to have low interest rates
#
because when they do there's more
#
money flooding out there
#
cantillon effect obviously the rich are
#
happy the people who fund the parties are happy
#
those interest groups are happy and they can
#
point to the stock market rise and say hey this is
#
great and of course there is a lag of this
#
money actually percolating down and
#
the price of apples and oranges going up so
#
the common person doesn't mind it now
#
because there is this lag
#
by the time actual inflation happens
#
and the common person does
#
not mind it the incentives of the politician
#
are changing too late because
#
when it reaches that stage where apples and oranges
#
are too expensive and you're thinking shit I could
#
lose the next elections then
#
A you are too late because
#
it's already gone very far and
#
B then there is a possibility
#
that you overreact and you say okay interest
#
rates really have to go down we've got to get this shit under
#
control and therefore it seems that
#
an overreaction on both
#
ends on lowering interest rates
#
and raising them then when you've got to get inflation under control
#
there's a fundamental tension
#
which sort of makes sure that
#
this finally comes into some
#
I traveled in Bihar in December
#
and I picked up this lovely phrase
#
and I want to use it over here
#
which is that when you have low interest rates
#
is therefore feeling rich because
#
he's paying less he can expand
#
so I'm just saying no no I'm sorry
#
I'm incapable of that but what I'm saying
#
when you need the notes you need
#
especially in India is really
#
so I think that brings the
#
but Amit is right on this time delay problem
#
because monetary policy works
#
you got to move with a lead time of 12 to 18
#
your problem statement is the precise
#
the community shifted to
#
this modern paradigm of
#
monetary policy which is two steps
#
step one that you code an inflation
#
so the law in India says
#
that the purpose of the Reserve Bank of India
#
and there is no excuse for them
#
saying I was doing something else
#
so we need to systematically remove
#
all the other objectives from the RBI
#
and the second is that the monetary policy
#
committee should be dominated by
#
people who are not controlled
#
by the government because the government will always
#
have that re-election perspective
#
so that's why a monetary policy
#
committee that votes and sets the rate
#
and a committee that is basically
#
filled with the citizenry
#
and they vote and so there can be one or
#
two votes who are the employees
#
of the central bank who will presumably
#
take instructions from the Ministry of Finance
#
but all the others we hope
#
and they will vote based on the merits
#
of the situation about getting
#
So two points over here, the first is that you've
#
talked a lot about the composition of
#
the committee what it's supposed to
#
be like and implicitly what
#
it's not like so I want
#
to ask you your views on that
#
but I also want to say that
#
there is this law and the law
#
requires that when the RBI
#
fails it explains why it fails
#
it's supposedly explained
#
but it's in a sealed cover
#
and unlike our new chief
#
justice who says sealed covers are not
#
acceptable here it seems
#
completely acceptable so therefore we're no
#
fact that policy should be accessible
#
to everybody so I want to ask your views on both of these
#
as presently constructed in India
#
people from the RBI including
#
externals and a casting
#
It's controlled by the RBI
#
It's completely controlled by the governor
#
because employees of RBI
#
are unlikely to go against the governor
#
given the feudal structure of Indian
#
independents disagree the governor
#
has a casting vote so in effect we don't
#
of the MPC I think this is
#
progress the present MPC is
#
progress because we do have meetings
#
and we do have discussions and some of the
#
three independents do disagree
#
so I think it has opened up
#
the space for a little more conversation
#
but it has not changed the power structure
#
explanation of why it failed
#
text of the section in the law
#
but it is an extremely well written
#
there is a failure on the inflation target
#
the RBI must diagnose what
#
write a letter explaining failure
#
and showing what remedial actions are being taken
#
an absolutely clean and well
#
written section of law. The way you're describing
#
it I'm wondering if you wrote it
#
really come out in the public domain but the
#
minister of finance has chosen to not do that
#
a digressive broader question
#
would be desirable but would a
#
also be against the basic principles of
#
democracy because they would not be accountable to
#
you could have a big industrialist
#
buy off four of those guys so that policy
#
the fundamental thing of a democracy is every
#
arm of a government should ideally
#
be accountable I mean this is I'm not
#
arguing one way or the other I'm just saying that
#
whenever you talk about an independent
#
arm which is not accountable
#
to the people as it were you know on
#
the one hand it's a good thing that the government
#
of the day has no control over them so short term
#
political incentives don't come into play
#
but on the other hand hey we are a democracy
#
and this MPC would be setting
#
something so freaking fundamental
#
that affects everybody including
#
the poorest of the poor but who
#
are they answering to? So I think
#
you know this is a very this is a super
#
is leading us into a fool's paradise
#
you know and in a sense it's at
#
the heart of one of the
#
at least political messaging of
#
our current government which
#
and I don't want to get
#
into that debate about this
#
to democracy some systems
#
are so complex that they require
#
in fact I'm not talking about
#
experts I'm talking about accountability
#
I'm coming to that I'm coming to that I heard
#
that part of it who controls
#
and the value that they place
#
in their reputation you know
#
because he's got a degree from such and such
#
for your most chronic or intractable
#
problem you probably don't even know where
#
he got his degree from you're going to him
#
because of the reputation now if
#
Ajay since I don't have a profession
#
on that monetary policy committee
#
he would be taking very
#
because to have reached there in
#
the first place he would have established a certain
#
reputation as a monetary
#
economist and he wants that reputation
#
that reputation for fairness
#
depth of thought to carry
#
and that's why experts are valuable
#
don't have that it's very unlikely
#
that you're going to be able
#
on the one hand I agree but the
#
counter to that would be that
#
as a member of the monetary policy
#
committee for example you would
#
reputational cost to doing something
#
wrong to say some industrialist giving you
#
five crores and saying boss interest rate
#
should be low and also in India
#
what we have seen and I wrote a column called
#
useful idiots about it we have
#
seen that we have seen many people
#
who we know know better
#
come out and support demonetization they knew
#
it was wrong but they did it
#
and they were experts and they are people with
#
great reputations including people
#
I would have called on my show before that but
#
appalled at that and it's a human
#
tragedy at one level but I don't think
#
reputational cost or benefit is really
#
everything I want to say that it's not everything
#
but it's huge but these people
#
ignore it so I want to say that
#
the technical design of
#
a monetary policy committee and the drafting of
#
the law is not a panacea
#
the corresponding capabilities in the
#
society to make it work correctly
#
take a pause to think about the appointment
#
the ministry of finance hires all the six
#
you want a sound appointment
#
process that will really bring some of the best people
#
of the country into these positions
#
do we have that do we not have that do we have
#
on macroeconomics in India where you have
#
raw material for people you would like to appoint
#
on a monetary policy committee
#
there is a broader ecosystem
#
problem where the economics profession in the country
#
all these pieces matter I want
#
political theory question
#
around the democratic legitimacy
#
tension so one is I was
#
describing the way in which
#
there is an election cycle around
#
interest rates so this has been measured
#
in developed markets before
#
monetary policy committees came along
#
ruling party has an incentive
#
for a year or two leading up to the election
#
because in the short term it feels great
#
and then there will be a bout of inflation after the
#
elections and you will scramble for a
#
year or two to get it back under control
#
and then you are ready for the next election so there was
#
this election cycle which is really
#
counterproductive it is not macroeconomic stability
#
so there is a problem that we are solving
#
and we should be willing
#
to come up with solutions to
#
felt needs so we are not
#
away from fundamental tenets of democracy
#
but we are trying to solve a felt problem
#
around the word accountability
#
as my good friend Lant Pritchett emphasises
#
to think deeply about the word
#
accountability in public life
#
and accountability is not
#
accountability as in giving the receipts
#
to your accountant but Lant
#
always emphasises that the most important
#
accountability that shapes all of us
#
that each of the individuals
#
in the society we are accountable
#
to each other the way it works
#
and we give an account of our
#
of our life that X happened Y
#
happened I was in a bind I
#
pondered this and I chose
#
this and you know what with the benefit of
#
hindsight I felt that was a wrong
#
decision I really feel bad that I did
#
that okay or you know it
#
worked out great it was very difficult to judge
#
at that time but I made this call
#
or the amazing story that
#
Mohit was telling me about
#
shot his wife with an air gun
#
and had misbehaved with Mohit when he was a kid
#
it is these conversations with each other
#
from our lives that did you have
#
a good day that's really the
#
moment of our lives and I think this
#
doesn't get given enough emphasis
#
whereas when you're a civil servant you're a career
#
bureaucrat you are powerfully in the
#
grip of the appointment
#
and promotion process you fear government
#
once you're willing to think
#
of societal problems like
#
corruption where person X
#
can be paid rupees five crore then
#
that could be any of the MPC members
#
so there's nothing special about
#
a private citizen who is being brought into an
#
MPC that makes them more or
#
less vulnerable to such difficulties
#
on integrity. I want to take
#
that point one level further
#
Amit which is that you know we
#
are talking about an environment
#
by all accounts and all
#
objective measures has always been
#
continue to function on that basis
#
that we are low trust society
#
and therefore everything must be built
#
in terms of more and more
#
checks and balances you're actually not improving
#
think we have to move towards
#
more trust rather than to
#
less and less trust more and more
#
bureaucrats because supposedly bureaucrats
#
are bringing some order into the system
#
actually you're just reinforcing that
#
sense that we don't trust anybody
#
and therefore we've got to have more and more supervision
#
everything needs to be run by
#
system is a bad starting place
#
but we've got to say we want
#
to move to a higher trust system
#
how do we do that and examine everything
#
and that can't start from no we don't
#
you're immediately saying we want to go to a lower level
#
of trust that's a different argument
#
the experts argument is a different argument this is more
#
a structural argument of incentives and accountability
#
but they're very much related Amit
#
just to go back to what you mentioned about what
#
that observation is correct
#
but is correct in a limited context
#
of you know a self-selected
#
group of people like yourself
#
and you guys or maybe like the three of us
#
in a sense we keep ourselves accountable
#
you to respect me and vice versa
#
or think of a 30 year old civil servant
#
they meet their friends
#
their friends and we all give an account
#
of our day to each other
#
but where it breaks down and
#
in the specific example I gave and I don't know
#
if I should take a name I won't take a name let's not do
#
that here but we know of
#
supported demonetization because in some
#
way they were part of the government infrastructure
#
or machinery and some who weren't even
#
part of it but became part of it later
#
which is important to note who supported
#
demonetization despite knowing
#
that it was a disaster it was
#
a humanitarian disaster
#
despite knowing that they did it
#
and we would respect them as experts
#
I mean there are very eminent names
#
among them you know and that happened
#
and all three of us spoke out
#
against it of course and in your case
#
Ajay with some risk because you were actually
#
connected to the government to the Ministry of Finance
#
of people didn't do that and let's not take names
#
but you know who I'm talking about
#
but we could be charitable to them
#
some of them could have
#
that perhaps there was some merit
#
at that time in a piece that any
#
economist who supported demonetization
#
was either a bad economist
#
both and you know that's true
#
how could anyone seriously
#
That's where I want to look at this in the larger
#
purely technical designs
#
of government systems and institutions
#
are not the answer because you've got to
#
locate that in the society and you have to think more
#
about these problems so I want to give you an
#
example I had a conversation with
#
the chief economist of the Bank
#
of England and I asked him that
#
have you ever voted against the governor
#
he said yeah I vote against him all the time
#
it's not a big deal I said do you feel
#
awkward do you feel uncomfortable when
#
you vote against him he said no not at all
#
it's very comfortable we disagree
#
we argue all the time we meet all the time
#
over and beyond the MPC committees
#
and I will go vote based
#
on my conscience and he will go vote based
#
on his conscience and we are good friends there's never
#
an issue around it now that's
#
a comment on the greatness of that
#
society that that society has
#
have the power structure where
#
work in a certain harmonious
#
exactly Ahmed these are high trusts
#
but we are not and that's a reality
#
of course so that's the point that
#
I made that we've got to move in that direction
#
but let me connect these pieces
#
so now we come to design that
#
Reserve Bank of India on
#
the monetary policy committee alongside the governor
#
through their conscience would they
#
develop an independent view
#
would they disagree in their voting
#
my concern is that given
#
the way in which we operate in Indian
#
society and it's a societal problem I don't want
#
to single out any individual
#
or any one organization it's a
#
societal problem that we have such powerful
#
pressures of conformism and group
#
think that it is very likely that all the
#
three will vote together now you must factor
#
that into institutional design so
#
if you were in the UK and you had
#
a couple of employees of the Central
#
external experts on an MPC
#
it may even work reasonably well but
#
we cannot do policy transplantation
#
without thinking how it will
#
work in that societal context
#
and so in India I would
#
advocate an institutional
#
design where there is one vote
#
for a central bank employee because you
#
understand that it's a monolithic organization
#
they're going to have one view
#
fine we'll respect that and they get one
#
vote so imagine that there are five people
#
on an MPC and there are four external
#
academics and two should be practitioners
#
servant I think that gives you a nice
#
MPC one that respects and recognizes
#
the difficulties of operating in
#
and this is a great point that many
#
thinkers keep making on my show I had an
#
episode with Shruti Rajgopalan and
#
Alex Tabarrok about exactly this
#
I think the episode was called elite imitation
#
but it was about the paper premature
#
imitation and whatever basically
#
isomorphic mimicry that you take
#
a policy that works somewhere else and you
#
transplant it to India and you feel so smart
#
I got a degree from Harvard
#
and I came and I did this policy and all these
#
studies show it works and all of that and that doesn't
#
work and that's a point
#
you made repeatedly as well like in the email
#
thread where we were discussing this stuff
#
before that you for example
#
spoke about how you know defined benefit
#
pensions would work well in Sweden but they can't
#
work in India and similarly when you
#
look at the banking environment here
#
that you have to take all of these subtle differences
#
maybe even talking about SVB
#
for example and what the regulators did there
#
is interesting in an abstract sense
#
but the Indian context has
#
its own local qualities
#
which we need to look at and think about
#
that so can you expand a bit on
#
these differences per se
#
and how we need to think of it differently
#
banking is a very difficult business
#
crude leverage ratio the total assets
#
divided by net worth is about 18
#
or 19 or something like that
#
and so if a bank makes a loss of about
#
technically insolvent and that's
#
in fact we were talking
#
about this earlier you know there's
#
this sort of ra-ra mood in India it's been there
#
for the last 7 or 8 years and it's
#
continuously being pumped up
#
and you talked about an article that you read
#
regulators need a lot to learn
#
from India implicit point being
#
that banks in India are absolutely safe
#
we don't make mistakes like this
#
bubble to the surface then there's a cost
#
to it so you know I just want
#
you to expand a little bit on
#
what is that cost and finally
#
there's no such thing as a free lunch somebody is paying
#
for that. What we've had in
#
go bad in some banks and either
#
they get absorbed into SBI or
#
ICICI bank or something or
#
every year the government
#
puts money in to recapitalize
#
these things are sort of
#
kept out of the surface
#
so things don't get really bad
#
in the recent years yes bank went bad
#
the case that there is any
#
great achievement of banking
#
regulation in India things have gone
#
really badly so I'm worried
#
that banks are highly leveraged
#
organizations you can't do derivative trading in
#
India with 20x leverage
#
average manager of a bank
#
the leadership of a bank
#
gets to run a 20x leverage
#
high wire act and things will go
#
wrong again and again and
#
that year after year there is
#
a cost upon the taxpayer
#
also the regulations are
#
many ways so what happens is each
#
time there's a bank failure you tighten
#
more regulations and that's not
#
necessarily wise so earlier
#
in the show I talked about
#
picture of what is banking regulation
#
where the job of the regulator
#
is to constrain the risk taking of a bank
#
so as to achieve a desired target
#
now that's not how a lot of banking regulation
#
in India works a lot of banking
#
regulation in India works by converting every
#
of one centrally planned institution
#
so all the banks behave alike
#
all the banks look alike
#
their products and processes are the same
#
they're severely constrained they do very little activity
#
with the private sector
#
and so you don't get the full benefits
#
for the country of having
#
a banking system and we are imposing
#
a burden upon taxpayers
#
so it's not a very good arrangement
#
and I'm also not optimistic
#
about things getting better
#
for a long long time so
#
progress in finance in India
#
with banking I am particularly
#
thinking that we'll be better
#
off for long long years
#
with a relatively small banking system
#
because it's a high wire act
#
and in the Indian state and
#
in the Indian system we will not
#
be able to do a good job of making it work
#
so you know that raises a few thoughts
#
in my mind one is something which we talked about
#
the very basis of banking
#
the fractional reserve system
#
I raise this in the context of
#
perhaps we need to relook
#
at the extent of fractional banking
#
even if we don't go the whole hog and say
#
there should be no fractional banking that
#
boggles my mind because then the capitalist
#
system is involved. Let's just think of
#
less leverage. Exactly that's
#
what I'm coming to. Just to demystify that
#
for those by 20x leverage you basically
#
mean that a bank has lent out 20 times
#
what has been deposited into it. Not
#
lent owns assets off because
#
they own a lot of bonds as well. Sure so they own assets
#
of 20 times. So they have 5 rupees of equity
#
and they have total assets of 100.
#
So basically if they have a 5% loss
#
their catastrophe gets over.
#
They're technically insolvent with just a 5%
#
loss and the higher the leverage
#
therefore the lower that percentage needs
#
to be to wipe you out straight away.
#
these are just numbers but yeah
#
a very uncomfortable number. As somebody
#
occasionally trades on leverage I
#
don't know what that can do. You can
#
wipe out your equity in one
#
day if you have a bad day
#
and then you have to decide whether you want to be
#
in the game or retire hurt or
#
put more equity. You've got a home in the hills.
#
what's a number you would be comfortable with?
#
I want to think through two parts
#
and then that starts taking you to NBFC
#
territory which I find very
#
insightful. So I want to
#
talk about a larger conception
#
first I just want to close on
#
this radical proposition
#
we had a country with low state capacity
#
and the air traffic control did not work well
#
and commercial airliners kept crashing
#
into each other at airports.
#
This is very unpleasant and lots of countries
#
ATC that works reasonably well but
#
on one hand we can keep on railing
#
and saying that we should make
#
the air traffic control
#
we should recognize that look it's
#
a high capability and at low
#
levels of state capability when you are an
#
early stage developing country maybe you should not be
#
using commercial aircraft
#
on that scale that it's an advanced
#
technology. So I want to make that analogy
#
here that we've really not done
#
well on dealing with the
#
banking system that we've gone we've done
#
everything wrong we have public sector banks
#
you have central planning you have very little
#
credit coming back out into the
#
private sector you have failure upon failure
#
you have claims upon taxpayers I mean
#
it's just one long litany.
#
But nobody believes you
#
Ajay. Everything is great
#
we have a great banking system.
#
Here between the three of us.
#
I'm raising a serious point.
#
I just think the 30 year track record
#
only in the early 90s some basics
#
of banking regulation started
#
being put into place. So you could
#
say in the 90s it was okay to
#
through the 2000s through the
#
2010s you know it seems that
#
the basic problems that you've got
#
a banking system which has
#
public sector domination that
#
is a resource gathering mechanism for
#
that lends very little out of
#
its overall portfolio to
#
error prone and failure prone
#
of innovation and problem solving
#
because there is one big central planning system
#
and all banks look the same they do the same
#
things they run out of RBI.
#
So when you add up these five problems
#
it's disappointing it's not
#
banking is not doing what
#
a good market economy in
#
some idealized conception it's doing very
#
little at a high cost. So I want to
#
ask you two specific questions from my
#
or one of the hats like
#
you I also wear many hats. So from my
#
Nifty which measures the prices
#
today and is the second
#
most traded instrument on the stock
#
market would you say the bank Nifty is
#
given the present structure
#
of the Indian banking industry
#
for many many applications you're down
#
to running to the same six seven eight
#
a lack of competition that's one more element
#
of the failure of the banking system. So
#
those six eight banks are widely
#
profitable and will be profitable for a long
#
time and when you NPV those
#
the cash coming out of these banks
#
you get to a hefty valuation. So
#
think it's a great deal being one of those
#
six to eight banks who are practically
#
the only game in town. Okay so
#
the second question which is
#
lending to the private sector
#
the question obviously then is
#
who are they lending to?
#
Aside from the bonds that they buy from the government
#
one more data point that I want to bring
#
in there and this is something that really
#
surprises me which is that if
#
we look at the change in the
#
over the last ten years
#
the change has been quite remarkable.
#
sectors are sham you know nothing is happening
#
over there. The second is
#
gone up which also reflects the way in which
#
the Indian economy has grown
#
component of lending of the banks
#
the single largest chunk is lending
#
whether for consumer durables
#
for personal loans, for housing
#
when banks lend to individuals and not to firms
#
because they are the people.
#
I just have an objection
#
when banks are a borrowing arm for
#
the state. It's a narrow point
#
engagement with the real economy is a good thing
#
it is a problem because really the sweet spot for
#
and not big firms. So banking
#
in India does not do a great job of that
#
but then it's part of this larger
#
paint where so many things are broken
#
Just for the sake of our
#
listeners I want you to amplify
#
a little bit on this issue of
#
the government and what that does
#
This will take us far afield
#
but I just want to do a quick
#
sense of what is going on.
#
RBI that compel banks to
#
buy a certain number of government bonds. Remarkably
#
enough both public and private banks
#
are buying government bonds in excess of that.
#
So it's very interesting to wonder why
#
assets are going back to the government.
#
So banks are an important
#
mechanism for government to borrow
#
About 5% of the borrowing
#
of government is coming from voluntary persons.
#
is coming from these coercive channels
#
and that's a larger separate
#
it does not get me excited about
#
contribution are banks making in the
#
society? I think the report card
#
when you peer into the future
#
it doesn't look like many of these
#
problems will readily get fixed. So
#
generally I feel that if
#
we think of development strategy for India
#
it's good to think of a
#
future with a reduction
#
in the role and importance
#
of banking in the country.
#
going to linger in the present
#
no great financial reforms process
#
that is underway whereby these
#
problems will be solved. There is some
#
really valuable stuff happening by way of
#
We'll see where it goes. But all
#
credit to the government, they privatised Air India.
#
We would have expected this was truly
#
hard. So potentially some
#
public sector banks will also be
#
privatised. So I think that there is some momentum
#
from about 2017 onwards
#
financial reforms in India broke down.
#
And so I'm not seeing these things getting fixed.
#
that we commit isomorphic mimicry
#
an integral part of the development
#
journey of a country is the emergence
#
banking system. I think
#
that where we are in India
#
we are many decades away from
#
making financial economic
#
banking relies on financial economic
#
policy. So I described at the beginning
#
that you got to get the regulation right, you got to get
#
the lender of last resort right,
#
you got to get the resolution corporation done.
#
None of these work today
#
and there is no light at the end
#
of the tunnel. So for a long long time
#
banking in India is not going to work well.
#
it's good for India if banking
#
is some small corner and
#
we get to do our financial intermediation through
#
other mechanisms. So private
#
equity funds work better, venture capital funds
#
work better, venture debt has started
#
happening. Securitization,
#
NBFCs, there are so many things
#
that are going on which have some energy
#
and dynamism of thinking about
#
feel they contain better incentives
#
and will allocate resources
#
more wisely as compared to
#
what we are seeing in banking. So
#
I would just question the standard
#
development economics paradigm
#
that to grow bank deposits
#
is synonymous with progress. In India
#
I fear it's a bit upside down.
#
So I want to, I love your phrase
#
the use of banking in society. It
#
is so resonant of Hayek's great essay
#
the use of knowledge in society. So I'm going to
#
ask you for some knowledge about banking because
#
something that you've said in the past
#
and we actually said this in
#
sort of a pilot episode
#
of our web show but it's not in the first episode
#
so let's talk about it here, is
#
how you've spoken about how you're very bullish in finance
#
but very bearish in banks and in
#
fact on banking and in fact you've
#
warned people, do not put your
#
money in banks, you know, just
#
put it elsewhere, do not
#
put it in banks. Explain why
#
you give that warning, what should they do with it instead
#
and of course I know that opens a rabbit
#
hole into personal finance and all that, we'll tackle
#
that in detail some other time. But just
#
this limited point of why should
#
retail investors like us
#
not put our money in banks.
#
started the Merton Miller
#
quotation that banking is a disaster
#
prone 19th century industry and banks fail
#
and we've seen it over and over
#
we've seen the PMC bank fail
#
we've seen a yes bank fail and it is
#
all kinds of stress and lack
#
of comfort for depositors
#
so I would just like to carry
#
this message to every grandmother and every dentist
#
the story you've been told that banks
#
are infinitely safe is not correct
#
But from a practical point of view there's another
#
very simple issue which is that you're not
#
paid to put your money in banks.
#
So then you come back to personal
#
financial advice, why are people holding
#
such large bank deposits?
#
What I always say to people is that
#
what is the banking product and now
#
this takes us to paradigm shifts, what is the
#
banking product? You're promised that
#
100 will never decline in value, you'll get some
#
measly interest in a current account
#
maybe nothing in a savings bank
#
account a little bit but it'll never go below
#
100. And then you're promised
#
connections into the payment system
#
so you can write checks, you can plug
#
into an electronic payment system and you can make
#
payments. These are the characteristics
#
and the little secret you're not
#
can get into trouble and
#
I would just question this saying empirically
#
all over the world banks have got
#
into trouble and we have seen how in India
#
be blocked for many many months
#
the payment of deposit insurance is not
#
frictionless like we've seen with the FDIC
#
and it's not a great system. So
#
what are the alternatives that we have?
#
I would definitely advocate
#
money market mutual funds. It's a low
#
interest rate, they don't give you a written guarantee
#
that it will not drop below 100
#
so called break the buck but the
#
losses will be tiny and negligible and
#
really there is no significant
#
risk of losing your money, you'll get
#
a low rate but you're completely safe
#
I find the safety of money market mutual funds
#
so much superior compared to the
#
safety of banks. These are non leveraged organizations
#
which are buying bonds issued by
#
the government or some of the highest
#
rated companies of India
#
and this just is a better deal, it's a
#
long only asset. The mutual fund
#
takes no leverage, it's not borrowing
#
anything, it's just putting his money in a
#
money market mutual fund and
#
we need to improve our policy frameworks
#
in terms of making that a first class
#
participant in the payment system
#
you should be able to write checks on a money market
#
mutual fund, you should be able to connect
#
from a money market mutual fund
#
overseas payment systems
#
so that's the things that
#
should be done in India to make money market
#
mutual funds work better so I think that's
#
a ready choice available to everybody
#
in India that it's a bank like
#
you may have to do a little bit of web browsing
#
to move money in and out of your bank
#
account and your money market mutual fund
#
but I would say to every CFO
#
if their energy and their intensity is
#
focused on their business then this
#
should be the elementary advice that their
#
their CA doesn't give it to them but this
#
put your money in liquid funds
#
formal education in India you're
#
supposed to have trained
#
MBAs and such like, I would
#
like it if this wisdom goes further
#
that it's such a simple proposition, don't
#
keep large sums of money in a bank
#
keep your large sums of money in a money
#
market mutual fund it'll broadly
#
be like an SB or a little better
#
the interest and you're completely
#
safe you just have to take the trouble of
#
moving one week's money into
#
your bank account at a time so you hold your
#
the money market mutual fund and every
#
week you have to do one transaction to move money
#
from that into a bank account some
#
banks are offering sweep
#
arrangements where automatically
#
your money market mutual
#
fund gets liquidated when your
#
checking account is out of money so
#
make everybody think more about these
#
propositions that the cover
#
story that we've been told
#
that banks are infinitely safe you can
#
put your money in a bank and forget about it
#
is not true and you know every
#
must be rethinking their lessons
#
experience except that most of them
#
what they've done is to put their money into Citibank
#
rather than into money market funds
#
actually there's been a huge movement
#
in favor of money market mutual funds also
#
in the United States I was reading after
#
event something like 0.15
#
moved out of bank deposits into
#
money market mutual funds so I think people
#
need this wake up call and
#
in the 19th century you had to sell
#
a certain story around fractional reserve
#
banking because the only way to organize
#
money was to have bank branches
#
in remote places who would
#
give out loans and take in checking accounts
#
so I think there is a story that is
#
of the good things that banks do
#
is that they will keep on failing
#
and taxpayers will keep bailing them out I
#
don't buy that in the modern age anymore
#
because things like money market mutual funds
#
direct access to central bank clearing
#
have pretty much eliminated
#
of money we can perfectly organize ourselves
#
and do transactions in society
#
without requiring banks so it's
#
perfectly possible to have a payment
#
system where money moves through
#
money market mutual funds or central bank checking
#
accounts central bank current accounts
#
without bringing this highly
#
leveraged institution and this brings me back
#
to how much leverage and basically
#
which is 5-6% basically
#
just be NBFCs raise bonds
#
don't have deposits fine that's a business
#
it's a nice clean business it's a healthy
#
legitimate strategy and NBFCs can
#
and should go belly up because their financing
#
is from bonds so just like you never
#
regulate the bond issuance of a
#
data steal you should not regulate the
#
bond issuance of an NBFC
#
they should go to the market and
#
their bond holders are professionals so don't bring moral
#
hazard there don't protect the NBFC
#
let NBFCs go belly up so
#
then professionals will choose to invest
#
in a good NBFC and this 5-6X
#
leverage it's not too crazy
#
so at this point I'm going to quote
#
the great Vijay Kelkar who has of course
#
been your co-author on a classic
#
book in service of the republic can you guess
#
so this is something he said to me during our
#
recording but it's not on tape if
#
you remember we took a break we were recording in the studio
#
in Mumbai when we did our episode together
#
Vijay went to the loo and then
#
he came back and then he
#
you know pointed a finger at
#
me and said Amit I would like to give you some advice
#
every time you're passing
#
and therefore at this moment
#
with these immortal words we shall take
#
a quick break and on the other side of this break we'll
#
kind of talk outside this paradigm
#
as I can see Mohit is dying to do
#
before I was a podcaster I was a writer
#
in fact chances are that
#
many of you first heard of me because of
#
my blog India Uncut which was
#
active between 2003 and 2009
#
and became somewhat popular at the time
#
I loved the freedom the form gave
#
me and I feel I was shaped by
#
it in many ways I exercise
#
my writing muscle every day
#
and was forced to think about many different
#
things because I wrote about many different
#
things well that phase in my life
#
ended for various reasons and
#
now it is time to revive it only now
#
I'm doing it through a newsletter
#
I have started the India Uncut
#
newsletter at India Uncut
#
dot sub stack dot com where
#
I will write regularly about whatever
#
catches my fancy I'll write about some
#
of the themes I cover in this podcast
#
and about much else so please
#
to head on over to India Uncut dot
#
sub stack dot com and subscribe
#
it is free once you sign up
#
each new installment that I write will land
#
up in your email inbox you don't
#
need to go anywhere so subscribe
#
now for free the India Uncut
#
newsletter at India Uncut dot
#
sub stack dot com thank you
#
Welcome back to the scene in the unseen I'm chatting with
#
Ajay Shah and Mohit Sathyanand or Mohit
#
Sathyanand and Ajay Shah if we go by
#
the academic way of ordering by last
#
name but whatever Ajay and Mohit
#
about banking and we thought
#
we'll you know cover a wide range of things
#
but Mohit has to leave in one and a half
#
hours because of activities
#
than 20 years ago but we won't get into
#
that but let's let's kind
#
of come out of this paradigm now
#
and one of our mutual friends
#
Kumar Anand said the other day
#
to us on whatsapp that one
#
of the great sort of aha
#
moments of his life was where
#
someone pointed out to him quote
#
if one half of all transaction is
#
money whose price is fixed by the central
#
bank then how can we say that this
#
is a free market stop code
#
and this bears thinking about because
#
we have normalized what
#
the system is we have normalized this paradigm
#
as it were that there is a central bank there
#
is fiat currency and money
#
is kind of controlled centrally
#
controlled and centrally planned now for everything
#
else in the economy we know that
#
central planning central control doesn't work
#
you know all of the last century was a
#
cautionary tale for that and
#
luckily in India we kind of managed to
#
come out of it after a point in time
#
you know all of Austrian
#
economics would be based on this saying that
#
hey this is not the way to go about
#
and there are like reams and reams of
#
theory and I'll see if I can put
#
some dummies guide links in the show notes
#
sort of a response to this or a solution
#
to this or a way out of this right
#
and across the world what we also see
#
in various other domains and I keep talking about
#
it on the show and I don't know if it's related
#
is a crumbling of the mainstream
#
everything is getting decentralized whether
#
it is media or the creator economy or perhaps
#
even nation states where their
#
their citizens live more and more
#
on the internet and in a globalized
#
world though one could argue that there's a backward
#
direction there as well so
#
thoughts on it and if I may quote you Mohith
#
document by which I mean a message
#
on whatsapp you once wrote
#
quote I have a deep intellectual
#
sympathy for the idea of competitive money
#
especially as many of my listeners would never
#
have even heard of this
#
for them it's like everything is normal
#
central bank is there, rupee is there
#
if you go out there is dollar
#
yeah it's actually very very
#
you know you can have an intellectual
#
sympathy for something but you can't actually build a
#
structure around it and
#
though there was a time in the US
#
the first world war where
#
every individual bank issued
#
as we know is a synonym
#
some of those bills were fully
#
backed by gold and some
#
of them were not and some of them were fully backed by
#
silver and some of them were not
#
and it was KV attempt or just as
#
you ask we were talking earlier
#
companies need to understand what the bank is
#
doing but perhaps we should exempt
#
the grandmother or the retired teacher from
#
every prospector who was out
#
and say needed to send money
#
on whether the bill that
#
he was using to transmit that money
#
money that was in the bank or not
#
so we have seen competitive
#
why I thought the idea of crypto was great
#
but that doesn't mean that eight or some other
#
successor of it might not
#
work whether in my lifetime
#
or my sons or should he have
#
views intellectual views of
#
people like you which is a progeny is a sin
#
it's very challenged because
#
when you have a monopoly you don't want to give it up
#
over money is also backed by
#
your monopoly over violence
#
then the chances of your giving it up are really
#
cryptocurrencies are via fiat
#
and so this is a huge intellectual
#
problem I don't have the bandwidth to
#
you know the intellectual armory
#
solution to it but that doesn't
#
mean that my intellectual
#
attraction towards competitive
#
now in a practical sense
#
190 or I don't know how many fiat
#
currencies that we have
#
is a fundamentally flawed currency
#
and therefore if I have
#
the wherewithal I'm going to take my money out
#
when I see trouble in Turkey
#
and put it into the US dollar or
#
rich people around the world have always done this
#
they've been able to exercise
#
that option and move into competitive currencies
#
functioning within the paradigm of one
#
you only look at India you can say there's no competitive
#
currency but rich people have always
#
had access to competitive currencies
#
for the last 20 years have been
#
taking money out of India whether to
#
invest overseas 100 years
#
again over this century
#
but they've always taken money out so competitive
#
they just don't exist within
#
the framework of a nation state
#
and they exist only for rich people I mean the whole
#
dream of crypto is if you decentralize everything
#
everybody can you know decide what
#
to use how to buy it but I don't
#
think you can do away with
#
the idea of competitive currency it's only a
#
question of as you said who can
#
utilize it it would be the case that
#
if we were in that particular equilibrium
#
it would be incredibly hard to imagine
#
how we would ever arrive to this equilibrium
#
although perhaps it would be easy
#
because state power would just consolidate
#
but having said that let's
#
leave the pathways aside
#
like conceptually I just
#
want to add one more thought to it which is
#
actually a very obvious one sitting here in India
#
which is the competitive currency
#
in India has always been gold
#
and certainly not a nation as poor as ours
#
hold so much gold because we have
#
such an imbibed history
#
so competitive currency
#
already existed I believe
#
that we need to democratize
#
more access to competitive currencies
#
for everybody not just the rich people
#
whatever it is and at the same time
#
we are seeing the kind of threat
#
that it poses to governments
#
and our government right now
#
is very clearly moving in a direction
#
where they don't want to say we want to stop
#
LRS but we want to make it
#
they're saying for every rupee that you take out
#
in the government treasury yeah we'll give it back
#
to you we'll adjust it against all your taxes
#
but as far as I am concerned
#
the cost of that dollar to me
#
I'm paying 100 rupees for the dollar
#
governments especially governments which are
#
I don't want to over emphasize the problem
#
I'm not saying the government is going bankrupt
#
but there are some fiscal straits
#
what does the first thing they do?
#
they make competitive currencies
#
over the last few years they've done it with gold
#
they've put up the price of gold imports
#
and they would have done more
#
I believe if it weren't for the fact
#
that they know that whenever you do that
#
you create other channels
#
you create criminal rings in
#
of criminality in Bombay began with that
#
and those same guys later when you banned
#
gold imports they became smugglers
#
of weapons and the same guys will do Havana
#
for every putative currency
#
question 1 is it a sound store of value?
#
gold versus Indian rupee
#
grandmother has understood that
#
gold works because it's a better store of value
#
the second dimension is anonymity
#
humans don't want to be
#
humans don't want to be counted, measured
#
and a currency that gives
#
higher anonymity is a good thing
#
for example cash works well
#
by now there is a mass surveillance
#
system all over the world and
#
the governments are watching everything
#
so that's measure number 2 which is
#
the amount of anonymity
#
the third measure is capital controls
#
the ease of moving across the border
#
a currency which is less
#
onerous in terms of moving across
#
the border while some states
#
choose to interfere with our
#
natural state of freedom
#
and the fourth dimension
#
is about ease of API access
#
in which I am able to write software which
#
where nobody is imposing
#
charges on me, nobody is saying you can't enter
#
get done reasonably frictionlessly
#
so these are the four dimensions
#
and now let's apply this to thinking about
#
a couple of currencies, so Indian rupee
#
store of value, we got to
#
an inflation targeting law in 2015
#
the people will know the extent
#
state is able to deliver
#
on the 4% inflation promise
#
it takes decades and decades to earn
#
time will tell but we are at the early stages
#
whereas if you think of
#
the euro or the dollar by and large
#
store of value is pretty good, we would think of
#
the recent period as an aberration
#
and they are mightily fighting
#
back to get to the 2% inflation
#
cash works well, gold works well
#
and the cryptocurrencies
#
don't work either, this is a
#
complete audit trail on the blockchain
#
about who is doing what
#
and any law enforcement
#
agency is able to find out everything
#
so contrary to common claims
#
there is nothing anonymous about cryptocurrency
#
as it works today, future
#
I just want to amplify on that
#
which is as I said the promise
#
governments recognize the risk to their
#
and therefore they made
#
no, I think it's from the design
#
the blockchain is an open system
#
so right from the design stage of this rev
#
let's just leave it at that
#
so dimension 1 is store of value
#
dimension 2 is anonymity
#
just to sort of understand that
#
a bit and forgive me I'll ask another dummy's question
#
the way blockchain works
#
I mean there are two aspects to it
#
one is anyone can of course see a blockchain
#
but you could just be an avatar in that
#
you could just be a number
#
but when the authorities come after you
#
they will get information out of your file system
#
that remaps you to your avatar
#
so in a hypothetical situation let's say
#
that I manage to open a bitcoin account
#
somewhere and somebody pays me for
#
say my writing course from there
#
what if I didn't figure out it's me?
#
they will first have to
#
obtain information from your laptop
#
so they have to physically
#
but that's the normal investigation system
#
so let's take US dollar, reasonably good on
#
store of value, on anonymity
#
100 dollar bills are great
#
the bulk of them are owned outside of the US
#
the whole world uses suitcases of dollar bills
#
as a pathway to anonymity
#
but when it comes to the formal sector transactions
#
they are completely surveilled
#
number 3 is capital controls
#
there are no capital controls, you can do whatever you want
#
and number 4 is API interconnect
#
they are decent, they are not great
#
so like this, we should think of the various possibilities
#
excellent in terms of capital controls
#
it's very cumbersome, you have to move physical pieces
#
like that, so every currency
#
can be evaluated in these 4 dimensions
#
and at a practical level
#
I think the dollar and the euro are decent
#
while they are manufactured by states
#
I think they work, they do a decent job
#
they deliver store of value, they deliver high value bills
#
and they have no capital controls
#
which has the highest bills
#
I didn't know the exact numbers
#
I don't want to view this ideologically
#
I want to view this pragmatically
#
which is, what are the currencies
#
that do a good job of serving
#
their users, these are the 4 tests
#
today's cryptocurrencies
#
they are not a good store of value
#
they have no real anonymity
#
and they have good behaviour
#
when it comes to capital controls
#
and they have full API interconnect
#
but on the first 2 things
#
they are not doing great
#
I remain interested in that field
#
and I think it's an important field
#
because we are only a few years
#
into the journey of bitcoin
#
the original Satoshi paper
#
if you look at fiat money
#
of one failure after another
#
similarly, India got to inflation targeting
#
until 2016 when the law was amended
#
the preamble of the RBI Act
#
said that this is a temporary act
#
based on a small number of years
#
I think that it was an important
#
to find that group of theorems
#
that give us a money-like functionality
#
that when your son is 50
#
mathematical theorem based
#
alternatives to state backed money
#
I think we are just at early stages today
#
so Mohit has a sack of Swiss currency
#
if you come over and question him
#
I was going to say a cup of tea
#
a cup of tea as well perhaps
#
having got that out of the way
#
both of you wear a bunch of colorful hats
#
not as good as our Modiji
#
I must confess but I don't think you will mind my saying that
#
but I will ask you to add one more hat on that
#
for the purpose of the next 10 minutes
#
which is the hat of the science fiction writer
#
like Mohit's son Kedar is 50
#
and there are options and this is not the world
#
paint a picture of what that world will be like
#
in terms of getting around
#
transacting and your imagination
#
can take you beyond the money question
#
but I am just trying to grok in my head
#
that what would such a world
#
look like from the perspective
#
of an average joe like me
#
limit myself to 25 years
#
honestly when it comes to investing
#
people ask me sometimes
#
when I talk about shares
#
they say what is your investment horizon
#
and I say mine is infinite
#
so what do you mean by that
#
and I said it's intergenerational
#
that this is just one of those
#
phrases that I am using or I don't really
#
want to engage with them but that's my honest answer
#
I think that's money can be like that
#
and I think that's even more true of ideas
#
which is perhaps also idealistic
#
for the sake of exercising your imagination
#
that there will be a time someday
#
it's not going to happen
#
even in Kedar's lifetime
#
it's not going to happen but I would like to think
#
money becomes unimportant
#
meaning that there is enough
#
resources that you don't have to
#
if you needed to stockpile money
#
because everything is available
#
so that's my idealistic world
#
I mean I hope we reach that
#
post scarcity world and certainty
#
you know like who knows the world is moving so fast
#
though we are a long way away from it
#
but we always overestimate the short term
#
and underestimate the long term
#
but you didn't tell me a story yet
#
so maybe Ajay will tell me a story
#
that you know when you are 120 for example
#
what's your day like just paint me a picture of your day
#
forget even the money angle
#
we can come to it but what does a day look like
#
when you are 119 rather when you are 120
#
a day is very very hard
#
because so many things will change money is easy
#
can I just paint money? money is easy
#
finance the DeFi dream works out
#
money that is backed by cold mathematical
#
and then think of the four dimensions store of value
#
check, anonymity check, let's figure out
#
capital control is not a problem because these things are immune
#
and API access no problem
#
all these modern things will have API access
#
so it will be the best money and
#
will become increasingly unimportant
#
starting first from free countries
#
so authoritarian countries
#
will put you in jail for having Bitcoin
#
free countries will say
#
yeah sure it's your choice you lead your life
#
but you have to pay tax on it
#
so the income tax authorities will want to understand
#
your total global income and
#
as with many other developments
#
in the world they will try to grapple with
#
the complexities of finding out your income
#
the adoption of this kind
#
from the developed countries
#
the quality of their own
#
resort to draconian measures
#
you could go to jail for
#
having a dollar bill in your pocket
#
so capital control violations
#
were criminalized so you will get that kind
#
of response and we are already seeing that
#
the country in terms of
#
its own institutional capacity on money
#
the more jittery is the response
#
whereas in countries where
#
their basic fiat money works reasonably
#
well there is a mood of
#
saying yeah let this thing also happen also basic
#
commitment to freedom tends
#
to be higher in prosperous countries
#
and is not the case in poor countries
#
freedom will be the places which
#
will incubate innovations in
#
new kinds of decentralized
#
finance there are also the places where
#
the dollar and the euro
#
and the pound and the swiss franc work reasonably
#
well then not first order
#
blemishes but still those things will bubble
#
and bubble and then over the years there
#
will be events and episodes
#
where it will be like a silicon valley
#
bank moment and suddenly people will
#
say oh shit and I'd rather go to
#
the cryptocurrency choice
#
the significance and influence of
#
state-backed money would go down
#
it may never completely vanish
#
but it may be like national
#
airlines ok British Airways was once a public
#
Air India not Air India but NTNL
#
Air India was once a public sector
#
organization and the pride of
#
India and all that but it just
#
becomes irrelevant beyond the point that you just
#
sell it off and it's much better not
#
having a government be in that business
#
so that's a slow transition that you can
#
see to that path but it also goes with
#
some couple of interesting consequences the
#
first is that capital controls would
#
vanish in that world once people
#
all over the world are holding
#
hard currency so to speak
#
the ability of a government to have capital controls would
#
go away which by and large I consider
#
it's just one of the odd things that states do
#
that really have very little justification
#
and the other interesting consequence
#
value that governments derive
#
the dividend that RBI pays the government
#
would go away so the government is earning
#
a rent on its money creation that
#
would go away correspondingly tax
#
rates would have to go up slightly to
#
fill that hole it's not a large amount
#
of money but there's a slight increase in
#
loss of seniorage revenue
#
the third and most important
#
consequence in my opinion would be that
#
there is this interesting side effect
#
which is that we've been able to come
#
up with this clever idea of an inflation
#
targeting system where central
#
control of the interest rate is
#
business cycle so that we deliver
#
it's not just a passive thing
#
bitcoin it's an active thing where the
#
interest rate changes based on business
#
cycle conditions I think of it as a very
#
where on one hand we are making
#
fiat money on the other hand by
#
doing inflation targeting we are also
#
stabilizing the business cycle
#
that hypothetical world
#
the first order effect would be that business
#
cycle volatility would be higher
#
a second order effect would be that
#
stabilization through fiscal policy
#
would become more important
#
yeah but the counter side to that
#
I mean you know my push back on that
#
of the business cycle is also amplified
#
by mistakes in monetary policy
#
so it's not just one way
#
the cold theorems versus
#
now it depends on which country you are in
#
different countries will build
#
central bank institutional capacity
#
at different levels of capability and trust
#
are you confident owning Indian rupees
#
okay it's about trust in Indian institutions
#
dissonance in one aspect of it
#
so maybe I haven't understood it correctly
#
but let's say that we are meeting the condition of
#
anonymity right so I go to a grocer
#
10 currencies I might have 10 too
#
from which to give him whatever so I pay
#
if there is anonymity then nobody knows
#
that this transaction has happened between us
#
then what you mention about
#
a nation state still taxing its citizens
#
and still figuring that out
#
how does that happen you can't really have both of these
#
if you have anonymity the taxes
#
game is over and no state
#
will ever allow that to happen they'll use
#
the monopoly on violence to keep the monopoly on money
#
there was electronics there was
#
cash cash was always anonymous transactions
#
were fully anonymous and there were
#
corporations and payroll
#
and governments figured out how to put an income tax
#
on a company an income tax on a payroll
#
you don't need a mass surveillance system
#
and finance to run a modern civilized
#
society it's a modern aberration
#
the extent of surveillance in finance is new
#
it only came after 9-11
#
I want to call these things out because over the years
#
we'll end up normalizing it so
#
so this idea of KYC and tracking
#
every single formal transaction
#
I think is an inappropriate
#
intrusion into the privacy of
#
it would be a desirable world where that is not there
#
and it's perfectly possible to envision
#
a modern well functioning state
#
and high levels of prosperity
#
without surveilling every single
#
purchase of chewing gum
#
that competition between states
#
can actually bring this about
#
for example for a lot of Indians
#
a lot of Indians are now
#
I mean there is a flight to capital that's partly why
#
LRS regulations have come into being
#
and that's partly why and two capitals
#
of other countries and that's partly why
#
these regulations are in place
#
example let me just pick Dubai
#
let me say the United Arab Emirates decides
#
as it has kind of decided
#
oil is going to run out at some point
#
we are going to make it attractive for creators
#
and entrepreneurs and business people
#
and the entertainment community from all over the world
#
to come here we'll make it attractive with
#
that ecosystem here and benefits will
#
flow from there so now when
#
India is facing this competition
#
reaction might be you know
#
our money won't go there we'll do these controls
#
we'll do LRS we'll do this we'll do that
#
but beyond the point in time that
#
doesn't really work you're having a flight of the wealthy
#
who'll figure their way out so then
#
the only way to handle this
#
is with good policies of your own
#
and then that could lead to
#
an interesting sort of virtuous
#
cycle where you have a greater
#
amount of liberalization across
#
various margins including
#
perhaps a dial back of surveillance if that is
#
what people want including allowing
#
multiple currencies if that is what
#
firstly I just want to on the detail
#
removal of capital controls
#
in our country so capital control has been
#
almost total in our country LRS
#
was a little window which allowed you to take
#
250,000 dollars out and
#
now they're feeling that even that
#
both of us remarked upon it
#
is that it's a visible sign that they have
#
noticed and they're worried yeah yeah absolutely
#
but as far as this other issue
#
is concerned yes absolutely
#
one component of the larger
#
in which it's going to happen
#
see incentives of large
#
government are as important
#
as incentives of the three of us
#
I think governments are smart
#
enough to realize that tax
#
competition eventually hurts governments
#
large government wants to be forced
#
as businessmen can sit down
#
inside a chamber of commerce and talk
#
about what they want to do to
#
a move by large governments
#
to try and ensure that there's some
#
amount of harmonization
#
capital gains you know all of these things
#
so that no large government is
#
competing other large governments out
#
you will have renegades
#
who will act as some kind
#
of safety walls but there'll be minor safety
#
there is an important opportunity
#
for tax competition for India
#
interest what has happened
#
in a lot of developed markets is
#
that they are saddled with large welfare
#
they have expenditure to GDP
#
ratios like 40 percent and 50
#
percent so they are stuck they have
#
to have very high tax rates we don't
#
have that problem the Indian state is small
#
the money required by the Indian state is small
#
so actually there is a phenomenal growth
#
opportunity for India by
#
drastically cutting tax rates
#
particularly the implicit
#
burden of taxation on investment so if you
#
think of the full life cycle
#
of money coming in from
#
a residence based taxation system
#
don't tax people outside
#
money gets invested in India earns
#
a profit the tax paid by
#
corporations every step of that journey
#
there is an opportunity for India
#
to do drastically lower
#
tax rates and thus attract
#
that Indian development strategy needs
#
to play tax competition
#
because it's in our interest it's a
#
it's a unique lever that we can use
#
because the advanced economies
#
economy investment projects will
#
always look less attractive
#
to the extent that they
#
their governments are stuck with
#
a large inflexible welfare state
#
but we in India have a small government we have
#
I actually think that it is wise
#
and efficient for India to play
#
this card that's not what the authorities
#
in India think okay so tax policy
#
people in India always want to raise tax
#
tax policy is too important
#
to be left to tax officials
#
thinking from the viewpoint of Indian
#
development strategy in my opinion
#
it would be wise for India to have
#
a corporate income tax rate like 10 percent
#
residence based taxation
#
just do the cold calculations
#
of putting up a factory in
#
Germany versus putting up a factory in India
#
and the calculation should
#
drastically favor putting up a factory
#
in India we can do that
#
one problem with this and another
#
sort of separate conceptual
#
very theoretical you know as
#
Josh Feldman pointed out in the episode in which you
#
co-host with me that policy needs
#
the three C's it needs to be clear
#
consistent and correct and
#
the consistent word is a problem in Indian
#
policy right any policy
#
that this government comes up with today
#
it has no credibility because you have no
#
idea if five years later the same
#
damn thing will apply so you set up a factory
#
at great rates you assume the worst yeah
#
are the problems we need to solve but
#
I'm just on the conceptual point that
#
no I don't think it's efficient for
#
India to be part of global clubs
#
who will hold up tax rates in fact
#
I think it's efficient for India to
#
cut tax rates dramatically
#
and this mindset issue is also
#
big like you said tax policy should not
#
be left to the tax man and
#
you know some people will
#
as a metric of how well a country is
#
doing what are the tax collections
#
and I with my libertarian hat on
#
always feel that that is crazy because all
#
taxes are a transfer of wealth
#
from the productive part of the economy to
#
the parasitic part of the economy right
#
and as Mohith correctly pointed out
#
it's not about my incentives or
#
your incentives the incentives of government
#
are what you need to look at and government
#
is an entirely separate beast
#
what is good for government may not be good for society
#
and vice versa you know
#
and this is a mindset problem
#
and an asymmetry that is only
#
the popular imagination this is
#
not normalized or this is denormalized
#
and you can see it for what it is
#
which seems really far from being the case
#
but that's more a lament than a question but
#
you know yeah no contest
#
over there we wear the same
#
hat a lot of economists
#
think that a high tax GDP ratio is a good
#
thing whereas I would always say that
#
if you have a choice between a tax
#
collection of rupees 20 and a GDP
#
of 100 versus a tax collection
#
of course the second is better the
#
people are better off so we
#
should be always asking how to organize
#
tax policies so that I get my 20
#
so I want to run a police I want to run a supreme court
#
okay I need 20 I don't need a
#
ratio I need 20 so you think
#
of the cost of running the organs
#
of the state and then we should be asking
#
how do you obtain a blossoming of
#
the prosperity of the country i.e.
#
how do you create conditions for private
#
investment and that requires low rates
#
strategy to compete against
#
the developed economies that have a
#
millstone around their neck of large
#
unaffordable welfare systems why should
#
India support that project
#
of their sustaining their
#
unaffordable welfare systems
#
a table the other day and it really staggered
#
me to look at this which is that
#
it compared the rate of return
#
foreign investment in India
#
with that of outward investment from
#
India in other countries
#
to see that the returns of money
#
coming into India were lower than the
#
returns of money going out from India
#
so it's not just about tax policy
#
it's also about your ability to
#
of the economy by which I mean
#
all the components of so
#
rates would be one important component
#
but first you got to make the profits before tax
#
in that sense India has not proved to be
#
a great destination for inward
#
money and I think that's a much
#
bigger question. I'm just holding everything else
#
constant I was just disagreeing with
#
an effort by many countries to come together
#
not compete with each other on
#
tax rates and India is an enthusiastic part
#
of that and I just think that
#
there's such a natural opportunity for us
#
and attract more investment holding
#
everything else constant.
#
And how much impact do the UAE's and Singapore's
#
of the world make on this with
#
their much more attractive
#
tax policies and so on?
#
As of now they are relatively small economies
#
you've got to think of what the large economies are doing
#
and India and China are
#
in a unique position because they don't
#
have these large welfare systems.
#
Modiji in all his wisdom decides
#
Ajay Shah is also a Shah
#
let's you know like my other friend
#
his advice and let's do exactly this
#
would a player like India coming into the
#
game and suddenly becoming more attractive
#
and being able to establish after a few years
#
that it is not just clear and correct but
#
also consistent. Would that change
#
everybody's incentives and
#
turn this vicious cycle into a virtuous
#
cycle? It would be one important
#
element of that so as Mohit
#
emphasises people are going to make a spreadsheet
#
they are going to cost everything
#
they are going to cost the
#
incredible payments to lawyers
#
that have to be made in order to operate
#
in India because dealing with the Indian
#
state is so difficult. They are going to price
#
the difficulties of the infrastructure and all that.
#
But at the end when you get to
#
the post tax ROE, tax rates
#
matter. So other things being equal
#
many many projects will tip over
#
into viability in India
#
whereas otherwise they would have not. So yeah
#
I think this single action
#
would have a material impact
#
on investment in India particularly
#
think about Indian companies who might otherwise
#
put their investment abroad
#
putting their investment in India.
#
You know on this specific topic
#
one of the significant things that the
#
was it 2019 when they lowered
#
2015. Yeah but there was a drastic
#
cut of corporate tax rates. What does it look like?
#
it's a complex tax structure but there was
#
tax rates and this was partly
#
an answer to the fact which
#
people like Ajay have documented
#
very clearly which is that
#
we need to make it more attractive
#
less lower tax rates was certainly one of
#
over there. But there we came up against
#
another issue which is the fact
#
that there's no effective demand.
#
increase my profits and now I'm sitting
#
on a good balance sheet. The twin
#
balance sheet problem has been partially
#
sorted out. Now companies
#
can invest money but they're still
#
not doing it and that's because another reason
#
which is that the consumer
#
doesn't have money. So this is just
#
taking me back to the point.
#
Holding other things. Not saying
#
this is the only thing but yeah this is a thing
#
and I think it's an important thing.
#
segwayed to talking about the world economy let's
#
continue talking about the world economy. One
#
intellectuals sometimes make is
#
I mean we all make sense of the world
#
by constructing stories around it and
#
a mistake that we often make is we assume
#
that there is an arc to history and that arc
#
is going to continue whether it is you know an arc
#
towards justice or an arc towards freedom
#
or an arc towards liberalism you know the end
#
of history question mark is Fukuyama
#
that there was an arc when it came to
#
at one point I think it would have been safe
#
to say that we would have thought the world is globalizing
#
it will continue globalizing. What
#
a great thing. We will all progress.
#
Technology. Blah blah blah. But
#
in recent years that's come
#
into question partly because
#
of the really interesting politics
#
of the last 10 years. Trump's rhetoric
#
towards China, US versus China
#
more and more talk of de-globalization.
#
Russia Ukraine war has affected all of it
#
but it is a factor. There's lots
#
over there. What is your sense
#
of all of this like you know
#
and currents and where could they take us?
#
I want to step back a little
#
bit from globalization.
#
First of all of course to say
#
that globalization is a great thing.
#
Both from a humanitarian point of view
#
as well as from an efficiency point of
#
agree with you that there
#
is some amount of de-globalization going on.
#
How much it is we can't
#
say. We're indulging in guesswork.
#
term thread of economic
#
progress is the march of
#
that's not going to stop.
#
Part of this whole de-globalization
#
competition over control of key
#
The access to those resources.
#
And whoever controlled that oil
#
increasingly it's being realized
#
digital technology. And
#
I'm reading a fascinating book
#
right now. Perhaps you read it
#
that is underlining to me the fact
#
that the US government has
#
largely always recognized
#
overtaking them in technology
#
is an existential threat.
#
And at some point in time they
#
took their eye off the ball a little
#
Which is why they're still ahead.
#
Which is why the threat
#
China of access to the latest
#
Especially in etching of chips
#
lithography, et cetera, et cetera.
#
But also design and so on. It's a very
#
real threat for China. So these are
#
technological progress for
#
a nation for more than five, seven,
#
ten years. And a long march of history
#
similarly globalization. It
#
optimizes on the margin.
#
It makes sure that you can buy cheaper, move somewhere.
#
Which is great because a lot of economics
#
happens at the margin. But if you look at the bigger
#
picture, it's a march of technology.
#
not going to stop. That's not
#
going to stop. Nor is the movement of minds
#
from places which can utilize
#
they are today. Nor is that going to
#
stop. It may, that physical movement
#
that movement of mind may stop.
#
But that movement of mind is going to
#
continue. So I think these are
#
actually minor blips. Globalization,
#
deglobalization, competition.
#
I mean they're real, they cause wars and
#
so on. But in the long arc, I don't think
#
I find it useful to think
#
opening of the Suez Canal. I think
#
the first globalization. This is a phrase
#
that is widely used in the literature.
#
This was an enormous connecting
#
up of the world when the American
#
Civil War took place. There was a
#
cotton trade out of Bombay
#
birth of capitalism in India. There was
#
Bombay Stock Exchange. All these
#
things happened and it was a connecting
#
up of the world on an unprecedented scale.
#
There's this beautiful quotation by
#
it meant to be alive, I think in 1912
#
or something, where the
#
wares of the whole world were available
#
for purchase in London and
#
you could invest your money anywhere in the world.
#
I also want to note, we should
#
not normalize things. That was
#
a world of passport free travel. Anybody
#
could travel anywhere without a passport.
#
Just like a mass surveillance
#
system on finance did not
#
passports did not exist
#
before 1914. You could just
#
travel everywhere. That first
#
globalization got a great setback
#
in the First World War and all the horrors
#
that followed and only in
#
some metrics of globalization
#
values and then you get
#
to what is called the second globalization, which is
#
explosive gains from about
#
container ships and then
#
many, many countries started liberalizing.
#
Deng Xiaoping started opening up China
#
Manmohan Singh and Narsimha
#
Rao started opening up India in 1991.
#
So I think that that second
#
come to a halt. I would put the
#
data somewhere in the Trump years.
#
I think today we are not ready to
#
pick that precise date, but somewhere
#
in the Trump years, a lot of that growth
#
has ended and we are in a new
#
of it as a third globalization.
#
In that third globalization, I think
#
certain amount of foreign policy
#
and defense harmonization
#
democracies who will freely trust
#
each other. So the United States
#
is very comfortable with the world's
#
greatest company making
#
It's not in America and there is no
#
friction there because there is
#
the Netherlands is an advanced
#
liberal democracy, is a member
#
of NATO, is aligned on foreign policy,
#
What is the de-globalization?
#
of Russia and China and potentially
#
many other authoritarian regimes
#
So I think that we remain
#
technology and production chains
#
the advanced economies, between
#
the liberal democracies of the world.
#
the gains from trade. So if you think of
#
Ricardo and the idea of gains
#
from trade, the gains from trade are the highest
#
when countries are dissimilar.
#
trade between the United States and
#
the Netherlands are relatively small.
#
They are there. We know in new
#
trade theory that the simple
#
Ricardian conception of
#
gains from trade is not quite an accurate description.
#
There's a lot of advanced economy
#
to advanced economy trade that happens
#
and that's good and proper. But I think that's
#
a description of the world as it
#
the advanced economies that make up something like
#
GDP who are doing true freedom
#
with each other where states
#
don't interfere with the freedom
#
it is on moving capital or
#
moving human beings or on establishing
#
complexity of supply chains
#
moving services and so on.
#
and Russia and authoritarian
#
countries in general, countries
#
that don't have a foreign policy alignment
#
with the advanced economies of the world.
#
I would in fact call it a renewed
#
that caution. You also saw it during the
#
after the fall of the Berlin Wall in 1989,
#
I think that many in the West were
#
an end of history proposition
#
around Russia and China
#
and I think even more so
#
amongst private persons
#
as opposed to the intellectuals.
#
So boards of companies were very comfortable
#
signing off vast investments
#
in China and Russia, thinking that
#
yeah, there's some politics but
#
in time everybody will figure out the glory
#
of becoming a liberal democracy.
#
So it was felt that the people
#
of China will know what's good for them and they'll become
#
a liberal democracy, that the people of Russia
#
will know what's good for them and they'll become
#
a liberal democracy. So there have been
#
suffered by global corporations
#
on account of their presence in Russia and China.
#
going forward it doesn't have to be a
#
capital control. It can just be
#
boards of companies saying like look
#
do we really want to operate in China?
#
Will there be theft of IP?
#
Will somebody make a clone factory
#
steal the intellectual property of my
#
routers and launch its own routers
#
and become a pretty much
#
peer in the global market
#
that have actually happened.
#
So I actually would say that if there was one
#
this rollback of globalization
#
took place, I think it's when Huawei
#
was pointed out as a security risk.
#
I think that'll probably be the date when
#
caution about free trade of
#
technology. Because saying
#
with other people is now going
#
a Chinese company that was also
#
very profound psychological
#
of the kind of fears. And I think
#
I would mark that as the day that
#
I'm not sure Trump had profound psychological
#
understanding of any kind. He just
#
lucked upon a rhetoric which happened to
#
have this particular effect.
#
I think both sides, both political parties
#
in the United States today are very skeptical
#
about China. Similarly,
#
newspaper stories aside,
#
I think that the United States
#
is very united on the subject of Russia
#
and Ukraine. So I think that
#
where people were comfortable
#
saying, oh, in time Russia and China are
#
going to get fixed. So you can just go ahead and
#
build business. I think that period is over.
#
It's changed too. Let's fix them.
#
Well, I mean, I'm just thinking about the
#
optimization of private companies.
#
How would it be in China's
#
interest to behave? Because there's a scene and the unseen
#
element here. And the scene element is that
#
there will be this thing that we have. We are
#
Let us spy on what other people are saying.
#
Let us steal IP. Let us build
#
clone factories. And let us do all of
#
these. And that's a scene effect. And that's your
#
kind of proximate gain. But the
#
unseen effect is that you're losing trust.
#
Your policy will never have the sea of consistency
#
for that matter. And it hurts you in
#
the long run. Right? So what
#
like from within China also
#
and perhaps there will be Chinese policy
#
listeners listening to the show. Who knows how
#
far my show reaches. But
#
from their point of view also
#
I would imagine that if they are playing a long
#
game, then their interest
#
would lie in actually being
#
clear and consistent and correct and not
#
doing all of this shit and not stealing IP
#
and not doing clone factories and saying
#
create double thank you moments. Let's work
#
for mutual benefit and so on and so
#
forth. But there is again
#
perhaps driven by their politics.
#
really lies in the fact that there is no
#
one China. The incentives
#
of the state, the incentive of a
#
man who wants to be crowned emperor
#
for life without limits which were
#
part of the way of the governance system
#
China are going to be very different from
#
of the interest of China. I think
#
define their objectives
#
within their national boundaries.
#
by the needs of the people at the top
#
which are of control rather than
#
by a broader conception
#
of a world. So I think that
#
very starting point is perhaps the
#
wrong point that there is such a thing as
#
China's interests. Or to jump
#
to a different analogy. Is
#
it efficient for Putin to fight a long
#
the war is a disaster for him.
#
But as you can imagine once
#
you say soldier, soldier, you get to crush
#
all domestic dissent. And
#
he's not exactly unhappy
#
that 500,000 of the brightest
#
people have left the country. He consolidates
#
a catastrophe for Russia.
#
they think the war is a disaster. But
#
it works for Putin. So there is
#
a constant separation between
#
the interests of the people and the interests of the state.
#
We should never conflate the
#
two. Very true, very true. And these strongman
#
leaders are such a problem. Thank God we don't
#
have that problem in India.
#
Let's talk about the Indian economy
#
now in the half an hour also that we
#
and I with the wonderful Pooja Mehra
#
we did a state of the economy episode maybe 18
#
months ago also at some point like
#
that. And I have been doing them every year
#
or every few months before that
#
as well. You know what has
#
changed? Like has anything changed? Are we
#
clearer about something? What is the current
#
direction? Like I did an episode with Pranay
#
Kutasane and Raghu Jaitley and Raghu
#
was saying that you know there are different
#
ways to look at it and you know where
#
you stand depends on where you sit
#
and from some angles it doesn't look so bad.
#
He was talking about you know from
#
the banking data that he is seeing, the rise
#
in credit growth or whatever. I mean
#
I am not, you know I can't
#
comment on those aspects that he was
#
you look at the Indian economy what do you see? Because
#
the one sort of thing that I see which really
#
worries me is this insular
#
trend where you are going more within
#
yourself. One you are trying to stop capital
#
fleeing in the ways that we described
#
but that is really minor. But the other is basically
#
for all his hatred of Nehru
#
Mr Modi seems to be imitating
#
Nehru's import substitution and so on.
#
I don't want to go into that.
#
when you talk about a person's
#
view of the economy. So you know you talked
#
problem that we have is the lack of data.
#
we have seen systematically over the last
#
the amount of data which is being produced
#
by the government is going down. And
#
when data is not convenient it is suppressed.
#
That is the first problem. The second
#
is a very peculiar problem which is
#
that whenever we talk about data
#
I can't stress this more.
#
We are talking about data
#
of the formal part of the economy.
#
We are not talking about data of the economy.
#
we used to have a situation where
#
data on the informal sector
#
was generated once every five years by
#
a very extensive survey. You can't do
#
it more often. Let's leave it there.
#
But it was not conducted in 2016
#
when it should have been. Demonetization.
#
It was not conducted in 21.
#
there is no talk of conducting it
#
again. So whatever data
#
formal sector of the economy.
#
Now if you were to just
#
as long as it was rising
#
see economy is doing well. GST
#
collections are going down. Now if you look at
#
long and then there was all this complication of
#
COVID and so on. So point to point data was
#
very difficult to look at. But if we look
#
we find that the growth
#
in GST collections been 12%.
#
We don't know what the inflation
#
number is. I like to use a number of 7%.
#
Let's not argue it too much.
#
So we are talking about the economy, the formal
#
Now we are also saying and this is
#
regime that Indian economy is formalized
#
which is a great thing. If it is formalized
#
you have to put a number on it.
#
Which means what? That the percentage
#
of the formal sector has gone up.
#
the formal sector has gone up by 5%
#
the informal sector has gone up
#
by less than 5%. Is it 4, 3,
#
2, 1 or negative? We don't know.
#
But therefore the Indian economy
#
5% and this is in a so called recovery
#
period. This is not great.
#
Point number one. Point number
#
Private Final Consumption
#
Expenditure. Which to my mind
#
is actually the only objective
#
Which is to enable each of us
#
expenditure needs to be curtailed
#
because we eat too much or whatever.
#
to my view is the ultimate objective
#
of an economy. Especially a poor one.
#
Which is that people should...
#
PFC has gone up by 2.2%.
#
number for a poor nation.
#
Where again you know we can have
#
all of these debates about defining
#
But we have enough poor people in this country
#
expenditure. PFC has gone
#
of people is also going up by
#
per annum. That means the average individual
#
the third thing which everybody recognizes
#
which is that we have a K shaped recovery.
#
story in the Mint the other day
#
about a woman who says she
#
doesn't wear her chappals every day.
#
In order to increase their life.
#
I can couple this story
#
with the fact that the sales of
#
footwear manufacturer in this
#
country, caters to the masses.
#
or whatever it is. Which is
#
upper class by realistic definition.
#
You can say it as a middle class brand
#
but that is our very contorted way of looking at middle class.
#
Where you and I and Ajay
#
all say we are middle class. Man we are filthy
#
rich by the standards of the Mint.
#
Last point, which is that
#
I look at company data.
#
at data for the last 20 years
#
FMCG companies of this country.
#
I forget the exact numbers but they were
#
growing at a rate of about 15%.
#
any 5 year period from 2000
#
to 2015, they were growing at a rate
#
of about 15%. You take inflation
#
out from there. They are growing at 10%
#
After 2015, that number
#
When you do the same number and you subtract
#
inflation, they are growing at
#
back into it, that means that
#
consumption of consumer goods
#
of the Britannias and the Hindustan
#
leavers and so on has gone up
#
population itself is growing by 2%.
#
I'm not saying it's in bad
#
shape because bad is such a
#
The fact is that the economy is not
#
in a way which a poor economy
#
needs to do in order to
#
improve the material well-being of
#
ultimately what is your road
#
to exercising franchise as a consumer?
#
To have agency as a consumer
#
An organization with which Ajay Shah
#
and all of its data are much more familiar
#
has really been the only
#
organization to bring out
#
data regularly on what's happening
#
Except for war-torn countries, India
#
force participation rate
#
of any major economy in the world.
#
in the last seven or eight years
#
at a time when population
#
And our unemployment rates
#
So anything that's rara
#
about the economy doing
#
disservice. Because unless you admit
#
you have a problem, you can't deal with
#
dismal about the state of the economy.
#
what happened. I think that
#
investment, which is 2011.
#
onwards, many things went wrong
#
that generated a turning point
#
where investment by many metrics
#
poorly thereafter. And I feel we've not
#
and their solutions so as to
#
Then came the difficulties of
#
the smaller and the medium companies.
#
So many events happened in India
#
corporations had the management
#
and the financial debt, the management
#
debt and the financial debt, to be able
#
Whereas when you're a smaller company
#
My heart really bleeds for smaller
#
India is made of thousands and thousands
#
and thousands of smaller companies
#
who are spread all over the country, who
#
matter disproportionately to
#
What happened is that for all of us,
#
think disproportionately in terms
#
of the formal sector data.
#
Because really the best data source in the country
#
is the company data. So
#
for me personally, how do I
#
think about what's happening in the
#
economy? I look at the large
#
non-financial firms. For me that is
#
the truth. It is the best measure
#
and admittedly incomplete
#
measure, but it's the best measure.
#
So you can understand what is happening to
#
their sales, express it in real terms
#
and you get a sense of the growth of the economy.
#
some parts of the recent
#
journey actually did rather well.
#
towards a fuller explanation
#
what happened was that they gained the biggest
#
firms, the large formal sector firms
#
gained market share at the expense
#
are an innumerable number of
#
companies in India who lost share
#
and the biggest companies gained share.
#
Which looks good for a certain
#
can get growth by gaining share
#
amount of time. You can't keep on growing. That's not a
#
deeper growth dynamic for the
#
economy. It's a temporary
#
formal sector companies, you come
#
to a question where I paraphrase
#
the famous book, Where Are Your Customers
#
Yachts? In similar fashion
#
where is your customer's income?
#
The big companies in India are
#
ultimately rooted in India.
#
It is middle India that buys their stuff.
#
performance of households in India
#
entertainment and biscuits and so on
#
of the formal sector. So the formal sector does
#
not inhabit a separate universe.
#
In a few sectors, yes, you can be a
#
software company in India. You can be a 100%
#
export oriented company. Great.
#
But for the rest, the bulk of the
#
non-financial firms in India operate
#
in this country and they sell to
#
these consumers. And so
#
for some time there was growth
#
through gaining share but it
#
tends to max out. So we've not
#
got to the deeper dynamic
#
of how that growth comes.
#
on private investment that
#
in the end all growth comes from private
#
investment. All gains in GDP,
#
all jobs come from private
#
investment. So we should be single-mindedly focused
#
on understanding private investment
#
what shapes private investment.
#
In a way that was the motivation that
#
led to the book that Vijay Kelkar
#
we were trying to go under the hood
#
it about the body language of the Indian state
#
so many private people from
#
choosing to live in India, commit
#
to India, invest in India, build
#
complex organizations in India.
#
And I feel we've got to go to those second-order
#
to private sector confidence.
#
my experience of smaller
#
exceptions but you know I've worked a lot
#
with smaller family owned
#
safety nets in terms of
#
entrepreneurs of my generation
#
who have family money running
#
for three or four generations
#
we don't want to be in manufacturing.
#
India is not a place in which
#
and not everybody can get into
#
the service sector. It requires a different
#
mentality and these people have
#
These are people who have risk-taking
#
etc. You need that in order to run
#
a treasury operation but
#
they've known how to build organizations.
#
They've delivered brands in the past
#
very, very successful brands
#
in the consumer space. They don't want to be
#
there anymore because it's just
#
Again, two personal points.
#
what ended up becoming the first
#
successful snack food brand
#
Not with my own money. It was a small brand
#
it was so difficult getting
#
factory approved land etc.
#
etc. We finally bought land from
#
an existing entrepreneur
#
existing entrepreneur in
#
possession of the land and give the final
#
demand draft to this young man
#
inclination towards setting up his own
#
business. He was receiving a large cheque.
#
The young man with dark glasses
#
Bombay Hindi film style.
#
take care of one thing.
#
He said, boss, you are in UP.
#
you had to on an annual
#
basis deal with, I counted
#
27 different inspectors.
#
a reason to penalize you is
#
And the costs of not paying are huge.
#
You can have a factory shut
#
Raj has not changed one
#
ways, you know, the tax department
#
is a little more transparent.
#
But on the ground, absolutely
#
We had this ease of doing business
#
stuff, you know, ease of doing business
#
has improved. It was only Delhi, Bombay.
#
World Bank didn't name who
#
data points were fudged.
#
But the point is that in the state
#
through it personally, in terms of
#
by a few hundred square feet.
#
who had a piece of property
#
which was owned, wanted to set up
#
a large residential project.
#
It took him five years.
#
A few weeks under five years
#
to get that permission through.
#
tenacity and the willingness to do
#
And they're continuous.
#
about money. It's about
#
do you really want to be doing this?
#
I did a disservice very recently.
#
And there were some very rich people
#
on the cruise. One of them was an NII
#
couple who had been very, very successful.
#
They live in the San Diego area.
#
estate company which has nine
#
Hilton, Sheraton, et cetera, et cetera.
#
India is the place where it's happening
#
and we've told our son that he must go to
#
India and so on and so forth.
#
What do you think about the state of the Indian economy?
#
Now, looking at them and their behavior
#
and so on and so forth, I could see that they have
#
partaken of the elixir of India
#
as the greatest place on Earth to
#
do business in and that
#
this was not my job, to
#
talk to them about economics
#
it's a long story. It's not an easy story
#
felt I must be honest to them. I said,
#
you know, before we get to
#
the Indian economy, let me ask you.
#
You now have nine properties, but I know that you
#
had more once upon a time.
#
You're a little older than me, sort of about 70.
#
have you established over the years?
#
So Waifu was the chief operating
#
We have built 39 properties
#
and how many times have you had to pay a bribe?
#
She looked at me with incredulity.
#
I said, how comfortable
#
would your son be, whom you want to
#
send to India, paying a bribe
#
She said, out of the question. It's in that case, you can't
#
send him to India. The matter was closed.
#
at that level, nothing is changed.
#
Both of you have done a great job
#
describing the what, right?
#
And we kind of know the why, outdated
#
mindsets, different kinds of incentives,
#
discuss the mad nauseam on the show,
#
politicians incentives, bureaucrats incentives,
#
my question is that, where
#
can an impetus for change
#
come from? Like one thing that
#
a lot about, and I wasn't aware of it
#
till my conversations with you, is
#
that 91 was not just about
#
the incentives during that crisis
#
that, you know, crisis ho gaya, balance
#
of payments crisis, IMF is saying this,
#
blah, blah, blah. There was a carder
#
of committed professionals
#
who built up a body of work
#
and sort of a fraternity
#
of reformers in the 10 years,
#
in the 12, 13 years before that.
#
I had an episode with one of them on Texigalu
#
Ali, where he describes that so eloquently.
#
You've spoken about that so often.
#
therefore is that in the
#
none of the reforms that would
#
moves towards a mindset
#
that we require to change this, are going
#
to come from the electoral marketplace.
#
marketplace is engaged in narrative
#
battles of a completely different mind.
#
And therefore, if change is to happen,
#
change will somehow have to happen from within.
#
And not from within in terms
#
of a politician saying ki yeh karte hain, wo karte hain.
#
And, you know, hoping for
#
an enlightened neta out there.
#
carder of reformers who stick at it,
#
who play the long game, and who say that
#
when the time comes, when the moment comes,
#
when the opportunity comes, we will
#
move again. I want to disagree with
#
the politician aspect of it.
#
So this is something Kelkar has always
#
pushed, and over the years I have
#
come to understand that
#
and the entrepreneur in
#
public policy is the politician.
#
So the officials will be fundamentally conservative.
#
the achievement of 1991
#
is ultimately Narasimha Rao.
#
That is at the heart of it.
#
Similarly, the achievements of 1977
#
H.M. Patil. And then after that
#
Indira Gandhi and Rajiv Gandhi
#
carried their work forward.
#
about two propositions. A,
#
political leadership can
#
a new journey. And that new
#
journey has to be created in the intelligentsia.
#
Narasimha Rao imbibed from the Indian
#
intelligentsia, but ultimately
#
where the politician asks
#
for a change in course, where
#
statements in public, but at least privately
#
you've got to understand that this
#
ain't working. And second,
#
and people in the ecosystem
#
who are able to take those ideas and implement
#
them. Both are required. So you can
#
amazing moment in terms
#
of an aspiration of a leader,
#
but if that strong body
#
of knowledge and community are not
#
in place, it will not get
#
implemented. And further,
#
if that strong body of knowledge and community
#
is not there, you will not
#
have created the conditions
#
for the political leadership to have figured things
#
of elite thinking in China,
#
and that elite thinking shifted,
#
which created conditions for Deng Xiaoping
#
to change. So I don't want to think of Deng Xiaoping
#
in an isolated way. Where I
#
think it can come in India from is
#
competition between the states.
#
a rara supporter of the
#
AAP government, but I think it
#
tried to do anything about
#
I'm not talking about the how
#
of education. I don't think
#
that necessarily government
#
sponsored education is the best way
#
forward. I have a lot of criticisms
#
the AAP government in Delhi is
#
handling private sector education. But
#
in which governments have thought,
#
the AAP government has decided
#
that, look, we have to place
#
front and center of our
#
And this is so radically different
#
government, which would talk about free
#
universal enrollment. Nobody
#
talked about outcomes. This is the first
#
time that somebody is saying,
#
our job is to make outcomes,
#
winning outcomes superior.
#
politicians are entrepreneurs,
#
political entrepreneurs in this country,
#
somebody is going to realize the
#
best way to bring employment and investment
#
the landscape, the landscape
#
of supervision, of inspectors,
#
In a sense, you could say
#
to the extent that this narrative
#
to some extent the Modi government said,
#
look, we need national champions
#
because we need investment.
#
making one person a national champion,
#
which as you showed is not enough. You need
#
seven of them to replace the
#
loss in investment. But somebody is
#
going to say, I don't want
#
to champion any one person.
#
I'm not in the business of
#
My job is to create opportunities
#
for as many winners as possible.
#
So I think it may not necessarily come
#
from the center, but competition
#
between the states will
#
drop. Two semi-final questions
#
before we end, because after this
#
I'll have one final question, but two semi-final questions.
#
One, taking off from what Ajay was talking
#
that politicians will be entrepreneurs
#
and that's great, but you also need that
#
fertile ground where you have a body of knowledge
#
and a cadre of technocrats
#
who can get the job done.
#
So my semi-final question therefore is
#
that, do we have that cadre of technocrats
#
today as we did such a vibrant
#
91 came about? That's one semi-final question.
#
The other semi-final question, Mohit, is that
#
you said that competition
#
between states will help and obviously
#
I agree, federalism is a great thing,
#
but more and more what the Indian
#
state has done is it has centralized power
#
to the extent that the notion
#
of India being a union of states
#
almost feels absurd because so
#
much of the power is centralized.
#
I had a recent episode on this with R. S. Neelakantan
#
as well in the context of North-South
#
within that for there to be actual
#
competition or is it just on
#
theory, is it just on paper? These are
#
my two semi-final questions. I think it will happen
#
irrespective. The fact that
#
the Modi government wants to centralize
#
And it took a while for that
#
to sort of concretely manifest,
#
fact, Delhi is the most obvious
#
example of that, which is that
#
the left-wing governor seems to be to obstruct
#
force, the force to dominate.
#
back and you look about GST,
#
it turns out that GST was a
#
fiscal dominance by the
#
center and this continuing
#
which don't come into the sharing and therefore
#
reduce the amount of money that goes into the state.
#
there will be or I believe that there
#
will be political entrepreneurs
#
who can find a way through it.
#
I think India is a vibrant
#
enough place and there are lots
#
of really spunky people out there
#
and we will find an answer.
#
of knowledge and community,
#
husbanded that knowledge
#
and nurtured that community.
#
a disruption of a lot of these organizations
#
in terms of questions around
#
management and leadership and
#
where the old establishment
#
has been a bit disrupted
#
and a new world is coming up.
#
I'm pretty optimistic and positive
#
about the nature of that new
#
the beginning of a bit of a
#
Cambrian explosion of many, many
#
new organizations who are bringing
#
are organizing it in new ways.
#
It's a struggle. It's a long
#
game. These things take many years
#
The funding environment is extremely
#
the funders in India would like to
#
give money for direct action
#
and don't understand the
#
role and value of ideas
#
and knowledge and community.
#
But within these constraints, I think a new
#
world is starting to emerge.
#
behind it, I think we are laying
#
the foundations for something which in
#
five, ten years will be pretty cool.
#
Fabulous. My final, final
#
question to you as I know we have to wrap up
#
in a couple of minutes. You know, I've
#
done biographical episodes with both of you.
#
Both of you have recommended books, films,
#
music, all of that. But
#
I'll just ask you to recommend one
#
thing each. Maybe it's a book, maybe it's a film,
#
maybe it's a music that
#
has given you joy recently and
#
which you would like to share with my listeners.
#
At the risk of sounding evasive, I have to say that
#
not a day when I don't find
#
a piece of music that gives me joy.
#
Today you brought me on this show. I went for
#
a cycle ride in the morning. Yesterday, yesterday.
#
No, no, no. Absolutely.
#
alive for me the joys of
#
I hadn't heard for a really
#
long time. But suddenly
#
I remembered, you know,
#
inordinate excitement and the electric
#
energy that Jimi Hendrix
#
brought to the music scene.
#
It came alive after 45 years.
#
A young Mohit from somewhere
#
within you just peeped out. Would you like
#
to name the young artist also? That's not
#
relevant. It's just Hendrix which came alive for you.
#
It was Hendrix which came alive. Hendrix. Amazing.
#
Last few weeks I've been learning
#
I think I was, I sort of knew
#
a lot of the standard things.
#
I'm now like systematically going
#
in chronological order. So
#
it's been a great experience. Fabulous.
#
On that note, thank you both for coming on the show.
#
This was great and I'm so glad we
#
ended on a note of hope with
#
the Cambrian explosion and everything and our
#
conversation on the Indian economy. It's not
#
Thanks so much. Thank you.
#
MohitSatyayanand.substack.com
#
You can follow me on Twitter at Amit Verma
#
A-M-I-T-B-A-R-M-A. You can browse
#
past episodes of The Scene and the Unseen
#
Thank you for listening.
#
episode of The Scene and the Unseen?
#
If so, would you like to support the
#
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#
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