ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles by T T Ram MohanSubscribe to T T Ram Mohan

Mumbai as International Financial Centre

Is an international financial centre in Mumbai such a big deal that all policymaking should be oriented towards this objective? This is the fundamental question that needs to be addressed in evaluating the report of the high-powered expert committee on Mumbai as an IFC. By that yardstick, the committee fails to provide a convincing argument that an IFC is necessary to sustain an 8-10 per cent growth rate.

Banking Reforms in India

The public sector banks have shown a remarkable transformation in the post-reform period. Profitability is comparable to international banks, efficiency and stability have improved and there is a convergence between PSBs and private banks. But the PSBs will be severely tested as disintermediation proceeds apace on both the asset and liability sides. Their survival depends on their ability to rise to the challenges ahead. Both unions as well as government in its capacity as owner have an important role to play in ensuring that PSBs are well prepared to meet these challenges.

Stock Market Fall

What caused the sharp fall in the prices of stocks in the month of May? The most plausible explanation is that, after the prolonged rise in prices, foreign investors judged that the market was overvalued and decided to book profits. They might have been pushed towards doing so by the rise in interest rates in industrial economies and the expectation that the rate rise has not run its course. The troubling aspect though is that India's share of portfolio equity flows has been fuelled substantially by participatory notes. Also, the composition of total equity flows of private capital in India is at variance with that of developing countries.

Neither Dread Nor Encourage Them

Foreign institutional investor inflows into the Indian stock market have conferred several benefits - in terms of lower cost of equity, securities market reforms and corporate governance. However, more receipts are unlikely to increase these benefits, while the downside is the potential volatility in exchange rates arising from the fact that participatory notes constitute a large component. We are unsure about the origins of funds that go into participatory notes and we do not know whether they are permanent in nature. It is possible to derive the benefits of FII investment without having to put up with the uncertainties created by PNs. We do not need to dread FII flows, but neither is there any need to be fixated about raising them.

Taking Stock of Foreign Institutional Investors

Institutional investors have grown in importance in the mature economies in recent years and come to supplant banks as the primary custodians of people?s savings. Flows of private capital through FIIs have in recent years augmented forex reserves in emerging markets. In India, over the past decade FIIs have displaced domestic mutual funds in importance in the equity market. Their shareholding in the Sensex companies is large enough for them to be able to move the market. The volatility in portfolio inflows to India has been modest compared to other emerging markets. As domestic funds grow in size and pension funds enter the equity market, that would provide a measure of self-insurance against volatility occasioned by FII flows. The real problem caused by variations in FII inflows from year to year is not stock market volatility but difficulties posed in management of money supply and the exchange rate.

Bank Consolidation

India's public sector banks lack a compelling rationale for consolidation. Contrary to the experience elsewhere, spreads at PSBs have not declined consequent to deregulation and profitability has improved sharply, making the Indian banking system the second most profitable in the world. The performance of PSBs, measured by the appreciation in stock values, has also been very impressive. It is hard to argue, against this background of improving performance, that greater size is the key to further performance improvement. At the very least, such a contention needs to be backed by rigorous research as to what constitutes the optimal size of assets in the Indian context.

Is India's Central Debt Sustainable?

This paper revisits the proposition that India?s debt problem is unsustainable in light of the recently changed outlook for growth and interest rates. Using a decomposition model, it separates out the effects on the fiscal deficit of growth and government behaviour in the past. If recent government behaviour were to continue, the economy would need to grow at 6.1 per cent in the coming years for the centre?s debt to be sustainable, a growth rate that seems eminently achievable. If a real growth rate of 6.2 per cent is posited in the coming years, only a modest degree of fiscal adjustment would be required, or none at all, to reach a tolerable level of the debt to GDP ratio by 2009-10.

Bank Consolidation : Misplaced Priorities

A clear case for consolidation among India's larger public sector banks is yet to be made. These banks have been improving their performance consequent to deregulation, thanks to an enhanced commercial orientation, greater autonomy and injection of market discipline. They need to focus now on human resource development issues, risk management and technological upgradation. A preoccupation with mergers at this stage is not only a distraction, it could derail the steady improvement in performance in the banking system over the past decade.

RBI Guidelines on Foreign Ownership in Banks

The RBI's draft guidelines on foreign ownership in Indian banks are actuated by an assessment of the relevance of foreign banks to the primary objectives of stability and efficiency in the domestic banking system. They reflect an appreciation of the improvement on these counts achieved by the Indian banking system in the post-reform era. Thus, an enlarged presence of foreign banks clearly appears to be undesirable at present.

Privatisation in China:Softly, Softly Does It

This paper examines China's record of privatisation to assess whether it accords with popular perceptions in India of that country having proceeded vigorously with such a programme. The record shows that China has moved cautiously in its privatisation efforts. It has privatised only the smaller state-owned enterprises, and the state retains control over the larger ones. Over a period, China has also pushed through reforms of SOEs, and the empirical evidence is that their performance has improved consequent to such reforms. It could be argued that fullblooded privatisation might have produced even better results. However, given the possible implications in terms of job losses as well as the absence of effective governance mechanisms in China's underdeveloped capital market, its rulers may well have been justified in hastening slowly with privatisation.

Comparing Performance of Public and Private Sector Banks

This paper attempts a comparison of performance among three categories of banks - public, private and foreign - using physical quantities of inputs and outputs, and comparing the revenue maximisation efficiency of banks during 1992-2000. The findings show that PSBs performed significantly better than private sector banks but no differently from foreign banks. The conclusion points to a convergence in performance between public and private sector banks in the post-reform era, using financial measures of performance.

Strategic Sale versus Public Offer: Dispelling Myths

The focus in India's privatisation efforts has shifted from disinvestment, the sale of minority shares to the public, to strategic sale where a controlling stake is sold to a private buyer. It is contended that strategic sale, by transferring control from government to a private owner, is best suited to the objective of improved efficiency. Because a process of bidding subject to a reserve price is involved, it will also help meet the objective of maximising government revenues through privatisation. This paper reviews these claims drawing on the findings of auction theory and the empirical evidence on methods of sale in privatisation worldwide. It also addresses popular misconceptions about the benefits of strategic sale. The auction literature suggests that strategic sale using the first-priced sealed-bid method currently employed cannot always be counted upon to maximise efficiency and revenues. The empirical evidence shows that share issue privatisation, the sale of government shares through a public offer, has been the preferred method of sale in privatisation carried out elsewhere.


Back to Top