Saturday, December 24, 2016

Appointment of Service Chiefs – the military doth protest too much, too unfairly


2016 has been a year of controversies for the Indian military. From the fracas over OROP to the putative responsibility of ACM Tyagi in the Agusta Westland case to the latest one of appointment of Lt Gen Bipin Rawat as the next Chief of Army Staff – it has been a rolling saga. A new generation of media (and social media) savvy ex-servicemen have kept the noise levels up on each of the issues at hand.

For a distant, amateur, but interested observer, the ex-servicemen betray a strange sense of entitlement and naivete in their outrage. The over-riding narrative in the COAS appointment saga, for example, is the following:
  • 1.       Govt choosing its own person (instead of going by seniority) increases political meddling in the Army.
  • 2.       Such meddling would result in senior officers currying favours with politicians.
  • 3.       The government is too disconnected from the military to understand merits of individual officers, hence should not get involved.
  • 4.       Rationale like “greater experience in Counter Insurgency operations” (the reported grapevine justifying Gen Rawat’s supersession of the two senior, armoured corps officers) are dubious – each army commander is as good as the other. Selecting an officer on account of greater operational Counter Insurgency experience is unfair, stupid and short-sighted.

5    As a (usual Indian) cul de sac, the example of Pakistan is quoted, where political appointments of the COAS has resulted in horrific consequences, generally.

The narrative is problematic on nearly all grounds.

First, political interference. The issue with the Indian military and politicians is not one of too much interference, but one of too little. For a democracy, the Indian military has an astonishing, somewhat appalling amount of autonomy over policy decisions. On AFSPA for example, successive governments have simply given a veto to the Army on decision-making. The same sense of entitlement and superiority (over "slimy politicians") is sought to be extended to appointments too. In terms of first principles though, it is entirely justified that the political leadership should choose a Chief of its own liking. The buck, finally stops there. The infamy of 1962 in popular narratives doesn’t touch the Indian Army’s massive failings but entirely revolves around the foibles and faux pas of Nehru and Krishna Menon. The responsibility for the nasty surprise in Kargil was laid at the door of Vajpayee’s Lahore diplomacy and civilian intelligence, not the Army (or its initial clumsy response to the threat). If the political leadership is to carry the can, it should darn well have the flexibility to choose any person it deems to be most fit for the Chief's role.

Second, global practice. In this, invocation of the Pakistan example is a red herring (as it is for most things). In both US and UK, the political leadership chooses its own Chief (Chairman, Joint Chiefs and Chief of Defence Staff respectively). There are no precedence, seniority and “arms” limitations binding the government. Taking a look at the latest appointments in both cases in a nutshell.

In January this year in UK, ACM Sir Staurt Peace was appointed the Chief of Defence Staff. It created no great ripples, but this BBC report has some interesting snippets.

          This appointment is a big surprise.
Within the MoD two candidates were being discussed - army general, Sir Richard Barrons, and first sea lord, Admiral George Zambellas.There has been an expectation that the three services would take turns in the job.Given the last two men to hold the job have been army generals, that might have counted against Sir Richard.But the Royal Navy has not had a chief of the defence staff since 2003, and would have felt it was their turn.Admiral Zambellas is certainly seen as charismatic, but that might not be how the prime minister likes his military commanders.Remember David Cameron's quote: "You do the fighting and I'll do the talking."Sir Stuart is his own man - a plain speaker and, like his service, far from stuffy. But he is also a known quantity.He may also be seen as less "partisan" than the other candidates.

In a nutshell, Prime Minister David Cameron selected a candidate who he considered to be “less partisan, less talking”. No one in UK upbraided the PM for using such subjective, behavioral rationale to make a choice, rather than using seniority to decide a first among equals.

In May 2015, President Obama selected Marine General Joseph Dunford as the next Chairman, Joint Chiefs of Staff. There was more news about this, given the Congressional confirmations for such positions in the US. But again, the rationale given for the selection are quite illustrative.
  
What makes him attractive is that he’s a ground leader, and we’ve still got ground wars going on,” said an administration official, speaking on the condition of anonymity to discuss the selection process.Sen. Jack Reed (R.I.), the ranking Democrat on the Senate Armed Services Committee, said Dunford would be well served by his time in Afghanistan, where he commanded foreign troops, guided a complex U.S. operation and contended with the challenges of local politics. “There are few people that have had the experience he’s had,” Reed said in an interview.

So, extensive counter insurgency and expeditionary experience counted high in the selection. Not dissimilar to the reasons ostensibly given for the selection for Lt Gen Rawat, where his greater operational experience in CI/CT has said to have tilted the scales in his favour. Again, no one raised hackles on why the US President used such rationale while arriving at his choice.

The Indian polity, since 1962 has treated operational military matters with kid gloves, leaving the space completely monopolised by the services. It has had a deleterious impact on India's strategic posture, with a conventional bureaucratic military making shortsighted, regressive calls on facets of national security - induction of indigenous equipment (MBT Arjun being a prime example), force structures (45 sqd air force built around the most expensive aircraft available) and more.

Its time that the political leadership took matters in their own hands. If it starts with the appointment of the new Army Chief, portends good signals!

Sunday, December 18, 2016

Demonetisation - a Schrodinger's cat (banking) success

There isnt enough data out to proclaim if the demonetisation exercise is a success or a failure (though that hasnt prevented even illustrious commentators like Kaushik Basu and Jagdish Bhagwati from weighing in with their views, on either side, on putative outcomes!). Whether this will result in diminution of black money, increase digital penetration, wreck the economy, result in a tax windfall, destroy livelihoods - there's little by way of empirical data, as yet. Some of the high frequency data points (auto sales, rabi sowing area etc) have been mixed, and hence its perhaps too early to conclude one way or another.

However, on one count, ie, that of rescuing the banking sector - as captured in an earlier post, demonetisation is well on its way to achieving its (un)stated objectives. How? Consider the numbers.

Total cash back into the banking system is already ~8 lac crores (12.5 lac crores of old banknotes have been returned, ~4.5 lac crores has been exchanged for new notes). Taking the "worst case scenario" (of the naysayers of the exercise), lets say the entire 15.5 lac crores of old banknotes come back. It would mean banks will be, after accounting for exchange to new notes, left with ~10-11 lac crores of deposits. Given the physical restrictions on withdrawals being likely to be in place for 3-4 months more, it would mean a straight drop of 15-18k crores to bank profits (assuming a conservative NIM of 3% on 11 lac crores for ~5-6 months). Assuming 75% of the deposits flow out once the physical restrictions are waived off, that still means incremental 4 lac crores in deposits, generating 8k crores p.a (@ a modest NIM of 2%) as annuity revenues.

Next, treasury gains to banks as a result of yields dropping and banks booking profits on their G-Sec trading portfolios. As per KV Kamath, the potential treasury gains are as high as 2.5 lac crores this year. Downscaling that number by half would still give 1.25 lac crores. Given the gains displayed by fixed income (and gilt) funds in the market, it provides a reasonable basis for bank treasury portfolio performance.

Last, the general softening of interest rates will result in expansion of margins across the board as legacy deposits are repriced over the next 6-12 months.

Take all the three above together, and the net impact on banks could be expected to be anywhere between 1.3 -1.5 lac crores of additional profits (or capital) for the banking system. The total recapitalisation requirement of Public Sector Banks has been variously estimated to be between 1.8 and 2.5 lac crores by 2019. Whichever number is taken, demonetisation helps plug at least 50% of the requirement. Add in modest government support (current year's budget is 25k crores for recapitalisation), and suddenly banks look to be in a much better shape to raise fresh capital from the market.

Ergo, from data available today, demonetisation as India's TARP is a conclusion that can be reached with reasonable amount of confidence. Certainly much tighter confidence intervals than the broader macro gains (and gloom) being predicted by the commentariat.

Flip side? Unlikely that the government can market this undeniably worthy objective as a measure of its success. In the long run, whatever else demonetisation might end up doing, it would be a Schrodinger's Cat - alive (successful) on the banking side, even if dead (failed) in everything else!