Six things D. Subbarao wants to do after retirement

Llive Mint:Tamal BandyopadhyayWed, Sep 04 2013. 04 26 PM IST

What does Subbarao, who steps down as RBI’s 22nd governor on Wednesday, want to do after retirement?

There are six things on his wish list:

• Studying mathematics and linguistics

• Learning the Salsa dance

• Travelling

• Re-reading some of the books he has already read like Catch-22by Joseph Heller and Zen and the Art of Motorcycle Maintenance: An Inquiry into Values by Robert M. Pirsig.

Subbarao also plans to open a tutorial class in which he will give special lectures on how to take baby-steps; how to switch from being a dove and a hawk; and how to flip-flop.

Finally, he will renew his relationship with his 94-year-old mother-in-law, who stopped talking to him after inflation started inching up. She has not spoken to him for the past three years.

There are quite a few things he will miss after demitting office.

They are the feeling of being important; being mollycoddled at every function; big luncheons; and being well taken care of during air travel.

What will he enjoy after his five-year stint at the corner room of the Reserve Bank of India (RBI) headquarters on Mint Road in Mumbai?

First, his personal autonomy.

He will not have to try and talk profoundly every time he meets somebody.

Finally, he can go to see a matine show of Chennai Express.

His advice to his successor Raghuram Rajan?

Well, he has only one piece of advice: Take every important decision personally and depend on the RBI staff for seemingly unimportant or trivial issues. The important decisions include deciding on the menu for lunches thrown in honour of dignitaries, what gifts should be given to such dignitaries and the sitting arrangements at such functions.

The staff should be consulted while making monetary policy.

Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.

Lessons from Nokia: Companies, unlike cockroaches, aren’t great survivors

Nokia made the first mobile phone in 1987

F P :Vivek Kaul Sep 4, 2013

Cockroaches are great survivors. They can even survive a nuclear attack. As Dylan Grice, formerly with Soceite Generale and now the editor of the Edelweiss Journal wrote in a report titled Cockroaches for the long run! in November 2012 “Cockroaches may not be able to build nuclear bombs, but they can withstand the nuclear war. They survive.” 

Grice also points out that the oldest cockroach fossil is nearly 350 million years old. “According to the record of the rocks, cockroaches first appeared just after the second of the earth’s five mass extinctions (defined as the loss of 75 percent of all species). In other words, that means they survived, the third, the fourth and fifth mass extinctions which followed,” writes Grice. 

And there is no rocket science behind the ability of cockroaches to survive. They follow a very simple algorithm. As Grice writes “According to Richard Bookstaber, that algorithm is “singularly simple and seemingly suboptimal: it moves in the opposite direction of gusts of wind that must signal an approaching predator.” And that’s it.”

Such a simple straight forward strategy, along with their ability to go without air for 45 minutes, survive submerged underwater for half an hour, withstand 15 times more radiation than humans and eat almost anything, including the glue on the back of stamps, helps cockroaches survive. Companies do not come with the same kind of flexibility. Neither are they good at avoiding trouble. And their turnover rate is pretty high. 

The average life span of a company listed on the S&P 500 index of leading American companies is around 15 years. This has come down dramatically from around 67 years in the 1920s. Companies have a very high mortality rate. As an article in the Bloomberg Businessweek points out 

“The average life expectancy of a multinational corporation-Fortune 500 or its equivalent-is between 40 and 50 years. This figure is based on most surveys of corporate births and deaths.” Companies are either acquired, merged, broken to pieces or simply shut down. Nokia, which till a few years back was the world’s leading mobile phone manufacturer, is now going through a phase of trying to stay relevant. It was announced yesterday that the mobile phone division of the Finnish company would be sold to Microsoft for $7.2 billion. 
Nokia produced the first mobile phone in 1987, more than a quarter century back. It was the world’s largest vendor of mobile phones, until Samsung overtook it in 2012. Even now, Nokia makes nearly 15 percent of the world’s mobile phones. But it only has a 3 percent share in the lucrative smartphone market, which most mobile phone users seem to be moving towards. So what went wrong with Nokia? It failed to see the rise of a new category of mobile phones i.e. the smart phone market. 

As marketing consultants Al and Laura Ries,write in War In the Boardroom, “The biggest mistake of logical management types is their failure to see the rise of a new category. They seem to believe that categories are firmly fixed and a new one seldom arises.” Companies tend to remain obsessed in selling a product they are good at selling and thus fail to see the rise of a totally new category. Nokia fell victim to this as well. 

The history of business is littered with many such examples. Sony invented the walkman but allowed Apple and others to walk away with the MP3 player market. RCA ,which was big radio manufacturer, had earlier allowed Sony to walk away with the pocket radio market. Southwest Airlines created an entirely new low cost airline market which gradually spread to all other parts of the world. Incumbents like Panam, Delta, Singapore Airlines and British Airways did not spot this opportunity. The 24 hour news market was spotted by CNN and not BBC as you would have expected to given the dominance they had in the global news market. 

So the question is why do incumbents who are doing particularly well fail to see the rise of a new category? The answer for this lies in what happened with Kodak, a company which was a global leader in film photography. As Mark Johnson writes in Seizing the White Space – Business Model Innovation for Growth and Renewal: “

In 1975, Kodak engineer, Steve Sasson invented the first camera, which captured low-resolution black-and-white images and transferred them to a TV. Perhaps fatally, he dubbed it “filmless photography” when he demonstrated the device for various leaders at the company.” 
Sasson was told “that’s cute – but don’t tell anyone about it.” The reason for this reluctance was very simple. What Sasson had invented went against the existing business model of the company. Kodak at that point of time was the world’s largest producer of photo film. And any camera that did not use photo-film was obviously going to be detrimental to the interests of the company. 



Nokia simply woke up to the smartphone game too late: AP image

So Kodak ignored the segment. By the time it realised the importance of the segment other companies like Canon had already jumped in and become big players. Also by then brand Canon had come to be associated very strongly with the digital camera whereas Kodak continued to be associated with the old photo film. The same thing happened to Sony as well. The MP3 player was ultimately an extension of the Walkman and the discman market which the company had successfully captured. So what stopped them from capturing the MP3 player market as well? Over the years, other than being a full fledged electronics company, Sony had also morphed into a music company which had the rights to the songs of some of the biggest rock stars and pop stars. 

Hence, Sony supporting MP3 technology would mean that one of the biggest music companies in the world was supporting the free copying and distribution of music because that was what the MP3 was all about. And that of course wouldn’t work. This obsession with the current way of doing business stops companies from seeing the rise of a totally new category of doing business. Closer to home, Bharti Beetel is an excellent example. The company pioneered the sale of landline phones which had buttons. But it was so busy selling these phones that it failed to see the rise of the mobile phone market. And by the time the market took off, brands like Nokia were firmly entrenched. 

This happened at the same time that Beetel’s sister concern, Bharti Airtel, became the largest mobile phone company in India. Imagine the possibilities here. If Bharti Airtel during its heydays had sold a Bharti Beetel mobile phone along with every connection, they could have made a lot of money. Another excellent example of this is Xerox. “Just think of Xerox’s Palo Alto Research Center, which famously owned the technologies that helped catapult Apple (the graphical user interface, the mouse), Adobe (post script graphical technology) and 3Com (Ethernet technology) to success,” writes Johnson. But the company had an excellent product in the photo copy machine which was selling like hot cakes, and there was no need for it to concentrate on other products which would be viable some day in the future. 

Nokia became a victim of this phenomenon as well where it completely ignored the rise of a new category. The company was busy selling its mobile phones and failed to see the rise of the smartphone market. Even though smartphones have been around for a while now it is only in the last couple of years that they have really taken off. Hence, as long as the basic phones of Nokia were selling well, it had no real interest in thinking about the smartphone market. By the time it woke up to the smartphone game, the likes of Galaxy (from Samsung) and iPhone (from Apple) had already captured the market.

 The company has been trying to play catchup through its Lumia brand but has very little market share. As a Reuters report points out “Although Nokia also said in July it had shipped 7.4 million Lumia smart phones in the quarter, up 32 percent from Q1, it was fewer than the 8.1 million units analysts had anticipated. Nokia now boasts only around 15 percent of the handset market share, with an even smaller 3 percent share in smartphones.” Blackberry is another such company. It was busy selling phones which had an excellent email application. Meanwhile like Nokia, it failed to see the rise of the smart phone market like Nokia. It is now trying catchup but other companies have already captured the market. In the days to come, the chances of Blackberry being acquired by another company, like Nokia has been, are very high. 

What the Nokia story tells us is that companies unlike cockroaches are not great survivors. As the Bloomberg Businessweek article quoted earlier points out “Even the big, solid companies, the pillars of the society we live in, seem to hold out for not much longer than an aver-age of 40 years. And that 40-year figure, short though it seems, represents the life expectancy of companies of a considerable size…

A recent study by Ellen de Rooij of the Stratix Group in Amsterdam indicates that the average life expectancy of all firms, regardless of size, measured in Japan and much of Europe, is only 12.5 years.

 Nokia started operating in 1871 and was named after the Nokianvirta river.

It spent more than a 100 years manufacturing everything from boots to cables to tyres.

 In 1987, the company made the first mobile phone.

 In 2013, the mobile phone division was sold to Microsoft.

 That’s a period of 26 years. Almost double the life expectancy of 12.5 years which prevails for companies in Europe.

 As per that parameter, Nokia has survived long enough.

The changing fortunes of Finnish handset maker Nokia

Reuters BT : September 3, 2013  | 19:08 ISTPHOTO: Associated Press

Here is a look at Nokia's changing face after it agreed to sell its phone business and license for its patents for 5.44 billion euros ($7.2 billion) to Microsoft.

* Named in 1871 after the Nokianvirta river where mining engineer Fredrik Idestam set up his second paper mill, Nokia spent more than a century making tyres, boots or cables before producing the first handheld mobile phone, the Mobira Cityman, in 1987.

* Nicknamed the "Gorba" after former Soviet leader Mikhail Gorbachev was pictured using one, it weighed a thumping 800 grams and carried an even more daunting price tag - 24,000 Finnish marks (4,650 euros).

* In 1992, Nokia sold off its non-mobile divisions and launched its first digital handheld GSM phone, the Nokia 1011.

* The basic Nokia 1100, launched in 2003, was a runaway hit, shifting 250 million units, making it not just the world's best-selling mobile, but the most popular consumer electronics device of any kind.

* Nokia remained the world's largest vendor of mobile phones until knocked off the top spot by Samsung in 2012, but it lost its lead in the lucrative smartphone market a year earlier, having been on the back foot since the launch of Apple's iPhone in 2007.

* Nokia unveiled its first Windows Phone handsets, the Lumia 710 and 800, in October 2011 after a strategic decision by new Chief executive Stephen Elop to ditch its own ailing Symbian operating system in favour of the Microsoft equivalent.

* Nokia picked up the pace of product launches in 2013, including the unveiling of its Lumia 1020 with a 41-megapixel camera . Also this year, it announced a 15-euro phone, its cheapest phone ever.

* Although Nokia also said in July it had shipped 7.4 million Lumia smartphones in the quarter, up 32 per cent from Q1, it was fewer than the 8.1 million units analysts had anticipated. Nokia now boasts only around 15 per cent of the handset market share, with an even smaller 3 percent share in smartphones.

Source: Reuters/Nokia

Outgoing RBI Governor D. Subbarao: The man who dared to disagree

Anand Adhikari       Last Updated: September 4, 2013  | 11:27 IST


"The Chinese have a saying, may you live in interesting times," Duvvuri Subbarao had said in June 2009, when he was hardly nine months into his new job as the Reserve Bank of India's (RBI) 22nd Governor. Set to complete his five year term and retire on September 4, he recalled his comment recently at a financial management summit organised by a leading economic daily in Mumbai. "I can hardly complain," he said, amid loud laughter from the audience of pin striped bankers listening keenly to him. "These have been interesting times for me, perhaps a bit too interesting."
 
Barely a fortnight after Subbarao took over in September 2008, US based investment banker Lehman Brothers went belly up triggering a global economic downturn. Subbarao, a 1972 IAS officer from the Andhra Pradesh cadre, had to cope with its fallout in India. He was no novice though. He may have studied Physics at the prestigious Indian Institute of Technology, Kanpur, but since then had worked extensively in the finance ministry as well as the World Bank for two decades before joining the RBI.  Subbarao was handpicked for the position of RBI governor by none other than current Finance Minister P. Chidambaram himself, during his earlier stint in the same position in 2004-2008.

Many may have thought Subbarao would behave like a finance ministry lackey in the central bank. He proved them completely wrong. Far away from New Delhi, at the RBI headquarters on Shahid Bhagat Singh Road, Mumbai, Subbarao knew he had his work cut out for him - ensure financial stability, keep inflation under check and support growth in the economy. One more thing bothered him, as he informed Business Today shortly after taking over - the lack of fresh air in his 18th floor corner room. The last he could do little about. 

Subbarao knew well he was occupying a chair luminaries before him had done - among them, M. Narasimham, I.G. Patel, C,D. Deshmukh, current prime minister Manmohan Singh, R.N. Malhotra, C. Rangarajan, Bimal Jalan and Y.V. Reddy. Reddy, his immediate predecessor, who was in charge at a time of nine per cent plus GDP growth, won belated respect - after the downturn struck - for having kept tight regulatory control during the gung-ho period, which left the economy better equipped to face the crisis. Before him Jalan too had effectively shielded the Indian economy from the Asian financial crisis of 1997/98.

The 2008 crisis - which has even been compared to the great depression of 1929 - started as a sub-prime crisis in the US mortgage market, but then gradually spread to Europe and other markets, India among them. At first, many dismissed the slowdown murmurs, noting that the Indian economy was still buoyant, but not Subbarao. His immediate concern was to ensure financial stability. 

Indeed, the banking system seemed more vulnerable than the economy. ICICI Bank, the biggest private sector bank, for instance, was in the news for all the wrong reasons - possible exposure in the sub-prime market and mark to market losses in other banks.  

The post crisis period exposed the chinks in central banks across the world. They had been behind the curve when it came to gauging the implications of innovative or exotic financial products in the market. It was said that Indian banking remained unscathed because Subbarao's predecessor Reddy had implemented the right policies. But Subbarao was not entirely certain. He felt the Indian banking model, especially that of banks with dozens of subsidiaries in capital intensive life insurance or capital market related businesses, was dangerous to financial stability. What if one of them failed? He was not at all comfortable with the universal banking model. "It may work in some countries and situations, but not in others," he said.

His next big challenge arose when he had to nudge Indian banks, which were struggling to implement the Basel-II framework, towards gearing themselves up for the still more stringent Basel III regulations. And this required higher capital provisions for financial risks.

Following the global recession, Subbarao realised quickly that the Indian economy was not immune. Manufacturing growth was slowing down, inflation was in the double digits and stock markets were falling. Many Indian corporations which had made billion dollar acquisitions abroad were over-leveraged. The domestic currency was witnessing a flight of capital, especially by foreign institutional investors (FIIs).  The rupee, after appreciating to 39 to the US dollar in 2007/08 had started to fall, hitting the 45-46 range in 2009. There was a danger of growth slowing down.  

To stimulate growth, Subbarao, in his first seven months as RBI chief, reduced the repo rate (the rate at which the RBI lends to banks and which in turn determines lending rates) from nine per cent in September 2008 to five per cent in March 2009. By then, it was clear that the Indian economy would be settling at a much lower 6.7 per cent GDP growth rate in 2008/09 against 9.1 per cent in 2007/08.  Was he wrong in reducing interest rates when inflation was inching up? Some bankers feel he was. 

Subbarao's first big mistake, according to them, was reducing interest rates in 2008/09. The wholesale price index (WPI) recorded an average increase of 8.2 per cent that year, much higher than 4.7 per cent in 2007/08.  

While India was slowing down, global central bankers and governments were taking measures to avoid a recession. Soon a danger arose, which initially went unnoticed. The US Fed started to buy bonds by pumping money into the US financial system. Quantitative easing (QE), as this was called, reached about $ 85 billion per month. A part of this new found liquidity flowed into the equity and bond markets of emerging economies like India. Traces of QE money were visible in the country's stock market, where FIIs, which had been withdrawing, began pumping in money instead.

For example, FIIs investment in Indian equities in the first six months of 2009/10 was  $14 billion, as against an outflow of a little over $5 billion in the same period the previous year. Dollar inflows into the country also boosted the Indian rupee value against the US dollar. The rupee's slide was halted and it remained in the 45 to 48 a dollar range through 2009/10. There was no threat to growth as advanced estimates showed growth of over eight per cent. Subbarao kept interest rates benign -- the repo rate was 4.75 per cent for the most part of 2009/10. 

Subbarao also took a path-breaking step in November 2009 when he decided to buy 200 tonnes of gold from the International Monetary Fund for $6.7 billion. He wanted to diversify the country's foreign exchange assets. Though the gold component of forex reserves is minuscule (less than five per cent) this move was appreciated by the market. GDP growth for 2008/09 was 8.6 per cent. 

But then, around September 2010, inflation started growing. Inflationary pressure was the result of low interest rates, global money and supply side issues in India which got compounded because of a poor monsoon. By the end of 2009, the challenge for Subbarao was to tame inflation. So he now began to raise interest rates, just the opposite of what he had been doing earlier. At a seminar in October 2009, Subbarao explicitly stated that India's policy rates would have to be tightened, ahead of those in advanced economies. "The resultant larger interest differential (domestic and global) may attract larger capital inflows," he said. 

In March 2010, Subbarao for the first time hiked the repo rate by 25 basis points to five per cent. Just two months before that, in January, Pranab Mukherjee took over as the finance minister. Growth prospects remained bullish in 2010/11 because of global liquidity and low interest rates. 

Subbarao's 2009/10 patch remains controversial. He was accused of not building up foreign exchange reserves when the rupee kept appreciating due to the dollar inflows following the QE, by, among others, Arvind Panagariya, Professor of Economics, Columbia University. Panagariya even called Subbarao's tenure one of the worst performances by an RBI governor. 

But Subbarao has addressed the criticism. At a May 2010 global meet, he said it was important to distinguish between countries whose reserves were a consequence of current account surpluses (like China) and others with current account deficits (like India) whose reserves were purely a result of capital inflows. "Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable," he said. In addition, the decision to buy dollars to accumulate reserves would have required the permission of his political masters. 

To stem inflation, between April 2010 to March 2011 , Subbarao  hiked the repo rate from 4.75 per cent to 6.75 per cent. This was when his differences with the finance ministry began to surface. The governor was correct in targeting inflation as average inflation (or the WPI) was 9.6 per cent in 2010/11. But the country saw a GDP growth of 9.3 per cent that year - the highest since 2008/09.

While the growth story looked intact, rising inflation and interest rates were a big concern. There was no dearth of advice for Subbarao - from ex-RBI governor C Rangarajan and now Chairman of the Prime Minister's advisory council, to Montek Singh Alhuwalia, Deputy Chairman of the Planning Commission to Kaushik Basu, now Chief Economist at the World Bank, all chipped in. 

Even though inflation in 2011/12 moderated at 8.9 per cent, Subbarao kept raising the  repo rate from 6.75 per cent in March 2011 to 8.50 per cent in March 2012. Some in the banking industry say that this was unwarranted. 

Prime Minister Manmohan Singh supported Subbarao strongly for the first three years of his tenure. But things were not going well for Subbarao with the finance minister. Mukherjee unilaterally declared that new banking licences would be issued. (The RBI is the licensing authority.) Subbarao had taken the stand earlier that there was no need for more banks. 

Despite this Subbarao's tenure was extended by another two years in September 2011. This extension was announced by none other than the prime minister himself. The first year of the extended stint was dominated by still more interest rate hikes in order to tame inflation. Industry and business leaders criticised Subbarao saying growth and investment would suffer. GDP growth eventually fell to its lowest in a decade touching 6.2 per cent in 2011/12. But Subbarao maintained the needs of the so-called 'silent constituency', the poor and downtrodden, who are the most affected by inflation, had to be addressed. "Inflation is a regressive tax on the poor," he said.

He also cited historical evidence to show that in the medium term, price stability and growth were not at odds. But he admitted that growth had to be sacrificed to some extent in the short term. He maintained that low and stable inflation, in the range of four to six per cent eventually helps growth in the long term.

The year 2011/12 was also the one when the current account deficit began growing alarmingly because of the rising trade deficit. It jumped from 2.7 per cent in 2010/11 to 4.2 per cent.  Subbarao finally changed tack and began reducing the repo rate from April 2012, with an initial cut from 8.50 per cent to eight per cent. He further reduced it to 7.25 per cent in subsequent months. 

But critics continued to carp that the pace of reduction was very slow. Subbarao responded by pointing out that he had to be cautious since the government had not provided any credible roadmap towards fiscal consolidation. P Chidambaram, who returned to the finance ministry after Mukherjee was elevated to president, did come out with one in October 2012 , but Subbarao's stance did not change. Frustrated, Chidambaram famously remarked, "If the government has to walk the path of growth  alone, it is prepared to do so."

Subbarao continued to insist that the country had to sacrifice some short term growth to contain inflation. GDP growth plunged still lower, to five per cent in 2012/13. 

The last six months have been very stressful for Subbarao as the rupee went crashing down from 55 to the US dollar to 68. In a debate in the Rajya Sabha  on the state of the economy last month , Chidambaram again noted that the RBI needed to focus on growth and employment. At the launch of a book on the RBI, Prime Minister Manmohan Singh too called for fresh thinking on monetary policy in a globalised environment.   

In his last speech as RBI governor, delivering the Nani Palkhivala memorial lecture in Mumbai, Subbarao hit back at his critics. He squarely blamed the government for the rupee's fall, defended his decision to raise rates to contain inflation, and hoped that Chidambaram, who made him RBI governor, would one day realise the worth of the actions he took in that position.  

Subbarao, 64, departs at a time when growth projections for 2013/14 have fallen below five per cent. In the first quarter (April-June), GDP growth was already 4.4 per cent. India is undoubtedly passing through one of its worst phases. No doubt the government is responsible for its tardy approach to reforms, but Subbarao has to share the blame.  

How will the history judge Subbarao? 

As a governor who fought fiercely for the central bank's independence, one who had a mind of his own and honestly did what he  thought was right for the economy? 

Or will the verdict be less favourable?