Governance is no “Indian wedding”

When India hosted the Commonwealth Games in 2010, the then-sports minister compared the event to an Indian wedding, saying that while preparations go on until the last minute, everything comes together on the day. I am reminded of that as I watch the stories coming out of India since the sudden demonetisation of two major currency notes on November the 8th, 2016.

The reasons why the move was made were unclear, and what one could and could not withdraw or deposit changed often. The Reserve Bank of India (RBI) refused an RTI (right to information) request asking about the reasons, and with its response to another RTI request, managed to create an impression that the RBI had no idea how many Rs 2000 bank notes it had printed. RBI is the Indian analogue of the Bank of England in the UK or the Federal Reserve (“the Fed”) in the US. These are not confidence enhancing moves, for citizens or for investors. To cite economist John Maynard Keynes: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

That is not the point of this monograph.

With my governance hat on, it is clear that no regulatory impact assessment was carried out before the demonetisation was announced. After all, the lives of so many publics – citizens, small and big businesses, state owned banks, private and multinational banks – were to be upended. If there had been such an exercise, RBI would have been more prepared rather than the ominous silence to which it treated the citizens before the Governor finally spoke nearly 2.5 weeks after demonetisation. (An alternative possibility, simultaneously more benign and more sinister, is that such an assessment was carried out but summarily ignored in favour of an “Indian wedding” type approach, and reliance on calls to nationalism and patriotism.)

Save for a top-down diktat, where was the country’s preparedness for such a massive transformation?

Does the “leadership” have experience of massive transformations involving both businesses and citizens? The committee to oversee it was announced nearly three weeks after the demonetisation. Other than Chandrababu Naidu, and possibly BCG’s Janmejaya Sinha, it is difficult to feel confident about the execution experience of the rest. Not least because the expensive failures presided over by some on the committee  are not easy to ignore.

What is the objective for this transformation? No, not the ones that changed daily, one increasingly jingoistic than the next! Minimising the black money in circulation? Reducing corruption? Making India a digital, cashless society?

For the sake of this argument, let’s assume a “digital, cashless India” was the goal.

Did anyone ask who will pay for the infrastructural investments needed? The National Payments Council of India’s (NPCI) Unified Payments Interface (UPI) is in the news but there is understandable confusion especially as different banks put out their own branded apps and the government adds to the confusion by launching its own app BHIM. The consumer-side apps are not the only solution needed. The government has asked banks to roll out 1 million POS terminals. No, nobody yet asking who will pay and how it will dent their profitability. Meanwhile, surcharges on the use of card payments have been introduced and withdrawn hastily.

(I am reminded of a friend’s wedding where a last minute Pashmina shawl purchase was made for over Rs 35,000 in 1996 money. Her mother told me, at weddings, expenses aren’t questioned. The “Indian wedding” analogy is still holding.)

Who thought ahead about the hundreds of millions of illiterate users who now not only need smart phones but also the magical ability to work their way through these apps to access and spend their own money? Apps to serve an illiterate user base will need inclusive design thinking, which is absent in the Indian public discourse, as I have written elsewhere.

What is the short and medium term impact on quality of life of citizens? Where is the mitigation for their loss of income or business? I am struggling to find any proof these questions were even asked.

There is no discussion whatsoever of who is benefiting the most at whose cost. My brief monograph on that question has remained on fire since it was published, suggesting I touched a nerve.

There is no evidence that the demonetisation was a considered policy move. There is plenty evidence that this is a case study for poor governance no matter how one looks at it. There was no clear goal, no plan. The leadership has no experience of delivering large transformations. Nobody has done any cost analysis or indeed asked who will pay. Citizens’ docility is assumed.

Governance is joined-up thinking. Absent that, it is just another “Indian wedding”.

[PS: About that Brexit thing ahead of us here in the UK, I am still looking for a culturally apt metaphor. Meanwhile, let’s go with “a giant omnishambles”.]

The governance we need: a reflection

I have had both shared and personal reasons to have spent much of the last year reflecting on the nature of governance around us.

It was a year marked by sharp separation between opposing factions. This cleavage had long been in the making. The divide between the haves and the have-nots was growing with an empathy deficit. The difference between correct and manufactured reportage was lost. The political outcomes of both the EU referendum and the US presidential elections are being seen as a revolt against the soi disant elites, disconnected from the reality of the lives of many.

This is however not just an issue of national politics. A friend of mine informed me that today, January the 4th, the second working day of 2017, is “Fat Cat Wednesday.” Today the FTSE 100 CEO has apparently already earned the average annual salary of an average UK worker, a sum of £28,200.  The UK is one of the most unequal countries in the developed world. Even though the link between CEO pay and performance is “negligible” according to research, with 80% rise in pay delivering only 1% improvement in performance, the pay gap persists and is demotivating to over half the workforce. If we have learnt anything from the political seismic shocks of the year that just turned, we know this is an unsustainable state of affairs.

We are at an historical inflection point whichever way we look.

If governance is all about building stable organisations – whether national entities, for-profit businesses or non-profits, educational institutions or anything else – it is self-evident that we need a different kind of governance.

We need governance that reaches across the aisles and engages, to heal and possibly to collaborate – whether it is Hillary Clinton gracefully attending Donald Trump’s inauguration despite the bitter and personal campaign both fought, or business people such as PepsiCo CEO Indra Nooyi agreeing to serve on the economic advisory council in the Trump administration despite her criticism of the language used for women and minorities.

We need governance to listen and to understand one another’s concerns, which may necessitate learning how the other side uses the same words in the same language to mean different things.

We need governance that may seek efficiency but not at the cost of efficacy, because organisations are not dumb legal entities but living breathing ones, working within the ambit of their wider societal contracts.

We need governance to be anti-fragile, both in its intentions and its recognition of consequentiality of various choices, over time and not just in the immediate quarter that follows.

We need governance that is true, inclusive, collaborative stewardship for all.

If the last line reminds you of Edmund Burke’s view of social contracts, let’s not forget his words which may as well be about the governance we now need: “All that is necessary for evil to succeed is that good men do nothing.”

(Disclaimer: These are my own views and do not reflect the views of the boards of either JP Morgan US Smaller Co.s Investment Trust or BeyondMe, where I serve as a non-exec director.)

The real story in India’s demonetisation saga

“Who benefits if we all go cashless?”,  asked a friend* of mine. This is indeed the money question in India’s demonetisation saga with its moving goal posts. “I am not here for the enrichment of Visa, MasterCard etc.,” she added.

Apart from convenience and fraud protection, the economic case for an individual consumer is near impossible to make. Many problems solved by card issuers are those related to card usage, not arising from the transaction or commerce itself.

The benefits of consumers going cashless accrue variously to businesses, who can reduce the cost of cash handling; to various players in the payments ecosystem — card makers, technology providers, POS terminal makers, card issuers and acquirers, wallets, and schemes such as Visa, MasterCard and RuPay — who make a fraction of a basis point on each transaction; and to society at large, in aggregate and in the long run.

My friend* remains suspicious of ideas where consumers were required to participate without having any agency, since, she argues, we do have agency in using cash e.g. when hoarding cash as vulnerable women do.

This is a fair concern. But consumers accept the notion of a state-sanctioned currency as a widely accepted means of value exchange within a territory. Consumers make trade-offs to get things they desire while accepting certain loss of agency even if they do so holding their noses.

As it stands, the state has unfair power in determining whether the currency has the value it is supposed to have. It is a power imbalance where the consumer’s agency is considerably less than the state’s. Consumers begin first and foremost with the belief that the state won’t mess with them and their stash of wealth. This trust is essential to exercising the consumer’s agency in stashing away hoards of cash. Acts such as the overnight demonetisation and the cack-handed execution of it destroy trust. The cash hoards of those vulnerable women have been destroyed in value overnight. Their agency is hugely reliant on the state’s benevolence in this instance.

What happens when the state does mess with consumer trust such as by demonetisation or overnight devaluation of the currency?

This is where the conversation veers into virtual currencies such as Bitcoin that remove state as the holder of power and distribute power to the two or more parties transacting. It would be the subject of an altogether different essay on why we are happier trusting an algorithm than we are trusting elected representatives whom we can bring to account.

The chatter about the demonetisation of certain currency notes and going cashless — the latter being some ways off in India, given the lack of infrastructure needed to make cashless work — is just a sideshow.

The main game is data.

When the economy goes cashless, a lot of data will be generated and the aggregate economic case for society will begin to emerge. At the very least, there will be new money brought into the system with convenience reducing the friction in commercial transactions and money.

Professional — and armchair pro-am — economists have wondered a while how India’s GDP would change if the unorganised sector, including the vast cash economy of domestic and unskilled workers, quotidian daily purchases like cigarettes and paan etc were to be recorded formally. The probability of such aggregation will increase with more data collection, though it remains to be seen whether this newly counted GDP growth will weather, balance or exceed the drop in GDP predicted by many due to the demonetisation.

“Who benefits if we all go cashless?”.

The key beneficiary of India going cashless will be whoever can make sense of the gazillions of exabytes of data that these transactions will generate, and that will enable the study of deviation from patterns to identify funds that may fail ATL/AML scrutiny. In an ideal scenario, the money that otherwise goes unnoticed while transacting in cash will be noticed and people in possession of it brought into the tax net, netting more money into the state’s coffers.

Money in all this is still the distraction. The real story is data.

As consumers, this real story should worry Indians because Indian citizens have no guaranteed right to privacy and India has no data protection laws to speak of. Despite a massive universal ID programme, named Aadhar, the government appears to have very little appetite for change in this regard. The Government of India’s open government data platform was launched in 2012 but is rightly criticised for incomplete thinking. A consultation on it  was opened to the public in July 2016.

My advice to my friend and to those watching the demonetisation story in India is quite simple:

If you want agency, watch the main game of data — and what unfettered, unregulated  access to data might enable — not the sideshow — of moves towards cashless society.

If this be the only lesson of 2016, so be it.

Here’s to not fearing the anomie of 2016 and to rebuilding in 2017!

*(Thanks are due to my friend, whom I do not name, for asking the vital question that sparked the conversation on November the 27th and 28th, 2016, and for permitting me to use her words in this post.)

Brexit and the luxury brands of Britain

(A version of this article appeared in LiveMint on November the 17th, 2016.)

British Prime Minister Theresa May’s visit to India and trade talks with her Indian counterpart take me back to the midsummer’s day in 2016. We in Britain woke up to find that the Leave campaign, colloquially called Brexit, had won the referendum. The pound plummeted and for a while, the stock markets were in chaos. Markets stabilised but the pound continued a downward trend, beating historic lows.

Britain luxury brands are known for their heritage, design, craftsmanship, and quirky individuality which together shape a luxury narrative matched by no other country’s. London too is a choice destination for the experience of buying both British and non-British luxury brands.

The weakened pound was good news for tourists visiting the UK. The month of Ramazan, which traditionally brings wealthy visitors from the Middle East to London, followed. Flight bookings from Europe as well as Asia reportedly rose after the referendum. Premium and luxury hotels benefited from a rise in reservations and stays by overseas guests too. All this made London the hottest and cheapest luxury shopping destination this summer. Much shopping took place as is evident from UBS’s analysis of tax refund receipts. Tax refunds, which are typically sought on big ticket goods, rose by 36% in August.

So far the Brexit vote looks good for luxury shoppers from outside the UK. The picture for luxury brands is more complicated.

The iconic British brand Burberry has seen a 30% rise in sales in its British stores in the last six months. Facing headwinds otherwise, Burberry has also cut prices in its Hong Kong stores, taking advantage of the weaker pound as the brand notably incurs 40% of its costs in Britain.

It is a mixed picture for luxury watches, which are often presented as investment pieces, hence seen as considered purchases not impulse buys affected by currency fluctuations. Many coveted luxury watch brands are imported into the UK and the weaker pound has made the imported goods more expensive. Prices for brands such as Cartier and Mont Blanc, owned by the Richemont Group, have been increased while Hublot, Omega and Tag Heuer, owned by LVMH and Swatch Group, are holding on. The latter category of brands is taking the impact on its margins. For now.

The British luxury watch maker Bremont however is quids-in despite 30% of its costs being imports of Swiss watch parts, which are now more expensive. A weaker pound has helped the firm deal with falling sales in Asia and come out stronger.

To complete the picture and London being a hub for creative entrepreneurs, I spoke with proprietors of several upcoming luxury brands. My conversations revealed a mixed picture. Many small luxury brands source parts, finished products or packaging abroad while serving mainly local British customers. After the referendum, the bill of materials is decidedly more expensive by 10-30% depending on where they import from. As small businesses and nascent brands, however, they cannot always pass on the costs as price increases to the customer. Some however are slowly edging up prices of some products while keeping other prices steady. Overall this does not bode well for smaller, upcoming British luxury brands. Tighter margins will hamper their growth, and in many cases, their ability to survive.

It is also important to remember that despite the outcome of the referendum, Britain is, at the time of writing, still operating in the single European market with free movement of people. This makes it easier for people from Euro countries to travel to and shop in the UK. Any change in the ease of travel will affect Europeans travelling to and shopping in the UK just based on a weaker pound.

Luxury marques already under pressure, such as British car maker Aston Martin, expect a short term lift from the weakened pound but that may only last till Britain quits the single market. The automotive supply chain is global, and that will continue to affect the brand’s margins and profitability especially if Britain loses single market privileges and is not able to strike similarly attractive deals with the many countries where Aston Martin sells.

Some luxury brands are already thinking long term. For instance, Bremont is collaborating with the Advanced Manufacturing Research Centre in Sheffield to reduce its reliance on imported parts. Aston Martin too has made recent investments in product development and a new plant in the UK although its reliance on imported parts will continue for a while. But absent any clarity on the nature of trade deals Britain may be able to make, the return on these investments remains uncertain.

The pound recorded a brief recovery on November the 3rd, 2016 after the High Court ruled that the government will need parliament’s approval to trigger Article 50 which is essential for the official start of negotiations with the European Union. The judgment has temporarily buoyed the Remain voters. The uncertainty is further compounded by the government choosing to appeal the decision in the Supreme Court.

Luxury brands, like many others, will just have to sit tight and watch. After all, what is a couple of years in the grand schema of luxury brands that have lasted or intend to last for centuries?

Of pigs and predictions

The Trump victory has left many of my friends reeling and in disbelief. It has also already brought out criticism of pollsters and polling data. Some sceptical ones go a step further and condemn all prediction makers, and mock machine learning and artificial intelligence. This condemnation is foolish and tantamount to throwing the baby out with the bathwater.

Prediction models turn on data, collected from the right questions being asked of the right statistical sample of people. Reductive questions generate neat data sets which then provide all the right answers.

But as experienced market research people will tell you, far fewer people, than those who enthusiastically nod and say they will purchase a new product, actually do. It is not that people are lying, it is just that human beings tend to give answers to please the asker. On politics and other emotionally charged matters, this tendency to give socially acceptable answers to minimise confrontation is especially pronounced. People also change their minds over time.

If the outcomes of any large exercise, where people actually make active choices, shock us it is worth remembering that the only truth is revealed preference i.e. what our actual choices reveal about our preferences. Human beings do not always seek to maximise utility, often preferring to use simplifying shorthand or heuristics to make decisions. The heuristics could have encoded in them experience and knowledge, as well as prejudices and received wisdom.

The concept of revealed preference is, of course, flawed too. If I pick Candidate A over Candidate B, it does not say I prefer Candidate A, merely that I prefer Candidate A to Candidate B. In the future, if Candidate A is up against Candidate C, I may pick Candidate C not because of Candidate C’s superiority over Candidate A but because my preferences are not immutable. Faced with more than two options, we have a way to simplify the choice for ourselves as well as I have written here.

It may sound nihilistic to suggest predictive modelling is not really reliable. But if we are relying on flawed and mutating preferences, and treating them as immutable truths in our analysis, how can methodologies and predictive models generate anything reliable?

It would be akin to putting lipstick on a pig. We would have used up lipstick but the pig would still be a pig.

In the last UK general elections, the Brexit campaign, and now the US general elections, predictions have failed to, er, predict anything reliable.

It is time we learnt to judge differently — by expanding our comfort zones, by listening more, by asking and seeking to understand more, by being healthily sceptical, and by bringing critical thinking lenses to all those pursuits.

For now, if your side won, good for you. The advice to try and understand the other point of view applies to you too. But if your side didn’t win, dry your eyes, dust yourself up, and go out and talk to someone who is not cohabiting your comfort zone.

The narratives we hear will have rough edges, and not the cleanliness or reductiveness of survey questions. But that texture is the stuff understanding is made of. Less data, more understanding. That is what we need.