Shamanth had a way with the institute authorities and it wasn’t very difficult to convince them regarding the concept. We hit a roadblock, however, when we realized that organizing a “professionally organized” quiz was a big deal, and would cost a lot of money, which means we had to raise sponsorship. And this is where our troubles started.

The first bunch of people we approached to help with sponsorship were the Saarang (IITM Fest) sponsorship coordinators, who had so successfully raised tens of lakhs for the just-concluded Saarang. Raising the one lakh or so that we needed would be child’s play for them, we reasoned. However, it was not to be. While the coordinators themselves were quite polite and promised to help, we noticed that there was no effort in that direction. Later it transpired that the cultural secretaries and the core group (let’s call them the Cultural Committee for the purpose of this post)  had forbidden them from helping us out. Raising sponsorship for an additional event would cannibalize Saarang sponsorship, we were told.

When we needed volunteers to run the show, again we found that the Saarang “GA Coordinators” (GA = General Arrangements; these guys were brilliant at procuring and arranging for just about anything) had been forbidden from working with us. The Cultural Committee wanted to send out a strong signal that they did not encourage the institute holding any external “cultural” events that were outside of its domain. It was after much hostel-level bullying that we got one “GA guy” to do the arrangements for the quiz. As for the sponsorship, we tapped some institute budget, and the dean helped us out by tapping his contacts at TCS (for the next few years it was called the TCS IITM Open Quiz).

One reason the quiz flourished was that in the following couple of years, the organizers of the quiz had close links with the cultural committee – one of the quizmasters of the second and third editions of the quiz himself being a member of the said committee. This helped the quiz to get a “lucrative” date (October 2nd – national holidays are big days for quizzing in Chennai), and despite being organized by students, it became a much sought after event in South Indian quizzing circles. Trouble started again, however, after the link between the quizmasters and the cultural committee were broken.

The Cultural Committee once again started viewing this quiz as a threat to Saarang, and did their best to scuttle it. The quiz was moved around the calendar – thus losing its much-coveted October 2nd spot, and soon discontinued altogether. Despite significant protests from the external quizzing community and alumni, there was no sign of the quiz re-starting. Finally when the cultural committee accepted, it was under the condition that the quiz be a part of Saarang itself. After significant struggle, finally a bunch of enterprising volunteers organized the quiz this year after a long hiatus. It is not known how much support they received from the cultural people.

The point I’m trying to make is that when you have one lucrative product (in this case Saarang), it is in your interest to kill all products which could potentially be a competitor to this product, which explains the behaviour of the IITM Cultural Committee towards the Open Quiz. And it is the same point that explains why Test cricket in India is languishing, with bad scheduling (Tests against the West Indies started on Mondays), bad grounds, expensive tickets and the likes. The Board of Control for Cricket in India (BCCI) now has one marquee “product”, the Indian Premier League (IPL). The IPL is the biggest cash cow for the BCCI, and the board puts most of its efforts in generating sponsorship for that event. And as a side effect, it does its best to ensure that most of the premium sponsorship comes to the IPL, and thus the stepmotherly treatment of other “properties” including domestic cricket.

Last evening, I was wondering what it would take for the BCCI to make a big deal of the Ranji trophy, with national team members present, good television coverage and the kind of glamour we associate with the IPL. And then I realized this was wishful thinking, for the BCCI would never want to dilute the IPL brand. Have you heard of a tournament called the Syed Mushtaq Ali Trophy? It is the domestic inter-state T20 competition. A potential moneyspinner, you would think, if all national team members are available. But do you know that last year the final stages of this competition coincided with the World Cup? I’m not joking here.

I’m sure you can think of several other similar examples (Bennett Coleman and Company’s purchase and subsequent discontinuation of “Vijay Times” also comes to mind). And the one thing it implies is that it’s bad news for niches. For they will begin to be seen as competition for the “popular” brand which is probably owned by the same owners, and they will be discouraged.

When overs sixteen to eighteen were bowled by Zaheer, Vinay and Zaheer respectively, I thought it was a tactical masterstroke by Vettori to keep the one extra over to the end. Given the skyrocketing required run rate, I thought it was a great idea that he was trying to put the match beyond Chennai Super Kings by the 19th over itself. And it worked well. From 75 needed off 5 overs, the equation was brought down to 43 off the last two overs (now, it is reasonable to expect Zaheer and Vinay to go at around 10 an over in the slog overs). And then what happened?

You have two overs left, 43 runs to win. You have a reasonably experienced medium pacer who is generally good at bowling at death, but is also prone to buckling under pressure. And you know you can’t trust whoever the other bowler is going to be. What you want is to have your good bowler bowl without any pressure on him. Without any pressure, you can expect him to go for about 10-15 in the 19th, leaving the batsmen to score nearly 30 off the last over – which would tilt the odds significantly in favour of the part timer who would bowl that over, since the pressure would be on the batsmen.

Instead, what do you do? Give the part timer the 19th over. He has no answers for Morkel’s slogging and edging, and goes for 28, leaving Vinay to defend 15. Now, it is Vinay (who is vulnerable under pressure) who has to bowl under pressure, and the batsmen know that. It is a miracle that the match went down to the last ball.

Of course you might say that I wouldn’t have reacted so angrily had either RCB won or Kohli had gone for less in his over. That’s not true. The match was in RCB’s pocket, to be won. The probability of victory reduced significantly the moment the ball was thrown to Kohli (for the 19th over). The ultimate result doesn’t matter. I would have blasted Vettori even if we had won.

Now, there is another uncharitable explanation that comes to mind, and I’m not very proud that this comes to mind. Was it mere incompetence or some sense of malice on the part of Vettori to give the 19th over to Kohli? I’m not talking about bookmakers here, I respect him too much for that. But think about it. Just yesterday, both Mint and Cricinfo ran articles talking about IPL 5′s poor TV ratings so far. The BCCI Chairman N Srinivasan (who not so coincidentally owns CSK) said that the answer to increasing TRPs was to play on batting-friendly high-scoring pitches, and to have close games.

The first wish was answered, when RCB set a target of 206. I wonder if there were some kind of instructions from “big brother” instructing that the game go into the last over, as a means to increase flagging TRPs. If Vinay had bowled the 19th and gone for 10 (say), that would have left a near-impossible 33 off Kohli/Bhatkal’s over. Match over by over 19. One more match that is not “close”, which will do nothing to boost TRPs. But keep the contest alive till the last over, TRPs would be boosted?

As an RCB fan, I hereby call for the immediate sacking of Daniel Vettori as captain and his replacement at the helm by one of Kohli or AB De Villiers  (maybe even Vinay Kumar or Zaheer Khan). Maybe I should create an online signature campaign for this purpose, and use my contacts to get the results through to Anil Kumble and other powers-that-are at RCB.

Bob: Damn, I’ve to go to Eve’s party tonight

Alice: Oh, but I thought you actually wanted to go?

Bob: Nope, I have other things to do and it’s inconvenient to go. But if I don’t go, Eve will get hurt.

Alice: I remember you saying the same thing the last time Eve invited you for a party.

Bob: That’s true, but I really care about Eve and don’t want to hurt her.

Alice: Tell me, have you ever told Eve that you don’t particularly enjoy her parties?

Bob: Nope, she would get hurt if I said that.

Alice: So you’ve never told her that you don’t enjoy it. And you’ve always accepted her invitations.

Bob: That’s true.

Alice: So how should Eve know that these parties are inconvenient for you? If she were to somehow get to know, maybe next time she may not invite you, and spare you the trouble of boring yourself at her party.

Bob: But she would get hurt if she were to somehow find out that I don’t enjoy her parties!

Alice: That is your problem, then. You don’t have any right to crib about her parties!

Till very recently, this was a result of caste taboos. People would refuse to eat food that was prepared by someone by another caste, and that led to a delay in the growth of the restaurant industry. When people traveled (even on business, and you need to remember that in India even today, a lot of business happens due to caste networks), they would try and stay with a relative, or a friend who belonged to the same caste, and would eat in their house. When I was a kid, outstation holidays were mostly restricted to towns and cities where we had relatives, and in case we didn’t have any, durable foodstuff such as bread (from our “usual” Iyengar’s bakery), biscuits and fruits would be carried, so that we could avoid eating out.

Thanks to this cultural preference, and the taboos associated with eating out, we have turned out to be a “home food” society. Most people cook in their homes on a daily basis, or at least attempt to do so. In my mind, this is clearly inefficient. Back when I was in Gurgaon when I lived alone and would cook for myself, I discovered the beauty that is economies of scale in cooking food. The incremental time and effort in making (say) three liters of Sambar compared to making (say) half a liter was small, and consequently, every time I made sambar, I would make it in large quantities, and keep it in the fridge and repeatedly re-heat. While this may not be particularly healthy (the wife blames some of my lifestyle diseases to prolonged exposure to this unhealthy habit of eating stale food), there was little else I could do in order to achieve said economies of scale.

There is, however, a better method of ensuring economies of scale, and on a much larger scale – restaurants, and this is the practice followed in most places elsewhere in the world. Unfortunately, the taboo against eating out means that for most people, visits to restaurants are “treats”, and restaurants have adapted themselves to accommodate this. When people eat in order to treat themselves, their primary criterion is taste. When you eat something once in a while, you don’t really care about the calories or sugar or triglycerides it contains. Consequently, food in a large number of restaurants in India is tailored for this kind of an audience, and hence is not particularly healthy. The main complaint that people have against restaurant food – that it is not healthy, and that one cannot eat that every day, does have its merits, but has a background in the culture of eating out only for treats.

From a national efficiency standpoint, this needs to change. People are spending way too much time and effort in cooking their own meals. It is ok to cook once in a while, but spending an hour of your day every day in front of the stove is a colossal waste of time. The answer lies in good quality restaurants that serve food that is similar to “home-cooked” food, in terms of health factor and taste. If there is a good number of restaurants that start doing that, it will drive a number of people to stop cooking at home (the early adopters are likely to be DINK Yuppies).

In some ways, this reminds me of the Chennai auto-rickshaw problem that I’ve described here and here. Restaurants don’t want to give up on tasty food and go the “healthy way” because they’re not sure there’s enough of a demand for the latter. People are not willing to give up home food in favour of restaurants because the food is not healthy enough! Again, this needs a nudge. And you can see some efforts in this direction. Back when I was in IIMB, I remember having dinner once at this place called Bangliana, which served “traditional” Bengali food at a reasonable price (a Bong friend who accompanied me confirmed that the food was quite authentic and “homely”). In primarily immigrant-dominated localities (such as Koramangala), you see more such restaurants coming up, and that is a good thing. If only it can spread and we move to becoming a restaurant-based culture, precious man-hours (and woman-hours) are bound to be saved.

PS: If the provisions of the Food Security Bill imply that we move to a “ration” model again, it would mean a step backwards, where everyone would be forced to cook at home. Or maybe the act could be implemented differently.. Say you could partly pay at hotels using your “entitlement points”.. Anyway, that is an aside.

There was one big problem though, this beast called “securities transaction tax”. Every transaction in securities in India attracts this tax. While it seems to be a fairly small number, when you are trading large volumes and looking to arbitrage out wafer-thin margins, it ends up being significant. This tax, we figured, was a big hindrance in true arbitrage-free pricing of securities in India. The tax meant that assets could be mis-priced up to a certain limit, because wiping out that mispricing through a trade was unprofitable thanks to this tax. This “flow tax”, thus, makes financial markets inefficient.

The problem is bigger when it comes to real estate. Historically, property taxes have been really low, but property transaction taxes have been high. There is a good reason for this. Back in the old days where record-keeping was inefficient and incomplete, it was impossible for the government to map out who owned which piece of land. Instead, they figured that they would have a record on all property transactions, and thus put a tax on that. This is a worldwide phenomenon.

It has led to two big problems in India. First is the market inefficiency that I spoke about with my equities example. High transaction taxes means that property markets are illiquid, and this prevents more people from entering and investing in the market. This also means that any price changes in the broad market are not reflected easily enough across a vast majority of property. Secondly, the high transaction taxes means there is massive under-reporting of the actual prices at which transactions take place. Both the buyer and the seller have an incentive to do so, and deprive the government of tax money. This leads to creation of massive amounts of black money in real estate. The problem is similar to the creation of all those Swiss bank accounts back in the days of 99% marginal tax rates.

There is a side-effect also, one that our socialist-minded government and the National Advisory Council (NAC) might be sympathetic to. Low reported prices of land transactions also implies lower realization for farmers and other villagers when land is forcibly acquired by the government. Though compensation might be declared as multiples of the “market value”, the true market value in most cases is so depressed that farmers usually get paid a pittance.

That aside, so what prevents us from dismantling these distortionary transaction taxes on property? Firstly, they are a massive source of income to state governments and local bodies, and if they are to be dismantled they need to be replaced with another equivalent tax. Economists usually advocate property holding taxes as a less distortionary and more stable means of funding local governments. Till recently, however, bad record-keeping meant those weren’t enforceable. You already have nominal property taxes that are collected, but reports in newspapers suggests that implementation is lax, and there is significant tax evasion there.

Even if all property records are formalized and computerized, there is another major hurdle in dismantling property transaction taxes and increasing property holding taxes. Higher property holding taxes means that the value of property will see a sudden drop (lower “free cash flow” each year, and all that). Markets might become more efficient and liquid, but real estate companies who have sunk in millions assuming a certain valuation of their properties will see a sudden erosion in that value, and see value in lobbying against this change taking place. In the long run, they will benefit, in terms of greater investment, greater liquidity and faster disposal of the properties they have built. But the initial “shock” in terms of reduced valuations will mean they will lobby against this change.

Thus, unless something drastic happens in terms of reforms, it is likely that we will be stuck in this inefficient regime of high property transaction tax.

Cross posted at The INI Broad Mind

The wise men at RBI, though, might argue the precise opposite. They will claim that in terms of already high volatility they wouldn’t want to do anything that might add to volatility, however marginally. This is a constant battle I faced in my last job, of delta improvements. I would frequently argued that when something was already high, making it delta higher was not so bad. I would argue in terms of making systemic changes that would reduce drastically the already high number, rather than focusing on the deltas.

Coming back to the rupee, you can also imagine the wise men talking about some stuff about black money and hawala money and all that. The thing with making the rupee fully convertible would be that hawala would be fully legal now, and the illegal practice would cease to exist. And when something becomes legalized it comes back to the mainstream rather than remaining on the margins, and that is always a good thing.

Then you can expect some strategic affairs experts to bring some national sovereignty and national security argument there. There will be people who will talk about the increase in counterfeit money (since it’ll become easier to “smuggle” rupees into India then), and about how foreign governments might pose a threat to India’s security by manipulating the rupee (who says that threat doesn’t already exist?)!

I don’t know. I don’t find any of these anti-full-convertibility arguments compelling. If we do adopt full convertibility, though, we can at least pay Iran for the oil we get from them, and that might for all you know help tackle inflation. I don’t, however, expect the RBI to act on this.

Around the same time, friends in competing consulting firms also told me that their firms, too, were bullish on retail. Naturally so, for it was around the time when this whole idea of FDI in retail had come up. Unfortunately back then the UPA government wasn’t particularly keen on any reforms, and the idea died. The only good thing that happened in 2006 was that FDI in wholesale was upped from 51% to 100%. Unfortunately that doesn’t seem to have had much of an impact.

I’ve mentioned several times in the past that I’m not a fan of modern retail. I think the service there just sucks, that they are staffed by a bunch of imbeciles and the systems (both IT and otherwise) are designed so badly that it is more likely for the customer to come out of there disgusted rather than delighted. Where organized retail does trump unorganized retail is in their superior sourcing practices and supply chain systems.

In this context, I had predicted back then (no this wasn’t consulting advice I sold to a client) that the winning formula would be with the front end (basically retail) remaining with the kiranas, who would then be backed up by an efficient wholesaling channel that would do all that was required to put efficiencies into the channel. Unfortunately that doesn’t seem to have taken off. Metro Cash and Carry, the first multinational to set up a wholesale shop in India has been stuttering, with only about a dozen stores. Bharti-Walmart is supposed to be doing well, but very restricted in terms of geography.

There are two fundamental problems here. On one hand, there are several laws that prevent the development of an integrated supply chain system in the country. In several states, farmers are forced to sell produce to the APMC (agricultural produce marketing committee) yards, which have a virtual monopoly over procurement of produce. There are curbs on inter-state movement of goods to complicate things (octroi is all but gone, but ohter barriers remain). Then, there is the human element with existing vested interests in the “channel” trying to block entities such as Walmart-Bharti or Metro from functioning efficiently.

On the other hand, I guess organized wholesalers suffer from precisely the same problem that plagues organized retail today – that they don’t have an efficient salesforce and customer relationship strategy that can wean retailers away from the existing channels. The existing wholesalers offer retailers credit (Metro on the other hand is “cash and carry”), deliver goods to their shopfronts at regular intervals so that they can manage inventory effectively and come up with periodic sales promotions which the retailer prefers.

In the face of this barrier, the wholesaler would have to offer significant price discounts to the retailer for the latter to give up his existing set of wholesalers, and they don’t seem to be achieving that. This is perhaps the reason the strategy I thought would win has completely failed to take off.

Then you have the consultants. With the presence of retail specialists in practically all top management consulting firms in India, it would have been expected that by now they would have transferred the foreign “best practices” in retail to their Indian clients. Given that it hasn’t happened, it could mean two things. Either Indian retailers weren’t really interested in engaging their services (unlikely, given the networks these firms maintain), or (more likely) the consultants recommended cut and paste formulas from the west and those have failed.

If the latter is the case, then the Walmarts are not going to have it easy in India. If consultants, who are generally known to be smart and typically know the worldwide best practices, working with Indian organized retailers, who know the markets well, haven’t been able to crack the code for organized retail in India, one may not be too optimistic about how the foreign firms would fare.

PS: coming back to the current failure of foreign-owned wholesalers, the new regulations will mean that these wholesalers will have “captive” retailers to sell to. So you’ll have retailers who will actually have low costs in terms of purchase prices (inclusive of supply chain costs). But I’m not sure if they’ll crack the customer service bit which hardly any current existing organized retailers have cracked.

Cross posted at The INI Broad Mind. Also see my post on the broad mind on the politics of the recent cabinet decision about retail.

This setup has been useful for behavioural economists to prove that people are not always necessarily rational. If everyone were to be rational, B would accept the split as long as he was given any amount greater than zero. However, real-life experiments have shown that B players frequently reject the deal when they think the split is “unfair”.

A version of this is being played out in this year’s Ranji Trophy thanks to some strange rules regarding points split in drawn games. A win fetches five points while a loss fetches none. In case of a drawn game, if the first innings of both sides has been completed, the team that has scored higher in the first innings gets three points, while the other team gets one. The rules, however, get interesting if not even one innings for each side has been completed. If the match has been rain affected and overs have been lost, both sides get two points each. Otherwise, both sides get zero points each!

I don’t know about the rationale of this strange points system, but I guess it is there to act as a deterrent against teams preparing featherbeds, batting for most of the four days and not even trying to win the match. In general, I haven’t been a fan at all of the Ranji Trophy’s points scoring system, and think it’s quite irrational and so refuse to comment on this rule. What I will comment about, however, is about the “ultimatum” opportunity this throws up.

In the first round of matches, Saurashtra batted first against Orissa and piled up a mammoth 545 in a little under two days. The magnitude of the score and the time left in the match meant that Orissa had been shut out of the game, and the best they could’ve done was to overtake Saurashtra on first innings score and get themselves three points. However, they batted slowly and steadily, with Natraj Behera scoring a patient double century, and with a few minutes to go in the game, they were still over 50 runs adrift of Saurashtra’s score, with three wickets in hand.

At that time, they had the chance to declare their innings, still some runs adrift of Saurashtra’s score, and collect one point, and handing over three points to Saurashtra. They, however, chose to bat on and block the game, and both teams finally ended up with zero points. It maybe because they also see Saurashtra as a competitor for “relegation”, but I thought this was irrational. Why would they deny themselves one point – if only to deny Saurashtra three points? It’s all puzzling.

Going forward, though, I hope the Ranji Trophy rules are changed to make each game a zero sum game (literally). Or else they could adopt the soccer scoring of 3 points for a win and 1 for a draw (something I’ve long advocated), first innings lead be damned!

It is a similar case with travel agents. Vacation markets (flights, hotels, etc.) are nowhere as liquid as financial markets, and will never be. Sometimes, when you are booking holidays to a strange place, you know little about it, and hence commission a travel agent to find you a place to stay there. Given that you know little about that place, the agent can charge you hefty commissions, and make a nice spread. Of course, nowadays such opportunities are diminishing for agents, as you have websites such as Agoda which allow you to book hotels directly. Now, at one place you can compare the prices of different hotels, and have better information compared to what the agents traditionally offer you. The spread is on the downswing, I must think.

Then, don’t you think package tours are very similar to structured products? Structured products are nothing but a package of several risks packaged together. By acting as a counterparty on a structured product, a bank (even now ) can afford to charge fairly hefty fees. Structured products are illiquid,  and there is no publicly available “market price”, so it is easy for banks to make themselves good spreads on such products. However, all it takes to defeat this is an intelligent customer. All the customer needs to do is to try and understand the risks himself, and start “unbundling” them. Once he unbundles the risks, he can now trade each of them independently, on more liquid markets, and get a much better price than what bankers will offer him. The catch here is that he’ll need to put in that effort in unbundling.

It’s the same with package tours. Given the bundles, it is easy for the agents to make higher spreads. However, if you as a customer simply unbundle the package (hotels, transport, food, etc.), you can find out the price of each (available on sites like agoda and elsewhere) and find out for yourself the spread that the agent is making. And then you compare the agent’s premium with the “cost” of making all the bookings yourself and make an informed choice.

Apart from communication, among the greatest boons of the internet has to do with dismantling middleman monopolies. It is incredible how much use a little information can be of!

The reason winners don’t get too much footage is that firstly, they are widely distributed, and secondly they spent away all their money. Think about a stock or a CDO or a bond being a like a parcel that you play by passing the parcel. The only thing is that every time you receive the parcel, you make a payment, and then pass on the parcel after receiving a higher payment. Finally, when the whistle blows, one person has the parcel in his hand, and it explodes in his face, ruining him. We know enough about people like this. A large number of banks lost a lot of money holding parcels when the whistle blew. Some went bust, while others had to be bailed out by governments. We know enough of this story so I don’t need to repeat here.

What is interesting is about the winners. Every person who held the parcel for a small amount of time was a winner, albeit a small winner. There were several such winners, each of whom “won” a small amount of money, and spent it (remember that the asset bubble in the early noughties was responsible for increasing consumption among common people). This spending increased demand for various goods and services produced in several countries. This increasing demand led to greater investment in the production facilities of these goods and services. Apart from that, they also increased expectations of growth in demand of these goods.

The damage the crisis did on the way up was to skew expectations of growth in different sectors, thus skewing investment (both in terms of financial and human capital). The spending caused by “small wins” for consumers put in place unreasonable expectations, and by the time it was known that this increased demand came as a result of an asset bubble, a lot of capital had been committed. And this would create imbalances in the “real economy”.

Yes, the asset bubble of the last decade did produce winners. The winners begat more winners (people whose goods and services were bought). However the skewed expectations that the wins created were to cause damage in the longer term. Unfortunately, I don’t see this story being told adequately, when the financial crisis is being talked about. After all, the losers are more spectacular.