Citizens' Issues
Building a Better India – Part12: Defence and Internal Security

India faces formidable security challenges and the only way to address them is to re-work the framework under which our services operate

India's armed forces are rightfully held in highest esteem and respect by citizens. They are brave, patriotic, highly disciplined and dedicated towards their duties. How can a soldier whose family is economically distressed guard our borders and fight with enemies to secure our lives?

In fact a separate and dedicated pay commission should be formed for fixing their remuneration, privileges, facilities, perks and post retirement benefits and to provide for the families of martyred.

The serious and highly neglected problem of obsolete arms (Almost half of the fighter planes have been lost in crashes during training in the last three decades, warships and submarines are aging, old Russian made tanks are deployed and no fresh procurement of modern heavy guns since 1984 when Swiss bofor guns were bought), shortage of ammunition and bullets, which is reportedly just enough to fight for a maximum of three weeks need to be addressed on priority. This task of procurement should be handed over to an autonomous constitutional body and implemented by a separate ministry under the direct charge of Prime Minister.

The long pending issue of appointment of a senior five star officer to head all three wings of the armed forces for proper, effective, quick and timely coordination is difficult to solve. The government is apprehensive of creating such a powerful post to avoid any chance of mutiny, although in our country such an event is nearly impossible. The viable option could be to appoint a coordination committee comprising of one senior most officer of four star rank from each wing, with the chairman being a retired chief of one of the services, with a system of collective decisions based on majority view.

The existing 26 different Acts on this subject should be simplified and consolidated in to three Acts:-

(A)  “INDIAN ARMED FORCES ACT”; in substitution of the following Acts:

Indian Reserve Forces Act, 1888
Indian Rifles Act, 1920
Indian Soldiers Litigation Act, 1925
Assam Rifles Act, 1941
Armed Forces (Emergency duties) Act, 1947
Air Force Act, 1950
Army Act, 1950
Army & Air Force (disposal of private property) Act, 1950
Commander-in-Chief (change in designation) Act, 1
Reserves & Auxiliary Air Forces Act, 1952
Indian Naval Armament Act, 1923
Naval & Air Craft Prize Act
Armed Forces (Special Powers) Act, 1958
Armed forces (Punjab and Chandigarh) special powers act 1983.
Armed forces (J&K) special powers act 1990
Works of defence act 1903
Fort William act 1881

(B) “INDIAN BORDERS SECURITY ACT”; to subsume and consolidate the following Acts:

Border Security Force act 1968.
Coast Guard Act 1978.
Indo Tibetan Border Police Force Act 1992
Territorial Army Act 1948

(C) “INDIAN INTERNAL SECURITY FORCES ACT”; to subsume the following Acts:

Central Reserve Police Force Act 1949.
National Cadet Corp Act 1948
Civil Defence Act 1968.
Central Industrial Security Act 1968/1999
Railway Protection Force Act 1957 /1985

A constitution body named the “Internal Security Management Commission (ISMC) should be set up to preserve, oversee and control the internal defence of India with the following duties, functions and powers:

To prevent, detect and combat terrorists and spies, both external and internal.
To requisition and take the services of police, CRP, paramilitary forces and if required of Indian armed forces at it’s sole discretion.

To detect, prevent and/or to crush communal and caste based riots. To detect and arrest people attempting to destroy public and government property.

To crush Naxalism completely with full forece, by directly coordinating with police and armed forces, in the event that Naxalites remain adamant in their unreasonable and unacceptable demands and refuse to have a peaceful settlement with the Central Government.

The institution of  ‘Intelligence Bureau’ should be disbanded and its officers and staff should come under ISMC and the latter will also select and recruit it’s own intelligence officers. It will post at least 4 officers in each district and in adequate numbers in cities and towns.

The DGP and head of CID of every state should submit a monthly report to ISMC by covering briefly, every important news and acts affecting internal security.

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Economic consequences of higher regulatory capital for banks
Higher regulatory capital or leverage ratio would mean involuntary monetary tightening as it were!

Pre-crisis, luxuriant supply of liquidity in an exceptionally low interest rate environment led banks to expand credit in any way they wanted, and inflate in the bargain the now infamous credit bubble, with all its cataclysmic consequences. All through the inflating of this bubble, banks actively engaged in excessive leveraging of their balance sheets. The regulators asked no questions, ostensibly because banks were consistently Basel 2 compliant based on their risk weighted assets. One very compelling reason for this, was that banks were looking for ways to pay excessively high  executive compensations. This was linked to a given NIM (net interest margin) and a given level of borrowing costs, resulted in ever increasing compression of RoA (Return on assets) parameters, which in turn, left no choice for banks but to correspondingly increase leverage with a view to keeping shareholders happy by delivering competitive equilibrium ROE (Return on equity); this reached a point where hedge funds, traditionally considered a byword for leverage, looked like apostles of defensive strategy in comparison. 
After the fact, regulators became wiser and thought up Basel 3 norms, which mandate a minimum leverage ratio of 3%, or a  maximum leverage of 33 times! Given that even this 3% is rather low, one can imagine where banks were on this parameter before the cataclysm. Even this rather modest number seems very ambitious if one reckons the fact that even this has to be complied with only by March 2018. Significantly though, this is a redeeming feature,  because any quicker transition would be counterproductive for the real economy given the state in which it currently is. 
To have a sense of what a quicker transition could mean for the real economy, it is instructive, intuitively appealing and insightful to model changes in output/growth in the real economy through an analogy of ICOR ( incremental capital to output ratio) by conceptualising IAOR (incremental assets to output ratio). Any quicker increase in regulatory capital will, as it already has, result in de-leveraging or shrinking of growth in bank balance sheets, hurting output and jobs. Specifically, the IAOR for India is empirically estimated at 2.5, which means that for every 1% decline in bank assets, output will decline by 0.4 %. This then is the  powerful and intuitively compelling way to model the impact of  an increase in the regulatory capital or leverage ratio for banks on the real economy and explains the caution on the part of  regulators, in calibrating the phased application of higher regulatory capital and leverage ratio. 
The other way higher regulatory capital and leverage ratio will hurt growth/output/jobs is expressed by the Taylor Rule. In this formulation, higher regulatory capital or leverage ratio would mean involuntary monetary tightening as it were. This would happen because all else being equal, which means NIM-RoA also remaining unchanged, RoA would need to rise for banks to be able to continue to deliver  market competitive equilibrium return on equity (RoE) to attract equity capital. With no further cost cutting and efficiency gains immediately possible, this in turn will, through corresponding increase in NIM, increase borrowing costs for the real economy. The effect of which would be the same as that of involuntary monetary tightening. It is precisely to mitigate this adverse impact on growth/output/jobs that a calibrated transition to higher regulatory capital/leverage ratio has been envisaged, although the 3% leverage ratio itself is rather low and needs to be higher at around 5 % to 7%. Indeed, Indian banks are already here and therefore, already 2.5 times Basel 3 compliant. Of course, the upside of a longer transition would be that in spite of increasing RoA, banks may even succeed over time  in reducing, or even minimizing, NIM-RoA via endogenous business process re-engineering and technology upgradation, resulting in reduced  borrowing costs for the real economy.
Incidentally, but significantly, Indian banks being already 2.5 times Basel 3 compliant, with leverage ratio of 7% plus, will need to increase equity capital only to maintain their existing leverage ratio; i.e. to remain compliant with themselves and not at all to comply with Basel 3 as is widely, but erroneously, made out in many quarters!
(The author is a former Executive Director, Reserve Bank of India)



Gopalakrishnan T V

3 years ago

The article is highly technical and carries a strong message that higher regulatory capital or leverage ratio would mean involuntary monetary tightening as it were. This is true provided the balance sheet is drawn strictly as per the regulatory prescriptions and accounting staandards.Is this happening in India is a major question? Fudging and window dressing of balance sheets is an established practice in India and the ratios referred to in the article cannot be given a serious weightage as such. The NIM,ROA,Capital Adequacy Ratio etc are all to a great extend only showing indicative trends and not necessarily the correct position. The NPAs are grossly underestimated and the off balance sheet items which get converted into risky assets do not seem to be getting a realistic assessment. The regulatory capital ratio exceeds the requirement level by a wide margin cannot be taken as a correct and comfortable picture. The ratio of pure equity capital in relation to all risky assets is perhaps a better assessment as regulatory capital has some components which are manipulative in nature.If pure equity capital is taken as a yard stick,the Indian banks particularly Public Sector banks cannot be said to be showing a comfortable position as increase in pure capital ie equity capital may not be proportionate to the increase in risk weighted assets.

The Little Book of Market Wizards: Book Review

This 'Little Book' is a selection from Jack D. Schwager's classic set of four previous 'Market Wizards' books.

In any list of ‘must-read’ books on trading, you would certainly find two titles of Jack Schwager: Market Wizards and The New Market Wizards. These two books—and a few later books of Schwager—have a fascinating format. They are questions and answers with the world’s largest and best traders. Schwager set out to find answers to what differentiates the highly successful market practitioners, or market wizards, from ordinary traders? What traits do they share? What lessons can we learn from those who achieved superior returns for decades while maintaining strict risk control? Schwager has spent decades interviewing legendary traders in search of answers. Himself a trader, he has been able to draw out ideas and strategies of the world’s best minds churning out great risk-adjusted returns in bonds, equities, commodities and forex markets.

Every interview charts their career paths, recording early failures and later successes. Many of them were almost wiped out early in their trading lives before they pulled themselves up and reapplied themselves, realising that controlling risk is the key to returns. These inspiring stories have resonated with traders all around the world. These two books, and later Stock Market Wizards and Hedge Fund Wizards, have become Bibles for traders. Peter Brandt, a successful trader, writes in the introduction that it is an annual ritual for him to read these books during Christmas holidays.

The Little Book of Market Wizards is a combination of the four books in the Market Wizards series. It provides the major insights garnered across the four Market Wizards books, spanning a quarter century. Schwager has extracted lessons and concepts that are essential to success in trading, regardless of the methodology. For instance, chapter five discusses the ‘Importance of Hard Work’. Schwager points out “I interviewed Marty Schwartz in the evening after a long trading day. He was in the middle of doing his daily market analysis in preparation for the next day. It was a lengthy interview, and they finished quite late. Schwartz was visibly tired. But he wasn’t about to call it a day. He still had to complete his daily market analysis routine. As he explained, “My attitude is that I always want to be better prepared than someone I’m competing against. The way I prepare myself is by doing my work each night.”

Chapter eight discusses ‘Risk Management’, the one a factor that can make or break a trader. When Schwager asked Paul Tudor Jones what was the most important advice he could give to the average trader, he replied, “Don’t focus on making money; focus on protecting what you have.” As the author explains, “most trading novices believe that trading success is all about finding a great method for entering trades. The Market Wizards I interviewed, however, generally agreed that money management (i.e., risk control) was more important to trading success than the trade selection methodology. You can do quite well with a mediocre (i.e., slightly better than random) entry methodology and good money management, but you are likely to eventually go broke with a superior entry methodology and poor money management. The unfortunate reality is that the amount of attention most beginning traders devote to money management is inversely proportional to its importance.”

Chapter nine elaborates on ‘Discipline’. When the author asked the market wizards what differentiated them from the majority of traders, the most common reply he got was ‘discipline’.
This may seem too simplistic to some, vague to others, and too obvious to many more. But Schwager underlines how Randy McKay, a very successful trader, once lost millions over a few days just because he slackened a bit and let a losing position grow too large.

One of the most important lessons from successful traders is that losing is a part of the game. Traders who have developed a method that works, and have a risk control system in place, are never bothered about losses. They know that trading is a business of probability—not certainty. If you have read at least the first two volumes of the Market Wizards series, you will find this a good refresher. If you haven’t, this would be a great appetiser.


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