economic and financial indicators:overview

• Corruption is dreadful in India, as shown by a current “season of scams”—over mobile-phone licences, the Commonwealth games and more. Politicians, notably the ruling Congress party, are now feeling the public’s ire. Worries have also grown that graft is scaring away foreign businesses.
• Circumstantial evidence points that way. A spokesman for a big Western firm mutters into his cappuccino about a recent High Court decision, which if upheld would cost his company billions. It was so strange, he says, it could be explained only by judicial graft. A representative of a British media firm, SIS Live, which broadcast the Commonwealth games from Delhi, in October, is furious—along with other contractors—at being left millions of pounds out of pocket because, he says, payments have been frozen by investigators digging up evidence of corruption at the event.
• Across the board, surveys regularly tell how graft is an unusually heavy tax on Indian business. An annual one published on March 23rd by PERC, a Shanghai-based consultancy, shows investors are more negative than they were five years ago. Of 16 mostly Asian countries assessed, India now ranks the fourth-most-corrupt, in the eyes of 1,725 businessmen questioned. Being considered worse than China or Vietnam is bad enough; being lumped with the likes of Cambodia looks embarrassing.
• Outsiders may get an exaggerated view. India’s democracy, with a nosy press and opposition, helps to trumpet its scams and scandals, more than happens in, say, China. Yet locals tell similar tales. A cabinet minister frets that there is so much ghotala(fiddling), “it tells the world we are all corrupt. It may be a dampener to investment.” Others agree. KPMG this month reported on 100 bosses who were asked about their own experience of graft. One in three said it did deter long-term investment.
• Judging how much difference it makes is tricky. Right now, investors may be spooked as much by the fight against graft as by the corruption itself. Arpinder Singh of Ernst & Young in Mumbai says foreigners, especially those with some connection to America, increasingly hire firms like his to help them comply with America’s Foreign Corrupt Practices Act. Once a foreigner holds more than about 5-10% equity in an Indian firm, it is seen as having some responsibility for how it is run.
• Now even Indian firms, if they want to raise money abroad, or if their bosses want to protect their own professional reputations, are doing the same. As other countries, such as Britain, bring in tough anti-graft laws like America’s, the trend will continue. Yet many Indian firms still fail to comply with higher standards, so deals falter. Mr Singh ticks off a list, “in infrastructure, ports, toll roads, irrigation, microfinance”, of deals he has worked on that collapsed over “governance problems”.
• None of this is enough to prove that graft, alone, is scaring off business. Pranab Mukherjee, the finance minister, insists there is no correlation between corruption and foreign direct investment (FDI). Jeffrey Immelt, the boss of GE, in Delhi last week, cheerily agreed, insisting that a fast-growing market trumps all other concerns.
• But something is keeping investors wary. In 2010 the country drew just $24 billion in FDI, down by nearly a third on the year before, and barely a quarter of China’s tally. There is no shortage of other discouragements: high inflation, bureaucracy, disputes over land ownership, and limits on foreign ownership in some industries.
• Even so, India is home to an unusually pernicious form of corruption, argues Jahangir Aziz of JPMorgan. Elsewhere graft may be a fairly efficient way to do business: investors who pay bribes in China may at least be confident of what they will get in return. In India, however, too many crooked officials demand cash but fail to deliver their side of the bargain. Uncertainty, not just the cost of the “graft tax”, may be the biggest deterrent of all.

what an ideal banking system should look like?

• Many countries have largely settled the question of what an ideal banking system should look like. Big diversified firms, tightly regulated, with a lot more capital and less borrowing than before, are, they reckon, the ticket. Britain’s financial intelligentsia, however, has been gripped by a riot of free-thinking. A thousand flowers have bloomed: banks should be broken into lots of bits, sliced in half, nationalised, removed from any state involvement, or even abolished altogether.
• A body set up by the British government to review(independent commission on banking) headed by Sir  John Vickers, in the wake of the financial crisis, how banking in Britain should be organised, including whether banks should be broken up. Active since last September, it has now largely finished gathering evidence and will produce a draft report to the government in April and final one in September.
• Sir John noted that both retail and investment banking were inherently risky. “The popular utility–casino distinction between types of banking activity seems more catchy than helpful,” he said.Those who hoped for a Jacobin tone will be disappointed.  Sir John also said that the cost for banks of raising capital was more expensive than raising debt. That may challenge some theoreticians at the Bank of England, who have argued that banks could carry much higher capital without having to make commensurately higher profits—a view regarded as bananas by Britain’s bank chiefs.
• The observations of  Sir John Vickers , more or less ruled out some of the more Utopian proposals that have done the rounds, including the idea of “narrow banking”, in which all deposits are invested only in government bonds—presumably leaving the job of lending to households and companies to someone other than banks (although who is never really specified). Sir John hinted strongly, although did not say explicitly, that the commission would not recommend that big banks be broken up into retail and investment-banking operations.
• Instead he focused on two priorities. First, the loss-bearing capacity of banks will have to increase above the level required by the new international “Basel 3″ capital rules, either through making them have more capital or by creating mechanisms to impose losses on banks’ creditors. This is as close to a truism in international banking circles as it is possible to get, and a variety of proposals are in the works to this end.
• Second, banks will have to ringfence their retail-banking operations legally, to protect them from problems at their investment banks and to prevent the investment bank from benefiting from the implicit government guarantee that the retail bank would enjoy. It’s not clear, however, whether this would make it easier for banks to amputate bits of themselves during a crisis. Some American firms, such as Citigroup, had separate broker-dealer operations that were separately capitalised and regulated—but did not dare let them go bust in the crisis. Most banks do not legally guarantee their foreign subsidiaries, but many, including HSBC, have supported to them, often at the behest of regulators desperate to avert chaos.
• The banks will protest that ringfencing is insanely costly and impossible to implement. This is doubtful too, except perhaps for those banks with big subsidiaries in foreign countries. There, regulators may object to a big, British-owned, local operation being reorganised in a way they think is inappropriate for their locally owned firms. On the same day as Sir John’s speech, the Financial Times reported Peter Sands, the chief executive of Standard Chartered, a London-based but largely Asia-focused outfit, arguing that forced restructuring of the banks could be “very damaging“ for the British economy. Sir John hinted how he might persuade reluctant banks: the more they ringfence themselves, the less capital it may be necessary for them to carry.
• Most of Sir John’s ideas are pragmatic and in the mainstream of thinking in international banking and regulatory circles. Still, it may suit him and the politicians to pretend to the wider public that Britain is now edging towards a revolutionary solution to too-big-to-fail banks. That isn’t the case, but if the banks are smart they will breathe their sighs of relief in private, while crossing their fingers that over the next few months Sir John does not change his mind.