Artificial Super Intelligence and the Humble Human Part 1

 

“Science fiction warned us about machines that think; it never warned us how ordinary that moment would feel.”

For centuries, intelligence was the one domain humans assumed would remain uniquely ours. Strength could be mechanized, memory could be stored, speed could be amplified, but thinking felt different. Today, that assumption is quietly dissolving. Artificial Intelligence is advancing not in steady steps, but in accelerating leaps, challenging our definitions of reasoning, creativity, and even understanding itself. And yet, when we look closely, the distance between computation and humanity remains both profound and revealing.

Artificial Intelligence is progressing in leaps and bounds, practically on a day-to-day basis. In many areas, it already outperforms humans by a wide margin. To evaluate how close AI comes to genuine human reasoning, we rely on benchmarks such as ARC, which attempts to measure AI performance in comparison to humans.

ARC (Abstraction and Reasoning Corpus) is a benchmark created by François Chollet to measure general fluid intelligence in AI—the ability to learn new skills and reason abstractly without prior domain-specific training. It has evolved into multiple levels: ARC-AGI-1, ARC-AGI-2, and ARC-AGI-3 (preview). Current leading AI models perform far below human level on the hardest levels: humans solve nearly 100% of tasks, while even the best AI models struggle to reach 50% on ARC-AGI-2 and under 20% on ARC-AGI v2.

The current performance landscape looks like this:

• Humans vs AI: Humans consistently solve 100% of ARC tasks, highlighting the massive gap in reasoning ability.
• AI Progress: While ARC-AGI-1 was nearly “solved” by large models, ARC-AGI-2 exposed their limitations—brute force and scale are insufficient.
• Breakthroughs: GPT-5.2’s ~53% on ARC-AGI-2 is a major leap, but still far from human-level reasoning.
• Future: ARC-AGI-3 will test interactive reasoning, pushing AI beyond static puzzles into dynamic environments.

In summary, ARC is the North Star benchmark for AGI, measuring whether AI can truly think, generalize, and adapt like humans. Despite significant progress, leading models remain far from human-level performance, especially on ARC-AGI-2 and beyond.

While researching this topic, I was reminded of Data, the humanoid android from Star Trek: The Next Generation. Curious, I asked Microsoft Copilot how Data might score by comparison. This was its response:

ARC-AGI-1 (basic abstract reasoning puzzles)
Humans: ~100% | AI: ~75–87% | Data: Effortless.
Data routinely demonstrates the ability to infer rules, patterns, and transformations far beyond simple grid puzzles. He would solve these instantly, likely faster than humans.

ARC-AGI-2 (harder, resistant to brute force, requiring deep abstraction)
Humans: ~100% | AI: ~53% (best models) | Data: Near-perfect.
Data shows fluid intelligence: he learns new games (like poker or strategy simulations) without prior training, adapts to alien logic systems, and reasons abstractly across domains. He would likely match or exceed human-level performance here.

ARC-AGI v2 (leaderboard variant, where top AI scores are <20%)
Humans: ~100% | AI: ~15% (best) | Data: Essentially flawless.
Data’s ability to generalize across unfamiliar contexts—whether deciphering alien languages, solving engineering crises, or improvising in diplomacy—suggests he would achieve near-100% here, like humans.

ARC-AGI-3 (interactive reasoning, dynamic environments)
Humans: ~100% | AI: Not yet tested | Data: Beyond benchmark.
Data thrives in interactive, real-world reasoning: commanding starships, negotiating with adversaries, and adapting in real time. He embodies the kind of general, embodied intelligence ARC-AGI-3 aims to test.

At this point, I listened again to a discussion between Data, Geordi (Chief Engineer), and Dr. Pulaski (Chief Medical Officer), which reminds us how far away even the fictional android is from being human.

The context is that Data and Geordi enter the Holodeck to play Sherlock Holmes adventures. Since Data knows all the stories, he keeps jumping the gun and spoiling the fun. Geordie got frustrated and abandoned the game. They both came to the café and discussing the frustration about playing with Data and Dr Polaski was listening to this conversation.

“What we were doing You are wasting your breath ,lieutenant. saying that to data is asking a computer not to compute” Said Dr Polaski.

“Am I so different from your doctor.” Asked Data

“Are you able to cease speaking on command. In medicine I am often faced with puzzles that I do not know the answer.” Said Doc

“She's right there. you always know the answer. to feel the thrill of victory there has to be the possibility of failure and where's the Victory in winning a battle you can't possibly lose.” Georgie observed

“Are you suggesting there is some value in losing” Data asked

“ Yes yes that's the great teacher . we humans learn more often from a failure or a mistakes than we do from an easy success . not you. you learn by rote. to you all is memorization recitation .” Said Doc

‘I don't know about all that. Deductive reasoning is one of data strengths” Georgie commented

“Yes and Holmes is too. But Holmes understood the human soul; the dark flecks that drive and turn the innocent into the evil, that understanding is beyond data.” Said Pulaski

“Now you're just being unfair doctor” Quipped Georgie

“I don’t think so lieutenant. Your artificial friend doesn't have a prayer of solving a Holmes mystery that he hasn't read’

Being a Star Trek aficionado, I then asked Copilot to compare Data with another Next Generation–era AI: the Emergency Medical Hologram from Star Trek: Voyager.

Data would consistently outperform the Doctor in abstract, cross-domain reasoning.
The Doctor would rival or surpass Data in medical problem-solving and human interaction. His emotional growth gives him an edge in empathy-driven reasoning, which ARC-AGI-3 (interactive tasks) is designed to capture.

In short, Data is the embodiment of general intelligence; the Doctor is the embodiment of specialized intelligence evolving toward generality. Together, they illustrate two pathways AI could take. one built for universality, the other for depth and human connection.

AI may bring super intelligence soon, not a normal human being. And will this super intelligence empower the human or annihilate the human is the question.

The idea behind this post is not to be judgmental, but to invite you to join me on a quest on what more is to being human- better human. Atma with a link to Paramatma ?

“Intelligence may be measured in problems solved, but humanity is revealed in the problems we struggle with.”

ONDC – Big Bang moment for eCommerce

 

The universe after the Big Bang evolved and is still evolving continuously. Not as a centrally controlled and managed process. But, as an ecosystem with each component in its trajectory, impacted by, and impacting, the other ecosystem building blocks. Zooming in further, the lifeforms also evolved from the single-cell wonders in the primordial soup to the atomic-age man through continuous innovation by nature what we know as mutation across the ecosystem. Every new innovation adds or subtracts functionalities and capabilities, with some succeeding to sustain and some failing and perishing. The technological progress we made as a human race from wheel to spacecraft also followed this incremental innovation across the ecosystem. That is the “Order of Nature”.

 Very often, success in the natural order arises in a simple yet fundamental paradigm shift, and successful players are those who quickly adapt to the evolving paradigms, cooperating and collaborating with the ecosystem. Thought leaders from Darwin to Schumpeter to Niall Fergusson in the modern era, have argued that, “This is the age of digital Darwinism, in which it is not the strongest or most intelligent that survives, but the one that most successfully uses technology to adapt to change.”

When it comes to eCommerce w can see that it has evolved out of line with this natural order of the nature. Two or three giants with deep pockets building up stranglehold in each domain tuned to maximise their shareholders’ interest.

There is extensive innovation in this model. But limited to innovation to maximise their self-interest through a centrally managed process, to meet the requirements of their typical user group and/ or enhancing their user group through a cookie-cutter approach.  Any outside innovation has no chance to survive unless it is subservient to or sold out to the biggies. [1] It is an uncontrolled that is engulfing commerce, eventually taking control of it all and leading to stifling diversity. Much like the magma chamber of a dormant volcano, this keeps the lid on growth and evolution. This has already set alarm bells ringing across the world, with many developed countries trying to mitigate through regulation, be it the America Innovation and Choice Online Act in the US, the Digital Markets Act in the EU or UK’s Digital Markets, Competition and Consumers Bill,

It is here that the idea of ONDC has come in with a big bang. Encouraging innovation and specialisation across the ecosystem with all of these building blocks communicating among them and interoperable through an open-source protocol. This allows and encourages lots of people to work on different building blocks and come out with a plethora of solutions for diverse user groups and not to straight jacket users or shape the users into a straight-jacket. As Howard Moskowitz observed in his research paper; there is no single optimum, but there are multiple optima for every use case. Some will fail and some will succeed and the winner is society, as a whole and not shareholders of a few enterprises.

This will address the challenge of market concentration and associated practices that are a challenge in the platform-centric world today.  This will encourage a natural order of continuous innovation with some succeeding and some failing with the overall ecosystem marching forward.

The Build for Bharat Hackathon organised by ONDC recently in collaboration with Industry demonstrates this. 100,000+ participants in 2,100+ teams from across the country coming together with outstanding solutions with most of them having a working model and monetization plan shows. This shows how Open Model will unleash creativity across a wider cross-section of big and small enterprises and individuals. This is what excited representatives from 20 VCs who attended the hackathon final.

Now it is clear why I have the audacity to term ONDC as the Big Bang Moment of eCommerce that can totally transform the world of commerce in the near future.

 

“When money, rather than innovation or value, is your competitive advantage, that’s when things get boring and stagnant, and monopolies take root.” —Hank Green

Enabling a Paradigm Shift in Social Protection through BECKN

Delivery of social protection measures is a big challenge to any government; especially in a developing country.  Social protection program has three key components.

The first component is how we can uniquely identify the beneficiary and enrol them into the program. Digital Id revolutionised this part. The pandemic demonstrated that the countries which have established a foundation of digital id can manage the outreach much better than a country that is lacking in this area. Countries which have gone one step forward and have established a somewhat comprehensive registry of uniquely identified deserving beneficiaries did even better.

The second component is the payment system. Building on the foundation of Digital ID, in India we have introduced Unified Payment Interface (UPI) which is a completely open and interoperable protocol that has transformed the payment system.  As of now, UPI handles more than 1.25 billion transactions per month which is more than four times the volume of transactions handled by the Credit / Debit card network every month. We are now in the process of building a next layer on top of it to provide a digital voucher using completely open protocol. This could be a straightforward money voucher, or it could be a voucher that is meant for a specific product if the government wants to ensure that the benefits are provided in kind with respect to certain goods and services.

The third element is the market including the supply chain, and it is still a challenge. That is why the governments are forced to run the whole physical operation of procurement, supply chain management and retail shops. Often very very inefficiently.

BECKN foundation established by Nanden Nilekani has come out with a brilliant solution to this problem. It has published and open protocol specification which can completely revolutionize the marketplace.

What is the challenge it is attempting to solve?  Digital marketplace is a big boon; but the market is still heavily siloed.  It is increasingly becoming walled gardens of few players. Take for example retail. There are  a few large aggregators like amazon/ big basket/ Alibaba They are doing a great job; but, they are walled gardens. Same is the case with delivery or mobility or health service. It is a pain for the consumer who must look at multiple apps to make an ideal choice. This limits the choice and makes markets inefficient.

The service providers are also constrained. Unless you are a part of the aggregator platform you are at a big disadvantage in terms of discoverability.

BECKN protocol addresses this issue for both the service provider and the consumer. It is a paradigm shift; we are making internet, small business friendly and not small business internet friendly.

A simple adapter to the payment system or inventory management system based on BECKN protocol can provide any service provider equal access to the market whether he is big or small. Any frontend app which is comfortable to the consumer; could help him or her to access all the options seamlessly if it has a BECKN based connector to the network. It may be WhatsApp may be telegraph may be Google map or a special app provided by the government.

These mean simplification of service delivery [e.g. one stop payment, personalized workflows combining multiple services, granular view of events as and when they occur], freedom of choice for consumers, stitching of suppliers to fulfil a comprehensive service, much better (network driven) view of consumer demand and ability of suppliers to fulfil that demand

Such a marketplace has also the potential for bringing dramatic innovations in terms of option to the beneficiary. Once such an Open Benefit Delivery Network is in place, governments can focus on scheme design and enrolling the beneficiaries and reaching him the subsidy / financial assistance . Then leave the markets to make the best offer.

The beauty of this solution is that we are not talking about huge investment in a new platform or software solution. The service providers at a very low cost can be enabled to plug into the market. We are democratising the market just like HTTP democratised the internet. This is not a wishful thinking. We are helping the first solution built around BECKN to go live in India next month and few more are on the way.

It is time to give this a serious try and be an innovator to solve fundamental problems so that we can manage emergencies like the pandemic much better.

“He who is best prepared can best serve his moment of inspiration and desperation.” ― Samuel Taylor Coleridge

Paving the last mile

My post “Last mile to the bottom of the pyramid” discussed how targeted delivery of subsidies and benefits can reduce leakage, improve efficiency of delivery and stimulate demand in the economy. In this post I discuss three critical components for targeted delivery.

Unique Identification: The first and foremost requirement for targeted delivery is unique identification of recipients. “Aadhar”, the biometric based unique identity for residents, addresses this issue. Especially, an infrastructure for verification of identity by matching the biometric signature (say finger print) of the recipient against the master database of UID effortlessly and cheaply from any part of the country would be an extremely powerful tool. This may sound like science fiction or a costly option for our country. Experts do point out that the current state of technology makes this quite feasible and affordable as we can have a standardized process for identity verification for variety of applications. With the increase in volume of usage, the cost would only drop further.

Enrollment of eligible person: The second component is the ability to filter out the individuals who are not eligible for specific subsidy or benefit. Today each agency that is responsible for providing an entitlement goes through extensive processes for enrolling eligible persons. If we take a deeper look, we can see that there are many common eligibility parameters for most of the entitlements. For example one or more indicators like age, sex, income, educational qualification etc are common for most of the subsidies and benefits. I agree that there are some efforts like BPL and APL list, differentiated ration cards etc in certain states which are attempts in this direction. But, there are hardly any agencies that have implemented an infrastructure using the power of modern technology to build and maintain such databases which can be easily accessed and referred to by other systems using a published standard interface.

If we are able to establish one or more entities that would build and maintain databases of individuals against their Unique Id (Aadhaar), various parameters which go into determination of entitlements, there will be tremendous efficiency gains and cost reduction in the process of enrollment. These databases should also have mechanism for reverse flow of information from the administering agencies which will help in continuous update of these parameters. These would be essentially utilities that focus on the IT enabled data management which help the implementation agencies to focus on policy administration.

Some people may point out that such integration of data is an intrusion into privacy. However, conceptually it is just like the credit bureaus like CIBIL that maintains credit history of individuals using data sourced from banks and financial institutions.

Distribution Channel for subsidies: The third critical component in targeted delivery is the distribution channel. As the various subsidies are provided by means of reduced price of products or service, there is a need to manage the distribution of these discounted products along with market priced products. If this movement is not strictly controlled and monitored there could be significant leakage. This would require each of the agencies to make significant investment and effort for this process control which often forces state management of distribution that sometime compromise quality of service.

One of the most efficient ways to address this is standardization of manner for delivering subsidized products. The highest level of standardization is when the subsidy is in the form of a money transfer. In this case the goods will move in market price and the eligible person will get the subsidy credited to a bank account which is easily accessible. In this way the process of benefit distribution is not product based but beneficiary based which can be same for variety of products or services from kerosene to education. The agency responsible can then plug into a standardized payment mechanism at very low cost. Further tweaking the eligibility condition will also require very little or no tweaking of payment system.

In this model the agency distributing the subsidy can focus on product/ service distribution. Moreover, there may not be any need to restrict such distribution through government controlled agencies and can be handled by a number of private and public service providers helping competition and resulting improvement in service quality. Government can focus on administration of eligibility and administration of the subsidy. This monetization of benefit can also leave the choice of how to use this entitlement to the beneficiary.

Criticism for this model is that the beneficiary may misuse the entitlement irresponsibly and the state will not be able to influence the behavior of the target audience. Even this can be addressed by mechanisms like transferring the subsidy to the account of lady of the house (It is a well researched fact that women of the house are normally more responsible with money. Similarly the better status of the Nair woman of Kerala who historically had the economic power on account of a matrilineal society could also support this) or dependent on compliance to certain conditions.

This can also be addressed by a minor tweak of payment system. In this case each of the subsidies can be treated as an entitlement credited to the account which can be used only against purchase of the prescribed service. As far as the payment system is considered it is very much like handling multicurrency accounts which is a well established process.

Tail piece: This post attempts to highlight the possibility of establishing two critical infrastructure utilities which in conjunction with the Aadhar can significantly improve the subsidy and social security administration. This cannot be achieved overnight. But it makes sense to give focused attention to the above as we have established Unique Id Authority of India.

In the end, it all comes to choices to turn stumbling blocks into stepping stones.Amber Frey

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Last mile to the bottom of the pyramid

Targeted drug delivery systems attempts to deliver drugs directly to the organs which are afflicted by disease or need repair. This improves drug delivery efficiency, reduces leakage and keeps the side effects to the minimum. The idea has been there for a long time; but, we had limitation of technology. Therefore we tried carpet bombing by injection to blood stream to take drug to affected area which caused enormous waste, failure to sufficiency penetrate to where it is needed the most and caused side effects to healthy parts of the body. Today advances in nano technology, advanced polymer chemistry and electronics engineering are coming together to revolutionize drug delivery system to make it more directed.

The same concept is applicable in social security systems too. Especially when we want to reach a helping hand to the needy in terms of subsidized food and fuel, health benefits, support for education and so on. In the absence of more effective means to address the last mile problem, we use carpet bombing here too. For example when we keep the price of kerosene low to help the poor, a large chunk of it is cornered by unscrupulous elements resulting in humongous loss to the exchequer and the needy is often denied what is promised to him. The same is the case of subsidies for many other products and services.

Today two silent developments are opening avenues to address this lacuna in a better fashion. The first one is the Aadhar project, which is attempting to identify each individual uniquely. This unique identity can help in reaching the benefits directly to the needy on a regular basis. The second critical component is the increased connectivity at affordable cost. Widely available connectivity specially using mobile technology has enormous potential for transforming the society in a variety of ways. When we marry the unique identification with reliable and affordable connectivity the impact can be truly astronomical.

Therefore our strategy for providing better data connectivity (whether as 2G, 3G or 4G) should be universal access that is practically free. I agree that we should avoid graft, corruption and nepotism in selection of service provider. Our approach for this selection and license charges to the service should not be to maximize short term revenue to the government but to reduce cost of access across the country. To avoid the service providers exploiting the low input cost, we can have mechanisms to regulate price or to share the revenue or other means which focuses on continuous cost reduction to the end consumer.

The benefit of mobile revolution in social transformation is obvious and there are many studies already undertaken to prove its impact in the poorer segment that today is learning to use this in a variety of applications. The fishermen of Kerala now use this to improve his yield and reduce wastage. Some village panchayats have found ways to use mobile phones to reduce domestic violence. (Whenever the drunken husband tries to beat up his wife she send an SOS to a specific number and then quickly and unobtrusively a group of women land up to the hut which acts as a deterrent to the drunken husband)

Our ability to reach such benefits to a large number of end consumers has another impact in the demand side of the economy. If we put more money to the hands of the rich (who are few in number) most of it goes to saving or spent abroad and so on. On the other hand when we put a little more money to a large number of poor people, most of it will go to consumption of food, cloth, shelter, consumer durables and non-durables, education and entertainment. This can have very significant impact to demand in the economy that will also protect us from over dependence of export which was one of the reasons for the eventual collapse of the East Asian miracle.

This increased purchasing power can be further leveraged if we can get the goods more cheaply with easier availability which is possible if we are able to bring in better efficiency in retail marketing and distribution infrastructure.

Although the policy makers are aware of each of the above areas, very often the vested interests with deep pockets are able to torpedo such initiatives often, with specious arguments and powerful lobbying. We see this in most of our policy making exercises including the annual budget. In this latest budget even though definite actions in these areas are limited, it is heartening to see that the Finance Minister is making an attempt. He has referred to strengthening the retail sector, ways to better farmer yield and reduce retail price by removing inefficiencies in distribution and also has established an inter-ministerial task force headed by Mr Nandan Nilekany to suggest means of directed subsidies to the intended intermediaries in the area of kerosene, LPG and fertilizers.

This a good start; and in comparison with the reduction in tax rate or permission given to the international investors in participate in Indian Mutual Funds or increase in FDI limit and so on which are more high profile policy changes, the impact of the abovementioned initiatives have unfathomable potential for strengthening our economy if we proceed forward from this baby steps keeping in mind that this is only a start.

“It has been said of the world's history hitherto that might makes right. It is for us and for our time to reverse the maxim, and to say that right makes might” Abraham Lincoln

To be or not to be –IV: Challenges of Regulation

I remember the two bullies who studied with me in high school. They intimidated poor souls like me quite often; had no shame in forcefully taking nice goodies from our lunch boxes, flick our chocolates, force us to let them copy from our assignments and what not. Absolute rascals; but they were good athletes. They bought honour to the school in every district and state championships and so they were darlings of the faculty. Every once in a while they got caught for their transgressions; will get few raps on the knuckles, may be few days of suspension and then they were back in action. I am sure many of you would have had similar experiences.

I remembered these bullies when I was reading comments by Hank Paulson (US treasury secretary July 2006- Jan 2009) in 2006. “If you look at the recent history, there is a disturbance in the capital market every four to eight years; savings and loan crisis in the late ‘80s and early ‘90s, the bond market blow up of 1994 and the crisis that began in Asia in 1997 and continued with Russia’s default on its debt in 1998. I was convinced that we were due for another disruption” (Referred in his book “On the brink”). He was proved right within few months.

The same book also refers to a remark by John Mack CEO of Morgan Stanley in 2008 on the cause of the melt down. “Greed, leverage and lax investor standards; we took conditions for granted and we as an industry lost discipline”

This is not just the cause of 2008 melt down; it is the cause of many melt downs. Such behaviour appears to be normal in this line of business. Take a look the civil case filed by Securities and Exchange Commission (SEC) against Goldman Sachs in April 2010 charging ‘fraudulent misconduct’. This is not just an isolated incident as we can see from the following.

“NASD fines Citi, Merrill, Morgan Stanley $250,000 each” The America's Intelligence Wire July 19, 2004” (i)


“On June 6, 2007, the NASD announced more than $15 million in fines and restitution against Citigroup Global Markets, Inc., to settle charges related to misleading documents and inadequate disclosure in retirement seminars and meetings for BellSouth Corp. employees in North Carolina and South Carolina.” (ii)


“Merrill Lynch & Company said yesterday that it would pay $100 million in penalties to New York and other states and change the way it pays stock analysts to end an investigation that its chairman said had damaged the firm's reputation. “ (iii)

Citigroup Inc. agreed to pay a $70 million fine for practices in its Baltimore consumer finance unit, including raising the cost of loans to poor and credit-starved customers by requiring them to have unnecessary cosigners” (iv)

“Morgan Stanley, the second-largest U.S. securities firm by market value, was fined $10 million by the Securities and Exchange Commission because it failed to guard against insider trading for at least eight years. The fine was the biggest ever for a violation of surveillance rule” (v)

These are just a few samples. Do a Google search with the word ‘fine’ along with the name of any of the large investment banker; you will be surprised at the frequency of serious transgressions which are not just fines on technical violation but fines on substantive charges. We will wonder aloud “Will we ever learn?”

Compounding such practices is the frequent roll out of complex financial products which are often too complex for the investors to understand. Hank Paulson’s (who has been the CEO of Goldman Sachs before taking over as the Treasury Secretary) reference on the proliferation of product innovation is quite blunt on this. “In theory this was all to the good. But there was a dark side. The market became opaque as structured products grew increasingly complex and difficult to understand even for sophisticated investors”

This is why we need innovative regulation to match with the innovations in market place. In his blog post on regulating the new financial sector, Prof. Willam Buiter has given a very interesting suggestion “the same rigour used by US FDA for pharma and medical products should be insisted for introduction of financial products to broader market does not look out of place in the context of the recent history”.

We also need to think innovation in the checks and balances that we build in the system. Quoting Paulson again; “The regulatory structure, organised around traditional business lines had not begun to keep up with the evolution of the markets”.... it had led to counterproductive competition among regulators, wasteful duplication in some areas and gaping holes in others”

We in India have few important lessons to learn from all these.


To prevent run-away innovation that is rash and irresponsible, we need to put in place the right regulatory establishment to avoid the same kind of mistakes that has been laid bare in front of us. If we expect responsible behaviour and self regulation collectively from the guys running financial markets we are asking too much. We have not seen such industry wide responsible behaviour anywhere in the world.

Regulation does not mean micro-management of day-to-day functioning. Regulator’s role is to set the rules of the game and keep a watch whether the players are playing as per the rules. He also has to keep a look at the impact of changing structure of the game and modify the rules. If I give an example, the rules of T20 is not exactly the same as in the case of test cricket though both are cricket. To make this possible the regulators will have to be able to attract people who have the right experience, the right domain knowledge and most importantly the right attitude who can establish appropriate processes and use the modern technology tools and match or better industry strengths. This is the challenge of governance.

One of the major suggestions on regulation we often hear is to curtail all innovations; I don’t agree with this. We have enormous potential for modernising the markets with innovative products. If we say that we will be insulated from the turmoil on account of lack of market sophistication, we are not being very bright. It is like saying that I never fell because I never rode. A sophisticated market is a prerequisite for growth. In this journey we will make mistakes; and these mistakes will trigger better controls and that is the democratic process of growth. To go into hibernation is not the solution. Look at our favourite sport, cricket; from leisurely five day test matches we have progressed to one day internationals and now to 20 over matches keeping pace with our life. Notwithstanding, the controversy of IPL, the innovations have only improved the game on multiple dimensions.

“ We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change, one that will allow us to more effectively deal with the inevitable market disruptions and one that will better protect investors and consumers.” Hank Paulson


(i) http://www.accessmylibrary.com/coms2/summary_0286-22046900_ITM
(ii) http://en.wikipedia.org/wiki/Citigroup
(iii) May 2002, New York times http://www.nytimes.com/2002/05/22/business/100-million-fine-for-merrill-lynch.html
(iv) Washington Post, 2004
(v) Bloomberg 2006

To be or not to be - Part 3; Of Controls and Decontrols

Penicillin is the first antibiotic that was discovered. Over the years, penicillin and its derivatives became one of the most important drug families to fight infectious diseases in a very cost effective manner. The way in which the Government of India tried to manage price and supply of this drug makes an excellent case study on the impact of micromanagement of resource allocation by government.

In view of the criticality of this drug, the Government of India (GOI) set up facilities in two Public Sector Undertakings [PSUs] to manufacture penicillin. Within a short span of time, the capacity of these production facilities was incapable of meeting the demand. Even at Rs 1200 per unit (as against an international price of about Rs 600 per unit) these PSUs could just about meet the cost of production.

The government needed to keep the price low, keep the inefficient PSU afloat and also manage the shortage. A complex problem of optimisation!

The scene was perfect for control, corruption, privilege postings and bulk gratifications; sacrifices in the name of providing healthcare for the poor and needy. Now the government came out with a bizarre plan to manage price and supply of the drug in the domestic market without compromising the sustainability of the PSUs.

The department of Chemicals and Petrochemicals, the operating ministry for managing this complex social challenge of such national importance, in the beginning of the year would ask the industry players what their expected demand for the drug was for the oncoming year. Then they asked the PSUs how much they expected to produce during this period. Now the ministry officials, after significant deliberation even at the level of the secretary made allocation of domestic production to the buyers on some ratio of their expected demand and last year consumption. The ministry also fixed the price of penicillin to about Rs 1200 per unit. The government also ensured that no new licenses were given to produce this in India. Then to manage the demand these buyers were allowed duty free import in proportion to what they bought from domestic market.

The domestic suppliers were often unable to keep up with the supply they promised and although the price was fixed and the suppliers were PSUs the buyers were overcharged by demanding interest free deposits and other charges euphemistically called packing and forwarding charges. Even after all this, every month the buyers visited with begging bowls like supplicants. Once the buyers managed to buy from the domestic suppliers then they rushed for the import license; filling in bundles of forms that had to be pushed from table to table. The industry players had special skilled staff to manage this ‘logistics’. Once they got the import license, they had to woo the egos and line the purses of the customs department to clear the goods although it was duty free. Industry had specialists employed for this too.

A total waste of time and resources; but for some it provided opportunities for privileged postings and corruption. All for the benefit of the poor! Finally sense prevailed and such draconian controls on import and domestic production were lifted. Penicillin became available in the domestic market at less than half the price.

The story was similar for many more products. Cement is another excellent case in point. I remember standing with a begging bowl at the district collector’s office for allocation of cement to build our house. The construction activities had to be synchronised to match the erratic supply of this precious commodity. In fact almost at the end, when I wanted few more sacks of cement I had to buy the same from black market at three times the price.

Why am I remembering these past horrors?

One reason is to remind that there are still many areas where the policy makers appear to be micromanaging; supposedly for the larger good of the public. But in the end it just adds to corruption and inefficiency. The Air India kept alive on ventilator is a case in point.

More damaging outcome of such policies is that very small interest groups are able to influence policy makers to create market distortions and enrichment of the select few. Amartya Sen has beautifully described how the agriculture pricing policies destabilize market, fail to benefit the deserving farmers or the guy on the street and distort farming practices. As per him “The overall effect of the subsidy is more spectacular in transferring money to medium and large farmers with food to sell, than in giving food to the undernourished consumers” (For a detailed discussion on this, refer to “The Argumentative Indian” by Dr Sen page 212 to 215)

Even the free electricity to the farmer is the same story. The poor farmer gets no benefit as he can’t afford even a pump and the electricity board is in perpetual red!

Reminiscing of this past becomes even more relevant today when we hear cries for more government intervention and control on account of recent failings in the markets.

But I think the problem also lies in our basic feudalistic culture. I have had many opportunities to be associated with projects where the so called non-bureaucrats appear to be in positions that require them to be involved in areas of public policy. It was almost hilarious and shocking to see them changing their colour so fast. They suddenly wanted absolute control and were even worried whether the democratic process and market forces can be depended on for balanced development.

It is worthy to remember that as Garry Hammel noted in his famous book "Future of Management” democracy with its checks and balances and markets with its invisible hand are two of the few institutions in this world that have sustained for centuries.

We have few examples in India of right policy interventions revolutionising industry sectors. As Dr Ajay Shah noted in his article "Flying on One Engine” “In the story of India’s economic reforms, the revolutionary changes on the equity market stand out with respect to the magnitude of the change which has come about from 1993 to 2003 despite concerted political lobbying in trying to prevent change”

It is true that at times markets will fail. We need to try to correct the failure and not to abolish the market. What is needed when the market fails is to correct irresponsible behaviour for which rules have be in place and the regulators will have to intervene. But what we need is course correction and policy nudges and not wholesale nationalisation or control. Infants should be nurtured; but also exposed to the reality of the competitive world else they grow up to be spoiled brats. (Take a look at "Devastation of world financial markets - A case of Policy Reversals in India?” and "Checks & Balances - Who checks and Who balances” for some thoughts on this.)

It takes imagination and ability to think through the ground realities and to come up with policy framework that nurtures healthy competition and incentivise responsible behaviour instead of creating ‘tables with a value’ in government offices. What we need today is administrative reforms that would compel and encourage policy makers to be adept in this than become feudalistic despots.

Optimism amidst Gloom – Opportunities for Value Investment

The Capital market is always choppy and wavy, like the high seas. That is the nature of the beast. There is no moment of rest. Each trough spreads its share of gloom, negativity and suicides and each crust bring with it euphoria, splurges and binges. We have seen many across centuries; Tulip Mania of Amsterdam 1637, South Sea Bubble 1720, Wall Street Crash 1929 and again in 1987, Harshad Metha driven boom in India 1992, South East Asian melt down in 1997, internet boom and bust around the world of 2000 and now the mayhem in world financial market.

I was looking at an article that I had written in 2003, when the sentiments were down after the tech bust, 9/11 Iraq war, Enron, Worldcom and Arthur Anderson scams. The BSE Sensex was around 3000. Paul Krugman’s observation in Fortune in September 1998 that ‘never in the course of economic events-not even the early years of economic depression- has so large part of the world economy experienced so devastating a fall from grace” looked relevant in 1998, 2003 and even today.

My article was an expression of my optimism that what goes down will come back. Since then we have gone up and now come down again. The Sensex in the region of 9,000 – 10,000. At this stage I feel it is relevant to feel optimistic again. I wanted to pen my thoughts about it and I realized that I don’t need to write a new article again. Just a few edits of my old article. And that is what I have done. For the sake of convenience, continuity and a bit of wry humor, I have retained the original parts in (bracketed small font) that I have edited out and marked the additions in italics. This is how it goes.

With (war clouds looming large) the world of financial markets having experienced a worldwide melt down, the world of investment seems to be in a state of limbo. Adding to this woe has been a spate of poor corporate performance (in developed) around the world, few high profile bankruptcies and accounting scams which have literally pulled the rug from under the leg. All in all the general perception seems to be in hoarding money in cash or near cash equivalent or park in yellow metal.

Let us take a look at it from a different perspective. I believe that this is the time for investors who are looking for value opportunities. A time to pick up shares at real good value. To get some good returns in medium term you don’t have to be even adventurous in terms of investing in speculative and high risk ventures. Just look for few well established and well performing conventional companies. The chance of disappointment is really low. What gives me this confidence? The same reason the prices are down today; the uncertainty around us. It has been always seen that at times of uncertainty the investor looks for a high risk premium and it translates to a lower price for stock. This means that the investor is willing to pay a relatively lower price, compared to times when the uncertainty is low, to buy a piece of the same company. Today we are surrounded by innumerable of factors of uncertainty, which leads to depressed prices.

There is certainly a very high probability that at least some sources of this uncertainty will get sorted out in the near future. This means that general level of depression will certainly pass and this has to convert to better valuations. We have seen this in all markets at all times. Look at what happened after the Gulf war in the US market. The markets have produced above-average gains following U.S. involvement in the World Wars, the Korean War, Vietnam and the Gulf War.

From the general let me venture in to specifics. Let us look at what can be one of the winning markets for the coming year. One of the winners definitely will be the Indian Market. The factors in favor are just too many.

Indian economy in general has been on a high gear. With a GDP growth of around (5%) 6.5% in 2009 compared to an average of about (2%) 3% for the world as a whole India has been one of the fastest growing economies in the recent past. Even the projections for the coming couple of years seem to be in the same direction.

Corporate Sector in India has been performing outstandingly till last year. The current year has witnessed the aftershocks of the worldwide melt down. (When the general results from the corporate sector around the world has been filled with more bad news than good, Indian corporates have been showing a different color.) Indian companies in the earlier era of protected markets had significant inefficiencies inherent in them. Now that they have been exposed to global competition, they have tightened their belts and released significant gains. (During half year ended in September 2002 the net profit of the Indian corporate increased by more than 50%. In the third quarter ended in December 2002, the results of the major 679 companies which released their results shows that the sales has increased by 70% and net profit has increased by 15%.) CMIE expects aggregate profit after tax (PAT) of listed Indian corporates to rise by 77.3 per cent in 2009-10.The detailed analysis by CMIE is given at the bottom of this article

The foreign exchange reserves have been growing at a quicker pace. For the first time after 1978 the year 2002 showed a surplus in the current account. With more than $ 290 (72) billion in foreign exchange in September 2008 Indian government has now allowed Indian citizens to buy and own foreign assets out of their rupee earnings in India.

(The external debt situation has also reduced significantly to 21% from a peak of 39% in March 1992. This has resulted in debt service ratio improving from 27% in 1992 to 17% in 2002). As per Ministry of Finance Press Release India’s total external debt stock at end September 2008 stood at US $ 222.61 billion, which is marginally lower than the level of US $ 223.81 billion at end June 2008. The ratio of foreign exchange reserves to total external debt as at end September 2008 stood at a comfortable level of 128.6 per cent.

(Realizing the reversal in the Rs /US$ exchange rate Indian companies are today taking un-hedged US$ denominated loans.)The recent depreciation of the Rs on account some capital flight has given some jitters to such companies. In fact these companies have been lobbying to get teh accounting standards modified so that they will not have to show the marked-to-market losses in their annual report.:-)

Even infrastructure sector has improved in an encouraging fashion. The telecom cost which was one of the most expensive in the world has seen price reduction of more than 50% since the complete decontrol of this segment. Today in spite of recession it is one of the fastest growing segments in India and one of the most attractive by world standards. Roads and Ports are getting significant investment.

With so much to go for India is an excellent bet for investment in medium term. Although I have been in the Industry for a long time I am normally very conservative and very guarded. But I have very little reservation in being bullish on India in the near future.


Corporate India’s PAT to grow by 77.3% in 2009-10 - CMIE clarifies

CMIE expects aggregate profit after tax (PAT) of listed Indian corporates to rise by 77.3 per cent in 2009-10. This robust profit growth projection is based on the expectation of the petroleum products sector returning into profits from the March 2009 quarter. The losses incurred by the petroleum products sector had eaten away more than a third of the aggregate profits made by the rest of the Corporate India during April-December 2008. Benefiting from the fall in the crude oil prices, we expect the petroleum products sector to make net profits of Rs.11,225 crore in 2009-10 as against the net losses of Rs.56,533 crore estimated for 2008-09.

The aforementioned profit figures are exclusive of prior period and extra-ordinary income. CMIE always uses PAT figures exclusive of P&E as it enables meaningful inter-period comparison.

We have excluded Rs.60,967 crore received by the petroleum products companies during April- December 2008 from the government in the form of oil bonds. The oil bonds are not with respect to the sales made during the quarter in which they were received. It is a reimbursement of the loss suffered by the petroleum products companies.

We expect the petroleum products sector to show a major turnaround at the PAT (net of P&E) level in 2009-10. This will have a major bearing on the overall profit performance of Corporate India as the petroleum products sector contributes 25-30 per cent to the aggregate net sales.

Excluding the petroleum products sector, the rest of the Indian corporates (listed on Indian bourses) are expected to report a 22.7 per cent rise in aggregate PAT in 2009-10. The healthy order-book positions of the construction companies and the machinery companies are expected to help them report robust sales growth. Sharp rise in sales, softening of interest rates and fall in commodity prices, particularly metals are expected to help the construction and machinery sectors to report 40- 50 rise in PAT in 2009-10. A gamut of other sectors such as commercial vehicles, wires & cables, tyres & tubes, plastic products and polymers are also expected to benefit from the fall in input (commodity) prices and low interest rates.


Non-financial services such as hotels, health services and LNG storage & distribution are also expected to report over 20 per cent growth in PAT in 2009-10. The hotels sector witnessed a fall in income and PAT in the December 2008 quarter because of the fall in occupancy rate following the terror attack and slowdown in the global market.

We expect the sector to show an improvement in income and PAT growth in 2009-10 backed by improvement in occupancy and hike in room rates. Similarly, the health service sector is also expected to report a healthy growth in profits backed by capacity
additions and higher average revenue per customer. Doubling of capacity by Petronet LNG and the additional transmission volumes of gas from the KG basin of Reliance are expected to help the LNG storage & distribution sector report a healthy income growth in 2009-10. This coupled with the lower raw material prices is expected to help the sector to report a 47.4 per cent rise in PAT in 2009-10.

We expect the profit performance of the banking segment in 2009-10 also to be healthy. The sector is expected to report a 28.3 per cent rise in PAT owing to continuation of healthy over 20 per cent growth in credit, lower operating expenses and lower provisioning levels compared to 2008-09.

Finally, it is not unusual for Corporate India to report very high or very low profit growth. In 2002-03 and 2003-04, PAT had grown by 70.2 and 76.0 per cent, respectively. In 1994-95, PAT had more than doubled (104.2 per cent) in a single year.

Devastation of world financial markets - A case of Policy Reversals in India?

The economies around the world in the last few months are trying to adjust to the neutron bomb like devastation that downed many titans of the financial market and decimated large part of the forces, both officers and the foot soldiers, all around the world. We in India have also been caught the wake of this destruction and has been exposed to a fair share of misery ourselves. This experience has since raised questions from many as to whether this is a signal that the market economy too is a failure; like the failures of communism and planned economies in the last couple of decades. For a country like ours that is struggling out of the paralyzing hold of the planned economy, the lower impact this meltdown had on our economy naturally triggered these doubts. Fanning these worries are many who enjoyed the protective cocoons, of licenses and controls we had for practically each and every economic activity ranging from manufacturing to imports and exports, which ensured profit for few at the cost of many.

I am not an expert to assess the reasons and impact of the quake that shocked the financial world. But I couldn’t help pen few thoughts that come to my mind on the issues that are being discussed among my crowd of friends.

It is in the nature of market to see cycles of growth and creative destruction. During the cycles of growth we will see extensive rallies of innovations. Many of these innovations are meant to die. Like experimental mutations of evolutionary process. The environment around test these mutations and the ones that can survive these tests precede forward in the path of evolution. As Garry Hammel has explained in ‘Future of Management’, this is one lesson we need to learn from the evolutionary process if we want to build sustaining institutions.

Some time these innovations build a momentum that takes it to ridiculous heights. If we recall, similar enthusiasm and short term orientation resulted in blowup of about 65 billion dollars in the dotcom revolution. Internet then was a new idea opening up opportunities that were not dreamed. The matrices to measure the performance were just evolving. In the meantime there was much causality. Did the internet industry die? No. The right kind of models survived. In past most of these such bubbles were localized to industry and market. Whenever new technology or new product ideas have been identified, we have seen an immediate profusion of organizations that spring up to exploit this. Most of them die and few survive to become successful players in the market. Men with showels who ventured to prospect diamonds when new continents were discovered to the number companies which were set up to manufacture electrical machinery to computers are cases in point. How many have survived till today? Very Few.

What can control this runaway acceleration is healthy governance and stronger regulatory institutions to ensure that the innovations are good for the market as whole and not just for few people. Any game would need clear set of rules and an umpire who understands the game, its rules, its compulsions and who is fair. Else, greed or muscle power or fraud will rule the game.

In the last few years we saw out of balance developments in the market in comparison to the development in regulatory mechanisms. When complex financial engineering products were being structured and marketed the credit rating institutions who are supposed to signal the true risk associated with these products failed in their duty. The pull of the unhealthy incentive structure for these agencies (where their income was derived from companies whose products are being rated by these rating agencies) distanced them away from their fiduciary responsibility leading to ratings that failed to reflect the true risk which in turn lead to mis-allocation of funds.

When such ingenious financial engineering helped US sub-prime loans to reach un-sustainable levels the bubble broke. The mere scale and spread of infected assets across the market players suddenly came to light. That took away the trust that these institutions had among them; the trust that kept the money flow between these entities.

When the inter-institutional trust evaporated the absence of such well structured markets were exacerbated. This squeezed flow of money in the international money markets. The pumps that pressured the flow were no more primed sufficiently. It was this flow that provided the lubrication for the economy to work. And the sudden drying of the money market seized many of the moving parts of the real economy.

Financial markets can be compared to the circulatory system in a body (the other industry segments may be compared to different organs of the body). In an integrated world the infection in the circulatory system spread very fast and wide and it had its impact even in India although there has been no build up of toxic assets in India. The drying up of the western money markets added pressure on the international investors who had invested in India and the Indian corporate who had exposure to international money market which contributed to selling pressure in Indian stock market and a credit squeeze in Indian Money market.

Governments realized the magnitude of this disaster and the need for immediate action. They quarantined the infected, separated toxic assets and pumped in liquidity. Like the doctor taking series of actions to contain the infection and suggesting a life style of extreme moderation till recovery to normal health. It also suggested the need of disciplined life.

But this no way suggests the ossified existence of a vegetating economy with a permanent freeze on any innovation and experimentation. I don’t think the governments of US and Europe that came in with a bailout package, plan to permanently run these as nationalized institutions frozen permanently into a mummified existence. They wanted to contain the mess, doctor them to health and put them back to the competitive pressures of the evolution process. If we look a bit cynically, this is in a way similar to Buffet pumping funds to Goldman Sachs and buying controlling stake really cheap. I am sure both these parties are going to be better off from these transactions once the tide has turned and will not be saddled with unproductive and unresponsive companies to run. I am not suggesting that the intention of the interventions was profits; it was primarily stabilizing the rocking boat. But the process and the expected outcome is going to be similar.

The failure that we witnessed in the market and the governmental interventions even in the developed countries seem to spur pressure on the policy makers in our country to revert back to more government control of business. Let us for a second look back at what the prevailing situation was in our country before started our journey towards liberalized market economy.

The Indian manufacturing was protected from both internal and external competition. Import restrictions and high import tariffs protected them from external competition. The government licensing system, coupled with the MRTP removed any incentive for innovation or even providing quality product, customer service or improvement of product features. The history of our automotive industry is a classical case in point. India commenced production of motor cars in 1957 ; Toyota commenced production of cars in 1937 and Honda motor company of Japan commenced production of cars in 1963. For the next four decades we produced the same car, sold it at ridiculously high prices and the buyer had to wait for months after placing an order after paying an advance. In the meantime the Toyota and Honda established as world leaders in automotive industry. This is not something that was unique to automotive industry. Each and every Industry in our country from blades to cement to pharmaceuticals has the same story.

Banking and financial services industry was no better. Customers of the banks, instead of being serviced were made to feel like mendicants asking for alms. Stock market was a closed club of brokers with the interest of the investor always coming last.

What did it mean to Indian Economy? India was never regarded as place where anything was happening. The slow growth rate of around 3% was considered the characteristic Hindu rate of growth. The consumer had no options for any new products. The job opportunities were limited. Few connected industrialists made all the money by cornering licenses, sharing the booty with the political bosses who were also able to exploit this state of affairs by attracting the patronage of masses who were living in a world of shortages.

Since we gradually moved towards a liberalized economy we have now established ourselves as a place where things do happen. There is a feeling of widespread optimism that we are on a path of real development and not in a spiral of poverty.

Let the nostalgia or the convoluted interpretations of the happenings around blind us to the history. But let us use this as an opportunity to learn from these mistakes and strengthen our institutions so that the momentum we built is not extinguished.