governance, political economy, institutional development and economic regulation

jaitley dnaindia.com3  

(photo credit: http://www.dnaindia.com)

A cold Republic Day had FM Jaitley looking dapper under his stylish cap as he snuggled into his overcoat on a rain lashed Rajpath munched nuts and broodingly watched the parade go past.

PM MODI’s OFF-SWING

Was he fleshing out what he would say in his budget speech to the Indian Parliament just one month away?  Should he bowl a leg-spin veering sharply left towards equity or an off-swing veering right and towards growth? Around him, on its 66 Republic Day, Modi India was visibly exhilarated celebrating its “off-swing” to the right.

China, possibly stung by this sudden change of events, after the cozy, bon homie of the recent jhula swing on the banks of the Sabarmati, retorted by clasping Pakistan even tighter as an eternal friend. Meanwhile the Greek “loony left”, united with the “loony right” to aspire to become a sovereign debt defaulter with the rest of Southern Europe waiting to follow, should their anarchic tactic succeed.

SOVEREIGN DEBT STRATEGY

Avoiding payment by default is not a new strategy. Latin America similarly exploited the short memories of lenders with serial debt defaults.  In contrast Asia, in general and India, in particular, has been very puritanical about its debt obligations, never having defaulted even once in the last forty years, though we came close to it in 1991.

Whilst morally correct, it is unclear if this is a good fiscal strategy. Standard and Poors rates India sovereign debt BBB-, the same as Brazil (which defaulted thrice-1983, 1986 and 1990 in the last 40 years) and lower than Peru-BBB+ (which defaulted twice in 1980 and 1984). From this perspective, debt default is not about “prestige”, “national honour” or about financial rewards. It is merely a game of brinksmanship to be played with the market, if it serves us well.

Was FM Jaitley pondering the merits of doing a Latin America; borrowing recklessly to finance a populist, public investment binge, which “growth-wallahs” are crying themselves hoarse demanding?

Borrowing more is the “soft” option to reforming expenditure since tax collections have dipped. Our borrowing capacity for FY 2015-is limited by a Fiscal Deficit (FD) envelop of 3.8% of GDP, down from the target of 4.1% in the current year. Even the higher FD level severely constrained resources though this constraint remained hidden. The previous UPA-II government put so many non-fiscal barriers on investment-lengthy environmental approvals; land acquisition constraints and contractual inconsistencies which ensured that the project stream froze thereby avoiding additional cash outflows.

The present government is working overtime to unclog the pipes and clear payment arrears. These have built up over time but they do not show up in the budget. Unlike Indian companies, the government follows the “cash” and not the “accrual” accounting system. Both unpaid current liabilities and uncollected current assets are not accounted for in the annual budget. This loop hole enabled the previous government to “sell our future” by collecting arrears whilst falsely showing a robust budget allocation.

GROWTH AND INFLATION

Indian “growth-wallahs” are prepared to risk inflation if it means pushing growth to 7% from the 5.5% it is likely to record in the current year. But the trade off, at the margin, between growth, inflation and jobs is unclear. This is dangerous ground for those living on the edge.

Growth is just a meaningless number for the average citizen. Jobs are welcome of course. But we do not have a “jobs filter” that can assess competing investment.  We do not even measure changes in employment through the year. In comparison inflation is an everyday reality which the poor and the urban lower middle class have to battle with daily.

If there is a choice between growth and more inflation, the FM would be well advised to choose containing inflation to below 5% even at the cost of chugging along at a 6% growth level.

PUBLIC INVESTMENT IS HIGHLY INEFFICIENT

The real question is if the domestic and international private sector is unwilling to invest, as for example in Nuclear energy, how can it be desirable for public investment? Clearly, an unhelpful institutional context makes these investments into “lemons”. Unless the root causes of their unviability are addressed, such projects are neither good for the private nor the public sector.

Public investment stoked growth is strongly dependent on the efficiency of public expenditure and the avoidance of “pork”- gold plated projects which fail to provide social returns and jobs. Excessive investment in new renewable energy (a rapidly evolving technology) has precisely this risk.

NO BUBBLES PLEASE

Of course the stock markets will not be enthused by such fiscal caution. But who really gains from the irrational financial exuberance (or despair) of stock markets except a few savvy speculators with deep pockets- not all of them Indian either.

Real Estate is another sector which should be left to lag not lead growth. It is a safe haven for “black money” fed speculation. Five years of cheap money since 2009, high inflation and massive corruption are the drivers of the Indian realty bubble. We have to guard against such bubbles, which consume the savings of the middle class, as in Japan (1980 to 1990) and more recently in the US (2004 to 2012).

LOOKING BACK TO THE FUTURE

One stratagem to inject conservatism into the budget would be to project the FY 2015-16 budget on the growth and revenue numbers which were achieved in 2014-15.

Looking backwards to define the fiscal envelop will further constrict spending estimates. But this would be a useful, albeit unorthodox mechanism, to drive better collection of tax and non-tax revenues and contain “pork” in the spending estimates.

If there are “happy” surprises – revenue exceeding estimates or growth exceeding forecast levels, the surplus generated could be allocated to pre-defined schemes in a supplementary budget later in the fiscal year. Leaving something on the table is good strategy anyway to keep stakeholders engaged and responsive.

Our biggest worry is that populism will trump reason. Subsidies are the elephant in the room of fiscal responsibility. Rationalizing them has become a political hot potato with potentially high political costs. This is why reform needs to be both well timed and appropriately sequenced.

LIMITED REFORM WINDOW

FY 2015-16 is the only reform window available to India for the next four years. If we can’t do it now we never shall. The 2016-17 budget shall be populist since Bihar (2016), UP (2017) and then Rajasthan, Karnataka, Madhya Pradesh and Chhattisgarh go to the polls (2018) followed by National Elections in 2019.

Can we, for starters at least, legislate a cap on subsidies just as there is a medium term trend and cap on FD? We don’t know enough about the extent, substance, nature and social impact of subsidies. Why not make these aspects more explicit by changing the way in which we present the budget documents?

Two subsidy reform steps are immediately doable.

First, making petroleum prices market determined is a no-brainer in the present scenario of cheap energy. This will plug one gap in the subsidy envelop.

Second, rationalize agricultural subsidies which are provided through multiple mechanisms; assured purchase prices for cereals; cheap fertilizer; cheap power; cheap irrigation water; no tax on income and minimal tax on land. Despite these subsidies, rural wages remain low and migration to urban areas is the only options for landless workers and marginal land owners.

These subsidies have only served to create a class of elite “millionaire” farmers; a tiny fragment at the very tip of the 600 odd million strong farming community. Why not use it to better target the poor, rural folk instead? An additional advantage would be that the rural poor have a significant overlap with Dalits and Muslims, neither of which are part of the BJPs traditional support base.

Will FM Jaitley grasp the moment and push through reform or do we have to wait till 2020 for substantive change?

(Reposted from the Asian Age January 21- http://www.asianage.com/columnists/bjp-dials-100-bedi-rescue-021)

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(photocredit: sahilonline.org)

The DNA of Kiran Bedi and the Bharatiya Janata Party seem twinned at birth. Bolly-wood films thrive on the “masala” (formula) of twins separated at birth but reunited after an epic struggle with a happily tear-jerking end. The BJP and Ms Bedi finding each other after so long is real life imitating art.

For both, “discipline” comes with a capital D. They share a strong belief in the ability of large, efficient organisations to provide direction and in the efficacy of formal rules and regulations to manage society.

“Crane” Bedi could as well have been known as “danda” Bedi. Armed only with a wooden baton, she single-handedly charged at a bunch of unruly, sword-wielding Akali protesters in Delhi. The BJP is similarly admired for strong leadership and decisive action.

Kiran Didi mesmerises kids just as Mr Modi does. In both these leaders kids see a strong, stern but clear-headed “parent” with a consistent idea of what to do next and the ability to prescribe, what seems to be, a winning game plan. They have a common bias for acronyms (Kiran Didi’s 6Ps — police, prisons, prosecution, people, parents and press — compete with Mr Modi’s 3Ds — democracy, demography and demand) and a shared communication style of keeping the message simple: Hard work, discipline, steadfast goals and an alert mind ready to grab any opportunity being the mantra for advancement.

Business people, Punjabi refugees, professionals, the “sarkari” middle class and all those with a stake in preserving the status quo form the core urban constituency of the BJP in Delhi. They all look on Kiran Didi with approval. She is a Punjabi herself; a self-made professional who strove to excel at whatever she did and ensured that she got recognised for her achievements. Professional aggression, ambition and, above everything else, success, is what this core constituency adores. These attributes Ms Bedi has in plenty.

Given more time, Ms Bedi could have consolidated the woman vote behind her. She is today a mélange of what many young girls dream to be a mother, a successful government officer, an outspoken social activist, a TV personality, a politician and, implicitly, very much part of the Delhi elite.

But time is scarce with barely three weeks to go for the polls on February 7, 2015. Indeed, the fact that time was running out is what induced the unorthodox induction of a “rank outsider” into the BJP, ostensibly to lead the campaign and, possibly, eventually become the chief minister. Galling as it must be for Mr Modi that his name was not enough to pull in votes in Delhi, the fact is that the BJP must look at systematic dispersal of power and responsibility if they are to win in Bihar and later in Uttar Pradesh.

This, in fact, is the way it has been thus far. BJP chief ministers in Madhya Pradesh, Rajasthan, Chhattisgarh or Maharashtra do not view themselves as subordinate to the Prime Minister, at least not yet and certainly not in the manner the hapless, erstwhile Congress chief ministers were with regard to Sonia Gandhi.

The induction of Kiran Didi should also be read as a sign that Mr Modi is not averse to modernising the BJP and aggressively broad-basing its membership beyond the rather obscure agenda of the Sangh. Mr Modi seems to be working towards reinventing the BJP as a party of the right, committed to small government functioning on the P4S principle of private sector-led growth, security, sustainability, social protection and passive secularism.

Both the BJP and the Aam Aadmi Party have their core support base intact in Delhi. It is the direction of swing in the erstwhile Congress supporters — Poorvanchali migrants, scheduled caste, scheduled tribes and the Muslims which will determine the vote change this time around.

Ms Bedi’s induction into the BJP is a game changer because, first, she has the star appeal and freshness to attract the middle class supporters of the AAP who were disappointed with Arvind Kejriwal’s reluctance to rule in 2013 and in whose eyes Mr Kejriwal became an opportunistic quitter. Many were coming around to the idea of giving him a second chance rather than support a “traditional party” like the BJP. Now they see in Ms Bedi an alternative, the manifestation of a “new” BJP just as AAP was in 2013.

Second, Ms Bedi shall attract the wavering, non-Muslim Congress supporters who are rudderless today with the demise of the Delhi Congress. For aspirational women and the educated professional, Ms Bedi’s BJP seems to be the true inheritor of the Congress’ erstwhile mantle of stability and development which kept it in power for 15 long years (1998-2013).

Third, the BJP’s core base is unlikely to reject the “outsider” Ms Bedi who exudes success and brims with optimism. Too much is made of the disaffection of the old-time Delhi BJP leaders. These are long-term political players, honed in the Sangh’s discipline to never break ranks. In any case, they can easily be assured that Ms Bedi is only “transiting” through Delhi to enter the national government, where she would get more traction. Police, land and housing in Delhi are all dealt with by the Union government. In fact, the Delhi government is more like an empowered metropolitan authority rather that an Indian state.

With the Congress in decline, Delhi elections are a face-off between the BJP and the AAP. The AAP 2013 phenomenon was a unique convergence of the middle class and Delhi’s “underbelly” votes. But even this coalition was not sufficient to get AAP a clear majority. This time around the AAP will be boosted by significant Muslim support which earlier kept the Congress in power. But even within the AAP’s core support base they will have to contend with Ms Bedi attracting women voters.

Ms Bedi is a powerful role model and a convincing administrator to assure the empowerment of women and their protection, not least because of her linkages with the police.

If Kiran Didi can project herself as the “face” of the “new BJP” — forward-looking, effective, gender sensitive, socially progressive, honest and committed to equitable development — she may well nudge the BJP towards forming the government in Delhi.

The Bedi baan (arrow) unleashed by Mr Modi is sure to give sleepless nights to “King Kejriwal” as he trawls the slums of Delhi to keep his flock intact.

sadhu

(photo credit: freepik.com)

There are three reasons why the AAP shall succeed in holding off a BJP government in Delhi.

BICKERING IN THE DELHI BJP

First, the debilitated state of the Delhi BJP unit for which the malfunctioning mike at PM Modi’s election rally on January 10, 2014 was an apt metaphor. PM Modi or his alter ego Amit Shah have not had the mind space to redress what ails it: intra-fighting, lackluster leadership and just sheer inefficiency. These short-comings do not go unnoticed by the demanding and discerning BJP supporters in Delhi. They showed how lukewarm they were during PM Modi’s recent 10th January election rally in sharp contrast to the upbeat mood, way back in March 2014, when Modi first rode into Delhi as the BJPs PM candidate.

In contrast Kejriwal and his team are a chastened lot- apologetic about their earlier blunders; better honed for politics; eager to please and reach out to Delhi voters with a campaign strategy of individualized and personal interaction and long term relationship building which appeals instantly. With the Congress in retreat and tacitly backing AAP-their ideological ally- an AAP surge is certain.

SAFFRON SELF GOAL

Second, the aggressive Hindutva campaign and the indiscipline of the saffron clad BJP ranks, who frankly sound like they belong in the 18th century, with their calls for increasing the production of Hindu babies; a return to the “traditional” subservient role of women in Hindu families and the obsession with religion. India is a religious country and most Indians believe in God and practice a faith. But we do not want to impose our faith on others. Nor do we want others to impose theirs on us. Mutual respect with complete freedom of choice for believers is the Indian social mantra of long standing. All faiths proselytize. But it does not have to be done in a grandstanding and confrontationist manner designed to make headline news. True and efficient Missionaries do not try and get brownie points by advertising what they do.

Departing from the development script immediately risks losing the minority- read Muslim 12% and Christian 1%- vote entirely and alienating intellectuals, secularists and educated, aspirational women and a large segment of the upwardly mobile youth. This is the “self-goal” that the saffron clad leaders of the BJP have scored.

Some also read into this irrational indiscipline of the saffron clad crowd, the invisible hand of the wise men in Nagpur- the RSS.  PM Modi is very much his own man and not the typical RSS acolyte who will allow fuzzy theology to trump real achievements or threaten medium-term National objectives. His agenda is clearly development and this is what got him votes in the 2014 national agenda. He has gone from strength to strength and in the space of a mere one year, has become the sole voice of the BJP/RSS. Nagpur could not have liked that.

More importantly, those, over whose heads PM Modi elevated himself, have an axe to grind and an incentive to undermine him. Ensuring the BJP loses the Delhi poll aligns with this perverse objective.

MISALIGNED AGENDA

Third, the BJP has not reduced its image handicap of being perceived as the party of the rich. The erstwhile refuge of the poor-the Congress- has slipped into oblivion and that mantle has squarely been grabbed by Kejriwal. But it is not just a matter of perception.

The poor-the foot path vendor, small shop keepers, “auto” drivers, retired folk and Dalits (25% population) remember with nostalgia, the short reign of Kejriwal when he cracked down on the widespread petty corruption at the public interface level. In contrast the over 200 days of indirect governance by the BJP Union Government has seen an upsurge in petty corruption and disregard for the poor and the powerless in the Police, the Public Service Departments and the Municipal Corporation.

WHY SHOULD BJP CARE?

How big a blow will it be for the BJP to lose Delhi? Far from bemoaning this outcome the BJP should want to lose this election. There are three reasons for this contrarian view.

First, AAP is likely, at the very least, to be the main and significant opposition. The BJP will be hard put to keep up with the forensic oversight the AAP would unleash on the functioning of a BJP government in Delhi unless the Delhi unit is completely revamped. There is little chance of this happening since too much political capital needs to be invested for this with meagre political returns. This helplessness is best demonstrated by the inability of the BJP to reform the three Municipal Corporations it controls in Delhi. Hence the BJP has very little upside to lose in Delhi.

Second, an AAP government is likely to have the very same limitations it had when it last came to power; an uncooperative National Government controlling both the Police and Urban Development. Delhi is thirsting for more water but with a BJP government in Haryana (the source of additional supply) and a BJP National Government, an AAP government in Delhi will get no help in getting additional supplies. This indicates an AAP government is likely to underperform versus people’s expectations. So best to give them a long rope with which to hang themselves conclusively.

Third, PM Modi’s “A” team (Arun Jaitley-FM and Rajnath Singh-Home Minister) is getting awfully stretched. Big political battles are around the corner; Bihar end 2015 and UP a year later. There is also the job of getting on with routine governance; the nuts and bolts of managing the pipes that deliver public interest outcomes like investment; growth and jobs. Managing Delhi is a distraction the BJP could do without.

Of course the BJP does not have it in its DNA to take the low profile, strategic, sustainable path. Their forte is the “shock and awe” tactic. The focus is very much on glossy, big ticket items: grand new schemes and projects; a “strong Rupee; soaring stock markets; clever IT apps; outstanding oratory and a one-headline-a-day frenetic outreach schedule.

Time for the BJP to do a huddle and think its Delhi election strategy through. Having recently won the war (National Elections), losing a skirmish (Delhi) is ok if it results in winning the battle (Bihar & UP) to follow.

Indian bus

(Photo Credit: www,m,inmagine.com)

For the French, “culture” is everything. It encompasses the language one speaks –French of course-; the food one eats-mildewed “blue” cheese; the wines one imbibes and the best of fashion. One Just has to compare the tres chic Christine Lagard-Managing Director of the International Monetary Fund with the practical, stodgy Mrs. Angela Merkel, Chancellor of Germany, to  visualize why France was so very different from the rest of Europe.

The idea of “one culture, one people” was peddled by France across its colonies, particularly in West and North Africa to create vast populations who, “in their heads”, were French, not African or Arab. Macaulay’s Minute (1835) did the same in India, except that British “Shepherd’s Pie and warm Beer doesn’t have quite the appeal as French cuisine.  No surprise then that in a cruel twist of fate Asian “curry” is the favorite British dish today. This would not have been possible in France.

French culture is emotively attractive. English has to be bit into-like a tough roast- to speak it but one has to swim languorously into French to speak it well. Listen to the French song “je t’aime”; a duet written by Serge Gainsbourg and immortalized by the Goddess of sensuousness- Brigitte Bardot in 1967. Compare this with the somber notes of Don McLean’s “And I love you so” and you will feel the difference between the cold Anglo Saxons and the emotive French.

The French, including the French co-optees- are a warm and loving people with their heads full of wooly, socialist ideals of Liberty, Equality and Fraternity. Of course all these ideals are bounded by a narrow regard for “French culture”. Take the case of dress codes. Muslims, who increasingly regard the “hijab” as an Islamic symbol, were not permitted to wear one in public. It is just as difficult to break through the French tradition of a large and inefficient public sector and taciturn trade unions- though we in India could give them a run for their money in this aspect.

Many nations, including the US and India, borrowed the ideals of the French Revolution 1789 but all applied them in a practical manner. Slogans like “we are all one World” sound great in a hippy hangout but are impossible to implement. End goals like Equality are just that. They define a glorious possibility but can never reflect the cruel, everyday reality of power hungry elites, patrimony and dissimilar endowments, as it exists everywhere in world.

The killings in Paris are being explained away as caused by religious, ethnic or economic cleavages. All of the above or any one of these could have been the immediate reason for the killings. But what they have laid bare is that the basic underlying assumption in France that one culture can laminate over all other cleavages is a lie.

A common culture is not enough of a glue to paper over the growing gaps between immigrants and insiders; white and the others; the Muslims (10% of the population) and the majority Christian faith; the educated and aspirational and the hopelessly poor and forgotten. Even Communist China has spectacularly failed in elevating the God of Communist Nationalism as a substitute for religion or ethnicity. This is despite the assistance of State machinery which is at its best in very heavy handed policing.  But a Common Culture is surely anathema alongside a belief in Liberty, Equality and Fraternity.

Our deepest sympathies are of course with the French for what has come to pass to their beautiful country. But no Indian can resist the deep sense of relief that despite our poverty; our widespread illiteracy; our linguistic, ethnic, cultural and religious heterogeneity we as Indians have hung together fairly well in relative terms.

This is not to say that minority rights are well protected in India. Nor do we hold that India has done well by its marginalized populations. But for a relatively new State and a less developed economy with deep rooted traditional cleavages, it is a remarkable achievement that we are bound ever tighter by our non-traditional beliefs in democracy; equity in access to public opportunities and freedom of choice in all aspects of life.

India has weathered violence more extreme, that seen in France recently, despite it being directly as viciously and specifically at a particular sect; religion or ethnicity. The reasons why we have managed to do so are ironical.

First, a weak State can be an asset. Unlike France we were never able to become a “Nanny State”. Every Indian knows that if she or her extended family does not look after themselves no one else will step in-least of all the State. This lack of an efficient, impersonalized, State provided social protection is cruel for the poor. But the consequential, pervasive, economic pressure of constantly working to make two ends meet keeps us on our toes. The desperation to keep working reduces the availability of idle human fodder to perpetrate the kind of terror in Paris.  The downside is the magnified roles local elites play in shaping opinion due to their economic and political clout.

Second, Indians happily accept that all 1240 million of us we are NOT one big happy family with a common culture. No Indian wants a common, Pan-Indian culture. Indians are used to living and working in an aggressively antagonistic, “non-localized environment”. The French in contrast are more molly coddled and less “internationalized” than us. 25% of Indians do not live in the place they were born and large scale migration is a fact. 2% of Indians live in foreign countries. We have assimilated and adapted to invaders, foreign conquerors and traders over the last 1000 years.

So let’s take heed of what has happened in France and the failure of the “one culture” project of the French. The world is too open; too complex and too integrated today for seeking “autarkic” options.

Culling our traditions to get options for the future is sensible but must have the caution that our greatest tradition has been of keeping our windows open, not tightly shut and making space for anyone wanting to clamber onto the “bus”, which is India.

old man

(photo credit: http://www.gettyimages.com)

For the small, timid investor and retirees, Provident Funds and Postal Savings were the investment vehicles of choice till 2000. Interest rate liberalization resulted in a progressive decrease in interest levels on long term deposits from 12% to 8.5% per annum.

The reform was sensible. Government could not afford to subsidize the growing gap between what Provident Funds assured investors and what they earned from investments-mostly in Government debt. This strategy also aligned with the objective of growing stock markets by incentivizing small investors to divert their savings to equity.

THE AGED BORE THE BRUNT OF INTEREST RATE REFORM

What the government forgot or disregarded, was that fixed return investments are the natural and appropriate choice for the aged, small investor, who treasures liquidity; safety and simplicity in transactions; characteristics typical of deposits and debt investments. Not everyone can be like Warren Buffet-the Sage of Omaha, who remains an equities guru, at age 83.

Consequently the negative impact of financial reforms has been borne by those who were least capable of doing so- the aged, retiree without an inflation indexed pension. There were two reasons why this happened.

First, high inflation, higher than the nominal interest earned, has reduced “real (inflation adjusted)” returns from interest to negative. If the interest earned is 8% per annum whilst retail inflation is 9% per annum, the investor is earning no “real” return at all. Instead she is paying an “implicit”, additional 1% on her investment to the government as “Inflation Tax”

Second, even on such negative real return, “explicit” income tax is levied at the applicable rate on the nominal return further reducing the real return to the investor and enhancing the “Inflation Tax” paid to the government.

What hurts even more is that dividend income is tax free but interest is taxed. There is a theoretical logic to this asymmetry. Dividends are paid out of the post-tax profit of a corporate. Since tax has already been paid by the corporate, on this value stream, it need not be paid again by the shareholder. Unlike dividend, interest paid by a corporate to a depositor is a “cost” and is set-off against revenue to reduce its taxable profit. Since no tax is paid by the corporate on this value stream the taxman is right to charge tax on interest in the hands of the receiver

Notwithstanding the soundness of this general principle, a solid case exits for exempting interest from income tax.

First, timid, small savers, particularly the aged, have no alternative financial instruments for investing their savings.

Financial pundits may counter that such investors should invest in the risk averaging, Mutual Funds available in the market. But Mutual Funds (MF) themselves tend to shift from equity into debt based investments in a stock market downturn, as happened during 2008 to 2013 (SEBI Annual Report 2013-14). After deducting administration costs, the returns available to MF investors, are not significantly higher that what they could get themselves from deposits.

It does not help that the Indian Stock Market, like other emerging markets, is highly volatile. In 2013 volatility in the Indian stock market was 17% as compared to 11% for the DOW and 12% for the FTSE (Bloomberg-2014). Volatility dissuades aged, timid, small savers from such stock market based instruments, since they have a strong preference for certainty of nominal return.

Second, Inflation management in an open, developing economy, hugely dependent on energy import is tricky. Our record, whilst much better than Latin America, is nevertheless worrisome for an aged person dependent on a fixed income. The government has demurred in offering inflation indexed, real interest rate, saving instruments for retail investors. Possibly the financial risks associated in offering such an investment are considered too high. How then can one expect an aged retiree to bear the inflation risk?

NARROWLY TARGETED TAX BENEFITS

Clearly, the universe of aged Indians are not all under privileged or timid or naïve investors. The cynical could well ask why should the likes of Rahul Bajaj- the illustrious, Indian industrialist, age 76 need special exemptions on interest income or for that matter senior government pensioners or retired senior employees of the formal private sector.

We hold no brief for them since they can look after themselves. In any case it is unlikely that this set allocates a significant proportion of their savings to fixed return deposits. They don’t need to since they have their inflation indexed pensions as a fall back.

Our plea is for the junior level retirees from the formal sector and all retirees from the informal sector. Assuming that 90% of the 62 million aged (5% of population above the age of 65-2011 census) are retirees from informal employment and further assuming that 30% of these-mostly in urban areas- have no income other than from savings, the target beneficiaries would be around 17 million aged people.  Most of these may not even be income tax payees. Those who are taxable would probably pay tax at the lowest tax bracket of 10%.

Consequently, the exemption is narrowly targeted at the deserving and is unlikely to result in significant loss of tax revenue.

POLITICALY CORRECT

There is widespread expectation that the FM would raise the tax free income level from Rs 3 Lakh (for senior citizens) towards Rs 5 Lakhs per year. This is a welcome but generalized benefit and not a specific benefit for the 17 million aged, lower middle class, urban retirees – all of whom are voters.

The BJP has been unfairly targeted for being tardy on social protection. The 2014 national election generated heated debate between “callous growth” and “virtuous equity”- a falsely projected zero-sum choice.

Expectedly, the FM will seek to correct this impression in the 2015 budget. But it is tough to implement efficient social protection schemes on a tight budget. Even efficient, rich, developed economies struggle to walk the thin line between providing perverse incentives to beneficiaries to become economic drop-outs and ensuring the adequacy of social security.

In the meantime, please Mr. FM, spare a thought for the average, pension-less, retiree from the informal sector. Save her from the perils of sinking her savings in unregulated “high return chit funds” in desperation, just to make her two ends meet. Exempting interest earned by individuals from Income Tax is a good way of doing this. There is no better “win-win” than this.

sheru1

Hello. My name is Sheru and I am 14 months old. I’ve learnt an awful lot since I was born and feel like an adult.

I never knew my father but my “uncles” were pretty supportive and protective. My mother was highly wired and plagued by traumas. But I loved her and would never have left her had I not been kidnapped.

I was one of six siblings. We were forced to huddle like monkeys for warmth because I was born during the winter month of November 2014 to a poor family in New Delhi. I have fuzzy memories of people saying that I was born on chacha Nehru’s birthday (November 14) and was blessed with a great future.

We were never short of food. My mother was a poor provider but the people around us really pitched in. They fed us milk, chawal (rice), dal (lentil) and biscuits. I liked biscuits the best. To this day the crackle of a polythene cover makes me drool.

One young woman was particularly fond of me. I think of her as my surrogate mother. She lived nearby and we would wait impatiently for her daily visits. She always brought something we needed. A mattress; a soft woolen shawl to burrow into and sometimes delicacies, like chopped liver. But far more than food, it was her warmth and her love for us, which I remember.

One month passed in this happy manner. We played outside when the Sun was up but stayed safely inside when it was cold or over-cast. Our mother and instinct taught us to be wary of three sources of danger- unfamiliar adults; huge machines which thundered along on the road outside our home and the people who lived in the houses around us and disliked the mess our potty, albeit insignificant, made to the clean surroundings.

It became colder as dreary and grey December wore on. It was becoming difficult to live life in the open. One day we woke up to find one sibling had quietly thrown in the towel. I hope she gets reborn some place better. Two weeks on and another sibling got crushed by a steel monster, whilst crossing the road. We were too scared even to go and check on him but he must have died instantly. It was becoming so hopeless that we almost envied the ones who died. When you are down and out, any change is better than the agony of the present.

I was getting bigger but also more depressed as I began understanding the bad cards life had dealt me. My “home” was a pipe which became a river when it rained and we had to struggle out of the way of the gushing water to survive.

We had to constantly try to remain invisible. The people who lived around us treasured their privacy and did not encourage others to occupy the spaces they owned. This is also why I became addicted to the night life- that was when the streets were empty and the houses dark and quiet leaving us free to roam. This was also when I watched adults moving about in packs which have a very strict hierarchy based on merit- mainly the ability to overawe and out-fight the next contender.

I was settling into a routine. 1 PM to 6PM was my sleep time followed by foraging for food till 12 PM by when the adults took over the streets. Sleep till 9 AM and then look for food helpfully offered by some kindly people, who spent their day, sitting next to the gates of the big houses around us. Shanker was my favourite. He often shared a sweet tasting delicacy with us. He said it came straight from God.  I have a sweet tooth till today courtesy Shanker. He was quite old and was respected by those around him too who called him Guard ji. Legend has it that he had shot people in cold blood. But it was unclear whether this was a dacoit in ravines of Chambal or after he joined the police. He carried a huge double barreled shot gun to prove his credentials. I felt safe around him and he liked me too, because I would watch out for people coming out or going through the gate next to him whilst he slept fitfully.

My early depression was passing with every new day as I slowly adjusted to my life; the environment and the people around me. I was also becoming the guardian of my remaining three siblings. My mother had almost given up on us. My siblings were timid and remained smaller than me, since I got to the food first every time. Was I selfish? Possibly, but I had to be strong since I guarded the entrance of our home from intruders and was the first in line with my siblings huddled behind me.

I didn’t know it then but big changes were in store for me. Shanker had told me that God would look after me.  So I was hopeful that things would turn out alright. But when the change came I was taken by surprise.  (to be continued)

Auld Lang Syne

New Year

The Scots are a practical people. What’s done is done and best forgot albeit with a tipple. If only we Indian’s were as straight thinking, life would be easier. Why waste time worrying about the past when you have a lifetime ahead of you.

Of course Historians hate this approach since it does them out of butter and bread. Economists love it because memory loss ensures no one can identify how many times they got it wrong in the past.

As we head into 2015 for India it is most certainly time to forget. PM Modi has initiated a dual agenda. One which encourages us to forget our past cynicism and pessimism, dream big and work hard to realize the dream. The other is an agenda which cuts deeply at the strings which still tie us to the past; an immediate past of farcical socialism; a recent past of colonial subjugation and a more distant past of foreign invasions.

But it is difficult to forget selectively. The modern mind is so stressed and overloaded that blunt instructions work best. The “forget the past” strategy risks deleting the entire cache of history we have to our credit.

India is a composite of everything which has happened in the last 5000 years – some of it is fact and a lot is legend, myth and fables. Communist China adopted the “forget the past” strategy to forge a new national consciousness. The question is now being asked what is it all about really as China descends from the clouds of collective achievement to the reality of slowing growth, civil stress, corruption, mis-governance and the conundrum of choosing between discipline – the “old economy” driver and innovation – the basis for growth in an open economy.

But forgetting selectively has its problems. The mind is free to roam and no one can prescribe what people will remember and what they will forget. This is especially tricky in relatively new and heterogeneous countries like India where groups have a past of antagonism. Best then to forget wholesale and move on via a Truth and Reconciliation process.

There is some indication this is happening. The likely PDP-BJP link up in Kashmir to form the new government is the most recent example where pragmatism is trumping ideology and past political battles.

The warming overtones in the relationship between PM Modi and President Obama on the one hand and the warmth between him and President Putin are similar signs of putting the past behind us.

More of this bon homie would be visible domestically if the BJP recognizes that they have been voted into power for five years and their primary responsibility during this period is to deliver what they promised. Ensuring that they get another five years is a secondary goal and not the primary one. This is not merely rhetorical. Choices are being made every day between the two objectives. If the BJP chooses its longevity in office over delivery, how then would it be different from the “dynasties” it seeks to replace?

The good news is that the choice is simpler for the BJP than others. Voters perceive it as the party which delivers so that is the objective it should maximize. Of course in politics there is no guarantee of success. But following the “dharma” is at least as important as the results.

India is blessed. There can be no other explanation why we have remained a growing economy and a vibrant democracy when so many other countries have gone under. Much of this is because of the quality of our people and our institutions but a significant amount of credit must also be given to our leaders, present and past, all of whom did what they could in public interest.

So as the magic hour nears and 2014 fades into 2015 lets follow the Scots and fleetingly, remember old times and acquaintances, for we are nothing but a collage of everything they made us become.

PM Modi “let it be”

mother mary

PM Modi should consider listening to the “words of wisdom” in the famous 1970 Beatles hit –“Let it be”.

Of course in this cruel results centric world of ours, only those who get going fast and hard survive. But there are virtues also to sometimes take a call and just let things be.

Take for instance the manner in which BJP is keeping up the electoral rhetoric. Amit Shah the BJP President is everywhere exhorting voters in Bengali and Tamil to vote BJP. The adoption of “shock and awe” tactics- the use of such overpowering force that it leaves the enemy convinced that defeat is certain and thereby demoralizes them- is useful especially since the BJP is adept at using technology and has “Sangh boots” on the ground to realize this tactic in real life. Such tactics may work, but not against an extremely well organized and determined enemy- like the Afghans or Kejriwal.

In fact Kejriwal would welcome the adoption of the tactic in Delhi to magnify his underdog status and “David versus Goliath” effect. Ironically, in Delhi the BJP is painting Kejriwal as the “shock and awe” man with an Rs 100 crore election budget. Be that as it may but Kejriwal’s electoral base amongst the poor and the Muslims seems intact and he will give the BJP a rum fight.

The real question, is should PM Modi bother about Kejriwal? Some fights are best lost. After all India would lose its democratic plurality if every Indian state government from Kashmir to Kanyakumari became saffron-the BJP colours.

A ceaseless election rhetoric also has the downside that it does not allow the adversarial environment to cool down for the business of governance to commence. This the BJP can ill afford since it has built its election agenda around performance and shall be judged accordingly.

If Parliament cannot function harmoniously; if state governments get deadlocked in confrontation with the center, the development agenda, the BJP so desperately needs to implement, will remain just good intentions and plans.

The dilemma confronting the PM is starkly outlined by the Mid Term Economic Analysis 2014-15, the first document authored by the new Economics team in the Ministry of Finance, headed by Arvind Subramanian.

The Analysis notes that all through the period 2007 to 2010 it is private investment which led growth. It acknowledges that private investment has dried up. Corporates are deep in debt- partly due to their own greed in lapping up cheap debt because all through this period, inflation rates exceeded interest rates making it a no brainer to access debt- but also because investments have not resulted in revenues and remain locked in incomplete projects bedeviled by land unavailability; fuel shortages; contractual disputes; scams; and hold up in environmental approvals.

Rapid institutional reform (the underpinnings of good governance) could attract private investment for growth but the Analysis is starkly honest and pessimistic about the possibility of institutional reforms in the near term.  Apparently the PPP model is “broken” and cannot be fixed in the near term. Ergo the only available, albeit second best option, is to pump up public investment to compensate and hope to kick start private investments.

The efficacy of a public finance led growth option is not the topic of this post. The dangers are well known. No amount of public finance can fix a “broken” system. The more we rely on public finance led investment; national champions and a necessarily interventionist government; the deeper we slide into the morass of mega scams; gold plated projects; monopolies; tariff walls to “nurture” the consequential white elephants built using public finance and a further erosion of state credibility. This is exactly what the opposition wants to happen, so PM Modi should beware.

Political nirvana lies in sticking to the path the PM propounded when the country voted for him.

First, work doggedly to reform institutions in the near term. The near term is not as near as the next budget in February 2015, it is till end 2015 by when election fever will grip Bihar and then Uttar Pradesh. This can be done by building a team of selected state governments, the higher judiciary, Parliament and the trade unions all working to a minimalist institutional reform plan, which stops at causing unbearable (and uncompensated) pain to any one actor. That is the essence of democracy.

Second, PM Modi should rise above the metric of stock market numbers. What matters to him is an improvement in the lives of the average voter.  These are not people who live or die by what is happening on Dalal Street. Stick to the “micro economic” problem of making their lives better and here we have a problem. The ongoing deflation (reduction) in rural wages, as the Analysis maps, is not a desirable outcome for the poor, especially in an environment in which government servants are 100% inflation indexed.

But above all the PM has a political choice to make. Is it better for the BJP to continue to hog headlines via an adversarial electoral agenda or reserve the “shock and awe” effect for later in 2015 when preparations for Bihar and then Uttar Pradesh elections kick-in?

He would be well advised, in these troubled times, to “listen to Mother Mary and let it be”.

(This blog is dedicated to my Grand Nephew Angad Ahluwalia, age 6, whose favourite song is “Let it Be” and whose current ambition is to be a Lead Guitarist in a band.)

fossilfree

(photo credit: http://www.occup.now.com)

Climate change took the world by storm in 1995 –two decades ago in Berlin- with the 1997 Kyoto “club of doom” postulating devastation if carbon emissions- primarily from the use of fossil energy- were not reduced.

The previous such “natural resources” doomsday club of scientists was the “Club of Rome”, which famously predicted in 1972 that oil would run out in in their life time. Some of them may still be around to ponder the recent historic reduction in oil prices, courtesy new age shale-oil development in the US.

In between, as the global doomsday industry gained strength in 1994, it predicted the “next war” would be over water shortages. Peter Gliecks, Pacific Institute<www.worldwater.org> faithfully features a list of over 400 water related conflicts since 3000 BC of which 219 happened post 1992. But the list is underwhelming. It includes every conflict with a “water” hash tag in it, none of which are of grave significance.

Take the case of water hungry Egypt, which has not gone to war against the nine other Nile basin countries upstream. Instead it was torn apart by a war against its own despot, propped up by the army. A far more worthwhile endeavor but infinitely more difficult, especially since no one organizes meeting in glitzy South American capitals, over Pina Coladas, for people who are fighting their own tyrants. The brouhaha over water related conflicts seems oversold.

Climate change-science or voodoo

Some scientists, not too many though, hold that the Climate Change science and predictions of doom are similarly dodgy. To believe that a 2 degree Celsius temperature increase is a red line the world must not cross and that the way to do that is by reducing carbon emissions, is very much like an article of faith.

Lay persons, like me, unable to understand the science, are not inclined to pay for avoiding global warming. The average citizen reaches for her wallet only after triangulating dire scientific predictions with her own experience to validate the “scientific” view.

After all we see a volte-face by “science” almost daily, diluting the credibility of science to change human behavior. Take the changing scientific view on (a) the usefulness of eggs as a food (b) Marijuana as an injurious relaxant (c) the amount of fat we should ingest (d) the virtues of jogging (e) data security levels in the cloud and social media apps to name just a few. Science, of the public goods kind, loses credibility every day because it can be secretly manipulated to set self- serving international agendas.

I spend a fair amount of time in the Ranikhet-Almora area of the Kumaon hills (in the State of Uttrakhand, India). Over the last two decades, the prevailing sentiment about the state of the local environment, was of doom and despair – all ascribed to the inevitable consequences of global-warming. Apples, a staple harvest two decades ago, had stopped growing as the volume of snowfall declined and ceased altogether below around 7000 feet.

Call it coincidence, a miracle, or an exception which proves the rule, but over the last three years snow has returned after a gap of 15 years to Dhamas-Khunt village, situated at a height of only 5600 feet and this year it is 4 inches deep already. No one there will attend a global warming seminar today, trudging through the snow underfoot, unless they are paid to do so.

The rich are tech savvy and green

Global problems and prescriptions have merit of course, as does a consistent process of trying to optimize solutions. But it is hard to disentangle global slogans from genuine problems and even harder to assess solutions.

PM Indira Gandhi famously said in the 1972 Stockholm Conference that “poverty” is the biggest polluter. She was not quite right, but made her point tellingly. The Planet has been degraded by the rich as the Climate Change science illustrates. In fact it is the patience and resilience of the poor that has enabled the rich to free ride on their environmental passivity.

If everyone on this Planet consumed at least as much energy as the minimum per capita energy consumption in the rich world, we could already be in the midst of an ecological disaster.

Access to technology, is at the heart of both becoming rich and being able to be environmentally correct. Had the rich world been willing to bear the pain caused by their environment degrading, industrial success they could have junked older, polluting technology; rapidly replaced it with “clean” energy technologies and started using them domestically to provide the scale effect to drive down costs internationally.

Risk averse and rich, Germany junked Nuclear Energy post the Fukushima Nuclear disaster. But not-as-well-off France, next door, continues to rely on Nuclear power.

More importantly it is utopian to expect rich, foreign governments to behave differently from the rich citizens in our own country.

Walk the talk

The way ahead for India is to stop the perpetual, sequential, sabre rattling, whimpering and whining we do in international fora and derive false pride in having thus “led” the developing country agenda. Let us implement, domestically, the environmental governance regime we want to see internationally. We can do this by stopping “environmental free riding”.

Why not have a national “Environmental Sin Cess (ESC)”. Those with a yen for acronyms will not miss that ESC is the button you press on your keyboard when you have got your computer into a mess.

The ESC could be in the nature of a “user charge”, levied on the electricity consumed by high-end domestic consumers only so as to insulate business and the poor from any inflationary impact. A similar tax could be levied on the supply of petroleum products to states and 1 million plus cities, which have higher than the national average per capita consumption of petro products. Building in progressivity could distinguish between states consuming marginally more than the national average and those at the very top end. State level regulators would be expected to pass through the tax to the targeted consumers.

This cost disincentive for committing “environmental sin” could drive behavior change in consumers. Cynics would say higher taxes never stopped smoking or drinking. The difference is that unlike cigarettes or alcohol there are substitutes available for fossil fuel based services, albeit not as cheap nor as convenient; energy efficient transportation, lighting and climate control services or applications or those powered by green energy: riding on a bus instead of driving; cycling or walking rather than riding or driving; LED bulbs for lighting; movement and heat sensitive switches; solar electric cars, scooters and pumps; solar heaters and air conditioners.

The tax collected should be corralled in a special account to avoid it from being drained by government expense. It could be managed by a new, independent “Sustainable Energy Innovation Authority” to develop a slew of fossil energy substituting; saving; efficiency enhancing options: human energy based transportation (walk and cycle paths); motorized public transportation; electrification of railways; solar street lights; operational cost subsidy for innovative renewable energy suppliers; energy efficiency initiatives and life-line energy access for the poor.

FM Jaitley should consider this SMART option for the FY 2015-16 budget. Growth is down and demand needs to kick started. But whilst presenting the usual array of “economic revival instruments” it would be good to also provide for incentives to delink fossil energy consumption from economic growth.

That such incentives would not be a “freebie” but would be financed by a cess on relatively rich users of fossil energy, is not only fitting but aligned with the principle of equity. The honeymoon is over. The immediate elections have been won. Time to talk “tough love” now and walk the talk in the budget.

Gov Rajan

(photo credit: economic times.com)

RBI Governor Raghuram Rajan got it horribly wrong when he amended PM Modi’s “make in India” program by adding a “make for India” byline in his FICCI address yesterday.

What on earth could he have meant? Was he implying that the domestic economy should be further insulated from foreign competition? That is the only way domestic industry can be induced to make only for India, rather than for the World, including India?

How does this “home centric” approach fit with his view, reiterated in the same FICCI event, that the economy needs to be more open. In an open economy business “makes” for markets worldwide because production and value chains are transnational and product standards, designs and prices converge across the globe squeezing out fat.

Indian industry did “make for India” pre the 1991 liberalization. The result was a small, fat big-business set; high prices; shortages and shoddy goods. The biggest achievement of liberalization is a convergence of product standards towards international levels because of import competition and the ample and ready availability of goods- except where government erroneously continues to believe that fixing maximum prices for goods and services can work. It does not, as we can see in electricity supply and now in drugs and pharma where shortages are resurfacing.

Exhorting Indian industry to restrict itself to the domestic market is an ominous sign of the export pessimism rampant in the pre-liberalisation period. Does this also mean that Governor Rajan will keep the INR unreasonably strong to keep imports (petroleum products) cheap at the expense of export competitiveness?
Surely the defence manufacturing we are initiating is not just meant for domestic consumption. Unless Indian armaments are in regular use in conflicts and wars internationally, how can we possibly be sure of their quality or get the “consumer” feedback for quality enhancement?

Maybe Rajan’s “rock star” status as an economic wizard got the better of him. After all, PM Modi’s penchant for acronyms and by-lines has now become national mania, rendering intelligible conversation impossible, littered as it now is, with 3AAA and 5Cs. But trying to best the PM can be fatal, even for an outstanding, independent regulator. Even the US President would look askance at the Fed. Chair speaking, out of turn, outside her circumscribed official ambit.

But on matters more related to his current charge, he got things right, as usual. In a downturn, especially with inefficient and wasteful government machinery, it is a better to leave income in the hands of the earner rather than transfer it to government via higher tax rates. The “income effect”, enhanced by the low inflation target of Gov. Rajan, induces consumers to spend and feeds into demand led private investments which is good for jobs and growth.

The conundrum, if tax rates are to be relaxed or if tax exemptions for savings enhanced, is how to balance the budget?

Here is a list of the “low hanging fruit” available.

First, our traditional expertise in going around with a begging bowl is best. PM Modi is prescient in aggressively seeking external grants and concessional funding from the word go. The challenge now is converting pledges into cash flows.

Second, ruthlessly cut revenue expenditure, particularly on general administration. This is a necessary “evil” to show that the government means business.

Third, our annual public investments are barely 12% of total expenditure. This requires stopping gold-plated construction and using the existing space better. Witness the new, palatial External Affairs Office complex in Delhi, which remains underused because it is far from the South Block-located-PMO. Anyone housed in the new office attracts the unwelcome tag of being farther from the powers-that-be than even the mother ministry.

Using the available space rationally, simply by squeezing government servants together can help. Today, senior officers occupy office rooms often much larger that the living room of their government allotted homes. Notice how even mid-level government officers do not work in “row cubicles”, as in private firms and there are no common-use spaces for work meetings. Every office is designed to accommodate a “durbar” suitable in size for the concerned officer – this is reminiscent of the hierarchy of “Princes”, established by the “Raj”, based on the number of guns fired in salute of a Prince.

Slashing perks like liberal use of office provided phones and cars and a cut on travel budgets are also necessary, albeit symbolic measures, for flagging the need for economy.

Fourth, more substantively, using the existing government investment in State Owned Enterprises (SOEs) more aggressively can help. For starters, increase the dividend payout ratio from 44% to 66%. This adds around Rs 25,000 crores to revenue – only 1.4% of the total budgetary resources – but sufficient to increase the central plan expenditure by a hefty 25%.

Higher payouts and consequential constrains on accessing internal resources will also force SOEs to become leaner and look for alternative PPP models for financing operations and investments. Listing more SOEs on the stock exchanges and launching an aggressive privatization program can leverage the economy; attract foreign and domestic private investment and create more fiscal room for Greenfield public investments.

Governor Rajan in right in predicting strained economic circumstances in the near term. But hiding behind the default option of producing only for our huge domestic market and hapless domestic customers, is not the answer – nor is tight market segmentation between the domestic and overseas markets possible. God save us from anyone advocating a back-to-the-future strategy of turning resurgent India into a fortress.

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