governance, political economy, institutional development and economic regulation

Grandfather stranded power assets equitably

August 10, 2018

Coal

Economic reform has few friends. This truism is visible today as the 2003 de-licensing of power generation capacity is being unfairly fingered as the culprit for the Rs 1 trillion bank debt turning delinquent due to pending or actual bankruptcy of the power projects.

De-licensing of power generation delivered what it was supposed to – capacity addition in thermal generation exceeding the planned capacity addition over the period 2012 to 2017 by 30%. Fingers are also being pointed to low coal production or the prohibitive price of imported gas as additional culprits. This is disingenuous.

Drivers of stranded power assets

The primary reason why installed generation capacity remains underutilised is that distribution utilities have failed to develop new markets for electricity and are stuck at unreasonably high levels of operational inefficiency. The CRE/ICRA 6th Annual Rating for Distribution Utilities July 2018, rates just 7 out of 41 distribution utilities with a satisfyingly high performance. But remember that rating standards in India are contextually determined to offer an incentive for improvement. Lowering transmission and commercial loss below 25% accrues incentive points. International standards would be way better.

The average loss in distribution utilities, during FY 2016, after accounting for subsidy received from government, was Rs 0.65 per unit (kWh) sold. Is it any wonder then that distribution utilities have failed to absorb the available supply of electricity. Actual users have to undergo forced power outages till the utilities can generate cash to pay for purchasing electricity from the grid. Constraints on the supply side have been unplugged by reform. The problem lies in stodgy utilities failing to aggregate potential demand.

India night lights

SHAKTI a transparent, effective resource allocation mechanism

Union government steps for reducing financial stress in the power sector date back to 2017. SHAKTI (Scheme for Harnessing and Allocating Koyala (Coal) Transparently in India) skillfully used the auction methodology to allocate up to 80% of the assessed need for coal supply to 11 generators (31 entities applied but only 14 were found to be at a reasonable stage of project completion) . Generators without any coal linkage, bid for coal supply from Coal India Ltd. by agreeing to reduce their approved levelized tariff , thereby sharing the gain with their customers. Bids for reducing tariff by 4 to 1 paise per unit (kWh) were received. This was commercially smart rationing of coal supply to favour the most efficient generators.

RBI shakes complacent defaulting promoters awake with looming insolvency

Debt Recovery

Why has the debate around stressed power assets gained currency today? Election time, which we are clearly into, is a good time to press for benefits. This applies to requests for extending the time period beyond the 180 days allowed to promoters to rectify a loan default. Under the Insolvency and Bankruptcy Code 2016, promoters or their associates, become ineligible to bid for the assets during resolution proceedings. This severe penalty is meant to spur promoters to fulfil their loan repayment obligations and pay banks back on time.

Timely negotiated settlements better than the judicial option 

Draconian penalties are of little use when the default is due to a systemic shock. The Enron private power fiasco 1992-1999 was sparked by spiralling of imported gas price. Negotiations, rather than judicial options, finally resolved matters. In 2005, NTPC, GAIL and MSEB acquired the assets in Dahbol, Maharashtra abandoned by the bankrupt US company.

Enron solution redux- neither desirable nor feasible

Dahbol involved only 2GW of abandoned assets. Today, 10 GW of gas generators are stressed, like Enron. In addition around 12GW of coal fired generators are also stressed after excluding those which have benefited from the SHAKTI initiative. The stranded asset problem is more than 10X of the Enron problem. The bank loans – mostly of Indian banks – at stake are around Rs 1 trillion. Is there a way out causing the least disruption to embedded economic incentives?

Reduce the cost of coal based generation by lowering the implicit and explicit “tax” imposed on it.  

The most direct route would be to end the extortive levies on coal production and transportation by rail. Rahul Tongia and Puneet Kamboj of Brookings India recommend making the railway freight charges cost reflective. This would also make Indian Railways competitive with road transport, to which it has been losing market share.

Currently, coal transport by rail is charged more than the cost of service. This is an implict tax on freight which subsidises passenger traffic. The resultant excess freight cost feeds into the cost of electricity generated. This increases the cost of electricity by Rs 0.21 per unit (kWh) amounting to Rs 108 billion per year.

In addition, there is an explicit tax on coal via royalties, levies and coal cess. These increased from Rs 200 per tonne in 2011 to Rs 800 per tonne in 2017 pushing up further the cost of coal based power.

Why should electricity consumers pay to subsidise rail passengers?

Quite unfairly, it is the honest electricity user who is indirectly subsidising rail passenger traffic – that too in a poorly targeted non-merit way. Freight charges should become cost reflective and the levies on coal production reduced to Rs 400 per tonne. IR should generate the additional revenue required for keeping passenger fares reasonable, from commercial development of their physical assets.

Subsidise rail passengers explicitly via the budget

There is also a good case to use the revenues from coal cess and other levies for this purpose. Rail transport is more efficient and environmentally less toxic than road transport. Switching to electric rail from road, reduces the import burden imposed by using petro products. A direct subsidy of Rs 150 billion should be allocated to IR specifically for adopting cost based freight charges in the 2019 budget. Lowering the cost of coal based power will improve the finances of distribution utilities and enable them to buy more power, which would feed into the financials of coal based generators.

Spread the pain of low availability of domestic fuel across all thermal power generators

Why not replicate the SHAKTI auction template to allocate a portion – say 50% – of the annual coal demand to all generators (those owned by the Union, state governments or the private sector) whilst retaining the existing allocations for the remaining one half. Electricity prices at the grid would reduce. The principle of price competitiveness (electricity supply) as the door to preferential access to scarce domestic coal will incentivise all generators to become efficient.

competition

Grandfathering existing contracts is the gold standard of contracting norms. But extraordinary circumstances call for innovative options. When the available resources fall short of demand, the principle of efficiency of resource use overrides historical rights in a merit order system. New generators win the efficiency battle, hands down.

Adapted from the authors opinion piece in TOI blogs, August 9, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/equitable-grandfathering-needed-in-thermal-power/

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Book Review: For Reasons of State

August 5, 2018

For reasons of state

India is a young nation. Three fourths of us probably have no recollection of the ravages of the Emergency period from January 1975 to March 1977.

This book was first published in 1977, just after the national elections, called by Prime Minister Indira Gandhi – in a bout of self-delusion as a referendum on the Emergency, swept out the Congress – they lost all seven parliamentary seats in Delhi – and brought in the lightly glued together Janata Party.

The authors, both veteran journalists, describe their work as an “investigation into the workings of (the) monstrous administrative machine during the Emergency and the devastation it left behind”.  It is a perfect informational tool – not just a blend of statistics and a chronological listing of events. The authors say they chose “to be accurate rather than sensational”. But the level of granularity they uncover in their investigations and the lively characterisations they add, make people and events come alive, giving the narrative a gut wrenching, virtual face-time feel.

Cashing in on current trends

Why re-publish the book now?  It is the fortieth anniversary of the Emergency. But that seems less than sufficient reason, even though the new version has a foreword by the celebrated “Indian” journalist, Mark Tully. The authors perceive a salience – the potential for constitutional subversion under today’s majority government, just as it happened during the Emergency.

The muscular track record of the Modi government and its commitment to implement deep political change evokes a visceral fear, amongst those, who apprehend that a major constitutional change can negatively impact minorities and the marginalised. The liberal order is being challenged universally, which heightens the fear that India is no exception.

Is India under a virtual emergency today?

Mark Tully points out that drawing a parallel between the Emergency and the situation today is illusionary. This assessment resonates well. Citizens voted overwhelmingly for the BJP in 2014. But the Congress has also been re-elected with a majority in the past. But each time, events conspired to temper authoritarianism. Today the BJP remains in a minority in the Rajya Sabha.  A vociferous, albeit small, opposition is active in Parliament. Democratic safeguards have actually worked. Consider Uttrakhand, where the judiciary quashed an attempt to impose Presidents rule in 2016. In Bihar 2015 and in Karnataka 2018 non-BJP governments were elected, illustrating that electoral rights remain intact.

Tully also opines that unlike the Emergency, today there is an absence of widespread anger. However, fear of a vigilante backlash or the termination of government largesse via advertisements or project funds, has muted criticism of government by non-government organisations and driven some of the mainstream media to self-censorship.

The authors believe that there are strong personal and institutional characteristics shared by the Indira Gandhi and the Narendra Modi governments. A massive mandate to rule is one such. This inevitably emboldens leaders to take strong, decisive action. There is also a desire to move quickly for results. Shackled by lumbering institutions, charismatic leaders seek to short circuit public processes. In doing so, they bring in trusted advisers, not accountable to the public – Sanjay Gandhi in the case of Indira Gandhi and the RSS in the case of the Modi government. Curiously, however, both these widely disparate centres of extra-constitutional power seem to target Muslims and Dalits.

Wannabe Lutyens denizens, charlatans and craven officials abandoned public interest 

The most interesting aspect of the book is that readers are invited to be flies on the wall, whilst dodgy decisions are taken by the high and mighty of the Emergency days. The authors do not shy away from naming specific politicians, officials and wannabes like “Begum” Ruksana Sultana, who were all actively complicit in subverting the rights of citizen in Delhi.

Ruksana Sultana

Nasbandi (forced sterilisation) and resettlement of slums were the key disrupters of social contracts and civic responsibilities during the Emergency. Slums were levelled overnight. 7 lakh hapless residents were transported to 27 resettlement colonies on the outskirts of Delhi with little more than 25 square yard demarcated plots and patchy one room houses. But under-provisioned sanitation facilities and drinking water, no markets, no access to health care or schools made these peri-urban deserts, seem designed to make the poor disappear and leave Delhi looking green and beautiful. They bred disease, death, and anger. In the 1984 organised hate crimes against Sikhs, it is these resettlement colonies like Trilokpuri and Mangolpuri, where the worst atrocities were committed.

Two perceptive chapters dwell on the travails of the Delhi police and the reasons behind its ready capitulation to manipulation by politicians during the Emergency. Imaginary threats were materialised and minor criminals magnified into severe security threats. Tragically there have been too many “Dacoit” Sunders (a Delhi badmaash who was built up into gun toting dangerous gangster, later captured by the police) who, like “Sant” Bhindranwale, in Punjab, were manipulated into larger than life figures only to meet their untimely end in a burst of righteous police action.

If a grim account of abandoned constitutional responsibilities, grossly violated official procedures and craven official machinations for personal glory can serve to entertain – this is it. Whether it puts readers off voting for the BJP or impels them to do exactly that, remains to be seen.

Adapted from the authors book review in Business Standard, July 31, 2018 https://www.business-standard.com/article/beyond-business/intimations-from-the-emergency-118073100018_1.html

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Data protection – new challenges but lame solutions

LOCK

Safeguarding your privacy from government and the use of your data by companies without asking you or paying you explicitly, are current concerns, even in under developed India, where more than one half of the population remains effectively unhooked to the internet because of patchy service in low population density areas.

The proposed solutions are pretty humdrum. A committee constituted by government under B.N. Srikrishna ( a retired judge of the Supreme Court) has adopted a please-all stance. A new legislation with new government agencies and draconian provisions for imposing penalties, modeled along the European approach seems to be the best that we can come up with.

An institutional approach to data protection

A new Data Protection Authority (DPA) is to be created as an “independent regulator” for monitoring, enforcement, standard setting, adjudication and grievance handling. Will this regulator work when so many others have failed to deliver? Only time will tell. But it cannot worsen the present levels of data protection. It may cost a bit more. But it will also create additional “good” jobs. So, on the whole, we should probably go for it.

A regulatory pancake is undesirable

The committee also recommends, somewhat surprisingly, that the Unique Identification Authority of India (UIDAI), which has the mandate to issue Aadhaar and manage its database, should also be given regulatory functions, its autonomy enhanced with enforcement powers over those entities which, in turn, are authorised to access the Aadhaar information. In addition, UIDAI will also become a data fiduciary regulated by the proposed DPA, like any other data fiduciary – all this via amendments in the Aadhaar Act.

This is convoluted, but it preserves the existing Aadhaar Act while also bringing the UIDAI under the mandate of the DPA. Clearly, this device diffuses potential resistance. However, wouldn’t it be sufficient for the UIDAI to be regulated by the DPA? The issue of data privacy in Aadhaar using fiduciaries could be directly regulated by the DPA. Data privacy leaks happen not within the UIDAI database, but in agencies like banks or food distribution centres which are required by the law or by executive order to access the Aadhaar base.

No reciprocity between citizen and State rights

In the context of private data protection versus the State, the committee’s recommendations are fairly status quoist. The committee has ceded regulatory ground, near completely, by exempting all authorities controlled by the government, as defined in Article 12 of the Constitution, from the need to obtain the consent of individuals (termed data principals by the committee). The only restraint is the triple test laid down by the Supreme Court (Puttaswamy case 2017) — State rights limited to those permitted by law; the principles of “necessary” and “proportionate” restraint on privacy and finally restrain only to promote a legitimate interest, such as the “security of the state”.

Trawling Big Data for security of the State

Civil society is almost certain to be unhappy that better and more explicit safeguards haven’t been suggested over public agencies to curb the practise of gathering “intelligence” or exercising “surveillance” in the manner of a “fishing expedition” — casting the net wide to gather all possible information.

The safeguard today is that approvals for interception, under the Telegraph Act 1885, are given by a three-person committee of top bureaucrats. The number of requests — around 8,000 per month — are huge. The secretary-level committee can only hope that their junior staff has sifted the requests carefully. A similar architecture exists in state governments. Under the Information Technology Act 2000, private information stored in computers can be similarly accessed for reasons of state, including crime prevention and detection.

The committee suggests that a new law is needed to exercise better oversight over intelligence-gathering, including wider parliamentary and judicial participation. That will take time. An earlier bill to regulate the functioning of the intelligence agencies had lapsed in 2011.

Cynicism on intra-State mechanisms to check abuse of data privacy are misplaced

Surely, even within the existing laws, there is much scope for improvement. Enhancing the capacity and willingness of government agencies to adopt a minimalist approach to data use is one such. Why not use artificial intelligence to handle the huge workload of identifying unreasonable requests or those drafted without proper application of mind? Why not empower the committee of top government officials to discipline line agencies submitting unreasonable requests? Further, can these high officials themselves not be disciplined if they fail in exercising due care? Why not have a group of ministers exercise regular and specific oversight over them? It is the minister, after all, who is answerable in Parliament.

Consider that the most egregious cases of privacy intrusion relate to the use of state power. A new law to improve state functioning is a narrow and time-intensive approach to the problem. It ignores the fact that “gold standard” laws in a poor, developing country, with massive functional illiteracy, does not really work.

Data is valuable “property”. Harness it to pay “data principals” for its use

The recommendations with respect to safeguarding privacy versus business interests are broadly aligned with the “gold standard” of the European Union General Data Protection Regulations of May 2018. We have a fatal instinct for legislating for gold, but settling finally for results equivalent to baser metals.

The committee has sought inspiration from the Directive Principles of the Constitution. Article 39(b) and (c) enjoin the State to work towards redistribution of the material resources of the community for the common good and to avoid the concentration of wealth and means of production. These are non-justiciable segments of the Constitution meant to guide lawmakers. It is worrying when the judiciary starts second-guessing the lawmakers.

Consider that applying these principles bluntly could mean, at an extreme , that data aggregation should be reserved for the public sector to avoid the concentration of wealth which private data aggregators like Amazon have achieved. This could kill the goose which lays the golden eggs. Reducing inequality is a legitimate concern. But the worst way of going about it is to socialise either the means of production or value creation. More significantly, these ideological considerations are misplaced whilst  thinking through what should be done to protect data without killing the value proposition embedded in its use.

Proposed restraints on business include stiff fines and draconian penal provisions 

JAIL

Businesses and bureaucrats will also view with considerable apprehension the recommendation that severe criminal liability should extend to incidents of “intentional or reckless” harm caused to data principals. That such offences should be “cognisable” — arrest by the police without a warrant and “non-bailable”. Experience shows in the case of criminal penalties, unlike in negotiations, the heavier the stick wielded, the lighter becomes its actual use. The low efficiency of our judicial system also needs to be considered. Such draconian provisions only serve to dissuade honest, lawful businesses, but do little to discipline criminal intent.

The direction for change recommended by the committee is positive, the narrative outstanding and the information collated impressive. An incremental, contextual approach and a near-term vision, would have helped earlier actualisation of its admirable intent.

Adapted from the author’s opinion piece in The Asian Age, August 3, 2018 http://www.asianage.com/opinion/columnists/040818/to-ensure-data-safety-a-better-vision-needed.html

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Secrecy, privacy and property rights

July 25, 2018

access denied

Rahul Gandhi alleged, during last week’s doomed-from the-start no-confidence motion in Parliament, that corruption in the 2016 agreement signed by the Narendra Modi government to purchase 36 Rafale fighter jets from France had forced defence minister Nirmala Sitharaman to backtrack from her assurance to disclose details of the price of purchase.

Parliamentary subterfuge – unnecessary, if there is nothing to hide

The matter could have been ended by Ms Sitharaman admitting that being new, she had overlooked the confidentiality clause – a plausible explanation since military purchases are a tough, black box to unravel. Instead, the government chose to hit back by pinning the blame on a 2008 bilateral security agreement signed by the then UPA government with France. This needed both parties to protect classified information which could compromise the security and operational capability of the defence equipment of either.

It is quite a stretch to argue that keeping the price paid a secret meets the test of “necessity” or “proportionality” which guide how much a citizen’s right to know can be restricted. The Chinese or the Pakistanis couldn’t care less what the Indian taxpayer shelled out for the fighter jets.

They likely already know the specifications of our purchases. But at the same time corruption cannot be lightly presumed to be the reason why Ms Sithraman backtracked. Expect this unresolved debate to hang like an ominous cloud as the counter to the BJP’s allegations of corruption during the previous UPA government.

The underside of unrestrained privacy

Privacy is to individuals what secrecy is to the State.  The debate on privacy got muddied by the recent arraignment of WhatsApp for being the conduit of fake news, which incited vigilante violence and hate crimes.

WhatsApp encrypts content in its pipes end-to-end like no one else. Complete secrecy attracts 1.5 billion active monthly users and 60 million messages per day. Its end-to-end encryption cannot even be decrypted by its own administrators. This rabid commitment to secure the privacy of its users doesn’t align with the extant law and is as over-the-top as is our government’s thirst for secrecy. The fundamental right to privacy is restricted by other fundamental rights, including public order, security and those embedded in Article 21 of the Constitution of India, to which privacy was also mapped by the Supreme Court in 2017.

A fundamentalist view on the right to privacy has spawned “dark”, impenetrable means of communication, like WhatsApp. This is a precursor of what could happen if the “dark web” becomes the norm. Similarly, if crypto currencies are allowed to subvert a sovereign’s power to issue currency and bury crime-related financial transactions underground, catastrophe beckons.

WhatsApp managers initially expressed technological helplessness to regulate the unsavoury use of its technology. They are now making conciliatory noises with an eye to their bottomline. Non-compliance could jeopardise their application for adding-on a payments app in India.

Psst! I have a secret

Secrets

Why has WhatsApp been allowed to linger on and not simply told to shut shop, as is China. The bottom-up view is that encrypted communication has wide appeal across political parties and individuals. We all have secrets.

WhatsApp democratises the power to have secrets, unlike the Official Secrets Act 1923, which locates this power only within the State. WhatsApp allows everyone to have secrets. This suits freewheeling democratic India.The last word on the privacy of digital data will be from the Justice B.N. Srikrishna Committee on data protection. This committee, appointed in August 2017, has worked in unprecedented grand isolation. Presumably, things have been decided behind closed doors and the collective wisdom will be revealed in due course.

TRAI recommendations on data privacy and security mundane, at best 

But in chaotic India, surprises are routine. Days before the report was to be submitted, the Telecom Regulatory Authority of India (Trai) published, on July 16, 2018, its recommendations on privacy, security and ownership of data. The TRAI recommendations are unlikely to make the committee pause and think again. It is already broadly agreed that the individual’s ownership of data is paramount. But both the fundamental right to privacy and the right to property over data are restricted. If the necessary safeguards exist to mask sensitive and personal information, the plea of privacy loses force for denying access to data, at least to the State.

Artificial intelligence requires masses of data to train machines to think and behave better than humans. Anonymised data aggregated across a large number of individuals is more valuable than oil, in order to understand and predict contextual human behaviour.

Who is “Free riding” on data?

The debate on free riding on data has focused on how aggregators free ride on individuals data. However, if an aggregator “pays” explicitly for using individual data, ownership over data should stand transferred to the aggregator. Consider that in touristy locations across the world, locals demand a fee to be photographed. Such contracts, for non-anonymised data, with adequate safeguards, should be encouraged not pushed underground.

With respect to strictly anonymised data the right to deny or withdraw access to, despite adequate masking safeguards, can be viewed as anti-development and also at a stretch anti-national. At the very least, denying or withdrawing access to anonymised data should attract a cost to be paid, since it amounts to “free riding” on the technological benefits gained by others providing their anonymised data.

TRAI has passed up an opportunity to assert that the ownership of anonymised aggregate data should vest with the entity doing the aggregation if a specific contract exists with the data generator (app user). This needs to be clarified to retain the value proposition in data aggregation.

A market for anonymised data

Conversely, TRAI has ignored the need for a market to price data. A market exists even today. But it is an informal and non-transparent market which hurts the commercial interests of the individual data owner and puts the controller or processor of data in the driver’s seat. This information asymmetry can be removed through innovative institutional development to ensure that individuals are not shortchanged and have to sell their data cheap – much like innocent tribals selling their land for peanuts. If data is the new oil, it must priced accordingly.

Restore property as a fundamental right 

demolition

We have grossly neglected property rights in general and specifically in the context of  data management. Civil society mostly focuses on safeguarding the privacy aspect of data management. There is a reason for this. Unlike privacy, the right to property stopped being a fundamental right in India in 1978. This makes it difficult to challenge laws infringing on property rights.

Conversely, the higher judiciary has been indulgent in admitting public interest litigation  (writs) challenging laws threatening fundamental rights generally, so privacy gets privileged legally over property. Privacy rights also align with the need to decriminalise gay sex. It is an emotive issue. In comparison, a right to property seems almost crass, where 60 per cent of people own no land or electric consumer durables; 40 per cent of households live in just one room and can fit their possessions into a gunny sack.

But make no mistake. Socialism erred in hiving-off the right to property from human rights. Property is intrinsic to the right to privacy and liberty. But we will have to keep arguing till we fix this error, eventually.

Adapted from the author’s opinion piece in The Asian Age, July 24, 2017 http://www.asianage.com/opinion/oped/230718/whatsapp-row-on-secrecy-privacy-property.html

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The price of democracy

July 9, 2018

beggar

Prof. Ashutosh Varshney of Brown University calls India an improbable democracy — poor, impossibly heterogeneous and multicultural, and ironically, only its colonial heritage keeps it going. So has our hubris cost us plenty?

Why we are not China

Forget comparing ourselves with China today. Are we at least on the same path? No, we are not. Assume a lag of a decade between China’s 1979 takeoff — Deng Xiaoping’s reforms — and India post-liberalisation in 1991. Second, assume that GDP growth is a decent proxy for national effort. Judging by the results, we have tried only one-third as hard as China to grow three decades into the reform process. Have we been tied down, like Gulliver, by democracy’s Lilliputian ropes?

Money or efficiency make the world go around

There are only two ways of increasing growth. Increase investment or increase the efficiency with which capital is used. The latter is tough but critical. Efficiency and stability invite foreign capital in, build supply chains and boost “federated” exports — many economies get a say and a share in the final product. Making the world your shareholder makes politicians more responsible — barring outliers like US President Donald Trump — and who knows, his unorthodoxy might well work for the United States.

Wasting scarce capital

Amravati

India is hugely capital starved. Sadly, it has not done well either in using capital efficiently. And it is not just the public sector alone which is wasteful. A generalised trend of wastefulness springs from poor monitoring systems available to the government, shareholders and citizens, none of which can easily check the data by triangulating information sources.

Over-designed public projects

Bengaluru airport has had charging points in its parking lot since 2008 for electric cars, which will not use them till 2030 – if then. You pay for casually over designed projects. The building of Amravati, the new capital of Andhra Pradesh, represents all that is wrong with our democracy with politicians free riding on tax payers.

Frank admissions of failure are as important as bragging about success

Finance secretary Hasmukh Adhia has admitted that the GST network has failed to provide end-to-end digitisation. We knew this. But speaking honestly and responsibly endeared him to the public. Unfortunately, no one is to be held accountable for this glitch.

Adhia

Cheap finance induces waste

Wasteful use of capital is hardwired into a system which prices capital cheaply. Most business folk will moan about the high cost of funds in India. But the fortunes, domestic and overseas troves of real estate barons and industrial tycoons were built on negative interest rates, with inflation boosting prices but diluting the real interest cost of a bank loan to zero over a 10-year period.

Four matras for democratic success 

Can we take remedial measures? The times are tough. But bad times never last. More important, are we primed to take advantage of the next uptick cycle in world economic growth? Possibly not. Here is a four-point mantra for getting there.

Efficient public services

online

First, the new national government, later this year or in early 2019, must tackle the long-ignored task of public sector reform. It is shocking that economic duality has widened since 1947. The average citizen and business is streets ahead of the government in the effective use of 21st century technology to make employees accountable. Can you imagine how the government would change if the bottom five per cent of employees were sacked every year for poor performance or if the courts disposed of cases quickly? Just focusing on achieving these two and keeping everything else on hold could retrieve democracy in India.

Make data accessible on citizen aspirations & preferences, government performance and business governance 

Second, know your citizens. Make all residents and citizens identifiable, traceable and accessible. Aadhaar is the answer. Make registration for Aadhaar painless and self-declaratory — the ability to cancel out duplicates is supposed to be built into the system — enhance its accuracy in identification; mask the private information better and multiply improved digital recognition equipment. Populate data for citizenship, electoral rights and public benefits, using Aadhaar as the base platform. Transfer all public benefits through bank accounts. Roster all government officials, below 40 years of age, irrespective of grade or cadre, to serve as field-level facilitators wherever they are posted, with specific mentoring targets, to help citizens access their benefits.

The BJP and some regional parties (Trinamul Congress, AIADMK, the Left parties) who have a cadre are ramping up to do this. Down this route lies the threat of democratic abdication. A citizen must be served by the government of the day, not tied to the apron strings of a particular party for accessing benefits.

Link official accountability with efficiency in use of capital 

Third, change public incentives and processes. Switch from lazy budgeting of inputs to specific outputs, achievable over two years and outcomes over five years. Form teams of specifically identified officials to programmes and projects; ensure that there are no transfers and the team remains intact for the next five to 10 years. This will ensure more responsible budgeting; development of job commitment and expertise and improve outcomes. China does not shuffle its officials about needlessly. They stay tied to specific tasks for long periods — many forever. We encourage our officials to forum-shop from one cushy position to another.

Stop fiddling with markets

markets

Fourth, walk the talk. Withdraw the government from being a market participant and it will work better. Markets are like forests. Naturalists like Pradeep Krishen say it is enough to fence barren land off from predators like goats to allow a forest to regenerate. Going with the grain of nature doubles results. Anything else is wasteful and inefficient.

Stop fiddling with markets and they will find their level. Focus on diluting, not alleviating, the pain of those who lose out from markets. Just that can consume all of the government. Do not dilute the bite of markets if you aim for efficiency. Equity initiatives must be front-loaded to enhance competitiveness, not installed at the end of pipe to shackle markets. Caste-based reservations for education, jobs or benefits are an end-of-the-pipe option. They gel perfectly with our real strategy of steady but inefficient, slow growth.

Democracy is not the reason for our woes. It is what we do with it that’s troubling. Democracy implies at least a 50 per cent chance of not getting re-elected. The great Mughals would not have approved of the risk profile. Neither, it seems, do our rulers today.

Adapted from the author’s opinion piece in The Asian Age, July 9, 2018 http://www.asianage.com/opinion/columnists/090718/price-of-democracy-a-4-point-growth-mantra.html

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Who rules Delhi?

July 6, 2018

Delhi throne

Khichdi – Risotto if you prefer the Italian version – is a traditional palliative for Delhi belly. But Delhi’s khichdi style political governance systems are guaranteed to give anybody the runs. So bad is the mess that it is difficult to find out who rules Delhi. The Delhi Government, a contender, appealed against orders of the Union Government to clarify its constitutional mandate.

Supreme Court clarifies the law

The Supreme Court, in its July 4, five judge bench, judgement, patiently re-explained the law, without venturing to drill down to the crux of the dispute between the Aam Admi Party (AAP) government and the BJP ruled Union government – who controls the public servants in the government of Delhi? The dispute closely resembles a Saas -Bahu quarrel – principally, who gets to jangle the house keys and run the house.

Judicial decisions unlikely to resolve political power stand-off

The AAP came to power by promising to the good but poor, people of Delhi, to set right the tyrannical, corrupt Delhi bureaucrats and other elites. The AAP found, to its dismay, that they had less real powers than the Municipal Commissioner of Mumbai. Being a glorified Municipal Commissioner was of no use in leveraging the AAP onto the national level and that too within months of coming to power. AAP chose the path of open, tactically public confrontation with the Union government in a David versus Goliath stand-off.

To be sure, the BJP run Union government’s intention were hardly kosher either. It tried to swat the AAP at every opportunity. The previous Lieutenant Governor (LG), Najeeb Jung – appointed by the Congress, called an end to his stressed innings in December 2016.

Will the Supreme Court verdict change things? India is peculiarly American in its belief that good laws and sound judgements can set things right. There is little evidence to support this belief. Laws, which are out of sync with reality and judgements which are legally correct but practically iffy are not the stuff that good governance is made of.

Expectations build reality. Delhi is often described as “closely resembling a State government”. Delhi is as much a state government as we are a “federal” country – another slipshod simplification used for the essentially unitary form of our polity albeit with some federal characteristics.

How it all began

Delhi government is a “special” child of the Indian National Congress, which was in power in the Delhi Metropolitan Council uninterruptedly from 1972 till 1990. In 1991 the INC decided to embellish their jagir with a totem of statehood- possibly to appease citizens with a magic bullet which would solve all their problems. In 1992 the 69th Amendment to the constitution – prescribed a special status for Delhi. It became a hybrid between a Union Territory, like Puducherry and a State government, like Goa.

But no matter how many new, white Toyota Innova’s Mr Kejriwal adds to his cavalcade, he will remain a Chief Minister in name only and Delhi’s Legislative Assembly a caricature of democracy. This is not because Mr Kejriwal or the legislators are wanting on merits. But the constitutional arrangements militate against them having a free hand in providing good governance.

Kejriwal

The proximate cause of the constitutional spat is that the Union government claims the Delhi government has no independent powers of managing their employees. It must do so only with the concurrence of the Union government. Municipalities face a similar constraint versus the State governments, which sit on their heads. The Supreme Court (SC) has not dealt explicitly with this critical issue. But reading between the lines, two implicit messages emerge.

SC judgement implies Delhi Government competent to legislate and execute on Public services

First, the SC has specifically stated that all matters in the State list, other than the three exempted subjects of Public order, Police and Land are within the legislative authority and hence also the executive authority of the Delhi government. State public services are one such subject at entry 41 of Schedule 7, List II of the State List of the constitution. A plain reading of the SC order indicates that this subject is within the mandate of the Delhi government.

But Delhi does not have its own cadre of IAS officers allocated to it or Provincial Service Officers appointed by it, unlike other states. It is staffed by IAS and DANICS (Delhi, Andaman and Nicobar Islands) officers, made available to it by the Union government, which is the cadre control authority.

Union government’s view on services too expansive

It is unclear where the Union government’s powers to manage these cadres end. Allocation of specific officers to Delhi, training, promotion and disciplinary action are powers intrinsic to cadre management. But must the Union government also approve their posting to or transfer from one position to another within the Delhi government? These are routine decisions which affect individual officers but do not impinge on cadre management.

LG only an “engaged watcher” on all matters except Public order, Police and Land

Second, the SC drew a useful distinction between the right of the LG to be informed of all decisions of the Delhi government and his specific power to reserve a matter for the orders of the President. It was careful to emphasise that the latter is to be used only in exceptional cases. This indicates that the Supreme Court veers towards a rational and harmonious sharing of personnel management powers between the Union and the Delhi government.

The sprawling Delhi bureaucracy prefers the Union government as “Mai-Bap”

A May 21, 2015 notification of the Union Home Ministry espoused the view that the Delhi government has no powers with respect to management of public services on the specious grounds that it has no public services or State Public Service Commission of their own.

The Union government’s unorthodox viewpoint draws support from the all-powerful IAS/DANICS cadre which fear loss of prime status, versus the uniformed services, if they are subjected to control of the Delhi government whilst the police remain directly managed by the Union government. The Delhi High Court will now rule on this sensitive issue.

Dharna

Delhi’s bloated administrative architecture wastes public money. It creates a clash of political egos and a surfeit of elected authorities all elbowing for space in just 700 square km of urban space. Delhi should revert to the 1956 arrangements – Union Territory with an Administrator overseeing the existing four civilian municipalities. But each must be headed by a directly elected Mayor. If the experiment works, India’s metros could finally join the world in participatory local governance.

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bureaucracy, Democracy, India, Judiciary and Law

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Show the middle class some love

June 30, 2018

middle class

The Indian middle class is a diverse set – professionals, public servants, skilled factory workers, the self-employed in the gig economy and smaller business folk who earn enough for daily needs, educate their children, access healthcare adequately and still have a surplus after consumption. High aspirations are what distinguish them from the hopelessness of the poor and the inherited arrogance of the rich.

Governments delight in extorting the private surplus available with the middle class via tax, purely because it is easier done than unravelling the legal defences and accounting labyrinths which protect the income and wealth of the rich.

The income tax anatomy of the middle class

Budget 2017-18, vicariously defined the middle class as having an annual income between Rs 5 to 50 lakhs. The rich got a surcharge of 10 per cent on top of the marginal top income tax rate of 30 per cent plus an additional cess of 3 per cent, increased subsequently to 4 per cent, for an annual income above Rs 50 lakhs.

A punitive, marginal tax rate of 20 per cent plus cess, on income above Rs 5 lakhs distinguished the middle class from the poor  Annual income up to Rs 2.5 lakhs (around Rs 4000 per head per month for a five member household) is not taxed. This is where being poor ends. Income above this level and till Rs 5 lakhs is taxed at a moderate 5 per cent plus cess. This low-tax, income slab provides a platform for inducting the poor, who are gritty enough to claw themselves into higher incomes levels, into the tax paying habit.

Income tax rates are reasonable

How a tax matrix affects real households is where the rubber meets the road. So how does the government’s tax policy look from the household upwards? Assuming a household of five persons, income per head per month of less than Rs 8,000 or more than Rs 80,000 is either too poor or too rich to qualify for being middle class. This  taxonomy captures the middle class fairly accurately.

GST rates are arbitrary

Problems arise if the impact of the Goods and Services Tax on the lower end of the middle class is computed. The effective tax rates have increased for most items of middle class consumption – branded products, white goods, eating out and holidays in homestays and mid-range hotels. For the large numbers of the middle class who provide services as consultants or on contract in the gig economy, the GST summarily appropriates 18 per cent of the billed revenue if it exceeds Rs 20 lakhs a year. Small suppliers of services do not have the market power to get their corporate customers to bear the tax, even though the latter are legally responsible to pay the GST on receipt of services. Reducing prices to fully or partly absorb the GST is their only choice.

Why is there no standard deduction for costs in services?

There are no standard deductions of costs available for services. Even depreciation on a vehicle is not allowed as a cost.  Oddly small retailers with a turnover of up to Rs 1 crore can claim a standard deduction of 30 per cent for costs. Such glitches are disincentives to declare revenue and completely contrary to the GST dharma of incentivising tax compliance.

Progressivity in GST on services is poorly designed

Oddly the GST is not imposed on the marginal amount of revenue from services exceeding Rs 20 lakh. It applies across the entire revenue. The message it sends is that it is foolish to use banked transactions for revenue from services beyond Rs 20 lakhs annually.  The income effect of such taxation illustrates the absurdity of the structure. The net income, after deducting notional costs of 30 per cent, from an annual billing of Rs 21 lakhs is Rs 17.5 lakhs. The imputed tax imposed by GST on net income is 26 per cent. Add to that income tax of 20 per cent. The post-tax disposable income gets slashed to just Rs 14 lakhs or 54 per cent of gross income. In comparison someone who keeps her billing of services restricted to Rs 20 lakhs pays no GST and therefore has a higher net disposable income of Rs 16 lakh!

Why does cross border supply of services not have a free-of-tax limit?

Arbitrary taxes on turnover are highly discriminatory and inhibit competition. Consider that no GST is payable if services are provided within a State up to Rs 20 lakhs. But all cross border supply to another State attracts GST. In the United States, cross border online supply of services are not taxed, creating a converse unfair advantage for such supply, versus local supply. This was struck down last week by the US Supreme Court. What can possibly be the logic of inhibiting competition by taxing cross border supply below the annual taxable limit of Rs 20 lakhs?

 

Fuzzy economic assumptions on the relative merit of public or private expenditure & savings

By taxing both income and consumption at punitive rates, the government drains the surplus available with the middle class, which could have been used more efficiently for higher consumption – triggering higher production or more savings, leading to more investible funds. We are fuzzy about a fundamental trade-off between being an efficient, rationally-taxed, private sector-led economy — a mantra which every government since Prime Minister P.V. Narasimha Rao’s has sworn by — and a punitively-taxed, state investment led, low efficiency economy — which is what we have become.

It does not help that the tax base remains despairingly low and the same law-abiding citizens and entities get taxed ever more by each succeeding government. The tax base of individual assesses of Income Tax is around 60 million. The tax loophole of agricultural income being tax exempt is a major inhibitor for growing the base significantly. The GST has around 11 million registrants. But tax compliance is said to be a low 70 per cent. The tax buoyancy is coming from bleeding the already compliant.

farm house

Despite extortionist taxes for the middle class, the tax to GDP ratio is stagnant at just below 12 per cent, because of massive evasion and statutory loopholes for avoidance. Inequality is increasing with income and wealth concentrating within the top 1 per cent. Inequality and tax impunity are “dhili” (loose) foundations for building a sharing economy.

This summer, as our political elite relax in the soothing cool of the leafy and shaded Lutyens’ Delhi, spare a thought for the middle class and show them some love. They also vote, you know.

Adapted from the authors opinion piece in The Asian Age, June 30, 2018 http://www.asianage.com/opinion/columnists/300618/its-time-govt-shows-the-middle-class-some-love.html

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Budget, Economy, India, Tax

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Nikki Haley – not one to get confused

June 28, 2018

Nikki

Ms Haley has been United States Ambassador to the United Nations since 2017 and was previously, the Republican Governor of South Carolina. She is in India right now on a goodwill mission at a time when “good-will” is not quite the flavour of the month between the US and India.  Of course, a less than cordial relationship was par for the course, till the United Progressive Alliance under Dr Manmohan Singh made strenuous efforts to align closer with the nation, which has been an Eldorado for millions of Indians.The BJP under Prime Minister Modi has added energy and substance to that initiative.

Ms Haley represents all that is virtuous in America. A child of immigrant, Sikh, professionally qualified parents, she did not wander into politics. It was a choice dictated by her will and courage to lead and be the best – a common American virtue, sometimes carried to a fault.

At the age of 32 she ran for and was elected to the South California, House of Representative and won a re-election in 2008. Her bid to run for Governor subsequently was endorsed by Republican heavyweights – Mitt Romney and Sarah Palin. South Carolina sensibly elected her Governor in 2010.  In 2012 she was speculated to be one of the options for Vice President partnering Mitt Romney for his Presidential bid versus Barack Obama. She determinedly squashed all speculation declaring that she “had a job to do which she would like to finish”. Wise move that one.

confederate flag

But it hasn’t been easy. Indian immigrants rising to the top in politics is new in America. After fellow Republican, Bobby Jindal, Ms Haley is the second Indian origin American to become Governor. The hope is that she could well be the first Indian origin President of the United States. She has the moves. She has the articulation and she has the nerves to make a great President.

In 2015 as Governor, South Carolina, she had the guts to advocate that the Confederate flag which was traditionally used as a State symbol should be respectfully retired saying – whilst an integral part of the past, it longer represented the future. This was in response to a hate crime in her State inside a Church, by a white man who killed nine people because he was trying to shoot black people and ignite a race war. South Carolina is in the deep-south where slave labour to work the plantations was a way of life before it was abolished in 1865 vide the 13th Amendment to the constitution. Of course it would be another 100 years before apartheid would be similarly ended in the US.

Ms Haley was born a Sikh but became a Christian and no, she does not speak or understand Punjabi. Theirs was the only Sikh family in the town where she grew up. As a brown skinned, Indian child it could not have been easy growing up in the Deep South through the 1970s.

The advice her parents gave was to focus on and develop the similarities with other kids, whilst retaining the differences within her. America is an avowedly secular nation where Presidents still take the oath over a bible. The heart of America is Christian, even if its head is secular. Little Nikki was clearly aiming for the heart when she switched her faith.

Is this a flaw in character then in the otherwise smooth, well rounded, balanced exterior? Only the most fundamentalist Sikh would take that narrow view. The key to deep religious feelings lies in surrendering to God, not in the highway chosen to reach Her.

But Ms Haley seems prone to sabotage. When she declared on national television in April, 2017 that sanctions on Russia were around the corner as punishment for supporting the Bashir Assad regime in Syria, she was publicly embarrassed to have the White House not support her claiming that she was probably mistakenly “ahead of the curve” and no decision had yet been taken. Not one to take a public put-down quietly, Ms Haley shot back on television that she was not the one who was confused. But this seems to be recurrent theme.

The news that the US has unilaterally postponed the 2+2 talks with India scheduled for early July this year, broke yesterday in the middle of Ms Haley’s India mission – not the most appropriate timing, if creating a conducive environment for her India visit was the objective. This begs the question if she is really one of the “big boys” of the Trump administration. Can she punch, kick and stab at the national level as well as she did in South Carolina?

Modi Nikki

America has a rich tradition of Governors going on to become President. In India this is new – Narendra Modi being the first Chief Minister to fight and win an election with him at the helm. Religion is high on everybody’s mind in India and blood is easily shed in the name of religion. Ms Haley is a powerful symbol of what can be achieved, if religion becomes a purely personal constraint and not the guiding principle for public policy.

 

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India’s elite bureaucrats – unshakably resilient

June 19, 2018

 

Mughals

The great Mughals (16th to 18th century) found it more difficult to manage their extended zenanas than to conquer fractious Hindustani kingdoms. The insidious politicking and power struggles of the women in purdah are well known. Less well appreciated are the strength, stability and support that the zenana afforded to the emperor, as a secure haven of peace and a source of experienced, sound, well-meaning advice. Ira Mukhoty exquisitely documents this aspect of the zenana in her new book -Daughters of the Sun.

zenana

The IAS is the metaphorical “zenana” for leaders of modern India

What the zenana was to the Great Mughals, the Indian Administrative Service (IAS) is to our political leaders at the Centre and in the states. Curiously, even the numbers match. Both the IAS and Emperor Akbar’s zenana — the largest — are around 5000 strong.

The only difference is that, unlike the zenana, the IAS is predominantly male. But this is changing. Like the zenana it is recruited on merit through intense competition. Once recruited, a minimum basic standard of life and respect is assured. But progress onto meaningful positions of power depends on both merit and political convenience. Bad political choices can end careers prematurely. Good ones can lead to a rapid rise.

IAS

Expectedly, disruptions to the existing architecture initiated by the emperor caused great trauma then, with fervent attempts made to subvert the change, as now. Not all disruptions end well either. But that is no argument for not trying to imbue knowledge competition into the workplace, as the Narendra Modi government proposes via the lateral entry of 10 joint secretaries.

Why change?

Modern workplaces have specific needs. Of these, IAS officers have only two characteristics which others may lack. First, they are the culled outcome of the UPSC exam which selects just 0.1 per cent of those who apply. This ensures that genetically they have the required level of raw intellect. Second, they have an accelerated and time-bound promotion career path. This ensures that they will always be ahead of those in other cadres. Even seniority, within a cohort of officers, is based on their score in the UPSC exam and the Mussoorie training academy. These embedded entitlements bestow upon an IAS officer ritual status, attracts respect, and often abject compliance. But an impartial, permanent civil service, as a source for leadership level advice, is an anachronism, for three reasons.

The IAS has no “skin in the game”

First, politicians today need bureaucratic advisers who have “skin in the game” — they prosper with a politician — zenana style — and go down with the politician they support. The need for “trust” and “faith” in the support senior staff around a minister is poorly aligned with the old civil service architecture of impartiality, seniority and permanence.

Quick to learn, but no deep personal knowledge or insight

Second, the explosive force of the knowledge economy and the range of new sovereign interventions call for total immersion for extended periods in a chosen area of work. This is alien to the way the IAS is managed and trained for general management purposes. To head an engineering department, it is not enough to have an engineering degree before joining the IAS. Most useful skills are non-academic and acquired on the job. Only a practising engineer can credibly navigate a politician through the likely cost-benefit of options. Our achievements in space technology, missiles and atomic energy are out of sync with the quality of our roads or public medical care. Both of the latter work areas are managed by an IAS officer at the top. And it shows.

Deep skills do not come cheap, nor do they remain captive

Urjit

Third, skilled help does not come cheap. The pervasive private sector provides the demand for top-level skills where the government can never hope to compete for talent. Only saints would give up private sector options and choose to work in the government, except for short periods, such as to round off one’s CV, enlarge networks and gain face time at the leadership levels. Facilitating short-term contracts in the government for skilled professionals is a good way of achieving the required skill infusion into the administration.

Short term hires should come and go with the government

Expectedly, the contractual top-level hires will be selected only where both ideologies and objectives match. This makes sense for both sides. The entrants and the government know that without an inside track with the political leadership, they would simply run out of time before achieving anything. In public policy, academic credentials have to burnish with zenana brownie points like loyalty and a complete alignment of objectives.

What does short term hire mean for the reservation policy?

Mayawati

This flags BSP supremo Bhen Mayawati’s concern of how to ensure that brilliant Scheduled Caste and Scheduled Tribe candidates do get a fair chance. At present, there is no caste quota for promotions in the Government of India for the elite services. The quota applies only at the time of recruitment. Currently, only two per cent of all joint secretary-level positions have been advertised for lateral entry. But in future, if lateral entries increase to, say, 25 per cent of all positions, the caste quota issue will need to be managed head on.

UPSC selection is not aligned with the hiring practices for short term experts 

Would the UPSC be a safer choice than an in-house government selection committee? Not necessarily. We have seen in the case of the appointment of judges, compromised selection is not the preserve of the government alone. But there should be a permanent selection committee comprising the secretary of the requesting department; two private sector or NGO subject specialists, and the secretaries of the UPSC and the department of personnel and training.

But safeguards to ensure merit and transparency must be built into the process

Lastly, the process adopted for lateral contractual positions must be differentiated from the existing process for internal appointments. Advertisements for contractual positions must specify the required mix of minimum educational requirements and particular work experience, along with the exact job description. Transfer from one specific position to another, during the contract, must not be allowed, to avoid gaming and to protect the incumbent.

Alas, has this come too late?

time

The Narendra Modi government’s move to open the doors for external, top-level skills is extremely welcome. But, as in the case of Air India’s disinvestment, its timing, at the fag end of the government’s tenure, loads the dice against persons of outstanding talent applying for this opportunity. Even the best house help is risk averse and abhors untimely disruptions.

Adapted from the authors opinion piece in The Asian Age, June 18, 2018 http://www.asianage.com/opinion/oped/180618/govts-lateral-hiring-great-idea-bad-timing.html

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BJP, Book Review, bureaucracy, India

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India’s geopolitical choices till 2040

June 17, 2018

Trump

Every passing day, America plays the truculent, ageing diva on the wane, whilst China exudes a quiet, confident gravitas. Their chosen global roles, however, do not reflect the fundamentals of either country.

America is one of the few developed countries with a robust economy, relative to its overwhelming size. It grew smartly at an average of 2.5 per cent over 1990 to 2016 (versus world growth 2.8 per cent). In Europe and Japan, ageing and poor economic policies are slowing down the revival process, post the 2008 slowdown. But America, thanks to its ‘open-doors’ policy for talent, its zeal for innovation and a super-educational architecture, has rebounded –– even though President Trump continues to play to the injured sentiments of middle America, which sees growth and jobs as a zero sum game.  But psychologically, America is shrinking into a smaller island of prosperity than it needs to be. The mood of the nation is to cut its losses overseas, lock the doors and count its millions. This is akin to voluntary national euthanasia.

China Russia

China, despite much less going for it physically, is psychologically expansive in its ambitions – eager to fill the gaps opened up by a receding America. In 2016, GDP at US$ 9.5 trillion (constant $ 2010) was roughly where America was in 1990. Despite high levels of inequality, which concentrates the incremental growth and wealth at the top, President Xi enjoys enviable domestic support. The average Chinese is gung-ho about occupying centre stage in global affairs.  Strategic allocation of its surplus for investments overseas has created an alternative variety of quasi sovereign international finance which, to put it bluntly, seeks to “immizerise”- to twist Professor Bhagwati’s signature concept-  the beneficiary nations who accept its cheap loans.

China investment

Inability to repay the loans followed by benevolent ever-greening of the loans, will bind the beneficiary nations into a long-term, largely one-sided financial relationship, reducing once independent nations to vassals. The Chinese will try and stretch out this symbiotic arrangement till they either supersede or take control of the United Nations and related institutional arrangements for management of international affairs. China might become the largest economy by 2030, and by 2040 indentured nations will have little choice except to bow to Chinese dominance, much like an addict wanting her next shot at any cost. It is unclear, however, if China will have the staying power to continue to splurge cash on winning friends till then.

Their game plan is not very different from what America itself followed post-1945. Financing the reconstruction of Europe and Japan bound these countries to America, creating a politico-economic group which represented 66 per cent of world GDP in 1960. Back then, America itself accounted for a heady 40 per cent of world GDP.

G7

This set of “friends of America” (FOA) still account for around 58 per cent of world GDP. But America’s share has shrivelled to around 18 per cent of world GDP. This is the core of President Trump’s angst. Whilst the FOA group has grown significantly since 1960, under American protection, they continue to be free riders when it comes to spending big bucks on global security. Indeed, avoiding large outlays on defence expenditure has enabled these economies to divert resources for growth and social welfare.

The truant behaviour by POTUS at the Quebec G7 meet should be viewed in this context. One can even make the argument that the trade wars are not so much directed at China but at America’s own allies – a wakeup call to start paying the bills for global domination. America is set to become an international wallflower after a half century of global domination.

China grew spectacularly at just under 10 per cent per year over 1990-2016. But to achieve somewhere close to the critical mass – 30 per cent of world GDP- needed for global domination, it will need to grow for twenty more years at 4 per cent above the rate of world growth. But unlike America, it does not yet have a set of permanent allies, who could pump up the group share.

SCO

India is a likely candidate for such friendship. Russia and India share traditional bonds which have deepened through the purchase, by India, of defence equipment. A bloc comprising China, India, Russia and Iran (CIRI) can pump up China’s economic heft to around 45 per cent of world GDP by 2040. China and India, respectively, would account for around 30 and 10 per cent of world GDP.

Admittedly, CIRI would be a grouping of convenience. The Friends of America group, in comparison, are glued together by history, culture, religion & race (other than Japan) and the liberal democratic State architecture.

It is unclear which way India should turn. India will be an easy fit into the FOA group because of shared liberal democratic values; history and language. India could bring to that group the demographic energy, at a scale they lack. But it is in the CIRI group, that India could play the more substantive role, including by providing much needed soft power to pull-in other nascent liberal democracies. In neither group is India likely to be the decisive partner over the next 20 years, which hurts our ego.

switzerland

A third pragmatic option is to play Switzerland on an international scale. Remain a neutral, trusted adviser to both groups – neither antagonistic nor subservient to either whilst remaining focused on shared economic growth domestically. International credibility to chart this principled course would depend upon developing a domestic eco-system reflecting these principles. This course suits Indian aspirations for leadership best. But are we, ourselves, ready to live by an elevated moral and human code?

Also available at https://blogs.timesofindia.indiatimes.com/opinion-india/indias-geo-political-choices-till-2040/

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