governance, political economy, institutional development and economic regulation

Hindu

The Rashtriya Swayamsevak Sangh “foot soldiers”- ostensibly till now a cultural “Hindu” organisation. Saffron is their colour. 

Utopian secularists are in convulsions at a “yogi” becoming chief minister of Uttar Pradesh. Of course, they have cause to worry. It does not help that Adityanath Yogi, as he now calls himself, has a history of political activism. Can he change his spots and rule equitably? Only time will tell.

The fear factor prevails 

Muslim

Secular Hindus – a minority themselves, and the religious minorities – particularly the Muslims- rightly fear even an implicitly theocratic state. The constitution specifies a secular State via an amendment in 1976. But there are no specific safeguards.

But all those who don’t subscribe to the Hindutva theology are bound to be fearful. And mere hope is not sufficient reassurance. The real question is why do we not have institutional safeguards to avoid an adverse outcome? Why are constraints on theocracy not specifically provided for by our Constitution and enshrined into workable instruments in our laws?

We kicked the communal “football” down the road in 1947

First cabinet

Pandit Nehru’s first cabinet had two Muslims and a Sikh as lip service to pluralism. But raw decision making power – in finance or in internal security, has never been out of Hindu hands – quite naturally, since close to 80 percent of India is Hindu.  

We should have known better. We have reached the natural culmination of where we have been headed since the formal adoption of a democratic architecture.  There have been early signs. But these were ignored because they largely never affected the elite. That one-fifth of Indians remain wretchedly poor shows that democracy has managed inclusion very badly. The status of women is another example where democracy has failed to translate into equity.

But the good news is that, in both cases, we have learnt and gradually built in safeguards to ensure inclusiveness. The political representation of the Scheduled Castes and Tribes has helped. Assured political representation for women in legislatures is an ongoing exercise.

Oddly, the Yogi, as CM, is a step forward towards reconciliation 

Odd as it may seem, we should welcome that the BJP has chosen pick Adityanath, the practising head of a mutt in Gorakhpur, as its chief minister. It would have been strategically better for the BJP to fudge and appoint a backward caste leader and continued to play the “game” of “political correctness”. That the BJP chose not to do so serves to highlight the existing yawning legislative gap between principle and practice. After all, the problems of Indian democracy can never be resolved unless we all speak and act from the heart, within the limits of the law.

Lets shed false pretences and bare our souls

sahibs

Much of the angst against Adityanath is drawn from the colonial “brown sahib” culture of political correctness. This culture privileges convention and process versus the outcomes of law. Examples abound. Brown sahibs believe that due process must be adhered to. Never mind that, in doing so, a poor applicant or litigant can get beggared into giving up the fight.  In the Brown Sahib’s logic, principles are not iron-clad concepts which produce and are validated by outcomes. They merely prescribe and often justify the process – rarely the outcome. Consider how shallow is our application of the principle of “right to be heard” in our law or the right to vote or the right to property.

Our constitution relies on good intentions, not iron clad safeguards

Our democratic architecture is inadequately developed to factor in the reality of India, with its multiple cleavages. If implicitly elitist rule has been possible over the last 70 years, it should not surprise us, if tomorrow brings implicitly theocratic rule. So for those of you who are uncomfortable with a Hindu yogi, a Muslim maulvi, a Sikh granthi or a Christian priest in a CM’s chair, here are three changes we need to introduce in our political architecture.

Mandate plurality in the cabinet

First, it is the privilege of the winning party or coalition to select any member of the legislature as CM. Can we not simply legislate that a religious head should never be selected as CM? Possibly not, because this would be a violation of the fundamental right to representation of a religious group. More practically, there is no watertight way of defining who is a “religious head”. Consider that Sadhvi Uma Bharti led the BJP to a three-fourths majority in 2003 in Madhya Pradesh and became CM. Unfortunately, she had to resign soon after, because an arrest warrant was issued against her on a 10-year old charge of inciting a riot. This setback also robbed analysts of a case study on how religious activists wield political power. The outcomes may well have surprised cynics. But it is best to explicitly provide for safeguards to curtail the potential for even an “implicitly” theocratic State.

One option, applicable at the national level and in large heterogenous states (not Sikkim or in the Northeast), would be to prescribe that the CM, the home minister and the finance minister can never be from the same religion or caste.  These are the three core positions in the Cabinet. This would automatically require political parties to create a rainbow leadership and not a narrow gender, caste or religion-based party cadre. Of course, it will still be possible to co-opt “nominal” members of the appropriate profile. So we need to do more than just introduce end-of-the-pipe restrictions post-election.

Second, the Cabinet must reflect the gender, caste and religious profile of the relevant jurisdiction. This is necessary for adequate plural representation at the decision-making level.

Mandate plurality in candidates nominated for elected office by political parties

Third, we must change the basis on which parties fight and win elections. Registered political parties must be required — by law — to nominate a rainbow of candidates, reflecting the gender, caste and religious demographics at three levels of government — local bodies, state or nation. This is necessary to ensure that the election rhetoric itself changes; votes are not sought on narrow or sectarian grounds and parties develop a pluralist voter base.

Three constitutional amendments to ensure political plurality

All three changes require specific changes to the Constitution so that “plurality” gets embedded in Parliament and in the executive.

It is over-the-top to believe that India or Uttar Pradesh can become a “theocratic” state just by having a “religious head” as its chief executive. As long as the Constitution remains liberal and non-discriminatory; the law is derived from the Constitution and the judiciary remains empowered, plurality and inclusiveness will remain enshrined in law. But additional safeguards are necessary to deliver inclusive policies and action on the ground. The BJP juggernaut is best placed, by using its massive majority, to display good faith by initiating these constitutional changes well before 2019.

nationalist muslims

Adapted from the author’s article in the Asian Age, March 22, 2017 http://www.asianage.com/opinion/columnists/220317/are-safeguards-possible-to-prevent-theocracy.html

 

 

 

victory 2

When it comes to winning elections, the sophistication and efficiency of the BJP political machinery is unmatched. Of course, Prime Minister Narendra Modi’s charisma provides the base, which the party leverages, to ensure that their individual candidates win. So what does this historic win — pulling in an unprecedented 77 per cent of the seats up for grabs in the UP Legislative Assembly — mean for the nation. And specifically, is UP the tail which can wag the dog? PM Modi knows it can. This is why he has set five years from now 2022 as the milestone for changing India – not 2019 when the next general election is due.

UP the sleeping giant

The taj

UP has a rich past and a glorious future. It is the present which needs some looking after.

Uttar Pradesh accounts for around 12 per cent of India’s GDP but has 17 per cent of its population. If you sometimes wonder why India doesn’t grow more than it does or why the existing growth is not well-distributed, look no further. UP is to blame for both negative outcomes. It pulls down national metrics on per capita income and growth. It also makes us look bad on social inclusion. Nearly a quarter of all Muslims and the poor (based on the government’s poverty headcount metric) live in UP. The state’s poverty level, at just under 30 per cent, is the second highest in the country, after Assam.

UP – the key to ending poverty

child poor

If the BJP can halve poverty in Uttar Pradesh, bringing it down from 30 to 15 per cent (same as the existing levels of poverty in Rajasthan, Gujarat and Maharashtra), the national poverty ratio will fall by a massive 10 percentage points, from 22 per cent to 12 per cent. Reducing the levels of poverty in UP also has high positive externalities — particularly political. There are sizable communities of migrant workers from UP in Kolkata, Mumbai and Delhi, through whom the message of “achche din” can travel to these metros, generating a “feel good” tsunami.  Consider that if the BJP can make Uttar Pradesh grow at the average rate of national GDP, it would increase the rate of growth of the national GDP by 0.5 percentage points. This additional income, even if it is proportionately distributed across the population of the poor, would reduce poverty to single digits in UP.

Why the BJP is uniquely place to take up the challenge

BJP leaders

Cynics could ask how can we be sure that the BJP will extract the potential? Others think the BJP will face headwinds while picking a chief minister, thereby risk displeasing sections of the winning rainbow coalition. The squabbling in New Delhi in 2014 is evidence that even the BJP is not immune to internal sabotage by disgruntled cadres. The BJP works best when it functions in a vertically-integrated manner — much like the Communist Party of China. Significant decisions are all made at the very top. Targets are determined for lower level formations at the state and municipal levels. These are then vigorously followed up and performance measured against targets. Now that UP is directly controlled by the BJP, the Narendra Modi performance juggernaut can be rolled out uniformly across the state.

So here are three focused ways in which the BJP can be different.

Give UP back to real-time management by it’s bureaucracy

UP officers

UP has many Durga Shakti Nagpals – officers who seek to serve. The present Cabinet Secretary, the Chief Election Commissioner and the PMs Principal Secretary are all UP cadre officers. But two decades of “populist” rule post “mandal” in the 1990s have diminished the excellence, which was the hall mark of UP administration.

First, today UP is a state which is resource poor and deficient in entrepreneurship. Out of the 100 top companies listed by market capitalisation on the Bombay Stock Exchange, only one company — Dabur India — is headquartered in UP. The Annual Survey of Industries 2014-15 lists only six per cent of the total number of factories and industrial workers, and just five per cent of industrial capital in UP. This illustrates that government efforts remain crucial, unlike in more developed states, where private sector initiatives can substitute for government efforts. The Modi magic, of revitalising the bureaucracy through direct interaction and consultation, as is now being practised at the Centre, must be institutionalised. This “direct contact” pattern of administration at the Centre has significantly reduced the earlier proliferation of corruption and silo-based operations. Mr Modi must return Uttar Pradesh to the real-time management of its bureaucracy, who have been sidelined and broken in spirit for too long.
The State in UP has become moribund. It must be reinvented, and used as an instrument for social change.

Make UP the international “laboratory” for agri growth

farmer

Second, agriculture is the heartbeat of Uttar Pradesh. Poor rural infrastructure and lawlessness have constrained additional investment in agriculture. Eighty per cent of the poor also live in rural areas. Agriculture based on “per drop more crop”; large scale diversification to non-cereal crops and commercialisation of agriculture outside the subsidy regime format of minimum support prices; cheap fertiliser and energy can pay rich dividends. The new land leasing arrangements should be led by UP, just as Rajasthan has taken the lead in amending outdated labour laws. More urgently, crop yield is not uniform across the four sub-regions. Average agricultural productivity can be increased by 10 per cent by simply pushing up productivity in the lagging central and eastern sub-regions (which account for around one-half of total foodgrain production in UP) to the levels prevailing in the state’s western region, adjoining Delhi and Haryana.

Invest in UP’s infrastructure

gadkari 2

Finally, UP has the worst road infrastructure in North India. Power cuts are rampant, even in Noida, which is a satellite township that adjoins Delhi. A proposal to build a regional air hub to service Agra has been gathering dust because the political alignment between the Union government in New Delhi and the state government in Lucknow was not favourable since 2002. If Delhi plans to link Myanmar and Southeast Asia by road with Afghanistan and beyond, over 700 km of this highway must pass through UP. Some of transport minister Nitin Gadkari’s expertise in getting infrastructure going could be usefully applied to UP.

2017 election results are a gift – use it well

The BJP is known for its executive and managerial abilities; its disciplined cadre; its capacity to ramp up domestic and foreign investment and to link investment to results. Uttar Pradesh is likely to give it the biggest bang for every buck it spends, simply as the desire to do better in UP is matched only by the utter frustration of its citizens over their stagnating future prospects. If UP booms, India will follow. This is one chance that we simply must not lose.

bangles

Bangles in Firozabad, brassware in Moradabad, rich textiles in Varanasi, the juciest mangos from orchards across the state, Nimish – the flavoured forth from early morning milking of cows, Mughal delicacies from Lucknow and Rampur, ancient monuments at every turn and a culture bred by centuries of civilised life – UP has it all, except transformational leadership- will Modi be the one? 2022 will tell.

Adapted from the authors article in Asian Age  March 13, 2017 http://www.asianage.com/opinion/columnists/130317/if-bjp-can-uplift-up-all-of-india-will-gain.html

 

Hulk

Scaling up is the name of the game in politics and in business. The BJP secured enviable gains in the early 2017 municipal elections in Maharashtra and Odisha. A win in the Goa state election is likely. A possible, albeit messy, near-win in Uttar Pradesh and potential inroads into Karnataka, Tamil Nadu and West Bengal portend that the Narendra Modi juggernaut is rolling out a massive, vertically integrated consolidation of party votes across the three levels of government.

Big, deep pockets business is in

In business, too, big is beautiful. Government banks and oil companies are being merged into competitively-sized entities. Reliance, India’s second biggest company by market capitalisation, after Tata Consultancy Services, still rankles at the loss of the top position due to faltering gas production. It is now hitting back at the fragmented competition in telecom, targeting an aggressive 50 per cent share by 2021.

ONGC

Bigger publicly owned enterprises and bigger government is the inevitable option if private investment response is weak 

The government sector too is expected to grow. Some of this is dictated by the compulsions of the faltering international economy. Private capital is risk averse when returns are dodgy. Public capital then is the only option. India is terribly under-capitalised in network and social infrastructure. We spend less than one half of what we should to get rid of the infrastructure constraints on growth and security. The government’s budget needs to expand by at least one-fourth to accommodate the necessary capital spend. FY 2017-18 is not budgeted to be different from the past. There is not enough time before the 2019 general election for grounding project plans into reality. Jobs will consequently be funded by public finance.

Citizen anxiety at being left out in the cold

anxious citizens

Should citizens and consumers then be apprehensive about the drive to consolidate and grow across government and business? Not really. Dominance is a systemic outcome of competition. Institutional safeguards can ensure that dominance is not misused to dilute citizen and consumer interests. The scale of operations should be a matter of choice, not compulsion, or the outcome of regulatory nudges. Citizens should rather be concerned that decent jobs won’t come unless businesses and government grow to scales dictated by market parameters.

Multiparty politics only means larger ballot boxes

ballot

The political architecture is similarly fragmented. A loose law allows a mind-boggling 1,452 political parties to be “registered” by the Election Commission under the Representation of the People Act 1951. Only 54 parties are recognised at the state level and just six are national parties. Recognition has stricter norms linked to voter share and elected candidates. Believe it or not, the commission’s powers to de-register moribund parties are not explicit.

Multi-party politics has become a fetish, far beyond its usefulness to the average voter. Tightening up on representational norms is possible without diluting the basic freedom to choose one’s political party. Just gearing up the disclosure, internal governance and accounting requirements, to the levels required for companies, can reduce the number of registered parties.

Smart regulation can weed out frivolous parties

Enforcing regulatory compliance can deter frivolous registration and ensure responsible representation. This is illustrated by the experience of companies. Of the 16 million commercial entities operating in India, just one million are registered under the Companies Act 2013, despite the benefits which accrue from registration. It is not as if only large commercial entities choose to get registered. 66 per cent of companies are very small with an authorised share capital below Rs 1 million or just $15,000. But the widespread reluctance to register is because of the accompanying higher levels of disclosure required. Political parties would respond similarly. Only the most serious ones would remain registered if regulatory requirements were increased in the public interest.

Political consolidation as a public good.

Why should we think of political consolidation as a public good? Our fractured and divisive social architecture provides ready opportunities for exploitation of the cleavages for narrow political purposes. We must make it difficult for parties. which cater solely to narrow agendas. Social inclusion fundamentalists would rebel against any institutional constraint on the freedom of a political party to represent even marginal views. But look at the trade-offs. Caste and religion find no place, in our Constitution, as legitimate grounds for political mobilisation. Introducing institutional mechanisms which encourage broad-banding of political platforms is therefore legitimate.

Mandate rainbow nominations for inclusive politics

symbols

One way to ensure such broad-banding across castes and religions is to mandate that parties must replicate the prevailing rainbow of castes and religions while nominating candidates in specific jurisdictions. Savvy political parties are already doing so. The BJP broadened its appeal to dalit and backward caste voters in Uttar Pradesh (2017). A quarter of Bahujan Samaj Party candidates are Muslims to demonstrate Mayawati’s good faith while seeking Muslim support. The Samajwadi Party’s tieup with the Congress broadens its appeal to dalits and upper castes — both long-time supporters of the Congress.

In a fragmented political market, institutional compulsions to broaden the electoral base can be an effective catalyst for consolidation. This would be a welcome change from the minimalist strategy of securing the largest number of votes polled by splintering your opponent’s vote share below your own.

Leave room to grow 

Limiting governmental and private sector dominance by constraining their ability to grow has negative social and economic outcomes. We barred Facebook from giving free access to a limited Internet space in 2016 due to the misplaced fear of deep pockets-driven future dominance. E-commerce — similarly driven by deep pockets — has somehow bucked the tendency to protect incumbents. Institutional reform to regulate big institutions is overdue. Smart laws and empowered regulators can sift destructive dominance from scaling up for efficiency enhancement. Bulking up is the international trend. We cannot but conform.

shoes

Adapted from the author’s article in Asian Age, March 9, 2017 http://www.asianage.com/opinion/columnists/090317/in-politics-like-in-biz-bulk-up-to-beat-rivals.html

voting

Do Indian voters remain deeply aligned with caste, clan and community (read religious) interests, as reported in the ongoing state elections? Possibly, yes, they do. Continued allegiance to traditional identities makes sense, if new ones never had the chance to take root.

Industrial work was one such silo-buster, as is urbanisation. Both, have had a limited impact on India’s social profile. Large, organised industry employs barely 10 million people, or just two per cent of the workforce. The impact of urbanisation is still far too recent to induce a change in social behaviour. Migration by men, for work in the urban, informal sector, has done a lot to contribute to the urban sprawl. But it doesn’t let new urban identities take root, as families remain village bound.

Modi – disrupting the status quo

No surprise then, if the 657 political parties (many are moribund) that are registered with the Election Commission vie for existing group interests as vote banks. There are only two examples in the past three decades which go against this grain of vote bank politics. The BJP came to power at the national level in 2014 by disrupting traditional identity-based vote banks. In a powerful outreach to young, aspirational India, Prime Minister Narendra Modi provided the instant hope of jobs through a government which worked for them, not against them. This enlarged support beyond the BJP’s traditional vote banks — upper caste and bania groups.

tea-3

Modi exults in the hard work and determination that enabled him to overcome his humble origins  – chaiwala (tea server) – in status quoist India. Mayawati – BSP and Mamata Banerjee – Trinamool Congress are female avatars of Modi.

It helped that Narendra Modi is himself from a backward caste. His is a rags-to-riches story. More important, he flaunts his humble origins and makes a virtue of his struggle to make good. More conventionally, he publicly dons the mantle of the selfless “sevak”. Anybody in the audience could be him, if they only had the gumption to succeed.

AAP – the new “Left”  

aap-uk

The Aam Aadmi Party had similarly disrupted traditional identity politics in December 2014. It fashioned a winning alliance of the urban poor and neo-middle class against the corruption of elites in the Delhi state election. This anti-establishment, anti-corruption model is now facing a test, for its resilience and appeal, in the rural settings of Punjab and the BJP stronghold of Goa — both of which are “rich” states.

Its a tough world out these

wire

Like the Congress during the post-Independence period, Mr Modi’s BJP is shaping a new India. It is an India that recognises today’s harsh international realities. First, unlike the rosy expectations of the 1950s, foreign aid, as an instrument of change, is dead. Economies need to fund their own development, by borrowing from the market or collaborating with foreign investors. This requires governments to bend before those who have the surplus capital; ship up to strengthen their own economies or continue to lag. Second, the consensus of the 1980s, that markets could substitute for the State’s inefficiency, is less credible, particularly after 2008. Strong states seem inevitable, albeit exercising judicious restraint while regulating markets.

A Nobel for the Communist Party of China?

china-politburo

For lifting more people out of multi-dimensional poverty that ever before; for adapting ideology to market realities and for standing true to their national objectives, the Nobel goes to ……. 

China has been the most successful economy, post 1990. It deserves a Nobel Prize for overcoming massive poverty and low levels of human development to become the factory of the world. It accounted for 1.5 per cent of world GDP in 1990 — the same as India. Since then it has cornered more than a fifth of growth in world GDP. By 2015 it accounted for 15 per cent of world GDP and has liberated nearly 300 million people — almost as many as the population of the United States — from poverty.

The Chinese story is of a single-party-managed mega-nation. By mixing market principles of merit and competition with the political energy of a proactive state, it has fashioned a massive politico-industrial machine. China has little patience with the effete romance of liberal idealism. Theirs is the classic hunter’s approach to life — smart strategy matters more than social ideology for filling your belly and remaining stronger than your adversary. This approach resonates in a world where persistent vulnerability to poverty; falling real income and increasingly skewed income distribution clouds even the rich world.

Where is the leadership in India?

tamil-nadu

Reverence for the absent trumps concern for the living, for gathering votes, in mystical India

Mr Modi’s world is that of realpolitik. Performance and outcomes matter the most. In contrast, the other national parties seem dated. The Congress — once a people’s movement, albeit led by professionals — is dormant. The Left is trapped in ideological echo chambers, seemingly unaware that organised, permanent workers are a diminishing vote bank. That economic forces have moved value addition beyond the spatially focused, integrated work areas, of the industrial age. The Lohia movements of the late 1970s rallied the backward castes into regional parties. But these lack vision, credibility or sustainability, beyond their narrow vote banks. The dalits have been transactional in their support for parties, although Mayawati has tried to substitute the Congress with a rainbow-style coalition. Muslims remain boxed into a defensive stance, perpetually seeking the status quo rather than transformation.

Where then do we turn to for leadership in India? The BJP is a clear and credible option. The mantra is that the government must focus on economic inclusion and social inclusion will follow. To take a practical example — higher government revenues from a more efficient tax regime can enable transfer of universal basic income to the poor and marginalised. This neatly avoids the clunky and inefficient option of physically providing cheap goods and services to the poor and caste or community-based support for the marginalised. It may also reduce corruption significantly by around one per cent of GDP.

A new social compact – trade entitlements for opportunity

taxi

The existing social compact between citizens and the State should be reworked. Will citizens be ready to give up their entitlements and de facto freedoms, in return for the State providing more economic benefits — security, macroeconomic stability, jobs, infrastructure and access to healthcare? With money and smartphones in their pockets, people — including the poor — will be able to shape their own societies, without being clouded by the past seven centuries of civilisational shibboleths dumped on them. Can Mr Modi get past the elites who benefit directly from the status quo? 2019 will tell.

Adapted from the authors article in Asian Age March 2, 2017 http://www.asianage.com/opinion/columnists/020317/can-modi-revise-social-compact-2019-will-tell.html

 

Funding the Republic

tricolour

The tricolour flutters happily at the Peer Makhdum Shah Dargah in Mahim, Maharashtra, hoisted by the peer’s devotees, as a symbol of the Indian Republic being alive and well. 

India is a Republic. But often it feels as though only the Union government must carry the can for doing unpleasant things – like levying tax on those who have the surplus income to add to the national kitty or getting heavy with tax evaders. Of course it is a juggalbandhi. The Union government invariably wants to grand-stand and hang on to financial muscle power so necessary to play “big brother”. State governments are only too keen to accept the federal goodies being thrown at them and thereby avoid the pain of efficiency enhancing structural reform in politics and in government. To be fair, the financial and political firepower of the Union government and individual states is asymmetric in favour of the former. This makes it difficult for a state to chart a lonely, unique, development path. The good news is we may be coming to the limits of this asymmetric sharing of development responsibilities.

The Union lacks funds for its core functions

Consider that rapid infrastructure development and public investment to strengthen competitive markets have become the stepchildren of the annual Union Budget process. This continues a trend, started by the previous government, of shoring up state government finances, at the risk of being stingy on spending in areas of its own core, constitutional mandate.

The Economic Survey 2017 notes that state fiscal deficits reduced sharply from 4.1 per cent to 2.4 per cent of the gross state domestic product (GSDP) over the last 10 years, since state governments adopted the Fiscal Responsibility Act. Enhanced Central transfers to states and reduced interest payments, courtesy debt restructuring, benefited states to the extent of 1.8 per cent of GSDP. To their credit, most states used the additional fiscal space to cover the revenue deficit and lower the fiscal deficit to below the target of three per cent of GSDP.

But how long can the Centre play the role of a responsible elder brother, darning his own clothes, whilst buying new ones for his younger siblings?

India’s poor infrastructure constrains growth. Low spending on infrastructure also limits job creation — something India needs. The Union government expenditure on infrastructure has increased from 0.6 per cent of GDP in 2015-16 to an estimated 0.9 per cent of GDP in 2017-18. But it remains inadequate. Adding the state government and corporate — public and private — expenditure on infrastructure totals less than three per cent of GDP in 2017-18 versus the five per cent of GDP we should be spending.

broken-bridge

Dodgy infrastructure: the bane of the Republic. photo credit: indiamike.com

Repairing the broken system for bank credit and private investment

Bank and corporate finances are the second black hole which the Centre’s Budget was unable to address. Banks have accumulated bad loans to the extent of `12 trillion, or 17 per cent of their assets. The Economic Survey 2017 exhaustively discusses the “twin balance sheet problem” — of banks that must write down at least one half of the bad loans and of large private companies that face bankruptcy, for failing to use the loans productively over the past eight years.

construction

The finance minister has been explicit that the government should not bail out the private companies who made bad decisions. This is well-intentioned but difficult to implement.

There are 13 public sector banks that account for 40 per cent of these bad loans. Merging them with efficient banks can mask the problem for some more time. But such mergers can spread rather than contain the contagion. Selling or closing a failed public bank or enterprise requires courage and conviction. Our inclination is to retain the “crown jewels” no matter how tarnished they get. Air India has got a capital infusion of Rs 1,800 crores in 2017-18 on top of the Rs 5,765 crores over the last two years.

Fifty private companies account for 71 per cent of the bad loans. The public mood is for the government to go for their jugular. This will make it politically difficult for the government to fund write-downs of debt. But vigilantism against corporates can rock the growth story, which we can ill afford.

judge

A fast track quasi-judicial process must distinguish between “wilful” and unintended default, caused by systemic shock. Different rehabilitation regimes should be determined for the two categories of defaulters. Wilful defaulters should be pilloried. The downside is that picking and choosing defaulters, itself can perpetuate what this government abhors — crony capitalism.The finance minister has allocated Rs 10,000 crores in 2017-18 for recapitalising banks. This is a placeholder. All eyes are trained on the additional resources unearthed by demonetisation. The RBI is yet to disclose the value of Rs 500 and Rs 1,000 notes which remain undeposited. This may be around Rs 1 trillion. Transferring the resultant excess sovereign assets, from the RBI to banks, can buy some breathing room.

Second, the incremental tax collection from demonetised “black money” deposited in banks, can fund infrastructure development or recapitalise banks, as it dribbles in over the next two years. This windfall was to be distributed to the poor as cash support. But recapitalising publicly-owned banks, albeit with more vigorous oversight and more transparent and intrusive stress tests, has a higher priority. More credit for corporates translates into more investments, more jobs and higher economic growth. These are the fundamentals that must accompany fiscal stability.

More “give” rather than just “take”, needed from States

We are in the middle of an incipient financial emergency, which can be triggered by a shock. The RBI cautions against thinking that inflation has been tamed. Other than food and oil, where prices remain low, inflation hovers just below the red flag of five per cent. This limits the headroom available to overshoot the fiscal deficit red flag of three per cent of GDP.

The Centre needs considerable fiscal slack to fund infrastructure development and recapitalise the banks. State governments can help by enhancing their own tax resources. Imposing income tax on agricultural income and vigorously collecting property tax are low hanging fruit available to them. These measures can add around one per cent of GSDP to their resources. This will enable the Union government to scale back the long list of Central sector schemes for human development and social protection and use the funds instead for its core mandate — developing infrastructure, markets and a competitive private sector.

gst

The Goods and Services Tax Council meets: State’s follow the take rather than give strategy. 

States may well ask why they should bother, since they were never partners in the illicit gains from mega crony capitalism. But this would be short-sighted. Faltering economic growth adversely affects all boats. An increase of six per cent in economic growth boosts state government tax revenue by one percentage of GDSP with more jobs in tow. But above all, cooperative federalism must have some give — along with the take. This is the time for states to give to the Republic, as equal partners in national development.

Adapted from the author’s article in the Asian Age, February 14, 2017 http://www.asianage.com/opinion/oped/140217/to-raise-resources-give-and-take-needed.html

Red flags for FM Jaitley

Finance Minister Arun Jaitley

The embattled Finance Minister Arun Jaitley – clearly aware that the knives are out for him

 

Finance minister Arun Jaitley will be fighting from a tight corner on February 1, 2017, boxed in by low domestic demand and the approaching international headwinds of a protectionist United States.

Fighting on the backfoot is new to this government, which had it easy over the first two years. The windfall from falling oil and commodity prices created fiscal space over the last two years to check the right boxes on fiscal deficit and inflation. High interest rates kept the rupee strong. Deft footwork also boosted GDP numbers since 2014 to signal a new age of high economic performance.

Here are six red flags, which track if the finance minister’s courtroom fighting abilities are still intact as he presents Budget 2017-18.

red-flagDoes the growth estimate triangulate?

The estimate for growth during the current year 2016-17 and 2017-18 will show whether the government recognises that it has a problem. Assumptions of unrealistically high growth have a domino effect. They reduce the credibility of the tax revenue projections and the size of the fiscal deficit both of which track GDP growth. GDP growth estimates above 10 per cent in current prices (corresponding to six per cent in constant prices) or a number higher than Rs 149.5 trillion for 2016-17 and above 10.5 per cent in current prices (corresponding to 6.5 per cent constant prices), for 2017-18 is a red flag showing the government is burying its head in the sand.

red-flagDo the tax revenue estimates sound real?

An estimate for gross tax receipts, including the share of the states in Centrally-levied taxes, higher than the 10.8 per cent of GDP budgeted for in 2016-17 is unrealistic. Sticking to this level may be termed not aggressive enough in the context of the hyped-up expectations from the attack on black money. But note that this level was previously last achieved seven years ago, in 2007-08 before the financial crisis. Now, with fresh uncertainties in demand and corporate profitability, it remains an aggressive target. Anything higher is dodgy.

Any incentives for tax compliance?

red-flagAssuming higher average revenue from increased indirect tax rates, when the Goods and Services Tax rates have still to be negotiated with the states, give the wrong signals for growth, business and private consumption. On direct tax, some fiscal courage is required. Dilute the disincentive to evade tax, inherent in high tax rates — currently between 10 to 30 per cent — for middle-income earners up to an annual income of Rs 24 lakhs. It is reasonable to expect that better compliance will compensate for the hit taken on lower tax rates. Not doing so flags low confidence in the responsiveness of the tax machine to broaden the tax base. Challenging the machine to do better can work. Try it.

red-flagAre there band aids for the victims of demonitisation? 

Economic shocks affect the poor the most. Eighty per cent of the poor live in rural areas. The bottom 40 per cent of the population are either poor — a constantly changing group averaging around 22 per cent of the population — or are non-poor but vulnerable to fall into poverty due to personal or systemic shocks.

The allocation for rural poverty alleviation in 2016-17 is Rs 0.6 trillion across four schemes. The ongoing National Rural Employment Guarantee Act (NREGA) is a second best but a practical, quick-start option to scale up income transfer to the poor to insulate them for the twin economic shocks.

NREGA operates in all the 707 districts of India. This is politically sensible but wasteful. Out of the 29 states there are nine states in which the proportion of the poor exceeds the national average of 22 per cent. These “stressed states” should be specifically targeted. Separately, the government should target 40 per cent of the poorest districts, using the “poverty gap/person equivalent” metric to ensure that there is an incentive to first transfer income to the poorest of the poor. Anything less than an enhanced outlay of Rs 1 trillion for poverty alleviation red flags an irresponsible development strategy.

red-flagHas the fiscal deficit become an unreal holy grail?

Mr Jaitley has been steadfast in lowering the fiscal deficit from the level of 4.3 per cent in 2013-14 — the terminal year of the previous government. He courageously embraced the daunting target of 4.1 per cent, naughtily left for him to deal with by P. Chidambaram in the interim Budget for 2014-15.

He succeeded in meeting the target against all expectations. But he was subsequently, practical enough, to retain a target of 3.5 per cent of GDP for 2016-17 instead of the planned three per cent. Inflation is currently low, at well under five per cent per year — the target level determined in the monetary policy framework. The US generated economic shocks to world trade; to growth and to world demand will keep commodity prices low.

It is good to recollect that the fiscal deficit peaked at 6.5 per cent in 2009-10 soon after the financial crisis of 2008. We are yet again in a perfect storm of domestic and external shocks. The need of the hour is to be practical not foolhardy. If the finance minister chooses valour over vision and sticks to a fiscal deficit target of three per cent for 2017-18, the red flag of fiscal cowardice should go up. The brave accept challenges and fight them openly.

red-flagHas public investment been provided for?

Sluggish private investment requires that the slack be met by public investment. Banks are to be recapitalised, infrastructure developed and armaments upgraded. 2016-17 targeted 1.6 per cent of GDP for Central government investment expenditure. Budget allocations have always trailed actual investment expenditure so there is room for some bravado here. The investment red flag must be raised if targeted investment in 2017-18 is below two per cent of GDP.

To navigate the dragnet of stagnant tax income, lower growth and low demand, the finance minister must avoid raising any of the six red flags. To do so, he must systematically cut waste and pork to balance the Budget transparently.

green-flagPushing for doubling revenues from privatisation to a never-achieved estimate of Rs 1 trillion is one button he should press for increasing the fiscal leeway available to him. This will also signal that the reform process is alive and well. There is nothing like a resource constraint to separate the winners from the also ran.

Adapted from the author’s artcile in Asian Age, February 1, 2017 http://www.asianage.com/opinion/columnists/010217/red-flags-that-finance-minister-must-not-ignore.html

generous-2

In a welcome change of national focus, becoming rich is no longer enough unless the poor are taken along. Prime Minister Narendra Modi, who is very au fait with international headwinds, was prescient in his December 31 address. For the first time, it was not the youth, nor non-resident Indians, nor Hindus, that the PM was focusing on. His attention was primarily on the travails of the poor. He donned the mantle, first evoked by Prime Minister Indira Gandhi four and a half decades earlier in 1971, of a pro-poor proselytiser.

Recovering lost ground

Speaking in the shadow of the economic storm unleashed by the demonetisation of 86 per cent of the currency in November and December 2016, Mr Modi extolled the poor for their patience and resilience. They had shown, he said, “…even people trapped in poverty, are willing to… build a glorious India… through persistence, sweat and toil (they), have demonstrated to the world, an unparalleled example of citizen sacrifice.”

The finance minister would do well to gauge which way the wind is blowing when he rises to present the fiscal 2017-18 Budget on February 1. It is not as if the poor were ignored in the earlier three Budgets presented by him. But they only figured tangentially. Growth, macro-economic stability, infrastructure and jobs for the middle-class young, the usual Davos consensus, took pride of place.

A sombre 2017 ahead

woeful-2017

We face a sombre fiscal year ahead. The International Monetary Fund’s economic outlook — a source the finance minister has used previously to highlight India’s outlier growth performance since 2014 — has projected a growth of only 6.6 per cent in 2016 — one percentage point less than the 7.6 per cent estimated pre-demonetisation. Worse, even growth in 2017 at 7.2 per cent will suffer. Even this is dependent on the shock being temporary. The subtext is that if the ongoing jihad against corruption is extended indefinitely and indiscriminately, business sentiment will collapse. Corruption is a curse. But it must be tackled surgically by an army of savvy saints, who are hard to find.

Lower growth in 2017 would reduce tax revenues. Hopefully this can be compensated by taxing some of the Rs 4 trillion, suspected to be dodgy money, deposited in banks during demonetisation.

Sops only for revenue and economic return multipliers

This stash should also encourage the finance minister to take the risk of slashing income-tax rates to boost revenue through better tax compliance and boost demand. The maximum tax rate for an annual income between Rs 25 to Rs 50 lakhs should be 15 per cent (current rate 30 per cent), with suitably lower rates for lower income slabs. The tax on income between Rs 2.5 to Rs 10 lakhs should be broad-banded at five per cent (current rate 10 to 30 per cent). Tax studies show that the revenue dividend is more pronounced by reducing tax in the lower income slabs. This is probably because the proportionate cost of evasion reduces at higher income levels so it is tough to beat. High income wallahs tax arbitrage internationally via corporate earnings. So, they declare domestically only enough to justify their easily verifiable lifestyle and assets.

Lower growth also red flags the fiscal deficit as a percentage of GDP, which acts as a cap on public borrowing to spend. High fiscal deficits can lead to inflation and public indebtedness. But courtesy demonetisation money is cheap. Banks deposits have swelled by Rs 6 trillion since October 28, 2016. This is low-interest money waiting to be used by the government and its assorted entities. Inflation is well below the target five per cent. This presents the option for temporarily breaching the fiscal deficit target of three per cent for 2017-18 to infuse income into the poorest households.

Rich farmers, poor workers

farm_620

Sops for agriculture are falsely conflated with poverty-reduction objectives. Admittedly, investing in agricultural growth is an efficient strategy for reducing poverty. Eighty per cent of the poor live in rural areas. But this is too blunt an approach.

Fifty-four out of 180 million rural households (30 per cent) own no land and survive on manual labour. Benefits from agricultural growth are indirect for the poor. Scheduled Castes, Tribes and Muslims are overrepresented in this group. They need instant relief. Consumption loans of Rs 20,000 for each household, deposited into bank accounts, repayable by labour in village improvement schemes, can combine the advantages of a direct benefits strategy, coupled with the self-selecting benefits of the National Rural Employment Guarantee Act programme. This requires an allocation of Rs 1 trillion — three times the NREGA allocation. This would be a fit use for the demonetisation windfall.

Neo-middle class vulnerable to sliding back into poverty

neo

But income support is a short-term mechanism to reduce poverty. The World Bank assesses that the Indian growth strategy, whilst effective in pulling people out of poverty, is less effective in keeping them out of poverty. By 2012 poverty levels were down to 22 per cent, from 45 per cent in 1994. But an astonishingly high 41 per cent in the neo-middle class were vulnerable to sliding back into poverty. Even in the go-go years (2005 to 2012) around seven per cent of the neo-middle class slid back into poverty. Sudden economic stress, like the loss of jobs, can significantly increase this proportion.

Reduce multidimensional poverty through better services 

Vulnerability to sliding back into poverty can be fixed if the poor get steady jobs, which are more likely if they are educated. Shocks to household budgets can be mitigated by access to healthcare. Nutrition can be improved through clean water supply and sanitation. Lower tax on low-income earners reduces the effective cost of labour versus capital, making labour competitive in the formal sector. Public services, which reduce the multidimensional index of poverty, can be ramped up by the private sector, if the government provides viability gap funding.

Junk low economic return schemes & protect the poor from shocks

India can be on track, to meet the interim sustainable development goal of reducing the level of extreme poverty to nine per cent by 2020, if we safeguard growth and cocoon the poor from shocks by providing access to better public services. The finance minister must identify the allocations specifically for the core objectives and discard the chaff generated by the testosterone of high growth.

Adapted from the authors article in Asian Age January 20, 2015 http://www.asianage.com/opinion/columnists/200117/safeguard-poor-bring-india-back-on-track.html

him

Public sector angst

So, what is it about social media which gets sarkari types hyperventilating about their gripes and grouses? First, we have members of the para military forces seeking sympathy for the poor living conditions they suffer on duty. Next, we have a General, passed over for promotion, pedaling conspiracy theories around his being overlooked. To cap it all the managing director of Air India laments that a CBI investigation into improper procurement could sabotage the critical turn-around of the publicly owned airline. 

Why for instance do the owners and employees of private companies not do the same. Why didn’t Mr. Ratan Tata wring his hands on social media about the underhand way his successor was cutting the ground from under his feet? Or, for that matter, why hasn’t Netaji – Mulayam Singh Yadav – done the same about the goings on of his son? Why don’t we get to hear more stories of backstabbing, sell outs and short-circuited ambition from the private sector? I suspect the private sector guys feel that exposing their angst on social media is unlikely to generate any public sympathy for them. Working to improve the bottom line of a private company does not gel with the popular concept of national service. Never mind that using resources efficiently and maximizing output and productivity are the corner stone of growth oriented, competitive economies. In India “profit” remains a dirty, exploitative word.

Not even bumbling saints

At the very least public sector officers could be bumbling saints – role models of honesty, diligence and accomplishment. But forget efficiency most do not even have the basic attributes of rectitude. We saw this in the abandon with which public sector bank employees participated in the conversion of old black into new black recently during notebandi. The reasons why more sarkari types do not conform to the ideal are complex. Low organizational expectations from them; a performance system which provides huge rewards for competing successfully for the market (getting a public-sector job) but virtually no rewards for competing in the market (continuously improving performance in the job); lax disciplinary procedures for miscreants and low accountability, all serve to cocoon the public servant in an impregnable miasma of collective might versus citizen demands.  

Antiquated management systems

Continuously improving public sector systems are part of the job of a public servant. But India, today, has possibly the most antiquated public management processes. This despite the availability of funds for purchase of equipment, procurement of technical expertise and the powers to make changes in existing rules being pervasive. But for years the job of managing the household efficiently has taken a backseat to racing ahead with announcing new initiatives for public good and spinning old initiatives into new ones.

High overheads

The overhead cost or, tail to teeth ratio, is very high in the public sector. Just the expenditure on salaries and pensions is around a quarter of the net revenue receipts of the central government. The administrative costs of managing offices – purchase of consumables, electricity, purchase of new equipment, maintaining and constructing offices and government houses, travel and communication costs are additional. 

In public sector accounting, employees matter more than machines. Getting boots on the ground and waving the flag is more important than empowering the employee. That is why Bollywood delights in stereotyping the bumbling cop who ambles up to a crime site gamely swinging nothing more than a lathi. A lathi costing Rs 300 is the sole piece of equipment the average policeman has. Never mind that the average police constable costs the government upwards of Rest 20,000 per month. Providing jobs is a means of empire building for politicians and far too often becomes a lucrative business for the recruiters.

It is no wonder then that “zero based budgeting (ZBB)” never took off. How could it? ZBB is based on the axiom that you can always do better. The past is nothing more than a sunk cost which must never hold back good decisions making in the future. But our public sector operating mantra is to never accept that a mistake has been made which needs to be corrected. Government auditors view all mistakes as evidence of waste. Never mind that individuals only learn by committing mistakes. A baby who is fearful of falling would never walk, let alone run. 

So, what is it that we can do differently in the public sector?

First, by providing cradle to grave employment, even at the officer level, we create a collective (the cadre) where only individuals need exist. Government must dispense with the cadre system for recruiting officers, which is at the heart of the problem. Recruit instead for specific positions against specific eligibility criterion. Open recruitment, on contract, would keep the officers on their toes. 

Second, adopt cost accounting metrics for budgeting. This would make operational systems more efficient and facilitate performance evaluation across verticals.

Third, decentralize financial and administrative powers extensively whilst making the reporting chain flatter. This is the first change Suresh Prabhu made as Minister for Railways in 2015. The beneficial impact is already visible. The IAS should be as adept at organizational development as at strategy or policy making. The incentive today is to shine in service delivery achievements. This is self-limiting once the low hanging fruits have been plucked.  

Fourth, we should experiment with flexible budgeting by broad banding expenditure allocations across schemes. This would enable the executive to maximize the physical impact of budgetary allocations based on the performance of schemes in the field. Parliamentary approval should be limited to setting the macro variables (primary deficit, revenue deficit, fiscal deficit, current account deficit, debt to GDP ratio and the assumption of economic growth) and approve the specific tax proposals. The specifics of how the money is spent should not be held hostage to Parliamentary approval. Parliament must safeguard the macroeconomic bottom line not become part of the executive in micromanaging expenditure via the power to allocate expenditure. 

Lastly, disciplining of errant public sector staff can be salutary. Mistakes happen. What is more important is that they should be corrected once they are detected. Severe sanctions should apply for those who commit rule infractions themselves or those who turn a blind eye to infractions by their subordinates, whilst managing to keep their own desk clean. Conversely, rewards must accrue for others who adopt a positive and proactive approach to rule infractions made without mala fide intention. Greater rewards should accrue, for those who can propose thoughtful changes in rules to plug loopholes and avoid repeat infractions in future.

Managing a government is very much like managing a large, noisy joint family. A combination of encouraging pats, dissuading slaps, a great deal of open discussion and well intentioned decisions made in public interest are the failsafe ingredients for a happy and productive public sector family.

 

 

professor

Some pictures may be worth a thousand words. But when the two are put together, as in a video, they evoke deep emotions and convey subliminal messages. Watch the master of the spoken word — Barack Obama, in his January 2016 address on the mundane subject of gun control in the United States and you will see what I mean. It is unfortunate, that despite the best talent in branding and outreach we fail to use words which convey our intent unambiguously.

Poor namkaran begets poor results

Consider the name of the government department, which is supposed to privatise the public sector. It was created in 1999 under the BJP-led NDA regime and helmed by finance minister Arun Jaitley. Even way back then, it was clear it would not take root. Mandated to raise capital through privatisation — it ended up being named, hypocritically, the department of disinvestment. “Divestment” would have been more proximate to the intent. But the fuzzy name, matched the lack of sustained resolve for a big-bang approach to privatising the public sector. It muddled along till, mysteriously, in April 2016, it was cumbersomely renamed as the department of investment and public asset management (DIPAM). It does nothing of the sort. Its core mandate remains to sell the industrial Central public sector. Public sector investment and asset management continue to be the mandate of every line ministry, for the state-owned enterprises (SOE) under them. No wonder then that the Central public sector not only lingers but grows.

In 2015, there were 235 operating SOEs. But an additional 63 were coming online. One-third of the operational SOE made a loss of Rs 27,000 crore in 2015. The data for 2016 is yet to be publicly shared. But there are unlikely to be surprises here. Named badly at birth, the department lingers on much like the loss-making SOEs.

Clever acronyms can mislead

bhim

Consider also the new government-sponsored payments app named Bharat Interface for Money (BHIM) created by the National Payments Corporation. The app was ostensibly named after Babasaheb Bhimrao Ambedkar — the learned dalit leader and constitutionalist. A payments app named after Babasaheb is quaint just as launching a human rights initiative in his name would resonate. The app is more likely to be associated with the brute power of the legendary Bhim from the Mahabharat conveying that the app is safe and impregnable. Yes, security is one important feature of an app. But it must also be nimble, adaptable, scalable, efficient and convenient to use. Bhim of the Mahabharat was none of these. Legend has it he was pretty resource-intensive — gobbling up nearly as much as all his four other siblings and was difficult to discipline, much like an invincible Robocop. “Killer app” is how kids term an outstanding app. But slang shouldn’t be taken literally to name government initiatives.

Words without momentum

modi-troubled

Prime Minister Narendra Modi, in his New Year’s Eve address to the nation, fell into the same rhetorical trap of belting out a preachy sermon but chose the wrong words. He stressed purity, pain and renunciation as key processes for exorcising evil — in this case black money and corruption-fed terrorism, Naxalism and Maoism.

Left unanswered was who should feel the pain more and make sacrifices — the honest many or the dishonest few? Also, conflating Maoism and Naxalism with terrorism, drugs and loss of human rights is okay if you are a right-wing, conservative American. But in India, these misguided socio-economic movements are the consequences of state failure in providing a basic level of welfare to the poorest of the poor. One cannot simultaneously romance the poor for their virtues — fortitude and honesty; finger the rich for their vices — dishonesty in evading tax, wallowing in luxury in big city bungalows — and yet denounce social movements which seek to give voice to the marginalised, however unpalatable their senseless violence may be.

BJP – get your mojo back

The BJP came to power in 2014 as the voice of reform and growth. It has traditionally been private sector-friendly. This resonated with an India fed up with populism and ersatz socialism, unemployment, poverty and a low quality of life. Touting the cause of the poor by pulling down the rich was never meant to be the BJP’s trademark. The Communist parties and the Congress fight from that shrinking corner of the electoral base. The poor versus rich genie will now be difficult to put back into the bottle. This will be particularly so if growth disappoints and economic stability suffers — both of which are near-term probabilities.

A strong government can trample over many citizens’ rights so long as it can stuff the mouth of citizens with money — as in China. But no money, no jobs and no rights are the fertile grounds on which violence, Naxalism and Maoism thrive.

Keep the narrative simple, not simplistic

Multiple objectives in public governance are a recipe for disaster. One hopes that in the waning days of this fiscal the government will shed some of the fluff it has accumulated. Focusing on infrastructure, macro-stability and private sector-led growth is the only option for creating sustainable jobs and reducing poverty. If an all-out fight against corruption is a must, because of electoral promises, let it begin where corruption breeds. This is in the public and not in the private sector.

A trishul for action

trishul

Three initiatives are overdue. First, make the funding of political parties open to public scrutiny. This is a far more important political reform than having simultaneous elections. Second, exorcise the public sector of corruption before terrorising the private sector. The bribe-giver is the victim of an unresponsive governance system. It is the bribe-taker who is delinquent. It is public sector banks, public service departments, the police and the lower judiciary which need to be “purified”, not the voting public. Third, restore the credibility of regulatory institutions by respecting Chinese walls purposefully built between them and the government. The Reserve Bank of India seems to be the latest victim of executive activism in the demonetisation snafu. Let’s ring the curtain down on disruptive, executive muscularity.

Adapted from the author’s article in Asian Age January 11, 2017 http://www.asianage.com/opinion/columnists/110117/to-create-new-india-3-initiatives-overdue.html

Tag Cloud

%d bloggers like this: