governance, political economy, institutional development and economic regulation

Populism, buttressed by dodgy economics, has become the fashion statement in politics. Last year, the Union government approved handsome “real” increases in government salary. There was little justification for doing so since the government salaries were already fully indexed to inflation and the largesse couldn’t have been justified as a reward for higher productivity.

The default justification was that more money in the hands of government employees would kick start a virtuous circle. Higher demand for goods and services would lead to expanded supply, more jobs and just possibly, more income for the rest of us.

AAP disrupts the cozy status quo in Delhi

This week, the Aam Aadmi Party government in Delhi, used similar tactics to grab eyeballs on Independence Day. Evoking the high moral stance of re-distribution of wealth and the economic principle of boosting demand as justification, the government declared massive increase in the minimum wage. In effect, it imposed a “living wage”, for workers in Delhi.

The impossible dream of “mandating” the end of poverty

Child searches for valuables in a garbage dump in New Delhi

The concept of a “living wage” — pegged significantly higher than the minimum wage — with an eye to decrease poverty has been used in over 100 urban jurisdictions in the United States since the late 1990s. It has also been used to set the national poverty level in India. But it is pegged at very low levels.

In Delhi, chief minister Arvind Kejriwal has proposed that the minimum wages of unskilled labour will be increased from Rs 9,500 to Rs 14,000, semi-skilled Rs 10,600 to Rs 15,500 and for skilled Rs 11,600 to Rs 17,000.

The hike seems unreasonable given that the minimum wage in Delhi is already 35 per cent higher than in neighbouring Uttar Pradesh and 72 per cent higher than in adjoining Haryana.

Delhi is rich but…

It is true that Delhi is relatively rich. Its per capita income of around Rs 18,300 per month is the highest among the states of India and the top 10 metros. Consequently, there is a case for setting the “living wage” in Delhi reasonably higher than in the neighbouring states, purely on the grounds of equity.

The real issue is whether a 47 per cent increase is warranted and how comprehensively should the “living wage” be applied? If it is applied just to the establishments governed by the Factories Act, then it is little more than populism. There are only around 8,000 such factories in land-hungry Delhi and employment in them is static.

If the intention is to enlarge the coverage of the “living/minimum wage” to all registered shops and establishments, which employ around 20 per cent (one million) of Delhi’s five million workers, then the economic consequences can be more substantial.

Mandated wages hurt business and make it shift out 

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Photo credit: blogs.ft.com

The negative impact will be felt in price-sensitive, low value-addition segments like clothing, food and household goods, where higher wages will hurt business profits. More importantly, will a similar “living wage” follow for the one million workers in the informal sector — household help in rich and middle class homes and in unlicensed small establishments? If so Delhi’s privileged elite and wannabes may have to look for a lifestyle change – let the ayah go and manage their own babies; cook for themselves or use an app to order in; make their own beds; wash and iron their own laundry and learn to use a vacuum cleaner. And what of the ubiquitous car drivers and guards who lounge around the front gate of Delhi homes? Will the well-off opt for Ola and Uber instead?

Poor enforcement can make mandated wage a sham

Mandated high minimum wages, far above the market rate, encounter three problems. First, enforcing payment of the mandated wages depends crucially on clean, clever and consistent regulation. In its absence, it encourages the petty but crippling, corruption of “inspector raj”. Enlarging the scope of inspector raj in Delhi, even as it is being diluted in Rajasthan and Telangana sends the wrong message to investment for increasing jobs and private sector growth in Delhi.

High wages result in loss of unskilled jobs

Second, studies from the US show that the benefits are not uniform across the entire spectrum of workers. On average, unskilled workers lose the most from a high minimum wage because employment declines even as a smaller number of workers, who remain employed, benefit from high wages. Mandated wages rarely benefit skilled workers. Governments tend to be conservative in fixing the differential for skills. Delhi provides only a premium of 21 per cent, or `80 per day between unskilled and skilled work. The market premium is already between 75 to 100 per cent. A mason gets twice the amount as his unskilled worker — often a woman, who does the manual work.

In-migration increases fiscal pressure to provide public services

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High, mandated wages attract in-migrants to cities. photo credit: http://www.rediff.com

Third, pegging a price for labour far above the market rate increases the fiscal burden. This happens directly when government salaries are needlessly enhanced. But it also hits the government budget indirectly, when applied to the private sector. Higher the mandated wage for unskilled work the more attractive it becomes for migrants. With open borders, no control on migration and the Delhi government committed, rightly so, to provide a basic quality of life for all — free water, free medical care, free education, cheap electricity, improved toilets and paved roads — the resulting fiscal impact can be crippling.

Immigrants reduce the market price of unskilled labour

One way of ensuring that market wage rates remain aligned with mandated wages and are not beggared by competition from in-migration, is to licence city workers, as in China. But it is difficult to do this effectively in a governance environment of pervasive corruption. Licensing is a one way street to inefficiency and corruption. If government land cannot be protected from encroachment by the mafia, there is little hope of implementing an equitable worker licensing regime. Railway stations are a good example. Try getting a licensed coolie to carry your bags at the stipulated rates and you are more likely to miss your train.

Test the viability first in government contracts

The high salary of unskilled government workers already provides a wage floor. But the incremental numbers employed are limited. The trend, since 1990s when the government adopted the practices of “new pubic management”, has been to outsource non-core services i.e. cleaning, canteen, security and office support. Worker productivity clearly increases under private management. But there is insufficient evidence that the wages paid to them reflect this higher productivity. The apprehension is that the workers will suffer from price competition to get government contracts.

This is a perverse and unintended outcome. Tightly regulating the private contracts that are funded by the government can ensure that the mandated wages are passed through to workers. And contractors do not corner the wage increase. This is how the financial viability of the enhanced wage rates should be tested before imposing them.

But there is little point in cultivating a small, handsomely paid labour “aristocracy”, as the CPI(M) did, whilst throttling investment and employment.

CPIM

Adapted from the author’s article in Asian Age August 19, 2016 http://www.asianage.com/columnists/how-viable-are-hiked-wage-rates-333

border crossing

Border controls across India’s 30 states fragment it economically. The Arvind Subramanian Committee Report, 2015 on Goods and Services Tax-GST, cites economic fragmentation as responsible for 15% in welfare loss. Hopefully, with the GST legislation on its way, the sight of trucks waiting patiently to pay tax will disappear.  Photo credit: http://www.thehindu.com

Expectations are unrealistically high from the long delayed move to amend the Constitution and levy a common Goods and Service Tax (GST- a value added tax) across the Union and all state governments. Truly, this tax can bind India far better than Bollywood or the All India Services have done thus far.

Like the proverbial blind men describing an elephant, each segment of stakeholders see only how the GST could benefit them. Consumers eagerly await lowered retail prices once the pancaked tax embedded in the value chain can be set off.

Suppliers hope that lower tax incidence will enhance their competitiveness versus imports. Studies suggest welfare gains of five percent by reduction within state transaction cost and as much as 15% for supply across state borders.

Tax payers are ecstatic at simplification — the clubbing of more than a dozen individual taxes into a single tax.

The government looks forward to additional tax revenue from better tax compliance on a tax base made larger by higher economic growth.

Governance evangelists are pleased at the potential of reducing corruption, inherent in diluting the incentive to evade tax. This will build on the existing mission to make tax regimes transparent and accountable. Indirect tax revenue grew 29% in the first quarter of this fiscal year, despite merchandise imports contracting by 14% — a tribute to efficient tax collection.

Unemployed students and their parents look forward to a revival of industry and more “good” jobs thanks to efficiency led higher economic growth.

Road freight transporters await the benefits of reduced transaction time and cost. Today 25% of a trucker’s time goes in just waiting at border Octroi posts.

But reality will bite

However, several of these expectations are unlikely to be met over the next three years. There is a trade-off between enhancing tax revenue for the government and reducing prices for consumers or costs for suppliers.

There is also a trade-off between making the GST comprehensive, thereby plugging tax evasion opportunities and shielding small tax payers from the cost of compliance to become a part of the digital audit chain. Eighty five percent of the 9.4 million taxable entities are small, with an annual turnover less than one crore Rupees.

Ensuring that no state government is harmed, also called revenue neutrality, poses the risk of pegging the tax rates so high that they constrain demand and pass no benefit to consumers. Alternatively, the government has to breach the fiscal deficit targets to finance the compensation, but risks stoking inflation.

The Arvind Subramanian Committee Report of 2015 discusses all the trade-offs, pitfalls and optimal options. It is a must read for those interested in an informed appreciation of the issues involved.

Federalism — the real winner

The real winner has been the principle of federalism which has been visibly and practically implemented in public interest. The continuous work on the GST spanning a decade and the directional consensus across three separate Union governments and similar changes within the state governments is heart-warming for all those who would like India’s commitment to federalism, to be more than skin deep.

Similarly, political parties evolved a consensus in Parliament (even the AIDMK’s opposition was muted to walking out, but not voting against the motion) to pass the one hundredth constitutional amendment illustrates that plural and inclusive democracy is vibrant in India.

Naysayers opine that political parties may agree to a generic, enabling provision such as this one, but they will be pricklier when it comes to putting flesh on the bare bones. They may be right. But all negotiations have to begin by defining the envelope within which there will be give and take. This is exactly what happened in Parliament on August 4 last week. Now after a simple majority of the State Assemblies give their assent to the Act, it will be ready to be presented to the President of India to become the law.

Thorny issues remain

However, thorny issues still abound — defining the tax base and thereby the exemptions to be allowed; specifying whether the exemptions are indefinite or have a sunset clause; setting the tax rates for the Union and the States; identifying the existing Union and state government taxes which will be rolled into the new GST; writing up the new model law; specifying the principles for tax assessment and to identify the place of supply at which the new tax becomes payable.

All these are to be worked on by a newly constituted GST Council consisting of all the State Finance Ministers and chaired by the Union Finance Minister. This institutional innovation embeds the concept of federalism even deeper.

The process of rolling out the GST will require a great deal of analytical legwork of the type done by the Subramanian Committee; intensive monitoring of the IT backup for extending digital invoicing and tax payment and coordination of activities across the state governments.

Attempting all this from within the Revenue Department of the Union Government would be an unbearable burden. It would distract from the just-as-vital task of actually bringing the bacon home — enhancing tax collections to 13% of the GDP from 11% today. It does not help that the Revenue Department gets swamped over for at least nine months by the annual budget process.

GST Secretariat

A stand-alone GST Secretariat with a defined budget and human resources can hasten the pace. The Council and its Secretariat could be attached to the Department of Revenue of the Union Government for administrative and budgetary purposes. But, it must have a level of autonomy if its deliberations are to be credible.

The experience with exclusively Union Government staffed secretariats, servicing federated institutions, is not encouraging. The Planning Commission failed to be a credible secretariat for the National Development Council. Its successor — the NITI Ayog — is a Union Government think tank. The Home Ministry based Inter States Council suffers similarly from a Union government bias.

The GST Secretariat should be a mirror of the federated GST Council itself — staffed by officers drawn directly from the state governments and the Union Government. In deference to the pre-eminence of the Union Government, it should be helmed by a Secretary General proposed by the Chair. But in the spirit of true federalism, all senior appointments should be ratified by the Council members.

The Secretariat should be lean and skills based, not exceeding 100. The officers nominated by the States should be paid by the state governments. They would represent state government interests even as they work for the Council. Having both, ministers and senior officers from state governments, represented in the Council and its Secretariat respectively, is federalism at its best. The ensuing bottom upwards consensus will facilitate time bound decision making. This may be a baby step for federalism, but it is a huge leap for indivisible India.

ITax

Last week’s “revolt” by senior income tax officers, meeting in Mumbai, against alleged micro management by the Union Revenue Secretary is unlikely to bother the average citizen. If anything, citizens would welcome glitches in tax collection behind which they can hide.

Mind the growing gap

But the revolt deserves attention because it illustrates a growing gap between officers and the political leadership. A similar gap resulted, earlier in 2015, in the extended and emotive agitation by army pensioners, for implementing the principle of One Rank One Pension (OROP). They and serving officers believed that it was a just demand being scuttled by the civil bureaucracy which acts as a gate keeper between the army and the political leadership. The revolt of the tax collectors is the second time that short circuited wires, between the political leadership and field level officers, are being exposed.

Bad strategy but genuine angst

The instrument chosen, by the tax officers, to voice their concerns via a resolution is questionable in terms of its efficacy as is the selection of the flash point for making their case. Unlike the army, income tax officers are no ones’ favourite person. The income tax department is, unfortunately, generally perceived as being self-serving and uncaring of citizen rights. Consequently, an upsurge of public sentiment in their support, as was the case for OROP, is unlikely. More likely, citizens would advocate even harsher disciplinary measures to pull up the department. Collecting tax is a thankless job.

The choice of flash point is similarly questionable — the transfer of a tax officer who allegedly adopted unfair means to boost his end-of-year performance. He issued a huge tax demand on a public sector bank just prior to the annual deadline and then allowed a refund of most of the tax amount immediately thereafter — a cynical “win-win” strategy for both the officer and the bank.

No one could possibly defend the officer’s use of “temporary tax terrorism” tactics. But the summary manner in which he was “punished” by being transferred (not officially a punishment), on the intervention of the Revenue Secretary, seems to have rankled. It does not help matters that the Revenue Secretary is traditionally from the Indian Administrative Service (IAS) but exercises oversight over the functioning of the Central Board of Direct Taxes (CBDT) under which around 8000 Indian Revenue Service (IRS) officers work. Incidentally there are seven senior officers of the IRS in the CBDT — the apex body for exercising operational control over direct tax administration. But none of them can ever break through the glass ceiling prescribed for them of the rank of a Special Secretary. This is lower than that of the Revenue Secretary, though they get the same pay.

Only empowered agencies perform

In India, we have not developed a culture of equality between field agencies and the secretariat. It is only in the armed forces that the correct equation between the secretariat and the field agency is maintained. This is visible during the republic day celebrations. In the line up to greet the President, the Vice President and the Prime Minister, the Defence Secretary stands lower down than the three service chiefs of the army, the air force and the navy. This is how it should be for all field level entities of the government. The officer in the secretariat must never be the person perceived to be in charge of the field level operations. Maintaining the principle of unity of command and responsibility is a pre-condition for efficient functioning within an agency.

Towards a more nerdy Secretariat  

nerd

The job of the secretariat is to assist the Minister in parliamentary work. It is perverse to adorn secretariat positions with high level administrative powers. The nuts and bolts of administration must be outsourced to the concerned agencies created specifically for the purpose. The role of the secretariat must shrink. The example of Minister for Railways, Suresh Prabhu, is worth emulating. One of the first things he did, on assuming charge, was to delegate away most of the operational powers, centralized in his office, to the Regional General Managers. A secretariat officer enhances value, not by banging people on their heads, but by skillfully using an insider’s appreciation of the operating environment and superior analytic skills to facilitate the functioning of field agencies. Making officers in field agencies perform better is squarely the job of the head of the concerned agency.

In a more evolved work environment, the secretariat is where policy and legislation is formulated. The field agency is where programmes are fleshed out and operations monitored for results. The relationship between the two must not be hierarchical as it inevitably is today. Policy formulation and programme implementation are two entirely different albeit symbiotic specialisations. There must be give and take between the two. One way of ensuring this is to make the heads of both the secretariat and the field agency of equal rank. Indeed, this is one way a Minister — who often might not be well acquainted with her charge — gets a rounded perspective of the issue at hand.

The bottom line is that, whilst the Mumbai IRS officers have chosen their battle badly, their cause, as indeed the cause of all other specialised government agencies and cadres, needs deeper consideration.

We should be moving over to a new governance architecture which values specialisation and extends equal opportunities to all cadres, particularly those which already exist in the Union government. IAS officers, unlike officers from the IRS, are on deputation from the state government cadres to the Union government. The IRS is a home grown, central government cadre. The logic for not letting the IRS manage its own house is questionable. Inserting an IAS officer between the political leadership and the IRS seems an archaic and inefficient way of managing the vital tax function.

The manner in which a majority of the senior positions in the Union government are “reserved” for the IAS is archaic because it does not recognise the heightened role for specialisation in modern administration. Law, Tax, Public Finance, Infrastructure, Human Development, Industry and Trade, Natural Resource Management, Defence, Security and Intelligence are all stand-alone disciplines in which practitioners spend their entire working lives. It is inconceivable that value can be added in policy formulation; program conceptualisation or project implementation, without the relevant experience and skill.

Lift the glass ceiling for specialized central services

Inflection points are always graphically depicted by glass ceilings getting smashed. Institutional wisdom lies in removing glass ceilings as soon as they develop cracks and well before they are smashed by the force of change.

smash

 

Rebranding Indian Rail

IR1

Indian Railways: Lifeline of the Nation” — runs the bold title of a 2015 government white paper. But the reality is that post-1991 the Indian Railways (IR), whilst retaining its high ritual status, ceded ground to competition from road transport.

Too many consultant chefs

It has only itself to blame. The railways steadfastly stonewalled all attempts to reform its operations. Over the past 15 years, railway operations have been studied by no less than six high-level committees, under Rakesh Mohan (2001), Sam Pitroda (2012), Montek Singh Ahluwalia (2014), Rakesh Mohan (National Transport Development Committee, 2014), D.K. Mittal (2014) and Bibek Debroy (2015). There was no committee chair from the railways.

There are seven executive members of the Railway Board, its highest body, that functions directly under the railway minister. There are 9,124 senior Group A railway officers who are specialists in finance, commercial services, maintenance, operations, construction and production of rolling stock. It’s odd, therefore, that the government has never trusted these professionals to come up with a vision of what “the lifeline of the nation” should look like. In fact, this illustrates that reform was never an internally driven priority.

No internal support for reform in IR

Admittedly, with a large workforce of 1.3 million, unionisation in the railways is strong. George Fernandes, former railway minister (1989-1990) and Janata Party luminary, sowed his wild oats as a firebrand, railway union leader. But this is exactly why the Narasimha Rao brand of “reform by stealth” cannot work for the Indian Railways. The bottomline is that in such huge industrial enterprises there is no alternative to a broad consensus around reform and approaching it head-on.

Road wins versus rail

Truck

The railways languished in the post-reform era as it was unable to build private partnerships and leverage its assets. The government too seemed to have given up on it and turned its attention to building highways instead. So as rail passenger transportation doubled, road passenger transportation has trebled since 1990-91. The railways’ share of freight decreased from 53 per cent in 1986-87 to less than 30 per cent today.

The Indian Railways lost ground as it got mired in its own corrosive image of a government entity focused on social objectives — providing cheap, even free, travel. Thus, it lost sight of its mission to become the “economic lifeline” of the nation. Communist China moves less passengers kilometre per kilometre of its rail network than India. But it moves four times more freight kilometer per kilometre of its network than India. The India Railways’ priorities are time-warped around passenger traffic.

The seamless movement of freight over long distances can cut the cost of production and make industry competitive. Long-distance freight is best moved by rail. But the Indian Railways lost the freight business due to a monopolistic tariff policy for bulk freight, such as for coal, iron ore, cement and foodgrains. It is similar for the power sector. Bulk consumers like industry are still charged at penal rates to cross-subsidise rural and retail consumers.

Fuzzy mission

Railway minister Suresh Prabhu, like several of his predecessors, is articulate, public-spirited and full of ambitious programmes spelt out in his Railway Budget speech this year. On offer is more public investment to remove the choke points which congest and slow down traffic; a more extensive search for alternative revenues from station redevelopment and the monetisation of assets; better passenger facilities and continued implementation of the dedicated freight corridors.

SPrabhu

But clarity on the Indian Railways’ core mission is missing. This has to be, first and foremost, the movement of freight and increasing the railways’ market share in the city and suburban passenger traffic.

Three reform measures are preconditions for success.

City and suburban travel

metro

First, it is SMART to switch city and suburban passenger traffic to rail from road. The savings on travel time and the avoided cost of air pollution justify such investments. But this is an option only if we can make these systems attractive for private investment and management. Assured viability gap funding on the back of regular adjustment of tariff is a must. The experience of “independent” regulators in electricity shows that in large metros, with high income levels, cost-reflective tariffs can work, if customers can transparently see for themselves the value proposition the service offers.

Use scarce capital to move freight

IRFreight

Second, allocation of public capital across competing projects has to be “value for money”. The railways’ passenger and freight businesses should be insulated silos for accounting purposes so that costs and revenues can be allocated to each service. Our rail freight tariff is on average 40 per cent more than China’s. But our passenger tariff is on average 75 per cent cheaper. Investing to make freight move four times faster at 100 km per hour instead of 25 km per hour makes sense as there is room to reduce tariffs and expand business. Investing to move passengers at 130 kmph, instead of 70 kmph, makes no sense because although passengers are willing to pay for it the Indian Railways is not willing to charge for it.

Go for partnerships

Third, the Indian Railways must think of itself as part of a supply chain rather than a stand-alone competitor. It must seek partnerships with air, road and marine transporters, and with traffic aggregators that can yield better returns. This is possible through transparent contracts, even as the railways remains a government entity.

In 1990-91, India had few choices except to reform by stealth. We have moved on since then. The reform constituency has grown. The real concern now is how to insulate losers from the pain of change and development. Loss of employment or of land must be fairly and adequately compensated. Using scarce fiscal resources for this purpose aligns with equity and is more efficient to bump up aggregate demand than across-the-board public sector pay increases.

Adapted from the authors article in The Asian Age, July 27, 2016  http://www.asianage.com/columnists/3-reforms-put-railways-fast-track-019

 

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Solar Impulse 2 touches down in Spain completing a historic trans Atlantic flight. photo credit: dispatch.com

Air India recently made headlines by offering last-minute unsold seats at the price of AC rail tickets. It makes a lot of business sense for the national carrier: every marginal rupee it earns adds to its bottom line. More important, the fact that its bottom line is attracting leadership-level eyeballs is welcome for a state-owned company that budgeted for government support of Rs 19,900 crores over the 2012-16 period.

This new initiative could bomb if it makes regular air travelers, who are time flexible,wait till the last minute to book tickets. This would squeeze revenues further. But if it induces rail travelers to fly instead, it will be a win-win. This is a calculated risk that must be tested. What is more significant is that it signals the Maharaja’s changed can-do business-oriented approach.

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Disruptive pricing or funded wars for market-share

Disruptive price innovation in passenger travel as a whole is a welcome move to squeeze out hidden value. This should be distinguished from the price war unleashed by private low-cost airlines a decade ago, and again in 2014, to gain market share within aviation. As the e-commerce market has found, funding losses to push out the competition quickly reaches the endpoint. Air India, a full-service airline, unlike some private carriers which levy hidden costs for baggage, seat allocation and food, should be encouraged to go further and explore all commercial options for expanding the air travel pie. Pulling away rail travelers, willing to pay AC fares, to fly instead is a good one.

Less than one per cent or 60 million inter-city travelers choose to fly. For most, the higher cost is the barrier. But for significant numbers easy connectivity is also an issue. Civil aviation is the neglected child of the ersatz socialism we have long practised. So deep is the association of private enterprise and markets with the rich that even this government, with its massive mandate, has to battle populist urges to stay on course with its reform agenda.

The socialist bias against air travel

Till just two years back, the thought of air travel competing with trains was a fantasy. Seen through the binary vision of poor versus non-poor, air travel is a luxury used mostly by the non-poor. Imposing penal taxes on air travel is therefore only a natural corollary of this bias.

The good news is that such mindsets are changing. The Union government has worked quietly but effectively since 2014 to convince state governments not to levy penal taxes on air turbine fuel, which cripple expansion of this sector. The fuel cost is 50 per cent of an airline’s total costs. State governments earlier saw air travel as a cash cow and levied VAT at penal rates of up to 29 per cent.

Government intervenes to correct the tax disincentives

But now several states, most affected by poor connectivity, wisely responded to the Union government’s efforts to de-demonise air travel. Orissa, Madhya Pradesh, Chhattisgarh, Jharkhand and West Bengal slashed VAT to nominal levels in late 2014. Even CPI(M)-ruled Tripura was persuaded to reduce VAT to 18 per cent. Around 50 per cent of air traffic today and the bulk of profits are from flights linking the seven large metros. The need for better regional connectivity is obvious in a country of India’s size, that is also saddled with our dodgy surface transport infrastructure. Travelling from Kanyakumari, on the Indian Ocean, to Jammu, just below the Himalayas, or from Dwarka, on the Arabian Sea,K to Dibrugarh in Assam takes at least three days by train and even longer by road.

The Centre has launched a parallel scheme to improve air connectivity by creating a special fund to finance the gap in financial viability for linking Tier-2 and Tier-3 cities by air. There are around 50 of these. The pity is that this initiative is seen as fulfilling a social objective. This is an effective way to kill the long-term sustainability of air operations on these routes.

Regional air travel a wooly “social” objective  or just good economics?

Regional connectivity shouldn’t be branded as a populist goody. Air connectivity drives and contributes to growth and decent jobs. Globally, every job created directly in civil aviation leads to an additional six jobs indirectly. Only a link with growth will induce serious air operators to see the proposed subsidy as an initial sweetener rather than a perpetual crutch. Faster and better passenger trains are an option too. But it will take at least two decades to build upgraded rail tracks and the appropriate rolling stock. Our fastest passenger trains run at an average speed of only 80 km/hour. High-speed trains of the type envisaged between Mumbai and Ahmedabad and later between New Delhi and Varanasi can be viable only on high-density routes. These also cost a packet. The intrepid Elon Musk of the SpaceX rocket venture; Tesla Solar Wall and automated electric car, envisages a disruptive technology – travel by Hyperloop — an elevated tube mounted on pylons with passenger pods pushed through at hyper-speeds using electro-magnetic waves.

hyper loophyper loop2

The ball park estimate is a capital cost at $6 billion, just a fraction of the $68 billion, planned to be spent on the high-speed rail link between Los Angeles and San Francisco. Musk concedes that beyond 1,500 km, air travel would still be cheaper.But this innovation in transportation is yet to be piloted and tested. Commercialization is unlikely before 2030 though Musk is pushing for 2020.

Air travel also more safe and easy to secure than surface transport

In lightly-policed countries like ours, the security and safety of ultra high-speed inter-city passenger trains is a matter of some concern. Air travel is more difficult to cripple and offers higher security levels as it is off the ground. It is suitable for connecting urban growth hubs at distances beyond 500 km under our “enclaved pattern” of development

The Maharaja has kicked-off its strategy to meet the competition in a fiscally sustainable and affordable manner. More power to the elbow of the civil aviation leadership to grow the pie of the air travel business.

air india

Adapted from the authors article in the Asian Age, July 18, 2016 http://www.asianage.com/columnists/incentivise-air-travel-new-links-will-boost-growth-825

 

rajan thinker

Rajan the thinking central banker: photo credit: bloomberg.com

Raghuram Rajan, India’s central banking czar, will be history by September 2016. He enjoys unprecedented popularity and near cult status as Governor of the Reserve Bank of India. Some of this has to do with his youthful looks and fresh demeanor — unusual in a profession peopled by dour old men. But much of his appeal is related to the confidence and skill he brings to the job, which he plunged into in weeks, rather than the months, which are the usual learning curve.

Even business — usually taciturn about rooting for bureaucrats, has also publicly supported his conservative strategy to keep the rupee stable; build foreign reserves; check inflation and ensure reasonable positive real interest rates, to protect the large mass of middle-class savers. International capital flows, which are as much about fundamentals as about the Iqbal — the credibility and charisma — of the central bank, responded well to his strategy for stability with fundamental reform.

Job specific technical brilliance and international standing matters

Rajan is the first RBI governor to came to the job with considerable experience in international finance (in the IMF) and even more significantly, a long spell in American academia, in the same area. To the billionaires who make the markets move, Rajan is a familiar face, with a track record of original thinking and practical foresight. He is best known for disagreeing with mainstream economists and foretelling the 2008 financial meltdown.

Rajan’s exquisite symphony- the “Dardnama” (book of pain)

In India, his legacy is the exquisite symphony, he wrote, of caution mixed with big-bang reforms. On interest rates, he was consistently cautious. His mantra was that flooding the economy with cheap money is not a quick-fix for growth. Instead, it can spark off high inflation, as in Brazil.

To the common man, this resonates well with the millennium’s continuing conundrum of jobless, inequitable, high growth. There are no quick fixes for these flaws in today’s post-industrial, service-oriented growth model. Rajan had no choice except to focus on keeping inflation low; preserving the real incomes of the disadvantaged who don’t have the luxury of inflation-indexed incomes and pushing banks and industry hard to become competitive.

His historic big reform was break with the past and publicly finger banks that had lent inefficiently, destroyed capital and most likely enhanced corruption — given the magnitude of bad loans accumulated by them since 2011.

He shone a bright light on the dodgy bank loans overburden- shockingly high at more than 12% of bank assets and 4% of GDP, rather than keeping them hidden under furtive, refinance Ponzi schemes. He was likened by “incremental reformers” to a bull in a china shop — pulling down both fraudsters and unlucky entrepreneurs with equal ferocity.

Admittedly, big-bang reforms shake up the cozy status quo and inflicts pain. But if followed through with decisive surgery, as Rajan recommended, it could have created sustainable wealth, in the medium term, rather than slowly bleed the financial system till it collapses, as happened in the developed world in 2008.

“Big bang” reforms too disruptive for India’s political economy

Will there ever be another Rajan as RBI governor? More importantly do we need another Rajan, given our political economy?

India is a conflicted society — at once eulogizing “savants” like Rajan, and yet shrinking away from the ripples they create in the village pond. It takes a lifetime of work in India to play the system harmoniously. Rajan came before India was ready for him. So while we may not be able to digest a Rajan today, there is unlikely to be a shortage of “suitable” talent. But the real pity is — why have we tried to “fix” a system that is not broken. Why not let the good work continue?

Tough global headwinds for the new Governor

head winds

Grapic credit: janeaustenslondon.com

The irony is that by letting Rajan go in September this year, the government will actually be cementing his “rock star” legacy. The second half of 2016 is blighted by uncertainty and will be hell for the new governor. First, is the near-term question mark over Brexit on June 23. If the “Leavers” win, Europe is surely in for turbulent times. But this may not actually happen, as the British are far too practical to be brash and emotional.

Second, even without a Brexit, the economic outlook is gloomy. Protectionism is growing and geopolitical instability is getting worse. These are fertile grounds for a flight of capital to safety and away from emerging markets like India. A tightening by the US Federal Reserve in the second half of this year may convert the capital flight into an outward-bound tsunami, severely denting our foreign exchange reserves and importing instability.

Oily silver linings and political compulsions

vote 2016

India’s largest state-Uttar Pradesh, votes in 2016: photo credit: teluguflavours.com

The only good news is that oil prices are likely to remain low. The low lead time for the mothballed 500-odd oil fracking rigs in the United States to return to work ensures that any uptick in price beyond $50 will deliver a supply response. Saudi Arabia, with nominal production costs, a deficit budget and a deficit current account and a proposed public listing for its oil company, is unlikely to rein in production or oil revenue. But low oil prices also depress incomes in oil-producing countries, which is bad for Indian exports and disastrous for inward remittances — that are largely dependent on the Gulf countries remaining lucrative employment sinks for Indian expatriates.

Low growth potential in the coming years, combined with the domestic compulsions of the largest state election in Uttar Pradesh in 2017 and three smaller states and a national election in 2019, are likely to strain the fiscal discipline, which the finance minister has assiduously built up since 2014. Rajan was lucky. But had yet to be “Indianised”. He would have got there. But time ran out.

Job description for applicants

queue

India financial leadership job vacant- only the best need apply: photo credit: blogs.wsj.com

Needed an RBI Governor with the political acumen to align with the government’s compulsions. Must be able to quickly improve the well-being of voters. Must also have the economic guile to minimize the resultant damage caused by politics to the economy. Must have his finger on the pulse of Bharat; the experience of having walked this tightrope earlier and the good fortune of being lucky. Must be able to strike practical deals — with big defaulters to ensure that capital starts getting rolled over; with banks so that interest rate cuts are passed on to borrowers; with the government so that Rajan’s “dosanomics” inspired efficiency enhancing incentives are carried forward: cut red tape and discretion in licensing of financial intermediaries; keep interest rates positive in real terms; exercise forensic oversight over banking discipline. Must be reconciled to the macro-economic ball being carried mostly by the government. Must have the access and ability to discreetly warn the government against scoring self-goals.

Adapted from the authors article in The Asian Age, June 19, 2016 : http://www.asianage.com/columnists/does-rbi-needs-political-governor-511

The death of “rutba”

police colonial

Rutba, an urdu word, means status or honour. In sarkari parlance it equates to the “shock and awe” evoked by a single determined officer. Some of this is larger than life, the stuff that legends are made of- like a single Sikh soldier equaling 1.25 lakh opponents in battle or a Gurkha mowing down dozens with a flashing Khukri.

The Americans are more practical about such things. For them shock and awe is unleashed via devastating fire power from the sky and thousands of armed boots on the ground. In India belief in the rutba of a single District Officer or Superintendent of Police to quell a local disturbance, still lingers.

Clearly, rutba, either of the Indian or the American kind, was lacking in Mathura, Uttar Pradesh, last week, when an armed mob of land grabbers, operating under the guise of social do-gooders and political anarchists, murdered two senior police officers and injured many more. Twenty-two squatters are reported to have died in the retaliatory police firing.

The occasion for the ruckus was a High Court order for their eviction from a public park they had illegally occupied since 2014, adjacent to the local police headquarters. It is not easy to preserve rutba if a police force has to be on good neighbourly terms with criminals camping unauthorisedly, on public land, right under their nose.

No dearth of Police martyrs

martyrs

photo credit: rediff.com

Search the net and there are dozens of police martyrs you will unearth- in the North East, Bihar, Kashmir, Punjab, Andhra Pradesh and Mumbai, battling ideological or religious terror mixed up with mafiosi making a quick buck from fractured politics and instability. All police officers are trained to lay down their lives in public interest. But this ultimate sacrifice should be a last resort not a prime mechanism to evoke public or a substitute for full institutional support.Getting killed is not a good way to serve the nation. The idea should be to kill the sob across the line of fire – to paraphrase US General Patton. This is not easy in situations of domestic violence. The enemy is elusive, as are the support systems for an honest police officer.

Institutional collapse in the police

Rutba overrode such political economy obstacles in the past. But no longer. Rutba derives its salience from inherited institutional prestige and power. The only Indian institutions, which continue to demonstrate rutba are the Supreme Court of India and the army. A soldier, in uniform, still creates a stir and evokes awe. Similarly, the Supreme Court has retained its reputation for independence and fair play.

Under colonial rule, the police and the army were co-joined. Even today, in Uttar Pradesh, the Superintendent of Police is called kaptan sahib. Captains of the British Indian army, who had to be cashiered out because of injury, were appointed to the police, which was considered a “softer” job.

But the two institutions have been purposefully made to diverge, possibly to check mate each other and thus ensure the supremacy of civilian control over both. The army continues to be viewed favourably, as the one which does all the grunt work. The police are perceived to just hang about wielding a baton or a lathi, harassing people and pocketing bribes. In a 2002 Transparency International survey of citizen perceptions, the police were ranked as the most corrupt.

Bollywood, has for long, either reviled the policeman as a bumbling Inspector Clouseau- of the Pink Panther fame – or played up the image of the good, fearless cop- Amitabh Bachchan in Zanzeer; Om Puri in Ardh Satya and Ajay Devgun in Gangajal-  who take on criminals and vanquishe all. Neither over-the-top-image is helpful.

The hapless police officer

hapless policeman

Being a policeman is an unenviable task. The police work best, in a regulatory environment where the dos and don’ts are clear and align with the law. Today, there is nothing muddier than when and how, a police officer should wield the powers legitimately vested in her. Whom to challan or ignore for a traffic violation; how forcefully to quell unruly behavior on the streets –  each petty incident, requires the police officer to first think through the political consequences. Decisive, timely, preventive action consequently suffers. Events snowball, as the local police wait for directions from higher levels, who ignore such events, till they explode and become “above the radar” on centralized flash point monitors. By them it is too late to save lives.

The colonial mindset- all are unequal

But are we all blameless? Indians, view the rule of law, not as a framework within which to mould our behavior, but as a hurdle, crossing which, is a metric of our prowess and power. District Magistrates and Superintendents of Police are required to be adept at this game of privileging and stratifying people – just as their colonial predecessors did.

poor

photo credit: revleff.com

Your social status is reflected in the manner you are received by these worthies. The poorest, unorganized litigants are stopped outside the gate by police guards. Their only chance to get the big man’s attention is to hope his car will stop, as it moves through the gate, its window wound down, through which a written petition is allowed to be stuffed and heart rending pleas babbled.

For the middle class- petty businessmen, small farmers and the poor who come via intermediaries – lawyers, village and block level politicians or non-state actors – a darshan (face to face meeting) is usually arranged by the peon in tacit recognition of their collective power. The aggrieved persons stand before the big man and only the leader is offered a chair to sit, whilst the issue is briefly discussed and assurances given to get it “looked into”.

darbar

Photo credit: tribuneindia.com

MPs, MLAs, rich landlords, big business people and senior government officers are ushered into an “inner office” where the atmosphere is more relaxed and tea may be served or at least offered. When ministers visit and want to meet the DM/SP, who will “call on” (visit) whom, depends on the relative political weight -“closeness” – of the two to the Chief Minister.

Unreal laws

Under colonial rule, the rule of law primarily protected the interests of Europeans. Post-independence laws are aggressively egalitarian on paper but quite toothless on the ground. In Kenya, another previous British colony, till 2006 or so, a large land owner – usually European – could shoot to kill a trespasser, without application of the “quantum of force used” rule. In India this principle regulates the use of force for self-protection. The Kenyan rule, whilst unjust, was honest and aligned with political reality. It worked well to preserve property rights.

Our laws are hopelessly idealistic and un-enforceable. We have the right to private property but it can be taken away, quite casually, for ill defined “public purposes”. Purposefully poor oversight of public property and abetment drive encroachments. But the reason why we all view encroachment so benignly is that, the concept of property rights is very lightly embedded in our political and social consciousness.

The High Court was legally correct to order eviction. But the political circumstances which allowed the encroachment to happen, in the first place, made the order unenforceable. The cost of such hypocrisy is two dozen people dead, many more injured and a further nail in the coffin of the rule of law. We ignore the political economy, within which laws operate, only at our peril.

Adapted from the author’s article in Asian Age, June 11. 2016 http://www.asianage.com/columnists/mathura-failure-grassroots-governance-382

 

June 3, 2016 things reach a head in Mathura, a pilgrim town two hours by road from Delhi towards Agra.

mathura

Lord Krishan’s Temple Mathura. photo credit: easydestinations.net

The hot spot is a 200 acre plus public park, occupied in 2014 by a set of criminals and land grabbers, masquerading as social revivalist and curiously, political anarchist associations camps in the public park on their way to Delhi, from Sagar in Madhya Pradesh, to demonstrate against the Union government policies.

Lord Krishna’s land seems attractive to them. The land-rich public park even more so. They dig in and grow in numbers over time to around 3000. They establish a self-ruled colony – as most slums are- under the nose of the District police office. They play the political game to resist eviction, even thought the town residents want them out. The local police, ever hesitant to take strict action per law, least they upset the apple cart and displease someone important in Lucknow or Delhi, play possum. A convenient route for inaction is found. Register a Public Interest Litigation with the Allahabad High Court. The expectation is that the case will drag on for generations. Meanwhile the status quo can be preserved.

math mathura

The massed “human shields” behind which the land grabbers hid photo credit: despardes.com

The Hon’ble High Court refuses to play ball. It swiftly orders the eviction of the interlopers. Cut to a young, conscientious, police officer – Mukul Dwivedi, Superintendent of Police (City) who leads from the front. Santosh Kumar Yadav, the Station House Officer of Farrah is with him. The task is difficult. The interlopers are armed to the teeth- guns, bombs and full of bravado. The police is aware of their arsenal. But they make the fatal error of underestimating the determination of the interlopers.

The police force is met with bullets, bombs, bursting gas cylinders and mayhem and is brutally beaten up. The SP dies from his wounds. The SHO is shot dead. Scores of policemen are injured. More police forces arrive. They retaliate with bullets. 22 interlopers are shot dead, beaten up or burnt to death in the ensuing melee.

the blazing battle

The blazing battle of Jawahar Park: Photo credit: UPI.com

The blame for letting the situation get out of control is, as usual, put on the local police and district administration. Indeed they are to blame, because they had the powers to evict the interlopers long back, but did nothing.

But the price in blood is paid by the officers on the spot. The state government awards each of the families of the two police officers callously murdered, a grant of Rs 20 Lakhs each. Jobs for family members follow. The healing touch is applied to the living.

The real question is, what has the incident done for the image of the police and their morale. No one wants to die in vain. Mukul Dwivedi and Santosh Kumar Yadav would gladly have given their lives, if by “giving up their today they could build a better tomorrow for their colleagues in the police”. But have they?

Read the anguish expressed in a characteristically mild manner letter of condolence (below) by the officers recruited in 1980 to the IAS, IPS, IFS, IRS, IC&ES and the IAAS  via the common UPSC examination. Most (including this writer) have retired. Those that still serve do so in leadership positions in the Union government and state governments. Other than the cohort camaraderie, what this group of 67 shares is despair, that the civil services should have come to this- where institutional inaction imperils their very lives.

To,

Shri S Javeed Ahmad, IPS, Director General of Police

Uttar Pradesh Shasan, Lucknow.<dgpup@nic.in>

Shri Alok Ranjan, IAS, Chief Secretary, Govt of UP <csup@nic.in>

Shri Akhilesh Yadav, Hon’ble Chief Minister, Govt. of UP. <cmup@nic.in>

Shri Rajnath Singh, Hon’ble Home Minister, Govt. of India <38ashokroad@gmail.com, jscpg-mha@nic.in>

June 6, 2016

Condolence message from 1980 batch AIS and Central Service Group A officers on the martyrdom of brave hearts: Mukul Dwivedi SP (City) and Santosh Kumar SHO Farah, Mathura

Sir,

We, the serving and retired officers of the 1980 batch of the AIS and Central Services Group A, deeply condole the untimely and violent death of Shri Mukul Dwivedi, SP (City), Mathura and Shri Santosh Kumar Yadav, SHO, Farah, Mathura.

We strongly condemn the perpetrators of this murderous assault on police officers performing their duties. We hope that an enquiry will swiftly identify the culprits and ensure that they are punished under law.

These brave officers have paid the final price in the call of duty to implement the orders of the Hon’ble High Court of Allahabad, in difficult circumstances, which were out of their control.

In doing so, they have held high the tradition of “service before self”, with courage and dedication and amply displayed their deep commitment to maintaining the Rule of Law. They have made us all proud.

Please convey our heartfelt grief to the families of the deceased police officers. We all stand with them in their hour of deepest sorrow.

We are also contributing Rs 50,000/- directly to each of the families of Shri Mukul Dwivedi SP (City) Mathura and Shri Santosh Kumar Yadav, SHO Farah, Mathura as a small token of our respect for the supreme sacrifice made by these two brave hearts.

Signatories

  1. Gurjit Singh, IFS, Ambassador of India to Germany
  2. Javed Ahmed, IPS (MH), Ambassador of India to Saudi Arabia
  3. Vinod Aggarwal, IAS (JH) Secretary, National Commission for Scheduled Castes.
  4. Ram Tirath, IRS, Member, CBEC, GOI
  5. Ananya Ray, IRS, Member, CBEC, GOI
  6. K.C. Jain IRS, Principal Director, Income Tax, Delhi
  7. Naini Dhillon, IAS (UT) Secretary, Interstate Council, GOI
  8. Satya Mohanty IAS (AP), Secretary, National Human Rights Commission
  9. Vijay Anand, IRS, AS, ISRO
  10. Anthony Desa, IAS. Chief Secretary, Madhya Pradesh
  11. Rakesh Garg, IAS (UP) Secretary, Minorities Commission, GOI
  12. Thubdan Gomphel Negi, IAS (HP) State Election Commissioner
  13. T.P. Seetharam, IFS, Ambassador of India to the UAE

14.Upendra Tripathi, IAS (KN) Secretary, Ministry of Renewable Energy, GOI

15.Smita Chugh, IAS (JH), Member Secretary, Tariff Commission, DIPP, GOI

16. Sujata Mehta, IFS, Secretary (West), Ministry of External Affairs, GOI

17. Shanker Aggarwal, IAS (UP) Secretary, Ministry of Labour and Employment, GOI

18. Ashok Lavasa, IAS (HY) Finance Secretary, Govt. of India

19. Rajiva Misra, IFS, Ambassador of India to Austria

20. Aradhana Johri, IAS (UP) Chairperson, NACWC

21.Ashok Shekhar, IAS (RJ) Addl. Chief Secretary, Rajasthan

22. Amitabh Kant, IAS Retd, (KL), CEO Niti Ayog

23. Shanti Jain IPS Retd. (UT), Member, Police Complaints Authority, Delh

24. K.P. Raghuvanshi, IPS Retd. (MH) Advisor Security, RBI

25. Ajit Kumar, IAS Retd. (BH) Vice Chancellor, NIFTEM

26. Sanjay Panda, IAS Retd. (TR) Chairman, Executive Committee for Skill Development, Tripura

  • DP Singh IAS Retd. (UP)
  • Sunil Arora IAS Retd. (RJ)
  • Navneet Wasan IPS Retd, (AP)
  • Vivek Harinarain, IAS Retd. (TN)
  • T.S. Appa Rao, IAS Retd. (AP)
  • Malini Thadani, IRS Retd.
  • Rajesh Kishore, IAS Retd. (GJ)
  • Maheshwar Sahu, IAS Retd. (GJ)
  • C.V.S.K Sarma, IAS Retd. (AP)
  • K.K. Maheshwari, IPS Retd.
  • PK Patnaik IAS Retd. (BH)
  • P.C. Sharma IAS Retd. (UTT)
  • S. Srinivasan, IAS Retd. (KN)
  • V. Ramani, IAS Retd. (MH)
  • Ambassador Radha Ranjan Dash, IFS Retd.
  • Sharad Bhansali, IRS Retd.
  • Shishir Priyadarshi, IAS Retd. (UP)
  • Atul Gupta, IAS Retd. (RJ)
  • Samir Mathur, IAS Retd. (HY)
  • Rajendra Kumar, IPS Retd, (AM)
  • N.P. Singh, IPS Retd. (TN)
  1. P.S. Kathiresan, IAS Retd (TN)
  2. Raghu Nadadur, IAS Retd. (KN)
  • Sunit Kumar, IPS Retd. (BH)
  • Ashwini Kumar, IPS Retd.
  • Udayan Mukherji, IPS Retd.
  • S.M. Jaamdar, IAS Retd.

54.Vijay Laxmi Joshi IAS Retd (GJ)

55.Kameshwari Subramanian IRS, Retd

56.T. Balakrishnan, IAS Retd. (KL)

57.Shri Krishen, IAS Retd. (UP)

58.Jagannath Chamber, IAS Retd. (UP)

  1. P.K. Mohanty IAS Retd. (KL)

60.Ambassador R. Swaminathan, IFS Retd.

61.Surjit Kumar, IAS Retd. (TN)

62.Amita Misra, IAAS Retd.

63.Nandita Bakshi, IRS Retd.

64.Neeraj Jain, IAS (MT)

65.Neera Saggi, IAS (WB)

66.Harsh Mander Singh, IAS (MP)

67.Sanjeev S Ahluwalia IAS Retd. (UP)

_____________________________________________

 

 

 

Yes, it’s true. Raghuram Rajan is very Un-Indian on multiple counts.

RR early

Photocredit: live.av.info  Raghuram Rajan a youthful financial messiah amidst grey heads

Early start

First, like Dr. Manmohan Singh before him and unlike every other Governor of the Reserve Bank, Rajan became governor at the “tender”, almost youthful age -by Indian metrics- of just fifty years. This is a tribute to his compelling competitiveness for the position. But more importantly, this means he is likely to have a long professional after-life, once he stops being Governor, just like Dr. Singh.

Not wedded to holding everlasting public office

But unlike Dr. Singh, Rajan is keeping his professional options open in case his term is not extended in September 2016. Of course, Rajan is not the first RBI Governor to contemplate an after- life out of public office. I. G. Patel, who also became the fourteenth Governor of the RBI at a relatively young age, went on to head the IIM Ahmedabad and then the London School of Economics. He is also reputed to have declined the offer to become Finance Minister in 1991.  But such instances of daring to dream beyond everlasting public office are rare.

The outsider

RRajan outsider

photocredit: mumbaimirror.com

Second, Rajan, unlike all his predecessors, did not come to the Governor’s office via the serpentine pathways of the extended public sector. Instead, like millions of upwardly mobile, middle class Indians of his generation, he earned his spurs in the US, in academia and then in the International Monetary Fund – where merit means having the capacity to challenge the established status quo with evidenced, sensible and better policy options.

Mission: To perturb, not preserve, the status quo for equitable growth

Perturbing the status quo is not a quality held in high regard in the backward looking Delhi Durbar. Here, precedent and incremental change- often mistakenly equated with policy predictability – command a premium. Rajan stands out for his impatience with an India, known perpetually for its potential but with an unendingly, shoddy present. Worse, he speaks out against a financial system, which has traditionally encouraged crony capitalism; been cavalier with the rights of the poor and constrained, rather than freed, India’s abundant animal spirits.

Tactics: Unafraid to work only for public interest

Third, Rajan’s single minded pursuit of macro-economic stability – read low inflation- in an increasingly uncertain world, marks him out as an outlier. The dominant, albeit convenient, consensus in India, is that we can simply spend our way out of an economic downturn, without feeling the pain of the structural reforms, which underpin sustainable and equitable growth. This is understandable, because inflation doesn’t really bother Imperial Delhi, Mercantile Mumbai or Harit Hapur- the triumvirate which moves India.

After all, babu pay and pension is 100% indexed to inflation, so why worry? Inflation doesn’t bother corporate India either. It pushes real interest rates into negative territory; reduces the cost of servicing debt and makes fresh borrowing cheap. Nor does inflation bother big farmers. The cereals or sugarcane they produce are sold on a cost plus price fixed by government. Never mind, that inflation is a silent killer – of daily wagers in the unorganised rural and urban sector, who have to eat one roti less, to make do and the lower middle class and the aged, who see their savings go up in smoke.

Metrics: Cut red tape and discretion in bank licensing

Fourth, by making available private bank licenses on-tap for eligible entities, Rajan displays completely Un-Indian haste in throwing away executive discretion in favour of transparency. By disciplining banks and forcing them to clean up their balance sheets, Rajan is exceedingly Un-Indian. He hits at the roots of the cozy relationship between politics and corporate money, which dates back to the Freedom Movement.

Market value: Options on both sides of the Indo-American universe

Lastly, Rajan’s ultimate betrayal of Bharatiyata is that he holds a Green Card, which entitles him to permanent residence in the US. Even worse, he wants to hang onto that privilege, if he gets a second term as Governor, post September 2016. Should he not have reciprocated his everlasting gratitude to the nation, on being appointed Governor, by tearing up his Green Card? Certainly, it would have been a grand gesture of his long term commitment to India, had he done so. But in a democracy, contractual obligations are determined by the law, not sentiment.

Attitude: Professional not a supplicant

But most galling is that by hanging onto his Green Card, Rajan displays a very Un-Indian desire to seek a second term, not as an abject supplicant but as a professional, on terms, which are mutually acceptable between him and his employer – the Government of India. Of course this is never-before-seen arrogance, by the standards of the public sector, where applicants must wait cap in hand, for the chance to serve.

Role model: For Indian bureaucrats

The upside, in this otherwise grim tale, is that Rajan’s approach is the only way we will ever have a professional, merit based bureaucracy, working in public, rather than narrow political interest. The internationally recognized system of contractual, senior public service appointments, has never found salience in India because politicians fear losing control over a pliant bureaucracy. Contractually appointed professionals, like Rajan, can say no, because they have market based options, outside the public sector.

Every Indian expatriate values competition and choice

But, consider also, that the hordes of expatriate Indians who throng Prime Minister Modi’s meetings overseas, are similarly Un-Indian, like Rajan, because they value competition and choice above embedded entitlements.

Not too different from any other worker in the Indian private sector

Guess what, 97% of the workforce in the Indian private sector are also Un-Indian, like Rajan, because they have no secure, life-time tenures. They face the test of competitiveness, on a daily basis.

arun jaitley London

Photo credit: Business standard.com:  Finance Minister, Arun Jaitley very much in tune with the future.

In fact, even Finance Minister Arun Jaitley might also be Un-Indian, under his very Indian clothes. After all, he does seem to be quite comfortable with Rajan and birds of a feather flock together. But, then again, perhaps not. After all, Jaitley’s Hindi is impeccable, whilst no one has ever heard Rajan speak in Hindi. Field Marshall K. M. Cariappa, India’s first commander-in- chief of the army, couldn’t speak in Hindi either. When berated by the entho nationalists of his time, he riposted, that he made up for not knowing Hindi by having a dil (heart) which was “ek dum Hindustani”. Surely, so is Rajan’s and that should be good enough.

cariappa

Field Marshall K.M. Cariappa- speaking from the heart 

Adapted  from the authors article in Newsiaundry  May 23, 2016    http://www.newslaundry.com/2016/05/23/why-raghuram-rajan-is-not-indian/

car jam

photo credit: indiatoday.com. How many 2000 cc plus private diesel cars can you spot in this randomly selected grid lock? Imposing a green cess on large diesel cars is populism at its worst. Less than 5% of private cars fall in this category and they have fairly competitive exhaust parameters because diesel engine technology has come a long way from the 1990s. The real culprit is the dirty fuel supplied in India. 

The practiced ease with which the Supreme Court settled the Uttarakhand political snafu and restored constitutional propriety and federalism there, with President’s Rule being lifted, compares unfavourably with its dilatory proceedings on the use of diesel for fuelling cars in Delhi.

To recap, the Supreme Court banned the registration of diesel cars with engine capacity of and above 2000cc in December 2015 at the height of the smog scare in Delhi. Earlier this month, it tried to enforce its April 1 deadline for all taxis in Delhi to convert from diesel to CNG, but later backed down due to the economic dislocation it would cause.

The court’s association with the micro-management of fuel, technology and urban air pollution in Delhi dates back to 1993, when it acted on a PIL to clean Delhi’s polluted air. Thereafter, the government practically ceded ground to the Supreme Court as the prime mover for preserving clean air in the nation’s capital. Citizens still applaud its historic 1998 order making CNG mandatory for all public transport in Delhi.

The Supreme Court didn’t like diesel as a fuel then, and its views today remain the same, though the technology and circumstance have changed considerably. It is generally accepted that bringing Indian fuel standards on par with Europe is the best option to lower urban pollution from motorised transport. The government has plans to upgrade fuel standards to European levels (Bharat VI) by 2019. But the government lacks credibility in making such promises, given its past record. This implies the need to monitor how well the government is working towards that goal.

Why diesel?

diesel

photo credit: greencarreports.com

Globally, diesel has become the fuel of choice in the past two decades since the Kyoto Protocol on climate change imposed carbon emission targets on developed nations in the 1990s. Diesel cars produce considerably less carbon emissions than petrol cars, but have higher particulate and NO2 emissions. Improving the quality of diesel supplied — along the lines of city diesel, that is low-sulphur, clean diesel developed in Sweden — reduces the particulate and NO2 emissions to acceptable levels. This is what Europe has done. India can and should do the same.

Why ignore the low hanging fruits of rationalising fuel price incentives?

In the short term, the Union government should equalise customs and excise duty on diesel and petrol. The Delhi government should do the same for value added tax. This will remove the artificial retail price advantage of 20 per cent enjoyed by diesel.

The fatal preference for diesel versus petrol goes back to our ersatz socialist past, when the lazy rich drove petrol cars while others used tractors, agricultural pumps, buses and trucks running on diesel, which was thus subsidised.

Today, the rich use large diesel cars while the growing middle class uses petrol-based scooters, motorcycles and cars and small cars running on diesel.

All public transport has converted to CNG and there is negligible agricultural activity in Delhi. These are ideal conditions for scrapping the preferential tax structure on diesel.

Correcting a tax-based market distortion will not attract eyeballs, nor does it appear as high-minded as imposing a “green cess”. But this is the right thing to do. Expenditure on fuel comprises around 25 per cent of the life cycle cost of running a car. So getting the price of fuel right is a key step to change consumer preferences. If a litre of petrol comes at the same retail price as diesel, much of the demand for diesel cars — particularly in the sub 2000cc segment — will simply vanish.

Green cess on large cars- populism at its worst.

The wrong thing to do would be to put a “green cess” on the registration of large, private diesel cars in Delhi as the Supreme Court seems to prefer. First, if a “green cess” is to be imposed, then in the interest of equity, it should be imposed on all “polluting” passenger vehicles that are not fueled by CNG or electricity.

Second, prescribing engine capacity as a metric for punitive taxation encourages gaming. Manufacturers will go marginally under the radar by “cheating” on capacity calibration with no benefit in emissions.

Third, imposing a selective “green cess” on engine capacity rather than emissions, which is a better, albeit easy to cheat metric, can be misread as populism and just bleeding the rich. Large diesel cars are just around five per cent of the car stock in Delhi. The cheapest large diesel car comes at a price of `20 lakhs-plus on the road. Of this, 45 per cent is tax and other government levies collected by the Union and state governments. Budget 2016 imposed an additional cess on large cars on top of the existing high excise duty.

If the intention is to penalise the use of large cars per-se — defensible environmentally on multiple counts — then the green cess should be imposed on all large motorised vehicles and not just diesel cars. The excise duty structure does that already. Excise duty on large cars is three times higher as compared to the duty on small cars. The real question is why make large cars unaffordable? What are the economic consequences thereof on jobs and economic growth versus the environmental benefits?

Going back to ersatz socialism?

Prior to the 1990s, the government used to dictate to industry what to produce and thereby constrain consumer demand. The government abandoned its policy of invasive ersatz socialism for good reasons. Why revisit a model which penalises wealth creation that is rightly dead and buried?

Banning the registration of large diesel cars in Delhi is an avoidable knee-jerk administrative response with unfortunate economic consequences. It disrupts economic activity (car production and consumer choice); puts people (taxi owners, drivers and consumers) in financial jeopardy and creates uncertainty through a rule-by-fiat approach.

There was never much to be gained from this ban in terms of cleaning Delhi’s air even in the short term. The bulk of air pollution is from point sources other than diesel cars. Aggregate pollution from motorcycles and scooters that run on petrol far exceeds the pollution from cars. Dust, agricultural residue, industrial stack emissions and soot from coal comprise the bulk of particulate emissions.

Citizens welcome judicial activism in the supply of public goods like clean air as the government routinely failed to provide them in the past. But all governments are not the same. Should not the principle of “judicial forbearance” prevail till a government fails? Let the government do its job. But keep a sharp eye out for citizen rights. Economic policy is about experimenting with trade offs, across multiple objectives and options, for which the law provides no real answers.

Adapted from the authors article in Asian Age May 17, 2016 http://www.asianage.com/columnists/don-t-demonise-diesel-955

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