governance, political economy, institutional development and economic regulation

The price of democracy

July 9, 2018

beggar

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

Why we are not China

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

Money or efficiency make the world go around

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

Wasting scarce capital

Amravati

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

Over-designed public projects

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

Frank admissions of failure are as important as bragging about success

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

Adhia

Cheap finance induces waste

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

Four matras for democratic success 

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

Efficient public services

online

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

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

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

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

Link official accountability with efficiency in use of capital 

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

Stop fiddling with markets

markets

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

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

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

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

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bureaucracy, Business, Democracy, Digital connectedness, Economy, India

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Who rules Delhi?

July 6, 2018

Delhi throne

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

Supreme Court clarifies the law

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

Judicial decisions unlikely to resolve political power stand-off

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

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

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

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

How it all began

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

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

Kejriwal

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

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

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

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

Union government’s view on services too expansive

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

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

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

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

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

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

Dharna

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

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Show the middle class some love

June 30, 2018

middle class

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

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

The income tax anatomy of the middle class

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

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

Income tax rates are reasonable

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

GST rates are arbitrary

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

Why is there no standard deduction for costs in services?

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

Progressivity in GST on services is poorly designed

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

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

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

 

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

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

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

farm house

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

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

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

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Budget, Economy, India, Tax

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Nikki Haley – not one to get confused

June 28, 2018

Nikki

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

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

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

confederate flag

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

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

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

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

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

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

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

Modi Nikki

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

 

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India’s elite bureaucrats – unshakably resilient

June 19, 2018

 

Mughals

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

zenana

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

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

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

IAS

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

Why change?

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

The IAS has no “skin in the game”

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

Quick to learn, but no deep personal knowledge or insight

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

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

Urjit

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

Short term hires should come and go with the government

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

What does short term hire mean for the reservation policy?

Mayawati

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

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

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

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

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

Alas, has this come too late?

time

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

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

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BJP, Book Review, bureaucracy, India

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India’s geopolitical choices till 2040

June 17, 2018

Trump

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

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

China Russia

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

China investment

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

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

G7

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

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

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

SCO

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

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

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

switzerland

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

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

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Pranab da mimics Atal ji

June 10, 2018

 

Paranab RSS

The brouhaha over Mr Pranab Mukherjee’s visit to Nagpur, as the chief guest at a valedictory function of the Rashtriya Swayamsevak Sangh (RSS), foregrounds the stunted nature of politics in India.

Politics is about reaching out

First, consider the absurdity of the prevailing schoolboy notion of “team” spirit extending to a ban on supping with one’s political opponents or with those whose ideology is distant from one’s own. This downgrades politicians to being nothing more than groupies of one or the other party – much like football fans.  Amusingly, ever more rigorous behavioural tests of allegiance are demanded, as parties themselves, become ideologically indistinguishable.

The “sameness” of post ideology politics

After all, other than the fuzzy social concept of Hindutva, there is little to distinguish between the BJP and the Congress. Even Hindutva – at least the soft Vajpayee version – is associated with no discrimination across caste or religion. This naturally includes no mollycoddling of Muslims or Christian but also rules out targeted pogroms against them. The constitution makes Sikhs, Buddhists and Jains, honorary Hindus, even though, these are distinct religious minorities. The erstwhile Karnataka government proposed this year that Lingayats be listed as a minority religion within the Hindu pantheon.

None of this aligns with the hard Hindutva line of “nationalising” Hinduism to the exclusion of all other religions. Indian Muslims often retain their caste consciousness, as do Sikhs, even though neither religion envisages caste divisions. For Baba sahib Ambedkar, caste and not religion, was the biggest social cleavage. And he was right.

Who, amongst the opposition, is not a Hindu?

opposition

Hard Hindutva remains untested as a political instrument to consolidate Hindu votes. Who amongst the opposition – Mamta Banerjee, Captain Amarinder Singh, Bhen Mayawati, Akhilesh Yadav, Lalu Prasad Yadav, Rahul Gandhi, Naveen Patnaik, Chandrababu Naidu, K. C. Rao, E.K. Palaniswami or P.Vijayan, is not a Hindu, albeit of the “soft” inclusive, Hindutva kind?

Standing tall, like Atal ji, means leaving the comfort of one’s corner 

Atal ji

Second, it is odd that, on the one hand, the “secular” camp bemoans the absence of “tall” leaders, like Atal ji, who were widely acceptable, aroused respect rather than antagonism and who could be relied upon to do the right thing by the nation. Yet, they take strong exception to Pranab da emulating the Vajpayee brand of inclusiveness, by reaching out to the RSS. Pranab da did not go to Nagpur in the naïve hope of converting the RSS into a peacenik. The purpose was to show to the current lot of political leaders, that it is possible to stand firm, on what one believes, even in the midst of political opponents. After all, our diplomats do this almost daily, when they serve on committees and in nations, where the mood may be inimical to India. By participating, one shows the public, the strength of one’s conviction and the rationale thereof. Opponents may remain opponents. But at the fringe, citizens get the opportunity to rethink role models, possibly resulting in a softening of hard positions, much like a glacier crumbling at the edges, in the face of climate change.

Demonising one’s opponent is unhelpful, listening and participating is better

Third, demonization of opponents is reminiscent of what fundamentalists do. Those who espouse a secular, liberal agenda must surely shun the fundamentalist’s tool kit. Prime Minister Modi was widely criticised by the secular crowd, for not donning a skull-cap, publicly offered to him by a delegation of Muslims in Gujarat. This was an extreme case of political symbolism, marking out Mr Modi, as being different from the average leader, who has no qualms paying lip-service to minority sentiment. The hosting of Iftaar parties, by those, not keeping the fast, is a prime example of superficial secularism.

Owisi

Asaduddin Owaisi, an MP from Hyderabad and President of the All India Majlis-e-Ittehadul Muslimeen, claims Pranab da’s Nagpur visit has “finished” the Congress. The implication is that Muslims will no longer feel “protected” by the Congress. This is entirely possible. But it could signal progress of sorts. Minorities voting for parties which advance their modern professional or business identities, rather than feeding-off their traditional identities, would be encouraging. If the Hindu vote is splintered today, why must minority votes remain transferable en-bloc, like pocket boroughs?

May Pranab da’s tribe multiply

We need more leaders like Pranab da, who are unafraid to grow a common ground between the uber Right RSS and mainstream, secular Indians. Even the Bharatiya Janata Party (BJP) should rethink its arcane electoral arithmetic, based on uniting the Hindus against the rest. The “Hindus” have never been a monolithic group. Caste and regional identities have always mattered more than the fact of being part of a family of Hindu religions. That is why Hinduism, despite all its warts – like the caste system – remains an attractive, forward looking religion, which assimilates rather than divides. Nationalising Hinduism, as the RSS is trying to do, will be as disastrously limiting, as the nationalisation of the private sector by Indira Gandhi, was for India.

Looking for repeat orders is better than one-off customers 

The BJP came as a whiff of fresh air in 2014, after a decade of more-of-the- same rule by the United Progressive Alliance. The last four years have seen some economic progress. The BJP should feel confident of citizen support based on results. It clearly overreached whilst setting targets, quite forgetting, that high aggregate targets do not matter to the average voter. Much as in commerce, repeat orders, are an outcome of a rewarding, initial customer experience. Would you buy a Patanjali product the second time, merely because their turnover is increasing rapidly or because the initial customer experience pleased you? Voters are no different. Indivisible security and shared growth remain key touchstones of State credibility. The government must strive to achieve these.

 

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BJP, elections, Hindu leaders, India, Indira Gandhi, politics, RSS, Secularism, social liberals

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Follow the money to tackle the fiscal perfect storm

June 6, 2018

Piyush Goyal 2

Piyush Goyal, the interim finance minister, will need to be a lucky general if he is to overcome the triple challenge of widening trade and fiscal deficits and lacklustre private investment.

Exports – India’s achilles heel

Despite our comparative advantage of cheap, skilled labour and entrepreneurial zeal, export pessimism is endemic — unlike in China. Last year we imported goods worth $460 billion, while exports were just $303 billion, leaving a trade gap of $157 billion. We try and cope with the trade deficit by mimicking the American economy — minus the pull of its global currency. We maintain a strong, stable rupee and high interest rates to encourage inward financial flows of capital to plug the deficit in the external account and protect our foreign reserves.

Our saviors – inward remittances from Indians in the Gulf

Gulf workers

We are blessed that our valiant expatriates in the Gulf states regularly repatriate their foreign earnings to finance their families struggling to survive in India. Net inward remittances — around $70 billion per year — cover around one-half of our trade deficit. The inward flow of foreign direct investment and “hot money” flowing into our equity and debt markets provide the residual foreign exchange for imports.

Aping America’s strategy to manage its external account, is out of context

A chronic trade deficit forces us into economic contortions. One such is high interest rates to generate demand for the rupee, never mind that it permanently disadvantages exports and makes domestic production uncompetitive, versus imports. A new monetary policy announcement is due later this week. If the Reserve Bank of India increases base interest rates, it will be in line with its inflation targeting, rupee strengthening and external account stabilisation objectives.

High interest rates can kill our nascent economic recovery

The consequences for the domestic economy will be harshly adverse. Cheap money and a realistic exchange rate is what drove the Chinese juggernaut for years. Admittedly, it can also create bubbles. But private investment is at risk. The emerging political uncertainty and the yet to be completed corporate insolvency processes — affecting 15 per cent of bank assets — are investment dampners. Higher interest rates could well be the straw that breaks the donkey’s back. Public investment is always a poor substitute for private investment. It comes with the enormous risk of misallocating capital hugely, including for political ends.

A circle of wealth excluding the poor?

Political economy considerations also conspire to maintain the inward financial flows of “hot money”, which boosts stock market valuations. Over the last two months, foreign portfolio investors have sold a net amount of around $3 billion of Indian assets roiling our thin domestic stock and debt markets — eroding the wealth of 40 million equity holders. But it matters little for over 200 million other families, who continue to squirrel away their meagre savings into interest-bearing bank or post office savings accounts, or in gold.

Look beyond tax revenue to fund burgeoning expenditure

HAL

The Central government is constantly walking on a razor’s edge to achieve fiscal deficit targets – which is necessary to avoid stoking inflation. It is a tough call to choose between allowing oil spikes to pass through to consumer prices at the cost of stoking inflation and consumer anger, or to absorb the price increase within the general government finances, at the risk of blowing the fiscal deficit targets. The win-win solution is to find a source of additional non-debt financing, till the full benefits of GST kick in over the next five years. One option is to monetise the public investments made thus far in industrial entities, infrastructure and land.

Find a non-tax source to replace the cushion provided earlier by low oil prices

Ashok

During 2015-18, the government reduced the fiscal deficit by one per cent of GDP because of the availability of additional revenues of Rs 2 trillion from cheap oil. The government should target raising Rs 4 trillion over 2018-20 by monetising public assets, including the sale of equity in public sector undertakings. These capital inflows can help keep the fiscal deficit within three per cent of GDP. This is not easy. Embedded vested interests, which benefit from such investments, would create hurdles. Political capital will have to be spent.

Sell our “crown jewels” and monetise completed publicly financed projects 

NALCO

The disinvestment ministry was notionally empowered last year to discharge a limited mandate with respect to managing government equity in PSUs. But disinvestment remains a programme of simply selling government equity, when the stock market is high, to plug the fiscal hole and keep the fiscal deficit in check. 2017-18 was a landmark year. The government sold equity worth Rs 1 trillion due to very adroit management and with help from deep-pocket publicly-owned entities like ONGC, which bought into HPCL and other institutional investors who generated the demand pull. This was a one-off. The target this year is 20 per cent less at Rs 800 billion.

Air India is a high-profile disinvestment, which can stem the annual loss borne by the government. The 2016-17 loss was Rs 58 billion. Not enough to break the budget but unnecessary, and hence wasteful. No bids were received for it. Blame the flight of international capital to “risk-free” investments. Blame our fragile domestic political environment prior to the general election. But also blame low appetite within the administrative departments to let go of the PSUs that they control.

Don’t mimic the UPA – discipline departments which fight to retain PSU assets 

Air India

It is astonishing how quickly political capital can fade. Prime Minister Narendra Modi’s signature theme was that his writ runs in the Central government. But the foot-dragging in the Air India disinvestment case seems to illustrate that this might have changed. Admittedly, Air India is an iconic brand. For long, you felt you were home once you boarded Air India — remember that familiar smell of curry? Selling it, specially to a foreign investor, is like the British selling Jaguar-Land Rover to the Tata Group. Pragmatic but heart rending. We have yet to become business-like about our crown jewels, as the British have. We sell our assets past their expiry dates and then wonder why we got peanuts.

Focus, diligence and smart choices can make a difference

Success in navigating through this perfect storm will depend on avoiding the bureaucratic gut instinct for “tax terrorism”; monetising public assets in mission mode; monitoring expenditure closely and ensuring fiscal discipline, while absorbing the oil price increase and providing for higher farm gate prices — two politically inescapable imperatives. If the finance minister is lucky, oil prices will subside; America’s tempestuous and unpredictable President will lapse into hubris and the domestic political landscape will change for the better. But don’t wait for it to happen.

Adapted from the authors opinion piece in The Asian Age, June 6, 2018 http://www.asianage.com/opinion/columnists/060618/a-fiscal-storm-looms-dont-wait-for-godot.html

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Oil shock: Entry point for reform

May 25, 2018

POTUS Saudi

The latest oil shock — an increase from $69 (average Indian import price) to $80 per barrel (Brent) this week — is courtesy the American President, Donald Trump, who unilaterally pulled the United States out of the 2015 deal between Iran and the UN’s Permanent Five (US, UK, Russia, France, China) plus Germany. This spooked the global financial markets, which justifiably fear renewed trade sanctions on Iran. Pulling out Iran’s 5 per cent contribution to world oil production has consequences. The nuclear deal which had earlier ended sanctions boosted world supply reducing oil price for India from $84.2 in 2014-15 to $46.2 in 2015-16. New sanctions may reverse the trend.

Who has POTUS benefited?

The gainers are the oil producers. The US President has imposed the supply constraint that Opec finds difficult. Saudi Arabia, Iran’s Sunni bête noir, is in clover. The 42 per cent increase in prices over last year, relieves fiscal stress; is wonderful for the long-awaited listing of Aramaco, its national oil company, and avoids the unpleasantness of having to tax its citizens or reducing their benefits.  Other countries in the Gulf, Venezuela and Russia will also benefit. America’s shale oil producers, for instance, are busily removing the covers on their drills.

Who suffers the collateral economic damage?

The big losers are China and India. For India, higher prices mean a bigger trade deficit and more stress on our foreign exchange reserves. Another outcome is rupee depreciation. Foreign hot money is pulling out to “safe haven” destinations also in expectation of an increase in US interest rates. The hot money bleed made the rupee slide by around six per cent to more than Rs 68 against the US dollar from around Rs 64 earlier. But it is still overvalued and needs to go down to Rs 70.

The risks for India

The oil shock poses two risks for India. First, the fear that it will increase the current account deficit (CAD) — the difference between international receipts and payments, from trade and income flows — beyond the acceptable level of two per cent of GDP.

Second, it poses a conundrum of navigating conflicting objectives — preserve the market-based retail oil price mechanism whilst graduating the price shock for consumers and containing inflation.

Moody had revised India’s credit rating upwards last year. Standard and Poor had not. Enhanced imbalance on the external account and missing the fiscal deficit target for 2018-19 will invite a review of India’s sovereign risk.

How serious is the risk for the CAD – red flagged at max. 2% of GDP 

At $80 a barrel, our additional spend on oil imports could be around $9 billion this fiscal, net of the increased earnings from oil product exports. But the threat to keeping the CAD below the target of two per cent of GDP is over-hyped.

The oil shock has a silver lining. With more robust fiscal balances in the Gulf, investment and jobs will increase for Indian workers, who generously remit all their earnings. Inward remittances, higher than $69 billion last year, will dilute the impact on CAD. More petro-dollars to spend, can boost our exports to the Gulf.

Second, the accompanying six per cent depreciation of the Indian rupee will make our price-sensitive exports much more competitive. Last year exports grew by 12.1 per cent to $300 billion. A three per cent growth in exports this year would generate the additional spend needed on oil imports of $9 billion.

Third, a weaker rupee discourages imports generally. Last year total imports increased by 21 per cent. Making domestic producers more competitive is in India’s interest. The risk of breaching the CAD cap is minimal.

imports

The risk of balooning the fiscal deficit

Transport minister Nitin Gadkari had recently opined that subsidizing oil consumers is not aligned with a market economy. Not quite right,sir. It is in a market economy that the question of subsidy arises – of course subsidy must be tightly targeted, which ours is not.

In an old, Soviet-style economy, there are no subsidies because the government sets the retail price for the production units which it also owns. In our context, this is analogous to directing ONGC to absorb the cost. This is best avoided.

Preserve oil PSU commercial autonomy

Last year, ONGC assisted in achieving the disinvestment target by buying the government’s shareholding in HPCL. Whilst even such nudging to support the government is undesirable. But far worse is to dilute ONGC board’s commercial autonomy for pricing products. More importantly administered pricing distorts markets and discouraged private sector investments and operations – both highly desirable in oil.

Three better options exist : They need professional effort and political capital 

Slash frivolous budget allocations for current year

swaach

Three options present themselves. First, intrusive Budget scrutiny can do the trick. A fiscal “surgical strike” slashing frivolous expenditure, which has crept in, can generate the Rs 0.6 trillion to sanitise consumers from a price increase. This is just six per cent of the Rs 10 trillion, which the Central government spends on schemes without including wages, pensions, interest or capital expenditure.

Pass through the price increase to customers @ 50 paise per litre per month  

Second, it is not desirable to entirely sanitise customers from the oil shock. This will kill the liberalised “marked to market” regime for retail prices of oil products, introduced last year.

It is also environmentally irresponsible not to have a price signal to induce lower consumption of petroleum products and incentivise users to switch to more efficient end-use equipment — cars, motorcycles, water pump and generators. Mr Gadkari is right. A portion of the oil shock should be passed through.

pollution

Invoke the GST style federalized decision mechanism for states to cut VAT equal to the windfall gains for price increase.

But state governments must be cajoled to give up the windfall gain accruing to them because VAT (their tax) is an ad valorem rate and not a specific rate as is Central excise or Customs. TERI, a New Delhi think-tank is modeling a revenue neutral taUse x realignment which would be useful. Government would do well to consult widely rather than go about taking decisions in secret as it tends to do.

Fiscal deficit 2018-19 target of 3.3% of GDP is unreal – last year we were 3.5%

Piyush Goyal

Lastly, Budget 2018-19 projects a fiscal deficit of 3.3 per cent of GDP versus 3.5 per cent in 2017-18. The target is not credible. Capitalisation of stressed public sector banks; agriculture minimum support price revisions; and the new flagship “Ayushman Bharat” medical insurance scheme will surely push the deficit beyond the target. The N.K. Singh committee report on Fiscal Responsibility and Budget Management “blessed” variations in fiscal deficit capped at 4 per cent of GDP. Following this lead can provide an additional Rs 1.3 trillion to the Finance Minister, Piyush Goyal, part of this could be used for absorbing oil price increase. But stoking inflation is a real risk here.

Oil at $100+ soon?

A further increase to the 2011-2014 level of $100+ a barrel is unlikely. Oil producers, like Venezuela, need to cash into the high price. Sanctions on Iran, now seem likely since the POTUS-Kim Jong – peace talks have collapsed and POTUS needs to look muscular.

POTUS

But even if imposed, sanctions will not bite till six months after they are imposed. If oil spikes nevertheless, a temporary adjustment loan, from the IMF, can dilute this external shock, which can otherwise jeopardise our plans for mitigating carbon emissions to meet targets to 2020.

The continued supply of Iranian oil, but denominated in rupees, like the Russian trade earlier, is also possible. The United States may accept such necessary but limited “exceptions” for Iran as a humanitarian response “needed by the Iranian people” to survive.

Economic stress creates reform entry points because the urgency becomes publicly visible. 1991 was an extreme event. The 2018 shock is low intensity in comparison. But it can help to push the needed third generation of reforms — deep fiscal austerity, energy security and PSU autonomy.

Adapted from the author’s opinion piece in The Asian Age, May 25, 2018 http://www.asianage.com/opinion/columnists/250518/oil-shock-entry-point-for-deepening-reform.html

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Book Review: Paying the price for aid

May 23, 2018

AID

Three themes undergird the author’s exhaustive narrative of the politics around foreign aid in India between 1950 and 1975, during the early years of the Cold War — the people who made key decisions; the domestic context and, finally, the geopolitical incentives that shaped donor responses.

The deal makers

Indian officials come across as being surprisingly entrepreneurial in securing aid. Mercifully, unlike more recently, the political and bureaucratic manoeuvring was almost never for personal gain, other than managerial satisfaction at seeing pet projects fructify.

Homi J Bhabha lobbied for civilian atomic power at a time when hydro and coal-based power was the norm. P C Mahalanobis, a physicist turned statistician, institutionalised centralised planning as a scientific prerequisite for development. C Subramaniam as minister for food ushered in higher agricultural productivity via the Green Revolution. Morarji Desai as finance minister and later prime minister promoted private Indian industry and trade, an outlier view, supported by G D Birla. B K Nehru — India’s economic ambassador to the US; John Mathai and later C D Deshmukh as finance minister, economist I G Patel and L K Jha as ambassador in Washington were more inclined to look to markets, international trade, the private sector and the criticality of macro-economic stability, all of which aligned more with the United States as a development model.

Jawaharlal Nehru and later Indira Gandhi as prime minister; Krishna Menon as defence minister, Sarvepalli Radhakrishnan and later D P Dhar, ambassadors to Moscow; Gulazarilal Nanda, deputy chairperson of the Planning Commission; K D Malaviya, petroleum minister; P N Haksar, principal secretary to Prime Minister Indira Gandhi and later deputy chairperson of the Planning Commission and T N Kaul as foreign secretary were the top decision makers who leant towards the Soviet Union.

The domestic context

But individuals became important only because they seized the moment in a given context. Nehru was opposed to be seen begging for aid. It did not fit with his ideology of non-alignment. But India needed lots of aid. With overt political alignment unacceptable, the second-best option for officials was to conspire and reassure donors, that India’s and their interests were aligned.

America feeds India

The establishment of the Peoples Republic of China in 1949 spurred America to save India from Communism. American aid funded technical assistance, community development, large irrigation and flood control projects like the Damodar Valley Corporation and credit lines for the import of machinery by private industries. The PL-480 programme, starting in 1960, provided desperately needed food grains against deferred payments in rupees. The accumulated amount equalled 40 per cent of the money supply by 1974. The US government generously wrote the largest cheque ever, of $2.05 billion, converting two thirds of the outstanding balance into a grant for India.

But disjointed Geopolitical compulsions act as spoilers

But the Indo-American relationship was an uneasy fit. The 1954 treaty of mutual security between the US and Pakistan was an early spoiler. India’s denial of an endorsement for US military action in Korea and later, in Vietnam, rankled. By 1969, interest in India waned, as President Nixon focused on resetting relations with China. In 1966, India accounted for one-eighth of total American aid. By 1975 it had dwindled to one-eightieth.

Soviet Union industrializes India hoping to strengthen Indian Socialism

Soviet aid comprised projects to build industrial capacity. This fitted Indian objectives of backward area development via the creation of model public sector factories in the “core” areas according to the 1956 Industrial Policy. By the 1970s, Indian industry had caught up, whilst the Soviet Union had fallen behind in technology and run out of revolutionary fervour. Meanwhile, enhanced multilateral, soft credit from the World Bank under Robert McNamara introduced new options to source industrial equipment commercially and competitively.

The West – aligned with fPakistan, wary of China and needing its buying power –  fails to provide arms to India 

The United Kingdom, the ex-colonial power, was best placed to meet India’s defence needs. But it was unwilling to supply arms against rupee payments. Military aid from the US for India was a non-starter, given that Pakistan was a close ally. The 1965 Indo-Pakistan war did not help. In 1971 the US-China détente prompted Henry Kissinger, secretary of state, to convey that America would not come to India’s assistance, against a Chinese attack, in response to India’s military action in Bangladesh. In comparison, the Soviets were generous – supplying military assets more modern that those supplied to China; readily accepting technology transfer and payment in Indian rupees. Consequently, the Indo-Soviet defence partnership has endured.

An informative, closely referenced read for diligent students of South Asian political economy, the author posits that India paid a price for foreign aid, which subverted indigenous institutions of collective decision-making, like the Planning Commission and the Cabinet. This assessment seems overblown. Institutions evolve and adapt. Their efficiency must be measured from real outcomes, not the stated objectives or the rigidity of the institutional framework.

The race towards assured mutual destruction in South Asia was fueled by competitive arms aid but civilian aid strengthened India

However, unregulated military aid has sparked off an arms race and contributes massively to the regional welfare loss from insecurity and high defence spend. But just as surely, civilian aid cushioned the negative impact of natural and economic shocks, boosted infrastructure and enhanced human development — all of which helped preserve the integrity of India’s nascent democracy. Individual, institutional or national egos were bruised in the process. In hindsight, that is a small price to pay, for what is today a sustainable and increasingly equitable, growing economy.

Adapted from the authors book review in Business Standard, May 23, 2018 http://www.business-standard.com/article/beyond-business/paying-the-price-for-foreign-aid-118052200013_1.html

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Book Review, bureaucracy, Business, Democracy, Economy, India

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