governance, political economy, institutional development and economic regulation

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

harish-rawat 2

Photo credit: NDTV.com: Harish Rawat – the unfortunate Congress Chief Minister, sacked by the President of India for failing to fulfill his constitutional mandate to get the budget approved

Nothing illustrates the cost of wantonly discarding democracy and handing over the government to unelected officials (Governor) than the case of Uttarakhand. To recap the turn of events , the President of India (read the BJP Union government) was pleased to take control of Uttarakhand on March 27, 2016, by invoking constitutionally vested emergency powers available to it if an elected state government fails to discharge its constitutional mandate.

The occasion for doing so was an allegation, by the Bharatiya Janata Party’s members of the Legislative Assembly, who are in a minority, that the Budget for 2016-17 was not approved by a majority vote in March, as required, to keep public finances running in the new year — April onwards. The ousted Congess government strongly refuted the allegation and approached the Uttarakhand high court, in appeal against the Presidents order. On March 28, a single judge of the Uttrakhand rubbished the President’s order. The Union government filed for revision of this order. A division bench however confirmed on April 21 that Presidents rule was unwarranted. The matter is now in the Supreme Court on appeal against the high court order. A ruling is expected this week but early indications are that the Court leans towards asking the ousted government to prove its majority on the floor of the Legislative Assembly, as is the norm and which aligns with what the Uttarakhand Governor had directed in the first place, once the dispute arose.

The absence of political leadership shows

But forget the legalese. The fact is that Uttarakhand has been without an elected government to take charge and be accountable for over a month now. It is fashionable for citizens to blame politicians for all the ills in the country. Unfortunately, the official machinery has failed miserably to showcase its strengths by managing the ongoing forest fire disaster. This illustrates that the “iron frame” of the bureaucracy is now so rusted that it fails to be proactive even when there are no visible political constraints on them.

Jhoom an age old practice

Jpeg

The people of Uttarakhand are no strangers to forest fires. Indeed, this writer has had out of control fires in previous years licking the boundary of his home and it has happened again this year. Just like in California, where habitations co-exist with forests, lighting fires can be property and life threatening. In India, the foresters and villagers resort to it as a low-cost, low-labour intensive practice to clear the fallen pine needles and accumulated undergrowth so that fresh grass sprouts from underneath for cattle to graze on. Till not so very long ago jhoom (slash and burn) cultivation — regularly setting fire to land and leaving it fallow to regenerate — was common practice. It is still followed in the Northeast.

The problem arises when local fires are poorly managed and they grow out of control and ravage vulnerable people (the old, the differently abled and the very young), homes, cattle, wildlife and indeed trees, none of whom can get away quickly.

Lack of advance red alerts 

Unfortunately, this year was different in a manner which people never recognised. The lack of rain created tinder box conditions. A more proactive bureaucracy would have sounded the red alert early, launched a communications campaign to sensitise the public against the danger, set up a war room fed by daily updates via sms and Facebook and designated local champions to lead the effort and build public opinion against jhoom.

chandi pd bhatt

Photo credit: indiatogether.org: C.P.Bhatt- Uttarakhand’s pragmatic Ecologist and community leader

Remember how Chandi Prasad Bhatt- alarmed at deforestation on an epic scale in the 1970s- a major cause for the Alakananda floods at that time – galvanised the women of Garhwal to launch the “Chipko Movement” (literally hugging trees) to guard against the rampant logging? He showed it is possible to build strong public opinion if people’s self-interest is shown to be aligned with a public cause. Managing perule better is a similar public interest issue.

Short sighted programme implementation

A previous government programme, which could have tackled the root of the problem, aimed at buying perule (fallen pine leaves) to incentivise villagers to collect them, rather than setting them on fire. Unfortunately it has long fallen into diuse. Villagers say it died because the amounts offered by the government were unattractive. Foresters say the villagers are too lazy to work and look for easy earnings and viable options for recycling perule were never developed. Also viable methods for recycling perule by compacting it into and selling, or the villagers themselves using it, as fire wood were never commercialised. Lack of sustained interest and lack of public finance effectively buried the programme even though it could have diluted the extent of the current ecological disaster by reducing the vulnerability of forests to catch fire.

Preventing disasters is nobodys business

But the real problem is that governments routinely under-spend on preventing disasters in comparison to the potential loss. Also, the tendency is to buy new equipment to manage disasters once they happen, rather than evolve low-cost, local options to prevent them. Had Uttarakhand done so, it would not be facing the terrible social and environmental costs of doing nothing.

A more technically savvy bureaucracy could have redesigned the old perule (pine needles) purchase programme to make it more attractive. But none of this happened. Minus a chief minister, the bureaucracy was a leaderless army. Local administrations headed by the district magistrate became a dead letter box into which the secretariat heavies dutifully dumped warnings and advice, sans funds, for guarding against fires.

This is not to say that the Uttarakhand bureaucracy was as callous as the Supreme Court described Union government bureaucrats to be. Whilst rapping them for not bringing forward evidenced solutions to reduce air pollution levels in Delhi, the court said: “Why can’t they come up with some research and solutions? You people are just sipping coffee and doing nothing”.

tea 2

photo credit: pinintrest.com: Delicately sipping tea – the bureaucrats relaxant.

What is true for Delhi is not necessarily true of state-level bureaucracies, which have responded magnificently, in the recent past, to disasters in Gujarat, Orissa, Andhra Pradesh and Tamil Nadu. But they all had a chief minister directing the coordinated effort that relief requires.

The key assurance an official seeks in an emergency is that his/her actions, taken in public interest, will be assessed not on the basis of how closely the regulations were followed, but on the context in which decisions were taken, and their effectiveness, in solving the problems disasters throw up.

This type of reassurance can only be credibly given by a duly elected chief minister. In today’s context, it takes a politician even to make the trains run on time! The colonial model, where the officials led and politicians merely presided, is past and buried.

Local political leadership is key 

Sans a chief minister in Dehradun, it is Delhi which is sending money, choppers and the Army to deal with the disaster. But only elected governments at the state and the local level can engage continuously to prevent disasters and effectively manage those that occur.

But the last thing to be wished for, in a disaster area, is a government led by officials with no effective political oversight. Even a bad chief minister is better than no chief minister at all. One hopes the Supreme Court will take note and end Uttarakhand’s misery.

 

CJI Thakur

Photo credit: Zeenews.comChief Justice of India, T.S. Thakar breaks down whilst sharing the misery of a judge’s life with Prime Minister Modi- the government promised to do better at staffing and funding the justice system. 

Adapted from the authors article in Asian Age on May 3, 2015; http://www.asianage.com/columnists/fuelling-fire-979

 

The new royals

Everyone loves a royal – especially a British royal, even cynics who claim to disdain them. And why not? There is something reassuringly middle class about being born to the good life and yet having to work hard – saying the right things, looking good, being on time, spending hours chatting with complete strangers and still remain in good humour. The job seems perfect for future age, fail safe robots. Till that happens, the Brits have the royal family – all eighteen of them headed by Queen Elizabeth – who turns 90 next week. Each royal has public duties. Taken together, the family makes itself available for a mind boggling 240 events every month or 8 a day, year in and year out, a burden even the most hardened socialite would wilt under.

royal family

The British royals are an especially diligent lot possibly because they draw their legitimacy, not from a divine right to rule, but from Parliament which contracted them for the purpose in 1701. They are funded from estates allotted to them and an annual Sovereign grant of around GBP 35 million (Rs 350 crores)- considerably more than the Rs 30 crores we spend on the office of the President of India. But consider, that per capita income in the UK is twenty times that in India. So in relative terms, the UK outlay is probably tighter than ours for a similar representational institution.

willkate 1.png

The Duke and Duchess of Cambridge-stooping to capture hearts and minds. Photo credit: rediff.com

The British royals have changed with the times. The stiff upper lip is going. Princess Diana’s inimitable compassion and common touch are now the norm. More significantly, male primogeniture- the gender insensitive British royal practice, whereby a male child always got precedence in succession was ended in 2013 by an Act of the British Parliament.

In comparison, Indian royals somehow never managed to make the transition from being rulers to becoming representatives of the new Indian state. Possibly they failed to brand themselves for the new India. The people’s movement character of the independence struggle, crafted by Mahatma Gandhi, discredited the royals further, as remote, effete relics and toddies of colonialism. Independent India went further. It sought and obtained, the surrender of their sovereignty to the India State in 1949. In 1971 the Indian Parliament abolished their titles and privy purses – pensions to which the erstwhile royals were contractually entitled under the 1949 settlement.

maharaja

Very few Indian royals managed to remain politically relevant. The Scindias of Gwalior stand out as exceptions who straddle the two main national political parties. Jammu and Kashmir royals and currently the Patiala royals also remain politically alive. But the other significant royals – think Hyderabad, Mysore, Baroda, Bhopal, Indore, Udaipur, Travancore, Kota, Bharatpur, Bikaner, Jaipur, Jodhpur and Cochin- have faded from public memory and affection. In South Asia, Bhutan’s royals stand out as proactive modernisers – British style. Nepal royals, in contrast, have succumbed to democracies march- much like in India.

You can abolish a royal by fiat but you can’t legislate royalty away. If you destroy traditional elites, new elites spring up, because they serve a social purpose, as glue, to bind society together, even in a democratic polity. The US has the Kennedys and the Bush family. In India, the Nehru-Gandhi family endures and inheriting a political legacy is pervasive. In 2011, 29% of the Members of Parliament were from established political families. But it is debatable whether these “political royals” have the affection of the people. It is telling that Amma, Didi and Bhenji- immensely popular in their areas – are all “Marlboro” women – who have built their political eminence not inherited it.

priyanka

The 2016 Padma Awardees: Photo credit: masala.com

But the real royals of independent India are movie stars, cricketers and the owners of big business- all fiercely competitive and determined to succeed against all odds. The Kapoors of Bollywood – traditional royals mix shoulders with new royalty- the Bachchans, the string of bigger than life “Khans” and Priyanka Chopra- who got a Padma award yesterday. We have an entire locker room of cricketing royalty, of which Mahender Singh Dhoni and now Virat Kohli are the most recent. Star struck business honchos abound. These “new royals” inhabit an interlocking and sometimes toxic world, of business, cricket and movies.

shahrukh

William and Kate – the Duke and Duchess of Cambridge, in line to succeed to the British throne, are of this generation of competitive royals. It is not surprising then, that they chose to schmooze with the new royals of Mumbai in their search for creating “new” Indian memories on their recent visit.

Tragically however, Mumbai’s mojo has yet to infuse Delhi, which remains near colonial. Never mind the eye balls you may draw; the advertising revenue riding on you or the name recognition you command. If you did not become a bureaucrat by age 25 and if you are not in politics, it is unlikely that the government will ever select you to serve the nation in a representational position – as Governor of an Indian state or as an Ambassador overseas. Incidentally, both positions entitle you to fly the tricolour. And so the wealth of available talent — academic, artistic, scientific, professional and entrepreneurial, is ignored. Is it surprising then that government is so stiflingly insular and non-competitive, quite out of keeping with the mood of the nation? Imagine our dated we are. The website of the British monarchy is at pains to inform you how much is spent on the Royal Family. The website of the office of our President is silent on this information and since Parliament does not vote to approve these expenses they are hard to come by. President Mukherjee has done more than most to open up the premises. But the institutional culture is forbidding.

RB

Rashtrapati Bhawan- our gated colonial inheritance- preserving the green but keeping the unwashed out?

The Padma awards, announced annually are our only mechanism of recognizing exceptional civilian personal merit and national service. These serve the purpose of one-off recognition. But independent and demonstrated talent should be associated more routinely, at every level of government, to leverage experience, build capacity and kindle the spirit of innovation.

Multilateral agencies, including the United Nations, are adept at co-opting celebrities to helm good works and campaigns. The British use their royals very effectively for showing the flag. Why not use our new royals similarly by vacating sarkari space for them? Give Padma awards to recognize long and meritorious service in official and public life. Give Governorships and Ambassadorial assignments to those who distinguish themselves in real life and wish to step out temporarily to serve the nation directly. You would be surprised at the power of incentives to change things around.

 

 

Which of us does not enjoy pulling down the high and mighty? And the thrill is even sharper if these are people who may have breached laws whilst rising to dizzy heights. And so it was with the recent Panama Papers leak which opens a window into the morbid financial gymnastics of the amoral, global elite. There are five hundred Indians also in the list. But no “A” team players have yet been disclosed. Of course there is considerable overlay between unaccounted money and simply “smart” money which is avoiding not evading tax- the former is illegal but the latter – well it is just good financial management. The Panama data leak does not sift out the latter.

The scale of dirty money

cash

photo credit: gizmodo.com

Global Financial Integrity (GFI) – a United States-based entity, which tracks and campaigns against black money – ranks India fourth out of 149 developing countries, after China, Russia and Mexico, on the basis of the volume of illicit outflows. But this metric is fuzzy. It relates outflows to the size of individual economies and consequently fails to reflect the severity of the problem in each country.

Conflating the GFI data on illicit flows with the World Bank data on GDP at current market prices results in a more useful metric. The average annual illicit outflows as a proportion of GDP for India, according to this metric, was 2.7 per cent over the period 2004 to 2013. Within the BRICS countries cluster, South Africa was at a whopping 23 per cent, followed by Russia at 5.6 per cent. Brazil was the lowest at 0.9 per cent, with China the second lowest at 1.8 per cent.

Out of the other large developing economies, illicit outflows out of Malaysia stood at a worrisome 14.1 per cent of GDP, Thailand at 5 per cent, Mexico at 4.5 per cent, Nigeria at 4.1 per cent and Indonesia at 2.1 per cent. In South Asia, Bangladesh is the leader with illicit outflows at 4.2 per cent of GDP, followed by Nepal at 3.1 per cent and Pakistan at a low 0.1 per cent.

Dirty money links

So, how do illicit outflows, tax evasion, corruption and crime link up? Simply put illicit flows legitimize the proceeds of any of these activities. In the hawala transfer route, an individual or entity, resident in India, desiring to transfer dirty money overseas, makes a payment in cash in India to a hawala agent whilst a designated counter-party overseas gets paid in foreign exchange.

The source of the cash in India could be from income on which tax has not been paid or the proceeds of crime, including corruption. The foreign exchange overseas could be similarly sourced from corruption, crime or from Indians remitting money home (remittance of invisibles, including by overseas Indians of their earnings, was around $223 billion in 2013). Remittances through hawala get a better exchange rate than those via bank transfers. Foreign exchange overseas could also be the proceeds from under-invoicing Indian exports with part payment being made by the foreign importer to an overseas account related to the exporter.

Such illegal caches of foreign exchange overseas can be legitimated by bringing them back to India by over-invoicing Indian exports. Such funds can also be masked as foreign portfolio investments from foreign jurisdictions where obscuring the ownership of funds is a fine art, as in Panama. GFI estimates that under and over invoicing of trade flows accounts for 83 per cent of global illicit outflows. Usually a combination of several illicit transfer mechanisms may be used to obscure and mask the direction and ownership of the net flows.

The drivers of dirty money

Crime, corruption and the ability to avoid tax are all the outcome of poor governance aided by low levels of financial intermediation and digitization in the economy. Identifying the real ownership of bank transactions using biometric tracers, reducing cash transactions, embedded red flags and alerts which identify and monitor irrational transactions and sniff out a mismatch between income and consumption or income and savings, are standard tools for clamping down on the extent of black money. But we have started down this path only very recently.

Till the 1990s, when India had a chronically precarious balance of payments, the loss of foreign exchange through illicit transfers was a major concern. Today with foreign reserves at around one year of imports this is less so. But the loss of potential tax revenue hits us hard. Assume the value of tax lost on illicit outflows of $83 billion at a conservative 30 per cent or $24 billion per year. This equals around one-fourth of the average fiscal deficit during the period 2010 to 2013.

Lost tax is just one of the problems associated with dirty money. Other downsides are less tangible. Strong political and business interests get entrenched which obstruct enhanced transparency, the reduction of discretionary administrative powers and systematically subvert the formal governance systems and the informal norms which bind society.

Where this happens over a period of time, societal norms shift towards a new normal which actively subverts the rule of law. Prolonged conflict creates a similar loss of cultural and social capital. Government loses credibility as the provider of security and the arbiter of equity and fairness. Citizens look to informal structures like caste, clan or even professional alliances for social support.

Triangulating the evidence

Can we substantiate this link between poor governance and enhanced illicit outflows? The World Bank’s Worldwide Governance Indicators (WGI) provide a ready index which maps six drivers of good governance across multiple data sources. For our purposes we look at two of these – Rule of Law and Control of Corruption. A close and negative correspondence between illicit outflows and the country WGI score can validate both the WGI and the GFI methodologies. High illicit outflows should correspond with a low WGI score.

The WGI ranks Brazil, Malaysia, South Africa and Thailand high on both upholding the rule of law and exercising control of corruption. India edges in only into the Rule of Law category in this ranking. But good performance in the WGI has not helped Malaysia, South Africa and Thailand curb illicit flows which are high, relative to GDP. In comparison, China and India with lower ratings in the WGI have far lower illicit outflows relative to GDP.

Similarly, Pakistan and Indonesia have minimal illicit outflows relative to GDP but score very low in the WGI index. The bottom line is that either the GFI assessments need to be improved or that good governance- at least as it is measured to day needs to be reviewed.

The trend going forward

GFI estimates that the aggregate outflow of illicit money for the set of 149 countries grew at 6.5 per cent per annum during the period 2004-2013 – more than double the rate of economic growth. This is worrisome because it illustrates a looser than desirable link between growth and tax revenues. If economic growth is leaky and does not boost tax revenues in developing countries, achieving social protection and human development targets can be severely compromised. Is India sliding down this slippery slope?

In India, illicit outflows more than doubled overnight from $29 billion in 2009 to $70 billion in 2010. During the period 2010 to 2013 – the latest year for which data is available – it averaged $83 billion per year or around 4 per cent of GDP. This period coincides with the second term of the United Progressive Alliance government, which was marked by serial scams in telecom and coal. But whilst it is tempting to deduce a causal relationship between the two, this is difficult to substantiate.

pipe

Better tools can help

What we do know is that we need better tools to monitor, in real decision time, the origin, magnitude and direction of illicit outflows, which are a vital red flag for poor governance. Achieving this is closely linked to professionalizing the government and rapidly digitizing the economy and government processes. We are doing far more on the latter, than on the former. This could be a costly and careless error. Till advanced robotics and artificial intelligence kick in sometime around 2030, the effectiveness of government servants will continue to matter

Adapted from the authors article in Swarajyamag April 12, 2016  http://swarajyamag.com/economy/joining-the-dots-on-dirty-money-and-how-india-can-become-clean

Politics sans service

The curious case of Uttarakhand (a small hill state in north India) shows that getting elected to political office confers powers but no responsibilities.

The otherwise placid, hilly paradise was rocked by frenzied politicking in end March, as Congress dissidents lit a fire under their own government, even as forest fires lit to clear shed pine leaves gusted up clouds of carbon and heat. Tellingly, citizens were more concerned with managing the forest fires than the fallout of the political shenanigans.

forest fire

Photo credit: disaster-report.com

The Harish Rawat-led Congress government still has one year to go. But it fell, because former chief minister Vijay Bahuguna and Mr Rawat’s ex-buddy from Garhwal, Harak Singh Rawat, and seven others pulled the plug on it. Their timing was cannily disruptive since the annual budget could not be approved — politically effective but irresponsible from a citizen’s viewpoint.

Triple political no-balls

What followed was a comedy of high-level bungling. The Speaker, Govind Singh Kunjwal, disqualified the dissident Congressmen the anti-defection legislation for voting against the government. But it is alleged that he did so only after the President of India had already put him and the state Legislative Assembly under suspended animation by dismissing the government.

Also, subsequent to the budget approval snafu, governor Krishan Kant Paul had already directed on March 18 that the state government prove its majority on the floor of the House on March 28. Why then did the President of India (read the Union government) scramble to dismiss the government on March 27, just a day before the vote of confidence?

The Congress approached the Nainital high court against the dismissal of their government. The honourable single-judge ordered on March 29, somewhat unusually, that the Congress test its numbers in the House on March 31 even though the Legislative Assembly had been suspended by the President of India. Expectedly, this order was stayed on appeal by a division bench of the court.

Politically motivated manipulation of constitutional powers is not new. But consider how low representative democracy has fallen and how remote politics has become from the people who chose to remain indifferent to the political machinations. It was not always like this.

activists

photo credit: tribuneindia.com

Leading up to November 2000, when the state was formed, the mood was upbeat and passions inflamed. The hilly areas of Garhwal and Kumaon had revolted against the allegedly quasi-colonial rule from Lucknow — the erstwhile city of nawabs, sheermal, galawati kebabs and the capital of Uttar Pradesh. Cut to 2016, and the dismissal of a duly elected government evokes no popular response at all beyond gossip at nukkad teashops. Apparently, the average citizen gets galvanised politically only when it is time to vote.

Dysfunctional inner-party governance

Consider also how dysfunctional our political parties are. A significant section — more than a quarter of the Congress MLAs — could not resolve their grievances through inner-party governance systems and chose to create a constitutional crisis to hit back at their party. They did not act out of high moral principles. Nor were there difference with the party around policy, legislation or programmes. Their rebellion was borne out of perceived insufficient recognition by the party of their merit, effort and political standing. Equally, it was irresponsible of the Congress, to ignore the growing dissidence, secure in the belief that the anti-defection legislation could contain dissidence and that there was still one more year before citizens could vote to call it to account.

Sadly, the five-yearly spells of public accountability do not protect citizens sufficiently from irresponsible governments. Can we do better?

Power to recall non performing MLAs

recall

photo credit: English.pradesh18.com

Being empowered to recall recalcitrant public representatives can make public representatives responsive to citizens. But Indian voters do not have this power, unlike in North America and Switzerland.

Technological improvements can help. Biometric identification can cheaply and correctly verify discontented voters who could digitally communicate their intent to recall, thereby triggering a re-election. The “Save the Net” campaign last year and subsequently supporters of Facebook/Internet.org, flooded Telecom Regulatory Authority of India with electronic messages. Voters could similarly message the Election Commission.

Devolve to dilute the zero-sum game of centralized politics

A second option to hold politicians to account is to devolve political office and powers closer to where voters live so that people can actively participate in overseeing an elected politician. The constitutional provisions have existed since 1992, but they have never been implemented in good faith and with full earnestness. Despite the rhetoric, there is little political appetite to let go of centralised powers in the Union and the state governments — both of which function remotely from people.

Our centralised, political ecosystem and architecture have created sticky political interests at the national and the state level.

Rarely does a village-level politician graduate to politics at the state level and even less so to the national level. The India-Bharat class divide exists even in politics.

True to their class ethic, state-level politicians perversely prefer to lose power to an opposing party, in the hope that it would come back to them one day, rather than see power trickle away permanently down to local levels. Consider that the consequence of a state government being dismissed is not the empowerment of local governments, to pick up the slack and fill the vacuum, but instead power is sucked back to Delhi where all state-level politicians aspire to work.

Would the Uttarakhand Congress dissidents have been as ready to rebel and trigger the dismissal of their government if the consequences were that elected leaders at the town and village levels would get vested with the executive powers of erstwhile state ministers and carry on working? Consider also whether the Union government would have been as willing a participant in the dismissal game, if the consequences meant executive powers being transferred lower rather than to the national level.

harish rawat

A chief minister under siege from his own party. photo credit: indianexpress.com

Petty palace politics and dodgy moves will continue to blight political stability and retard effective executive action, unless we rejig the institutional structure to generate political incentives. Citizens must be able to hold governments to account in real time.

Adapted from the authors article in Asian Age April 4, 2016 http://www.asianage.com/columnists/petty-palace-politics-570

signals

Photo credit: everettlaw.com

Weird as it may sound, despite the rhetoric around innovation and private entrepreneurship being key for growth, this is not the consistent message emanating from government policy and regulations. Here are three examples.

Ideological neutrality versus enlarging access to the internet

First, consider that TRAI caved-in, in February 2016 to the “shrill voices” demanding that Facebook/Internet.org be stopped from offering free basic (limited) internet. The wooly thinking behind this decision was that Facebook- a deep pocket player- could thereby lure users to the Free Basics site- dubbed by activists as a walled garden, from which there would be no escape. Customers would be so entranced by the scented garden, that they would never wish to explore anything beyond the limited products on display within. This may have pleased Facebook- the description of Free Basics closely matching what heaven must be like- but they upped stakes and left.

Foreign companies make easy targets

Most likely Free Basics, a foreign venture, was just an easy target. TRAI probably played to the home grown, software industry – represented by NASSCOM- which was up in arms against the foreign interloper. But it is the consumer who lost out- particularly those at the margin of attaining internet access. These millions could have been in a free walled garden. Today they continue to wander through the dust of an internet less but limitless, real desert.

The economic cost of banning access to free basic internet

ICRIER, a Delhi based think tank, is assessing the economic cost of not providing internet access through a nineteen state survey. Preliminary assessments show that there is a significant increase in GDP by adding more users to the internet. The, un-confirmed, upper-bound assessment could be an astounding additional GDP growth of around 2.5% if the number of internet users are increased by 16%. This is exactly what Free Basics would have done. But they have been thwarted by rules, which adversely impact competition, jobs and wealth creation via innovation.

Restraining private equity funds from attracting customers to e-market platforms

Sadly, this is not the only example. Yet another instance of rules which increase the transaction cost of doing business for innovators, rather than reducing it is the new FDI regulations permitting 100% foreign equity in e-commerce market platforms. Whilst the relaxed FDI limit is progressive, the additional constraints it comes with are not. One condition is that no supplier should have more than a 25% share in sales on the platform. Another condition is that the market platform must not influence retail prices.

e-market platforms are not stock exchanges

The government’s conception of an e-commerce platform seems to closely resemble a stock exchange, which is hands off aggregator and facilitator for matching demand and supply. Why then would we need more than one such e- commerce platform – since profits lie in scaling up operations? God forbid if the next step is to specify that the market platform must be co-operatively owned by all the suppliers.

Lip sympathy for bricks and mortar retailers

The underlying concern behind the restrictive concerns seem be that e-commerce market places should not disrupt the business of stand-alone bricks and mortar retailers by offering deep discounts, using private equity funds, to grab market share. True private equity driven scaling up can bankrupt inefficient and under- funded retailers. But isn’t it in the nature of business to remain efficient via disruption? Government needs to concern itself not with the fortunes of individual businesses but the aggregate health of the retail sector- employment and customer services provided. Instead of protecting individual jobs, government must grow the total number of jobs recognizing that innovation- by definition, is disruptive of the status quo.

In any case rules to artificially maintain the status quo are rarely effective. They can be undermined and evaded. That is not the concern. The real concern is the adverse impact, that impractical rules have on the innovation eco-system. Innovators and their financiers, expose themselves to enormous business risk. The last thing they need, as an add-on transaction cost, is the risk from uncertain regulation.

Why extend the broken business eco-system of legacy industries?

There is also the issue of the attracting the wrong kind of innovators and private equity- those who are adept at working within a tightly regulated regime using the nod-wink approach to compliance with rules. This was a key qualification for doing business in India earlier. It should not be allowed to become the norm in e-commerce also.

We acclaim IIT/IIM graduates who are courageous enough to start their own e-business. But why tie their hands behind their backs from the start by forcing them to be dishonest; by requiring them to innovate a business model which will hood wink the law. And what about the potential risk that these illogical regulations may be tightened further. For example, prescription of rigorous tests for a Chinese wall between the e-market platform and the suppliers with respect to shareholding; a ban on inter-company loans from cash rich platform developers to suppliers to avoid the short circuiting of the discount ban by setting up shadow, intermediate whole-sellers between the market platform and the actual suppliers.

Most importantly, the desire to tick the box on allowing 100% FDI in marketing platforms whilst mollifying the lobby of bricks and mortar retailers, has derailed the existing eco-system for innovation in e-commerce. Rather than getting out of their way, the government has ended up increasing the potential nuisance from the new regulations. This is not a healthy environment for promoting innovation.

Remember the boom in private IT and telecom business?

The spectacular IT growth since the 1990s was the result of facilitation rather than intrusive regulation. Similarly, the telecom industry grew exponentially post-2000, because the quality of regulation was light handed and promoted competition rather than intrusive regulation of business processes and pricing of retail services.

Electricity – the limitations of intrusive regulation

In sharp contrast, the electricity supply industry has intrusive cost of service based retail price regulation. The results are before us. Despite three separate schemes, since 2000, to restructure the stressed loans of electricity distribution companies, they still comprise a quarter of the non-performing assets of public sector banks. Whether privatization of electricity distribution in 2000- as was envisaged then- along with liberalization of the energy supply chain, could have had happier results, is in the realm of speculation. But intrusive regulation has not helped one bit in restoring the sectors health.

The consistent lesson is that less government is better governance. This was PM Modi’s rallying principle. One only wishes that he would make someone, who has his ear, responsible for alerting him every time government departs from this golden rule.

 

1121 words

Owning India

Javed Akhtar’s response to the “Bharat Mata ki Jai” controversy stoked by Asaduddin Owaisi — the member of Parliament from Hyderabad — was just what was needed to pour oil on the dangerously choppy course our politics has taken. And there is no joy to be had in justifying this trend by pointing to the US, where politics has become similarly divisive, courtesy Donald Trump, who wears both his heart and his head on his sleeve.

The right to own India

Javed Akhtar

Glamour and Guts: Shabana Azmi & Javed Akhtar. photo credit: saveondish.com

Javed Akhtar was, till last week, a nominated member of the Rajya Sabha. In his farewell speech on March 16, he put the controversy to rest by simply stating that it is irrelevant to figure out whether or not it is constitutionally mandated to shout “Bharat Mata ki Jai”. He views this as his right not his obligation.

What exactly may he have meant by that? The uncharitable would say that it is not unusual for those ending their term in Parliament to curry favour with the incumbent government in the hope of re-engagement or promotion to a higher office. Whilst anything is possible, what Mr Akhtar said is so aligned with his frequently espoused idea of a syncretic India, that it being merely a self-seeking posture is unlikely.

But, even if Mr Akhtar’s intention was partly self-serving, it would not be a bad idea to have Mr Akhtar and his vivacious spouse — actor and activist Shabana Azmi — occupy a high-profile sarkari position which requires balance, a mindset uncluttered by bias and international stature.

Mr Akhtar and Ms Azmi fill this criterion to the brim. What could be better than having them in the Rashtrapati Bhavan — which has languished for many years as a resting place for politicians — save for a brief period during the tenure of the unforgettable A.P.J. Abdul Kalam?

More importantly, Mr Akhtar brought to the fore, in his characteristic and effortlessly chaste Hindustani, an issue that troubles many. What is “Bharat” and “Bharatiyata” (Indian-ness) all about? And, as a corollary, who owns India?

A new top down Idea of India

Tomes have been written on the “idea of India” and the dilution of consensus around its “syncretic” nature.. But it does not help to merely point a finger at majoritarian reflux against vote bank-based pandering to minority interests as the key factor disrupting an ancient tradition. If a muscular version of Hindutva is being fanned, there is also a reciprocal fundamentalism in the type of Islam being advocated. It is akin to the Khalistan movement during the late 1980s.

The notion that the “idea of India” is something which we have inherited from the distant past is ludicrous because colonialism ensured it never took root. The freedom fighters and members of the Constituent Assembly, amongst whom Jawaharlal Nehru remained the key executive fulcrum for over a decade, first created the idea of a new India. Thereafter, we have struggled to give a permanent and concrete form to the social and economic transformation, which underpins the idea of owning India. The continued dominance of traditional identities, including religion and caste, as a defining classification for people is a significant barrier to evolving consensus over what being Indian means to people.

The best option for resolving this vexed issue is, if traditional identities themselves evolve and become more inclusive — like an open access class structure. Growth, prosperity and education were expected to dilute traditional identities as a social consequence of enhanced economic equality. But this hope is fading. As we see in the US, traditional identity — in their case race — is the trump card politicians play when times are hard. The Indian state needs to do more, albeit in a soft-handed manner, to foster the ownership of India.

The notion that Indian-ness can be induced from above is not fanciful because of the long arms of the state in India. A complete divorce between religion and the state seems unachievable in a deeply religious country like India. But meticulously even handed treatment across all religions is a reasonable option for rationalising our affirmative action policy, reservations, for public sector jobs; access to publicly-funded education and bank finance. For this purpose, adding economic eligibility criteria to the existing framework built around traditional identities, makes fiscal sense given the need to target subsidies tightly.

Creating Bharatiyata requires even handed sacrifices by all citizens

But unless “Bharatiyata” is based on equitable sacrifices by all Indians and offers equal stakes to all, this objective will be stillborn. The biggest real divide today is not religious. It is the one between the poor, irrespective of religion and caste and others who have used the available opportunities to improve their living standards. An efficient and effective policy of positive affirmations has to be dynamic and must evolve to target those who are left behind because the composition of the have-nots has changed. Whilst this is a social and indeed a moral obligation, it also serves a societies self-interest well to intervene with targeted social protection and human development measures. After all, aggregate domestic demand can only increase if incomes grow across the spectrum. Economies, where wealth is unduly concentrated at the top – as are some dictatorships with very high GDP date (think Russia)- are neither happy (unlike Bhutan which is), nor prosperous (unlike Scandinavia which is)  and definitely not sustainable (unlike the US which is).

Reform the political architecture

Reforms to our political architecture are key. Ensuring that election tickets for political office are given to nominees in a manner matching the religious and caste profile of the relevant political entity (national, state or local) is a powerful and somewhat obvious tool. It is not for nothing that Justin Trudeau, the rockstar Canadian Prime Minister, remarked recently, “There are more Sikhs in my Cabinet than in Modi’s”.

Other key advances in representational democracy would be making 50 per cent-plus-one of the votes cast as the threshold for being elected instead of the first-past-the-post system we follow. This single change can drive inclusive politics given the new imperative it will create — to gather a larger critical mass of voters to get elected. Introducing minimum educational qualifications for members of all elected bodies is another very important instrument to encourage more nuanced debate and legislative action. Mandating a minimum 50 per cent representation for women in the legislature and in the civil service is another game changer.

It is commonly understood that growing the divisible pie enhances the value derived from ownership. It is illustrative that roots of the current political disarray and lumpenisation of political debate in the US and in parts of Europe are attributed to the tapering-off of the good times they enjoyed since World War II ended in 1945. In contrast, the value of being Indian has grown significantly post 1994, when the benefits from economic reforms, liberalisation and globalisation started kicking in.

Young india

President APJ Abdul Kalam- science buff and mentor, inspired the young to dream big and act resolutely. photo credit: thehindu.com

What we lack is a critical mass of meritocratic, Indian elite who put the nation first. But a new elite is growing – based on education and opportunity; charged with the spirit of entrepreneurship and unhindered by chips on their shoulders, left over from colonialism or faux  socialism. Also an increasingly demanding electorate may yet be the catalyst for change in political accountability. The next 50 years present India an even better opportunity for economic growth led domestic, social and economic convergence in owning India. The opportunity is only ours to lose.

Adapted from the authors article in Asian Age March 22, 2016 http://www.asianage.com/columnists/owning-india-331

Arvind S

Arvind Subramanian Chief Economic Advisor- GOI: Rising star and Rajan clone?

The Indian Economic Survey is an annual document that is wrongly titled. The data it reveals is overpowered by large dollops of economic wisdom, literature and policy analysis. Arvind Subramanian, India’s Chief Economic Advisor and the key author of this year’s Survey, has clearly burnt the midnight oil liberally in making the Survey a reader’s delight, even for one who has only a nodding acquaintance with economics, gleaned primarily by pursuing the pink papers.

Running hard to stand still

The key guidance the general public has been looking forward to, is the credibility of the near miraculous GDP growth rate of 7.6 % recorded this year and in that context, prospects for the next year. Unfortunately, clarity still eludes the average reader. Whilst generally optimistic about the government’s ability to improve on the performance this year, the survey is curiously negative on growth prospects for next year (7 to 7.75%), which it says would be strongly dependent on world growth reviving rather than domestic reform being implemented. Running hard to stand still is not a very good incentive for public sector reform. Consequently, India should brace for lower growth next year.

Better fiscal administration but significant legacy problems

The Survey makes the point that over the last year India has done more than most of its peer countries- those with an investment grade of BBB, including China, to retain macroeconomic stability per the index of macro-economic vulnerability developed in the Survey last year. But it simultaneously notes that the quality of assets in government-owned banks has been deteriorating since 2010. This is complemented by the overleveraged position of large business houses who are finding it difficult to service these loans because market conditions are adverse and both the top-line and their bottom-line have taken a hit. Exports have reduced by 18% last year and the competitiveness of domestic suppliers even to meet domestic demand is dodgy. The domestic steel industry being the most recent example.

The popular explanation for the logjam in corporate funds has been that the financial stress of big corporates has less to do with inefficiency or injudicious resource allocations by them. The blame is pinned on government projects not progressing smoothly over the last few years of the previous government resulting in corporate funds getting blocked unproductively.

gadkari

Minister Nitin Gadkari doing the impossible- shaking the dust off moribund highway projects

But over the current year Minister Nitin Gadkari has revitalized the implementation of a large number of projects in the highways sector. Railways Minister Suresh Prabhu has similarly awarded more than double the level of contracts in railways than was the trend earlier.

prabhu Minister

Minister Suresh Prabhu -improving the plumbing of  Indian Rail – a colonial legacy and democracy’s neglected child 

State governments have also enhanced public investment per the Survey which states that the combined public investment increased by 0.8% of GDP over the first three quarters of the current year versus the previous year with state government contributing 46% of the investment.

Why then does corporate loan servicing remain a problem? Is it just a time lag issue before public expenditure decisions kick in and funds flow resumes to corporates? If this is the case  the salutary effects should be visible next year. Or is it that the loan defaults have less to do with poor implementation of government contracts than with the “smart” arbitrage strategy of big corporates to borrow domestically in an unreasonably strong rupee, post 2013 and salt investments away safely overseas? Is it not necessary then to keep the rupee at aggressively competitive levels to avoid the incentive for “carry trade”, boost export competitiveness and price the fiscal impact of imports- particularly oil, realistically?

Does a high risk fiscal strategy make sense?

If the economy could chalk up a relatively high growth rate of 7.6% this year, despite the adverse conditions, why then is there a clamour for more liquidity and lower interest rates to kick start private investment and to fund higher levels of public investment in the coming year?

Would it not be sensible to stick to fiscal rectitude and keep the fiscal deficit target at 3.5% of GDP and hope for the same growth rates next year particularly if domestic actions will count less than world growth and demand?

Does it not make sense to guard against the risk of inflation- particularly drought induced food inflation? Our poorly integrated agricultural markets and inadequately prepared public management structures for managing food inflation by using market mechanisms are unlikely to be effective to deal with the risk of such inflation should the next year also be dry.

Oil prices remain volatile even though the survey is sanguine on the potential for an oil price increase. Whilst there is still no agreement amongst the top oil producers for limiting production, India is badly placed, being heavily (85%) import dependent, to bank on low oil prices continuing. Adequate fiscal space must be reserved for dealing with an oil price shock. These could be occasions when drawing down capital from a highly capitalized Reserve Bank of India (the survey labels it second only to Norway in being highly capitalized) can help without increasing the debt burden.

At least Mint Street is like Norway – we like that

Drawing down RBI reserves to fund dodgy capital investments in the public sector is a bad idea. It would be ok in Norway but not if accountability levels are low.Oddly, to an average India, the fact that we are close to being like Norway, as least with respect to the RBI is comforting and gives hopes. Indians are notoriously miserly and magnificent savers.

rajan RBI

RBI Governor Raghram Rajan – firm as a Norwegian rock: photo credit: businessindia.com

Tax revenue complacency

The survey skirts around the advisability of increasing the ratio of tax to GDP above the 10% achieved last year. It appears  complacent that tax buoyancy in the first three quarters of current year exceeds the average of the last three years- particularly for indirect taxes. The full year’s data would only be available with a lag but the budget documents would show if this happy trend has persisted in the last quarter also and whether the revenue deficit is indeed on track as a consequence.

Ignoring the impact of committed and contingent revenue expenditure

The significant burden (Rs 100,000 crore) imposed by the 7th Pay Commission has been dealt with lightly. Enhanced government salary and pension can increase expenditure by 0.6% of GDP for the Union government alone and threaten the revenue deficit target. The jury is still out on its possible beneficial impact on stimulating demand.

More importantly, the survey deals unduly summarily with the issue of enhancing rural income support and social protection as necessary adjuncts of macro- economic stability. Marco-economic stability can be the first victim if India’s political stability is compromised by concentrated high growth, which is not reflected in shared prosperity. The survey notes that 42% of Indian households are dependent on the rural economy. What it does not mention is the low ability of 60% of households to adapt to income shocks emanating from loss of insecure jobs, medical emergencies or other social obligations. Food for this segment accounts for approximately 40% of their expenditure. Rural wages are down 2.5% this year. Around 40,000 jobs have been lost per the Labour Bureau’s September 2015 report. Even the IT industry has reduced jobs and IT majors like INFOSYS -under a new leadership- are automating processes and putting employees out to pasture. These ground signals fit the survey’s assessment of India being in a hard place. But the survey is short on the best options for dealing with this economic shock.

The historical inadequacy in dealing with out-of-control and poorly targeted power, fertilizer, food, water, public transport subsidies hinges around the inability of elected governments to be seen to be heavy handed with income strapped households. These resultant fiscal pressures amounting to around 5% of GDP (all of government) can only escalate in the highly charged political environment during the next two years on account of state level elections.

A soft Railway Budget- harbinger of the main budget?

The Rail Budget 2016-17 could be a harbinger of such populism. Despite a large number of facilities and passenger amenities being announced there was no increase in the passenger fares which recover on average only around one half of the cost of services. Air India continues to be heavily subsidized. Loss making PSUs continue to sap public resources. How credible the fiscal consolidation plan can be in the face of these risks remains unclear.

Hopefully the Finance Minister will show the way on Monday in the Union Budget 2016-17. We await with bated breath.

Adapted from the authors article in The Wire February 26, 2015 http://thewire.in/2016/02/26/the-bewildering-optimism-of-the-economic-survey-22864/

Finance Minister or supermom

mom

Will Finance Minister Arun Jaitley protect wailing babies; photo credit: mubasshir.blogspot.com

High expectations in the near mystical ability of any finance minister to find a balm for all economic ills is common across all Budgets. Like all of us, finance ministers are egoists. They respond to expectations, like a supermom does to wailing babies.

The chorus of expectations from finance minister Arun Jaitley in Budget 2016-17, is no different. Growth fundamentalists expect a growth-oriented Budget — presumably heavy on infrastructure and investment. One may well ask then, why the accompanying demand for lower interest rates or for more investment than last year? Last year’s investment-lite Budget — just 1.7 per cent of the gross domestic product — pulled off GDP growth of 7.6 per cent, if government data is to be believed, despite the depressing economic environment.

Low social sector allocations

Social sector fundamentalists fret about low allocations for education and health — the building blocks of tomorrow. In the last Budget, the proportion of devolution to state governments was increased by 10 percentage points as per the recommendations of the 14th Finance Commission. Basic and secondary education, and primary health are state government mandates as per the Constitution. It is, thus, up to the states to get on with the job of prioritising social sectors in their spending.

Inadequate spend on defence

Security groupies worry about our poor defence preparedness. But they simultaneously support large pay and pension increases for the men in uniform who significantly outnumber the amount of modern equipment available to equip them with. No one seems to be thinking about reducing boots on the ground and using the money saved to upgrade much-needed equipment in this age of drones, airborne rapid action deployment and missile warfare.

air force

India’s aging fleet of fighter jets; Photo credit: indianexpress.com

Creaky infrastructure

Business, meanwhile, slouches about in the shadows, cribbing privately about the slow pace of the over-hyped initiative for rapid infrastructure development like the Delhi-Mumbai Industrial Corridor which is a confusing mishmash of railway lines, transportation hubs for improving freight movement and murky land deals for providing the usual real estate sweetener of houses, offices and malls. The fact that the Japanese are funding the railway freight component was probably its strongest point since both, the availability and cost of domestic funding, are at a premium for long gestation ventures. Ditto for the Ahmedabad-Mumbai bullet train.

plans

More plans than progress; Photo credit: dnaindia.com

As if all this was not enough to put any human into the ICU, public sector banks, egged on by the Reserve Bank of India, have chosen to make the December 15, 2015, quarter their “show and tell” moment.

Domestic shock: high levels of stressed bank assets

Whilst the financial cognoscenti may have known for years, the average depositor is just about finding out about the rot in government banks. Loans worth Rs 6 lakh crore have been extended over the years to borrowers who had no intention of paying them back. Instead of writing-off these loans when they soured or providing reserves against a potential loss, government banks have been dressing up their accounts to look good on paper by restructuring the unpaid loans. In essence, kicking the bad loans football down the road into the lap of the Bharatiya Janata Party government and Raghuram Rajan, governor of the RBI.

The result is that unless the government steps in and coughs up possibly Rs 4 lakh crore to recapitalise government banks over the next two years, bank finance will remain difficult to get and, even if available, it will be expensive. Despite the high margin these banks charge between the rate at which they get finance from the RBI and the rate at which they lend to borrowers, dodgy sets have reduced their profitability and affected growth. As a consequence, the market has sharply marked down the value of the equity of listed government banks.

Three trade-offs before the Finance Minister

Should Mr Jaitley bite the bullet and provide for reviving the government banks or should he keep this on hold and push public money directly into new infrastructure projects? The first option compromises short-term growth, the latter medium-term growth.

Mr Jaitley has to also choose between living with the unwise commitment to increase government pay and pension by 23.5 per cent or enhancing social protection and rural income support. The former helps the middle class, the latter the poor.

Another choice is between theory and practice. Should he stick to a fiscal deficit target of 3.5 per cent of GDP for 2016-17; increase tax revenue by hiking the rate of service tax; levy capital gains tax on equity and income-tax on dividends or should he play to the God of all things — the lack-lustre stock market — and keep tax rates low but blow out the fiscal deficit target?

Unfortunately, much as he may want, the finance minister cannot play supermom and please all. One hopes that he will bite the bullet and set about capitalising government banks — the engines of growth. Hopefully he will also set in motion fundamental reform in government banks. One extreme but useful step could be to explore support funding from the International Monetary Fund in the event of domestic or external shocks — like another drought or a sharp increase in oil prices — disrupt his plans.

The government of Gujarat has shown the way and the President’s address hit the right notes on safeguarding the allocation for social protection, rural income support and human development. The middle class may have to wait for their salary bonanza till growth-driven revenue buoyancy enhances the fiscal space available for such largesse.

To be cannily pragmatic or rigidly correct

The supermom character of the finance minister should kick-in whilst managing the trade-off between retention of the fiscal deficit target, tax revenue enhancement and managing stock market expectations. This is where the finance minister’s judgment will be key in doing something for everyone without disappointing all.

Our friendly Jats in Haryana have made their point with characteristic aplomb. By summarily cutting off the supply of water to Delhi they established a clear quid pro quo between water for Delhi in return for reserved government jobs for themselves. They seem to have won. Mr Jaitley could learn from their earthy pragmatism.

Who said that supermoms have an easy life?

Jaitley in parliament

Finance Minister Arun Jaitley in  Parliament: Adept at keeping hopes alive. Photo credit: oneindia.com

Adapted from the authors article in Asian Age February 26, 2015 http://www.asianage.com/columnists/finance-minister-or-supermom-261

Tag Cloud

Follow

Get every new post delivered to your Inbox.

Join 4,628 other followers

%d bloggers like this: