governance, political economy, institutional development and economic regulation

Archive for June, 2015

Socializing the Dragon

dragon

(photo credit; http://www.mrwallpaper.com)

China has “bested” its way onto the big boys table through three critical initiatives which bore fruit since President Xi took over as China’s numero uno in 2013.

The first was the founding of the BRICS New Development Bank (NDB), headquartered at Shanghai. Symbols speak louder than words. The logo of the NDB is eerily reminiscent of Chinese communist logos of yester-years encased in two encircling stalks of wheat or maybe olive branches, as in the UN logo. At its center is a round blob with geometric shapes embedded- a suitably vague and nondescript statement of intent, possibly illustrating that the Bank can go any which way and has endless opportunities.

Whilst the first President of the Bank is an Indian corporate guru -K. V. Kamath, no one is under any doubt that it is China which will call the shots, exactly as the US does in the World Bank or Japan in the Asian Development Bank. This is fair since she who pays the bills gets to call the tune.

The second success was to get thirty eight regional and twenty non-regional countries, including members of the G8 except the US, Japan and Canada who kept away, to sign up as Prospective Founding Members of the Asian Infrastructure and Investment Bank which is to be based in Beijing. The candidature of North Korea and Taiwan was refused by China. The former because it is a renegade and the latter because China does not recognize Taiwan as a sovereign country.

The third success completes the trilogy of China’s financial hegemony. China has offered to fund the European Infrastructure Fund at a time when Europe’s powerhouse- Germany and the European Union are engrossed in managing the financial bog of a potential “Greek exit” from the Euro and the likely ensuing turmoil. Massive investments in infrastructure are viewed as one way to kick starting growth in Europe, which has lagged recovery post the 2008 crisis. With Europe agonizing over how much more pain it can take, China’s generous offer of financial support is well timed.

China gets it fiscal muscle from its foreign exchange reserves of over US$ 3.7 trillion. These are down from their peak last year of nearly US$4 billion but remain the largest reserve ever. The annual trade surplus is a healthy US$300 billion plus. Its budget deficit, albeit increasing is still low, though off-balance sheet borrowing by state owned enterprises and the iffy quality of bank assets could cloak an incipient problem.

Its diplomatic and economic muscle is evident from its success in cowing down the meek protests by the Philippines and Japan against its assertive claims over small islands in the South and East China Sea. Far-off South Africa, the continents most developed economy, has repeatedly refused to give a visa to the Dalai Lama since 2009, reportedly out of deference to Chinese sentiments. The Dalai Lama, who is resident in the gorgeous Indian mountain paradise of DharamshaIa, is not recognized by China as the titular head of the Tibetans. China promotes an alternative in the Panchen Lama who is resident in Tibet.

Only the feisty Mrs. Merkel, Chancellor of Germany has had the gumption to ignore China’s ire and met formally with the Dalai Lama. Now with China bailing out Germany-till now the primary “money bag” for the reconstruction of Europe – the jury is out whether Mrs. Merkel would be inclined to repeat this diplomatic equivalent of thumbing her nose at China.

There are two jewels China still seeks. First is to implement President Xi’s vision of reviving the ancient silk route from Western China to Europe. The second is to develop a maritime silk route in the Indo-Pacific region from Myanmar via Bangladesh to India and Sri Lanka. Possibilities exist of extending this further West to Pakistan (where China is already developing the Gwadar port) and Iran where India is tentatively engaged in a similar venture at Charbahar.

These Chinese financed beltways will straddle Asia physically. If China pulls it off they are sure benefit the economies of the continent by reducing transit cost and linking local markets better. But the key issue spoiling the party is sovereign doubts about China’s true intentions in proposing these extravagant infrastructure plans.

Action speaks louder than words. Chinese overseas investment, particularly in Africa, is perceived to be driven too narrowly by self-interest. Its muscular approach to safeguarding what it considers its justified claims in the South and East China Sea give rise to fears of territorial expansionism.  Despite the fact that the India-China border has been peaceful for the last forty years the fear of conflict is ever present.

China needs to demonstrate that it has crossed the hump of middle-income prickly aggression into the beneficent altruism of a self-confident, high income country. It needs to take on an international commitment which demonstrates its resolve to make the world a better place.

It has already taken the first step by voluntarily capping carbon emission by 2030 including by increasing the share of clean energy to 20%. The voluntarism is praise worthy. But a bird in hand is always more credible than two in the bush by 2030.

Stabilizing Afghanistan presents an existential challenge which China can use to establish its credentials as an international force of substance. This single initiative can start a virtuous cycle of development in the “roundabout of Asia”- as president Ghani of Afghanistan, terms his country- with spill over benefits across the region.

China is well placed to substitute the US in leading this effort. It has a close relationship with the Pakistani army and civil leadership which are crucial to contain the Taliban. It has the resources. The US is reported to have spent around US$ 800 billion in Afghanistan, over the thirteen year from 2001 to 2014. This is not a scary number for China, especially since there are spin off benefits- bringing to the international market the huge copper and iron ore deposits in Afghanistan; honing the experience for the Chinese army and equipment in the field and creating a stable buffer in Afghanistan which can sever the existing arc of terror and violence that extends today through Syria, Iraq, Iran, Afghanistan to Pakistan.

The real question is will President Xi bite this bait to flex muscle productively or shall transactional engagements remain the order of the day for China.

1061 words

Naga rebels are also Indian

Rijiju

(photo credit: northeastnews.in)

Bloodletting always makes good copy. No wonder then that the killing, by Naga rebels, of 18 unarmed Army jawans going on leave in Manipur on June 5 and the airborne counter-strike on June 9 by Indian troops on rebel camps in Myanmar, stirred public sentiment. The depth, the speed and the effectiveness of the Army response was breathtakingly efficient, and reflects the capabilities of our Army when it is effectively led.

But the “cheer-leader” type response of the young minister of state for information and broadcasting — Colonel Rajyavardhan Singh Rathore, himself an ex-Armyman, using Twitter handles to extend dire warnings that Indians will root out terrorists who attack India or Indians anywhere, was reminiscent of President George W. Bush’s forceful “Marlboro Man” resolve to “hunt down” the Al Qaeda perpetrators of 9/11.

Col. Rathore forgets that President Bush was targeting enemy aliens who had wreaked havoc on American soil. Naga rebels are as Indian as the minister — historically disgruntled though they may be. Surely the optics of managing our own rebels has to be different from the manner in which foreign enemies are dealt with.

Col. Rathore will rue his remarks should he, one day, become minister in-charge of the Northeast — as his more illustrious colleague Gen. V.K. Singh (retd) is today. Negotiating with “rebels” you wanted to once hunt down becomes unnecessarily more awkward and difficult.

Alternatively, Col. Rathore could, in future, become minister in the external affairs ministry where he will rue a hawkish image whilst dealing with our immediate neighbours. The friendly government of Myanmar ostensibly only came to know about India’s targeted penetration into their territory, after the airborne Indian Force had returned — a mirror image of the US strike to hunt down Osama bin Laden in Pakistan.

No government likes its sovereignty to be taken lightly, least of all our immediate neighbours in South Asia, who already bristle at our “big bully but empty pockets” image. China is also a big bully, but at least they shut the protesting mouth with cash.

The point Col. Rathore should consider is that he is not mandated to speak on matters outside his portfolio. He may have personal opinions. As an ex-Armyman it would be natural to glow with professional pride at the faultless manner in which the operation was executed.

But the code on tweeting personal opinions by ministers was established in 2009. Shashi Tharoor, a junior minister in the previous government, got a rap from his party for tweeting jocularly that he was willing to travel “cattle class” or economy on government work in solidarity with all our “Holy Cows” — a particularly evocative term for the “secular”, very politically correct optics code of the Congress.

India’s very professional armed forces, like all professional soldiers worldwide, are the first to acknowledge that violence, even when it is justified and used by the state legally, is at best a necessary evil to deal with those who do not respect the rules of law. The Army is a highly honed, surgical knife, effective only when used for the shortest period to maximum effect. Violating this key axiom for their deployment results in rapid degradation of their effectiveness. This is what happens when the Army is used for extended periods to ensure internal security as in Northeast.

India has made enormous strides on the diplomatic front by establishing a functional relationship with the government in Myanmar. No trivial task given the political contradictions within Myanmar. The nascent democratic architecture; our ambivalent competition with China — intent on using Myanmar as an overland route to the Indian Ocean area; India and Nobel Laureate Aung San Suu Kyi’s subdued take on the human rights of the marginalised Rohingya Muslim community — all add to the complexity of Indo-Myanmar relations.

But it is on the domestic front in Nagaland and Manipur that the deficiencies are more extreme. As in Kashmir and in the Maoist-affected eastern districts, the incentive for local citizens, including rebels to end the conflict is less than self-evident.

It does not help when local administrations are elitist, historically weak, inefficient and often corrupt as in Nagaland and Manipur.

The jury is out on whether democracy helps or hinders this process of stabilisation in conflict situations. It is entirely possible that a strong authoritarian government, with deep pockets can “crush” rebellion temporarily. This is the expectation in China. But it is yet to happen in Tibet or in Xinjiang.

Unless the root causes of marginalisation are addressed and the incentive to conform to the rule of law becomes greater than the incentive to rebel, sustained stabilisation is unlikely. In any case, India is committed to working within the democratic framework. Both Nagaland and Manipur have elected governments, as in Kashmir and they have to be supported to take control. Emerging from conflict into peace is a complex societal process.

The good news is ordinary people in war-torn areas are usually unequivocal about their desire for peace. Padma Rao Sundarji’s Sri Lanka: The New Country presents this alternative view that local Tamil Sri Lankans, in sharp contradiction to the jingoistic sentiments of overseas Tamils, are happy that the domestic war in Sri Lanka has ended. All “armies”, including ones own, are extractive in character and feed off the local population, which suffers the economic cost, the indignities and the atrocities of conflict.

Rebels living comfortably abroad sheltered and assisted by “friendly” foreign governments and their agents never truly represent the ordinary citizen in the conflict zone. The recent incidents in Manipur are surely not the last round in the battle of attrition, ongoing since 1952, between the Indian state and the Naga rebels.

The real question is whether we are doing enough to innovate a domestic political solution? Can Team Modi build the process of reconciliation on the aspirations of educated, young Nagas? Are there more Kiren Rijiju’s (junior minister for home who is from Arunachal Pradesh) out there?

Adapted from the Asian Age June 12, 2015: http://www.asianage.com/columnists/innovate-move-conflict-peace-902

Navigating India’s “perfect storm”

BeltTight

(photo credit:www.webmd.com)

It’s final now. The run of good luck PM Modi enjoyed has tapered off.

The monsoon is likely to be deficient by 12%. This would be the second year in a row. True, agriculture only accounts for around 15% of the economy and didn’t grow much last year either. But when you target 7.8% growth every basis point, added or lost, counts.

Manufacturing and services growth is already slow. Companies are at best cautiously optimistic but the caution makes new investment sticky. The money and jobs spinning realty sector, driven earlier by negative interest rates, is in a slump.

To complete the “perfect storm” scenario there are two important state level elections around the corner-Bihar later this year and UP in 2017. Neither state has BJP governments currently, so doing well in these will inevitably be a metric of how strong the Modi magic remains.

The good news of course is that every threat is also an opportunity. This is PM Modi’s opportunity to show that he is the Lion we think him to be.

Fiscal stability disaster prone

First, more will need to be spent on drought relief; restructuring of bank loans for farmers and income support schemes for farm workers. Delhi, admittedly with a miniscule rural area, has already distributed Rs 50,000 per hectare as relief for the farmers hit by the April 2015 unseasonal rain. FM Jaitley is possibly right that the drought will be localized in North and Central India. But these regions account for around 45% of the farmers. Retaining the targeted revenue deficit at 2.8 % and public investment at 14% of the budget will consequently be tough.

Postponed subsidy reform

Second, it is unlikely that subsidy corrections will now be possible this fiscal. Cheap electricity, water and fertilizer are here to stay with a possible relaxation of the tight minimum support price policy of the last few years.

Higher wage cost

Third, a significant expansion in the wage bill looms. For the armed forces it is the One Rank One Pension promise of the PM.  For the Civil Service the recommendations of the 7th Pay Commission are to kick-in from 2016. Luckily the wage bill is low by international standards- 1.6% of GDP and 14% of the budget. But even small incremental increases, unless accompanied by efficiency enhancing restructuring, are not affordable this year.

This perfect storm of shocks cannot be wished away. Better to deal with it upfront. Here are five suggestions:

Winning the market perception battle

First, don’t be cowed down by stock market fluctuations or seek to pander to them. These are short term adjustments by speculators and not reflective of annual economic prospects. Consequently, rather than play down the “perfect storm” scenario it makes sense for the government to highlight the extreme shocks they are battling with to keep economic growth growing. Even in this David versus Goliath scenario, what is key is to share a plan of action on disaster management; income support; and realigning revenue expenditure to retain the revenue deficit and investment target.

Nothing much was heard about the recommendations of the Bimal Jalan, Expenditure Management Committee (August 2014). But it could provide some useful strategic, short term revenue expenditure rationalization measures.

Cut the Red Tape

Second, stressful times also create an environment conducive for administrative reform. PM Modi’s can quickly lick babudom into shape through positive strokes. He should consider setting up a lean but empowered “Decision Support Team” in his office, manned by ten senior Joint/Additional Secretary level officers selected for their expertise in key sectors; their ability to persuade and their flair for collaborative performance.

They would be mandated to speak for the PMO and be tasked to work with the key ministries and state governments to cut through red tape holding up investment decisions. Working against weekly targets with real time feedback to the PM, the mantra for this team should be “ANA- Achievement Not just Activity”.

Those taking up such high tension assignments should expect to be on the fast track to become Secretaries to the GOI.  The PM is known to be cagey about trusting officers beyond a tiny circle familiar to him. This is not surprising given that he has never worked closely with the babudom in Delhi. But he should experiment by subjecting a larger group to the “agnipariksha” of performance. He will not be disappointed with the results.

Forget the optics of who gets the credit

Third, the knotty problem, particularly in Bihar and Uttar Pradesh, is how to be proactive in the face of state governments, which have the incentive to rebuff such support as being politically motivated.

The farmer does not distinguish between the state and the Union government (Lokniti Survey 2013) – 58% held both the state and the Union government responsible for the sorry plight of agriculture. If farmers fall through the gaps of political finger pointing, they will punish both the BJP and the SP-in Uttar Pradesh and the JD (U)-in Bihar. The beneficiaries of apathy will be Bhenji (Mayawati- the BSP supremo) in UP and Lalu Yadav in Bihar. Doing little is not an option for the Union government despite some of the shine rubbing off on the SP and the JD (U).

Don’t rattle the private sector

Fourth, it would be a big mistake to take too seriously the campaign to paint the BJP as a consort of the corporate sector. When stern action is warranted, it must be taken transparently and without rancor or bluster. But a “Preet Bharara type” of regulatory action is not what we need. Jobs are what the average citizen wants, which only the private sector can generate them.

Strong arm regulatory actions against foreign investors are bad optics- both for investment and for citizen sentiment. If our regulatory agencies are seen to be handmaidens of the government, they lose credibility. But the government also loses by devaluing an efficient instrument for regulating the private sector in a hands-off, technical manner.

Sticky revenues

Fifth, boost revenue. The tax receipt scenario is grim. First, projections for the year were over optimistic at Rs 14.5 lakh crores (US$ 230 billion) around 16% higher than the previous year. Tax receipts are bound to slide with slow external and domestic demand and lower corporate profits, despite the 15% increase in the rate of service tax. A tax receipt equal to last year’s estimate of Rs 13.7 lakh crores (US$217 billion) or 9% more than the actuals of last year is the best we can hope for- 5% points due to inflation and 4% points due to growth of the taxable base.

Getting more tax payers into the net is a worthwhile but effort intensive option with limited upsides. In 2013-14 there were 47 million direct tax assesses. New assesses have varied between 1 to 3 million per year since 2011. Even doubling the number of new assesses helps only marginally in additional revenue.

Transferring the crown jewels to citizens

There is more upside in fast tracking disinvestment. Listed Public Sector Undertakings (PSU) account for 13% of the valuation of the Bombay Stock Exchange or around Rs 13.6 lakh crores (US$ 215 billion). Of this, some equity is already held privately by minority investors. But an additional 10% can be sold without diluting government’s majority control. The problem is that, in the past, Institutional Investors have been the primary takers for such shares. Retail investor appetite has been largely absent from the tumultuous stock market for some years now and market momentum has been primarily provided by Foreign Institutional Investors.

Selling PSU shares in large volumes, without transferring majority control to the private sector, dampens the market price. Even the private IPO market is slow. Government is wary of inviting the charge of crony capitalism by selling shares to large institutional investors at cheap rates.

On the other hand, selling directly to retail investors is more defensible even if the price is low. After all the “Crown Jewels” really belong to citizens. Dispersing the ownership of PSUs widely also meets multiple objectives. Why not borrow a leaf from Dhirubhai Ambani’s 1982 market making strategy and incentivize the retail investor back into the market?

Link disinvestment, as a sweetener, to the issue of government debt for retail investors only – special convertible bonds – with a fixed return for three years at the prevailing Government Bond rate. 50% of the face value could be optionally convertible on termination in 2018-19, into a balanced bouquet of public sector equity at a 15% discount to the then prevailing market price.

A sequenced, mega issue of Rs 1 lakh crores (US$ 16 billion) of an asset backed government security can reduce the short term risk profile of PSU equity investments and pull in finance from an alternative source.

Government must come out with an evidenced strategy to deal with the “perfect storm” India faces. Of course, the PM is a “lucky General”. The drought may not materialize; the world economy may sort itself out and the opposition in Bihar and UP may self-destruct. But waiting for this to happen may be pushing the Gods too far.

Lion King – India roaring?

Lion

(photo credit: http://www.archives.financialexpress.com)

Prime Minister Narendra Modi’s adoption of the Asiatic Lion as the symbol of “Make in India” has triggered off a debate. The lion — Gujarat’s state animal till now — has become ubiquitous. The brilliant, public brand developer, Amitabh Kant has made the lion near synonymous with Incredible India, as Dalda once was for ghee (clarified fat).

The lion now appears in tri-colour ruffles; bedecked with flowers; impaled by pistons, wheels and gears; outlined in bright LED lights or most elegantly just in a steely grey profile. The message is clear — India is not a power you can mess with.

Of course, the truth about the lion — but not the lioness — is that it is the laziest big cat ever. It uses its overpowering muscle mass and speed to forage for food; overeats voraciously and then sleeps contentedly barely able to control its snoring. But just the sight of its mane; its magnificent rock cut nose and jawline; its arrogant gaze and its tawny coat can bring on the goosebumps, absorbing the viewer for hours on end. The lion is not king without a reason.

In comparison, the Bengal Tiger — India’s national animal — is a furtive large cat which slinks about in the dense undergrowth. Whilst magnificently graceful and elegantly clad in striking stripes, it relies on strategy and guile in making its kill. Lions are more transparent. They hunt in a pride and can even take down an elephant. The tiger is a solitary hunter and can even be done in by a pack of wild dogs.

Which of the two suits India’s image best? Today’s “muscular” India is closer to the lion than the tiger. For the longest time, through the 1970s, ’80s and till the 1997 financial crisis, East Asia was known for its fast growing “Tiger economies” — tightly managed, efficient, lithe and opportunistic.

India is far from that model. We are too big to emulate the East Asian steps or use the entry points available to them — FDI in electronics and automobiles from Japan and later China and external trade drive growth. We are too diverse to have a single model fit all requirements. The “Pride of Lions” model suits us best — group effort; selection of the fittest amongst the group to lead and a strategy which leverages our size and inherent strength rather than rely on our low levels of flexibility or the accompanying moderate speed.

Valmik Thapar — India’s best-known Tiger conservationist — suggests that adopting the elephant suits India best. In fact, the elephant is the state animal of three Indian states — Kerala, Karnataka and Jharkhand. But elephants can’t dance, jump or dunk. They do have prodigious memories and are very community minded. Elephants will mourn a dead member of the herd for considerable periods and are very human in their reactions to loss and their fondness for a drink when the Mahua fruit ripens.

But its ponderous pace reminds us of the bad old days of the Hindu rate of economic growth. Its high maintenance — a daily feed of 140 kg and water consumption of 120 litres is the kind of resource intensity we need to get away from.

Its proclivity for making false charges and trumpeting to scare off the enemy is too close to the regressive character of our political discourse today.

Its unfortunate tendency to defecate in large quantities at inconvenient locations is so similar to the India we are already used to, that it just cannot become a symbol of what we want to be. I suspect even Mr Thapar would agree.

In fact, most likely, his apparent willingness to forego the “national animal” status for the Tiger — his first love, in favour of the elephant, seems to be a red herring — a canny move to propose a substitute so impossible, that it can mire action in discussions for the next decade, thereby maintaining the status quo, which suits Mr Thapar best. This tactic is familiar to every well-trained bureaucrat and part of her arsenal of tactics for blocking change.

But move away from the tiger we must. Here are three key reasons for doing so. First, we would thereby enable its adoption by West Bengal, which currently has to make do with the unglamorous “fishing cat” as its state animal. This is unbecoming for a state where the mighty Sunderbans Tigers prowl. Also, Bengalis in India can never digest the fact that Bangladesh has unfairly appropriated the Royal Bengal Tiger as its national animal leaving them with just a cat. The recent Communist governments in West Bengal never bothered about this because for them all cats are the same. In any case, in the “man versus wildlife” debate, they are squarely on the side of man. Prior to them, the Congress government was a mere handmaiden of the Union government. Didi (chief minister, Mamata Banerjee) now needs to right this wrong.

Second, despite being the national animal and thereby enjoying the VVIP special security arrangements of Union government-funded tiger reserves, the tiger population in India has not stabilised. In contrast, Mr Thapar notes, the lion population in Gujarat has increased, thanks primarily to the proactive conservation efforts of the state government. The lesson is clear. If the tiger is to be saved, name it as the state animal of West Bengal, Uttar Pradesh, Madhya Pradesh and Rajasthan so that state governments develop a direct stake in its conservation.

Third, the question of naming the Indian elephant as our national animal does not arise. It is a beautiful animal and we don’t want to lose it by elevating it to this status.

But if the “national tag” is the kiss of death, what hope is there for the Asiatic Lion to survive its de facto national status? Here we have to pray that the “Lion” that we have as the Prime Minister, currently, will look after his own, just as he did in Gujarat.

In case Mr Modi does not deliver, we could always switch to naming rodents as our national animal and at least be done with them forever.

Reposted from the Asian Age June 6, 2015 http://wwv.asianage.com/columnists/king-industrial-jungle-282

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