governance, political economy, institutional development and economic regulation

Archive for May, 2016

Why Raghuram Rajan is not Indian

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/

Don’t demonise diesel

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

Disaster sans democracy in Uttarakhand

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

 

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