governance, political economy, institutional development and economic regulation

Archive for October, 2017

FM Jaitley’s press meet – more lobs than ground strokes

Jaitley lobs

What was Finance Minister, Arun Jaitley’s press conference on Tuesday all about anyway? If the intention was to gain eyeballs, it succeeded. But if it was to allay fears about the Indian economy, it failed. Here is why.

Misguided choice of communication medium

First, the optics were all wrong. The finance minister had just returned from the annual meetings of the International Monetary Fund and the World Bank in Washington. The timing required talking up the economy in a more artful way, drawing on international trends, in rethinking the role of the State in development. Instead, the assembled press corps got drab statistics. The naysayers remain unconvinced that the economy is doing fine. Presenting alternative indicators — other than those already in the public domain — could have helped. For example, the government has reduced risk by conferring residency tax benefits for local administrative offices of multinational companies. Similarly, GST revenue is marginally more than the targets for the first quarter.

Recycled “kosher” ideas for fudging data on the fiscal deficit

Second, the key “announcement” was a proposed outlay of `2.1 trillion for recapitalising public sector banks over two years. This was presented as a “bold” step. But how is it going to be achieved without relaxing the fiscal deficit target of 3.2 per cent of GDP this year and 3 percent next year? The budgeted outlay, for capital support to publicly-owned banks is just Rs 200 billion till FY 2019. Where will the “additional” resources come from? The how and when remains a mystery – though speculation, some of it inspired by the views of Chief Economic Adviser, Arvind Subramanian, abound.

FM Jaitley unhappy at being trapped

The finance ministry has a long, credible tradition of technical expertise. The Prime Minister can get away with making generic promises, as he has done in Gujarat, of a tax amnesty for small business, for past misdeeds. But finance ministers are required to be very precise. They can’t waffle. They must not seem to be led by advice, whispered into their ears, while a press conference is on. This, unfairly, makes the finance minister look feeble, or worse, being led by the nose.

arvind subramanian and jaitley

Mr Jaitley fell squarely into these traps. To his credit, he looked decidedly unhappy and uncomfortable while doing so. It is inconceivable that this media jamboree was his idea. Just back from Washington, where “best fit” fiscal practices are the main discourse, resorting to fuzzy announcements, which create high expectations and uncertainty, is not par for the course.

It’s the politics stupid

So what explains Mr Jaitley going down this route? After all, the Budget is just three months away. The sanctity of placing new budgetary proposals before Parliament, prior to revealing them to the public, is a sound convention. The only explanation is that the press meet was convened to boost the feel-good factor prior to the Himachal Pradesh and Gujarat elections, due over the next two months. Recapitalising banks sounds good. Building infrastructure sounds even better. If this was the intention, Mr Jaitley was right to look uncomfortable. Nothing stops the Union government from doing its job, even as state elections are being held. But a red line must be drawn at presenting significant new fiscal proposals, that are not already embedded in the existing fiscal roadmap.

Stick to your instincts Finance Minister

Mr Jaitley’s instincts remain sound. He will try hard not to breach the fiscal deficit target. He will resist reducing the capital outlay. He must also resist forcing cash-rich, listed publicly-owned companies to subscribe to the special recapitalisation bonds proposed to be floated by public sector banks. Listed, publicly-owned companies must be managed by their boards, and insulated from politics, at least with respect to their investments. Anything else is very unfair for the minority shareholders and the Securities and Exchange Board of India is duty-bound to resist such moves — however bizarre that may sound!

Deepen equity divestment in publicly owned banks & companies

Generating Rs 580 billion by selling-off government equity held in excess of 51 per cent in banks is a good idea for a start. A better idea is to dilute government equity even further to 26 per cent without relinquishing effective control. The government does not need more equity to ensure that the public interest continues to be served. We must resolve the legal obstacles which prevent such dilution of equity.Using disinvestment proceeds to inject public finance into private companies, which create growth and jobs, is a great idea. But doing so via the chosen long route of public sector bank recapitalisation is worrisome. Unless management systems are restructured, politicised loans and NPAs will persist. This cannot be achieved by 2019.

Use equity divestment proceeds to refinance private NBFCs for MSME business

What can be done is to use disinvestment resources to refinance private banks and non-banking finance companies, who in turn finance end-use borrowers, including small and medium enterprises (SME), to scale up operations. The unmet financing needs of SMEs are estimated at Rs 65 billion. But this could be an underestimate, not least because of their widespread use of cash or unbanked transactions. The share of manufacturing SMEs in GDP is seven per cent, or just under 50 per cent of total manufacturing GDP. Their most immediate financing need is to discount their invoices and thereby reduce the 60-to-90-day payment cycle which saps their cash reserves.

Scale up private, boutique, supply-chain finance providers

Private specialised companies offering boutique supply-chain financing already exist. The largest is reputed to be the New Delhi-based Priority Vendors Technologies Pvt Ltd. founded by Kunal Agarwal in 2015 (http://www.priorityvendor.com)But these early entrants tend to finance only the payables and receivables of large, star-rated corporates who buy from, or sell goods and services to, smaller ancillary firms. There are 5,000 large corporates. Compare this with 1.6 million registered SMEs.

We have barely scratched the surface of the potential for supply-chain financing. Saturation levels of financing can alleviate the cash crunch, at the firm level, caused by the GST regime of advance tax payments coupled with the delays, in “matching” tax credits, earned on purchases, before they can be used by firms, to pay taxes.

Jaitley ground strokes

India is replete with good ideas. The finance minister could have unleashed an array of nimble steps, which can lubricate the economy, reduce risk and create jobs. But, by not grounding Tuesday’s press meet around a friendly conversation about the nitty-gritty of unleashing private potential and mitigating the hardships arising out of GST, this opportunity was lost. There will surely be another time. But will we be prepared by then to grasp the tide at its flood?

Adapted from the authors article in The Asian Age, October 26, 2017 http://www.asianage.com/opinion/columnists/261017/wheres-the-big-idea-fm-got-optics-wrong.html

Xi and Modi – joined at the hip

xi-jinping

Prime Minister Modi and scores of democratically elected leaders, must envy Xi Jinping the President and “uncrowned emperor” of China. The serried rows of compliant and attentive members of the People’s Congress, seated, as if pinned, to identical red upholstery; displaying endless patience through Xi’s three and a half hour over-long, speech, without once dozing off or interrupting with a “point of order”. All this must seem like a dream to our leaders, used as they are, to rambunctious legislatures, more eager to speak- often all together – than to listen.

China shines

china2

Clearly, China has something to be chuffed about. Its model of socialism with “Chinese characteristics” cut away the romantic nonsense of socialist collectivism and recognizes that private enterprise and (less strongly) markets, create wealth, rather than good intentioned, tight, public-sector management. By combining private enterprise with a strong government and political stability, the Chinese model borrows the best from different ideologies. China gets an A for creating national wealth and for distributing it – poverty was down to just 2 percent in 2014 versus 21.2 percent in India (per World Bank definition $1.9 PPP (2011) per person per day).

But a more benign social policy beckons 

dissent

But the jury is out on whether an authoritarian State can nurture citizen centric growth. How long can the iron hand of the Chinese Communist Party (CCP) continue to rule China absolutely? Will the Chinese middle class not replicate the autonomy and democracy movement of Hong Kong? These are current concerns. This much is evident, from the new Xi doctrine, spelt out on October 18 in Beijing, which espouses that the CCP must provide for the “happiness” of citizens;  remain closely in touch with their aspirations and monitor citizens perceptions better.

Bhutan: Democratising for happiness

king

China’s tiny, neighbor, Bhutan could teach China a lesson or two on whether “happiness” mixes well with absolutism. King Jigme Singye Wangchuck voluntarily abdicated in 2006, in the hope, that this would help Bhutan evolve into a modern, egalitarian, democratic country, whilst retaining its trade mark of happiness. The Bhutan constitutional monarchy is revered, like the British monarchy, which is widely respected and admired.

Wealth alone does not breed content

The Chinese quest for a prosperous, satisfied and happy populace living under the hegemony and parental control of the CCP, is self-defeating. The spirit of liberty and competition is not divisible. A market led economy cannot be sustained under monopolized political power. Where markets rule, they drive the political process. Where the State rules it drives business. Innovation does not thrive in eco-systems, where the freedom of thought is absent. China is much admired as the factory of the world. But it has grown because worker rights do not exist, access to legal rights is limited and public interest is expected to mirror the CCPs interest.

India and China: different strokes

Unlike China, India is determinedly heterogenous and multi-party. It lends itself to decentralized, democratic governance. It is tempting to infer, therefore, that India illustrates the value of democracy even in a poor, developing country.  The recent Pew survey showed that 85 percent of Indians trust the government, even though, 40 percent of the population is vulnerable to poverty; governments have been negligent in providing public services and human development indicators are worse than in sub-Saharan Africa. But, disturbingly, the very same Pew Survey also shows that 55 percent of citizens are comfortable with a more autocratic, “strong” government.

Nationalism rules

This swing towards authoritarian governments is not isolated to India. It is an international trend in reaction to the economic limitations of the open economy, liberal, democratic model for development, particularly with respect to containing growing inequality. It is not surprising, therefore, that President Xi Jinping should advise developing countries to look closely at the Chinese model, which comes with dollops of loan assistance, as an alternative to the more standard western model of development, advocated by the Multilateral Financial Institutions.

The country cousins meet

Xi and Modi

Prime Minister Modi was not just sharing dhoklas with President Xi in Ahmedabad way back in September 2014. There seems to have been a meeting of minds there. Like Modi’s vision of modernity, rooted in tradition, the Xi doctrine, also evokes the five thousand old civilization of China. Both leaders focus heavily on external and domestic threats to security. Both advocate much stronger oversight of the media, the internet and educational institutions, to regulate disruptive dissent. Like Xi, Prime Minister Modi has used the first three years to implement structural reforms. His high decibel war on corruption is expected to minimize the financial “fire power” of the mafia; bridle political opposition and improve public sector outcomes. Implementation of the long-delayed Goods and Services tax (GST) shall, like Bollywood, bind us more tightly and provide incentives to integrate further. Regions which are seamlessly connected for commerce tend to remain together. Like Xi, Modi views infrastructure as a “glue”. For Xi it is a glue to foster Chinese hegemony over its near abroad. For Modi it is a “glue” to bind the nation.

The Xi doctrine seeks to realize the ”China Dream” – a vision of a prosperous, environmentally clean country at the center of the world, contributing positively to mankind, by 2049 – the centenary of the founding of the Republic of China. There will be much to learn from China. There are two immediate take-aways. First, that it is futile to copy the political systems of other countries mindlessly. Second, that even authoritarian governments need to listen to the people.

lagislature

Indira Gandhi, turned away from absolutism and towards democracy, in 1977, by choosing to call for elections. This ended the two-year old national emergency. She gained personally and politically from this astute move. But it took an entire decade, till 1991, for the democratic apparatus to be used effectively, in public interest. We have not looked back since. India’s political architecture is finely tuned to the risk averse nature of its citizens. It charts the middle path to progress and shuns extreme options.

China will do well to study this option closely, as it seeks to move center stage in world affairs and looks for domestic pathways, to transform from being a single minded, ruthlessly efficient, economic, power-house to a house, fostering happy Chinese.

Also available at https://blogs.timesofindia.indiatimes.com/opinion-india/xi-and-modi-joined-at-the-hip/

Bad police work or “perfect” murders

Rajesh and Nupur Talwar were having an impromptu pre-birthday celebration for their daughter Aarushi, at their Noida residence on the evening of May 15, 2008. Their live-in, trusted house-help Hemraj was about, as usual. Some time before 6 am the next day, both Aarushi and Hemraj were dead — the victims of horrific violence inside the house. The Talwars say Hemraj killed Aarushi, but ascribe no motive for him to have done that. Also, they have no idea who killed Hemraj, or where. His bloodied body was found on the terrace, which was locked from outside. The key to it was never found.

Changing investigation agencies adds to the confusion on the ground

On May 23, 2008, the Uttar Pradesh police arrested Rajesh Talwar on suspicion of being the prime accused in the double murder. Unhappy with the way the UP police was conducting the investigation, the Talwars petitioned for the case to be transferred to the Central Bureau of Investigation. Policing is a state subject under the Constitution. Unless the state government agrees, the CBI has no jurisdiction in such cases. But then UP chief minister Mayawati had no hesitation in letting the CBI carry the ball forward.

The CBI steps in…but shambolic investigations continue

By May 31, 2008 the CBI was officially in charge. By July 11, 2008, the CBI filed a report in the designated CBI court that there was insufficient evidence against Rajesh Talwar, who was consequently released on bail. The next three years were spent trying to find out who did it. Over this period four different investigating officers handled the case. Finally, A.G.L. Kaul, DSP, filed a closure report on January 1, 2011, citing the lack of any conclusive evidence to indict anybody.

CBI court starts proceedings against the Talwars suo motto

To their credit, the Talwars contested the finding and urged further investigations. The CBI court decided to proceed with the case. But it summoned the Talwars as the accused. Courts do have this power. But more usually, this happens when the police seems dilatory in lodging a first information report, not when a closure report has been filed by the police after investigations. The Talwars, possibly shaken by being named as the accused, moved the Supreme Court for relief. But their petition was dismissed. The outcome, two years later, on November 25-26, 2013 was that the Talwars were convicted by a CBI court for the double murders.

Allahabad High Court strikes down the conviction due to insufficient evidence

The Talwars appealed against these convictions. The Allahabad high court has, on October 12, 2017, ruled in favour of the Talwars. It held that the lower court had erred in considering the chain of circumstantial evidence adduced as being conclusive since multiple conclusions could be drawn from the same facts. This is only temporary relief for the Talwars. The CBI has 90 days to appeal to the Supreme Court. But the CBI also has a credibility issue, particularly within the Supreme Court. In 2013 the CBI was described, by a justice of the Supreme Court as a “caged parrot” of the government of the day.

The legal battle may not be over

In our topsy-turvy, anything-is-possible, adversarial, judicial system, the better argued case inevitably wins. It seems a one-sided battle. The Talwars will fight for their continued liberty, the restoration of normalcy and social standing. The CBI will fight to improve its record of convictions and to show that crime does not pay. Sadly, no one is fighting for Hemraj or for the wife and kids he left behind. As for 13-year-old Aarushi, it is difficult to say how she may have wanted things to pan out.

Too many questions, not enough answers

But with shoddy initial investigations and doubtful evidence, that has already been questioned exhaustively in the high court’s order, what another appeal will achieve remains unclear. Once the investigation is compromised the benefit of doubt doctrine ensures that the criminals walk free. Consider, even the weapons used for the murders remain unidentified – a golf club, a khukri, surgical scalpels, a hammer have all been mentioned as possibilities. The motive for murder remains unestablished. It is not even conclusive whether the flat was  locked from inside or not – this is important because it either points the finger of suspicion on the Talwars or opens up the possibility of others being involved. Aarushi’s phone was found and returned some days later by a colony maid. It had been wiped clean of all data. Who took it, wiped it clean and then tossed it aside in the colony? Too many loose ends remain uninvestigated, And what about Aarushi’s new camera – presented to her on the night of the murder? Was it also clean of evidence? Who killed Hemraj? Why and where? There are no evidenced answers.

Poor institutional arrangements for bringing criminals to justice

It is also tragic that despite transferring the case from the allegedly, bumbling UP police — supposedly, more familiar with law and order rather than tricky, crime investigations — to the more savvy and efficient CBI, the results are so pathetic. Justice for Hemraj and Aarushi remains elusive even a decade after.

To be fair to the CBI, conventional crime is not its core mandate. Investigation of economic offences and corruption is its forte. Since 2008, terror-related crime investigations have already been hived off to the new National Investigation Agency (NIA), which can, seamlessly, also deal with crime having national consequences or cross-state crime networks.

Conventional crime is usually dealt by the state police. The deleterious trend of frequent transfer of cases to the CBI dates to the early 1980s. It enables forum shopping, scratch my back bargains and politicisation. It also discourages state police forces from developing their expertise and practices for investigating and prosecuting crime.

The double murder does not qualify for the CBI’s attention. Delhi records 598 murders and Uttar Pradesh 4,860 murders per year. The Aarushi-Hemraj case, however horrific, is a personal tragedy of only two families. The public outcomes are negligible. Its investigation could have remained with the UP police. Transferring the case to the CBI has only muddied things at the field level and encouraged finger-pointing. The then director of the CBI had this to say, in 2014, as part of a tribute to the untimely demise of A.G.L. Kaul, SP, CBI, the last investigating officer: “Despite the many lacunae and loopholes, due to the fact that the case had been handled initially by the UP Police, (Kaul) was able to obtain a conviction.”

Doubtful if India can be policed well from Delhi

Till recently, there was a tendency to centralise financial and administrative resources in the Union government on the grounds of higher efficiency and rectitude. This is self-defeating. The surest way of retaining power is to distribute it to where it can best be administered. The CBI must be honed to do its primary task — bringing moneyed crooks to justice.

Central police organisations are hopelessly outdated in their staffing pattern, skills and equipment. They need knowledge and technology to collect intelligence, investigate and prosecute. Boots on the ground look great in the Republic Day parade. But they are costly and ineffective in tackling 21st century criminals. Leaner, officer-oriented, specialised and mobile security agencies are really the way to go.

Adapted from the author’s article in The Asian Age October 17, 2017 http://www.asianage.com/opinion/columnists/171017/sloppy-cbi-police-work-gives-a-licence-to-kill.html

A “green” Diwali sans firecrackers

SupremeCourtPhotos(47)

Managing winter smog in the National Capital Region (NCR) has occupied the Supreme Court since 2015. Three interim orders — in November 2016, September 2017 and October 2017— each of which changes the status quo, imposing commercial costs, illustrate the limitations of the judicial approach while balancing commercial interests with public health concerns.

Joined at the hip

joined at the hip

Delhi and Sivakasi, 2,650 km away in Tamil Nadu, are symbiotically joined. Sivakasi produces three-fourths of India’s firecrackers. Delhi and its surrounding areas are the prime consumers. Consider that 40 per cent of 610 permanent licensees for selling firecrackers are located here. Delhi also licences 968 temporary fireworks retailers. The NCR’s stock of fireworks is estimated at 6,000 metric tons — enough to fill 600 trucks.

CPCB plays truant

The reason why a substantive decision on the sale of firecrackers remains elusive is that the Central Pollution Control Board (CPCB) has failed to define the permissible ingredients for firecrackers and their volumes thereof. Without a standard regulating manufacture, the task of optimising across public health concerns; preserving employment and nurturing business potential becomes, at best, an approximation with avoidable costs. Only blunt options like banning the sale of firecrackers present themselves. The actual public health benefit of such measures is uncertain. But irreparable harm to businesses and distress to workers is certain.

At the very beginning…

Back in November 2016, during the Diwali season, Delhi was enveloped in smog. CPCB air quality reports indicated that in 2015 and 2016, the level of pollution had spiked during and after Diwali. Pitampura, a densely populated area in Delhi, suffered an increase of pollution by four times in 2015 and more than 10 times in 2016. Dealing with an emergency, the Supreme Court suspended all licences for the sale of firecrackers in the NCR on November 11, 2016. It also directed the CPCB to submit, within three months, a comprehensive report on the air pollution impacts of bursting firecrackers. The implied strategy was clear. Take stern action in keeping with the magnitude of the crisis and incentivise manufacturers and sellers of fireworks to negotiate with the government for setting standards. Since Diwali was already over, the commercial dislocation caused by the order was minimal.

The CPCB has yet to submit the report due on January 11, 2017, on the air pollution impact. Meanwhile, prohibitions on using antimony, lithium, mercury, arsenic and lead compounds were imposed piecemeal by the Supreme Court on July 31, 2017 and on strontium chromate on September 13, 2017. The court is clearly working hard despite executive intransigence.

And more recently…

Gearing up for the festival season in 2017, the Sivakasi manufacturers and suppliers requested the Supreme Court on July 5, 2017 for a modification of the suspension of permanent licenses.

The Supreme Court recognised the harm being caused to 300,000 livelihoods, despite the absence of any proven link between the bursting of firecrackers and hazardous air pollution.

The National Green Tribunal has listed seven sources of air pollution in NCR. Firecrackers are not one of them. A January 2016 IIT Kanpur report had also not listed firecrackers as among the major sources of air pollution in Delhi.

On September 13, 2017, the Supreme Court allowed a partial lifting of the suspended licences, to enable the accumulated stock of fireworks to be sold in NCR or to be transferred out. To avoid any reoccurrence of a fait accompli, it directed no more fireworks should be transported into the NCR. More significantly, it directed that the number of temporary licences in NCR be halved in 2017, and both permanent and temporary licences further halved in 2018. Taking a cue from the 1999 experience in defining noise pollution standards for firecrackers, it constituted a multi-stakeholder, technical committee chaired by the CPCB to report on the impact of bursting firecrackers on air quality. By all accounts this was a fair and forward-looking order mitigating the commercial harm caused by regulatory uncertainty while seeking to reduce the public health impact.

The puzzling about turn

Inexplicably, on October 9, a three-judge Supreme Court bench put the September 2017 order in abeyance till November 1. The intention was clearly to postpone the restitution of sale till after Diwali, thereby nullifying the positive commercial benefits. The court invoked the “precautionary principle” in the public interest. This principle advocates abundant caution if the potential for irreparable harm exists. Thereby, the significant, negative commercial impact of the order simply became inevitable collateral damage.

Regulating better is possible

Could the regulatory process have been managed better? First, it goes without saying, that this is yet another instance of the government purposefully abdicating politically sensitive, inconvenient regulatory ground. Commercial uncertainty and public health costs are bound to escalate when this happens.

Strong action effective only if sustained

CJI Thakur2

Second, could the Supreme Court have been more consistent? Yes, it could have limited its initial intervention in 2016 to simply nudge the executive to introduce safe manufacturing standards, including by using back channels for the purpose. Possibly, its strained relationship with the government during this period, over the judicial appointments issues, may have constrained it from using this practical tactic to resolve the problem.

Optionally, the court could have issued a nuanced order, suspending temporary licenses in NCR to restrict retail sale; allowing permanent licenses to continue, but at a progressively decreasing scale and directing the executive to limit the bursting of firecrackers to collective displays at pre-designated sites. This would have reduced the quantum of firecrackers burst; minimised the commercial harm and preserved the incentive for firecracker manufacturers to actively pursue formulation of safe manufacturing standards. Despite the storm in the social media decrying the  encroachment of Hindu religious rights by limiting firecrackers, the public is in favour of clean air and a cleaner India.

Green “bangers” anyone? 

bamboo

Finally, the court could have explored the manufacture of “green” firecrackers. Before gunpowder was invented in the 10th century, the Chinese made them by heating bamboo. Northeast India is resplendent with bamboo, just waiting to be used. China might also be happy to modernise this sustainable technology and commercialise it under the Make in India initiative. Green “bangers” can preserve the thrill of Diwali, only minus the smog.

Adapted from the authors article in The Asian Age October 12, 2017 http://www.asianage.com/opinion/columnists/121017/costly-flip-flops-over-ban-on-firecrackers.html

Tag Cloud

%d bloggers like this: