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Trump’s – “ugly American” redux


President Donald Trump’s administration is showing its a mean. mercantilist machine. Unsurprisingly, for it, international trade is a one-way street, with exports increasing wealth in America, at the expense of the importing economies and imports stealing American jobs. The psychosis is familiar territory for India and scores of developing countries. What is truly unusual is the conversion of the United States of America to this flawed concept and the abandonment of the open economy model, by the erstwhile foremost exponent of this philosophy.

Nǐ hǎo ma America

In today’s topsy-turvy world, Mr Trump is aping the Great Qing emperors of China during the mid-19th century. At that time China was more than willing to sell Chinese silks, ceramics and art in exchange for silver, but felt no need to import any foreign goods or influences. The result was a burgeoning trade surplus. It took export of cheap opium and gunboat diplomacy by the Western colonial powers to balance the trade.

Emperor Quinlong

Unlike China under the Great Qing, the United States runs a massive trade deficit equal to around three per cent of its GDP. This is normal for many developing countries but unusual for a “great power”. American consumers are accustomed to the “opium” of cheap imported goods. It helps that the appetite of foreigners for AAA-rated US dollar securities finances the deficit. But what matters to Mr. Trump is protecting US jobs. Hence the plan to reduce the deficit, particularly versus China, by $100 billion. Hiking import tariffs on metals significantly is part of that  endeavor. Mr. Trump hopes that metals, being intermediate goods, the resultant rise in price of final goods will not be immediately visible. More bizarre tactics may follow.

Jobs for the boys, at any cost 

But higher tariffs will rob both American consumers via higher prices eventually and jobs in ancillary, user trades, which are sensitive to price rise. All this, just to keep jobs alive on life support, in the metals production business. This is bad politics and worse economics – at best a short-term tactic — to signal the Trump administration’s sympathies for Republican rough-necks. The economy wide negative impact will be diluted over time. Mr. Trump believes in deals. So expect to be able to evade the higher tariffs if you are willing to buy enough of iconic American products – like Harley Davidson motorcycles, stetsons and Boeing aircraft.

The US remains the biggest single country, market. It imports $2.7 trillion of goods and services. But the European Union’s market for imports is much bigger, at $6.7 trillion. Japan alone imports $0.8 trillion and China imports $2 trillion worth of goods and services. So the US is steadily dropping away from being a dominant market for world exports.

India is not the target, but we suffer collateral damage

The new import tariff of 25 per cent on steel and 10 per cent on aluminum are of marginal consequence for India. Our share in world steel exports is just 2.5 per cent. Steel exports to the US, over 2012-16, averaged around 6.5 per cent of our total steel exports. We also export metals to other big markets like the UAE, Europe, East Asia and South Asia. Our share in world aluminum exports, averaged 1.5 per cent over 2013-16. The share of the US in our aluminum exports is significant, at 10 per cent. But our largest importer is South Korea, with significant volumes also exported to Mexico, Malaysia, the UAE and Turkey. Indian exports to the US are not of the scale where they could threaten the economic security of American industries. Also, our special relationship with the US, since the 2005 US-India Civil Nuclear Agreement, the shared commitment against terror and common military logistics arrangements, can facilitate privileged access to the US market.

The US – a willful ally

The elephant in the room is US intransigence, amounting to the “ugly American” behaviour. Starting with the US walking out of the 2015 Paris climate change agreement; and its recent regressive approach to immigration — in sharp contrast to responsive European policies; and its most recent arbitrary protection via high import tariffs of steel and aluminum manufacturing jobs — all these have damaged its “soft power”.


Of course, the US has the firepower, bolstered by its $600 billion defence expenditure, to promote “gunboat” diplomacy. But faced with China’s relentlessly expanding economic muscle which makes it an implacable adversary in the superpower sweepstakes, the US will be hard pressed to convince its own allies that it can back its brash words with action.

Indians have indelible memories, from 1971, of the threatening deployment of the US Seventh Fleet in the Bay of Bengal seeking to prevent the liberation of East Pakistan by the Bangladeshi Mukti Bahini from the oppressive, quasi-colonial rule of the Pakistani-Punjabi mafia — a long-time close US ally. It was only the counter deployment of Soviet nuclear submarines and warships, in response to a request for help from India, which rendered the USS Enterprise and the rest of the Seventh Fleet toothless. If the US was not willing, in 1971, to face down the Soviets, to help its ally Pakistan, then how credible is its willingness and ability to come to the help of India in facing down a possible threat from China?


China, our awesome, prickly neighbour

In a networked world, trade, investment and security are intertwined. The US views China as its primary adversary. Luckily for it, China is several thousand miles removed from the American land mass. But China lurks on our northern borders. It spends $180 billion on its military alone — almost equal to the total budget of the Indian government. Whilst, lining up to seek favourable trade terms from America, it would be foolhardy to provoke a trade war with China. India did well, recently, to dilute the potential use of the Dalai Lama’s April 19, 1959 flight to safety in India, as an irritant for “Emperor Xi”.

Navel gazing better than eye-balling

Modi emerging

Prudence lies in following the Chinese strategy of subordinating muscular diplomacy to economic growth till the time is ripe. It remains in India’s interest to adhere to the open economy model. We have limited capital and governance capacity. We must be frugal in allocating them to first build our domestic infrastructure and facilitate private investment, whilst keeping our markets lightly regulated and open to competition and foreign investment.

Let us not obsess about job creation or force-feeding the formal economy. The US creates two million jobs in a year. Non-farm jobs are scarce everywhere. We should become better at generating fiscal resources to redistribute as income support to the “lost generations” of unskilled, unemployed Indians who are older than 50. This will boost domestic demand and fuel economic growth, far better than resorting to failed economic solutions — such as protectionism, subsidies and publicly financed businesses to chase impossible dreams.

Adapted from the authors opinion piece in The Asian Age, March 17, 2018

Junk policy for action


Policies mean very little, unless there is a national consensus behind them, because governments change in a  Formulating a policy is a clunky, time- and effort-intensive, process. It should be attempted only if massive structural change is necessary. India has rarely been in the game of big bang reform. Our forte is incremental change. For this, key actions with outsize results are more significant than policies.

Industral licensing became ideological & lasted well past its expiry date

Also, policies can haunt a country for longer that necessary.The Industrial Policy Resolution of 1956 was one such. It was inspired by the seductive early achievements of the Soviet Union. The Bombay Plan 1944 formulated by leading industrialists, including the redoubtable JRD Tata, implicitly supported massive state intervention and regulation to protect domestic industry from foreign capital and competition. This became the trap, chaining private enterprise in regulations and excluding it from capital intensive “core” sectors.

Never mind that Jamsetji Nusserwanji Tata had invested in Asia’s largest integrated steel plant as early as 1907, helped by a buy-back arrangement from the British Indian government, which also laid a railway link to the site. It was India’s first public–private partnership (PPP).


It took us over eight decades, till 1992, to come around to the idea that leveraging public resources with private management and investment was cleverer than autarkic public investment. It took another 25 years for us to come to terms with foreign investment. In the meantime, India missed the bus of industrialisation and manufacturing, even as China marched ahead, from the 1980s, to become the factory of the world.The short point is that making a policy is no panacea for achieving results.

Were the existing low-level of health outcomes unachievable without a policy?

Health is a state government subject under the Constitution in India. But a National was formulated in 1983. Despite three decades of central planning since then, health outcomes vary significantly across states and aggregate achievements are unimpressive.

Gradual privatisation of SOEs is ongoing because there is no policy to stop it

Balco 2

Conversely, structural change is often implemented without articulating a policy.Consider the privatisation of state-owned enterprises. The National Democratic Alliance government under Prime Minister Atal Bihari Vajpayee found it impossible to build a consensus around privatisation. A comprehensive privatisation policy was therefore, never attempted. The Industrial Policy Resolution of July 1991 — which sought to weaken the stranglehold of the government over industry — had shrunk the industries reserved for the public sector to atomic power, defence, mineral oil, mining of coal, iron and other metals and the railways. This enabled the sale of minority shares in the other public sector undertakings (PSU). Then finance minister Yashwant Sinha used the 1999-2000 Budget to reduce the reserved sector to “strategic” PSUs in atomic energy, defence and railways only. All others could be privatised.

Gradual disinvestment has been ongoing, primarily with the intention of raising revenue. This year the government anticipates an all-time high of Rs. 1 trillion from disinvestment, being 30 per cent of non-tax receipts, other than debt.Seasoned bureaucrats will advise never write something down, unless you need to.

Electricity remains a “vexed” business despite reform legislation and policy

Merely articulating aspirational objectives in a policy will not achieve results. This has become particularly true in an uncertain world, made even more unstable by technology development. Clunky state action tends to come late and gets clogged into stranded assets.

This is the fate of our Mega Power Policy with 30 GW of power generation stranded because of low demand or disrupted fuel supply. Policies create huge inertia. Consider that as late as 2015-16 the Budget Speech sought to create 4 GW of additional power capacity, even as stranded power assets were building up.

Foreign policy is different 


Some policies are intended to signal political alignment and intent rather than become an entry point for concrete action. falls clearly in this genre. The “Look East” policy of the Manmohan Singh government was followed by the “Act East” policy of the present government — both signaling our interest in South East Asia. But substantively little has changed in the years since, even as China has gone, from being a dominant economic power to a power-hungry bully in the region.

Paris 2016 – the world laid to rest, climate policy & switched to voluntary actionable metrics 

India does not have a comprehensive  We tend to put development before the environment — in exactly the manner other developed countries have grown. This is pragmatic. The 2016 recognises the futility of having a single for the world. Instead, it defines a global target — reversing aggregate carbon emissions to keep global temperature rise within 1.5 degree Celsius of pre-industrial levels. Countries now evolve their own action plan, keeping in view their development needs. Collective action works better than global posturing.

Imagine the impact on Google’s share value if it bound itself to follow a medium term policy

Consider that multinational companies do not formulate business policies in an autarkic manner. They define strategies which, nimbly align with global trends to  eke out the maximum value for themselves. This is a sensible approach. We should get away from announcing sector policies. Instead, we could define incremental and jointed action plans, which result in achieving national objectives.

Google folllows the money. We could follow the Directive Principles in our Constitution

happy girl

National objectives do not need to be defined afresh. A close look at Part IV of our Constitution will suffice. The Directive Principles of State Policy were formulated more than 75 years ago. Our task is to put in place the action points to achieve them, via the annual and medium-term budgets. Politicians love announcing policies and programmes because these can be narrowly targeted at specific beneficiaries for votes. This is the downside of the dharma of  We should junk sector policies as an instrument of development. Intellectuals will disagree. But pragmatism must trump ideals.

Adapted from the author’s opinion piece in Business Standard, February 26, 2018

BJP self goals dim the shine

Gadkari 3

It is not often than an innocuous government statement becomes the fulcrum of a storm. The sudden announcement that Minister Nitin Gadkari’s plan to announce a policy for 100% electrification of transportation by 2030 was off the cards, sent shock waves through the industry and political analysts.

Subsuming Gadkari’s proposed electric vehicle policy in a broader Alt Fuel Policy makes sense 

To be fair, not having a narrow policy just for electric vehicles makes sense. Nesting actions, needed to achieve cost-effective electrification in transportation, within a broader “alternative fuels policy”, ostensibly, being prepared by the NITI Aayog, as disclosed by Amitabh Kant – the NITI CEO, who works directly with the NITI Chair – Prime Minister Modi, makes perfect sense.

It is good practice not to choose specific technical options via a policy. Instead, good policy formulation should specify a generic pathway to achieve the final outcomes- in this case lower carbon emissions, clean air and reduced congestion. In the best-case, simplistic scenario, tax incentives for the transportation industry, should be linked to the carbon emissions and road area saved per unit of travel, irrespective of the technology option adopted by them.

Leaving the technology option to industry – electric, hybrid or hydrogen-fuel powered, ensures that the market for innovation is not artificially distorted in favour of any technology.

Why put all our eggs in a China basket?

But, life is rarely that simple. Consider that China has emerged as the leading low-cost manufacturer of electric vehicles. They have also firmed-up supply chains of lithium for the manufacture of associated high efficiency batteries. Natural resource constrained Japan, is in contrast likely to push for a clean, hydrogen powered vehicle.


Strategically, our relationship with China is cool if not chilled. We lean towards a “Triad” of the US, Japan, India – for collaboration in security and transnational infrastructure development. The choice of Japan, as the partner for the Industrial corridors project to link Indian metros by fast passenger and freight trains and for the proposed Asian Africa Growth Corridor, are illustrations of such cooperation. Closer logistics integration with the US and Indian military forces, is another. Joint patrolling of the sea lanes in the South China Sea is yet another.

Clearly, relying solely on electrification of transportation, has strategic implications with respect to tying our future to China, which begs a more nuanced approach. Ministers Nitin Gadkari and Piyush Goyal might have thought up the electrification push, early in 2017 when Minister Goyal was in charge of Power, Coal and Renewable Energy, to absorb the stranded capacity of 30,000 MW in the power sector.

Boosting efficient electricity consumption by creating demand makes sense

The capacity of distribution utilities to absorb electric power is constrained by the low, regulated retail tariffs versus the higher grid cost of delivering power using coal or gas generation. This makes it sensible to explore alternative options for using power for customers who are willing to pay cost based retail prices for electricity. If additional solar capacity comes up to meet the target of 175 GW of renewable power by 2020 at grid supply prices of 4 cents per unit (kWh), capacity utilization in coal and gas-based generators will fall even lower than 60%.

white goods

Are cabinet ministers being shown who is boss?

Modi Jaitley

At the best of times there is more politics than economics in public policy formulation. But with elections around the corner, every action of government, acquires heightened importance. So, for example, could the trashing of Mr. Gadkari’s policy initiative be an indication that Prime Minister Modi is showing him who is the boss? Ministers Gadkari and Goyal are perceived to be the most effective members of the cabinet. With reverses in recent bye elections in Rajasthan and a perceived tough fight ahead in Karnataka and Madhya Pradesh, has it become necessary for PM Modi to flex his muscles to keep the cabinet orderly?

The PNB scam adds to the slight of losing three bye elections in Rajasthan

Political leaders are notoriously sensitive to perceived loss of power. Given PM Modi’s larger than life persona, this is surely, his personal Achilles heel. The BJPs lucky run over the first four years seems to be petering out. They could avoid responsibility for the Rs 10 trillion of non-performing banking assets they inherited from the UPA. But the most recent case of a fraud of Rs 110 billion in the Punjab National Bank due to poor controls and oversight by a clutch of banks shows that things have not changed.

The “no cash transactions” rule has hit the profitability of the diamond and gems industry 

More worryingly, the market capitalization of listed jewelry companies has become less than one half of their debts. Their profitability is plunging. Their interest cover ratio is barely above the red line of 1.5X with sundry debts increasing to 43% of sales.

Difficult to value jewels have always been a favoured route for hawala (over invoicing imports and under invoicing exports), which is one way to safely transfer black money abroad. Much of this is often brought back as FDI or more likely foreign portfolio investment in the stock market where returns have been generous, inflation has been subdued and the Rs artificially stable such that even exchange risk was minimized, at the cost of exports and at the cost of making domestic production uncompetitive versus imported goods.

Finance Minister Jaitley faces the heat for poor oversight over publicly owned banks

More importantly it is the timing of the expose which is like rubbing salt into the wounds of bye-election losses for the BJP, which campaigns based on “zero tolerance for corruption”. Unfortunately, Finance Minister Jaitley will be in the line of fire too, much as Minister Suresh Prabhu, was hounded out for recurring railway accidents.

Silence breeds discontent and distrust. Communicate please.

With barely a year to go for elections, the number of moving parts is increasing by leaps and bounds. The French Rafale fighter jet deal was also poorly managed. Even worse, communications outreach has failed to dispel the fiction, that it is another “Bofors scam”. Champions get moving when the going gets tough. The BJP had a fabled communications team leading up to the 2014 elections. Today, ensconced in power, the last thing on its mind seems to be, sharing carefully thought through public policy positions with citizens, in a credible manner. Not having an opposition has its own downsides. Or is it the BJP’s unerring instinct to dim the light, just when it is shining.

Also available in the TOI blogs February 17, 2018

Post-budget stocks – Storm-in-a teacup


Those who live by the stock market must pay for their indiscretions. The stock market slid by 2.7 percent on February 2, 2018 – the day after Budget Day; by an additional 0.88 per cent on Monday, February 5, followed up by a further slide of 1.6% on February 6. in tandem with the global sell-off sparked by crashing US markets.

Its the Bond Market stupid?

Lazy analysis would pin the roil, in India, at the usual open-economy problem of capital flight to safety from small markets making them catch cold when the US sneezes. But a closer look tells a more granular story. Of course hot money will move about in search of higher risk adjusted return. So if the fed fund rate rises in the US to a 3% real return some foreign portfolio investors will move out. But consider that on a 6.5% growth and 4% inflation, the Indian stock market grew at 28% over the last year. There is plenty of room for the let the hot air out and still end up reaping a 8% real return in US$.

Media hysteria around the stock roil is over the top, as usual. Consider, if the stock market slid by 5.3% over three trading days post budget since Feb 2, the value which was lost was value added on since as recent as January 5, 2018 when the SENSEX was at 34154. On Feb 7 the stock market is roughly at the same level. India is high growth story with working markets. There are not many such markets available in the world where 8% returns in US$ are reasonable expectations.

Retail investors will rue their panicked selling

To be sure, panicked retail investors, who have sold their shares are the losers and heavy weight “bears” who drive markets by selling today and buying forward in the hope of buying back the same shares at a lower price, have gained. Note that even their capital gains till March 31, 2018 is free of long term capital gains tax. So bears have scored a double victory – taxless capital gains and re-purchase at a lower price. Brokers are also smiling because they make money of both sales and buys.

For small investors, the lesson is that despite the hype, what happens in the US stock market must not dictate their actions in India. Our markets rise and fall due to a variety of reasons- not just what is happening in the US. There is enough financial fire-power with domestic institutional investors to substitute, a temporary flight of foreign hot money to the US.

Domestic drivers of stock markets 

Stepping back here is an alternative story of why Indian stocks fell post budget.

Will inflation rear its ugly head again?

inflation 2

First, inflation fears arising out of the Budget proposals. The fiscal deficit this year has overshot to 3.50 per cent of the GDP, with no respite likely even next year. Mix this with the possibility of oil prices increasing further and the picture turns toxic.

Oil prices (Brent) started increasing from US$ 46 a barrel in end July 2017. They reached US $60, three months later, in end-October 2017. The high of US $70 came in mid-January 2018 with a subsequent cooling off to US $68 per barrel this week.

Consumer price inflation in India, was at 4.5% in 2016-17. Thereafter, it declined through the first half of 2017-18 but increased to 4.9 per cent in November 2017. But food prices tapered off, so 2017-18 is likely to end, with a similar inflation level as 2016-17.

Note that crude oil price increase during the second half of 2017-18, of around 50 per cent, has not directly fed into Indian inflation because government passes only a marginal proportion of crude price changes to final consumers.
2017-18 was a perfect storm. Growth reduced by at least 1 per cent due to the shocks of demonetization and introduction of the GST. These negatives have abated. Direct tax collection this year is 2.5 per cent higher than budgeted. Next year they are budgeted at 14.4 per cent higher than receipts this year. Receipts from GST next year are budgeted at 54 per cent higher than this year. These positives illustrate that broad fiscal stability around 3.5 per cent of GDP is possible, even if crude oil continues to trade at $70 in 2018-19.

Fiscal policy in 2017-18 has prioritized putting income in the hands of consumers – government pay and pension hikes; pro-poor income support (MGNREGA) and farmer income support at the expense of publicly financed investment in infrastructure. More income with consumers creates aggregate demand for better utilization of the surplus manufacturing capacity. Reviving exports – driven by an uptick in world trade – will also absorb some surplus capacity and create value. Inflation fears are consequently overblown.

Global ques only deepen domestic bearish trends.  

Second, the big bear of multiple increases in the US Fed funds rate, to cool an over-heating domestic US economy, has been looming over developing markets. Last week Bond prices fell, pushing up yields in US and Europe, in anticipation of increases in the fed rate. However, yesterday, bond yields pulled back up.  The signals are unclear. More likely it is domestic drivers which are punishing markets.

India has uncovered financial fire power post the crack down on cash and carry

Third, we have a large community of around 40 million domestic investors in our stock markets. Around Rs 1 trillion flooded stock markets, post demonetization, as the earlier mouth-watering returns in realty and cash and carry trade dried up in January 2017. Savvy intermediation by mutual funds and portfolio management companies facilitated the switch into financial assets by investors.

Churning your portfolio helps your broker more than you

But most investors buy and sell based on trust, led by their share brokers. These market participants are likely to have advised investors to sell and book their capital gains in anticipation of the long-term capital gains tax (10 per cent of capital increase) being imposed on all equity sell trades from April 1, 2018.

This advice is flawed since it ignores provisions, sensibly introduced by the Budget, of “grandfathering” capital gains till February 1, 2018. It makes little sense to sell in a turbulent market, unless you desperately need the money. But who can shake an investor’s faith in their trusted share broker -who incidentally, earns a fee on both the sale and the re-investment in – what else but shares!

Government needs to steer the ship of state steadily- no surprises please

The recent experience with demonetization has not helped. Uncertainty in financial arrangements is crippling and its trauma lingers. Under such circumstances, rumors acquire an undeserved potency, over reason.

Fall out of imposition of dividend distribution tax in FY 2018-19

Fourth, treasury management requirement of mutual funds, particularly for their “dividend based” schemes, could also have prompted a sell off. The budget has proposed a 10% dividend distribution tax on equity mutual fund schemes, to level the tax imposition on capital gains (the basis for investor earnings in growth-oriented schemes) and dividend distribution (the basis for investor income in dividend-oriented schemes). Mutual funds will try and distribute the maximum dividends to their investors, in this fiscal itself, to save them the tax imposition next fiscal. This requires mutual fund to sell equity holdings to generate the cash required.

At the risk of gross simplification, 60 per cent of the sell-off, of around 3.5% of market capitalization till close of February 5, 2018 was due to investor uncertainty about future taxation and the treasury needs of mutual funds. Inflation fears possibly drove 25 per cent of the sell off, whilst global cues were responsible for the residual 15 per cent. The good news is that this sell off is temporary. Stock markets are now back to, where they were just a month ago on January 5, 2017. A mere storm in a tea cup, created by investor exuberance in anticipation of a “please all” budget.

Buying into India’s growth story will recover the tax you pay though growth


So, hang onto your shares and count your blessings over time. If you hold an equity portfolio of Rs 20 lakhs, an 8 per cent dividend payout of Rs 160,000 will attract a tax of just Rs 16,000 – easily absorbed by postponing purchase of a microwave oven. In the case of additional capital gains, over and above the higher of the purchase price or the market price of the share on February 1, 2018 –-assuming a gain of 15 per cent or Rs 300,000, is just Rs 30,000. Making do with the existing car tyres would do the trick. Anyway, eating out and taking the metro or a taxi are rational and possibly pleasurable substitutes.

Adapted from the authors opinion piece in Indian Express on February 6, 2019

Jaitley’s Budgetary Trident

Jaitley trident

In these cynical times, slim is the market for big ideas, unsupported by facts and figures. The Finance Minister’s 2018-19 budget proposals have met the same fate.

The three big picture proposals –a price assurance scheme covering all Kharif crops at a minimum 50% above their cost of production; boosting agri-product exports from US$30 billion to US$ 100 billion and NamoCare – providing free health insurance for 500 million poor Indians – are being referred to, snidely, as preparation for the state elections this year, closely followed by general elections by in April 2019.

There is some justification for the criticism. The means for supporting these transformative activities are not transparently embedded in the budget. Where is the money to do all this, demand the naysayers?

Imagining the future


Piyush Goyal, Minister for railways, remarked, in response to a similar question asked of him on ITV, that those who lack the imagination to think big, are forever dissuaded from “parting the seas” (not his phrase) by the accounting problems. There is some truth in what the Minister says.

NamoCare the game changing first fork of the trident

Let’s take NamoCare first. The budget provides a mere place holder of Rs 20 billion as premia. No estimate of the likely premia were shared. In subsequent press meets numbers ranged from Rs 100 billion (@Rs 1000 per family) to Rs 400 billion were shared by different official spokespersons. Such waffling does not inspire confidence.

Lazy pre-budget preparations are typical outcome of a party having overwhelming majority in parliament. Over time parliament is viewed as a mere inconvenience. It stops being, the key forum to get genuine buy-in for proposals in public interest.

There is little doubt that NamoCare is in the public interest. Heath coverage in India is abysmal. Well-off citizens, government officials and politicians are publicly funded to seek medical treatment in private hospitals rather than risk the vicissitudes of government hospitals. Citizens spend two thirds of the total spend on private health care.

It is in this context that NamoCare could be a breathtaking transition. This writer has a Rs 5 lakh health cover from a government insurance entity. Extending a similar health care cover, for free, to 100 million – the bottom 40% – Indian households, is a huge step towards universal wellness. It also shreds the status quo today, where “class” determines the quality of public service available to citizens. NamoCare is the great leveler.

Is NamoCare unviable and likely to bust the budget? The minimum likely premia is around Rs 5000 per family. This is the existing cost for a Rs 2 lakh family health coverage. Scaling up the turnover can l distribute the risk reducing costs. Scaling up the coverage will enable the government to negotiate down the cost of medical treatment with the health care industry.

Think of NamoCare as a viability gap public funding program to improve the quality of diagnosis and healthcare, rather than the cosmetics surrounding the industry today. Many private hospitals look better than fancy hotels. But the quality of health care may not match up. It is not as if, “best fit” healthcare models are not available in India.  Sankara Nethralya, in Hyderabad, is one such which combines “cut rate” prices with international quality health care.

Despite multiple private insurance companies, only around 210 million Indians (17% of the population) has in-hospital medical care cover of the generic type proposed under NamoCare. The market would be enlarged by 2X when NamoCare comes through. This means a massive incentive for expansion of the private health industry to serve the poor. It is the equivalent of Unilever’s shampoo in a sachet to level product use between the rich and the poor.

But most interestingly, once the bottom 40% are covered along with the top 20%, it is inconceivable that the middle 40% would remain outside the market. Full coverage of the Indian population within five years would create a private health care market at globally unprecedented scale. This is what the Finance Minister meant when he called NamoCare an aspirational proposal.

NamoCare emulates the success of the government financed scaling up of the market for LED bulbs, accompanied by a steep 75% reduction in the price of bulbs, without subsidization, using purely scale economy effects on production.

Critics of the proposal should think of the outlay on NamoCare as a demand boost for kick starting investment in private health care which incidentally is an employment intensive services.

The rural fork

The second fork of the trident are a revised scheme for assuring cost plus purchase of all Kharif crops or direct payment of the difference between the administered price and the market price (if it is higher) to farmers. This aligns with the pilot being implemented by Madhya Pradesh.

Clearly the direct payment option is superior although “big data” based oversight system would be necessary to ensure that “viability gap” payments are not made for the same produce, repeatedly, as was the case with the famous Integrated Rural Development Program financed cattle, in the early 1980s.

The real issue here is whether this is an equity enhancement support scheme or a productivity enhancement scheme. There is much truth to the criticism that the practice of assuring administered prices is inefficient. It promotes the status quo in which big farmers gain at the expense of small farmers who anyway do not have much surplus to market.

Also, it plays to the fanciful view that small farms are more productive than large scale mechanized farming, by making the existing farming practices seem viable. This can only prolong the pain in the context of doubling the productivity of farming. However, one half of rural income comes from farming. Changing the status quo must be done sensitively, aligned to employment opportunities in nonfarm activities, generated by growth.

Agri-exports to be liberalised

Another aspect of the rural fork of the trident is the most potent albeit the most innocuous. Mr. Jaitley has promised that agricultural exports would be liberalized. Their export can increase from $ 30 billion to their full estimated potential of $100 million. Total exports are around $ 270 million, so the target is substantive.

The minimum export price for onions has been slashed to zero – as if in response to the Finance Ministers budget assurance. But the truth is that we have a bumper harvest of onions this year and prices have crashed by around 20% over last year’s kharif crop arrival in Maharashtra – the key producer of onions.

We need to do away completely with the practice of putting regulatory controls on the domestic marketing, exports and imports of agriproducts if we are to develop a robust and productive farm sector. Farmers will be watching out for follow on measures to walk the talk of liberalizing exports.

The fiscal fork

The third fork of the trident was on the revenue side. After a gap of two decades, long term capital gains tax was reintroduced on equity. The stock market expectedly slid by around 2%. Should we worried? Dr. Manmohan Singh once famously brushed aside the stock market as a metric for the mood of investors. Stock market short term movements are created by punters who try and make a killing by anticipating or even creating the public mood.

So, hang onto your stocks. The downturn is temporary. By holding on you spoil the game for professional “Bears”, who short-sell stocks in the hope that they can buy them back cheap, after you have disposed off your stocks.

Others are worried Foreign Portfolio Investors (FPI) will exit triggering a long-term downturn. FPIs are driven by relative profit. Even after a 10% tax on capital gains, the Indian market remains vastly more profitable that what they make back home. Even if they exit following a “risk” derived algorithm, they will be back, once the bottom line starts hurting and if growth in India holds up.

Exit by FPIs could be a blessing. The INR exchange rate could drift down to more realistic levels, diluting the disincentive for exports and pricing imports at competitive levels.

Competitive exchange rates, is a preferred option for Make in India than the selective enhancements in customs duty on imports of electronics proposed in the budget. Beyond the WEF rhetoric, there are good reasons for using trade to enhance domestic competitiveness.

Without competitive pricing, medium term capital allocation signals get distorted; generate anomalies and stranded cost like our stranded capacity of 30,000 MW in power. Poor capital allocation is the consequence of cheap bank capital, industrial slow down magnified by an export slow down; the 2016 demonetization shock and the crippling, but healthy, impact in 2017-18, of GST, on manufacturers, who profited primarily, by operating in the black economy.

Mr. Jaitley’s trident is a powerful instrument to enhance equity, generate growth with “good” work and bring about transformational social changes in India. Not supporting is being short-sigh.

Also available at TOI Blogs Feb 4, 2018

FM walks the budget plank gingerly

happy kisan

The Union Budget 2018-19 appears an honest and judicious construct when first viewed on video. Reading the fine print takes some of the shine off, going by precedent. The biggest relief is that there has been no substantive deviation from the path of fiscal discipline. The fiscal deficit for 2017-18 is pegged at 3.5 percent of GDP. This is 0.30 per cent higher than the budgeted estimate for this year.

But it is well within the 0.50 leeway recommended by the N.K. Singh Committee report on Fiscal Responsibility and Budgetary Management. Disruptions caused by GST still linger. Banks need to be recapitalised to expand new credit and public investment pushed because the private sector is still sitting on its funds. The stage seems set for walking through the door opened by the FRBM committee, in the interest of growth and jobs.

More reassurance comes from the fiscal deficit target for 2018-19 set at 3.3 percent of GDP. This re-establishes the declining trend for fiscal deficit towards the magic number of three per cent of GDP, which has eluded us so far.

Marginalised agriculture gets a break 

On the expenditure side, agriculture and rural development take centrestage. This is welcome against the backdrop of agrarian distress and farmer suicides. Ajay Jakhar of the Bharat Krishak Samaj points out that an Indian farmer commits suicide every 40 minutes. No wonder then that Mr Jaitley outlined, in great detail, many of the specific measures proposed to reverse this trend.

One popular, but possibly ineffective step is an assurance that all the crops notified for the kharif cycle will be covered under the minimum support price (MSP) scheme. This means that if market prices fall below the cost of production plus 50 percent as margin for the farmer, the government will stand committed to make good the difference (as is being done in Madhya Pradesh now) or to physically procure the produce.

Ajay Jakhar

But representatives of farmers’ interests are not satisfied. They want the methodology for setting costs should be spelt out in a participative manner to ensure that a meaningful MSP is assured. The downside of an MSP type of production incentive is that it kills innovation and discourages crop diversification away from those covered under MSP. This way of assuring farmer incomes also privileges the traditional “Green Revolution” areas in the North, which unfortunately are not well endowed with the natural resources — water, for example — to sustain intensive modern farming. On the other hand Eastern India, has all of nature’s bounties, but it is too far away from the national capital-oriented policy making we follow. Consider how different things would have been if Lord Hardinge had not decided in 1911 to shift the capital of the British Raj from Calcutta to Delhi.

Agro-products exports to be liberalised – $100 billion potential

Other big-ticket items in agriculture are a more than doubling of the outlay for agro-processing industries to Rs 14 billion and assurances that the export of agri products would be liberalised to boost their exports threefold to their potential of around $100 billion. Corporate tax on income was also reduced from 30 percent to 25 percent for firms with a turnover upto Rs 2.5 billion (US $35 million) benefiting 99 percent of the registered firms in India.

Bamboo the new “green gold”


For the Northeast, a Mission for Bamboo – now recognised as a grass and not a tree to facilitate its commercial cultivation – with an outlay of Rs 13 billion. Two new infrastructure funds — one for fisheries and aquaculture and another for animal husbandry — at a total outlay of Rs 100 billion. Crop credit would increase by 10 per cent to Rs 11 trillion in 2018-19 and lessee farmers would be facilitated to access crop credit from banks — something which they cannot do today and have, instead, to rely on rapacious moneylenders.

The budgetary outlay for rural roads, affordable houses, toilets and electricity extension of Rs 2.4 trillion will leverage five time more funds from other sources and generate work for 10 million people, per the Budget documents.

NamoCare is bigger than ObamaCare – health-equity in motion

Big changes were also announced in healthcare. A new flagship scheme will provide in-hospital medical insurance to 100 million poor families with an insurance cover of Rs 5 lakhs. Compare this with the measly cover now available of Rs 30,000 only under the Rashtriya Swastha Bima Yojana. The outlay on health, education and social protection increases by around 13 per cent over the 2017-18 spend to Rs 1.4 trillion. Simultaneously, the three publicly owned general insurance companies – National Insurance Company United India Insurance Company and Oriental Insurance Company are to merged to create a behemoth conservatively valued at Rs 4 trillion and listed on the stock exchange. Listing would enable the government to progressively hive off equity in them to the public and generate the estimated Rs 1 trillion per year premium to fund this mammoth programme, nick-named NamoCare after ObamaCare of the US. The scale of the ambition embedded in the program is breathtaking. A Rs 5 lakh cover is what even the well-off deem sufficient as health insurance. More importantly it signals that for the government the life of the poor is as valuable, as that of a well off person.

Incentives for generating employment rather than buying machines

The government proposes to extend the existing scheme under which it meets the cost of a contribution of 12 percent per year towards the Employees’ Provident Fund contribution in the medium, small and micro enterprises to all the manufacturing sectors. The idea is to increase the attractiveness of employing young job seekers by reducing their cost to the employer for three years, by which time it is expected the skills they acquire will make their value addition viable on its own.

Infrastructure development – falling short

The highlights for new projects in infrastructure are that 99 smart cities have been selected with an outlay of Rs 2.4 trillion,  against which projects worth around 10 per cent of the outlay are ongoing and projects worth one per cent of the outlay have been completed. The government expects to complete 9,000 km of highways in this year. Bharat Net, the fiber connectivity programme, is also proceeding apace. The Railways will spend Rs 1.48 trillion on capital investments, mostly in new works in 2018-19. Six hundred railway stations are to be upgraded.

The nominal GDP in 2018-19 is estimated to be 11.5 per cent  higher than in the current year. The total expenditure next year is around 10 per cent higher than the estimate for 2017-18 of Rs 22.2 trillion. On the revenue side, the big increase is an estimated increase of 53 per cent (after accounting for the fact that GST was collected only for 11 months in 2017-18) in GST revenues next year by around Rs 2.6 trillion to a level of Rs 7.4 trillion, and a conservatively assessed Rs 20,000 crores from the new capital gains tax of 10 per cent on equity sold after holding it for one year. The huge increase assumed in GST and the undefined budgetary support for “NamoCare” make sticking to the 3.3 fiscal deficit target a bit dodgy in 2018-19.

FM keeps his gun-powder dry and in-reserve

Jaitley budget 2018

But who knows, maybe the finance minister has some artillery hidden up his sleeve.. Disinvestment has been assessed conservatively in 2018-19 at Rs 80,000 crores, against the achievement this year of Rs 1 trillion. The bank recapitalisation support of Rs 80,000 crores is expected to leverage new lending capacity of Rs 5 trillion. One cannot but  feel that some of the expenditure estimates are a bit conservative relative to the ambition embedded in the programmes.

The good news is ending 2018-19 with a higher fiscal deficit but equal to this year’s at 3.5 per cent is no big deal from the view point of fiscal stability, if all of it is pumped into infrastructure and other investments. But for the Narendra Modi government, which takes targets seriously, it would be an unhappy ending.

The blog and the article mistakenly mention the estimated value of a merged insurance behemoth as Rs 400 trillion. The error has now been corrected in the text. I am deeply embarrassed by this snafu. A more reasonable number is Rs 4 trillion. Regrets.

Adapted from the authors article in The Asian Age February 1, 2018

Sustaining growth in an unfriendly world


Put it down to the heavy snow in Davos or to a rare case of blunt honesty by an international agency. Whilst sharing the good news of the revival of the world economy in 2017 and its expected continued growth till 2019 at 3.9 percent, Christine Laggard – the IMF Managing Director, cautioned that 20 percent of the developing world was not part of that revival, tempering the WEF celebrations with sobriety. Latin America and resource dependent economies, had suffered negative growth, even in 2016.

India’s growth angst

India’s angst is real with growth dropping to 6.5%, versus the 7% plus real growth of recent years. We are new to this business of high growth. The two decades from 1980 to 2000 only had a growth rate of 5.7 percent per year. It is only post 2000 that a growth rate of 7 percent per year become part of our expectations. In comparison, China’s high growth period of 8 plus percent per year – with minor annual deviations – began in 1977 and continued for over three decades till 2011.

Trade liberalisation and world growth – China timed it right

The 1970s and 1980s were a good time to grow. Under the General Agreement on Trade and Tariffs (GATT) the Kennedy, Tokyo and Uruguay rounds of negotiations (1963 to 1993) reduced average tariffs from 22 percent to 5 percent. World exports as a share of world GDP increased by 40% between 1972 to 1982 (from a level of 14% of world GDP to 19%). Over the next two decades, till 2002, world exports further increased by nearly one third to a level of 25% of world GDP. The bulk of Chinese growth happened during this period of trade liberalization.

India – a growth laggard, got the timing wrong

India lost the favourable two decades from 1962 to 1982 to domestic political headwinds. We liberalized, tentatively, from 1985. But reform put down roots only from 1992. By then world growth had tapered off. During the quarter century after 1992 till 2016, only in four years, did the world grow at 4% per year or more. In the quarter century before 1992 there were 14 years when growth exceeded 4% per year with 1964 being the high point at 6.7%. India has struggled against the declining trend in world growth to pull itself up. Fresh challenges can be expected over the next decade.

Can India replace the broken “open economy” model

The world grew rapidly using the “open economy” model over fifty years till 2008. Is it now broken? And did rising inequality within economies kill it? And are we now left only with the long, dark alley of “directed Chinese capitalism”, as a viable “growth model”?

Yes it can, if only we collected more tax revenues

India can offer an alternative model aligned with the “open economy, freedom, democracy” matrix, if we can boost our tax to GDP ratio to generate the resources required for “sharing growth”. The combined revenue receipts, in India, of governments at all levels is 22% of GDP.

Meanwhile public outlays are critically short in health by 4 % of GDP; education by 3% of GDP; infrastructure by 3% of GDP and defence by 2% of GDP. This adds up to 12% of GDP.

Around one third of the additional fiscal resources could come from continuing to grow at 6% per year – an achievable target. Another one third could be met from non-tax receipts like from privatization and savings on pro-poor subsidies by targeting and distributing them better, including digitally. But we cannot escape increasing our tax to GDP ratio (all of government) to 26 % of GDP.

The broad anti-corruption framework offers hope

The drive against corruption; stricter adoption of banked transaction norms and the increasing popularity of digital transactions and online marketing are expected to ensure that tax collection in fiscal 2018 meets the budgetary targets of Rs 19 trillion (including state share of Rs 6.7 trillion).

This is despite a reduction in the budgeted nominal growth of GDP over last year from 11.8% to 9.5%. This buoyancy gives hope that continued rationalization of tax rates; improved assessment and review processes and fairer and faster settlement of tax cases will induce better tax compliance.

Specific incentives for officials can seed growth filters in local decision making

We should learn from China how to devise local incentives for enhancing revenues. 99% of the 50 million Chinese officials are locally recruited and are never transferred away. They are truly a “permanent” bureaucracy.

Secondly, a significant part of their pay is linked to the fiscal health of their local unit. A healthy unit means higher bonuses and benefits for employees. Fiscal downturns bring austerity even in the take home benefits for employees. This close and sustained identification of officials with local offices and the localities where they exist, creates a shared bond between citizens and the officials – all of whom sink or swim, together.

Recruit officials locally & keep them there, for better identification with local needs

In India, officials are birds of passage, even at the village level. Their take home pay and benefits are completely unlinked to the fiscal health of the local office or the locality they serve in. It is no surprise then that rent gouging is widely prevalent with no concern for making the locality or the employing organization fiscally healthy.

“Authoritarian” China is effectively more decentralised than “democratic” India

The Chinese government does not habitually, bail out bankrupt local governments. They must work themselves out of the holes they dig for themselves. At the same time, the government does not hesitate to formally allow policy departures, at the local level, driven by exigency. Ironically, this makes “authoritarian” China, extremely decentralized and participative, whilst India – part of the “free world”, looks hopelessly rigid and centralized in general. We must build up the bright exceptions.



No job is too dirty for me

Parameswaran Iyer, Secretary, Government of India, a sanitation specialist, recruited from the World Bank,  walks the talk, by demonstrating that composted pit latrines are no longer dirty. Commitment to field level results and competence in action.


Resilience to overcome future challenges comes from open-order economies, promoting innovation and flexible structures

The WEF has cautioned that the near-term future is full of security, climate, technology and economic risks. They advise that resilience is the best antidote to risk. For complex organisations, enhancing resilience means embedding flexible, modular structures and business relationships, which allow the freedom to alter the scale of operations to fit demand and to cultivate innovation and the capacity to work at “the edge” of the frontier. Tellingly, none of this is aligned with a heavy top down, centralized, cookie-cutter, approach. Change is upon us. We must bend lest we break.

Adapted from the the author’s opinion piece in TOI blogs, January 28, 2018

Fiscal 2019 -what the tea leaves foretell

Jaitley Adhia

The four years since 2014 have been chock-a-bloc full of fiscal and financial reforms. India needs a rest from such frenetic reforms. It’s time to take a deep breath, consolidate and pull all the loose strings together. One hopes that fiscal 2019 (April 2018 to March 2019) is devoid of breaking news, dull as ditchwater but fulsome in terms of outcomes.

Full marks for restoring fiscal stability

The most successful reform of the Narendra Modi government has been the restoration of fiscal stability. The Union government’s fiscal deficit is down to the targeted 3.2 per cent of GDP this fiscal (2017-2018), from a high of 6.5 per cent in fiscal 2010, post the 2008 financial crisis. The revenue deficit has similarly trended down to 1.9 per cent of GDP. Consumer price inflation has been tamed at sub four per cent. This achievement burnishes the credibility of the government’s fiscal management.

State governments get a bigger share in revenues, now also spend more

Significantly, fiscal discipline was enforced despite a reduction in the net tax resources. The 14th Finance Commission had enlarged the share of state governments, in the divisible pool of Central taxes, to 42 per cent from 32 per cent effective from Fiscal 2015. State government expenditures have consequently increased rapidly.

State governments now collectively spend 87 per cent more than the Union government (Mishra and Singh, NCAER 2017) compared to just six per cent more in 2011. Some of the increase was due the UDAY scheme for restructuring electricity utility by state governments absorbing their debt of around Rs 1.4 trillion, in 2016 and 2017. The collective state government fiscal deficit ballooned from less than two per cent in 2012 to nearly 3.5 per cent of GDP in 2016.

Tax receipts have been stagnant at 11 percent of GDP

Tax receipts have been a traditional fiscal Achilles heel. Union government tax receipts are near stagnant at around 10 to 11 per cent of GDP. State governments additionally collect six to seven per cent of GDP as taxes. But there is a silver lining now. The Goods and Services Tax is likely to disrupt this placid tax regime, because it introduces positive incentives for paying taxes via the tax credit provisions. Honing the multiple GST rates to the specificities of India’s political economy will remain an ongoing exercise. Once the tax revenue stabilises, the government could consider reducing the multiple tax rates, thereby harnessing the efficiency gains of simplification.

Direct tax collection over the first three quarters of 2017 grew at 18.2 per cent over the previous year, versus a target of 15.7 per cent, courtesy the clampdown on cash transactions. India’s direct tax rates are not extortionary. There is little scope to provide tax breaks. In fact, existing tax breaks could be ended, like those for capital gains on equity held for just one year. The stock markets are defying gravity. So, this is a good time to tax capital gains.

A tax on capital gains in equity offers revenue potential

It is nonsense to argue that taxing capital gains on equity is double taxation because corporates already pay tax on income. Yes, taxing dividend distribution is double taxation and wholly unjustified without allowing credit on the corporate tax already paid. But capital gains relate to the market value of a share – which has many more determinants than the book value of the share. Taxing capital gains on equity also aligns with reducing inequality.

But more generally, a consistent rules-based, capital gains regime across asset classes is required. The current tax rate on long-term gains, other than equity, is 20 per cent. Short-term gains are taxed at the applicable income-tax rate. The case for taxing capital gains at a lower rate than income, is sound — it provides an incentive to take risk and invest. Inflation indexation of the capital gains and a common tax rate of say 10 per cent — across asset classes, would be eminently sensible.

We could step up social sector expenses if only private investment built infrastructure

India spends very little on education and health. While throwing money at either is not guaranteed to improve services, low allocations are a serious constraint. More fiscal space could become available for social sector spend, if private investment and management could do the heavy lifting in infrastructure and manufacturing. State-owned enterprises are strewn across transportation, telecommunications, power, coal, oil and gas, steel, metals and other minerals. Nearly all could usefully be privatised and the capital receipts utilised more gainfully in core sovereign areas. But India’s political economy has, for long, enshrined the perks and patronage, derived from public ownership of industries, as the fruits of being in power.

What about the quality of expenditure? Capital expenditure lagged, and revenue expenditure surged during the period 2010-11 to 2014-15. Under the Modi government this trend has reversed. Capital expenditure has increased from a share of 12 per cent till 2014-15 to 14 per cent. Simultaneously, the Central revenue deficit has decreased from 3.1 per cent of GDP in fiscal 2014 to 1.9 per cent in fiscal 2018.

But private investment has dried up from fiscal 2016. Plagued by 14 per cent of stressed loans, banks focused on damage control adversely hitting new lending. The “twin balance sheet problem” of banks and their defaulting borrowers needs faster summary resolution for results.

Solutions must be found for alleviating poverty — one-fifth of our citizens remain poor and another one-fifth are vulnerable to poverty from shocks. Inequality is increasing. This reduces aggregate demand in the economy. Demonetisation and the attack on corruption has subdued consumption and investment, till businesses adjust to the new operational constraints.

80% of the poor live in rural areas – income support can increase demand

There is a general expectation of sops from Budget 2018-19 in view of the impending elections. Finance minister Arun Jaitley is sure to resist this temptation. However, he might be tempted to withdraw subsidy benefits from urban areas, where incomes are higher and employment more easily available. The subsidy burden on food, cooking gas and fertiliser is an unsustainable two per cent of GDP — principally because it is badly targeted and inefficiently spent.

Rural distress and poverty far exceeds that in urban areas. Indeed, entrepreneurial rural folk access urban areas for employment, medical help and higher education. In rural areas, a phased switchover to direct cash transfers for BPL families is required. This will stimulate rural markets, provide flexibility to the beneficiaries and reduce the deadweight loss of high transaction costs.

whale spout

The finance minister is fiscally bound this year, not least because the GST is performing below expectations. He should frankly admit that the economy needs breathing time, before the numerous reform steps deliver results. In the meantime, keep breathing, if you can.



Adapted from the author’s opinion piece in The Asian Age January 22, 2018

Modi@Davos – Jawboning the future


Even as Prime Minister Narendra Modi will be winging it to frosty Davos for the World Economic Forum’s annual meeting next weekend, his bete-noire — Congress president Rahul Gandhi — has decided to be different and spend the coming week in his parliamentary constituency of Amethi, in rural Uttar Pradesh. Both seek inspiration and support. But from very different sources.

A shared future less likey than a dystopian nightmare


As usual, bombast is expected to rule at Davos. Consider the title of this year’s meet — “Creating a Shared Future in a Fractured World”. It completely obfuscates the fact that everything the world has done over the past 40 years has conspired to keep the majority share of the fruits of development within the elites. The rising inequality and congealing wealth at the very top is witness to the failure of the open economy model to deliver growth benefits across the population. China’s President Xi Jinping contested this proposition in his address at Davos last year. Yes, China has lifted 700 million people out of poverty — more than any other nation. But relative poverty has increased even in China.

As if this was not enough, automation and artificial intelligence shall, over the next two decades, push ever greater masses of unfortunates outside the virtuous cycle of income enrichment. This is a prime concern for India, with 60 per cent of our current population less than 31 years of age.

It doesn’t end there. Once we create this dystopian world in which the few, engaged humans work within an insulated eco-system of high tech, the large mass of humanity will be on the outside looking in. They would be fed by subsidies thrown at them. Consider that block chain if applied widely to everyday transactions can scupper the employment of auditors, accountants, lawyers and judges — all of whom earn a living out of the problem of authenticating facts. Possibly, the efficiency benefits of automation may be high enough to finance generous handouts to the losers. But it would be a sorry society surviving on aid, rather than individual effort. We know already how debilitating aid dependency is.

This model of growth is not sustainable and needs to be junked. But it is unclear what should replace it. Davos is unlikely to help in that direction. There is never time at Davos to get beyond the breaking news.

The silver lining – WEF exaggerates the fear of a fracturing world

Consider also the assertion that the world is a more fractured place today that it was a few years ago. Nothing could be further from the truth. Just last year at Davos, China, a habitual outlier, took the lead to reinforce the need for world integration. Compare this with the China of just 40 years ago — which was not even a member of the World Bank, and which joined the World Trade Organisation only in 2001. The rapid increase in the share of domestic GDP exported today is another indication that the world has shrunk, not fractured.

Show me the money

Davos is more about striking deals than philosophising about the world order. Prime Minster Modi is a consummate deal-maker. So, expect some significant commercial action at Davos. After all, Davos is not the United Nations, where nations talk at each other. It is a forum for leveraging business opportunities through public-private partnerships.

India a leader in frugal innovation


India has already thrown its hat into the ring of frugal innovation in space technology, with our Mars mission. Davos would be a good opportunity to emphasise the peaceful development of missile technology by India — in stark and sharp contrast to China, Pakistan and North Korea.

Unparalleled deep fiscal and institutional reform

No country has taken steps, on the scale we have, to root out corruption using digital technology, banked transactions and the Goods and Services Tax. These have together negatively impacted economic growth in the short term. To be sure, there have been glitches along the way. But steadfast remedial action is delivering financial inclusion for all. This is more than just an economic revolution since it goes to the heart of culture and social practices.

Conquering terror

Mr Modi was one of the first to warn the developed world that terrorism was a hydra which strikes rich and poor alike. India has for long suffered cross-border terrorism, which seeks to incite an alternative religious reality to Indian Muslims, who are a significant minority. India’s foundations are secular.

India is quintessentially liberal and entrepreneurial.

India was a secular country even before the term “secular” was inserted, somewhat unnecessarily, into the preamble of our Constitution in 1977, during the Emergency, by then Prime Minister Indira Gandhi. Also, despite the term “socialist” having been inserted into the Constitution at the same time, India has never been a Socialist country.  Land ownership has always been personal in India. The concept of property rights is deeply embedded into our culture. The state-owned industrial monoliths — the visible outcomes of “socialism” and the entire employment in the government sector, has never exceeded around five per cent of total employment. If there is one thing India is known by it is the spirit of entrepreneurship. The government is trying to liberate “animal spirits” through light touch regulation, the rule of law and supportive infrastructure.

Can POTUS & Modi queer President Xi’s, 2017 play as “leader of the world”


US President Donald Trump seems to have upset Prime Minister Modi’s moment at WEF. The ebullient and volatile POTUS is likely to garner all the sunshine. But Mr Modi is sure to use their joint appearance at Davos. He will fashion events and his remarks in a manner which point to a genuine partnership between the United States, Europe, Japan, Southeast Asia and India. Together, these economic actors contribute nearly two-thirds of the current world GDP. More important, they share some institutional and cultural attributes, which even by the jaded standards of today, can be called morally superior — like due regard for citizens’ rights and a commitment to enhancing the transparency with which the State functions.

Some homework may show that India walks the talk on shared growth


Davos will be a tough challenge for Prime Minister Modi. He needs a credible story to explain why growth — the holy grail of the Davos crowd — has lagged in India even as growth has picked up world-wide. It would be great if he could substantiate that while headline growth has lagged, shared growth has increased, particularly if the 116 backward districts (out of 593 total districts in the country), identified by NITI Aayog have, contributed more than their share in GDP to growth.

That, after all, is the growth model the World Economic Forum is looking for.

Adapted from the author’s opinion piece in The Asian Age January 13, 2018

Fiscal 2018-19: Revive shared hopes

shared growth

Normally, the fate of the next fiscal is sealed even before the year begins. Barring windfall gains, the economic engines of value addition are quite stable — business keeps running and salts away its surplus; the government similarly keeps churning out public goods; and individuals — particularly us Indians — keep squirrelling away something for a rainy day, even out of our meagre earnings. But who can predict shocks?

But India is vulnerable

oil 2

India remains very vulnerable to external shocks — changes in the price of oil, the monsoon, the cost of guarding against external aggression, the state of the world economy and domestic events — more specifically elections, as these take away whatever mindspace the politicians have for sustainable development.

Fiscal 2019 will be election fodder

Fiscal 2018-19 is littered with state-level elections followed by the national general election in the first quarter of the next fiscal. Consequently, expect “plug the hole” type of fiscal tactics to be rampant in the government. Borrowing from banks to invest back in them is one such tactic to stick to the targeted fiscal deficit. Borrowing long but promising to liquidate short-term liabilities is another. This is great fiscal accounting. But that’s where it ends.

Growth data just one metric of government performance

There is a world, beyond the fiscal math, in which we all live. Did you feel the change economically in 2014-15 when economic growth jumped from 4.7 per cent in 2013-14 — the last year of the UPA government — to 7.4 per cent — a jump of nearly three percentage points?

Narendra Modi

Yes, our hopes soared with Narendra Modi’s elevating optimism and high energy. Yes, he made us believe in the future. We felt that we had put a large part of our colonial baggage behind us. But at the ground level, nothing much changed because GDP growth data is just that — numbers which are useful for nerds to track policy impacts and take corrective actions. It’s like the speedometer on your car. It can tell you when you rev up or slow down. But it tells you very little about when you will get to your destination. So please don’t tie your dreams to data. Treat it with the caution it deserves.

Ignore rarified metrics – the stock market & growth, focus on your economic reality

Fiscal 2017-18 will end with a real GDP growth of 6.5 per cent, helped by low inflation, versus 7.1 per cent last year. If you didn’t notice the upswing in 2014-15, you are unlikely to be substantially affected by this year’s downtick. Or for that matter by the uptick to seven per cent growth next fiscal, as the “satta market” for growth (if there is one) would predict. The stock market valuations, as measured by the Sensex, rose by 29 per cent over 2017 with just 6.5 per cent growth. Consider also that the market capitalisation of the top 10 family-owned business groups rose by 46 per cent. Clearly, the business biggies don’t live or die by GDP growth data, so why must you? Far better to hone your own tunnel vision of the economy — real stuff which matters to you, and leave growth rates to the genteel debates between the macro policy wonks.

Telescope 2

If you are one of the 20 million students graduating next year, judge the health of the economy from the availability of jobs. For 118 million farmers, who eke out a living on land holdings of less than two hectares, keeping a lookout for the timing and adequacy of the monsoon means much more than GDP growth. For 21 million large and medium farmers, who account for the bulk of the surplus food grain produced after meeting the needs of the family, it’s the government’s minimum support price for your produce, the cost of fertiliser and availability of water and electricity, which will determine your well-being. The point is that each of us has a specific reality which is only loosely tied to the GDP growth data.

Tying our well-being to the GDP growth rate is seeking false comfort when the numbers rise and equally false despair when they fall. The last two fiscals have been costly. Demonetisation in the third quarter of fiscal 2016-17 and implementation of the Goods and Services tax in this fiscal year were both major disrupters for businesses and their employees. But these are behind us now.

Reduce income tax rates at the lower slabs to compensate for tax reform related pain  

Over time, business entities who survived earlier by not paying tax will disappear. They will be substituted by more efficient, possibly scaled-up substitutes. But all that will take time, well beyond the next two fiscal years. Till the efficiency impacts of tax reforms kick in, the government must take steps to insulate citizens from the pain, just as it held state governments harmless — by insuring them against a fall in their tax revenues.


Citizens, particularly those who took to digital payments and bank transactions with gusto, find they now pay, not only the GST, but also the income tax (possibly never paid before) of the seller. Direct and indirect tax rates must be reduced to keep household budgets stable, till the efficiency impacts of tax reforms kick in.A fiscal bridge is necessary.

Overshooting the fiscal deficit target is ok to preserve capital outlay

Reforming governments factor in fiscal turbulence. If reform translates into collateral pain for consumers, it is dead in the water. We are battling a perfect storm of reforms — restoring the health of banks; reforming the tax structure to improve compliance while reducing transaction costs and dealing with the additional costs of mitigating climate change. It can’t all be done painlessly.

This pain must be shared. The government must abandon its managerial instinct to stick to the budgeted fiscal deficit target of 3.2 per cent this year — in fact it already has. For the next fiscal, the “glide path” for the fiscal deficit must be kept stable, as advised by the majority opinion in the N.K. Singh Committee on Fiscal Reform. Even at 3.5 per cent, the fiscal deficit will be 15 per cent (0.6 basis points) less than the 4.1 per cent achieved in 2013-14. When the facts change, one must change one’s opinions and tactics. That’s the way to shared growth.

Adapted from the author’s opinion piece in The Asian Age, January 6, 2018

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