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Modi@Davos – Jawboning the future

Davos

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

famished

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

Frugal

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”

POTUS

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

sharing

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 http://www.asianage.com/opinion/oped/130118/modidavos-a-new-kind-of-challenge.html

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.

Paytm

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 http://www.asianage.com/opinion/columnists/060118/be-flexible-on-reforms-ensure-pain-is-shared.html

BJP’s new script – defending the losers

Modi grim

Thus far, the BJP has played to a core script of development; a more effective State and muscular nationalism, fanned by Hindu revivalism and an assertive foreign policy stance. This has resulted in a “tick all the boxes” type strategy, with the central focus being on winning elections. This strategy has paid rich dividends politically.
But some of the steam appears to be leaking out of this construct.

Admittedly, more Indians still put their faith in the BJP than in any other party – not least because of its charismatic Prime Minister – Narendra Modi. But voters are notoriously fickle. A politician is only as good as the last bag of goodies delivered to supporters. The BJP needs a strategy to generate goodwill in a more sustainable manner.

One option is to systematically address the concerns of those who have fallen through the cracks of the neo-liberal, open economy model we have followed since the 1990s. Of course, in doing so, the BJP will have to distinguish itself from populism and vote buying, which is the hall mark of a failed politician. Here are some options.

Protect children from malnutrition

stunted

First, we have smashed the pre-1980s growth, glass ceiling of 4 per cent per year, also called the “Hindu rate of growth”. Sustained growth reduced poverty to around 20 per cent with an additional 20 per cent teetering on the edge of the abyss of poverty. But it is shocking that 40% of children remain malnourished and not all of them are poor.

Unless a child is adequately nourished in the first eight years, there is a high likelihood of permanent damage to its brain. Clean air (to increase lung capacity), clean water (to avoid diarrhea) and micronutrient rich food can guard against stunting. Unless this is done, we are continually handicapping around 90 million kids or 7 percent of our population, from childhood.

Spending today, on these three inputs – clean air, clean water and nutritious food, is well worth the avoided economic cost of perpetually sustaining a stunted population of around 500 million. Do the math if you are not convinced. Consider also, that looking ahead, the quality of the human brain and not brawn, will determine if a nation succeeds or fails.

Social protection for the elderly- 50+ and poor

old man 2

Second, experts agree that the capacity of the average human brain to learn and innovate decreases sharply with age. Start up India, Make in India, Mudra – loans for MSMEs, all benefit those under 50 years of age, who retain the vitality to do new things. For those above 50, who have been thrown out of jobs or others who have never held a job, there is little on offer, except the back-breaking NREGA.

SKILLS India is also not a solution for them because failure rates in adult education are very high. Around 6 percent of the people above 50 years of age, or 80 million people, are poor. They could never have saved for their old age. Also, poverty is sticky and disadvantages entire families. Even their children must be barely able to keep body and soul together.

Cash benefits for this set of 80 million, at a paltry Rs 1000 per person per month would cost Rs 1 trillion per year. A progressive annual cash allocation, increasing with age, as the likelihood of doing gainful work decreases, would be sensible. This is expensive but an inevitable cost of our past public transgressions.

In addition, they must get free basic medical insurance schemes, allowing them to seek in and out-patient treatment, at any registered clinic for free, just like the middle class and rich do. This way the elderly poor will cease to be a burden on their children. The cash and other benefits for supporting the girl child have worked well. So can, a benefits scheme for the elderly poor.

Respect land ownership rights

Third, liberalization, whilst creating enormous private wealth, also generates inequalities. There are losers who fall through the cracks. Take our historic failure to provide credible commitment that acquisition would “cause no harm” to land holders. The common apprehension is that bank financed, land acquisition, incentivizes excess acquisition for speculation. It also robs the land holder of the ensuing value creation.

This creates resistance and fear. Even the latest version of the Land Acquisition Act is backward looking. It merely seeks to “compensate losers”. It should explicitly provide for “sharing of the ensuing value creation” between the land holder, the project developer and the government, using a Participative, Public, Private Partnership (PPPP) model.

land protest

India is land starved. The ownership of this valuable asset must be respected as an equity contribution to new projects, with pre-defined, time bound returns, insured by the government. Even “public purpose” must bow to the rule of law, which upholds the property rights of land-owners.

Penal sanctions for public delinquency

Lastly, some tough love is necessary to improve our public services. We should legislate – “The Public Services Act” – sanctioning those who fail to use the fiscal resources put at their disposal; we must attach criminal penalties to public actions which result in public harm, due to lack of due diligence whilst budgeting or poor implementation of projects.

death 2

If citizens die in road accidents because an ambulance cannot ferry them, in time, to hospitals; if hospitals negligently harm, not cure patients; if defective public buses, trucks, aircraft, ferries and ships are allowed to ply, resulting in deaths; if shoddy public construction causes death or disability; if an official values her time more than the life of a citizen in urgent need or if a citizen dies because the police is away on VIP duty, the delinquent officials must be held accountable. Only then can the right public service culture and moral fiber be created, so necessary, to deal with the ceaseless challenges in public life. It cannot be a one-way street with only citizens serving the State.

Also available at TOI Blogs, December 31, 2017 https://blogs.timesofindia.indiatimes.com/opinion-india/bjps-new-script-defending-the-losers/

The two conundrums of the Modi government

DOKLAM

The Narendra Modi government poses two conundrums for citizens. First, citizens want an effective government, like PM Modis. But they also value and actively guard their rights. Making a colonial-style government gallop, often means cutting corners and turning a blind eye to the encroachment of citizens’ rights. We are still very far from being China, where even the option to negotiate a tradeoff, between effectiveness and rights, does not exist. For PM Modi reforming the government — a long-delayed, unpleasant, plumbing task — is one way to reduce the starkness of the tradeoff as it exists today.

Harsh on corruption soft on criminality

criminals

Second, there is a yawning gap between the proactivity of government in ending corruption and the business-as-usual approach to ending criminality. For the average citizen, criminality is far more worrying than corruption. A government which does not consistently impose the rule of law uniformly loses credibility over time. The djinns unleashed by allowing hired goons to massacre Sikhs in 1984 or by allowing kar sevaks to bring down the Babri Masjid in December 1992 still haunt us.

Going up the down escalator, is hard work and wasteful

The dead weight of poor governance practices and a predilection for unorthodox solutions, to show quick results, create a drag on its otherwise creditable efforts — just like a person running up the down escalator. Switching escalators can help. But this requires a change in ideology to put growth with jobs and a crackdown on criminality first.

Growth slows

Growth has taken a hit. Fiscal 2018 will end with a probable 6.5 per cent growth and the terminal year of the Narendra Modi government — Fiscal 2019 — with seven per cent. The average growth will then be one percentage point lower than under the previous government — a point Dr Manmohan Singh repeatedly emphasises to show that this government is only about hype.

But growth is not the only metric of governance

But this is being uncharitable to the BJP government. Growth is just one of the metrics of good governance. The open economy model spits out growth but often without jobs and with growing inequality, corruption and criminality. At some point, an efficient and purposeful tradeoff can be made between higher growth and more rounded social and economic outcomes, like social protection and investing in human development. Growth has been affected because drags like the accumulated stressed assets of banks trap them into recycling credit to discredited corporate borrowers to keep the accounts “healthy”, crowding out credit to others, who could build the future. This is slowly being rectified. But the steps towards building a more responsible banking culture, to avoid reoccurrence, are not yet visible.

New beginnings in infrastructure and connectivity

metro2

Poor infrastructure and high transaction costs are another drag on growth. Higher allocations of public finance for infrastructure; doubling the rate of highway development; modernising ports and railways; tripling the number of airports connected with regular flights; promoting the free flow of goods across state borders, are positive steps to reduce the drag on growth. Allowing the overvalued rupee to realign with its real value can boost exports to meet reviving overseas demand and level the playing field for domestic producers versus seemingly cheap imports.

There is little near-term hope for private job creation

Job creation is doing worse than growth, increasing inequality, because jobs in services and manufacturing are being axed at the middle and lower end. Even in agriculture, higher productivity will depend on using machines for tasks currently done by humans, and changing regulations to allow leasing-in land for scaled-up commercial farming — again at the expense of jobs.

Reversing the trend of declining public sector employment could help. We need more specialised skills, directly linked to service delivery — nurses, doctors, teachers, engineers, accountants, tax professionals and lawyers. Better talent can be attracted by linking salary and benefits to specific positions, filled through open competition, rather than through a cadre, as they are today. The Modi government has made some lateral appointments at the highest level. But a comprehensive policy for reforming government appointments is sorely needed.

Despite the rough edges PM Modi enjoys respect and credibility

Modi mask

Quixotically, the levels of public trust and credibility that Prime Minister Narendra Modi has generated, within India and abroad, is unprecedented since the days of Pandit Jawaharlal Nehru. Admittedly, his supporters are overwhelmingly upper and middle-caste Hindus, though a tentative outreach to the lower castes, dalits and tribals has started. The minorities are caught in the “appeasement”and “alienation” paradox. Their “alienation” today is explained as an inevitable consequence of ending the practice of “appeasement” of earlier governments, to retain them as votebanks. The BJP is less ideologically committed to social and religious diversity than it is to forge a uniform national identity — China style. China faces potential social unrest — a drag on growth. We cannot afford another drag on growth.

Democracy incentivizes  political rhetoric

Democracy is about winning elections, forming stable governments, governing efficiently and ensuring justice. The BJP government has shown it can do three of the four very well. Turning up the heat on corruption has become the leitmotif of the BJP government. The costly demonetisation exercise; the rapid rolling out of the GST despite the associated implementation glitches; the strong action against corporate founders defaulting on bank loans or short-changing customers and suppliers; rapid financial inclusion and the promotion of bank and digital financial transactions to replace the use of cash — all these are initial steps towards combating corruption, increasing tax revenues and improving corporate governance.

But are we doing enough to reign in criminality?

More must be done to reduce the drag of widespread criminality. Reforming the election system to root out criminals; working with the Supreme Court to reform the dilatory judicial process and speed up the delivery of justice; enlarging the reach of judicial services; and reforming the police and prosecution systems are critical to reduce the drag imposed by shoddy implementation of the rule of law.

Use 2018 to consolidate past initiatives with just two new beginnings

2017 was a year of significant disruption and of useful beginnings. 2018 should be devoted to consolidation of ongoing initiatives rather than the scheme-a-month, headline-grabbing strategy of the past three years. Two new beginnings would, however, be welcome.

First, steps to compensate for the collateral damage caused to business, employment and incomes by hurried attempts to show results and win elections. Second, defined pathways to reaffirm the wider social compact between the government and all citizens.

inter faith 2

Adapted from the authors article in The Asian Age, December 28, 2017 http://www.asianage.com/opinion/columnists/281217/protect-rights-of-all-or-itll-be-drag-on-growth.html

BJPs half-win in Gujarat

gujarat-elections

The David versus Goliath battle in Gujarat Assembly elections has ended, as expected, with Rahul Gandhi failing to pry away the State from the BJP. But the Modi magic has been dented, particularly with the slim margin of victory and the loss of his home constituency of Unja. With a 41% plus vote share the Congress has reasserted its political credibility in the state.

What is the glue which binds the 41% plus vote share of the Congress?

Of course, it remains to be seen, how well the glue, which holds the Congress together, sticks. State level legislative assemblies do not function in a manner which provides the opposition a forum for high profile “statesmanship” as should be the norm in parliamentary democracies. It is pretty much a zero-sum game with the executive getting most of the face time.

gujarat-elections Gandhi

Five corrective steps for the BJP 

So, will the Congress leave the BJP in the dust, in the general elections of 2019? Yes, it may, unless the BJP takes five corrective steps – broaden its core leadership; roll out public jobs; junk Hindu consolidation; push federal decision-making in education and health and go hell for leather in rolling out infrastructure.

Broaden the core leadership

First, the BJP should seriously consider bolstering the public profiles of their state chief ministers and rely on them to win the state elections rather than just on the Prime Minister’s charisma. MP, Chhattisgarh and Rajasthan are coming up for elections in 2018.

It is ironical, that such homilies were once regularly directed at the dynastic Congress, which had systematically decimated its state level leadership to ward of “pretenders” to the Gandhi fiefdom. Today, it is the BJP, once a party of open entry and merit, which needs to go back to the future.

2019 will be traumatic if state level BJP leadership sits on its hands, whilst only the Shah-Modi combine toil.

Create publicly funded jobs as an interim filler

gujarat-photostory-Hardik

Second, if young voters are to be attracted to the BJP, it is jobs, which will do the trick. There is precious little the BJP can do, over the next two years, to turn around the gloomy situation on jobs in the private sector. But there is nothing to stop it from recruiting youngsters for government. Done strategically, every person given a job, creates hope in at least ten others. If government can increase employment by a million people, ten million others feel hopeful.

Even in the civilian (excluding the military) part of the central government, employment has declined by around 2,00,000 since 2001. There are 4,20,000 unfilled positions today. In the broader public sector, which includes all state and local governments, employment has fallen by 2 million since the peak, in 1995, of 19.5 million. Filling up these 2 million jobs provides hope to 20 million youngsters. This is a no-brainer.

Junk the strategy of Hindu consolidation

Third, the strategy of consolidating the Hindu vote. It is dead in the water. Prime Minister Modi must revert to his 2014 vision of a multicultural, meritocratic nation for the good of all citizens, with no obeisance to caste or religious divides, for narrow political ends. Hindus are not under threat in India, nor is their culture under threat of being swamped.

The minorities need to feel that they are a minority, only nominally. That being a minority is only an arithmetic fact. That what they can achieve for themselves, their families and society, is limited only by their own inhibitions and not by an unsupportive state architecture.

Just as surely, putting the young in touch with their roots; correcting history, where it may have been written with a bias; building a national consensus on language and cultural policy, are all legitimate State objectives. State actions seem menacing only when they are a cloak for achieving partisan political ends.

Extend the federal council concept (GST) to education & health

Fourth, political federalism has taken a backseat beyond implementation of the GST. The central government must broad base this principle with respect to areas in the concurrent list of the constitution, where both the Union government and the state government have a mandate to legislate. Education and health are two key areas.

Clones of the GST council could be formally created in education and health, to make decisions on allocation and utilization of funds, participative and consensual. India lags, even many developing countries in Sub Saharan Africa, on education and health metrics. Joined up action; significant expansion in the public education and health services; leveraging technology to improve the quality of services and a doubling of budgetary outlays in both sectors are reforms which can be implemented in the short term. Just focusing on these basic services can spread a warm, nurturing glow amongst voters.

Gap filling of infrastructure better then new projects

Fifth, focus on completing last mile gaps in infrastructure rather than new projects to maximize value creation. Jobs, better connectivity, lower transaction costs – all flow from public investment in this sector. Some innovation is needed. Crowd sourcing small infrastructure can reduce the fiscal burden.

More significantly, this makes private citizens and entities feel like partners not just recipients of public largesse. Assuring decent returns on private funds contributed in this manner will help. Think – functional street lights; road over or under passes for pedestrians; public toilets; better public transport; better water supply.

Bulk up budget re-allocation resources for infra, edu & health by 3% of GDP

The fiscal situation is already under severe stress. The money will need to be found by reallocating the existing funds. Additional funds to the tune of 3 per cent of GDP need to be directed towards health, education and infrastructure. Cutting back on defense allocations and starving peripheral departments of funds can achieve this objective over the next two years.

fort

The BJP has been on a winning streak thus far. It is now time to defend the political fortress it has built. How it goes about doing so, will make the difference between a fractured, weak India in 2020 or a progressive, forward looking nation, fulfilling citizen aspirations.

Also available at TOI Blogs December 18, 2017  https://blogs.timesofindia.indiatimes.com/opinion-india/bjps-half-win-in-gujarat/

Aadhaar – catching crooks & criminals

UIDAI members

The Aadhaar fever started in 2009, when the UPA government was in office. It encountered turbulent times in 2014 when the government changed. But Prime Minister Narendra Modi, a technology enthusiast, was persuaded to look beyond the past at the opportunity it gave to reduce official discretion and corruption, whilst targeting and delivering public services.

Inspirational achievements: Speed, scale, low cost & sustainable institutions

The results have been impressive on three counts — speed, cost and sustainability. First, the system was scaled up at breathtaking speed. Around 15 citizens were digitally registered every second, over seven years, assuming a 60-hour week.  Registering 1.2 billion residents out of around 1.3 billion, in a country spanning 3.3 million sq km is by itself a “never- before” achievement.

Second, unbelievably, this feat was achieved at a nominal cost of Rs 73, a little more than $1, per person. The norm for biometric identification anywhere else has been at least $10 per person. Clearly, frugal Indian innovation was at its best here.

Third, Nandan Nilekani, the single parent of Aadhaar, moved on in early 2014, serially to politics, social impact ventures and today heads Infosys as its non-executive chairman. Small, effective public institutions — UIDAI had a sanctioned staff of just 115 in 2009 — tend to be helmed by charismatic banyan trees — leaders who allow nothing to grow under their horizontally spread branches. But the Unique Identification Authority of India (UIDAI), which he first headed, continues to flourish, which speaks volumes of its sustainable management systems and the quality of successor chairpersons.

Why, then, the angst?

So why then the public angst against Aadhaar? Three reasons come to mind — all of them related not to the technical effectiveness of the system itself but the manner in which it is proposed to be used.

Illegal immigrants are rich political fodder

First comes politics. Illegal immigrants from Bangladesh — between three million to 20 million — along with legal immigrants from Nepal, have acquired voter IDs and ration cards. They are difficult to distinguish from their neighbours. But it has also suited the government politically, till now, to not identify such immigrants. Aadhaar can upset political calculations. Targeting Aadhaar at residents — a more inclusive genre — than citizens was a compromise solution. But the threat remains that this powerful data set will feed into culling voter lists of duplicates or ghosts and weeding out passports wrongly issued to people who were never Indian citizens.

We are all “crooks”

Second is the scale of disruption associated with ending corruption. Consider that 14 per cent of Indians, or 180 million, have a driving licence. But one-third are fake and many more are improperly given to ineligible drivers — a key factor in road fatalities.  290 million Indians have a unique number called PAN, required for filing income-tax. But 80 per cent are not authenticated with the Aadhaar database. This illustrates the poor integrity of the tax database.

Big bang reform catches headlines but induces a push back

Third, managerial ambitions have outrun executive caution in graduating the pushback from those adversely affected. From being a back-office tool, Aadhaar has become a digital shortcut to cull ghosts from the burgeoning food security scheme; weed out manipulations in income-tax submissions; introduce a security check over phone connections or use big data to link bank accounts, phone numbers, vehicles, houses, financial investments with each biometrically identified individual. Aadhaar is the shortcut to dig out our dirty secrets. And no one likes that.

Protection needed against low data integrity at time of issue & poor connectivity for authentication of Aadhar

aadhar center

Section 7 of the Aadhaar Act 2016 specifies that Aadhaar shall not be the sole arbiter of identity for accessing public benefits.  Section 5 makes it obligatory for UIDAI to get those, who lack identity documents — children, women, the specially-abled, senior citizens, workers in the unorganised sector, nomads are mentioned — covered under Aadhaar by other means. The intention is clear. The State must devise methods to include all residents in the database and ensure, till then, that the flow of public benefits to eligible recipients continues uninterrupted. Similarly, the onus for protecting the privacy of the individual is on the State. The government has no option except to align with the law. Indeed, it seems to have already diluted its hard stance on the timeline for the implementation of Aadhaar.

Rolling back or stalling the program a poor option

Two options present themselves for the way forward. First, the government could downsize its ambitions for Aadhaar and allow other modes of identity verification to continue till the availability of Aadhaar becomes universal and, more important, the hardware for authenticating Aadhaar is widely available. This is unlikely, in the short term, till the Bharatnet fibre cables have been laid and are operational in all gram panchayats. Just one-fourth are connected today. But the more real downside here is of a slide into never-ending inertia. This seems alien to the present government’s style.

Prescribe fall-back identity authentications with better oversight over the quality of initial data capture 

AAdhaar alt

The second and better option is to deal with the fears of activists who have petitioned the Supreme Court against linking bank accounts and phones with Aadhaar. With respect to privacy, the fact that the State will be able to trace individuals behind phone conversations or bank accounts seems innocuous. On the contrary, both security and tax revenue considerations point to this being desirable, if not essential.

Better branding: disseminate tax and security advantages of Aadhar widely

The government has advertised the Aadhaar principally as a means to transfer benefits to citizens in a more targeted manner and thereby optimise the public subsidy on such benefits. But this is only part of the story. Aadhaar is a significant tool in increasing tax revenue and bringing criminals to justice. What is in it for those who do not enjoy social security benefits? They must be made aware of how Aadhaar creates a trade off between privacy on the one hand and public finance and security on the other. It must be re-branded as a broad governance tool. It should take a cue from what President Obama said about privacy concerns. No individual right, against the State, is perfect. It must needs bow to the larger public interest.

Theoretically, any information, available with the State, can be misused to violate the privacy of an individual. But surely an income-tax officer using the Aadhaar authentication to check if you have included all your bank accounts in your tax return does not fall in that category. What about a duly authorised police officer who traces the owners of phone numbers talking about crime or a threat to public security? Protocols for tapping phones and accessing details of private bank accounts already exist. The Aadhaar link simply makes it easier and faster to catch crooks and criminals.

recovery ITGovernments rely on their credibility to gain the trust of citizens. Safeguards for individual rights do help. But only for governments that are public-spirited and well-intentioned. Once this is no longer the case, the only recourse is to voice your opinion through your vote, and good luck to you on that.

Adapted form the author’s opinion piece in The Asian Age, December 13, 2017 http://www.asianage.com/opinion/columnists/131217/aadhaar-fever-unveiling-secrets-to-secure-india.html

TRAI should junk net neutrality

Chairman TRAI

Telecom Regulatory Authority of India (TRAI), was once the gold standard for “light touch” regulation, in stark contrast to electricity regulators, who continue today, to be stuck in byzantine rate of return regulation and administering cross subsidy between classes of users.

TRAI loses industry focus

TRAI has changed since. Consider that on November 29 it recommended to the Department of Telecommunications (DOT) that rural users should get a limited amount of data for free, funded from the Universal Service Obligation Fund (USOF) managed by DOT. To the everlasting credit of DOT, this was shot down, as unnecessary and inconsistent with the basic objective of the USOF, which principally finances telecom infrastructure.

One third of the 250,000 gram-panchayats, targeted under Bharatnet, have been connected to broadband. Tenders have been finalized to connect an additional one half. But Bharatnet is still a work in progress. Diverting funds into revenue expenditure is unwise.

TRAI’s proposal would have taken telecom down the route of electricity regulation, where subsidies for agriculture and domestic users have proved intractable and sap the viability of the distribution utilities.

Intrusive regulation has become the norm for TRAI, suitably packaged as serving the interest of the “small” user. Regulatory experience shows that governments should steer clear of distorting business incentives by subsidizing one technology over another or by benefiting a set of users either at the expense of other users (cross subsidy) or at the expense of budgetary allocations (state subsidy).

Net neutrality has its adherents but is it backward looking

Net Neutrality

It is ironic that, way back in March 2015, Facebook had proposed a privately funded initiative to provide free access to limited or curated content, in collaboration with a Telecom Service Provider (TSP) to the same “small” users, whom TRAI now wants subsidized from public funds.

Curiously, this proposal was shot down by TRAI in February 2016 as violating “net neutrality”, cheered on by vocal, Indian “netizens”. Over 1 million netizens had jammed the servers of TRAI with outraged petitions against Facebook’s proposal. NASSCOM, which represents software and content providers, added its weight to the storm, thereby protecting the business interests of incumbent content providers.

Even IT gurus like Nandan Nilekani opposed the innovative intrusion into the cozy confines of Indian IT. Paying homage to “net neutrality” was, at the time, also justified by pointing to the elaborate systems, for protection of this concept, put in place by the Federal Communications Commission (FCC) in the United States.

United States FCC to roll back “over regulation” and restore net freedom

Ajit PaiToday, a marginally Republican FCC, incidentally helmed by Indian origin, Ajit Pai, is rolling back, what it calls stifling “over regulation” of the net in the name of restoring freedom for innovation. To be sure 22 million US “netizens” have howled in orchestrated protest, against a rule change, seemingly, in favour of business. In this charged debate, anything which is pro-business is anti-consumer. A zero-sum view of commerce which is a familiar story in India.

Closer home, the November 28 recommendations of TRAI on “net-neutrality”, expectedly, carry forward the bloated carcass of Obama style intrusive regulation. TRAI is right in asserting that neutral traffic management is a technical ideal – selective blocking, slowing down or degrading specific content even when line capacity is available is banned. No one contests that generic principle.

Competition is aso an effective tool for optimisation

The real regulatory choice today is between competition in transmission, as a compelling instrument to simulate what “net neutrality” was supposed to do versus continuing with intrusive oversight over quasi-monopolistic transmission providers. Relying on and enforcing competition, seems a more effective, hands-off option in our pervasive, low-oversight ecosystem.

Another reason why “net neutrality” as a principle stands compromised is that increasingly, the transmission needs of content vary. With new services coming online, we will need multiple transmission protocols. Consider that online text need not be continuously streamed without detracting from reader pleasure. But online heart surgery support can be fatal unless continuous streaming is ensured. The same applies to internet access for driverless vehicles. TRAI has recognized these difficulties and the possibility that the Internet of Things will transform the rules for optimum scheduling of transmission.

Regulation by exception is non-transparent

TRAI’s solution falls short of transparent regulation. It has provided for exceptions, on a case-by-case basis, from “net neutrality” norms – for emergencies and unspecified “specialized services”. The latter are distinguished from general services by their targeted appeal to a narrow set of users.

Is net neutrality obsolete?

A better option would have been to review whether “net neutrality” itself is not obsolete because it will become riddled with exceptions. It was an important principle in the 1990s, to ensure market access for fledgling innovators in content provision by prescribing a merit order for getting past monopolistic telecom transmission utilities. But today competition is rife, both in transmission and in content provision. Possibly, the need of the hour for TRAI was to seek pathways downsizing regulations to simply protecting access, to basic internet services, for small users. High value-added services anyway, provide sufficient revenue incentives, for TSPs to push availability.

Providing net access remains a challenge

A massive challenge for India, per TRAI data, is that only one half of Indian citizens are connected to the internet as compared to 81 percent in the US and 76 per cent in China. Competition has reduced the access charge to affordable levels. But the quality of services is low because of under- investment in infrastructure.

Internet Service providers need new pools of revenue

Heavy penalties for non-compliance with quality standards can improve the quality of service. But TSPs finances are already under stress. Spectrum cost is high. If government earnings from spectrum are not to be reduced and user charges are to remain low, TSPs need to find new pools of revenue to fund infrastructure development. Their business models need to go beyond being just “passive pipes” – the role which “net neutrality” forces on them.

Software and content providers are not necessarily winners either in a net neutral environment. Consider that, in 2015 Facebook got stymied in India. But which Indian “edge provider” (jargon for content providers) gained from that blocking action? Rapid growth of infrastructure is the best option to fuel demand for content. This is a better incentive for innovation than protectionist regulation.

“Minimum government, maximum governance” is a Modi mantra. TRAI appears not to have been copied.

Also available at TOI Blogs December 6, 2017 https://blogs.timesofindia.indiatimes.com/opinion-india/trai-should-junk-net-neutrality/

Exports – India’s Achilles heel

children airplane

Before the world became flat in 1990 — to borrow the title of Thomas Friedman’s 2004 book on globalisation — developing countries were locked into twin traps of low access to foreign currency and low levels of domestic savings. India’s anxiety about foreign exchange, to fund imports, goes back to those desperate times when export pessimism was rampant and import compression all the rage.

Externally strong but domestic trip-wires aplenty

India has come a long way since then. Standard and Poor’s, the international rating agency (November 24, 2017 rating action), considers India’s external position to be the strongest aspect of its aggregate credit profile. Foreign exchange reserves are more than a year’s imports; external debt levels are modest at around 20 per cent of GDP and the foreign exchange gap between earnings from exports and remittances and the outflow on imports has narrowed to less than one per cent of GDP (2016-17). This is a tribute to India’s prudent external account managers.

Export of goods key laggard

Indian goods exports (excluding services) are 12 per cent of the national income. Manufactured goods (including textiles, clothes and gems) have a share of 76 per cent; minerals and agricultural products account for around 12 per cent. Petroleum products account for the remaining 12 per cent. The dissatisfaction has been with the trend value of exports. Over the last three years, this has lagged GDP growth significantly. The Trade Policy (2015-20) target of increasing our share in world trade from 1.5 to 3.5 per cent is unlikely to be realized anytime soon.

The world in the slow lane is unhelpful

 

This was never an easy target. World growth is yet to recover from the slowdown. Protectionist barriers, related to the loss of domestic employment and increasing inequality, are finding favour, including in our largest trade partner: the United States. In this unsupportive ecosystem, increasing our share of world trade pie needs a calibrated strategy to target markets and product lines where Indian goods are most competitive. Five initiatives can be considered.

Focus on niche markets, South Asia & Africa

Expanding bilateral trade within South Asia and with Africa should be the first order of business. Some trade is already round tripped via the Gulf, adding intermediary margins, which are denied to both the original exporter and final importer. Trade relationships tie regions together. The Indian Ocean littoral needs targeted attention via specific product chains.

Higher agri exports protect jobs

Primary products, particularly agricultural goods, were overweight in our export basket in the 1980s. Their share has shrunk post liberalisation. Legalising commercial leasing of large tracts of land for farming can revive agricultural production for export markets and protect domestic jobs.

Regional air connectivity initiative can bring export markets closer

The recently-launched progressive policy of regional air connectivity offers an opportunity for embedding export orientation even in hitherto inland, poorly connected locations. Air connectivity adds value to the local economy by kickstarting business around newly-serviced airports which are logistic nodes, connected to hubs in metros.

Long on diversity but short on volume

The Economic Survey 2017 notes that India exports a wide range of products. We export 97 per cent of the top 100 items traded worldwide at the four-digit nomenclature level and 83 per cent at the six-digit nomenclature levels. But the volumes exported are low, at just 1.6 per cent of the total value of world exports.

Joined up policy formulation and implementation needed- Committee for Investment and Trade (CIT)

Prabhu Modi

Exports need to be supported by a trade policy developed collaboratively with state governments. The Goods and Services Tax committee provides a role model. A similar federal trade and foreign investment committee, with all state governments on board, could provide a structure for joint policy formulation and implementation. Consider that meat exports have declined as state governments failed to sanction goons extracting “rents” from the movement of cattle — other than even cows — for slaughter. This also imposed a direct loss in domestic income of $1 billion — small beer, perhaps, in the larger scheme of things. But unnecessarily disruptive for one million people employed in the leather, dairy and meat industry. Significantly larger income loss is inevitable if the 40 million rural households who keep milch animals for boosting nutrition and for profit are dissuaded from doing so.

Link devolution to export effort – 15th Finance Commission

State governments lack incentives to promote exports. The recently constituted 15th Finance Commission could help by tweaking the fiscal devolution to include export effort as a carrot for enhanced devolution. Direct incentives are more empowering for states than Union government-funded schemes. Landlocked states, which have fewer options for exports than seaboard states, could be incentivised for narrowing the gap between themselves and the exports to GDP ratio at the national level.

Realistic exchange rate for ending the incentive to import and push exports

India has, perversely, become a world leader in initiating action under anti-dumping measures. In 2016, out of a total of 145 actions by all countries, India initiated as many as 69 actions. Maybe, if we were to fix the rupee exchange rate more realistically, so many anti-dumping actions may not be needed. Domestic producers are already hurting from the turbulence, admittedly temporary, from the recent tax reforms. But they also remain handicapped by an appreciated rupee. A “strong” rupee is bad for exports. It is also bad for domestic producers, since it makes imported goods artificially cheaper.

We are not the US – capital flows to plug the trade gap is not sustainable

Prudent management of the external account has chuffed investor confidence so much that surging capital inflows (other than debt) have obscured the desperate need to enhance exports to plug the foreign exchange gap, emanating from the trade imbalance.

Watch the oil price closer than your enemy

We have benefited from the continued low prices for imported oil by around $50 billion. But our inflows, via remittances from Indians working in the Gulf and elsewhere, have suffered a collateral damage of $10 billion. The net effect is a benefit of $40 billion.

But betting on oil prices is worse that betting on the monsoon being on time. Our dependence on imported oil, to fuel growth, shall continue, till solar power becomes the primary fuel for transportation. But that future is at least a decade or more away, even in developed economies. In the near term, we must make our trade balance resilient to the possibility of an oil price increase.

agri india

Exports, economic growth and good jobs are organically linked. We are ahead on growth. But the two other legs also need to catch up.

Adapted from the authors opinion piece in The Asian Age, November 29, 2017 http://www.asianage.com/opinion/columnists/291117/will-exports-remain-indias-achilles-heel.html

How Ivanka Trump can revive our exports and create jobs

Mumbai local

The future of work is uncertain. Within this global conundrum, India has a peculiar problem. The International Labor Organization estimates that less women in India are opting to work. In 1990 there two men for every woman in the workplace. Now there are three men for every woman in the workplace. Despite women becoming better educated and overweight in the honors list of colleges, two thirds of graduate women do not work.

Men “crowd out” women in a stagnant jobs market

This statistic does not align with the over-crowded “Ladies” section of the Mumbai local trains or how the workplace looks in metros, particularly InfoTech heavy Bangalore, where gender diversity is the norm.  What seems more likely, is that with low-skill jobs declining in significant numbers, women step back to allow their men to get such jobs. It helps that men are implicitly preferred by employers, despite costing more than women for similar work.

This wealth of unused woman power in India, is what Ms. Trump could tap into, at Hyderabad next week, where she will be a key note speaker at the Global Entrepreneurship Summit.

Ivanka and global supply chains

Ivanka trump

Ms. Trump, now in honorary public office, as an Advisor to the President of the United States, was previously a businesswoman in the luxury goods market. She knows first-hand, the potential of global supply chains, to drive development and growth, across networked economies. India needs all the help it can get in boosting exports.

Standards and Poor’s assesses India’s external position as strong

Exports have lagged economic growth since 2014 and this trend is projected by Standard and Poor’s – the international rating agency – to continue, at least, till 2019. Curiously, S&P is simultaneously bullish about the resilience of India’s external position. This is principally due to our sound monetary management; a “liquid” rupee, trading for which constitutes around 1 percent of all forex transactions; low external debt levels at around 20 percent of GDP and our ability to finance the sizable trade deficit of 7 percent of GDP from surpluses in the export of services; our net balance of remittances from expatriate Indians and inward net flow of foreign investment.

But oil price increase can upset the finely balanced external account

But left unsaid is the fact that low oil prices over the last three years have significantly decreased the trade imbalance. Nevertheless the risk of potential external imbalance remains if the oil price strengthens. Pumping up exports is not just necessary for a healthy and sustainable external balance. Booming exports are a signal of increasing competitiveness of the domestic economy and its enhanced integration into global supply chains.

Rational pricing of currency can boost exports and price imports competitively

It is less easy to define how to boost exports selectively, without distorting incentives for domestic producers. Creating “walled” export enclaves with superior facilities means “ghettoizing” the rest of the country. China can do this, because of its repressive labor and immigration policies and its top down, centralized, party managed, authoritarian State. India is closer in values; in diversity and in political architecture to the US. Out of the options for incentivizing exports – tax breaks; cheaper finance or better infrastructure facilities, the least distorting and the most efficient is maintaining a realistic exchange rate.

The Rupee is currently overvalued by around 20 percent. This strategy is great for limiting the public expenditure on import of defence and transport related equipment and on the subsidy for installation of imported solar panels for generating power.  It is also great for households which buy “cheaper” imported products – ranging from LED backlit plastic Gods to iPhones – from China. But it is a killer for domestic industry. It is not just the exports which suffers. Small and medium enterprises also take a direct hit if ceramic tiles from Turkey can out price domestic production.

Agriculture also suffers. If the exchange rate was realistic, government would not need to impose an additional duty to discourage the import of cheaper, imported onions. A seasonal glut of vegetables could be avoided if a realistic exchange rate made the export of agricultural produce more competitive, thereby increasing farm incomes without a subsidy.

Three takeaways

If Ms Trump is truly concerned about empowering women, the lessons from India are the following. First, women suffer more from economic downturns than men. By losing their income they slide into the traditional role of being financially dependent – not a happy position to be in, for anyone. Second, higher exports help women, particularly if production is decentralized to exploit localized skills, like high value embroidery and handicrafts. Finally, integrating domestic production into global supply chains seamlessly, is key, for empowering women sustainably.

The Pearl Price Index

pearls

One hopes Ms. Trump will ponder over these issues. Over dinner, in the lavishly ornamented Falaknuma Palace, one wishes she would nudge Prime Minister Modi into depreciating the Rupee to realistic levels, by exclaiming, she was shocked by the dollar prices quoted for the pearls, she had intended to buy, at Charminar. She would only be  furthering US interests. Robust exports, increase India’s capacity to buy American. Down-at-heel Indian exporters and the women of India will also thank her for this collaborative gesture.

 

Moody God of bond markets

bond_mesopotamia_

The international bond market, with an outstanding volume of around $22 trillion, is the final arbiter of a country’s destiny. Bonds, unlike loans, can be traded, or “marked to market”. This makes trustworthy credit ratings, like Moodys’, critical to give pricing signals. Since there is a market, even discards are recycled. Discards are called “junk” bonds. Their outstanding volume is $1.3 trillion. They are traded at insanely high returns up to 12 per cent per annum as compared to AAA-rated bonds, where the yield is just four per cent. India had an investment grade rating of Baa3, which Moodys upgraded, on November 17, to Baa2 (stable outlook).

Rating the sovereign

A sovereign credit rating reflects the country risk. It serves as a “glass ceiling”. Bond issuers from any country can never have a credit rating higher than their country’s rating. India has not issued a sovereign bond overseas thus far. But government-owned companies and private entities access the international bond market. This is one reason why the rating upgrade is welcome.

It is a win-win for India. The upgrade increases the incentive to invest in India. The Reserve Bank must be vigilant to sanitize the potential of such inflows to strengthen an already-overvalued rupee, which is hurting export competitiveness. But our stock market is already inflated in the aftermath of demonetization by the surge of domestic savings, seeking refuge from a dull realty market.  This may dampen the inflow of “hot money”.

Sovereign rankings

The upgrade pulls us ahead of Italy (negative outlook) and level with Uruguay, Colombia, Spain, Bulgaria, the Philippines and Oman. We remain behind Panama, which has a positive outlook and can be upgraded to Baa1 to join Thailand, Mauritius and Slovenia. In the next level (A3) are Mexico, Malaysia, Peru, Latvia, Lithuania, Malta and Iceland. China floats high above at A1 — four rating segments above us.

Unpacking the Moodys rating

The Moody’s rating methodology is complex. First, a country is fitted into one, of three possible levels, for each of the 25 indicators. These are then aggregated into 11 sub-factors using assigned weights. The sub-factors in turn are aggregated into four factors using assigned weights. There is a mechanism to “fine-tune” the final rating using qualitative assessments – this is where confidence-building measures help.

Massaging the numbers

The highest weight — 50 per cent — is for the risk probability of default on interest payment or redemption of the bond. Risk is assumed to increase with higher levels of income inequality and lower scores on the World-Wide Voice and Accountability index (both reflective of political stability); higher reliance on external debt; higher borrowing need relative to revenue; weak banks; imbalance between foreign exchange receipts and expenditures and higher reliance on foreign investment.

Fiscal strength gets a weight of 25 per cent, related to lower nominal and trend line of debt to GDP levels and lower interest payments relative to revenue and to GDP.

Institutional strength has a of weight 12.5 per cent. Countries scoring higher in the World-Wide Government Effectiveness index; the Rule of Law index and the Control of Corruption index get higher marks.

Economic strength has a weight of 12.5 per cent. Higher real growth with lower volatility of GDP; higher nominal and per person national income and a better score on the World Competitiveness Index all ensure higher scores.

Labouring through this long explanation of the methodology becomes rewarding because it points us to a prioritised pathway for improving our credit rating.

Push the right buttons

First, remember that in today’s networked world, not only is it important to do the right thing generally but one must also push the right buttons. Our credit rating depends on our score in the five independent indices, mentioned above, relating to – voice and accountability, rule of law, government effectiveness, control of corruption and competitiveness. The Niti Aayog has demonstrated how our score and rank can be improved in the Doing Business Survey. Similar effort, in these five indices, can directly improve our overall credit rating.

Fastrack four priorities

Second, consider that four initiatives — (1) reducing inequality via direct transfers and NREGA to supplement low incomes; (2) funding investments through tax revenue and domestic private savings via financial inclusion and market development; (3) strengthening the resilience of our banks by shrinking the size and functions of weak banks and recapitalising the strong banks; and (4) increasing export earnings by removing the import bias for a “strong” rupee, can together improve one half of the overall score. These four areas should have a very high priority.

Go easy on piling up debt

Third, stabilising the aggregate public debt to GDP ratio is necessary. This contributes to one-fourth of the aggregate credit score. Moody’s recognises that this ratio shall increase from 68 per cent in 2016-17 to 69 per cent in 2017-18.

headload

It may even be higher, if real GDP growth this year is less than 6.7 per cent. State government debt has increased by Rs 2.7 trillion (1.5 per cent of GDP) due to financial engineering in acquiring 75 per cent of the stressed assets of electricity utilities through UDAY (electricity restructuring) bonds. An additional source of stress is the proposed recapitalisation bonds, particularly if financed from public funds. Financing the capital needs of strong banks through private equity would be far better, even if government equity must be diluted to 26 per cent. At the very least, the market would force adequate internal restructuring. Sharply reducing the revenue expenditure by 10 per cent can bridge the “effective revenue deficit” (0.7 per cent of GDP) and release fiscal space for virtuous allocations. Revenue expenditure — other than interest and capital grants —is budgeted at Rs 11.2 trillion this year.

Diligent nudging will show results

The Moodys’ rating methodology has evolved beyond the pure commercial intent of repaying lenders on time, to assess systemic sustainability and happy citizens.

The ball is now in the government’s court to navigate the tightrope between short-term welfare priorities and medium-term fiscal stability and growth. Political sagacity, restraint and technical wizardry in choosing the right boxes to tick will determine if the finance minister can widen our smile.

Adapted from the authors opinion piece in The Asian Age November 21, 2017 http://www.asianage.com/opinion/columnists/211117/after-the-upgrade-can-fm-widen-our-smile.html

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