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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

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/

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.

 

A “green” Diwali sans firecrackers

SupremeCourtPhotos(47)

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

Joined at the hip

joined at the hip

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

CPCB plays truant

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

At the very beginning…

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

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

And more recently…

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

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

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

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

The puzzling about turn

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

Regulating better is possible

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

Strong action effective only if sustained

CJI Thakur2

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

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

Green “bangers” anyone? 

bamboo

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

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

Pensioning-off cows

cow veneration

So is “the cow” (including bulls) a living deity, like the Ganga or Yamuna rivers, to be revered as a “mother”, or just another productive asset like a buffalo or a goat? This debate dates to the Constituent Assembly sessions in the late 1940s.

Cow protection smuggled into a non operative part of the Constitution

constituent assembly

Hindu traditionalist members of the Constituent Assembly wanted complete protection for the cow as a fundamental right. This was stolidly opposed by realists like B.R. Ambedkar, who saw it as a veiled attempt to deify upper caste brahmanical practices, to the detriment of the poor — for whom the cow means a source of milk, meat and leather.

Modernists like Jawaharlal Nehru thought it would blemish the liberal, secular character of the Constitution. A consensus was urgently required. Clever drafting by Dr Ambedkar pleased all by inserting an ambivalently worded Article 48 (on working towards prohibiting cow slaughter) in the Directive Principles, that are not legally enforceable. Therein lies buried the knotty, seven-decade-old problem of what the cow means to Indians.

But Hindu reverence for the cow has increased seven decades later

Neither modern education nor “development” has diminished the demand for prohibition of slaughter. Educated, well-off Hindus, across castes, are avid supporters. Higher incomes enable more people to “Sanskritise” — fashion their customs by emulating brahmanical practices. Vegetarianism is a “luxury” in desperately poor India, as is substituting cereals with vegetables and lentils. The clamour to save the cow will increase as ever more people are economically capable of “assimilating” themselves, culturally, into upper castes. Beef is already an “inferior” food eaten mostly by the poor.

Our “secular” government and political parties are politically expedient

Rather than amend the Constitution outright to reflect this demand, devious bureaucratic means have been adopted to achieve the same effect, whilst hiding behind the economic usefulness of the cow. Nine state governments — Jammu and Kashmir, Haryana, Punjab, Himachal Pradesh, Delhi, Uttarakhand, Uttar Pradesh, Rajasthan and Gujarat — ban the slaughter of cows and bulls outright. Seven states — Arunachal Pradesh, Meghalaya, Nagaland, Mizoram, Manipur, Sikkim and Kerala — allow slaughter. Others permit slaughter of animals who are no longer productive — usually more than 15 years old. The varying levels of “protection” are directly related to Hindu upper caste political dominance in a state. The only exception is J&K — a Muslim-majority state, which bans cow slaughter. In more normal times this would be an example of our “syncretic” culture.

New rules drive Beef markets underground

cow markets

The Union government has chipped in by banning the export of beef and cows, thereby minimising the incentive for cow slaughter. It also promulgated rules on May 23, 2017 under a Central law, Prevention of Cruelty to Animals Act, 1960, which ensure cattle markets are not used to purchase “bovine” animals for slaughter. The rules are onerous. They require multiple certifications, declarations and identity verifications. They will ensure all sale/purchase of “cattle”, which includes buffalos and camels, would end in cattle markets. Curiously, a convenient “out” remains available. Direct purchase from a cattle owner doesn’t attract these rules. The net result will be trading will move to one-on-one sale/purchase, or to large commercial dairy farms — now facilitated by the agricultural land leasing policy. These will be informal cattle trading hubs, without health certification to ensure meat quality.

Ironically, even as the Niti Aayog and agriculture ministry are striving to make agricultural markets efficient, the trade in dairy animals is being driven underground. Perversely, the new rules are being touted as the fallout of a July 2016 Supreme Court order, that was intended primarily to stop the flourishing cross-border traffic of cattle into Nepal and Bangladesh. The loud protests by West Bengal and Kerala and muted noises from Tamil Nadu and Karnataka are as farcical, playing to the dalit and Muslim vote banks.

Are we willing to pay for pensioning-off cows?

Surely, this farce played out repeatedly, since 1948, should end now. Why not have a referendum to establish the extent of support for cow protection? Seth Govind Das suggested this in 1948. The cost would be around Rs 50 billion, equal to the cost of a general election. The outcome, as in Brexit, is by no means certain.

If the existing 190 million (2012 data) indigenous and hybrid cows are to be cared for after their useful life, for say an additional five years (underestimated), the annual cost at a daily spend per animal of Rs 50 is Rs 1.1 trillion.

This is four times the spend in 2017-18 on medical, public health, welfare of SC-ST, backward castes and minorities and social security — spread thinly across around 400 million of India’s income-insecure citizens. It’s more than half the spending on defence. Maneka Gandhi and animal rights activists will be delighted, but it’s impossible to fund a pension scheme for cows publicly.

cow employment

Cow retirement homes run by the private sector on viability gap funding basis will create around one million jobs. But there is no free lunch, even for spiritual or emotional fulfilment. So how many of the 280 million Indian households would be willing to pay an additional Rs 4,100 per year for protecting the cow?

What about the environmental consequences of keeping 70 million old cows

The 1.5 lakh hectares of land to house the “retired” cows can be found. But the additional water resources — far exceeding the needs of 200 million humans — would be a challenge. The retired, unproductive cows will increase methane emission, which are worse than carbon dioxide, by an estimated 0.6 per cent, even as we are struggling to reduce carbon emissions.

Of course, it may never come to this absurd end. Farmers won’t buy cows if they can’t sell them for slaughter. Bulls are redundant in mechanised farming. Buffalos are more productive milk producers. “Nandi” clone bulls and milk white cows might become like racehorses or elephants — the treasured preserve of rich people and temples. And this is how it should be.

bulls

If the suggestion by Justice Mahesh Chand Sharma of the Rajasthan high court (now retired) “trends” sufficiently, the cow could become India’s third national animal, alongside the other “big two” —tiger (de jure) and Gir lions (de facto). Welcome to India’s new-age action safari.

cow temple

Adapted from the authors article in The Asian Age June 3, 2017 http://www.asianage.com/opinion/columnists/030617/the-cow-indias-icon-wholl-pay-the-price.html

Needed paychecks not pink slips

Jobs 2

Photo credit: Zee news

Ask any of the 68 government departments in New Delhi, what they are doing about private sector jobs, and each will point at the other for an answer. The truth is that governments have not been held accountable for job creation since the 1980s, when neo-liberalism took root. No one advocates going down the horribly inefficient public sector job creation route again. So, it is up to the private sector and self-employment to absorb our surging army of millennials — almost 10 million strong annually — which is equal to the entire Australian workforce.

bot

Humans versus machines- who’s winning?

But does the private sector have incentives to produce jobs? Looking purely at the bottom line, machines are superior to humans. They also come with financial incentives for capital investment — cheap bank finance and accelerated depreciation for tax purposes — which boost the bottom line. Technology is fast eroding the capacity gap between the unique attributes of human labour and machines. Siri (Apple), Cortana (Microsoft), Google Now and the mellifluously named Maluuba are all cheaper than hiring a real-life assistant and are on call 24×7. Bots will progressively replace humans, more so in logically-executed routine jobs. Not only are human services more expensive, but they come with enormous social and economic costs for housing, transport, education, health and security.

Can government help preserve human employment?

highway

So, how can the government help create new jobs and preserve existing ones? Kickstarting infrastructure projects; promoting “Make in India” and resolving the bad loans burden of banks — are all great government initiatives for new employment. But their impact is medium term. In the near-term, the government needs to preserve existing jobs. Here are four options.

Market Indian skills in 34 “Aged”, rich, countries 

indian farmers

First, extend the H1-B strategy, used to great advantage in the US, for temporarily exporting Indian workers overseas. Rich countries, with ageing populations who need the workers, but fear the cultural dilution associated with permanent immigration would be the targets. Assign targets to our ambassadors posted in these locations to negotiate with their host countries to allow temporary immigration, lightly monitored by the government and directly supported, under the Skills India initiative, to acquire local language and cultural skills. The associated fiscal costs are outweighed by the social and economic benefits from repatriated earnings alone. A stretch target could be to export a million workers over the next three years.

Discourage the “paper chase” by avoiding “gold plated” human resources.

microsoft-employee

Second, build respect for skilled work by venerating those who have these skills. Our caste and hierarchy-ridden Brahmanical social norms devalue skills and overvalue “intellect” — both in the public and private sectors.  This unfortunate social milieu engenders “qualification creep”. Both Indian companies and the government routinely advertise for engineers even when an experienced mechanic is needed. Consider the irrational gap between the wage for a nurse versus a doctor. Good nursing vastly reduces the workload for doctors — specially in the emergency room for the care of trauma patients. But this noble, highly skilled profession is not a first choice today. Instead, there is a stigma attached to it, as being fit only for those who cannot afford the high cost and long incubation period for becoming a doctor. Why is a Bachelor of Arts degree needed to become a bank clerk — a high responsibility but a routine, people skills-oriented job? Only a select few, intending to teach at the college level or do research, should need a master’s degree. Tests and interviews for jobs should focus on personality and psychological attributes, rather than educational qualifications, which are rarely aligned with job skills anyway. Only when we consciously make the paper chase redundant will we value real-life skills accretion, where the maximum potential for human jobs exists.

Reward socially responsible business leadership which looks beyond the “bottom line”

murthy gates

Third, introduce disincentives for layoffs. Yes, flexibility in workforce management is a must for employers. But companies can be incentivised to be socially responsible employers. Those who go beyond watching their “bottom line” to retaining and growing their employees should be rewarded through tax breaks, access to cheaper finance and publicly recognised as nation builders. Why not devise an index to assess social leadership qualities of company honchos before they get awards and honours, get invited to Rashtrapati Bhavan; preferential access to our ambassadors overseas or get nominated on to government committees? We need to publicly distinguish between narrow-minded private employers who only watch bottom lines, and truly transformative business leaders, if the private sector is to lead in job creation.

Give incentives for digital/banked wage payments by individual employers

Around 300 million workers are employed in the agrarian and household sector as daily wagers or long-term help by individuals — farmers, rich and middle class urban households. Legislating minimum wages and benefits for this segment is lazy policymaking and can end up having a regressive impact due to weak oversight capacity. The Niti Aayog has taken the lead to plug the data gap on informal employment where most of the incremental jobs will be created. The government can step in with near-time transactional measures for light-handed regulation of such employment. As an initial step, the government should promote the payment of wages into bank accounts to generate big data on such employment. An incentive of Rs 5 credited back to the employer’s account for every Rs 1,000 paid into an employee account could help. If costs are shared between the bank and the government, a budget outlay of Rs 5,000 crores can pay for this incentive and bank annual wage payments of an estimated Rs 18 trillion, much of which is in cash today. Individual employers, with a track record of employing more than five workers and banking wages of more than Rs 10 lakhs per year, should be publicly recognised as “social growth enablers”.

Collaborative governance is key

bicycle with flag

Last, the optics must be right. The government needs to step away from the colonial pedestal of being the “mai baap” (supreme preserver). The “lal battis” (red beacons) have gone. It is time now to puncture some sarkari egos further and spread the accolades for social and economic achievements.

Adapted from the author’s article in The Asian Age July 16, 2017 http://www.asianage.com/opinion/columnists/160517/a-to-do-list-for-govt-to-create-more-jobs.html

Bulk up to beat the competition

Hulk

Scaling up is the name of the game in politics and in business. The BJP secured enviable gains in the early 2017 municipal elections in Maharashtra and Odisha. A win in the Goa state election is likely. A possible, albeit messy, near-win in Uttar Pradesh and potential inroads into Karnataka, Tamil Nadu and West Bengal portend that the Narendra Modi juggernaut is rolling out a massive, vertically integrated consolidation of party votes across the three levels of government.

Big, deep pockets business is in

In business, too, big is beautiful. Government banks and oil companies are being merged into competitively-sized entities. Reliance, India’s second biggest company by market capitalisation, after Tata Consultancy Services, still rankles at the loss of the top position due to faltering gas production. It is now hitting back at the fragmented competition in telecom, targeting an aggressive 50 per cent share by 2021.

ONGC

Bigger publicly owned enterprises and bigger government is the inevitable option if private investment response is weak 

The government sector too is expected to grow. Some of this is dictated by the compulsions of the faltering international economy. Private capital is risk averse when returns are dodgy. Public capital then is the only option. India is terribly under-capitalised in network and social infrastructure. We spend less than one half of what we should to get rid of the infrastructure constraints on growth and security. The government’s budget needs to expand by at least one-fourth to accommodate the necessary capital spend. FY 2017-18 is not budgeted to be different from the past. There is not enough time before the 2019 general election for grounding project plans into reality. Jobs will consequently be funded by public finance.

Citizen anxiety at being left out in the cold

anxious citizens

Should citizens and consumers then be apprehensive about the drive to consolidate and grow across government and business? Not really. Dominance is a systemic outcome of competition. Institutional safeguards can ensure that dominance is not misused to dilute citizen and consumer interests. The scale of operations should be a matter of choice, not compulsion, or the outcome of regulatory nudges. Citizens should rather be concerned that decent jobs won’t come unless businesses and government grow to scales dictated by market parameters.

Multiparty politics only means larger ballot boxes

ballot

The political architecture is similarly fragmented. A loose law allows a mind-boggling 1,452 political parties to be “registered” by the Election Commission under the Representation of the People Act 1951. Only 54 parties are recognised at the state level and just six are national parties. Recognition has stricter norms linked to voter share and elected candidates. Believe it or not, the commission’s powers to de-register moribund parties are not explicit.

Multi-party politics has become a fetish, far beyond its usefulness to the average voter. Tightening up on representational norms is possible without diluting the basic freedom to choose one’s political party. Just gearing up the disclosure, internal governance and accounting requirements, to the levels required for companies, can reduce the number of registered parties.

Smart regulation can weed out frivolous parties

Enforcing regulatory compliance can deter frivolous registration and ensure responsible representation. This is illustrated by the experience of companies. Of the 16 million commercial entities operating in India, just one million are registered under the Companies Act 2013, despite the benefits which accrue from registration. It is not as if only large commercial entities choose to get registered. 66 per cent of companies are very small with an authorised share capital below Rs 1 million or just $15,000. But the widespread reluctance to register is because of the accompanying higher levels of disclosure required. Political parties would respond similarly. Only the most serious ones would remain registered if regulatory requirements were increased in the public interest.

Political consolidation as a public good.

Why should we think of political consolidation as a public good? Our fractured and divisive social architecture provides ready opportunities for exploitation of the cleavages for narrow political purposes. We must make it difficult for parties. which cater solely to narrow agendas. Social inclusion fundamentalists would rebel against any institutional constraint on the freedom of a political party to represent even marginal views. But look at the trade-offs. Caste and religion find no place, in our Constitution, as legitimate grounds for political mobilisation. Introducing institutional mechanisms which encourage broad-banding of political platforms is therefore legitimate.

Mandate rainbow nominations for inclusive politics

symbols

One way to ensure such broad-banding across castes and religions is to mandate that parties must replicate the prevailing rainbow of castes and religions while nominating candidates in specific jurisdictions. Savvy political parties are already doing so. The BJP broadened its appeal to dalit and backward caste voters in Uttar Pradesh (2017). A quarter of Bahujan Samaj Party candidates are Muslims to demonstrate Mayawati’s good faith while seeking Muslim support. The Samajwadi Party’s tieup with the Congress broadens its appeal to dalits and upper castes — both long-time supporters of the Congress.

In a fragmented political market, institutional compulsions to broaden the electoral base can be an effective catalyst for consolidation. This would be a welcome change from the minimalist strategy of securing the largest number of votes polled by splintering your opponent’s vote share below your own.

Leave room to grow 

Limiting governmental and private sector dominance by constraining their ability to grow has negative social and economic outcomes. We barred Facebook from giving free access to a limited Internet space in 2016 due to the misplaced fear of deep pockets-driven future dominance. E-commerce — similarly driven by deep pockets — has somehow bucked the tendency to protect incumbents. Institutional reform to regulate big institutions is overdue. Smart laws and empowered regulators can sift destructive dominance from scaling up for efficiency enhancement. Bulking up is the international trend. We cannot but conform.

shoes

Adapted from the author’s article in Asian Age, March 9, 2017 http://www.asianage.com/opinion/columnists/090317/in-politics-like-in-biz-bulk-up-to-beat-rivals.html

Funding the Republic

tricolour

The tricolour flutters happily at the Peer Makhdum Shah Dargah in Mahim, Maharashtra, hoisted by the peer’s devotees, as a symbol of the Indian Republic being alive and well. 

India is a Republic. But often it feels as though only the Union government must carry the can for doing unpleasant things – like levying tax on those who have the surplus income to add to the national kitty or getting heavy with tax evaders. Of course it is a juggalbandhi. The Union government invariably wants to grand-stand and hang on to financial muscle power so necessary to play “big brother”. State governments are only too keen to accept the federal goodies being thrown at them and thereby avoid the pain of efficiency enhancing structural reform in politics and in government. To be fair, the financial and political firepower of the Union government and individual states is asymmetric in favour of the former. This makes it difficult for a state to chart a lonely, unique, development path. The good news is we may be coming to the limits of this asymmetric sharing of development responsibilities.

The Union lacks funds for its core functions

Consider that rapid infrastructure development and public investment to strengthen competitive markets have become the stepchildren of the annual Union Budget process. This continues a trend, started by the previous government, of shoring up state government finances, at the risk of being stingy on spending in areas of its own core, constitutional mandate.

The Economic Survey 2017 notes that state fiscal deficits reduced sharply from 4.1 per cent to 2.4 per cent of the gross state domestic product (GSDP) over the last 10 years, since state governments adopted the Fiscal Responsibility Act. Enhanced Central transfers to states and reduced interest payments, courtesy debt restructuring, benefited states to the extent of 1.8 per cent of GSDP. To their credit, most states used the additional fiscal space to cover the revenue deficit and lower the fiscal deficit to below the target of three per cent of GSDP.

But how long can the Centre play the role of a responsible elder brother, darning his own clothes, whilst buying new ones for his younger siblings?

India’s poor infrastructure constrains growth. Low spending on infrastructure also limits job creation — something India needs. The Union government expenditure on infrastructure has increased from 0.6 per cent of GDP in 2015-16 to an estimated 0.9 per cent of GDP in 2017-18. But it remains inadequate. Adding the state government and corporate — public and private — expenditure on infrastructure totals less than three per cent of GDP in 2017-18 versus the five per cent of GDP we should be spending.

broken-bridge

Dodgy infrastructure: the bane of the Republic. photo credit: indiamike.com

Repairing the broken system for bank credit and private investment

Bank and corporate finances are the second black hole which the Centre’s Budget was unable to address. Banks have accumulated bad loans to the extent of `12 trillion, or 17 per cent of their assets. The Economic Survey 2017 exhaustively discusses the “twin balance sheet problem” — of banks that must write down at least one half of the bad loans and of large private companies that face bankruptcy, for failing to use the loans productively over the past eight years.

construction

The finance minister has been explicit that the government should not bail out the private companies who made bad decisions. This is well-intentioned but difficult to implement.

There are 13 public sector banks that account for 40 per cent of these bad loans. Merging them with efficient banks can mask the problem for some more time. But such mergers can spread rather than contain the contagion. Selling or closing a failed public bank or enterprise requires courage and conviction. Our inclination is to retain the “crown jewels” no matter how tarnished they get. Air India has got a capital infusion of Rs 1,800 crores in 2017-18 on top of the Rs 5,765 crores over the last two years.

Fifty private companies account for 71 per cent of the bad loans. The public mood is for the government to go for their jugular. This will make it politically difficult for the government to fund write-downs of debt. But vigilantism against corporates can rock the growth story, which we can ill afford.

judge

A fast track quasi-judicial process must distinguish between “wilful” and unintended default, caused by systemic shock. Different rehabilitation regimes should be determined for the two categories of defaulters. Wilful defaulters should be pilloried. The downside is that picking and choosing defaulters, itself can perpetuate what this government abhors — crony capitalism.The finance minister has allocated Rs 10,000 crores in 2017-18 for recapitalising banks. This is a placeholder. All eyes are trained on the additional resources unearthed by demonetisation. The RBI is yet to disclose the value of Rs 500 and Rs 1,000 notes which remain undeposited. This may be around Rs 1 trillion. Transferring the resultant excess sovereign assets, from the RBI to banks, can buy some breathing room.

Second, the incremental tax collection from demonetised “black money” deposited in banks, can fund infrastructure development or recapitalise banks, as it dribbles in over the next two years. This windfall was to be distributed to the poor as cash support. But recapitalising publicly-owned banks, albeit with more vigorous oversight and more transparent and intrusive stress tests, has a higher priority. More credit for corporates translates into more investments, more jobs and higher economic growth. These are the fundamentals that must accompany fiscal stability.

More “give” rather than just “take”, needed from States

We are in the middle of an incipient financial emergency, which can be triggered by a shock. The RBI cautions against thinking that inflation has been tamed. Other than food and oil, where prices remain low, inflation hovers just below the red flag of five per cent. This limits the headroom available to overshoot the fiscal deficit red flag of three per cent of GDP.

The Centre needs considerable fiscal slack to fund infrastructure development and recapitalise the banks. State governments can help by enhancing their own tax resources. Imposing income tax on agricultural income and vigorously collecting property tax are low hanging fruit available to them. These measures can add around one per cent of GSDP to their resources. This will enable the Union government to scale back the long list of Central sector schemes for human development and social protection and use the funds instead for its core mandate — developing infrastructure, markets and a competitive private sector.

gst

The Goods and Services Tax Council meets: State’s follow the take rather than give strategy. 

States may well ask why they should bother, since they were never partners in the illicit gains from mega crony capitalism. But this would be short-sighted. Faltering economic growth adversely affects all boats. An increase of six per cent in economic growth boosts state government tax revenue by one percentage of GDSP with more jobs in tow. But above all, cooperative federalism must have some give — along with the take. This is the time for states to give to the Republic, as equal partners in national development.

Adapted from the author’s article in the Asian Age, February 14, 2017 http://www.asianage.com/opinion/oped/140217/to-raise-resources-give-and-take-needed.html

Fiscal love for job loss

unemployed

Times are tough. Exports are in free fall. The import bill is increasing as oil prices harden in response to the international oil cartel’s plans to cut production. Domestic demand is moribund despite the largesse of the Seventh Pay Commission for the public sector. The stock market has sagged. Informal sector jobs are under threat. We need a push to get people over this sullen hump.

Electoral compulsions

Four states, comprising one-fifth of the nation’s population, are about to elect provincial legislatures in the first quarter of 2017. From a national perspective, the BJP has little to lose but much to gain. Goa, that is ruled by the BJP, elects just two MPs; Punjab, ruled by ally Shiromani Akali Dal, elects 12; while Uttarakhand, ruled by the Congress, elects five MPs — which together account for a mere four per cent of the 542 seats in the Lok Sabha.

It is Uttar Pradesh, ruled by the Samajwadi Party, which is the real prize. It elects 80 MPs (just under 15 per cent of total seats) to the Lok Sabha. Varanasi is the Prime Minister’s adopted constituency. This is the Hindu heartland of India. A wipeout in UP may not directly impact the BJPs prospects irretrievably in the 2019 general election. But a win would surely be a grand start to the campaign.

Finance Minister as fire fighter

Finance minister Arun Jaitley seems eager to salve those burnt by “notebandi”. He may offer some tax relief in the coming Budget, but that helps only a tiny sliver of the population — just two per cent who pay income-tax. Lower indirect taxes are hostage to progress on the Goods and Services Tax (GST). But a GST with multiple rates, and with the highest nominal rate at 28 per cent, is unlikely to reduce the incidence of indirect tax or drive growth in GDP.

The FM had budgeted a nominal GDP of Rs 151 trillion for this fiscal, 11 per cent higher than the nominal GDP last fiscal. This is now unlikely for two reasons. First, growth in real terms will slip by between one to two percentage points. Second, inflation is lower by one percentage point. Taken together the nominal GDP increase will be eight, not 11 per cent, over last year. Tax estimates are based on “nominal” GDP — real growth plus inflation. So, tax collection at 10.8 per cent of GDP will also slip by about Rs 0.4 trillion from the budgeted amount of Rs 16.3 trillion. There is little headroom in this fiscal to play with tax reduction.

Even in the next fiscal, with significant economic headwinds and domestic uncertainties, the prospects for a revival in growth is wishful thinking. Tax reform with lower taxes seems a far cry. A temporary income support mechanism is more appropriate.

The losers 

The population segment most affected by demonetisation is domestic migrant labour and their families in villages. Urban migrants live on and save from what they earn daily. Over a period of six months, the income shock will feed back into their families in villages as income transfers decrease or vanish and migrant labour return home.

The FM must provide a “package” to soften the hard landing at home for returning migrant labour. This is urgent. Migrant labour are highly aspirational, having seen the “good life” available in cities. Their aspirations must not be squashed. Of cours it is not easy to distinguish between those affected by the loss of employment and others who never had any. Targeted income support for migrants can be ruled out.  But a more generic income support for all those with stressed incomes is not as wasteful as it sounds.

Income support for stressed families in villages

Three approaches can be combined to suit the context. First, borrow the concept of “helicopter money” from the much talked about income transfer scheme. Make the support freely available on demand with very selected and easily verifiable eligibility criteria. Second, revive the now defunct notion of “taccavi loans”, which were used in the colonial period as a famine relief measure. Third, use a participative and transparent good governance approach to identify the beneficiaries. Ranking families by the extent of income loss in open village meetings mediated by village-level government officers is a useful way to develop consensus and reduce the mistargeting. Lastly, devise the support mechanism in a manner which eliminates the undeserving.

Give consumption loans at market rates repayable in labour

nrega

The income support should be a loan and not a grant. This will deter those looking for a freebie. The interest rate should be reasonable but not subsidised for the same reason. Around 12 per cent per year, or one per cent per month can avoid misuse for interest arbitrage and yet peg it much lower that the unsecured informal market loans, which are available at an interest rate of 40 to 50 per cent per year, or between three to four per cent per month.

To further deter those looking for freebies and to make the scheme attractive only for those who really need the work, the loan and interest should be repayable only through around manual labour by the family in village works and not in cash. Around 50 days of labour can repay a loan of Rs 5000 along with accrued interest over six months. The advantage of this twist is that it leaves the migrant worker free to continue looking for work in cities,once he has secured a “taccavi” loan for his family to help them survive for six months without compromising the future through crippling debt. As in NREGA, the productivity of village-level work is very contextual and varies. But such inefficiencies are a small price to pay for the positive ripple effect of well targeted, publicly funded, social security schemes.

The fiscal burden is bearable.

Around 60-80 million such unsecured loans of Rs 5,000 each could cover all needy families (broadly 15 per cent households in urban areas and 30 per cent households in rural areas), with a sufficient margin to spare for the inevitable leakages from poor identification. The one-time cost of Rs 0.3-0.4 trillion can be met by either enlarging the allocation for NREGA (Rs 0.35 trillion for 2016-17) or by overshooting the fiscal deficit target by 0.25 percentage points (3.75 per cent instead of the budgeted 3.5 per cent). With weak retail demand, this temporary transgression from the fiscal deficit target is unlikely to be inflationary and in effect sustains rural demand.

Desperate times need innovation, with a human face, to soothe the hurt imposed by systemic shocks. Shielding the weak from the unbearable cost of bad economic decisions is a must, to preserve the consensus for change.

yech

Adapted from the authors article in Asian Age December 20, 2016 http://www.asianage.com/opinion/oped/201216/fiscal-love-for-a-sullen-electorate.html

 

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