governance, political economy, institutional development and economic regulation

Posts tagged ‘Arun Jaitley’

Why Raghuram Rajan is not Indian

Yes, it’s true. Raghuram Rajan is very Un-Indian on multiple counts.

RR early

Photocredit: live.av.info  Raghuram Rajan a youthful financial messiah amidst grey heads

Early start

First, like Dr. Manmohan Singh before him and unlike every other Governor of the Reserve Bank, Rajan became governor at the “tender”, almost youthful age -by Indian metrics- of just fifty years. This is a tribute to his compelling competitiveness for the position. But more importantly, this means he is likely to have a long professional after-life, once he stops being Governor, just like Dr. Singh.

Not wedded to holding everlasting public office

But unlike Dr. Singh, Rajan is keeping his professional options open in case his term is not extended in September 2016. Of course, Rajan is not the first RBI Governor to contemplate an after- life out of public office. I. G. Patel, who also became the fourteenth Governor of the RBI at a relatively young age, went on to head the IIM Ahmedabad and then the London School of Economics. He is also reputed to have declined the offer to become Finance Minister in 1991.  But such instances of daring to dream beyond everlasting public office are rare.

The outsider

RRajan outsider

photocredit: mumbaimirror.com

Second, Rajan, unlike all his predecessors, did not come to the Governor’s office via the serpentine pathways of the extended public sector. Instead, like millions of upwardly mobile, middle class Indians of his generation, he earned his spurs in the US, in academia and then in the International Monetary Fund – where merit means having the capacity to challenge the established status quo with evidenced, sensible and better policy options.

Mission: To perturb, not preserve, the status quo for equitable growth

Perturbing the status quo is not a quality held in high regard in the backward looking Delhi Durbar. Here, precedent and incremental change- often mistakenly equated with policy predictability – command a premium. Rajan stands out for his impatience with an India, known perpetually for its potential but with an unendingly, shoddy present. Worse, he speaks out against a financial system, which has traditionally encouraged crony capitalism; been cavalier with the rights of the poor and constrained, rather than freed, India’s abundant animal spirits.

Tactics: Unafraid to work only for public interest

Third, Rajan’s single minded pursuit of macro-economic stability – read low inflation- in an increasingly uncertain world, marks him out as an outlier. The dominant, albeit convenient, consensus in India, is that we can simply spend our way out of an economic downturn, without feeling the pain of the structural reforms, which underpin sustainable and equitable growth. This is understandable, because inflation doesn’t really bother Imperial Delhi, Mercantile Mumbai or Harit Hapur- the triumvirate which moves India.

After all, babu pay and pension is 100% indexed to inflation, so why worry? Inflation doesn’t bother corporate India either. It pushes real interest rates into negative territory; reduces the cost of servicing debt and makes fresh borrowing cheap. Nor does inflation bother big farmers. The cereals or sugarcane they produce are sold on a cost plus price fixed by government. Never mind, that inflation is a silent killer – of daily wagers in the unorganised rural and urban sector, who have to eat one roti less, to make do and the lower middle class and the aged, who see their savings go up in smoke.

Metrics: Cut red tape and discretion in bank licensing

Fourth, by making available private bank licenses on-tap for eligible entities, Rajan displays completely Un-Indian haste in throwing away executive discretion in favour of transparency. By disciplining banks and forcing them to clean up their balance sheets, Rajan is exceedingly Un-Indian. He hits at the roots of the cozy relationship between politics and corporate money, which dates back to the Freedom Movement.

Market value: Options on both sides of the Indo-American universe

Lastly, Rajan’s ultimate betrayal of Bharatiyata is that he holds a Green Card, which entitles him to permanent residence in the US. Even worse, he wants to hang onto that privilege, if he gets a second term as Governor, post September 2016. Should he not have reciprocated his everlasting gratitude to the nation, on being appointed Governor, by tearing up his Green Card? Certainly, it would have been a grand gesture of his long term commitment to India, had he done so. But in a democracy, contractual obligations are determined by the law, not sentiment.

Attitude: Professional not a supplicant

But most galling is that by hanging onto his Green Card, Rajan displays a very Un-Indian desire to seek a second term, not as an abject supplicant but as a professional, on terms, which are mutually acceptable between him and his employer – the Government of India. Of course this is never-before-seen arrogance, by the standards of the public sector, where applicants must wait cap in hand, for the chance to serve.

Role model: For Indian bureaucrats

The upside, in this otherwise grim tale, is that Rajan’s approach is the only way we will ever have a professional, merit based bureaucracy, working in public, rather than narrow political interest. The internationally recognized system of contractual, senior public service appointments, has never found salience in India because politicians fear losing control over a pliant bureaucracy. Contractually appointed professionals, like Rajan, can say no, because they have market based options, outside the public sector.

Every Indian expatriate values competition and choice

But, consider also, that the hordes of expatriate Indians who throng Prime Minister Modi’s meetings overseas, are similarly Un-Indian, like Rajan, because they value competition and choice above embedded entitlements.

Not too different from any other worker in the Indian private sector

Guess what, 97% of the workforce in the Indian private sector are also Un-Indian, like Rajan, because they have no secure, life-time tenures. They face the test of competitiveness, on a daily basis.

arun jaitley London

Photo credit: Business standard.com:  Finance Minister, Arun Jaitley very much in tune with the future.

In fact, even Finance Minister Arun Jaitley might also be Un-Indian, under his very Indian clothes. After all, he does seem to be quite comfortable with Rajan and birds of a feather flock together. But, then again, perhaps not. After all, Jaitley’s Hindi is impeccable, whilst no one has ever heard Rajan speak in Hindi. Field Marshall K. M. Cariappa, India’s first commander-in- chief of the army, couldn’t speak in Hindi either. When berated by the entho nationalists of his time, he riposted, that he made up for not knowing Hindi by having a dil (heart) which was “ek dum Hindustani”. Surely, so is Rajan’s and that should be good enough.

cariappa

Field Marshall K.M. Cariappa- speaking from the heart 

Adapted  from the authors article in Newsiaundry  May 23, 2016    http://www.newslaundry.com/2016/05/23/why-raghuram-rajan-is-not-indian/

Finance Minister or supermom

mom

Will Finance Minister Arun Jaitley protect wailing babies; photo credit: mubasshir.blogspot.com

High expectations in the near mystical ability of any finance minister to find a balm for all economic ills is common across all Budgets. Like all of us, finance ministers are egoists. They respond to expectations, like a supermom does to wailing babies.

The chorus of expectations from finance minister Arun Jaitley in Budget 2016-17, is no different. Growth fundamentalists expect a growth-oriented Budget — presumably heavy on infrastructure and investment. One may well ask then, why the accompanying demand for lower interest rates or for more investment than last year? Last year’s investment-lite Budget — just 1.7 per cent of the gross domestic product — pulled off GDP growth of 7.6 per cent, if government data is to be believed, despite the depressing economic environment.

Low social sector allocations

Social sector fundamentalists fret about low allocations for education and health — the building blocks of tomorrow. In the last Budget, the proportion of devolution to state governments was increased by 10 percentage points as per the recommendations of the 14th Finance Commission. Basic and secondary education, and primary health are state government mandates as per the Constitution. It is, thus, up to the states to get on with the job of prioritising social sectors in their spending.

Inadequate spend on defence

Security groupies worry about our poor defence preparedness. But they simultaneously support large pay and pension increases for the men in uniform who significantly outnumber the amount of modern equipment available to equip them with. No one seems to be thinking about reducing boots on the ground and using the money saved to upgrade much-needed equipment in this age of drones, airborne rapid action deployment and missile warfare.

air force

India’s aging fleet of fighter jets; Photo credit: indianexpress.com

Creaky infrastructure

Business, meanwhile, slouches about in the shadows, cribbing privately about the slow pace of the over-hyped initiative for rapid infrastructure development like the Delhi-Mumbai Industrial Corridor which is a confusing mishmash of railway lines, transportation hubs for improving freight movement and murky land deals for providing the usual real estate sweetener of houses, offices and malls. The fact that the Japanese are funding the railway freight component was probably its strongest point since both, the availability and cost of domestic funding, are at a premium for long gestation ventures. Ditto for the Ahmedabad-Mumbai bullet train.

plans

More plans than progress; Photo credit: dnaindia.com

As if all this was not enough to put any human into the ICU, public sector banks, egged on by the Reserve Bank of India, have chosen to make the December 15, 2015, quarter their “show and tell” moment.

Domestic shock: high levels of stressed bank assets

Whilst the financial cognoscenti may have known for years, the average depositor is just about finding out about the rot in government banks. Loans worth Rs 6 lakh crore have been extended over the years to borrowers who had no intention of paying them back. Instead of writing-off these loans when they soured or providing reserves against a potential loss, government banks have been dressing up their accounts to look good on paper by restructuring the unpaid loans. In essence, kicking the bad loans football down the road into the lap of the Bharatiya Janata Party government and Raghuram Rajan, governor of the RBI.

The result is that unless the government steps in and coughs up possibly Rs 4 lakh crore to recapitalise government banks over the next two years, bank finance will remain difficult to get and, even if available, it will be expensive. Despite the high margin these banks charge between the rate at which they get finance from the RBI and the rate at which they lend to borrowers, dodgy sets have reduced their profitability and affected growth. As a consequence, the market has sharply marked down the value of the equity of listed government banks.

Three trade-offs before the Finance Minister

Should Mr Jaitley bite the bullet and provide for reviving the government banks or should he keep this on hold and push public money directly into new infrastructure projects? The first option compromises short-term growth, the latter medium-term growth.

Mr Jaitley has to also choose between living with the unwise commitment to increase government pay and pension by 23.5 per cent or enhancing social protection and rural income support. The former helps the middle class, the latter the poor.

Another choice is between theory and practice. Should he stick to a fiscal deficit target of 3.5 per cent of GDP for 2016-17; increase tax revenue by hiking the rate of service tax; levy capital gains tax on equity and income-tax on dividends or should he play to the God of all things — the lack-lustre stock market — and keep tax rates low but blow out the fiscal deficit target?

Unfortunately, much as he may want, the finance minister cannot play supermom and please all. One hopes that he will bite the bullet and set about capitalising government banks — the engines of growth. Hopefully he will also set in motion fundamental reform in government banks. One extreme but useful step could be to explore support funding from the International Monetary Fund in the event of domestic or external shocks — like another drought or a sharp increase in oil prices — disrupt his plans.

The government of Gujarat has shown the way and the President’s address hit the right notes on safeguarding the allocation for social protection, rural income support and human development. The middle class may have to wait for their salary bonanza till growth-driven revenue buoyancy enhances the fiscal space available for such largesse.

To be cannily pragmatic or rigidly correct

The supermom character of the finance minister should kick-in whilst managing the trade-off between retention of the fiscal deficit target, tax revenue enhancement and managing stock market expectations. This is where the finance minister’s judgment will be key in doing something for everyone without disappointing all.

Our friendly Jats in Haryana have made their point with characteristic aplomb. By summarily cutting off the supply of water to Delhi they established a clear quid pro quo between water for Delhi in return for reserved government jobs for themselves. They seem to have won. Mr Jaitley could learn from their earthy pragmatism.

Who said that supermoms have an easy life?

Jaitley in parliament

Finance Minister Arun Jaitley in  Parliament: Adept at keeping hopes alive. Photo credit: oneindia.com

Adapted from the authors article in Asian Age February 26, 2015 http://www.asianage.com/columnists/finance-minister-or-supermom-261

Indian budget in the eye of a fiscal storm

Finance minister Arun Jaitley’s third Budget signals the mid-point of this government’s tenure till 2019. At the best of times, the honeymoon period would have ended by now.

jaitley jostled

Photo credit: in.news.yahoo.com

But it is unfortunate that the FM has to face a perfect storm of snowballing, fiscal liabilities in public sector banks; drought induced low agricultural productivity; international economic head winds; the additional cost of securing India in an increasingly insecure world and the consequences of populism- primarily the wholly unnecessary increase of 23 percent in government pay and pensions and the outcome of delayed reforms in subsidy.

Running out of fiscal resources

In comparison, the government’s budget kitty is woefully inadequate even without meeting the long standing demand for spending more on health and education; developing infrastructure; boosting rural incomes; extending the patchy system of social protection and enhancing long neglected defence preparedness.

cash box

Photo credit: Dreamstime.com

Consider that the total annual capital budget of the Union government last year was just Rs 2.4 lakh crore (just 1.7 percent of GDP). State Governments spend a similar amount. But public investment at just 3.4 percent of GDP does not compare well with the thumb rule for developing countries of at least 8 percent of GDP especially when you are also running a fiscal deficit of 4 percent also in the Union budget alone.

The mess in government banks

More worryingly, even this meagre public investment may not actually be possible if the fiscal mess emanating from public sector banks is to managed. Loans worth Rs 3.5 lakh crore in government owned banks are acknowledged as non performing (the borrowers have defaulted on repayments). Some provisioning for writing off these loans has been done but not enough.

The real risk is that a whopping Rs 2.7 lakh crore of loans have been dressed up by “restructuring” them. In essence rolling over non-performing loans (NPA) so that they exit the NPA classification. But whether the favoured borrowers can support future repayments is unclear. The RBI has come down heavily on such practices and directed banks to start provisioning against all stressed assets. Hence the spate of losses recorded in the quarter ending December 2015 by government owned banks.

Another worry is that government banks will need an additional Rs 1.8 lakh crore of equity infusion to comply with the Basel III capital adequacy norms. This takes the total capital requirement of government banks to Rs 6 lakh crores- just under 4.5 percent of GDP.

Even if the entire capital budget of the government is diverted for re-capitalizing government banks — it will still take two to three years before they get a healthy balance sheet. And what is there to stop the cycle of irresponsible lending from being repeated? After all, these non-performing assets were built up over the past several years. But none of the top honchos of these banks — present or past — have been called to account for this colossal deception.

Poor credibility of corporate governance in government banks

ATM

Jugaad trumps systems; Photo credit: Alamy.com

Today, government bank equity is deeply discounted. The credibility of corporate governance in government banks has been dented. Worse still, there is no clear path for restoring stability. The direction preferred by the government is to retain the governance architecture of government owned banks with notional changes to enhance bank autonomy. Privatization of select government banks – a sure mood lifter for domestic and international investor community- has never been a preferred policy option.

Government ownership has benefits. For one, it notionally reassures depositors that their money is safe. Possibly this is why there is no run on deposits in government banks, unlike what was seen in Greece recently. Depositors and bond holders view government banks through the filter of sovereign credit. It helps that India has an impeccable record on meeting all its financial commitments.

But one trigger, which could escalate the financial risk sharply could be if oil prices start firming up subsequent to the production freezing agreements between Saudi Arabia, Russia and other top oil producers. This will stoke inflation in India; keep domestic interest rates high, thereby impacting investment and worsen the current account deficit. Add to this that sharply reduced public investment- a consequence of possible diversion of capital to clean the balance sheets of government banks, will also impact growth, jobs and incomes.

The poisoned chalice of trade offs

Government has a poisoned chalice it needs to sip from. If it brushes deep, bank restructuring under the carpet, it can postpone the day of reckoning- but only at significant medium term economic cost. A broken government banking system, which caters to 70 percent of banking needs, cannot sustain rapid private sector growth.

One option for maintaining fiscal stability, is for the government to access multilateral support from the International Monetary Fund (IMF) for restructuring government banks. IMF support reassures investors because it comes with a programme of structural and governance reform, including broad basing the share-holding of banks to non-government investors; professionalizing their boards and embedding oversight mechanisms to insulate them from succumbing to politically motivated loan melas or dodgy, private projects.

Government should shed the muscular stance

The down side is that going cap-in-hand to the IMF does not fit the muscular India story, which is the leitmotif of the BJP government. The BJP will worry that it will have negative political consequences in the forthcoming state elections in West Bengal, Assam, Tamil Nadu and next year in Uttar Pradesh (UP). This is true. But none of these states offer credible political gains for the BJP in any case, except UP. The muscular approach can be abandoned without much grief. Its marginal utility is diminishing and reduced dividends are already visible.

One hopes that the government’s brand managers are reading the tea leaves correctly. This is not the time for soaring rhetoric or proclaiming achievements loudly. Far better to adopt a humble posture, point to the depressing state of the world and outline an agenda for dealing with adverse circumstances.

humble jaitley

The FM can be charming if he tries. Photo credit: freepressjournal.in

Three big steps out of the fiscal mess

First Mr. Jaitley must guard against 2016 becoming India’s 2008 “Lehman Brothers” moment. Lehman Brothers was a global financial services firm that filed for bankruptcy protection. This sparked off a domino effect which exposed deep financial irregularities across the banking sector. It also triggered the Occupy Wall Street movement. Ordinary citizens, disgusted by the extent of malfeasance in the financial world, took New York by storm and shut down the financial district. At the best of times, Indians are suspicious of big business and are quick to come out on the streets in protest. This is not the time to risk an “Occupy Dalal Street movement”.

Government must regain credibility by coming out strongly against all those who have connived to build up this huge quantum of non- performing loans — bank managers who were in decision-making roles, large corporate borrowers and those within the political establishment who may have turned a blind eye to such maladministration. Mr. Jaitley must also share publicly how deep is the rot and what steps the government proposes to manage the fall out.

Second, government should take this opportunity and opt for only a “holding budget” for 2016-17 — an accounting exercise to rationalize and consolidate past initiatives. The bottom line is to insulate income support for the poor and allocations for agricultural production from the fiscal mayhem. Health, drinking water and sanitation and education allocations should be held at 2014-15 levels relative to projected GDP.

Finally, the government must increase gross tax collection over the next two years from the low of 10 percent in 2014-15 to 12 percent of GDP- last achieved in 2007-08. The GDP growth projections of 7.5 percent lack credibility when triangulated with the ground realities. Lower growth will impact tax revenues negatively. Services tax is a progressive tax, which primarily affects the well off. Raising the rate by 2 percentage points could generate an additional Rs 30,000 crore. Taxing capital gains from the sale of equity and the receipt of dividend beyond a threshold level, is another option for reducing income inequality and plugging a big hole in the tax net.

Government already spends more than it earns on revenue expenditure. We still run a revenue deficit of nearly 3 percent of GDP, which we fund by taking loans. Hence, the increasing burden of interest payment. Trade-offs will have to be made if the unwise commitment – amounting to Rs 100,000 crore – on the 7th Pay Commission recommendation is implemented.

So are we in the eye of the storm? And could we be on the cusp of a potential financial emergency? We should act before a flash point triggers this eventuality. A modest budget for 2016-17, enhancing tax collection by selectively increasing the effective tax rates and sharply focused allocations for value enhancing public expenditure, is the only way out of this mess.

storm

A storm brews around Rajpath, New Delhi. Photo credit: gizmodo.com

Adapted from the authors article in Swarjyamag February 24, 2015 http://swarajyamag.com/economy/indian-budget-in-the-eye-of-a-fiscal-storm

President Hollande’s musings on India

You have to hand it to the French. They look effortlessly stylish- think Christine Lagarde, the French Managing Director of the IMF.

lagarde

Even when they wear plain work clothes they come encased in an inherited frisson of elegance- the 1789 French revolution, it seems,  diffused aristocratic elegance more evenly rather than destroying it all together, as in Russia. But scratch the coiffed surface and an au natural savage surfaces, readily comfortable with the oddities of humanity existence – cigarette smoke, food smells, passions and emotions. This being the one real French connecion with India.

It is not surprising them that art, fashion and spiritualism constitute areas of instant rapport between Indian and France.

Amrita sher gill

Indian artists- Amrita Sher Gill in the early part of the 20th century; Fashion and art ace photographer Prabudda Dasgupta towards the latter half;

Prabuddha Dasgupta

and current enfant terrible of the fashion world- Manish Arora all made Paris their karambhoomi (home away from home)

manish arora

But art and fashion were far from President Hollande’s objectives. So what were the  first impressions from his three day, Indian safari

Hollande 1AIt must have struck him that there is no easy familiarity between the French and Indians. It goes beyond the language barrier. At the heart of the difference is the romantic, liberalism of the French, naively combined with a deep allegiance to preserving their culture. In India, traditional ways are so deep a social barrier for two thirds of Indians that the great hope is for rapid urbanization and industrialization to erode the embedded biases against women, the poor and the marginalized. Disruption rather than continuity is the order of the day in India today.

Too shy to Bhangra?

This difference showed, he must have ruefully thought. There was no spontaneous affection between the visiting French and the Indian people, unlike, he ruefully pondered, what was powerfully on display when Bill Clinton danced the Ghoomer with Haryanvi villagers in 2000. Nor did the French capture hearts and minds, in the manner Michelle Obama did last year, with her ready laugh and radiating warmth.

French President in Chandigarh

The French are formal people and their Presidents do not go around grabbing babies or unknown dancers. The familiarity never extends beyond a glacial airbrush, double kiss. Elegance, grace and exclusive glamour is the French game and it was played well, in Delhi, as President Hollande supped with the beautiful people.

Beautiful people

But the President banished such negative thoughts as he slipped off his shoes- hopefully made in France, unlike his spectacles. Sinking into the warm familiarity of his customized Airbus A 300-200, whilst reaching languidly for his favorite seafood aperitif and a well-deserved glass of French wine, he rooted around for “learnings from India” as all diligent leaders must.

Indian state 2

The brooding edifice of the Indian state

His overriding emotion was of envy at how solidly the State is in control in India and how deeply stabilizing is the role of our elites. Delhi, a city state of 10 million people was effortlessly turned into a fortress by 60,000 security personnel. It worked without a hitch. Compare this with Paris, where even his delegation may have had difficulty in getting a cab back home on arrival, because taxi drivers were on strike against the ubiquitous Uber’s entry into France. If only, the President must have thought, I had more Indians in France, things would work better.

Illusions are the reality

Second, he brooded over the new Indian Rope Trick by which diversity and tradition are kept alive as a fond memory- a static picture in the head- whilst the real life incentives are all to become part of a national mainstream. The colorful floats, the folk dancers and the serried rows of soldiers- all marching in age old regimental silos in a manner reminiscent of 19th century India- all serve to highlight that they have transcended traditional cleavages. That their nationalism is not about one dress; one food; one drink, one language. It is something deeper and visceral. The President shook his head. Such flippant, multi leveled, varied allegiances to social norms would never do in France, where one culture is the leitmotiv of nationalism.

Social stability and change

Third, President Hollande mulled over the resilience of the feudal order in India, albeit mutated away from ancient entitlements to merit based access to State resources, with family and clan networks, patrimony and inherited wealth as the currency of convening power. Quite like Africa he must have thought.

He smiled at the contrast between the muffler clad, “peoples”, Chief Minister of Delhi, Arvind Kejriwal, with his socks insolently peeking through his open sandals loping around to be noticed at the Indian Presidents party and the haughty power exuded by the powder blue, baby soft, finely embroidered Kashmiri shawl, wrapped around a seated Finance Minister Arun Jaitley, like an impregnable cloak of influence.

Give me some air please

Fourth, he coughed as he felt the the smog and pollution which had literally taken his breath away. Despite the chirpy commentary on Republic Day, which ignored the oppressive mist and spoke joyfully of the bright skies, he could smell the smog through the glass screen and feel one’s throat constricting. Nuclear power, the President thought, is what India needs and the French can provide.

Money, money, money…

Fifth, the business potential warmed President Hollande’s heart. But could French business, used to high margin deals and troubled with low cash reserves work in the price sensitive Indian markets. Indians worry about the cost of fuel whilst buying a Porsche. How, the President, thought, can I make French business nimble and lean like the Chinese or the cash flush Japanese who casually drop down investment in dollops of $10 billion. How to shake the French industrial aristocracy out of their complacence?

Instant graphics

Sixth, Hollande reflected over how good Indians were at escaping into selective retention- their movies, our politics, our social norms all pay obeisance to this particular facility. They have retained Gandhijis spectacles-on top of a tractor float, as a symbol but discarded the topi; simplicity; erudition and the open windows of his mind. They air brush reality at will. Goa, it seems from their float, is a paradise of saree clad Indians dancing decorously to undistinguished folk music. But is that is the culture more than 1 million Indians and foreigners go to see over Christmas and New Year! What about the week long carnival of eclectic music; 24X7 partying; food for the mind, soul and spirit and sociable company right there on the redolent beaches! How lucky India is, Hollande thought. If only he could similarly airbrush away France’s social upheavals with just one master stroke of graphics!

The soothing ambience of his air-home away from home, relaxed the President. His beguiling, spaniel eyes drooped in weariness. His horn rimmed, foreign made spectacles slipped off. As he turned over he surrendered himself to the muted, distant roar of a Lion electronically mixed into the soothing, lapping sounds of the waters of a swachh Ganga- must build bridges around water was his last thought.

fly past

Prime Minister Modi smiles whilst President Hollande strains to find a French aircraft in the fly past finale- Republic Day, New Delhi, India, January 26, 2016

1148 words

Sarkari pay: Too much love

A picture is worth a thousand words. Even the Oxford dictionary has conceded as much by admitting the emoji “tears of joy” as the first ever “pic-ord” which sums up the prevailing worldwide emotion of relief at even small mercies.

emoji-tears_3502911b

This emoji must have resonated with the 10 million employees and pensioners of the Union government as they read the generally beneficent recommendations of the Seventh Pay Commission presented to Union finance minister Arun Jaitley this week.

 

Coming as it does against the disturbing backdrop of faujis (Army veterans) having to resort to public agitations to get their due, the commission’s key objective seems to have been to soothe jangled sarkari nerves by adopting equity as the leitmotif of its recommendations.

 

Even recommending erosion of the pay “edge” enjoyed by the Indian Administrative Service (IAS) by making it available to all other Group A services, fits in well with this axiom. It mollifies the other cadres whilst giving ample opportunity to the IAS to retain its predominance by other means. After all they are the ones who write the rules today.

 Equity – yes! but for whom?

But equity is an expansive concept spanning generations. How equitable, for example, are the recommendations versus citizens? Citizens have never been considered “stakeholders” by any of the commissions till now.

 

Prime Minister Narendra Modi, however, has different ideas. He wants IAS officers to go beyond the files and the political intermediaries who crowd around key government employees and to consult directly with people to know the truth. Incidentally, this was why district collectors in earlier times went on extensive tours and camped in villages. One wishes that the Commission had also followed this practice of consulting the intended beneficiaries of public services, instead of limiting consultations to only government employees.

Fiscal impact to crowd out public investment, as usual 

The Commission assesses the direct fiscal impact of its recommendations at `1 lakh crore ($15.5 billion) per year on pay, allowances and pension for 10 million employees and pensioners. The unassessed indirect impact will be at least thrice this amount, since the ripple effect raises all public sector employees’ wages in state and local governments and those in the state-owned enterprises who number 12 million, excluding pensioners.

 

The question that 220 million households — comprising the rest of India who do not partake of this public bounty — are likely to ask is why should each of them pay an additional `4,500 every year to finance this splurge?

Income Tax

Government pay is already indexed 100 per cent to inflation and pension is similarly indexed substantially. Any increase in the “real” pay — after accounting for inflation — needs to be justified against additional or better work performed. There is no evidence of any such link compelling the proposed enhancements.

 

Most importantly, the additional burden is ill-timed. It is mere statistical jugglery to justify the fiscal burden (0.65 per cent of GDP) by pleading that it is less than the burden (0.77 per cent of GDP) imposed by the preceding Sixth Pay Commission a decade ago. Another argument is that the prospects for economic growth are bright, making the additional burden manageable. This is iffy reasoning.

 

The fiscal challenges faced by the government today are far more daunting than in 2009, when there were expectations of a quick rebound in world economic growth. Consider that the aggregate, cumulative loss of state electricity boards alone is around `3 lakh crores ($45.5 billion) which needs to be dealt with to improve electricity supply. Union minister of state for power, coal, new and renewable energy Piyush Goyal has taken a hard stand against the Union government bearing the burden without basic reform within these entities. This is the right way to go. If subsidies for the poor need to be narrowly targeted, so must “real” public sector salary enhancements, and that too only to reward the few performers in the vast government machinery and not spread equitably like largesse to all.

Link public pay enhancement to higher than targeted GDP growth 

Given this background prudence dictates that even if the recommendations are accepted in-principle, actual accrual and pay out of these amounts should be graduated. An option to link pay enhancements with performance is to link their payout to GDP growth which is a specific, measurable, assignable, realistic, time-related specific, measurable, assignable, realistic, time-related (SMART) metric for aggregate government performance.

 

One obvious option is to use the existing proportion of emoluments to GDP of 2.77 per cent. This can be thought of as the “share” of Union government employees in GDP. A similar share can be justified for distribution of the recommended pay enhancements out of the actual additional value created above the GDP growth target.

 

Using this principle, for every 0.5 per cent of growth above the target (say 7.5 per cent instead of 7 per cent), the amount available in that year would be around `30,000 crore. This is less than one third of the assessed fiscal impact of the Commission’s recommendations. Once sufficient “additional” growth has been achieved — say over the next three years — the recommendations can kick in. Alternatively the implementation can be staggered annually. This forces government to perform before increasing the “real” pay of its employees. From the citizens’ point of view this is akin to hiring an auto rickshaw. You only pay after the driver has brought you to your destination — not in advance.

ice cream

No ice cream without results

There is more evidence of excessive generosity. An assured annual increment of 3 per cent seems too generous for an inflation-indexed salary even though it is calculated only on the basic pay. Unearned annual increments should not be more than 1 per cent at best.

Fauji “pension edge” levelled yet again

The concern with equity has driven the commission to extend the principle of One Rank One Pension — granted by the government to the armed forces just prior to the submission of the Commission’s report — to civilians also. This is akin to compounding an earlier mistake. Levelling the armed forces’ and civilian pensions means taking away the “pension edge” which was so tenaciously fought for and won by the armed forces. The downside is that it may spark off a second round of fauji gussa (anger).

veterans

The Commission has done stellar work in sharing employee demographics for the first time. It has also laboriously listed an incredible 196 different allowances and worked meticulously to simplify and rationalise them by recommending termination of 52 and clubbing 36 others into other allowances. That still leaves 108 allowances to be dealt with later. The government would do well to heed the advice that fuller and more transparent budgeting of allowances is necessary.

 

But pay commissions, despite their expansive mandates, are not really expected to create a new architecture for public service. Their job is to shut the maximum number of mouths with the least amount of cash. The Justice Mathur Commission could have done worse. Thank God for small mercies!

7th PC

Adapted from the authors article in the Asian Age November 22, 2015  http://www.asianage.com/columnists/it-s-rip-127

 

Jaitley’s Maiden Budget Mujra

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“Mujra”, the traditional PakIndia dance of seduction honed in glittering Lahore, immortalized by the ever beautiful, dusky Rekha in Umrao Jan, a classic film by our very own desi, aristocrat, designer Muzaffar Ali. Mujra is a dance of deception. The idea is for the danseuse to so mesmerize the viewers, that their head gets delinked from their heart and money slips through their loose fingers, like a snake escaping from fire.

All Finance Ministers have to be expert Mujra dancers. This will not be difficult for Arun Jaitley. First, he is a lawyer and those of his ilk are masters of deception. They apply the art of “need to know” whilst arguing in court. The need being to win the case of course. Second, Jaitley is a Panjabi. Amritsar, just an hour away from Lahore, rejected him for Patiala Royalty. But all Panjabis, on both sides of the border, know that when Royalty comes calling, others have to step aside.

Finance Ministers stamp their personalities on the speech they make on budget day in Parliament. Only the Mujra of the speech is different. The budget proposals have remained much the same since the Union Jack made way for our Tiranga in “our tryst with destiny”.

Manmohan Singh radiated “good intentions” and technical competence but was as dry as the Gobi desert

Yashwant Sinha, a babu, was all technical arguments and feigned “savoir faire”, as babus are when they stop being babus. Technically correct, but forgettable.

Chidambaram was Tamilian guile and sophistication coupled with brains sharper than a pair of “Shun” knives. But off-putting with his so very deliberate speech, which seemed consciously slowed, to enable the rest of the World to catch up with him.

Jaitley is different. In his latest avatar he is a cuddly as a Panda and larger now than a Sumo wrestler. But his personality radiates from his heart, which is as solidly Panjabi, as Amritsari Fish. His style is argumentative erudition bordering on the pedantic and mildly adversarial. He needs to watch that. Budget session is all about consensus, not contest.

But don’t be fooled by the style, the special smile, the sensuous, sliding look through the sides of the eye or the fluttering hands of the Mujra dancer. Look past the flashing diamonds on display. Look closely at the core service being offered and then and only then, make up your mind to loosen your purse.

Here are seven core indicators to signal whether or not the Finance Minister is serving you well.

First, has be budgeted for a decrease or an increase of the Fiscal Deficit over the FY 2013-14 budget? Forget the 2014-15 interim budget presented by the UPA it was worse than Mujra. It was pure American “smoke and mirrors” designed to set impossible benchmarks for the next government, which UPA was sure would not be them.

The Fiscal Deficit in India is the difference between the total income of the government plus recoveries of loans and what it intends to spend, loan or gift over the next year. It is financed by borrowing at between 8 to 9% per annum. If it is being spent on the salary of an absent policeman or a sleeping babu, there is no way the government can get a matching “economic return” on that amount. So be very wary if the Fiscal Deficit is increasing in nominal terms over 2013-14. If it remains at the same “nominal “level you are winning because inflation has eaten away 8% of last years value. The Fiscal Deficit in 2013-14 was (hold your breath) Rs 5,24,530 crores or Rs 5,254 billion.

Do not be fooled by sops like a reduction in the excise duty for automobiles or enhanced allowance for setting off EMIs against Income Tax on loans taken for buying property. Do not rejoice even if the Income Tax Free limit is raised. Inflation can eat away these “notional” gains faster than water flows through Delhi’s clogged drains.

If you are not a senior or a super-senior citizen and earn Rs 600,000 a year pre-tax, an 8% inflation eats away Rs 48,000/- of your income. Compare this with “Mujra” gains FMs tend to give:

  1. A 5% point reduction on the excise duty for a car worth Rs 600,000 comes to only Rs 6,000 per year over the five year life of the car.
  2. The FM would need to raise the “free of income tax” limit from Rs 200,000 to Rs 300,000 and similarly raise the upper limit of the band in which you pay Income Tax at 10% above the free limit, from Rs 500,000 to Rs 600,000, just to neutralise the likely impact of inflation on your purchasing power. A change in Income Tax rates on this scale is very unlikely to happen.

Of course, if you are one of the 18 million lucky ones, working for the government, or if you are one of the estimated 10 million government pensioners, you need not bother about inflation. The government meekly and automatically adjusts babu salaries (including allowances) and pensions, twice a year, for inflation, which ironically, is caused by the loose fiscal policies; inefficient expenditure decisions and corruption within the government.  

If you are not a babu and still under the age of 28, try and become a babu to get the “life-long” immunity from inflation. It’s a one-shot vaccination. If you have crossed that age limit, your only option is to not spend/save at least 8% of your monthly income because you will need it later in the year to cope with rising prices.

This blog intends to discuss one “citizen budget indicator” a day till July 9, 2014 so watch this “Mujra” space closely. 

The first indicator is the budgeted estimate for Fiscal Deficit: (1) Rs 5000 billion. Rating: Outstanding (2) Rs 5300 billion. Rating: Good (3) Rs 5700 billion or more: Rating: Poor              

 

  

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