governance, political economy, institutional development and economic regulation

Posts tagged ‘Prime Minister Modi’

Deep freezing India

deep_freezer

Terminally ill people are opting to deep freeze their body hoping for a cure some day which would make them come miraculously alive and be well. But would you opt to temporarily freeze 85 per cent of your bodily functions merely because you cannot compete with the explosive, short burst speed of Usain Bolt but are running well ahead of Haile Gebresellaise  – the Ethiopian long distance champ? Not likely, given the huge risks and the meagre reward.

Shockingly, the Government of India chose to do just that on November 8, by de-legalising notes of Rs 500 and Rs 1,000, which comprise 85 per cent of the Indian currency in circulation. This deep froze the world’s third (or fourth?) largest economy which was ticking over happily at a growth rate of just under 7 percent. It also irreversibly, hit the sentiments and the pockets of its most ardent supporters – the 400 million citizens who comprise the middle class earning between Rs 2.5 to 50 lakhs (US$ 3,500 to 73,500) per year.

Exit “old”black money enter “new” black money

If the government’s actual objective was to destroy black money, estimated at 25% of the US$ 2 trillion economy, think again. A widely dispersed “new black money” machine has already mushroomed, exchanging the frozen Rs 500 and Rs 1,000 notes into new legal tender at a cost of between 20 to 40 per cent of their face value. Many people prefer this route rather than declare their hoarded stocks and lose 33 per cent to tax -if the amount is the current year’s income- or 100 per cent as tax and penalty if it is undeclared income from previous years.

But not all sellers are owners of undeclared wealth. Many are ordinary people who got caught short on cash and are desperate to buy things they need — medicines, food or pay for transport to get home. The banks are inaccessible for exchanging currency and ATMs are by and large not operative. This mess will take at least till the end of the year to be straightened out.

In the meantime, scores of small establishments and workers will accumulate debts to pay daily expenses while the economy loses potential value added over this period. The direct economic cost for a two month deep freeze is at least 1% of GDP foregone. The loss of individual credibility from contracts not honoured because of a cash shortage; loss of savings or atleast the interest on it; the permanent shut down of small businesses due to bankruptcy and the consequential loss of self-respect even for hard working people. is far more permanent and immpossible to tabulate.

No to Black Money – but focus on its sources. 

gold

Who would oppose hunkering down systematically on black money? Surely not more than 15 percent of the “black” wealth  (undeclared to tax) is held as cash in Indin Rupees mostly to transact, not as store of wealth. Much of it is held abroad; invested in real estate bought partly in cash to save tax and invested in gold and diamonds. Going after the cash component, whilst neglecting the other “black” assets, is like impounding the fuel in the tank of a highly polluting car, in the hope it will reduce smog. So long as the car exists it will  find the fuel; smog will result and new black money will be generated.

Prime Minister Narendra Modi has targeted election financing and corruption as the root of the black economy. But we are a long way from doing anything substantive. Even the accounts of political parties are not yet open to public scrutiny under the Right to Information Act. As for bureaucratic corruption it is a long haul with patient , deep surgery needed to unclog the pipes of good governance. There are no quick wins here.

High minded objective but low tech implementation

The declared objective is noble. But did we choose the optimum implementation mechanism? What have we achieved by the secrecy; the haste and the resulting action without adequate preparation – all of which are reminiscent of the anti hoarding drives against food grain traders of yore. Why not, instead, have given adequate notice of the government’s intention to crack down, specifying a future date? The efficacy of the step would not have been diluted. If anything, it would have been enhanced. Brandishing a big stick is better than using it.

stick

A notice period would have allowed better logistics to be in place — sufficient new notes; working ATMs and mobile exchange units for the unbanked. Ordinary people could have been educated and prepared for accessing the new currency. There was nothing to stop the tax authorities and the police from clamping down, during the notice period, on the activities of potential black money aggregators to dissuade leakages — just as they are doing today. After all social media and electronic surveillance has vastly increased the powers of government to monitor the activities of citizens.

Leakages are inevitable in any currency exchange programme. Around 53 per cent of our 400 million bank accounts are dormant. Many may be multiple or “benami” accounts of the same person. These accounts are viable vehicles to launder black money by paying the nominal holder of the account a small fee.

The government says it will not scrutinise deposits up to Rs 2.5 lakhs in each account. But even an average deposit of Rs 40,000 in each of the 200 million dormant accounts can convert Rs 8 trillion of black money in old notes into temporarily white money, in new notes. Other avenues are for small businesses to deposit their old notes as an advance in the accounts of their suppliers. Employers can similarly deposit advance salaries in the accounts of their employees.

The math of who holds how much currency

Thirty per cent of the Rs 14.5 trillion currency in the high denomination notes is held legitimately in banks and other government agencies as working capital. Another 30 per cent could be the legitimate savings in cash of around 170 million households, after excluding the poor households, and the cash working capital of the 10 million registered businesses in India.

This leaves 40 per cent, or Rs 6 trillion, as the potentially unaccounted wealth held as cash. The expectation is that the “black money” component, held in cash, will not be deposited for exchange because the depositors would then become liable to tax.  But don’t hold your breath — it would be very surprising if the amount extinguished is more than just 15 per cent or Rs 1 trillion. After all, the government’s tax amnesty scheme which closed in September 2016 required a sacrifice of 45 per cent of the amount as tax and penalty. It netted just Rs 0.65 trillion in undeclared money. In the late 1970s, when gold was smuggled into India because legal import was prohibited, a small proportion was regularly and ritually “caught” and confiscated by the customs authorities — a “nazarana” for retaining the “izzat” of the “sarkar”.

Much the same may happen now. Around Rs 1 trillion may fail to be deposited in the banks. This is the amount the RBI can write off from its liabilities, enabling the government to declare victory, while individual hoarders of black money take a haircut. With inflation at historic lows already, the two month economic deep freeze will push it down even further. The windfall in RBI resources could be useful in FY 2017-18 to boost the economy, which would still be reeling from the internal shock and disruption. But caution on stoking inflation is fiscally and politically advisable.

Fix whats broken  

Recapitalising public sector banks and waiving the debt burden of state governments can give decent economic returns if it kickstarts investment in projects or if it generates the necessary political capital to implement GST on schedule. Using some of this largesse to reduce the tax rate for low and middle income earners in FY 2017-18, particularly for senior citizens, may compensate them for the pain unnecessarily inflicted on them. Some significant salve is necessary to restore the credibility of the government as an efficient protector of the aam aadmi. There are two lesson from the mess. First, never fix what isn’t broken? Second, think before you deep freeze tomorrow’s lunch.

Adapted from the authors article in Asian Age, November 20, 2016 http://www.asianage.com/opinion/columnists/191116/a-noble-objective-but-the-execution-is-faulty.html

 

Disaster sans democracy in Uttarakhand

harish-rawat 2

Photo credit: NDTV.com: Harish Rawat – the unfortunate Congress Chief Minister, sacked by the President of India for failing to fulfill his constitutional mandate to get the budget approved

Nothing illustrates the cost of wantonly discarding democracy and handing over the government to unelected officials (Governor) than the case of Uttarakhand. To recap the turn of events , the President of India (read the BJP Union government) was pleased to take control of Uttarakhand on March 27, 2016, by invoking constitutionally vested emergency powers available to it if an elected state government fails to discharge its constitutional mandate.

The occasion for doing so was an allegation, by the Bharatiya Janata Party’s members of the Legislative Assembly, who are in a minority, that the Budget for 2016-17 was not approved by a majority vote in March, as required, to keep public finances running in the new year — April onwards. The ousted Congess government strongly refuted the allegation and approached the Uttarakhand high court, in appeal against the Presidents order. On March 28, a single judge of the Uttrakhand rubbished the President’s order. The Union government filed for revision of this order. A division bench however confirmed on April 21 that Presidents rule was unwarranted. The matter is now in the Supreme Court on appeal against the high court order. A ruling is expected this week but early indications are that the Court leans towards asking the ousted government to prove its majority on the floor of the Legislative Assembly, as is the norm and which aligns with what the Uttarakhand Governor had directed in the first place, once the dispute arose.

The absence of political leadership shows

But forget the legalese. The fact is that Uttarakhand has been without an elected government to take charge and be accountable for over a month now. It is fashionable for citizens to blame politicians for all the ills in the country. Unfortunately, the official machinery has failed miserably to showcase its strengths by managing the ongoing forest fire disaster. This illustrates that the “iron frame” of the bureaucracy is now so rusted that it fails to be proactive even when there are no visible political constraints on them.

Jhoom an age old practice

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The people of Uttarakhand are no strangers to forest fires. Indeed, this writer has had out of control fires in previous years licking the boundary of his home and it has happened again this year. Just like in California, where habitations co-exist with forests, lighting fires can be property and life threatening. In India, the foresters and villagers resort to it as a low-cost, low-labour intensive practice to clear the fallen pine needles and accumulated undergrowth so that fresh grass sprouts from underneath for cattle to graze on. Till not so very long ago jhoom (slash and burn) cultivation — regularly setting fire to land and leaving it fallow to regenerate — was common practice. It is still followed in the Northeast.

The problem arises when local fires are poorly managed and they grow out of control and ravage vulnerable people (the old, the differently abled and the very young), homes, cattle, wildlife and indeed trees, none of whom can get away quickly.

Lack of advance red alerts 

Unfortunately, this year was different in a manner which people never recognised. The lack of rain created tinder box conditions. A more proactive bureaucracy would have sounded the red alert early, launched a communications campaign to sensitise the public against the danger, set up a war room fed by daily updates via sms and Facebook and designated local champions to lead the effort and build public opinion against jhoom.

chandi pd bhatt

Photo credit: indiatogether.org: C.P.Bhatt- Uttarakhand’s pragmatic Ecologist and community leader

Remember how Chandi Prasad Bhatt- alarmed at deforestation on an epic scale in the 1970s- a major cause for the Alakananda floods at that time – galvanised the women of Garhwal to launch the “Chipko Movement” (literally hugging trees) to guard against the rampant logging? He showed it is possible to build strong public opinion if people’s self-interest is shown to be aligned with a public cause. Managing perule better is a similar public interest issue.

Short sighted programme implementation

A previous government programme, which could have tackled the root of the problem, aimed at buying perule (fallen pine leaves) to incentivise villagers to collect them, rather than setting them on fire. Unfortunately it has long fallen into diuse. Villagers say it died because the amounts offered by the government were unattractive. Foresters say the villagers are too lazy to work and look for easy earnings and viable options for recycling perule were never developed. Also viable methods for recycling perule by compacting it into and selling, or the villagers themselves using it, as fire wood were never commercialised. Lack of sustained interest and lack of public finance effectively buried the programme even though it could have diluted the extent of the current ecological disaster by reducing the vulnerability of forests to catch fire.

Preventing disasters is nobodys business

But the real problem is that governments routinely under-spend on preventing disasters in comparison to the potential loss. Also, the tendency is to buy new equipment to manage disasters once they happen, rather than evolve low-cost, local options to prevent them. Had Uttarakhand done so, it would not be facing the terrible social and environmental costs of doing nothing.

A more technically savvy bureaucracy could have redesigned the old perule (pine needles) purchase programme to make it more attractive. But none of this happened. Minus a chief minister, the bureaucracy was a leaderless army. Local administrations headed by the district magistrate became a dead letter box into which the secretariat heavies dutifully dumped warnings and advice, sans funds, for guarding against fires.

This is not to say that the Uttarakhand bureaucracy was as callous as the Supreme Court described Union government bureaucrats to be. Whilst rapping them for not bringing forward evidenced solutions to reduce air pollution levels in Delhi, the court said: “Why can’t they come up with some research and solutions? You people are just sipping coffee and doing nothing”.

tea 2

photo credit: pinintrest.com: Delicately sipping tea – the bureaucrats relaxant.

What is true for Delhi is not necessarily true of state-level bureaucracies, which have responded magnificently, in the recent past, to disasters in Gujarat, Orissa, Andhra Pradesh and Tamil Nadu. But they all had a chief minister directing the coordinated effort that relief requires.

The key assurance an official seeks in an emergency is that his/her actions, taken in public interest, will be assessed not on the basis of how closely the regulations were followed, but on the context in which decisions were taken, and their effectiveness, in solving the problems disasters throw up.

This type of reassurance can only be credibly given by a duly elected chief minister. In today’s context, it takes a politician even to make the trains run on time! The colonial model, where the officials led and politicians merely presided, is past and buried.

Local political leadership is key 

Sans a chief minister in Dehradun, it is Delhi which is sending money, choppers and the Army to deal with the disaster. But only elected governments at the state and the local level can engage continuously to prevent disasters and effectively manage those that occur.

But the last thing to be wished for, in a disaster area, is a government led by officials with no effective political oversight. Even a bad chief minister is better than no chief minister at all. One hopes the Supreme Court will take note and end Uttarakhand’s misery.

 

CJI Thakur

Photo credit: Zeenews.comChief Justice of India, T.S. Thakar breaks down whilst sharing the misery of a judge’s life with Prime Minister Modi- the government promised to do better at staffing and funding the justice system. 

Adapted from the authors article in Asian Age on May 3, 2015; http://www.asianage.com/columnists/fuelling-fire-979

 

Prime Minister Modi says Ni Hou

Ni Hou

(photo credit: india.com)

Arun Shourie- minister in the earlier NDA government and senior BJP leader was being strategically alarmist when he went public on May 1 warning Prime Minister Modi against succumbing to the seductive spell, which the Chinese put on Pandit Nehru (India’s first Prime Minister) eagerly accepting his diplomatic largesse and support whilst remaining firm on giving nothing in return, which was not expressly bargained for and agreed.

Mr. Shourie has a flair for the dramatic and an uncanny ability to be evocative in his speech, sweetly hitting hardest, where it hurts the most. The Chinese “betrayal” of Pandit Nehru’s “brotherly” love by invading India in 1962 broke Nehru’s heart and spirit. He succumbed to the body blow two years later. China supporters maintain that unclear messaging from India forced China to retaliate since it perceived India as being bent on unilaterally disturbing the status quo along an un-demarcated Himalayan border between the two countries. Be that as it may, the China-India 1962 war, in which, despite heroic, determined but futile resistance from an ill-equipped and poorly led Indian army, China soundly trounced India, has left an open wound for India, which is still raw more than five decades later.

One doesn’t need to go back to 1962 to be sure that China is not a natural ally for India. We are just too similar with few complementarities and hugely competing priorities.

India-China, twins separated at birth?

Both countries are in a race for fuel, which neither have and both need to grow their economies and feed their people. One out of every three humans is either Chinese or Indian. China is racing to achieve high income economy status (per capita GNI> US$ 12,746) whilst India is striving to be an upper middle income economy-where China is today (per capita GNI> US$ 4,125). Both need to find export markets to fuel their growth. Both are relative “outsiders” to the high table of developed countries and both are jostling for space. Both peoples are hugely entrepreneurial and compulsively competitive. But there the similarity ends.

Even twins grow differently

India is barely at the threshold of being a lower middle income economy but its international, political engagement is larger than its economic heft. China is already an upper middle income economy but traditionally prefers to remain below the international diplomacy radar and boxes well below its weight, except when it perceives its national interest directly at stake.

India is a democracy of long standing, grounded on the compulsion of complex heterogeneity and plurality. China is a largely homogenous, beneficent, authoritarian meritocracy.

India is has been institutionally and ideologically networked into the developed world due to its colonial heritage and the facility with English. But it is a recent and somewhat unwilling, entrant to the international trade and investment value chains. China’s culture and values are unique and somewhat autarkic but its planned tapping of developed country knowledge, innovation, research and technology market has worked well. Its pragmatism, easy adaptation to change and determined implementation of a growth strategy by integrating into trade and investment value chains, sets it apart from even its East Asian neighbours, most certainly India and previously communist countries.

Given the lack of complementarities and the visibly rivalrous character of the relationship why has Prime Minister Modi steadfastly wooed the Chinese?

Why China eyes India

China knows well what it wants from India. It wants to service India’s booming market with cost competitive goods and services. This is why a bilateral trade target of even US$ 100 billion per year is rather limited for China. Given a choice it would rather shoot for US$ 200 billion so that it can buy into India’s growth prospects for adding at least 1% to its GDP growth over the next few years.

Growth is flagging in China. This is worrisome for the leadership which has built its credibility by “filling people’s pockets to shut their mouths”- a snide reference to the grand political bargain in which Chinese citizens agree to trade in individual freedom for material gains.

India has a trade deficit of 50% of US$ 37 billion with China. Bilateral trade is US$70 billion.  This is higher than the aggregate trade deficit which is 20%. Further expansion of trade will likely worsen this deficit, since China is a more efficient mass producer of goods. Trade with China is consequently only a lever for India with which to negotiate alternative benefits in investment; security cooperation and mutually supportive diplomatic stances in multilateral fora.

So what is it about China which should excite India?

China made Indian Gods

Rather than predictably moan about the trade deficit with China Prime Minister Modi should praise the Chinese people for their achievements.

First, thank them for sending affordable goods to India thereby directly benefiting Indian consumers and forcing Indian industry to become competitive through attrition of uncompetitive businesses.

Second, thank China for being a role model for developing countries on the following three counts. (A) Illustrating the virtues of savings and investment led growth, particularly in manufacturing (B) Establishing the necessity of increasing public investment in human development and social protection (C)  Providing to the developing world a model for enhancing employment, jobs and rapid reduction in poverty

Third, invite them to visit India as Tourists, Students, Scholars and Friends so that our great cultures can learn from each other directly.

The gloved fist

Much has been made of the Chinese excursions into India even as President Xi was eating Dhoklas with Prime Minister Modi in September 2014.  Was this part of an elaborate Chinese plan to remind India that sipping green tea together does not mean China will give up its claims on Indian territory? Or were they a Peoples Liberation Army game plan to stab the reformist Xi in the back and undermine his international credibility? We may never find out. But what it does illustrate is that diplomacy is like sleeping with snakes-one has to sleep light, remain vigilant, move slowly but definitively and remain calm and unperturbed by the ensuing rattles.

Chinese cash

Should we fear Chinese investment in India? Clearly they have the cash and we have the need for it. One reason why we need the cash is to generate jobs. This means that the standard Chinese model of project implementation which relies on Chinese expatriates does not suit our needs. Rather they should build Indian skills in project implementation in keeping with their celebrated record in project implementation.

Partnership with Indian companies is the best model for Chinese investment in India so that social benefits and tax revenue flows downwards to the people of India whilst corporate profits flow to China. Other than a very short negative list of investments in sensitive border areas, Chinese investment should be welcomed. In fact co-partnership in international value chain related production can be of mutual benefit in services, engineering and chemicals.

End game

Prime Minister Modi’s China strategy must needs be minimalist. India looms too large in China’s neighbourhood for comfort. China will pull no punches in consciously trying to establish its dominance in South Asia and thereby cramp Indian influence. This is very similar to the effort India spends on cultivating Vietnam now and Taiwan earlier to the chagrin if China.

The best that India can hope to do is to stop China from playing “spoiler” in India’s unfolding growth story. Chinese support for Pakistani Terror or Maoist rebels in east India is an illustration of such proxy efforts. The best way of neutralizing “spoilers” is to co-opt them into the game as active participants. We must encourage China to develop significant investment stakes and trade links with India so that they too benefit from India’s growth. Actively encouraging highway and rail links across borders is a good place to start. India must aim to become “too big” in the Chinese investment portfolio for it to stall Indian growth- this is what “protects” the US.

It is inconceivable that Mr. Shourie is oblivious of this imperative to reach out to China. Could it be then be that his highly publicized “missive” to the PM was just a charade, dreamt up by the BJP “dirty tricks” department, to build up PM Modi as a strong and forceful leader with the reach; the credibility and the strategic depth to ignore inner-party, high level resistance to warming up China-India relations? In other words was Mr. Shourie’s advice given with the full knowledge that it would be ignored?

Similarly, could it be that the recent government action against Greenpeace and the Ford Foundation for crossing red lines by supporting activities against the national interest, were also initiated to project Mr. Modi’s government, ahead of the China visit, as being strongly nationalistic, able and willing to cock a snook at the US, just to illustrate, that India is not wedded to any traditional power block.

Far-fetched or not, PM Modi leaves for Beijing on a stronger wicket, as a friend of China, than he started with in September 2014, in part, thanks to Mr. Shourie.

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