governance, political economy, institutional development and economic regulation

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India’s pressured public institutions

BOOK REVIEW
Rethinking Public Institutions in India
Devesh Kapur, Pratap Bhanu Mehta, Milan Vaishnav (Eds)
Oxford University Press
548 pages; Rs 995

Rethnking Pub Inst in India

Public institutional reform has a stale air about it. There are plenty of options but little action. The sombre packaging of this book adds to this gloom. Possibly, the “monkish”, value-for-money branding is a consciously adopted tactic, setting it apart from the current trend favouring glitz and hype. The authors appear to be flinging a dare — that in their case substance needs no gloss. They are right.

PBM

The editors’ academic pedigree is reassuring. Pratap Bhanu Mehta is the best-known of them, a public intellectual extraordinaire and the acknowledged voice of evidenced, liberal political thought.
Devesh
His co-editors Devesh Kapur and Milan Vaishnav are US-based academics.
milan vaishnav
This new publication is a follow-on of a 2007 publication Public Institutions in India: Performance and Design co-edited by Messrs Kapur and Mehta.
The contributors are an eclectic mix of UK-, US- and India-based academics and Indian civil servants, serving, repositioned or retired. What is common is their deep and systematic association with public institutional development and an enviable record of publishing their work and opinions.
Are public institutions in India doomed?
So, are central public institutions going to seed? And does that explain India’s future challenges? The introductory chapter, written by the editors, provides an elegant, broad sweep of drivers and trends in institutional malaise, highlighting areas where performance has been dangerously below par. But the helicopter view is a mite too one sided, veering to a dark view of the state of national institutions.
Institutional resilience outnumbers the failures 
A more nuanced and refreshing view emerges from the succeeding chapters, each about a single institution. James Manor, writing on the Presidency, exquisitely details how this apex institution, despite the occasional failures of individual incumbents – think Fakhruddin Ali Ahmed who signed on the dotted line to impose emergency in 1975 and Giani Zail Singh, who was not averse to being actively political – has been a steady hand, safeguarding constitutional propriety and citizen rights from potential executive and legislative transgressions.
Errol D’Souza, reviewing the Reserve Bank of India, describes its pugnacious success in enlarging its regulatory space, solely through its performance-driven credibility. E Sridharan and Milan Vaishnav pen a fluid and attractively rendered tale, about the Election Commission of India, which has similarly earned its spurs. Eighty per cent of Indians trust it because of its remarkable conduct of timely, fair and efficient elections. Madhav Khosla and Ananth Padmanabhan describe how the Supreme Court has nurtured the public’s trust by courageously and consistently ruling in favour of equity, inclusion and fair play. However, they warn that dark clouds loom unless justice is delivered more efficiently.
Navroz Dubash writing on new infrastructure regulatory institutions – the Central Electricity Regulatory Commission (CERC) and the Telecom Regulatory Authority of India (Trai) – acknowledges that in the initial years both had to fight severe challenges from publicly-owned monopolies and their patrons in government. Two decades on, they are the arbiters of positive change. The CERC has overseen competition in bulk electricity supply. The Trai has curated highly competitive private telecom customer services and tariffs. However, Dubash correctly points to the need for enlarging the regulatory space such that all actors – the Parliament, Judiciary and the Executive become active players in negotiating regulatory outcomes, with the Regulator playing the balancing role,
Institutional failure more visible in sub-national entities
“State failure” is a malaise more visible in sub-national institutions, which have failed to imbibe the positive changes taking place in related central public institutions. State governors, legislatures, the lower judiciary, state public financial management institutions, electricity regulatory commissions, vigilance departments, and election commissions are often severely blemished. T R Raghunandan woefully records that institutions of local government remain ignored, underfunded and underused, except in Kerala, Karnataka and West Bengal. Consequently, inclusive growth suffers and an opportunity is lost for embellishing and inculcating local traditions of results-based democratic functioning.
But there are black sheep at the national level too
Not all national institutions, despite inherited advantages, have developed benignly. Parliament is one such. M R Madhavan ruthlessly excavates the reasons it has lost the public trust. R Shridharan similarly unravels why the Central Vigilance Commission, India’s anti-corruption agency, and its investigative arm, the Central Bureau of Investigation, have failed to establish their credentials. The former is merely a tool, to be used selectively, by the executive against its own officials. The latter is at its nadir. The moniker “caged parrot” accurately reflects why it has lost credibility in the fight against corruption.
The Comptroller and Auditor General (CAG) of India, the supreme audit institution, gets mixed reviews from R. Shridharan and Amitabh Mukhopadhyay. The CAG is uniquely placed and significantly empowered, to guide and assist Parliament to exercise granular oversight over the executive. Its path-breaking exposure, under Vinod Rai, of massive inefficiency and financial impropriety in spectrum and coal allocations lifted its public profile. But, in its “independence”, also lies the danger of it being ignored, through a “conspiracy of silence”, between a dysfunctional Parliament and a pliant executive.
The civil service, particularly its elite component – the All India Services (AIS), which constitute 0.03 per cent of the total civil employees and just 1 per cent of the Group A employees of the Union Government – have unambiguously failed. K P Krishnan and T V Somanathan admit that nothing has changed for the better over the past decade. Recruited on merit, this tiny elite thereafter enjoy the rents accruing from that initial, one-time achievement. But the authors shrink from endorsing that the AIS be phased out and its functions reallocated to the specialist cadres of the Central Services — these constitute 99 per cent of the Group A civil employees, who currently fester despondently.
This is a multi-layered, exhaustively referenced publication, which surgically exposes the dark side of public institutional dysfunction. But it also provides sufficient evidence of institutional resilience, on which an enlightened political leadership can build. A must-have, for all those who either belong to, or wish to join, the frustratingly uplifting community of public institutional developers.
Adapted from the authors review in Business Standard June 15, 2017 http://www.business-standard.com/article/beyond-business/public-institutions-under-scrutiny-117061401505_1.html
raj ghat
Raj Ghat – Gandhi ji’s memorial keeps the flame of “independence” alive

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

 

Indian Economic Survey 2016: Bewinderingly optimistic

Arvind S

Arvind Subramanian Chief Economic Advisor- GOI: Rising star and Rajan clone?

The Indian Economic Survey is an annual document that is wrongly titled. The data it reveals is overpowered by large dollops of economic wisdom, literature and policy analysis. Arvind Subramanian, India’s Chief Economic Advisor and the key author of this year’s Survey, has clearly burnt the midnight oil liberally in making the Survey a reader’s delight, even for one who has only a nodding acquaintance with economics, gleaned primarily by pursuing the pink papers.

Running hard to stand still

The key guidance the general public has been looking forward to, is the credibility of the near miraculous GDP growth rate of 7.6 % recorded this year and in that context, prospects for the next year. Unfortunately, clarity still eludes the average reader. Whilst generally optimistic about the government’s ability to improve on the performance this year, the survey is curiously negative on growth prospects for next year (7 to 7.75%), which it says would be strongly dependent on world growth reviving rather than domestic reform being implemented. Running hard to stand still is not a very good incentive for public sector reform. Consequently, India should brace for lower growth next year.

Better fiscal administration but significant legacy problems

The Survey makes the point that over the last year India has done more than most of its peer countries- those with an investment grade of BBB, including China, to retain macroeconomic stability per the index of macro-economic vulnerability developed in the Survey last year. But it simultaneously notes that the quality of assets in government-owned banks has been deteriorating since 2010. This is complemented by the overleveraged position of large business houses who are finding it difficult to service these loans because market conditions are adverse and both the top-line and their bottom-line have taken a hit. Exports have reduced by 18% last year and the competitiveness of domestic suppliers even to meet domestic demand is dodgy. The domestic steel industry being the most recent example.

The popular explanation for the logjam in corporate funds has been that the financial stress of big corporates has less to do with inefficiency or injudicious resource allocations by them. The blame is pinned on government projects not progressing smoothly over the last few years of the previous government resulting in corporate funds getting blocked unproductively.

gadkari

Minister Nitin Gadkari doing the impossible- shaking the dust off moribund highway projects

But over the current year Minister Nitin Gadkari has revitalized the implementation of a large number of projects in the highways sector. Railways Minister Suresh Prabhu has similarly awarded more than double the level of contracts in railways than was the trend earlier.

prabhu Minister

Minister Suresh Prabhu -improving the plumbing of  Indian Rail – a colonial legacy and democracy’s neglected child 

State governments have also enhanced public investment per the Survey which states that the combined public investment increased by 0.8% of GDP over the first three quarters of the current year versus the previous year with state government contributing 46% of the investment.

Why then does corporate loan servicing remain a problem? Is it just a time lag issue before public expenditure decisions kick in and funds flow resumes to corporates? If this is the case  the salutary effects should be visible next year. Or is it that the loan defaults have less to do with poor implementation of government contracts than with the “smart” arbitrage strategy of big corporates to borrow domestically in an unreasonably strong rupee, post 2013 and salt investments away safely overseas? Is it not necessary then to keep the rupee at aggressively competitive levels to avoid the incentive for “carry trade”, boost export competitiveness and price the fiscal impact of imports- particularly oil, realistically?

Does a high risk fiscal strategy make sense?

If the economy could chalk up a relatively high growth rate of 7.6% this year, despite the adverse conditions, why then is there a clamour for more liquidity and lower interest rates to kick start private investment and to fund higher levels of public investment in the coming year?

Would it not be sensible to stick to fiscal rectitude and keep the fiscal deficit target at 3.5% of GDP and hope for the same growth rates next year particularly if domestic actions will count less than world growth and demand?

Does it not make sense to guard against the risk of inflation- particularly drought induced food inflation? Our poorly integrated agricultural markets and inadequately prepared public management structures for managing food inflation by using market mechanisms are unlikely to be effective to deal with the risk of such inflation should the next year also be dry.

Oil prices remain volatile even though the survey is sanguine on the potential for an oil price increase. Whilst there is still no agreement amongst the top oil producers for limiting production, India is badly placed, being heavily (85%) import dependent, to bank on low oil prices continuing. Adequate fiscal space must be reserved for dealing with an oil price shock. These could be occasions when drawing down capital from a highly capitalized Reserve Bank of India (the survey labels it second only to Norway in being highly capitalized) can help without increasing the debt burden.

At least Mint Street is like Norway – we like that

Drawing down RBI reserves to fund dodgy capital investments in the public sector is a bad idea. It would be ok in Norway but not if accountability levels are low.Oddly, to an average India, the fact that we are close to being like Norway, as least with respect to the RBI is comforting and gives hopes. Indians are notoriously miserly and magnificent savers.

rajan RBI

RBI Governor Raghram Rajan – firm as a Norwegian rock: photo credit: businessindia.com

Tax revenue complacency

The survey skirts around the advisability of increasing the ratio of tax to GDP above the 10% achieved last year. It appears  complacent that tax buoyancy in the first three quarters of current year exceeds the average of the last three years- particularly for indirect taxes. The full year’s data would only be available with a lag but the budget documents would show if this happy trend has persisted in the last quarter also and whether the revenue deficit is indeed on track as a consequence.

Ignoring the impact of committed and contingent revenue expenditure

The significant burden (Rs 100,000 crore) imposed by the 7th Pay Commission has been dealt with lightly. Enhanced government salary and pension can increase expenditure by 0.6% of GDP for the Union government alone and threaten the revenue deficit target. The jury is still out on its possible beneficial impact on stimulating demand.

More importantly, the survey deals unduly summarily with the issue of enhancing rural income support and social protection as necessary adjuncts of macro- economic stability. Marco-economic stability can be the first victim if India’s political stability is compromised by concentrated high growth, which is not reflected in shared prosperity. The survey notes that 42% of Indian households are dependent on the rural economy. What it does not mention is the low ability of 60% of households to adapt to income shocks emanating from loss of insecure jobs, medical emergencies or other social obligations. Food for this segment accounts for approximately 40% of their expenditure. Rural wages are down 2.5% this year. Around 40,000 jobs have been lost per the Labour Bureau’s September 2015 report. Even the IT industry has reduced jobs and IT majors like INFOSYS -under a new leadership- are automating processes and putting employees out to pasture. These ground signals fit the survey’s assessment of India being in a hard place. But the survey is short on the best options for dealing with this economic shock.

The historical inadequacy in dealing with out-of-control and poorly targeted power, fertilizer, food, water, public transport subsidies hinges around the inability of elected governments to be seen to be heavy handed with income strapped households. These resultant fiscal pressures amounting to around 5% of GDP (all of government) can only escalate in the highly charged political environment during the next two years on account of state level elections.

A soft Railway Budget- harbinger of the main budget?

The Rail Budget 2016-17 could be a harbinger of such populism. Despite a large number of facilities and passenger amenities being announced there was no increase in the passenger fares which recover on average only around one half of the cost of services. Air India continues to be heavily subsidized. Loss making PSUs continue to sap public resources. How credible the fiscal consolidation plan can be in the face of these risks remains unclear.

Hopefully the Finance Minister will show the way on Monday in the Union Budget 2016-17. We await with bated breath.

Adapted from the authors article in The Wire February 26, 2015 http://thewire.in/2016/02/26/the-bewildering-optimism-of-the-economic-survey-22864/

Gov. Rajan gets it wrong this time

Gov Rajan

(photo credit: economic times.com)

RBI Governor Raghuram Rajan got it horribly wrong when he amended PM Modi’s “make in India” program by adding a “make for India” byline in his FICCI address yesterday.

What on earth could he have meant? Was he implying that the domestic economy should be further insulated from foreign competition? That is the only way domestic industry can be induced to make only for India, rather than for the World, including India?

How does this “home centric” approach fit with his view, reiterated in the same FICCI event, that the economy needs to be more open. In an open economy business “makes” for markets worldwide because production and value chains are transnational and product standards, designs and prices converge across the globe squeezing out fat.

Indian industry did “make for India” pre the 1991 liberalization. The result was a small, fat big-business set; high prices; shortages and shoddy goods. The biggest achievement of liberalization is a convergence of product standards towards international levels because of import competition and the ample and ready availability of goods- except where government erroneously continues to believe that fixing maximum prices for goods and services can work. It does not, as we can see in electricity supply and now in drugs and pharma where shortages are resurfacing.

Exhorting Indian industry to restrict itself to the domestic market is an ominous sign of the export pessimism rampant in the pre-liberalisation period. Does this also mean that Governor Rajan will keep the INR unreasonably strong to keep imports (petroleum products) cheap at the expense of export competitiveness?
Surely the defence manufacturing we are initiating is not just meant for domestic consumption. Unless Indian armaments are in regular use in conflicts and wars internationally, how can we possibly be sure of their quality or get the “consumer” feedback for quality enhancement?

Maybe Rajan’s “rock star” status as an economic wizard got the better of him. After all, PM Modi’s penchant for acronyms and by-lines has now become national mania, rendering intelligible conversation impossible, littered as it now is, with 3AAA and 5Cs. But trying to best the PM can be fatal, even for an outstanding, independent regulator. Even the US President would look askance at the Fed. Chair speaking, out of turn, outside her circumscribed official ambit.

But on matters more related to his current charge, he got things right, as usual. In a downturn, especially with inefficient and wasteful government machinery, it is a better to leave income in the hands of the earner rather than transfer it to government via higher tax rates. The “income effect”, enhanced by the low inflation target of Gov. Rajan, induces consumers to spend and feeds into demand led private investments which is good for jobs and growth.

The conundrum, if tax rates are to be relaxed or if tax exemptions for savings enhanced, is how to balance the budget?

Here is a list of the “low hanging fruit” available.

First, our traditional expertise in going around with a begging bowl is best. PM Modi is prescient in aggressively seeking external grants and concessional funding from the word go. The challenge now is converting pledges into cash flows.

Second, ruthlessly cut revenue expenditure, particularly on general administration. This is a necessary “evil” to show that the government means business.

Third, our annual public investments are barely 12% of total expenditure. This requires stopping gold-plated construction and using the existing space better. Witness the new, palatial External Affairs Office complex in Delhi, which remains underused because it is far from the South Block-located-PMO. Anyone housed in the new office attracts the unwelcome tag of being farther from the powers-that-be than even the mother ministry.

Using the available space rationally, simply by squeezing government servants together can help. Today, senior officers occupy office rooms often much larger that the living room of their government allotted homes. Notice how even mid-level government officers do not work in “row cubicles”, as in private firms and there are no common-use spaces for work meetings. Every office is designed to accommodate a “durbar” suitable in size for the concerned officer – this is reminiscent of the hierarchy of “Princes”, established by the “Raj”, based on the number of guns fired in salute of a Prince.

Slashing perks like liberal use of office provided phones and cars and a cut on travel budgets are also necessary, albeit symbolic measures, for flagging the need for economy.

Fourth, more substantively, using the existing government investment in State Owned Enterprises (SOEs) more aggressively can help. For starters, increase the dividend payout ratio from 44% to 66%. This adds around Rs 25,000 crores to revenue – only 1.4% of the total budgetary resources – but sufficient to increase the central plan expenditure by a hefty 25%.

Higher payouts and consequential constrains on accessing internal resources will also force SOEs to become leaner and look for alternative PPP models for financing operations and investments. Listing more SOEs on the stock exchanges and launching an aggressive privatization program can leverage the economy; attract foreign and domestic private investment and create more fiscal room for Greenfield public investments.

Governor Rajan in right in predicting strained economic circumstances in the near term. But hiding behind the default option of producing only for our huge domestic market and hapless domestic customers, is not the answer – nor is tight market segmentation between the domestic and overseas markets possible. God save us from anyone advocating a back-to-the-future strategy of turning resurgent India into a fortress.

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