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FM Jaitley’s press meet – more lobs than ground strokes

Jaitley lobs

What was Finance Minister, Arun Jaitley’s press conference on Tuesday all about anyway? If the intention was to gain eyeballs, it succeeded. But if it was to allay fears about the Indian economy, it failed. Here is why.

Misguided choice of communication medium

First, the optics were all wrong. The finance minister had just returned from the annual meetings of the International Monetary Fund and the World Bank in Washington. The timing required talking up the economy in a more artful way, drawing on international trends, in rethinking the role of the State in development. Instead, the assembled press corps got drab statistics. The naysayers remain unconvinced that the economy is doing fine. Presenting alternative indicators — other than those already in the public domain — could have helped. For example, the government has reduced risk by conferring residency tax benefits for local administrative offices of multinational companies. Similarly, GST revenue is marginally more than the targets for the first quarter.

Recycled “kosher” ideas for fudging data on the fiscal deficit

Second, the key “announcement” was a proposed outlay of `2.1 trillion for recapitalising public sector banks over two years. This was presented as a “bold” step. But how is it going to be achieved without relaxing the fiscal deficit target of 3.2 per cent of GDP this year and 3 percent next year? The budgeted outlay, for capital support to publicly-owned banks is just Rs 200 billion till FY 2019. Where will the “additional” resources come from? The how and when remains a mystery – though speculation, some of it inspired by the views of Chief Economic Adviser, Arvind Subramanian, abound.

FM Jaitley unhappy at being trapped

The finance ministry has a long, credible tradition of technical expertise. The Prime Minister can get away with making generic promises, as he has done in Gujarat, of a tax amnesty for small business, for past misdeeds. But finance ministers are required to be very precise. They can’t waffle. They must not seem to be led by advice, whispered into their ears, while a press conference is on. This, unfairly, makes the finance minister look feeble, or worse, being led by the nose.

arvind subramanian and jaitley

Mr Jaitley fell squarely into these traps. To his credit, he looked decidedly unhappy and uncomfortable while doing so. It is inconceivable that this media jamboree was his idea. Just back from Washington, where “best fit” fiscal practices are the main discourse, resorting to fuzzy announcements, which create high expectations and uncertainty, is not par for the course.

It’s the politics stupid

So what explains Mr Jaitley going down this route? After all, the Budget is just three months away. The sanctity of placing new budgetary proposals before Parliament, prior to revealing them to the public, is a sound convention. The only explanation is that the press meet was convened to boost the feel-good factor prior to the Himachal Pradesh and Gujarat elections, due over the next two months. Recapitalising banks sounds good. Building infrastructure sounds even better. If this was the intention, Mr Jaitley was right to look uncomfortable. Nothing stops the Union government from doing its job, even as state elections are being held. But a red line must be drawn at presenting significant new fiscal proposals, that are not already embedded in the existing fiscal roadmap.

Stick to your instincts Finance Minister

Mr Jaitley’s instincts remain sound. He will try hard not to breach the fiscal deficit target. He will resist reducing the capital outlay. He must also resist forcing cash-rich, listed publicly-owned companies to subscribe to the special recapitalisation bonds proposed to be floated by public sector banks. Listed, publicly-owned companies must be managed by their boards, and insulated from politics, at least with respect to their investments. Anything else is very unfair for the minority shareholders and the Securities and Exchange Board of India is duty-bound to resist such moves — however bizarre that may sound!

Deepen equity divestment in publicly owned banks & companies

Generating Rs 580 billion by selling-off government equity held in excess of 51 per cent in banks is a good idea for a start. A better idea is to dilute government equity even further to 26 per cent without relinquishing effective control. The government does not need more equity to ensure that the public interest continues to be served. We must resolve the legal obstacles which prevent such dilution of equity.Using disinvestment proceeds to inject public finance into private companies, which create growth and jobs, is a great idea. But doing so via the chosen long route of public sector bank recapitalisation is worrisome. Unless management systems are restructured, politicised loans and NPAs will persist. This cannot be achieved by 2019.

Use equity divestment proceeds to refinance private NBFCs for MSME business

What can be done is to use disinvestment resources to refinance private banks and non-banking finance companies, who in turn finance end-use borrowers, including small and medium enterprises (SME), to scale up operations. The unmet financing needs of SMEs are estimated at Rs 65 billion. But this could be an underestimate, not least because of their widespread use of cash or unbanked transactions. The share of manufacturing SMEs in GDP is seven per cent, or just under 50 per cent of total manufacturing GDP. Their most immediate financing need is to discount their invoices and thereby reduce the 60-to-90-day payment cycle which saps their cash reserves.

Scale up private, boutique, supply-chain finance providers

Private specialised companies offering boutique supply-chain financing already exist. The largest is reputed to be the New Delhi-based Priority Vendors Technologies Pvt Ltd. founded by Kunal Agarwal in 2015 ( these early entrants tend to finance only the payables and receivables of large, star-rated corporates who buy from, or sell goods and services to, smaller ancillary firms. There are 5,000 large corporates. Compare this with 1.6 million registered SMEs.

We have barely scratched the surface of the potential for supply-chain financing. Saturation levels of financing can alleviate the cash crunch, at the firm level, caused by the GST regime of advance tax payments coupled with the delays, in “matching” tax credits, earned on purchases, before they can be used by firms, to pay taxes.

Jaitley ground strokes

India is replete with good ideas. The finance minister could have unleashed an array of nimble steps, which can lubricate the economy, reduce risk and create jobs. But, by not grounding Tuesday’s press meet around a friendly conversation about the nitty-gritty of unleashing private potential and mitigating the hardships arising out of GST, this opportunity was lost. There will surely be another time. But will we be prepared by then to grasp the tide at its flood?

Adapted from the authors article in The Asian Age, October 26, 2017

Lest we forget our “dark” non-democratic past


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Forty Eight years ago on March 23, 1977 India emerged from the darkness of a 21 month long “national emergency (Article 352 of the Constitution)” into the light of full restoration of fundamental rights. Indira Gandhi- the then Prime Minister, a feisty mother, tired of the excesses of her son- Sanjay Gandhi, called for general elections in January 1977, which resulted in the decimation of the Congress Party in the North and the humiliating defeat of herself and Sanjay from their pocket boroughs of Rae Bareilly and Amethi respectively.

Lest this dark period repeat itself, we must plug the institutional gaps which allowed it to happen in the first place.

Better oversight of the need to impose emergency

First, today the President is the only entity empowered to exercise oversight over the government’s proposal to implement the emergency provisions. This arrangement has not served us well.  The manner in which the Indian President is selected- indirectly by a simple majority of the MPs and MLA vote- only ensures that a “candidate” of the ruling party wins. Any, but the most exceptional, human being is bound to serve those who appointed him. This makes the President unsuited to stand up to a Prime Minister who has a more direct democratic mandate. Fakhruddin Ali Ahmed- no moral giant succumbed to Indira Gandhi’s dark machinations- and approved the Proclamation of national emergency.

But that was as inevitable as the more recent example of the shoo-in, unelected Prime Minister- Manmohan Singh, subverting public interest, presumably under pressure from the Congress Party. Sonia Gandhi- an astute politician ensured her centrality by putting in place a non- threatening President of India (Pratibha Patel-2007 to 2012) and a Gandhi subaltern as Prime Minister.

Can we avoid a recurrence of such crass undermining of our constitutional framework? There are three options.

  1. We could change the manner in which a state of national emergency is approved by making it more inclusive and subject to ex-post-facto approval not only from the Parliament, as presently required, but also by state legislatures. The downside is this is likely to be a clunky process and unsuited to the urgent needs of a “real” emergency.
  2. We could change the manner in which the President is elected to strengthen the incumbent’s independence from the executive and preserve his mandate for guarding against a mala fide “emergency provision” by the government of the day. The best way to do so is to directly elect the President. Whilst there are good reasons why we should adopt a Presidential style of government, doing so, just to safeguard against malicious use of the provisions for national emergency, would be like the tail wagging the dog.
  3. We could narrow down the basis for imposing national emergency by excluding “armed rebellion” as one of the three reasons. The other reasons are “war” or “external aggression”. This approach resonates in these troubled domestic times. A large part of Eastern India is under siege from Maoist and assorted rebels but life goes on there and the situation is improving, without recourse to emergency provisions.

In any event “armed rebellion” is largely a “domestic law and order” issue which is handled by state governments and can be dealt with using the existing laws criminalizing violence and terrorism. Nothing stops the Union Government from coming to the assistance of a state government which needs help in dealing with the break-down of the rule of law.

A State Government, which is unable to manage “armed rebellion”, may yet be reluctant to seek or accept help for political reasons. The proper way to deal with such governments is to impose state level emergency provisions under Article 356 if there is break down of the constitutional machinery at the state level. There could be a number of reasons why there may be a constitutional meltdown in a state and “armed rebellion” is just one of them.

Limit the period

Second, more broadly, the scope of a Constitutional provision for imposing emergency; suspending fundamental human rights and diluting recourse to the higher judiciary against excessive or unjust executive action needs to be relooked.

Independent India has fought four wars till now- 1962-China, 1965-Pakistan, 1971-Pakistan and 1999-Pakistan. They all ended within a month except the last one, fought on the heights of Kargil, which lasted three months. This illustrates that the need for unfettered executive action, unencumbered by clunky constitutional provisions, lasts only for a limited period. Presently, emergency provisions can be extended ad-infinitum merely with Parliaments approval. The 1975 emergency lasted 21 months! That is way too much power to give to a simple majority of Parliamentarians with too few safeguards to guard against the mala fide use of such wide powers.

Forget the “steel frame” 

Third, our dark past showed us that faced by a determined and malign political power the much vaunted bureaucracy crumbles and “crawls” even without specifically needing to do so. The “steel frame” has eroded far too much to be revived. Indeed it is questionable if it should. After all, in modern democracies it is those who have the popular mandate who must rule and be responsible for the outcomes. Professional bureaucrats are today just that- professionals who devise the most optimum way of achieving political objectives. They cannot and indeed must not, be expected to carry the can of defending the nation against tyrants. That is best done by developing robust institutions; formal and informal norms for political behavior.

Make political parties democratic

Fourth, political parties are the vehicles for consolidating and representing the opinions of voters. They continue to be very ineffective in the absence of commonly accepted norms for their internal governance. Even a small public limited company is exposed to more regulatory control to ensure transparency and protect the interests of the small shareholder, as compared to even the largest political party. Media reports suggest that the Congress party could be the biggest real estate owner in India! In the absence of disclosure standards for political parties rumor may well be fact.

Unless a code for ensuring transparency and preserving inner party democracy is imposed on recognized political parties, the “recognition” granted to them by the Election Commission is meaningless. It is instructive that the nascent Aam Admi Party is self-destructing even today on the charge of undemocratic and authoritarian rule by a select few leaders. The Election Commission must be empowered to define and audit standards for the internal governance of political parties- audit and accounting of party funds; election of leaders and protecting the rights of the ordinary member, in much the same way as SEBI does for public limited companies listed on the stock exchange.

Democratic party processes can breed democratic leaders and thereby cut at the root of dynasty; megalomania and delusional complacence.

Time to get working on protecting the ordinary voter from the tyranny of undemocratic political parties.

Subrata “Sahara” Roy: Victor, villain or victim?

Image Subrata Roy the florid, flashy, brash promoter of the Sahara Group has been in Tihar Jail since March 4, 2014. The crime committed by him baffles most aam admis, including this one.

The Supreme Court held way back in 2012 that his companies acted in contravention of the SEBI rules for public issues by unlisted companies. His legal arguments that SEBI has no jurisdiction over unadvertised issuance of Optionally Convertible Debentures by unlisted companies have been rejected by the Supreme Court and he was directed to refund Rs 175 billion (USD 4 billion) collected by his 1.2 million agents from an estimated 22 million small investors between 2008 and 2011.

In a more “liberal” environment Roy would be hailed as an innovator par excellence who extended financial inclusion to millions of investors and provided livelihood to over a million agents.

Wherein lay his innovation? Quite simply he profited by providing “informal financial services” on top of the wave of public corruption which has conservatively equaled between 2 to 5% of the GDP since the “ go go” years began in the 1990s. His modus operandi is probably simple. He provides a “cloak” of legit financial services to the corrupt public servant and politician by managing the cash generated illegally by them. This “cloak” of financial services is based on a micro-financial network of investors and agents on a staggering scale with around 3000 branches and massive investments in real estate…what else?

Similar to any other Ponzi scheme, his trick was to offer huge returns in excess of 25% per year. Ponzi schemes ultimately fail because they run out of new investors to provide the cash flow to service the existing investors because the underlying assets invariably never provide adequate return. This is where Sahara had a winning card. They possibly had access to an inexhaustible source of unaccounted cash coming to them from corrupt public servants and politicians. Forget for the moment, the cash flow available from the film industry, drugs or terrorism.

Since Sahara serviced the politically powerful, they were immune from censure. But a more basic reason why Sahara remained below the radar was possibly because they maintained a tight leash on the volume of “real” small time depositors who provided the cloak to “benami” big time investors. It is noteworthy that the Supreme Court wondered how many “real” investors they had. No one knows. But had these small time investors reached a volume where their investments exceeded the illegal cash, the scheme would have imploded. As it happens it never did.

It was Securities Exchange Bureau of India (SEBI the David) who slew Sahara (the Goliath). It investigated the retail cash collection done by Sahara agents (Rs 175 billion or around US $ 4 billion) between 2008 and 2011 against the issue of a “hybrid” instrument called Optional Convertible Debenture. It held that this was “akin” to a public issue and hence in their turf. Since Sahara had no approval from SEBI for issuing such “public” securities the cash collection was illegal. What motivated SEBI to wake up? Ostensibly they responded to a complaint by an association of investors. It is not clear if any of them had actually invested in the debentures or were simply being “high minded”. Other reasons could be: (1) the financial regulator fighting for turf with the Ministry of Corporate Affairs, who had approved the issue of debentures under the Companies Act; (2) SEBI’s apprehension that significant domestic savings were being directed away from the bourses where listed companies raise money under SEBI oversight . Between 2008 and 2011 listed companies, in India, raised USD 26 billion as new capital against USD 4 billion raised by Sahara, an unlisted Indian company, (3) as always in India, the possibility of government settling political scores.  We await an intrepid investigator to inform us, which of these was the case.

But what there are some intriguing aspects to this case:

First, why did the dog not bark? Why did no retail investor complain that Sahara had defrauded them? Subrata Roy asserts that not a single investor has been disadvantaged and that all assets are being serviced and redeemed. This seems entirely plausible in the light of the reasoning given above that the “beauty” (as Subrata himself would say) of the scheme lay in completely insulating the retail investors from risk and indeed to molly coddle them with fabulous returns, using the inexhaustible cash flow of the fatter investors.

Whilst Subrata is no Robin Hood, his novel method of socializing and distributing the gains from corruption across 30 million investors is unique in its scale . Reliance has had a similar strategy which makes investors forgiving of its poor public image.

Dhirubhai, was an early mover in this game. He had an uncanny feel for the pulse of the nation. He was the first to recognize that distributing profits to over 3 million shareholders is a good way of building social capital for a corporate. Subrata has gone much further with 30 million investors, though they are difficult to trace.

Second, why is it that the entire government machinery, except SEBI, has remained passive and silent? Why has no action been taken against the Ministry of Corporate Affairs, which since 2008 was sanguine enough about the operations of Sahara to clear their Red Herring Prospectus for collecting cash from investors?

Third, why is Subrata Roy in Jail? He is not a criminal. Even if he has committed contempt of the Supreme Court, why has SEBI failed to attach Sahara’s; issue a public notice to ascertain who their investors are and compensate them accordingly, despite being specifically directed by the Supreme Court to do so in 2012?

Is this a case of judicial activism where the Supreme Court has stepped in to discharge a public duty which appropriately lies with the executive? If so then why not name and shame those in the executive who have been hand and glove with Sahara? Why is the corruption angle not being investigated by the CBI and the CVC?

Arbitrary curtailment of human rights violates the Rule of Law, no matter how high the authority which falls into that trap.

Finally why pick only on Subrata Roy. Is he paying solely for the scale of his illegality (Rs 175 billion against Harshad Mehta’s Rs 40 billion); for his flashiness and love of the good life?

We aam admis can be forgiven for muddling the offence of corruption with the social opprobrium that an open flouting of the law should attract.

But a judicial determination guided by anger at the passivity of the executive, rather than cold, legal logic does not give comfort that India’s system of checks and balances is working.

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