governance, political economy, institutional development and economic regulation

Posts tagged ‘Trade’

Sustaining growth in an unfriendly world


Put it down to the heavy snow in Davos or to a rare case of blunt honesty by an international agency. Whilst sharing the good news of the revival of the world economy in 2017 and its expected continued growth till 2019 at 3.9 percent, Christine Laggard – the IMF Managing Director, cautioned that 20 percent of the developing world was not part of that revival, tempering the WEF celebrations with sobriety. Latin America and resource dependent economies, had suffered negative growth, even in 2016.

India’s growth angst

India’s angst is real with growth dropping to 6.5%, versus the 7% plus real growth of recent years. We are new to this business of high growth. The two decades from 1980 to 2000 only had a growth rate of 5.7 percent per year. It is only post 2000 that a growth rate of 7 percent per year become part of our expectations. In comparison, China’s high growth period of 8 plus percent per year – with minor annual deviations – began in 1977 and continued for over three decades till 2011.

Trade liberalisation and world growth – China timed it right

The 1970s and 1980s were a good time to grow. Under the General Agreement on Trade and Tariffs (GATT) the Kennedy, Tokyo and Uruguay rounds of negotiations (1963 to 1993) reduced average tariffs from 22 percent to 5 percent. World exports as a share of world GDP increased by 40% between 1972 to 1982 (from a level of 14% of world GDP to 19%). Over the next two decades, till 2002, world exports further increased by nearly one third to a level of 25% of world GDP. The bulk of Chinese growth happened during this period of trade liberalization.

India – a growth laggard, got the timing wrong

India lost the favourable two decades from 1962 to 1982 to domestic political headwinds. We liberalized, tentatively, from 1985. But reform put down roots only from 1992. By then world growth had tapered off. During the quarter century after 1992 till 2016, only in four years, did the world grow at 4% per year or more. In the quarter century before 1992 there were 14 years when growth exceeded 4% per year with 1964 being the high point at 6.7%. India has struggled against the declining trend in world growth to pull itself up. Fresh challenges can be expected over the next decade.

Can India replace the broken “open economy” model

The world grew rapidly using the “open economy” model over fifty years till 2008. Is it now broken? And did rising inequality within economies kill it? And are we now left only with the long, dark alley of “directed Chinese capitalism”, as a viable “growth model”?

Yes it can, if only we collected more tax revenues

India can offer an alternative model aligned with the “open economy, freedom, democracy” matrix, if we can boost our tax to GDP ratio to generate the resources required for “sharing growth”. The combined revenue receipts, in India, of governments at all levels is 22% of GDP.

Meanwhile public outlays are critically short in health by 4 % of GDP; education by 3% of GDP; infrastructure by 3% of GDP and defence by 2% of GDP. This adds up to 12% of GDP.

Around one third of the additional fiscal resources could come from continuing to grow at 6% per year – an achievable target. Another one third could be met from non-tax receipts like from privatization and savings on pro-poor subsidies by targeting and distributing them better, including digitally. But we cannot escape increasing our tax to GDP ratio (all of government) to 26 % of GDP.

The broad anti-corruption framework offers hope

The drive against corruption; stricter adoption of banked transaction norms and the increasing popularity of digital transactions and online marketing are expected to ensure that tax collection in fiscal 2018 meets the budgetary targets of Rs 19 trillion (including state share of Rs 6.7 trillion).

This is despite a reduction in the budgeted nominal growth of GDP over last year from 11.8% to 9.5%. This buoyancy gives hope that continued rationalization of tax rates; improved assessment and review processes and fairer and faster settlement of tax cases will induce better tax compliance.

Specific incentives for officials can seed growth filters in local decision making

We should learn from China how to devise local incentives for enhancing revenues. 99% of the 50 million Chinese officials are locally recruited and are never transferred away. They are truly a “permanent” bureaucracy.

Secondly, a significant part of their pay is linked to the fiscal health of their local unit. A healthy unit means higher bonuses and benefits for employees. Fiscal downturns bring austerity even in the take home benefits for employees. This close and sustained identification of officials with local offices and the localities where they exist, creates a shared bond between citizens and the officials – all of whom sink or swim, together.

Recruit officials locally & keep them there, for better identification with local needs

In India, officials are birds of passage, even at the village level. Their take home pay and benefits are completely unlinked to the fiscal health of the local office or the locality they serve in. It is no surprise then that rent gouging is widely prevalent with no concern for making the locality or the employing organization fiscally healthy.

“Authoritarian” China is effectively more decentralised than “democratic” India

The Chinese government does not habitually, bail out bankrupt local governments. They must work themselves out of the holes they dig for themselves. At the same time, the government does not hesitate to formally allow policy departures, at the local level, driven by exigency. Ironically, this makes “authoritarian” China, extremely decentralized and participative, whilst India – part of the “free world”, looks hopelessly rigid and centralized in general. We must build up the bright exceptions.



No job is too dirty for me

Parameswaran Iyer, Secretary, Government of India, a sanitation specialist, recruited from the World Bank,  walks the talk, by demonstrating that composted pit latrines are no longer dirty. Commitment to field level results and competence in action.


Resilience to overcome future challenges comes from open-order economies, promoting innovation and flexible structures

The WEF has cautioned that the near-term future is full of security, climate, technology and economic risks. They advise that resilience is the best antidote to risk. For complex organisations, enhancing resilience means embedding flexible, modular structures and business relationships, which allow the freedom to alter the scale of operations to fit demand and to cultivate innovation and the capacity to work at “the edge” of the frontier. Tellingly, none of this is aligned with a heavy top down, centralized, cookie-cutter, approach. Change is upon us. We must bend lest we break.

Adapted from the the author’s opinion piece in TOI blogs, January 28, 2018

Can GST make Hasmukh Adhia smile?


Hasmukh Adhia, India’s revenue secretary, is finance minister Arun Jaitley’s chief aide for rolling out the Goods and Services Tax. Contrary to his first name, he never smiles, at least not in public. But even he can now take a break and smile. The GST juggernaut is careening ahead. In just over a week, India would have leapfrogged into the league of economies which have walked the talk on rationalising indirect taxes.

Noose tightens on black money generation

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So what will Mr Jaitley and the GST Council have achieved on July 1, 2017? First, this collegial team of finance ministers, across the Central and state governments, would have fired the first, potent salvo against black money. Demonetisation; tax raids; getting back overseas black money caches — all pale in significance, compared to the institutional impact of GST. Consider, that the most vocal protests against GST have come from dry fruit traders, cloth merchants and jewellery makers. These businesses have been traditionally cash heavy. Of course, the intrepid evader will still have tax leak holes left open. Agriculture, food items and the business in booze remain yawning gaps in the tax revenue security architecture. But the message is loud and clear: the rope is shortening. So watch out!

Lower net indirect tax, lower prices to spur demand


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Second, the massive discounts being offered on pre-GST clearance of the stock of consumer durables suggests that prices of these goods will reduce. An entity, empowered to investigate and ensure that net tax reduction benefits are passed on by manufacturers and dealers to consumers, is in the offing. The history of such clunky, intrusive executive action is not encouraging. Due to information asymmetry, determining the cost breakdown of products externally, is invariably inefficient. Either the enforcement agents get compromised or they end up harassing manufacturers and suppliers for trifling results.

But in truth, it really doesn’t matter. Inflation levels are at historic lows — below three per cent per annum; the monsoon is progressing well and global demand remains damp. Babus and their counterparts in the public sector — around 18 million households — have all either been given or will soon get pay revisions. They are itching to spend the windfall.

Clunky “inspector raj” to check price rise – a bad idea

Even if the entire tax rationalisation bonanza is retained by manufacturers and dealers, it will still generate surpluses for private investment — in debt servicing, realty and equity markets. Improving the revenue steam of corporate India is vital for getting over the gargantuan NPA problem, which is bad cholesterol for growth. The good news is that most product markets are competitive. Digital marketers have cut retail margins to the bone. Even the market for services is hyper competitive — think telecom. This makes it tough for corporates to retain extra normal profits.

SMEs & Trade pay the price for becoming accountable – high compliance cost

Also, undeniably, tax rationalisation has come at a cost. The actual transaction cost, for business, to comply with digital GST processes is unknown. But GST provides a huge opportunity to India’s IT developers to innovate low-cost compliance and oversight options — particularly for value segments produced by small and medium industries. These could be perfected at home and marketed worldwide as context-specific solutions for developing countries. In 2013, at a conference in Washington, the World Bank president asked Nandan Nilekani why he wasn’t rolling out Aadhaar across the globe? Mr Nilekani responded that he was too busy at home and had no time left for solving the problems of the world. This single statement projected India’s enormous domestic, digital market potential far better than the glossies, which international consultants and governments routinely produce touting themselves. These digital opportunities have multiplied by several degrees with GST.

Multiple rates align with multiple objectives 

Third, the agreed-upon somewhat clunky architecture for GST reflects compromises made to achieve the twin overriding concerns — protecting the poor and ensuring fiscal neutrality for all governments. In the absence of a direct cash transfer framework, continuing tax exemptions on mass consumption goods and services is a reasonable policy option. Given the federal structure and the plurality of our polity, there never was an option to the consensual approach adopted by the GST Council. Meeting the revenue concerns of state governments has inevitably led to six GST rates. The highest rate of 28 per cent is designed to be used for neutralising any revenue loss for state governments.

Multiple rates result in efficiency loss due to tax leakage from misclassification of goods to a lower tax rate. A good example is the amorphous classification of a storage battery as a computer peripheral (lower tax rate) versus use for backup lighting needs (higher tax rate). Multiple rates also increase the accounting load for keeping track of tax credits and debits. But the economic benefits from early implementation of a less than perfect solution far outweigh the opportunity lost from a prolonged wait for the BJP to come to power in all the states, thereby enabling a best practice single rate template to be imposed from above, China style.

Fourth, GST is good for jobs. It gives a boost to “Make in India” by withdrawing the tax advantage for imported manufacturers. Importers pay Central state tax at four per cent as special additional customs duty. But domestic products are taxed at the rates of state sales tax, which are generally higher. This disadvantage for domestic production will vanish with GST. Imports, in addition to customs duty, will pay additional customs duty at the GST rate applicable for domestic products.

Flexible implementation arrangements – to muddle through the knots

Finally, the finance minister has consistently adopted a firm but nuanced, practical stance on the implementation schedule. Recognising that small-scale industry and traders are lagging in preparations, he has agreed to defer the filing of returns by two months. Assurances have also been given that the GST rates could be adjusted if the net tax burden gets distorted or gets unbearable. A government that is open to negotiating beneficial outcomes for all stakeholders and still retains the will to keep the national interest foremost is quite clearly operating at the tax-related good governance frontier. Smile, please.

Adapted from the author’s article in the Asian Age , June 23, 2017

Jaitley black money

“Tweak” the process transparently to deliver PM Modi’s “Big Things to Small People”

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Charismatic leaders can mould crowds like putty. Bill Clinton’s March, 2000 “US and India are natural allies” address to the Indian Parliament; Barrack Obama’s University of Cairo “New Beginnings” address to the Muslim world, June, 2009 unleashed a Tsunami of optimism and “feel good”. In much the same way, PM Modi-the man with an agenda of Big things for Small people- in his recent Madison Square address, won over the hearts and minds of a “massive” (by US standards) crowd of 18,000 Indian-Americans in New York and an even larger audience back home in India.

For many Indian expatriates, including us in India, it is a relief to have a Prime Minister who radiates strength, speaks extempore and from his heart. It also helps that he is a consummate performer, who draws energy from the crowd and returns it to them magnified many-fold.

Those looking for suave wit and a sophisticated exposition of geo-political gyan were sorely disappointed. Modi was deliberately folksy and simplistic. He capitalized on his strengths magnificently, just as Indira Gandhi, the last Indian PM with an international stature, used to do more than three decades ago.

Of course, it helps if one can live on water endlessly and still have the physical ability and mind space to go through a deliberately, whirl-wind program. By doing so Modi has become a live bill-board for the low carbon footprint potential of solar energy. His eschewing food altogether, through the trip, was akin to the Mahatma wandering through the London chill in his sparse loin cloth, protected only by the churning energy generator in his mind.

Till now the West has been wowed by India’s IT skills, thanks to our Silicon Valley diaspora. Next, we are likely to be branded as Yoga maestros all and expected to perform never-before feats of physical endurance.

But it was not all plain sailing.

Three areas where plain speaking-PM Modi’s forte, would have helped, are listed below.

First, what exactly is our stand on joining the fight against Islamic Terror and the linked approach to Afghanistan? The message coming through till now is fuzzy. It seems India is likely to carry on in much the same muddled way we have done till now; remaining visible in Afghanistan, but primarily as well wishers, bringing development to the people of Afghanistan. This is clearly dissatisfactory and unrealistic in the context of the impeding US withdrawal and the likely security turmoil courtesy the unresolved political contestation between the Ashraf Ghani and Abudullah Abdullah groups. National governments are prone to fail. Similar recent experiments in Nepal, Zimbabwe and South Sudan illustrate the illusive nature of such options for “externally enforced” stability in the face of unresolved local contestation.

Our interest lies in clearly establishing that we view the Taliban, the Pakistan Army and Militant Kashmiri jihadi groups as part of the same set of Islamic Terrorists, which are a direct and existential threat to us and our secular, plural democratic system. We must be willing and able to take the most effective action in our near abroad to crush Islamic Terror. But where Islamic Terror is not a direct threat to us (as for example the ISIL) whilst any UN endorsed initiative will have our support, we do not have the resources to join a plurilateral initiative against global terror. This is strictly for the big boys; the US, its NATO allies and China.

PM Modi has been at pains to explain that on this trip that whilst he has been trying for more than the last two decades to get the US to recognize the global consequences of Islamic terror, they took cognizance only after 9/11, when it hurt them directly. The fact is we must be similarly discriminating in unbundling Islamic Terror into immediate and distant threats and not be distracted by the enormity of global threats and ignore focusing on managing immediate threats, closer home.

Plain speaking about our threat perceptions, our limitations and our determination not to be cowed down by terror would have helped.

Second, the message on trade and investment needs to be distilled better. The economic opportunities in India are well known. The demographics; the steady economic growth and resultant demand and our democratic architecture.

Unfortunately most foreign investors live in the present. No international manager has a business perspective beyond a decade-even if they draw up beautiful thirty year perspectives. What big business looks for is leadership level facilitation to get their specific project up and running quickest with commercial and political risk minimized.

Tardy environmental clearances; tax opacity; poor infrastructure and most recently, the extended ambit of judicial review of contracts are big dampeners. Many of these constraints are institutional and require structural change, which is long term. What we need are near tern solutions, of the fire-fighting kind, to establish the enabling business environment. Selective but transparent tweaking of dilatory process is an obvious option but there are challenges even here.

At the leadership level, “successful tweaking of process” requires political credibility that the selective attention is in national interest and not another manifestation of crony capitalism. Consensus building between the executive and the judiciary of the acceptable envelop of “process tweaking”, in national interest, is key for retaining the credibility of the executive and the independence of the judiciary, whilst simultaneously ensuring that the judiciary does not get drawn into settling political scores.

PM Modi is best placed to manage the optics on this score. At the operational level, he will need the support of a highly skilled and empowered team of state government officials working with counterparts from the Union Government, to pilot the tweaking process towards accelerated launch of projects.

What should constitute the government’s decision matrix for determining the “hurdle rate” for projects to be eligible for tweaking the “way we do business”? In such circumstances it always helps to have narrow objectives. “Employment and poverty reduction”, both of which are urgent near term investment related goals, present themselves as excellent “filters” for evaluating and identifying proposals which merit the highest level of facilitation.

50 projects; 5 million jobs; US$15 billion investment can be the rolling target with automatic replenishment by new proposals as projects get launched. Unfortunately, we missed the opportunity to generate the frisson of excitement which the project based approach generates.

Third, plain speaking on our environmental and energy policy would have helped. It is clearly in India’s interest to clean its water bodies and rivers; reduce air pollution and reverse the denudation of forests and degradation of land. Degradation of these natural assets has immediate economic and social outcomes usually with adverse poverty consequences. It is the poor who are impacted negatively when water bodies and rivers become polluted because they use them directly for personal needs and business. The poor similarly suffer the most from atmospheric pollution because they are incapable of insulating themselves and their children, from such ambient pollution. Unregulated deforestation robs the poor of their eco-system and their livelihoods. Combating land degradation, like increased salinity often caused by unsustainable use of ground water and poorly managed large irrigation schemes, is a costly undertaking, which is often beyond the financial ability of the poor.

On energy our big concern is energy security. The use of coal is likely to remain a staple component of our energy profile. Similarly, more aggressive utilization of the hydro potential in India and in South Asia is an efficient option. Embedding passive energy efficiency building design is another significant option. Urbansiation levels are relatively low but there is a big stimulus in the offing under the PMs target of a house for all by 2022.

More generically, India is committed to technology choices which are congruent with our two, often conflicting, goals of reversing the degradation of natural resources whilst ensuring energy security. An increasing share of wind and solar energy is one such technology choice. Increasing the share of public transportation by railways relative to roads is another which the government is pursuing. But capping India’s carbon footprint at an unrealistic level is similar to capping food subsidy at historical prices which India has already rejected.

The mantra for plain speaking on the Indian strategy for managing terrorism; enlarging trade and safeguarding the environment is to rely on the simple rule of first reserving the fiscal and the physical space for the developing world to “catch up”, before providing breathing room for the developed world, who have abetted and often perpetrated all three global problems, by agreeing to hold them harmless.

Spicing the Pak-India “Punjabi Tango” with Gujarati Dandia could yield results.




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The Pak-India affair is almost as tiresome as the Israeli-Palestine impasse.   Neither party can pull apart nor do they live together in peace. Successive governments on both sides start a peace initiative at the beginning of their terms, only to lapse into status-quo near the end-defeated by the inertia of babus and elite interest on both sides.

For most of India, south of the Vindhayas and East of the Yamuna, Pakistan remains a distant and intractable land. For the average Pakistani, India is a bully, growing muscular by the day, bent upon destabilizing Pakistan.

It doesn’t help that for all practical purposes, Pakistanis and North Indians are very alike.  They share the same values and prejudices. The daily “show” of faux aggression at the border post of Attari, near Amritsar, illustrates the brawny culture on both sides. Border guards on both sides face off in a peculiar, mirror image, “Punjabi Tango” of choreographed, muscle and moustache to the accompaniment of lusty words of encouragement of their country people. But the bravado ends tamely, with both sides trotting off to their own quarters, their duty done.

The similarities extend to the mirror, comparative advantages of the two countries; near similar human capital development levels, low income levels and low natural resource endowments. Also similar are the barriers to growth, vast inefficiencies in government and elite capture; by the agro-military-industrial complex in Pakistan and by the agro-industrial elite in India.

Both economies have benefited from adoption of the “open economy” model of growth since the mid 1980s. India more so than Pakistan, which has been constrained over the last two decades by its preoccupation with Afghanistan and its own war on terror-albeit some of it, of its own making. As Bhindrenwale was to Indira Gandhi, the Taliban has become for Pakistan; an out of control Tiger.

The first casualty of insecurity is investment-both public and private-especially in infrastructure. Long payback periods are unsuitably risky if revenue streams become uncertain. More importantly, with the world increasingly in the “open economy’ mode, there are easier business pickings elsewhere. The 21st century belongs to growth in Africa and that is where business is rushing to be, both Indian and Pakistani.

It is not surprising therefore, that trade between Indian and Pakistan is minimal and stagnant, relative to the total trade of both countries. Pakistan exports only 1% of its total goods to India and only 4% of its imported goods are Indian. Of course, the official data underestimates the actual trade through third countries and destinations. Both could benefit by cutting out the intermediaries margin and higher transportation cost of acceptable third party destinations. Non-tariff barriers on both sides; poor trade infrastructure and low financial integration make even the best cross border trade intentions die. Cross border investment is yet to be a reality.

Why then bother at all to disrupt the convoluted stalemate of the past five decades? Here are three good reasons:

First, Pakistan estimates (Economic Survey 2013-14) that it loses up to 3% of its GDP due to insecurity, bleeding it of nearly one half of its potential GDP growth. For India, an insecure Western border is expensive. The geo-politics of Pan-Islamic militancy unsettles its domestic, plural aspirations.

More generally, “including the poor” is a common challenge for both countries. The last thing, either could possibly want, is to add the cost of managing terror to that long list of unproductive, resource draining preoccupations.

Second, India and Pakistan both gain by operationalizing the Turkmenistan-Afghanistan-Pakistan-India gas pipeline. This has been on the agenda for the last two decades and 2018 is the new aggressive target. Both economies are deficient in gas, a clean and versatile fuel for power generation, domestic use and industrial purposes. India loses 0.5% of its GDP every year due to shortage of peaking power capacity. Perversely, domestic coal supply shortages and the high cost of imported coal and LNG keeps installed capacity idle. The TAPI pipeline, would meet around 20% of our gas demand till 2030.

Third, the lack of Pak-India economic integration provides a ready opportunity to China; the “big Panda in the room”, to deepen the economic “silos” with each integrated independently to China, but not to each other. This is already happening. Whilst trade between India and Pakistan stagnates, trade between China and Pakistan is booming, as is trade between China and India.

Of course China is the world’s factory. It aggressively supplies price competitive goods, well suited to the limited pockets of developing countries. Chinese trade comes with generous financial outlays to develop and manage strategic infrastructure; Gwadar Port in Baluchistan (linking the Middle East to China in a trade and energy corridor) and the offer to build high speed railways and highways in India.

Both Pakistan and India will accept much needed foreign capital and investment from anyone who offers it. That is the wise thing to do commercially. But it makes strategic sense to also develop alternative trade and investment opportunities in their “near abroad”. Infrastructure development is a great facilitator for growth. But it also has enduring legacy value. It determines the future spatial spread of growth and jobs along economic corridors. It is sobering to remember that Karachi Port is nearer to Delhi and Amritsar than is Mumbai.

Democracy is great for transparency but is a killer for negotiations, strategic deals and moving on, which are best done in privacy. This is a limitation for PakIndia normalization. The history of distrust and animosity extends far beyond the cricket field. Babu led governments become hostage to the “agency problem”. The narrow self-interest of the managers drowns the real interests of those they represent.

Progress can only come from “disruptive innovation” by leaders. It’s PM Modi’s call. A dash of Gujarati Dandia could spice up the frozen-in-time “Punjabi Tango” to produce results.  


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