World War I: a turning point for the Indian economy

The centenary celebration of the end of World War I has mostly focused on its political impact, especially the implosion of multinational empires that led to the creation of new ethnic nations in Europe, as well as the communist capture of power in Russia. In India, the return of Punjabi soldiers after the end of the war also galvanised political activity against colonial rule in that province, which became the spark for wider protests.

Less attention has been lavished on the economic impact of the conflagration. World War I ended the first era of globalization. It was followed by three decades of economic misery thanks to the collapse of global trade, a rising tide of protectionism and deep recessions in several countries. The balance of global economic power began to shift as the US and Japan made a deeper impact on the world economy.

World War I also proved to be a turning point for the Indian economy. The economic historian Tirthankar Roy has explained in his work how the British engagement in World War I had a complicated impact on India. There was a sharp increase in demand for Indian goods in Britain as production capabilities in Britain itself were diverted to the war effort. However, the disruption in shipping lanes because of the war also meant that Indian industry faced dislocations because of the shortage of inputs that were earlier imported from Britain and Germany. There was excess demand as well as supply bottlenecks.

One result was inflation. Industrial prices nearly doubled in the six years after 1914. Accelerating prices benefitted Indian industry, as was also the case during World War II a few decades later. Farm prices rose as well, but at a slower pace than industrial prices. The internal terms of trade moved against agriculture. This trend continued for most of the next few decades, and especially during the collapse in global commodity prices during the Great Depression. The rapid rise in industrial prices as well as improving internal terms of trade for Indian industry benefitted industrial enterprises.

However, that was not the entire story. The war years also saw a shift in colonial policy away from laissez faire to a more interventionist approach—a shift that had a profound effect on the subsequent policy framework. There were two primary forces driving this shift.

First, the British realised that their most important colony needed strategic industrial depth if it had to be successfully held during disruptions such as a world war. Second, the long nationalist campaign for the state to support Indian industrialization began to bear fruit. The colonial state finally accepted the need for a specific policy framework to support industrial investment in India.

In March 1916, Ibrahim Rahimtoola proposed in the Imperial Legislative Council that a committee should be appointed to examine what policies were needed to promote industrial development in India. The Viceroy accepted the proposal. There were four Indian members in the group that wrote the Indian Industrial Report that was made public in 1918, or 100 years ago. These Indian members were Fazulbhoy Currimbhoy, R.N. Mookerjee, D.J. Tata and Madan Mohan Malaviya.

The Indian Industrial Report recognised the need of state support for industrial growth, but also stopped short of the original demand by Rahimtoola that the power to impose import, export and excise duties to promote domestic industrial investment should be shifted from London to New Delhi. Fiscal autonomy was rejected, and the anodyne conclusion was: “A powerful and well-directed stimulus is needed to start the economic development of India along the path of progress. Such a stimulus can only be supplied by an organised system of technical, financial and administrative assistance.”

More powerful than the official report itself was the scholarly dissent note written by Malaviya. He marshalled data from Indian economic history as well as the recent experience of late industrializers such as Germany and Japan to argue for a more meaningful government support for Indian industrial growth. This was at a time when mainstream Indian nationalism was enthusiastic about rapid industrialisation, and a few years before the Gandhian idea of village self-sufficiency took hold of the public imagination. The dissent note written by Malaviya is a treat to read even 100 years later.

His protest was not wasted. The die had been cast. The next few years after 1918 would see the setting up of a Fiscal Commission to provide some element of fiscal autonomy for India as well as a Tariffs Commission that would offer temporary protection for a handful of industries that had been carefully identified based on the comparative advantage.

The coming three decades would be tough as the world economy stuttered. India also lost out to the Japanese in key areas such as textiles. However, what happened in the six years after 1914 had an impact over the longer term. The extraordinary profits earned during World War I provided the initial capital for several Indian industrial groups that would become dominant in the years to independence. The acceptance of state support for industrial development should be seen as the precursor of the more structured calls for national planning from political leaders as diverse as Jawaharlal Nehru, B.R. Ambedkar, V.D. Savarkar and Subhas Chandra Bose.

The initial success followed by the eventual failure of Indian planning is another story altogether.

Niranjan Rajadhyaksha is research director and senior fellow at IDFC Institute. Read Niranjan’s previous Mint columns at www.livemint.com/cafeeconomics

Source: Mintlive epaper, 21/11/2018

Growth may pick up, but concerns remain

India may well clock the highest growth rate globally, but more is needed to create jobs and reduce poverty.

With more than one quarter of the year and two months of the monsoon over, it is time to take a look at what the whole year is going to be like. Are there signs of recovery? If there are, are they robust? What are the short- and medium-term concerns of the country?

Sectoral trends

The monsoon has been somewhat below expectations — the overall rainfall deficiency was 3% (as of July 25). Though it may seem negligible, it has to be noted that there were 11 meteorological divisions (of a total of 36) which were deficient. The area sown has come down. Rice-producing Bihar, for instance, has been severely affected. However, the monsoon can pick up. There is no consensus on the future behaviour of the monsoon. Agricultural growth may at best be equal to what it was last year — 3.4%.

The services sector may perform better because public expenditure will be maintained at a high level. This is to be expected, as this happens to be the year before the elections. As for the industrial sector, we have data for the Index of Industrial Production (IIP) for the first quarter. They show substantial improvement over the corresponding period of the previous year. It is important to remember that the correlation between the IIP and national income data on manufacturing is poor. Some sectors (automobiles and railway freight traffic) in the first quarter have done well. The combined revenues and profit of 370 large companies have shown better performance in the first quarter, even though they are on a weak base. The problems of the goods and services tax (GST) may have been largely overcome, but it is still a work in progress. A pick-up in the growth rate in the manufacturing sector is likely.

Looking at the overall GDP, after several quarters of low growth, there was a strong pick-up in the last quarter of 2017-18. If this momentum is maintained, the growth rate (2018-19) will certainly be above 7%. How much higher above 7% will depend on a number of factors. International financial institutions have forecast a growth rate of 7.3%. The Reserve Bank of India (RBI) expects it to be 7.4%. However, we need to take note of certain concerns that can come in the way of faster growth.

External environment

The external environment is far from reassuring. Trade wars have already started and can get worse. The U.S. has raised duties on several products such as steel and aluminium, and on certain products imported from China. In turn, China has retaliated. India has also been caught in this exchange. It is difficult to forecast how much worse this will become. Besides these, there are country-specific sanctions such as those against Iran, which have a direct impact on crude oil output and prices. India benefited from the fall in crude prices earlier but this position has reversed. There has been some lull in crude prices. As a net importer, India’s balance of payments can take a beating if crude prices rise again. India’s current account deficit was as low as 0.6% of GDP in 2016-17. It rose to 1.9% of GDP in 2017-18, mainly because of crude price rise. India’s trade deficit has always remained high. In 2016-17, the merchandise trade deficit was 4.8% and rose to 6% of GDP the next year. The answer lies in raising our export growth which has shown severe swings in recent years. It is partly a reflection of world trade. The fall in crude oil prices had also affected our export growth earlier. In 2017-18, India’s export growth rate was 9.78%. There is an inescapable need to raise our export growth rate.

In this context, we need to ensure that the rupee does not appreciate in real terms. Despite a current account deficit, India’s rupee had remained strong because of capital flows. With a rising trade deficit and some outflow of capital, the rupee has depreciated. This is not unnatural. The RBI should act only to ensure that the adjustment is smooth and there are no violent fluctuations. But what is really important is to make our exports competitive. The exchange rate is only one element. Improved efficiency in production and better infrastructure are equally important. Maintenance of domestic stability also plays a key role. Over the medium term, we need to search for an alternative fuel.

Reviving the banking system

The banking system continues to be a source of concern. The RBI’s latest report on financial stability shows that the gross non-performing asset (NPA) ratio of scheduled commercial banks rose to 11.6% (March 2018). The ratio for public sector banks was 15.6%. This is indeed a very high level of NPAs. Some part of the increase is also due to the adoption of a more rigorous definition of NPAs. The high NPA level has a dampening effect on the provision of new credit. In fact, credit to the industrial sector has slowed down considerably. Recapitalisation of banks has become an urgent necessity. Of course, this will impose a serious burden on the fiscal position. Many suggestions, which include asset reconstruction companies, have been made to resolve the NPA issue. A quick decision has to be made. Unless the banking system recovers fast, it is difficult to sustain a high growth of the industrial sector. Medium-term banking reforms will have to wait until the immediate problem is resolved.

Impact on the fisc

The third concern relates to the fiscal position. So far in the current year, the Central government’s fisc has been within limits. At the end of the first quarter, the fiscal deficit as a percentage of total deficit for the year as a whole was 68.7% — a strong improvement over the deficit in the corresponding period last year.

There are two aspects of the fisc which need to be kept under watch. One relates to GST. It is estimated that GST revenues are currently running behind budgetary projections. Perhaps revenues may pick up in the second half. But one doesn’t know. It is also not clear how much of the refunds are outstanding. Any significant shortfall can put the fisc under stress.

The second concern relates to the impact of the proposed minimum support prices (MSPs) for various agricultural commodities. The MSPs have been raised sharply in the case of some commodities. Except in the case of rice and wheat (where there is unlimited procurement at MSPs), there is no indication of how the MSPs will be implemented in relation to other commodities. If market prices fall below MSPs, there are only two ways in which farmers can be assured of the minimum price. One is the M.P. model where the State pays the difference between market price and MSP. But this can turn out to be a serious burden if market prices fall steeply. This is apart from the administrative problems involved in implementing the scheme. The other alternative is for the government to procure excess production over normal production so that market prices rise. This alternative may be less burdensome. However, this alternative will not work if the MSP is fixed at a level to which the market price will never rise. Thus the burden on the government as a result of the new MSPs is uncertain and needs to be watched. The possibility of cutting expenditures if revenues fall below projections is remote in a year before elections.

The expected growth rate of 7.3-7.4% may be reassuring. It may even be the highest in the world economy. Nevertheless, it falls short of our potential. It is below of what is needed to raise job opportunities and reduce poverty. It is true that the external environment is not helpful. All the same, a stronger push towards a much higher growth is very much the need of the hour.

C. Rangarajan is former Chairman, Economic Advisory Council to the Prime Minister and former Governor, Reserve Bank of India. He is also Chairman, Madras School of Economics, Chennai

Source: The Hindu, 14/08/2018

Government launches logo, tagline for GI... 

Department of Industrial Policy and Promotion (DIPP) under Ministry of Commerce and Industry has unveiled tricolour logo for geographical indication (GI) certified products. The logo has tagline “Invaluable Treasures of Incredible India” printed below it.
 Key Facts
 In the open contest, winning logo  was designed by Adri Chatterjee and winning tagline was coined by Akancha Tripathi. The purpose of logo and tagline for GI selected is to increase awareness about intellectual property rights (IPRs) and also and importance of GI products in the country. From now on, GI-registered goods will sport logo and tagline to make them more attractive... 

GI tag is name or sign used on certain products which correspond to specific geographical location or origin. It is used for agricultural, natural and manufactured goods having special quality and established reputation. The goods and products having tag are recognised for their origin, quality and  reputation and gives it required edge in global market.... 

So far, total of 320 products have been conferred GI status in India. Darjeeling Tea, Tirupathi Laddu, Kangra Paintings, Nagpur Orange and Kashmir  Pashmina are among registered GIs in India. Karnataka tops with 38 GI products, followed by Maharashtra which has 32 GI products.  Tamil Nadu comes third with 25 GI products.... 

World Bank report concludes Modi’s demonetisation had more pluses than minuses

If India’s economy is substantially whitened, demonetisation will be remembered as the act that began the process

Shock therapy can work, even in India, but not without leaving some burn marks. The World Bank’s latest India Development Update attempts to make another assessment of the impact of the Narendra Modi government’s demonetisation experiment. It does not shy away from saying that demonetisation caused considerable distress among informal sector workers in general. But its general conclusion is that ‘notebandi’ had many more pluses than minuses and its negative fallout was limited. Part of the reason for this, however, was simple luck: A normal monsoon helped cushion the rural economy.

The report interestingly looks at the velocity of M1 money supply, a way to measure the number of transactions in cash, bank accounts and normal places people keep their money. The velocity fell from 5.7 to 5.6 between the last quarter of 2016 and the second quarter of 2017. This would be expected but the fall was remarkably small, indicating that a national inclination for jugaad found ways around the lack of physical banknotes. The bank predicts a sharp rebound in velocity in the coming quarters.

The report repeats what other studies have shown, that India’s GDP growth rate dipped but only marginally during the demonetisation period. It estimates GDP growth rate was at 7.3% in the first half of the fiscal year and dropped a mere one-third of one percentage point in the second half. However, like everyone else who has come out with such a figure, the bank admits it has no clear means to calculate the impact on the informal sector. But certain parts of the formal economy proved quite resilient: Air travel by the urban middle class was wholly untouched by ‘notebandi’.

There are clues to the degree of turmoil in the informal sector. Demand for jobs in the formal sector by February, for example, matched the entire demand of 2016. This is a clear sign of how many jobs were lost during demonetisation. However, this also underlines a key advantage of demonetisation, at least if it is merged with a widespread digitisation of financial transactions: It is helping push India out of the shadow of its black economy.

Formalisation of the economy has numerous gains: It means better wages and conditions for workers, greater revenue for government, less corruption and more transparency, and higher productivity and investment levels overall. There are many who speak in favour of the informal sector. But the poor man’s economy has a crucial flaw. Because of its static productivity and technology levels it keeps its inhabitants in poverty. If India’s economy is substantially whitened, demonetisation will be remembered as the act that began the process.

Source: Hindustan Times, 1-06-2017

Developed states not adding to skill sets; face big gaps: ASSOCHAM Study

New Delhi: The most economically developed states are not adequately adding to skill sets , which may result in the severe shortages of skilled manpower in the coming years, with Maharashtra leading the table followed by Tamil Nadu, according to an ASSOCHAM-Thought Arbitrage Paper.

Other states which lack in creating skilled manpower include Haryana, Gujarat, Kerala, Himachal Pradesh and Punjab, said the paper.

By 2022, the biggest deficit in supply of skilled labour force is expected to be faced by Maharashtra, with the number pegged at 48.9 lakh persons, according to the paper. Tamil Nadu comes close second with shortage of 46.3 lakh.

“These two states together account for more than 70 per cent of the skills deficit in these seven states (mapped by the paper) with highest per capita NSDP and large skill gaps. Haryana and Gujarat are expected to face shortage of approximately 13 lakhs and 11 lakhs persons respectively by 2022. Kerala, Himachal Pradesh. and Punjab are likely to witness skills shortage of about five lakhs each by 2022,”, it said.

In terms of verticals, construction, building and real estate would have incremental human resource requirement of 31 million in the next five years, while retail sector would need about 17 million additional work force. Other sectors generating employment opportunities through skill up- gradation include beauty and wellness (10 million), transportation and logistics (12 million), furniture and furnishing (7.2 million) and handloom, handicrafts (6 million). Textiles and clothing would require additional 6.3 million people and tourism and hospitality 6.5 million.

“Our mapping of the skills shortages suggest that committing resources to training and skill upgradation would serve the twin purpose of employment creation as also helping the industries to grow in a cost effective manner,” said ASSOCHAM Secretary General Mr D S Rawat.

Source: Indiaeducationdiary, 28-05-2017

The real problem with productivity

More attention needs to be paid to the real possibility that productivity isn’t slowing the way we think

The problem is our inability to measure the digital revolution that has redefined the economy

When it comes to productivity, only two things are undebatable: that the official rate of US productivity growth has stalled since 2007, having started to slow before then, and that there is no consensus about why or what to do about it. There is, additionally, some broad consensus that without stronger productivity growth going forward, standards of living will not improve appreciably, which is likely to fuel the current wave of populist discontent.

One explanation, however, is increasingly popular even as it faces considerable scepticism among economists and policymakers: that the problem is less about productivity than about our inability to measure the effect of the digital and now data revolution that has redefined the American economy. In short, there is a growing chasm between what our economic system is and what our numbers are capable of measuring.

Take Google. Its searches are used billions of times a day. Every single one is free. The same could be said of Google Maps or Waze, which are free for the user. While some of what they offer adds little to collective economic output (a group chat between a gaggle of teens has no immediate economic value), a considerable percentage does. That navigation app reduces time spent on the road or stuck in traffic, potentially reduces the amount of gas used, and then frees up that time and savings for other, possible more productive uses.

Several years ago, Erik Brynjolfsson, a Massachusetts Institute of Technology economist, tried to measure what these “free goods of the Internet” might be adding to gross domestic product (GDP). The methods were innovative, trying to gauge what value people assign to their time and then multiplying that by time spent using Google and similar services. He estimated that as of 2012, such “free goods” might add $300 billion to gross domestic product, increasing at the rate of $40 billion a year, which would mean close to $500 billion in 2017. These were only halting initial steps in what is surely a complicated and as yet unresolved process to factor the innovations of the past decade and more into calculations of economic output and activity. In early May, the US Bureau of Economic Analysis released a paper concluding that its own measures of inflation and GDP had been unable to keep up with the changes in the economy, and hence had been off by as much as half a per cent a year.

These issues are not new, but they remain unresolved. The lessons of the Federal Reserve in the 1990s are instructive. The US economy was booming, new technologies were proliferating, and yet productivity numbers were anaemic. Then governor Alan Greenspan tasked the team of economists at the Fed to investigate. Building on the 1989 observation of Robert Solow that “computers were everywhere but in the productivity statistics”, the Fed began to assess how productivity was calculated and understood. That led to more emphasis on different formulas such as multi-factor productivity, which went beyond looking just at labour and capital investment; they also took a longer view that new innovations can take years to show up in official statistics.

Measured productivity did begin to accelerate in the mid-1990s, along with greater attention by policymakers to different formulas such as multifactor productivity to measure it. That said, the debates today haven’t altered much, with a few voices suggesting that we fail to account for the “consumer surplus” or adequately account for the gains from the digital revolution, while many others, such as Robert Gordon, contend that the productivity slowdown is a result of a mature economy that is not keeping pace with societal needs. For them, the statistics, even if slightly outmoded, reflect an unarguable reality whose economic and social consequences are evident. Even those who acknowledge underestimation of productivity tend to argue that if you added back some amount for the hard-to-quantify effects of the digital revolution, you still wouldn’t get back to the levels of the 20th century.

Perhaps. Or perhaps the mismeasurement debated is only a portion of just how significant these mismeasurements are. Even more, perhaps the entire framework is now flawed. The hard numbers today are failing to account for certain observable contradictions—such as how there can be high levels of employment combined with very little wage growth and extremely low inflation. If various free or inexpensive digital solutions are generating adequate output without adding much in the way of labour costs or capital spending, then that would explain why labour costs and capital investment are low. And if those solutions are also leading to less expensive goods and services, that would in part explain why measured productivity is weak.

All this suggests that much more attention needs to be paid to the real possibility that productivity isn’t slowing the way we think, or that slower measured productivity isn’t having the same consequences as when the economy was primarily based on making physical goods. Perhaps if we emphasized quantity and quality rather than market price, the optics would be different. Governments seem unwilling to allocate resources to developing a system for better accounting for free services and how the deflationary effects of technology can both improve standards of living and lower GDP. But if we are going to understand the causes of inequality and formulate solutions, we need to start with data we can count on.

Source: Mintepaper, 24-05-2017

Looking after leaping

Economic Survey’s hesitations are both refreshing and disturbing

For those who read every line, the latest Economic Survey is alarming. For those who read in-between the lines, it is disturbing. Certainly, there is some good news. FDIs, for instance, are still on the rise (while foreign portfolio investment is declining) and the current account deficit has been reduced, in spite of the diminution of remittances, largely because of a contained trade deficit. Growth remains high at 7.2 per cent, but its rate is declining and its composition is worrying. Services continue to grow at 8.8 per cent and agriculture is back at 4.1 per cent because of a good monsoon, but industry registers a setback, from 7.4 per cent in 2015-16 to 5.2 per cent in 2016-17.

The Economic Survey asks: “What went wrong?” and offers the following explanation: In the 2000s, “economies all over the world were booming”, Indian firms “made plans accordingly. They launched new projects worth lakhs of crores”, their “investment financed by an astonishing credit boom”. Naturally, “projects that had been built around the assumption that growth would continue at double-digit levels were suddenly confronted with growth rates half that level”. Firms stopped investing and banks, mostly public, which have accumulated a huge amount of bad loans, stopped lending. The growth of credit to industry became negative during the last fall, making SMEs suffer even more than big companies.

What to do? This is where the Economic Survey needs to be read in-between the lines. A few pages after celebrating the liberalisation of the economy and the end of socialism, the authors admit that while “Most economic problems are best resolved through market-based mechanisms”, “in this case, this mechanism doesn’t seem to be working” — more, “a centralised approach might be needed”.

Which means that “the bulk of the burden will necessarily fall on the government” and that it may even imply “forgiving some burden on the private sector”. In other words: Businessmen have not strategised properly, but they should not be held accountable, and the taxpayer has to help them. In this market economy of some kind, benefits can be private, but losses have to be socialised.

To be fair, this is only the short-term solution the Economic Survey is suggesting. The authors do not content themselves with this quick-fix perspective because they know that “unless there are fundamental reforms, the problem will recur again and again”. Why? Because, as Atul Kohli has already demonstrated, India is not market-friendly but business-friendly (As the Economic Survey says on page 42, “India is not quite what it appears to be”): Even if crony capitalists have bad projects in mind, politicians will twist the arm of the public bank managers to lend them the necessary amount — in exchange for the funding of some election campaign.

Hence, this suggestion: “Structural reform aimed at preventing this can take many forms but serious consideration must also be given to the issue of government majority ownership in the public sector bank”. Why is the suggestion not more precise and so hesitant, because the authors know (and say!) that it is in the domain of reform that “the least amount of progress has occurred” under the Modi government. While the prime minister has reached the middle of his term, the Economic Survey points out that “Perhaps the most important reforms to boost growth will be structural”, like strategic disinvestment, tax reform and subsidy rationalisation. This is long overdue for those who supported the BJP in 2014 and for whom reforms were the mandate. These reforms have not really taken place yet, according to the Economic Survey.

In fact, the epithet “structural” is repeated 18 times in the Survey, to say that structural reforms are needed, to suggest they are on their way and to say that they have happened already. The chapter on demonetisation illustrates this fundamental hesitation.

The Economic Survey offers the first official detailed analysis of demonetisation. The reasons it mentions are standard: “to curb corruption”, counterfeiting, the use of high denomination and especially, the accumulation of “black money”, generated by income that has not been declared to the tax authorities. The authors admit that the impact of this decision on the growth rate is underestimated because the evolution of the informal sector — that has been the most directly affected — is not measured precisely in the national income accounts. Yet, the graphs shown by the Economic Survey are telling: Sales of two-wheelers and cars have dropped by 10-20 per cent after the November 8 announcement; the real estate market has sunk, etc. The Survey candidly admits that the most badly affected have been the poor, a category coterminous with the 350 million people who have no cellphone. These “digitally excluded” cannot easily go cashless. (Paradoxically, the Survey considers that demonetisation has been popular in India on the basis of a “phone survey across households in five states (that) shows that approval rates for demonetisation have remained high, over 75 per cent on average”).

While the short-term damage is obvious, the most disturbing conclusions pertain to the long-term gains. The authors of the Economic Survey do not conceal that the long-term effects are conditional: Demonetisation will only bear fruit economically if it is accompanied by structural reforms, including an ambitious GST. Speculating that “GST will probably be implemented later in the fiscal year”, the authors conclude: “The fiscal gains from implementing the GST and demonetisation, while almost certain to occur, will probably take time to be fully realised”.

The many doubts that are pervasive in the Economic Survey are refreshing in the present era of post-truth democracy, when facts are often conveniently overlooked. But they are disturbing too because the rulers’ sense of direction does not seem to be as firm as public discourse would like citizens to believe.

P.S.: One of the main issues for Indian society, jobs, is mentioned in passing — in contrast to the detailed study of the labour market in last year’s Survey. One of the few indirect references made to it concerns the loss of India’s competitive advantage in the textile and leather industries vis-à-vis Vietnam and Bangladesh — one more reason for asking for structural reforms.

The writer is senior research fellow at CERI-Sciences Po/CNRS, Paris, professor of Indian politics and sociology at King’s India Institute, London

Source: Indianexpress, 9-02-2017

Why India doesn’t trust its private sector

Excessive government intervention and uncertain regulatory environment have affected outcomes in the market

The Indian economy has made enormous progress since the 1991 economic reforms. All political formations in power have taken this process forward. The latest Economic Survey, in its second chapter, “The Economic Vision For Precocious, Cleavaged India”, has beautifully mapped some the developments in the Indian economy. For instance, India’s trade to gross domestic product (GDP) ratio has doubled to reach 53% over the last decade ending 2012 and is higher than that in China. The flow of foreign direct investment has also picked up significantly in recent times and the contribution of the private sector has increased over the years. However, the latter’s failure to gain the trust of Indian society has been an enduring problem.The survey has made a sharp observation in this context: “All states, all societies, have some ambivalence towards the private sector. After all, the basic objective of private enterprises—maximizing profits—does not always coincide with broader social concerns, such as the public’s sense of fairness. But the ambivalence in India seems greater than elsewhere.” It further added: “It appears that India has distinctly anti-market beliefs relative to others, even compared to peers with similarly low initial GDP per capita levels.”

India’s ambivalence towards the private sector should be cause for concern as it can affect economic growth in the medium to long run. There is enough evidence to point to the vectors of concern. For example, there is notable resistance in the political establishment to privatizing public sector companies, and several sections of society expect the state to take more responsibility. Since this can prove to be a serious bottleneck, it is important to examine why—despite visible gains from economic reforms—India is still not certain about the role of the private sector. There could be three broad reasons.

First is the legacy of the pre-reform era when the private sector was seen with suspicion and the government wanted to control practically every part of the economy. There were controls on production and profit was a bad word. As the survey also notes, industrial licensing meant that the incumbents were seen as benefiting. Even though India has opened up the economy, economic reforms have been half-hearted at best. Businesses close to the ruling establishment are still seen to be gaining, though steps have been taken in the last few years to bring more transparency. Also, the government has been fairly reluctant in creating more space for the private sector—often fearing political backlash. This is one of the reasons why privatization has been slow. Montek Singh Ahluwalia has appropriately described the Indian situation as having “a strong consensus for weak reforms”. Excessive government intervention and uncertain regulatory environment have affected outcomes in the marketplace.

Second, India’s experience with the private sector has also been fairly mixed so far. On the one hand, sectors where private participation is allowed have made significant progress. On the other hand, there have been governance issues which have dented confidence. The private sector is seen by many as excessively driven by self-interest without adequately acknowledging the interest of other stakeholders, including consumers. India’s telecom sector is an example. While penetration has increased significantly over the years with extremely competitive tariffs, the quality of service has left much to be desired. Further, high-profile cases where promoters are seen to be gaming the system have not helped.

Third, the state has not been able to create the necessary capacity in the system required for the smooth functioning of the private sector. For instance, according to the World Bank’s ease of doing business ranking, India has one of the lowest rankings in enforcing contracts. The inability to enforce contracts or delays in the process affects outcomes in the private sector. Regulatory gaps and lack of clarity in rules in some areas and the excessive compliance burden in others affect the smooth functioning of the private sector.

India will need to overcome these challenges to be able to grow at higher rates in the long run. For this, the government will have to work on multiple fronts. It will first have to create more space for the private sector and allow the markets to function. This will, among other things, lead to more efficient allocation of resources. Simultaneously, the government will need to build capabilities to be able to intervene if markets fail. It will also need to create a regulatory environment where consumer interests are well protected.

But the private sector must also do more, especially on the governance front. For an example of what a failure to do so can cause, one need only look to the US and the populist backlash catalysed by the sentiment that government and business interests no longer coincide with those of the broader society.

Source: Mint epaper, 7-02-2017

Lift the veil of secrecy

The primary aim of the demonetisation exercise was to tap black money. To mark the last day for depositing the demonetised notes, on December 31, 2016, the Prime Minister, in his address to the nation, fully acknowledged the great hardship suffered by common people due to the serious delay in making the new currency notes available in the banks, ATMs and rural areas, and thanked them for the faith they reposed in him in spite of such hardships. He announced a slew of financial sops to the marginalised and farmers. While he made a passing reference to black money hoarders being on the run, and about collusion on the part of a few bank and government officials, he made no mention of specifics like the government’s estimates of black money and counterfeit money unearthed by the demonetisation. Perhaps it was too early to arrive at such estimates with some precision.

Subverting the system

Newspapers were full of reports of some sensational cases of hoarding of new currency notes, within a few days after the demonetisation, even as common people could not get more than one, and then two new ₹2,000 notes even after standing in queues for hours. As of December 10, it was reported that a stash of ₹242 crore in new currency notes had been uncovered. Cases have to be investigated with the greatest speed as top priority and persons involved should be given exemplary jail terms. The investigation should reveal how the new notes, which were in such short supply, reached these hoarders in record time. The Prime Minister or his representatives should have given some details about the likely time frame for strong action against those caught, including hoarders and corrupt officials, to reassure the common man about the government’s seriousness in dealing with black money.

There are two other aspects of demonetisation on which clarity is required. One is the status of political funds, and the other the status of donations/offerings made to temples and religious institutions, through the so-called temple hundis.

Political donations as conduit?

Political party funds are exempted from income tax, though parties are required to maintain books of accounts, and file income returns. Moreover, they are not required to keep any details of the source of funds if the individual contributions are ₹20,000 or less. It is well known that almost 90% of the funds of major political parties are of this nature.

The Union Revenue Secretary reportedly said on December 16 that political parties can accept cash donations even after November 8. The Finance Minister, however, said a couple of days later that political parties cannot accept donations in old ₹500 and ₹1,000 notes. The question, thus, is whether parties did accept cash donations in demonetised bills after November 8. If so, it could have been a great device for converting black money into white in the hands of unethical political parties by breaking down huge contributions into a number of small ones of ₹20,000 or less; an unethical political party could even receive cash contributions after November 8, but show in its books that the money was received before that date.

Disclosure of figures about cash donations received by political parties before and after November 8, and the amount deposited in the banks by December 30, and whether any part of it will be taxed, would help in an informed debate. It may be noted that all political parties have taken a stand that they are not subject to the jurisdiction of the Right to Information Act.

It would also be useful to find out the amount of cash deposited by temples after November 8 purportedly received as donations to know how funds so received will be dealt with (so as not to enable conversion of black money into white), and whether any part of such collections would be taxed.

Keeping the public informed

Even if the entire ₹15.4 lakh crore of demonetised currency is received back in the banks, obviously a part of it would be black money (i.e. money that hadn’t been taxed). The government should ask the Income Tax Department to finalise suspicious cases within six months, if necessary by putting aside all routine work relating to regular assessments, etc. for the time being.

Before the demonetisation exercise, it was reported that the Income Declaration Scheme, which ended on September 30, 2016, has fetched ₹67,382 crore of undisclosed income and should result in tax and penalty of ₹30,322 crore, to be paid in two equal instalments on November 30, 2016 and September 2017. The government should reveal how much tax was actually received by November 30 out of the estimated ₹15,161 crore.

The Pradhan Mantri Garib Kalyan Yojana provides a window from December 17, 2016 to March 31, 2017 for holders of black money to declare their assets. Fortnightly data of remittances to this fund should be released for information of the public.

Most people think that the fountainhead of black money is the provision that political parties need not disclose source of contributions of ₹20,000 or less. Support for the Prime Minister would have soared sky-high had he declared that from the midnight of December 31, all cash donations to parties were to be banned. But he missed the opportunity, and now it cannot be done even if one wants to until the upcoming Assembly elections to five States are over.

K. Padmanabhaiah, an IAS officer of the 1961 batch, served as Union Home Secretary and is the Chairman of the Court of Governors of Administrative Staff College of India (ASCI), Hyderabad.

Source: The Hindu, 25-01-2017

Richest 1% in India own 58% of country's wealth: Study

Davos: PTI





`Women Form 60% Of Lowest Paid Group'

In signs of rising income inequality , India's richest 1% now hold 58% of the country's total wealth. Worldwide, 8 billionaires alone hold about 50% of global wealth, a new study showed on Monday . The study , released by rights group Oxfam ahead of the World Economic Forum (WEF) annual meeting attended by the rich and powerful from across the world here, showed that just 57 billionaires in India now have the same wealth ($216 billion) as that of the bottom 70% population of the country .
The study said there are 84 billionaires in India, with a collective wealth of $248 billion, led by Mukesh Ambani ($22.7 billion), Dilip Shanghvi ($16.7 billion) and Azim Premji ($15 billion).The total wealth in the country stood at $3.1trillion.
In the report titled `An economy for the 99%', Oxfam said it is time to build a human economy that benefits everyone, not just the privileged few. It said that since 2015, the richest 1% has owned more wealth than the rest of the planet. “Over the next 20 years, 500 people will hand over $2.1 trillion to their heirs -a sum larger than the GDP of India, a country of 1.3 billion people,“ Oxfam said.
Over the last two decades, the richest 10% of the population in China, Indonesia, Laos, India, Bangladesh and Sri Lanka have seen their share of income increase by more than 15%. “Due to a combination of discrimination and working in low-pay sectors, women's wages across Asia are between 70-90% of men's,“ it said.
Referring to the Global Wage Report 2016-17 of Indian Labour Organisation, the study said India suffers from huge gender pay gap and has among the worst levels of gender wage disparity -men earning more than women in similar jobs -with the gap exceeding 30%.
In India, women form 60% of the lowest paid wage labour, but only 15% of the highest wage-earners. It means that in India, women are not only poorly represented in the top bracket of wage-earners, but also experience wide gender pay gap at the bottom.
It also said that more than 40% of the 400 million women who live in rural India are involved in agriculture and related activities. However, as women are not recognised as farmers and do not own land, they have limited access to government schemes and credit, restricting their agricultural productivity .

 

Source: Times of India, 17-01-2017

The New Cultural Revolution

Demonetisation is aimed at a behavioural change necessary for building a new India.

Change is the law of life. Modernity is about breaking stereotypes that govern individual and institutional habits. In today’s world, technology has come to be the main driving force of change. From the steam engine to the electric bulb and internet, technology has defined the evolution of the human mind and civilisation. Should India not keep pace with this momentum?

The demonetisation of high-value currency notes announced on November 8 by Prime Minister Narendra Modi has several dimensions. Cutting off money channels to terrorists and extremist elements, weeding out counterfeit currency and driving out black money are the visible, short-term objectives. But the long-term consequences and gains include ushering in a behavioural change at all levels of society. It is a part of the grand “cultural revolution” that the PM is working on. The entrenched old order needs to make way for a new normal. This cultural revolution, impinging on all walks of public and private life amounts to shaking up the system. It ranges from attending office on time, keeping working and living environments clean, accountability, transparency, technology adoption, innovation, etc.

Instead of quibbling over the ratio of our currency to GDP vis-à-vis other economies, the moot question is how and by when can a common Indian make technology an effective tool. Logic suggests it should be as quick as it can be, given the humongous advantages. Why should one carry currency at all? A least cash society needs to be our goal. The major latent benefit highlighted by the recent demonetisation is it has driven home the point that all Indians should be prepared for a least cash ecosystem. This entails a major attitudinal change and a behavioural modification.

Let us examine demonetisation in the overall context of our institutional culture that has evolved since Independence. There may not be too many dissenting voices if I say that the prime contours of the existing decadent culture are corruption, opportunism, nepotism, greed, repression (remember Emergency?), exploitation of power, sycophancy and self-seeking behaviour. Non-Congress governments made sincere efforts to change this culture but the results fell short given their too brief interregnums. So, everyone knows which party is primarily responsible for this entrenched decadent culture.

Vested with an absolute majority in the Lok Sabha for the first time after 30 years, PM Modi has taken upon the responsibility to change this deeply entrenched system. This is an essential pre-requisite for the making of a developed India. What has PM Modi done and what will the consequences be?

One, he has given the clarion call for a “cultural revolution” against the old decadent culture, whose contours have been outlined above. Two, he set in motion a multi-pronged and comprehensive strategy to cleanse the system of all ills that have worked against the interests of the poor, the common man and the middle class, since the system nurtured by the Congress benefited only a few individuals and groups. Three, his efforts will result in a “new normal” in which the financial institutions and systems will serve the interests of the poor, the common man and the middle classes, who constitute the vast majority of the “honest” that our society is made of.

Four, the initiatives of the prime minister and the government, including the latest “remonetisation”, are aimed at a “behavioural change” that is necessary for building a new and resurgent India based on the cleanliness of thought and action. Five, the perception about India from that of being “corrupt” to “clean” will result in increased investments and enhanced economic and business activities benefiting millions of unemployed youth. Six, the new initiatives will herald a modern India on the lines of advanced countries, where financial payments and transactions will not require currency — technology will become a tool in the hands of common people. Seven, targeted behavioural modification will eventually result in the elimination of black money leading to increased revenues to Central and state governments that ultimately benefits the poor, common man and the middle classes. Finally, the new initiatives will soon transform India, erasing the legacy of the old decadent culture and Modi will emerge as the tallest leader of post-Independence India.

This prospect has obviously rattled some parties, families and individuals who stand to benefit from the status quo. This is the prime reason for their so-called aakrosh. But this anger has no justification as it does not echo with the people who have braved long queues since November 8 with patience and discipline despite the best efforts of some parties to provoke them into violence and unrest. People have raised their hands for a new Bharat. The judgement of the people is out. This, however, is not palatable to some. Their worry is how Modi finds such a resonance with the people. So, let us disrupt Parliament.

It is time that such parties stand by the change that people want and vent their aakrosh against status quo instead of seeking to block change with photo opportunities.

Source: 29-11-16

Demonetisation and its discontents

Demonetisation seems to have made friends of foes, and foes of friends in the political firmament. If Bihar Chief Minister Nitish Kumar differed from his allies while heaping praise on Prime Minister Narendra Modi for embarking on demonetisation, Shiv Sena chief Uddhav Thackeray was critical of his party’s senior partner in government for “bringing tears in the eyes of the people” who had voted it to power. In West Bengal, Mamata Banerjee and her Trinamool Congress showed a readiness to join hands with arch-rival Left Front to fight the demonetisation drive. While the withdrawal of high-denomination notes can hardly be expected to trigger a political realignment anywhere, political parties seem to be rising above mundane political calculations while reacting to the demonetisation. A cynical view might be that Mr. Kumar is keeping his political options open by building bridges with the BJP, and keeping his politically junior but numerically stronger ally, the Rashtriya Janata Dal, in check. Arguably, he could be trying to recover his assiduously cultivated anti-corruption image, which took a beating following his electoral pact with Lalu Prasad of the RJD. But a simpler explanation cannot be ruled out: that Mr. Kumar saw some merit in the demonetisation drive, even as he recognised the difficulties in implementation. Similarly, the Sena cannot afford to break with the BJP at this juncture. Quite likely, Mr. Thackeray was prompted not by the possibilities of political realignment (of which there is practically none), but by the realities on the ground, in distancing himself and his party from the demonetisation decision. In West Bengal, an alliance between the Trinamool and the Left Front is inconceivable, but that did not stop Ms. Banerjee from reaching out to the CPI(M) in her fight.

If political parties have thus reacted unpredictably, it could just be on account of the mixed results seen on the ground. None can afford to be seen as directly opposing measures to clean up black money and weed out counterfeits. However, stories of cashless banks and shuttered ATMs seem to have given some life to opposition parties looking for an issue to pin the government down on. Reports of the BJP having made huge cash deposits in banks in West Bengal, and land deals in Bihar days before the demonetisation, have provided some ammunition to opposition parties that were initially reluctant to criticise the move for fear of being labelled supporters of black money hoarders and counterfeiters. Demonetisation might not have changed political equations, but it has shaken up the political scene. What they cannot oppose in principle, parties have opposed in practice.

Source: 28-11-2016

India’s golden moment

Demonetisation is an ethical step. It can help us leave behind culture of illegality, indiscipline, ill-gotten wealth.

The public frenzy for getting hold of cash is visibly subsiding. However, the pressure may well be shifting to smaller towns to which currency supply may not have kept pace. Also, the next wage payment for casual workers, who may well comprise nearly 60 per cent of the workforce, is approaching. Therefore, it may be a good time to take stock, draw lessons and initiate steps to prevent short-term pains from resulting in permanent loss of economic activity.

For me, the ethical and social aspects of this dramatic move are of utmost importance. The measure represents the draining of a cesspool, created over seven decades. We are all party to its creation, either actively or in our passive acceptance of the growing vulgar ostentatious consumption that threatens to become all pervasive. Demonetisation will surely reverse, to some extent, the brazen flaunting of ill-gotten wealth. It may induce India to turn away from the Latin American model of state, with its extreme inequities and rampaging drug mafias, and hopefully, turn it towards the more equitable and honest East Asian model.

We know that black money (currency) is only a small part of the black economy. However, this does not necessarily imply that it is not worthwhile to liquidate stocks of black money without simultaneously attacking other “illegally” acquired assets. The aggregate black economy is estimated at over 30 per cent of the formal economy. Even if black money constitutes 10 per cent of this amount, it represents a cash hoard of nearly Rs 5.5 lakh crore. To try and immobilise that amount or even a substantial part would convey a strong anti-corruption signal.

Three types of criticism have been mounted against the measure. First, economic costs would far outweigh any potential benefits. Second, implementation has been badly botched. Third, it has not gone far enough because it only attacks the stock and does nothing to stymie future flows of illegal economic activity. The first and the third arguments are contradictory because the first considers the measure to be harmful, while the third demands more of the same.

A major concern has been that all those in the informal sector who have legitimate business, though carried out in cash, will be undeservedly hurt. Some may be hurt mortally and result in their permanent closure resulting in job losses and the slowdown of GDP growth. Some wild estimates see GDP growth plummeting to zero in the next two quarters and not recovering in the foreseeable future.

This is surely scare-mongering. All medium, small and even micro production enterprises (production MSMEs as opposed to wholesale or retail traders) surely have some access to formal credit sources. This must be true of MSME export units that are reported to account for 45 per cent of India’s total merchandise exports. The majority of MSMEs deal only partially in cash. Anticipating the onset of GST, many had started to move away from cash transactions as these would not receive any tax credit. Therefore to argue that demonetisation spells doom and disaster for MSMEs is sheer exaggeration.

Farmers, it was asserted by Lalu Prasad, are in deep distress and dying. This is hyperbole. Farmers can sell their kharif harvest of sugarcane to mills with receivables being directly credited to their bank accounts as always. Any amount of paddy can be sold to the FCI at the government-declared minimum support price (MSP). Agro-inputs are normally available at 30-60 day credit to virtually all farmers.

Rabi sowing is, therefore, reportedly on track, opposition parties’ grandstanding notwithstanding. In his November 16 blog on Modi’s bold move, Kenneth Rogoff, the author of The Cashless Economy, wrote: “The short-run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.”

It is, therefore, not surprising that the opposition parties find themselves terribly short of public support. Not surprisingly, they have been patently unsuccessful in taking their protests out of Parliament to the streets, where they will be exposed to the strong public support for the PM’s move.

The implementation certainly could have been better. Admittedly, the measure was humungous in scale, cloaked in necessary secrecy and complex. The RBI and ministry of finance should own up their responsibility. To their credit, they have been learning on the job, and have been open to suggestions.

Three practical questions must be answered for further course correction. First, was the relatively short window of 50 days necessary and could it not be extended? Second, could the domestic security printing press capacity constraint not be overcome by placing orders on foreign printers to produce Rs 100 and Rs 50 notes? Printing additional quantities of these denominations would not have breached secrecy and could have augmented the much needed currency supplies? Third, given the scale and time constraint, could government departments and treasuries not be used as points for dispensing and exchanging currency to overcome the shortage of ATMs that are still being re-calibrated.

It is, of course, necessary to take steps to restrict future flow of illegal earnings without which this huge exercise could come to a naught. Some measures are already in place: Greater transparency in governance and roll back of the “inspector raj”, strictures and action against the corrupt in the central government, compulsory linking of Aadhar card with deposits and withdrawals from bank accounts and large purchases of jewellery and real estate, the impending GST, greater surveillance by the CBDT and commercial banks of brokers, developers and jewellers and Jan Dhan accounts, which are the expected conduits for laundering black money. Modi has repeatedly announced that demonetisation is but the beginning and that other steps to curb black money are in the pipeline.

Modi has risked the support of the core constituency of the BJP and RSS — traders, middlemen and small entrepreneurs. He has taken this risk because he believes the measure can help India leave behind the culture of illegality, indiscipline and ill-gotten wealth. Every country needs its “golden moment” to transform itself and surge ahead. I suspect Modi feels it in his bones that this might be that moment for India.

The writer is senior fellow, CPR, and founder director, Pahle India Foundation

Indian Express, 25-11-2016