Tuesday, June 19, 2012

To Do List for the Indian Economy

New Delhi's Corridors of Power

As finance minister Pranab Mukherjee gets ready to leave the North Block later this week, his successor will be confronted with five critical tasks initiated by him — cut Subsidies to reduce expenditure; fast-track FDI reform to bring in hard currencies; insurance and pension reforms; get infrastructure spending to deliver the goods; and kickstart tax reforms through goods and service tax (GST) and the direct taxes code (DTC).
Regardless of whether the job is taken up by Prime Minister Manmohan Singh, aided by his two trusted lieutenants — C. Rangarajan, the former RBI governor, and Montek Singh Ahluwalia, plan panel deputy chairman — or by a politician such as home minister P. Chidambaram or commerce minister Anand Sharma, these five jobs are crucial to India’s future economic course.
1.    Subsidies: Mukherjee has been working with states to make them give tax concessions on petrol and diesel and match the reliefs with similar cuts in central taxes, thereby reducing the government’s fuel subsidy burden. State levies on petrol and diesel range from 15 per cent in Puducherry to 33 per cent in Andhra Pradesh. Karnataka, Maharashtra, Tamil Nadu and Bengal also have high fuel taxes. Besides, the taxes are ad valorem, meaning the amount goes up with the prices.
Mukherjee wanted states to cut taxes by up to 25 per cent. The bold measure obviously requires adroit political manoeuvring to get off the ground.
Urea subsidy is another area the new Czar at North Block will have to train his guns on.
Increasing urea prices every year for the next three years and eventually introducing free pricing in fertilisers will help the government to check its huge subsidy bill and also save farms from being turned into wastelands by the overuse of heavily-subsidised urea.

2.    FDI Reforms : The depreciation of the rupee, which has lost around 24 per cent of its value in a year, is snowballing into a major area of concern. Though India has one of the largest forex reserves, it needs to shore up its investment as a large part of the foreign exchange is in the form of debt.  To bring in a fresh wave of investment, the government wants to not only open up FDI in retail, defence and aviation but also revive stalled insurance sector reforms.

3.    Pension and Insurance reforms : Even if the FDI cap on insurance can’t be raised because of political compulsions, Mukherjee’s other proposals reforming the insurance sector, can lift market sentiments and rake in hard currency. Chief among the reforms is to allow Lloyd’s to open a trading floor in Mumbai, permit foreign reinsurance firms such as Swiss Re and Munich Re to enter India and give a green signal to public non-life insurance companies to raise capital by selling minority stakes.
4.    Spending : Earlier this month, the Prime Minister had held a meeting of infrastructure ministries to try and push them into meeting their spending commitments. But in truth, this job is done best by two people – the finance minister, who holds the purse strings and sits in on all meetings on permission for projects, and by the Planning Commission deputy chairman, who appraises the projects. To rev up growth it is just as important to spend money on infrastructure projects which can pep up the economy as it is to stop spending on wasteful subsidies.
5. Tax Reforms: Implementation of the goods and services tax will be on the top of any finance minister’s priorities. This tax reform measure, which will help to unify India’s markets and increase its GDP by 1-1.5 per cent, has been held up because of opposition from BJP-ruled states and to an extent by Bengal.
The direct taxes code, will, however, be a simpler task as most of the hard work has already been put in by Mukherjee’s team and now just requires some fine tuning.

Saturday, June 16, 2012

Pranab Boss Again

Vintage Pranab Mukherjee

In 1974, when a 39-year-old Pranab Mukherjee was appointed minister of state in the key ministry of finance, he met a studious-looking economist who was three years older than him and then the ministry’s chief economic adviser.
Mukherjee and Manmohan Singh worked together on the first tentative revenue reforms in the late ’70s after the former was made junior minister with independent charge of revenue and banking and Singh appointed finance secretary.

In 1982, when Mukherjee came back to North Block as finance minister at the young age of 48, he remembered Singh who had by then shifted to Yojana Bhavan as member-secretary. Mukherjee recommended Singh for the job of Reserve Bank of India governor.

The recommendation from Mukherjee, who counted then Prime Minister Indira Gandhi as his mentor, was accepted. Singh got the job.

Decades later, in 2004, Mukherjee joined Prime Minister Singh’s cabinet as minister, first for defence and then for external affairs before eventually returning to his old portfolio of finance in 2009.

From tackling the Telangana crisis to the spectrum scandal, Mukherjee became his party’s man for all seasons — so much so that by 2012, he headed some 25 Groups of Ministers and Empowered Groups of Ministers.

However, by 2012, Singh had probably started getting a little wary of his former boss, who had a different take on some issues. Sources said Singh often felt cramped by Mukherjee.

Mukherjee is now set to depart his North Block office to try and take up residence in the house atop Raisina Hill, giving Singh, widely regarded as the father of India’s reforms programme, a chance to retake his original ministry and try to shape the economy in his own way.

Mukherjee said as much to reporters, who wanted to know how the government would tackle the economic slowdown, after the announcement of his candidature for President.

“The Prime Minister himself is an eminent economist and under his leadership we will overcome this crisis,” Mukherjee said.

India’s Constitution is vaguely worded on the powers of the President, which has often led to tiffs between Prime Ministers and politically driven Presidents (such as the ones between Jawaharlal Nehru and Rajendra Prasad and between Rajiv Gandhi and Zail Singh).
However, many analysts believe that perhaps this very vagueness may lend Mukherjee more powers than usual to solve India’s myriad problems, in working together with Singh.

Becoming President at a time the country is going through a period of crisis could also give Mukherjee more influence than he would have had in an earlier decade. An added advantage is that he could use the prestige of his office to draft Opposition parties’ support.

With the economy in slowdown, he could play a lead role in resolving the deadlock between the government and the Opposition on key pieces of legislation such as the land acquisition, insurance and pension bills, the goods and services tax and the value-added tax.

Usually, the President’s office does not get down to resolving legislative imbroglios. But with the economy in the doldrums and Parliament numbers often proving elusive for the ruling alliance, a pro-active President may well be the answer to the frustrating wait for reforms to unfold.

Constitutional experts say that the rules of business do not preclude the President from acting as an elder statesman.

They cite how the Supreme Court had ruled that the President is not a mere figurehead but a moral authority who may stay in touch with the Prime Minister on matters of national importance and policy.

Thursday, June 7, 2012

The Triad, Society and Market Rules

 Amul cartoon ad on corruption

The other day, I was part of an adda session where those present were lambasting our political leadership for the mess that is India. Others blamed the `steel frame’ or the babus who run the system and yet others, business leaders who helped corrupt the two.

Of course, the very idea that we are in a mess is not new. Even when India was on top of the world with 9 per cent GDP growth , we were simultaneously in a mess. High levels of corruption, poor infrastructure, social and political unrest in some parts of the country, huge urban-rural income divides remained side by side with `Shining India’. The only difference is that now things look worse – as coupled with all the ills of a typical developing economy, we now have a slowdown in our boom-time story, with its attendant sene of despondency.

This makes the search for the culprit even more interesting. If one can really pin-point him or her, curing India may be that much easier?

At all times there will be dishonest politicians, business leaders and bureaucrats as well as honest ones. This is a triad which has ruled all countries since time immemorial. There are just two more social pillars which count in forming or reforming national societies – the regulatory judiciary which assures rules of the game are followed and the press, which acts as a conscience keeper.

The main differences between a `good period' and a `bad period' for any society lies in - i) the degree to which the triad has been corrupted and ii) the degree to which this system's regulators -  judges/judicial magistrates/ quasi-judicial officers including economic regulators have emained free and fair.

I am told JRD Tata had in the 1950s and 1960s spurned offers by his lieutenant and others to use bribes and favour exchanges as a way of getting around the `License Raj' which was stifling his empire's growth. In this, he was unlike most of the other big business houses of this country. Tatas remained one of two big houses in the country, till the Ambanis came along. Corrupt politicianss or bureaucrats were not unknown in those decades, but their numbers were perhaps within tolerable limits. The judiciary, despite being political appointees, were similarly, more or less fair and honest.

One prime reason for all this was that Indian society as a whole looked down on corruption, conspicuous consumption and flashy lifestyles.

Society started changing its stance towards corruption in the 1980s, becoming more willing to accept and compromise. The old rules of the `License Raj' were seen as outstanding examples of how to corrupt the system and people who `actually got around them' and build enterprises were lionised. It was no longer fashionable to be poor. Rather the reverse - showing off wealth - was a must do. In Delhi University, students from certain states, openly talked of the dowry one could expect if one cleared the civil services or managed to bag a seat in prestigious management schools. One interesting but tell-tale fact in the dowry ranking was that a railway clerk earned a higher dowry than many officers! Obviously, by then Indian society had started accepting that some of its members could be dishonest !!

Paradoxically, the revelations of kickbacks in the Bofors scam (which now seem like chicken-feed) and subsequent scams seems to have encouraged greater corruption levels down the line. The idea being if the high and mighty can feed off the system, why not the rest.

By the 1990s, when we started dismantling the old, much reviled `License Raj', Indian society was more than willing to embrace the market. Socially, a man or a woman was appraised, not on the basis of his learning or his qualities of head and heart, but rather on his spending power and/or the influence he could peddle.

One example was that politicians and bureaucrats who did not really need a red or blue beacon on their cars, started hankering for it (I have still not understood what society gains from giving anyone other than ambulances and patrol cars those prized lights, and it has always remained a big question why a minister needs a beacon, when his police escort car has one and clears the way for him in any case).

Bringing in `The Market' also meant bringing in transparent rules and regulations which the West had developed over centuries and which we had forgotten through the `pseudo-Socialist era'. However, we were reluctant to embrace those rules as were the western businesses who flocked to Indian shores. They `compromised' `opportunities'!

We are still to bring those rules in, in full measure. Attempts like the amendments to Companies Act which could bring fairplay into the running of our firms, have been deliberately diluted. Many of the economic regulators who have been set up, either did not have the legislative teeth to go about their business or had the misfortune to be at times led by officers who were unable or unwilling to root out wrongdoing in the marketplace.

I cannot comment on whether some of them were compromised or not. But suspicions do linger in some cases, which means the rules which governed these regulators were less than transparent and allowed greater than usual discretionary powers of commission and more importantly ommission.

Questions also come to the mind on the system by which regulators were selected. Perhaps, we should look very seriously at the leader of the opposition, Mr L.K.Advani's, suggestions on a collegium which could select the Chief Election Commissioner. This collegiums could perhaps also be given the chance to select the principal economic regulators, given the fact that their rulings affect the lives of millions of ordinary Indians! (A ruling by the airport regulator could well make aircraft tickets costlier or cheaper e.g the recent ruling on differential development fees charged from passengers flying out of Delhi.)

The point that one may make is that the regulatory environment is far from perfect and this compounds the turmoil being witnessed in India where new economic rules and systems are replacing the old. Under such circumstances not only the marketplace but also society at large remains in turmoil.

The good thing about the 2000s is that Indian society seems to have got fed up with this environment of total laissez faire, with its attendant chaos. Good, for one thing, this less than perfect system is hardest on the poorest and the weakest, on whom it preys the most.

Remember, in every scam someone is becoming rich at the expense of someone else and that someone else is the weakest and poorest member of our society.

When Special Economic Zones and mining leases are given away to business tycoons at a fraction of the cost which they should command, the compensation package for the farmers and tribals ousted is that much lower.

Similarly, in a more convulated way, when steel barons are allowed by politicians/bureaucrats/ top bankers to get away from their interest payback commitments despite having siphoned away millions by overstating capital expenditure, it is the poorest bank deposit holder who loses out the most. His fixed deposit fetches less as the bank faces higher NPAs and reduces borrowing costs. He also faces the double whammy of inflationary pressures as the money written away remains circulating within the economy, raising prices.

Society, without thinking all this through, has instinctively shown its preference for transparent rules of the game, along with market capitalism. Without being told so, society has understood that this is the best way to check corruption and inefficiency. The Anna movement is in itself may not be much to be spoken of, given its many downsides. However, it brings to the fore people's expectations of better and more transparent regulations, which in turn checks what ails India.

What I would have liked to say at that adda, which I referred to in the beginning, but did not manage to say, is : Let's stop criticising one or the other member of the triad, listen to the common man in the street and take this opportunity to try kick in responsible rules which could actually improve the system.