Oil Magic

 

Many say that it is not Modi magic which has saved the Indian economy from going Europe’s way but rather oil magic. Prices of India’s biggest import item – crude oil – fell by some 46 per cent from a peak of $ 107 in June to less than $ 57 a barrel by last week of December.

India's oil import bill for the last financial year stood at $150 billion. A $ 30-40 billion cut in that huge bill translates into that large a stimulus for the Indian economy. A rough back of the envelope calculation says that every $ 25 cut in crude prices translates into a $ 10 billion stimulus for the Indian economy.

The impact is visible -  the rupee value is far more stable, the fiscal deficit despite being worrying is more manageable because the Government spends that much less on fuel subsidies and has more money to spend on infrastructure. Finance Ministry economists estimate that instead of last year’s Rs 140,000 crore oil subsidy bill, the actual bill this year is likely to be nearer Rs 80,000 crore.

Banks have more money to lend as Government borrows less to pay for its oil bill (estimates are that the Government borrowed $ 39.25 billion less in the first half of this year than what it had planned to), which translates into more lending and more consumer demand.

Indian consumers too benefit, as prices linked to fuel – energy, food and vegetables – either fall or at least remain stable. Less spending on petrol  and diesel to run busses, trucks, cars or two wheelers also means that much more money in hand with ordinary citizens for other necessities.

Of course, the full impact of the drop in crude prices has not been passed on by the Government. A two-step rise in excise duty has ensured that the Government will mop up an extra Rs 40,000 crore in taxes and deny consumers that much money in hand. However, the Government has been beset by falling revenue collections and its excuse that this was the only way it could balance its books, seems to have been accepted by a wary citizenry.

This move to `balance books' of course is a leaf taken out of the thinking from the old `Command and Control’ economy which the Narendra Modi Government says it intends to do away with. True adherence to market economics would have meant passing on the drop in oil prices in full, to consumers and giving them the right to give the market a stimulus through increased consumer spending. But then, like all other things Indian, to expect us to make the leap from a `planned economy’ to a market economy with one change in Government is to expect too much. Change here really means change with  continuity ! 

The obvious question rising from all this is how did this change in our fortunes  happen? Crude prices are really down because of discoveries of shale oil in the US and Canada. There has been an increase of 1 million barrels per day of oil available in the market for each of the last three years because of the US shale revolution. Not only has more oil has come into the market, but the US, traditionally the largest importer of crude, no longer needs Saudi oil to fuel its engines !

The Saudi Arabia-led OPEC (Organisation of the Petroleum Exporting Countries) has traditionally tried to hold prices by cutting supplies. However, this time around, fears that US and Canada, will not cut oil supplies to the global market and muscle into their traditional markets stayed their hand. Possibly the fact that the oil countries which have traditionally used their oil wealth to build infrastructure and subsidise citizens’ lives are under greater pressure to continue to do so to keep them loyal in the face of a fundamentalist Islamic  revival in Arab lands which threatens the oil monarchies.

In fact conspiracy theorists claim that the US is intentionally driving down prices to beggar enemies and frenemies (friends who are really its rivals) ! Kuwait, Qatar and the United Arab Emirates can break-even on their budgets with oil priced at about $70 a barrel. Whereas, Iran needs a price of $136, Venezuela and Nigeria - $120 and Russia - a price of  $101 – making these economies vulnerable whenever the crude price plunges.

Postscript: Is oil below $ 60 the end of the story? Experts expect the fall to continue to sub-$50 levels and that to help economies like India and the US become productive and healthier. `Maybe `acche din’ may not be too far now !

Mumbai Home For `A Girls Best Friend'

Diamonds - they say - is a Girl's best friend

Egged on by a Russia smarting under European sanctions, India wants to leverage long term buys of rough diamonds worth billions of dollars from the world’s biggest diamond miners -  Alrosa of Russia – to help turn Mumbai into a rival diamond trading hub to Belgium’s Antwerp.
Prime Minister Narendra Modi has announced that his government has decided to create a special notified zone, to which mining companies can import rough diamonds on a consignment basis and re-export unsold ones. The move, Indian diamtaires said could help turn India's financial capital into Asia's diamond trading bourse.
The Modi announcement came at a joint innauguration of a world diamond conference here with Russian president Vladimir Putin, whose Government owns 44 per cent stake in Alrosa, the mining giant which accounts for 30 per cent of the world’s annual yield of rough diamonds. About half  of its output is now sold to India through diamond bourses in Antwerp and Dubai, a fact which both Russia and India want to change by doing business directly.
“We get better margins and have stabler production regimes  if we can get into long term purchase agreements with Indian diamantaires… we used to have three such deals 4 years back, now this year we are increasing it to 12,” said Andrey Polyakov, vice president of the $ 5 billion mining giant which has since long overshadowed the more famous DeBeers in the diamond market.


Rough Diamonds - India Processes 70 % of Global Production

"We (Indian firms) will be buying diamonds worth $2.1 billion from Alrosa in the next three years," Gems and Jewellery Export Promotion Council Chairman Vipul Shah confirmed.
India sees this as a big opportunity to be grabbed to turn Mumbai into a rival to Antwerp and Dubai. “We are talking to the Government to give us a tax regime for diamond traders similar to Antwerp which has a small presumptive tax on trading profits and allows miners to bring sparklers here, sell whatever they can and take back unsold stones without taxes and hassles,” said Pankaj Parekh, vice chairman of the Gems & Jewelery Export promotion Council.
Russia is not averse to this as US and European sanctions means that it may not be able to sell directly in Antwerp, the largest market for diamonds in the world, and may have to resort to the Cold War period subterfuge of selling its diamonds through DeBeers or some other diamond miner.


The Modi-Putin Diplomatic Tango

At the `World Diamond Conference' here, the `Big Boys’ of the global diamond market – Alrosa, DeBeers, Rio Tinto came to mingle with India’s diamantaires. India already processes some 70 per cent of the world’s diamond roughs into polished diamonds or sets them into jewellery to be sold all over the world.
Forecasts by diamond miners’ associations say that the market for retail or finished diamonds in India and China is rising and taken together could equal that of the US, currently the world’s largest market within the next 6-7 years.
Alrosa’s interest in striking direct deals with Indian firms is but natural says Parekh. Polyakov avers : “We follow the trade.”
Parekh and other GJEPC office bearers have been doing the rounds of North Block and global mining capitals to try get their dreams of Mumbai rivalling Antwerp as a trading centre off the grounds. “Does Mumbai have the potential to be a diamond hub?,” asks Polyakov rhetorically. “I think the answer is – yes – you just need to follow rules  that other hubs do.”
There is of course more than `following the trade’ or `potential’ involved here. Russia is perhaps trying to make a statement to both India and the West. Russian analysts in recent weeks have been at pains to stress that sales of helicopters to Pakistan does not mean that the `special relations’ with India are to be endangered and the high profile visit along with help in transforming Mumbai into a diamond trading hub along with key defence, gas and nuclear deals are expected to be part of that statement.


Mumbai- the New Diamond Capital?

Thumbing Russia's nose at western sanctions is of course something which Putin has been working at for quite some time with gas deals with China and East European nations.  A diamond deal with India could well help him teach the European Union with which Russia is locked in a conflict over Ukraine, that in the resources market, it still counts.
 

The Reimagining India Man : Arvind Subramanian

The man who told the world `Why China’s dominance is a sure thing’ and rated the Modi Government with 3 straight As along with a dismal D, Arvind Subramanian, Senior Fellow at the Peterson Institute for International Economics, will be India's new Chief Economic Advisor.

Arvind Subramanian & his book `Eclipse'

Report Card For Modi

A year before the Indian elections which swept Modi to power, Subramanian in an essay `Precious Experiment’ written in a book `Reimagining India', said “strong leaders, who will deliver good governance and reforms, like Gujarat chief minister Narendra Modi” were part of the reason to maintain faith in India’s economic possibilities.  He also pointed out that at that point of time, in comparison to neighbor China, India suffered from relative less effective state capacity, an indirect but easily understood criticism of the Manmohan Singh regime.

Not surprisingly, just about 45 days after Modi took over, Subramanian published a `Provisional Scorecard for Recent Modi Government Measures’, where he gave three straight As to the Modi regime for tackling inflation, encouraging states to liberalise free movement of fruits and vegetables, and partially rolling back restrictive labour laws. He however gave the Government a poor `D’ rating for raising sugar subsidies and increasing duty on sugar imports in a bid to appease the powerful Uttar Pradesh and Maharashtra based sugar lobby.

The Government’s decision to raise duty on imported sugar to 25 per cent announced on Friday 22 August coincided with news leaking out that he will be the new Chief. One wonders how the economist reacted to the cause of his `D' grade rating becoming a reality.

The Inevitable Superpower

Subramanian, whom the influential Foreign Policy magazine included in its annual global list of `Top 100 Thinkers’ for 2011, is considered an unconventional yet brilliant economist whose seminal book `Eclipse: Living in the Shadows of China’s Economic Dominance’ which challenged the conventional belief that US would remain the global leader well into the rest of the century at best and at worst share the power-play with China at worst. He did this by coming up with an index of dominance based on GDP, trade and the extent to which a country is a net creditor to the rest of the world, to figure out relative standing of the largest economies between 1870 and 2030.

His startling finding was that even on a conservative estimate, the world was going to be a unipolar one, dominated not by the US, but by China, whose relative rise would fuelled partly by American decline and partly by its own economic ascendancy. The US debt to GDP ratio, for instance, would have crossed 100 per cent, while China which already holds 50 per cent of US paper, would have accumulated far greater credit holdings. In an interview he gave to the magazine wired, Subramanian said: “I see China’s Renminbi replacing the dollar as a global reserve currency in 10 to 15 years.”



 

`China's Star Over Africa'

The Stephanian, who had gone on to study at IIM Ahmedabad, before doing his doctorate in economics from Oxford, pointed out in a preview piece in the influential Council for Foreign Affairs’s publication – Foreign Affairs - that it was control over the levers of credit, which allowed the US to use the IMF, in the words of Mickey Kantor, US Trade Representative under Bill Clinton, as "a battering ram," to open up Asian markets, including India, which in time would give China global dominance.

Even before that, the USA had used the threat to hold back credit to get the ageing Super-power of that time - Great Britain - to withdraw troops from the Suez canal in 1956. A bitter Harold Macmillan, who, as the British chancellor of the exchequer, presided over humiliating stages of the crisis, would later recall that it was "the last gasp of a declining power." Macmillan has been quoted as having said then "perhaps in 200 years the United States would know how we felt."

Subramanian's contention is that despite having a fairly low per capita income, China had already started using credit and trade to influence global power-play. Among other things by convincing African countries where it invests heavily to shut down Taiwanese embassies. It has similarly forced European and US firms to part with technology to allow them to access to its market and America's time feel the hurt was coming sooner than Macmillan had predicted. 

His controversial book won him many detractors, but also admirers among the best brains in the world. Legendary former US Secretary Henry Kissinger, Stanford professor and influential author of `End of World’, Francis Fukuyama and Pulitzer prize winner  Liaquat Ahamed  are among those who gushed about his thesis.

Indian Perestroika

Subramanian who has worked for the GATT and IMF in previous incarnations, in another startling paper, vindicated what many of President Pranab Mukherjee aides when he was finance minister in the Indira Gandhi Government,  have long touted - the real  `Indian perestroika’  happened in the 1980s and not in the 1990s.

He pointed out in a paper, "Hindu Growth" to Productivity Surge: The Mystery of the Indian Growth Transition’, co-authored with Princeton economist Dani Rodrik, that it was India’s decision to cut corporate tax rates, lift price controls and opening up the market to imports, which spurred firms to become more competitive.

His implicit argument was that the `pro-market’ reforms brought about Dr Manmohan Singh which brought in a surge of foreign investment would not have been possible without the `pro-business’ steps of the 1980s which made domestic business competitive, in effect ran counter to current economic wisdom.

It is now to be seen whether he continues with the 1990s pro-market reforms or strives to bring back some of the 1980s pro-business measures to prop up Indian manufacturing which has been tottering in the wake of the global meltdown and greater ascendance of Chinese manufacturing muscle.  

 

Demise of Yojana Bhawan

Jawaharlal Nehru chairing a meeting of the Planning Commission

Like other relics of the Nehruvian era  - smoke-belching Ambassador cars, huge unwieldy Murphy radio sets, urban sprawls of ugly, box-like, post-World War flats, the fashion statement of the Nehru jacket and Godrej typewriters – the Planning Commission, housed just three buildings away from the Indian Parliament, is now destined for history’s dustbin. 
The body, housed in the appropriately named Yojana Bhawan (Planning House), was a warren of offices where in its heydays, economists and Babus decided how many bicycles could be made in a factory, what should be the price of a bar of steel and whether a planed factory should see the light of the day or not.
The concept of economic planning was borrowed from the Soviets, who in the eyes of Third World leaders seemed to have done a wonderful job of pulling their poor, backward Russia into the 20th century. Interestingly, the concept planning and a body which would plan for India was first floated in 1938, by Subhash Bose, as newly elected Congress President. He decided, his rival within the Congress, Jawaharal Nehru was the right man to be dumped with the task of dreaming up plans for India’s  economic greatness.
Nehru, himself a Fabian Socialist,  was nevertheless attracted by the Soviet model of centralised planning and a command economy. In 1950, he issued an executive fiat based on a cabinet resolution setting up the powerful plan panel, something which was said to have upset his finance minister John Mathai to resign, and eventually forced him to resign.  Old timers say, what galled Mathai’s was that the body, which did not even have any constitutional authority, was to take away his powers to decide how much money he could spend for India’s development.
The first man to head it was Gulzari Lal Nanda, a simple, honest Congressman who later went on to be twice acting Prime Minister, before breathing his last in a tiny flat atop a shop in Delhi’s  Khan market.
However, the real spirit behind the planning commission was the statistician P.C.Mahalanobis, a personal friend of Nehru, who came up with an input-output matrix for planning or a spread-sheet method on how much capital to invest to get a required targeted rate of growth for any given industry. Nehru and Mahalanobis’s plan model became something of a rage for development economists across the world, with many making the pilgrimage to Delhi to study the new methodology.

P.C Mahalanobis with Nehru

The Second five year plan, which he authored was a remarkable success with the economy growing at 4.5 per cent. However, before and after that growth floundered, with India’s GDP growth prior to 1991, averaging a poor 3.5 per cent and in some years dipping below 1 per cent!
However, with each passing year and the deepening of India’s License Raj,  Yojana Bhawan came to be seen as politically and financially all-powerful. Though the prime minister was nominally chairman of the Planning Commission, the real master of the house, was the full time deputy chairman. He had the "discretion" to distribute "plan funds" to state governments.  To decide which industry could get how much bank financing, how much machinery they could import, how many shifts they could run and even which industries were at all necessary for India.
At its best, however, economists point out, that it was responsible for much of what Nehru described as temples of modern India – Bhakra Nangal multi-pupose dam project, Durgapur Bhilai, Bokaro and Rourkella steel plants. However, critics also point out how the same commission also recommended setting up stainless teel plant at Salem in Tamil Nadu, under the influence of Mohan Kumarmangalam, without any coal or iron ore available anywhere within 1,000 kms of the plant. Steel made at Durgapur and Roukella was sent by train to be melted down again to be rolled into stainless steel, a remarkable planned exercise in duplicating effort and costs.
The Deputy Chairman of the Commission was more often than not a political stalwart – thir ranks included the likes of V T Krishnamachari, C Subramaniam, P N Haksar, Rama Krishna Hegde, P.V. Naramsimha Rao, Pranab Mukherjee, , Madhu Dandavate, K C Pant and Jaswant Singh, who could skilfully deal with chief ministers and top industrialists alike.
However, not everyone accepted the diktats of the plan panel happily. Two years back, ," Tamil Nadu Chief Minister J Jayalalithaa, sarcarstically told journalists, "We have come to Delhi just to be told by the Commission how we should spend our own money.”
Critics also pointed to the waste and lack of monitoring by the planning body. Bridges which were to have built by the Third Five year plan, were found to have remained unbuilt even after the lapse of 8 more 5-year plans!  Panel members gave themselves a Rs 35 lakh toilet and the panel’s deputy chairman Montek Singh Ahluwalia spent a daily average of Rs 2.02 lakh during a six month period in 2011 on foreign tours, even as the Commission recommended that people could live on Rs 28 a day!

 

Should We Celebrate World War I ?



Comic strip on the war

The War to end all Wars  - That is how leaders of that era sold the war to people at large !  It did not of course, end all wars. Not even in Europe where it was largely fought. 

This is a year when many people around the globe are celebrating the memory of that war. However, as nations pay homage and hold grand ceremonies to commemorate the `Great War' and the generation which fought it, many forget the reasons why the war  was fought in the first place.

Was it about naval rivalry? National Pride? Naked German aggression ? The inherent conflict between European royalty, all of whom were closely related to each other, triggered by the assassination of one of them in distant Sarajevo ?

All these were certainly factors, but the underlying reason for most wars are economic. The First World War too was no different. The war in truth, was a conflict over the spoils of colonialism.

The first world war was preceded by a mad scramble  to occupy Africa. All European powers joined in the race to claim bits and pieces of the `Dark Continent' with its immense riches. The major European powers had already carved up the Americas and much of Asia in the centuries before and in the process increased the per capita income of their citizens manifold. This was the last habitable bit of Earth which could be had to add to Imperial `estates.' In this battle for land and influence, as first movers, France and Great Britain, had an advantage over late comers like Germany and Austria and that triggered the tensions which transformed into a World War. 

The rivalry between the two camps – newly arrived Germany and land-locked Austria-Hungary  on the one hand and older sea-borne colonial powers – was not just for colonies, but also colonial trade, trade routes and privileges.

An insight into the scramble for colonies can be had from the two Moroccan crisis which occurred  just before the Great War began –

In 1904, France had concluded a secret treaty with Spain partitioning Morocco and agreeing not to oppose Britain’s moves in Egypt in exchange for a free hand in the till then independent kingdom of Morocco.  The next year, German emperor Wilhelm II visited Tangier and declared for Morocco’s independence, not really in support of an oppressed people, but because he wanted to parley with fellow European kings over colonial rights and needed a bargaining chip.

This `First Moroccan Crisis’, was resolved in January–April 1906 at the Algeciras Conference, where German economic rights in the region were upheld, while the French and Spanish were entrusted with the policing of Morocco.

The World Carved Up Among European Powers

The Second Moroccan Crisis sparked in 1911,  when the German gunboat Panther was sent to Agadir  ostensibly to protect German interests during a local uprising in Morocco but in reality to cow the French. This “Agadir Incident” sparked a flurry of war talk during that year, but international negotiations continued, and the crisis averted with the conclusion of a convention in November 1911, by which France became `protector' of Morocco and, in return, Germany was given strips of territory from the French Congo. Obviously, the local people were never consulted when they were bought or sold!

Map of the proposed railway

However, the Germans had ambitions further afield, which included nebulous control over the newly found oil wealth of Mesopotamia. A Berlin-Baghdad railway line was planned which could be later extended to Teheran. Germany would be supplied by oil and other supplies from the east, by this railway, while the Ottoman Empire which controlled Baghdad would gain a railway network for quick military mobilization into the Balkans were they were facing up to Russia's expansionist threats. The problem was that a German railway up to Baghdad or Persia, was just a step away from India !

Let me quote the American Orientalist Morris Jastrow, to explain what was at stake : "It was felt in England that if, as Napoleon is said to have remarked, Antwerp in the hands of a great continental power was a pistol leveled at the English coast, Baghdad and the Persian Gulf in the hands of Germany (or any other strong power) would be a 42-centimetre gun pointed at (England's dominion over) India."

Europe readied for war. The older colonial powers – France, England, Russia and Italy to protect their colonies and trading privileges, the newer ones – Germany and Austria, hand in glove with a  threatened tottering power – the Turkish Ottomans, in search of fresh colonies and trade routes. The assassination of Archduke Ferdinand  of Austria at Sarajevo by Serbian-Bosnian rebels in 1914, was merely an excuse for the war to begin.

We, Indians, had no say in the war at all. Most Indians wanted only one thing - independence. Not rule by  King George V or by Emperor Wilhelm II. However, without any strong national leadership, Indians joined in the war effort in large numbers for the pay and job opportunity which came their way.  Boys from rural India fought bravely and possibly won the larger part of the war in the Middle East. Damascus, Palestine, Jerusalem, Gaza, Haifa, Kut-Al_Amara, Baghdad, Basra and Tigris, all figure in the battle honours list of the Indian Army. (Lawrence of Arabia and his motley crew of supporting Sheikhs, were considered by many as merely extras in that battle for Arab lands. The real muscle power was mostly Indian.) More than half of the Indian brigade thrown at Gallipoli died in a brave but futile attempt to take on Turkey's brilliant General, Kemal Pasha, side by side with the ANZAC (Australia and New Zealand) troops, though in the national memories of the West, that epic folly of a battle is associated with Australians alone. In all some 65,000 Indian soldiers died fighting the King's war. The Sub-continentals won some 13,000 gallantry medals including 12 Victoria Crosses, the highest gallantry award the British gave to a fighting man.

Recruitment Poster

Quite rightly, we need to celebrate our boys' bravery and mourn those who died. However, should we really celebrate this war which was not ours ? There is after all a distinction to be made in celebrating our own people’s bravery and someone else’s victory.

Neither was the victory ours nor the defeat. It was a white man's war fought also by brown and black boys, who were not allowed to be promoted to officer ranks nor get the same pay or perks that their white brethren received. The 140,000 Indian soldiers rushed to defend France were sent in without adequate winter clothing or footwear ! Despite that they fought and were decisive in the battles of -Ypres, Givenchy, Neuve Chaplle, Festubert and Loos.  Modern medi-care was given to the Indian wounded, but in segregated hospitals on the English coast. Barbed wire surrounded these hospitals and sepoys were not allowed into town un-chaperoned ! Even in matters of food they were discriminated.

An Indian soldier’s daily ration during the Great War consisted of :

¹⁄₄ pounds (lb) meat
(Non-meat eaters received 2 ounces of gur (coarse, unrefined sugar made from sugar cane juice) or sugar or 3 ounce (oz) of milk in place of 4 ounces of meat); ¹⁄₈ lb potatoes; ¹⁄₃ oz tea; ¹⁄₂ oz salt; 1 ¹⁄₂ lb atta (raw flour); 4 oz dhal (dried lentils or peas or beans); 2 oz ghee (clarified butter); ¹⁄₆ oz chillies; ¹⁄₆ oz turmeric; ¹⁄₃ oz ginger; ¹⁄₆ oz garlic and 1 oz gur (unrefined sugar)

While  a British soldier received :

1 & 1/4 lb fresh or frozen meat, or 1 lb preserved or salt meat
1 & 1/4 lb bread ; 4 oz. bacon; 3 oz. cheese
5/8 oz. tea; 4 oz. jam ; 3 oz. sugar ; 1/2 oz salt ; 1/36 oz. pepper
1/20 oz. mustard ; 8 oz. fresh or 2 oz. dried vegetables ; 1/10 gill lime juice (if fresh vegetables not issued);
1/2 gill rum (at discretion of commanding general) ; up to 2 oz. tobacco per week (at discretion of commanding general)

Britain is right in celebrating the first World War. It was  indeed her hour of glory. Britain is also right in apportioning some credit (belatedly?) to the 1.4 million Indians who donned the colours to fight for Britain.

This leads me to the logical question, could we  in any way be described as part of the victors' party? I would not hesitate to say `No'. Please remember Indians were not even allowed to enter certain streets and clubs inside India at that time or aspire to most of the higher ranks of service within their own motherland. India's revenues were being used to finance British colonial wars in all parts of the world - ranging from China to Africa and even to the European theatre, without our  agreement, and by beggaring our people in the process. During World War I, Britain stripped India of 3.7 million tonnes of supplies worth 80 million pounds and 146 million pounds of revenues for the war effort, the largest contribution by any country's colony.  To understand the value of that contribution at today's rate multiply the figures by 340 and that gives you the mind-boggling figure of  76.84 billion pounds or Rs 783,760 crore. This happened even as teenagers were being jailed for reciting `Vande Mataram' and hung for fighting for India's freedom. 

Landmarks in our nation's history - the Komagata Maru  incident - happened in May 1914, while - the Jalianwala Bagh massacre - happened in 1919.   Should we not commemorate those sad milestones in India's freedom struggle from Britain, rather than applaud a victory in an European war, which merely deprived us ?

Postscript:

India's First Flying Ace : Indra Lal Roy

First Day Cover to Commemorate India's first flying ace

Indra Lal Roy, India's first ace pilot, was born in Calcutta on 2 December 1898. Despite initial prejudices against him, Roy, a schoolboy at St Paul’s, London,  managed to win a commission in the Royal Flying Corps in 1917, at the young age of 18, within three months of joining the Corps. Credited with 10 kills including 9 in a span of just 14 days over the skies of France, he died a hero in 1918, to be  posthumously awarded the Distinguished Flying Cross.

The citation in the London Gazette on 21 September 1918 praised Roy as 'a very gallant and determined officer' whose 'remarkable skill and daring' had enabled him on occasion to shoot down 'two [enemy] machines in one patrol'.

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Inherited Problems for Modi's Economy Czars

After the Tsunami of celebrations, the time to address immediate economic problems for the yet-to-be sworn in Narendra Modi government, has probably started even before it takes office.
Top mandarins say the BJP will inherit not only the iconic red sandstone buildings on Raisina Hill, which stand at the heart of Delhi’s power corridors, but also the myriad economic `time-bombs’ which the Manmohan Singh Government will be leaving behind.


Gas Wars
Possibly the first challenging decision which the new BJP-led government will have to tackle will be  the gas pricing conundrum, which the Manmohan Singh regime will be leaving. Earlier this year, gas prices were sought to be hiked to over $ 8.40 a mmBtu, double the current rate.
The move which was stalled by the Election Commission as part of its code of conduct, will if accepted by the new Government, mean an immediate increases in the price of electricity, fertiliser, gas used by public transport, and plastics with its longer term knock-on effect on the price of almost every good and service in the country. 

For a government which would be trying to consolidate its recent massive mandate, any sudden price rises could translate into quick dampening of support and a reversal of voting trends in key state elections which would be coming up in the next two years.
However, not allowing any increase could damped investor sentiments in the oil and gas sector, which hasn’t seen any major discoveries in  recent past. Besides, the Reliance Industries Ltd, which was instrumental in seeking the rise in the first place, has sought arbitration proceedings on stalling of the price hike. The Government would have a legal fight on its hands which again would not exactly help build investor confidence, especially foreign investor confidence, something which the BJP-led government is believed keen on.
A possible way out would be to go in for staggered increase in the price of natural gas which could help keep prices under the lid and yet at the same time solve the possible legal tangle with the country’s largest industrial house, which many say is also close to both the new and former ruling parties.

Battle Over Money

The Yaksha & Yakshi Sculptures Guarding RBI
 

If India Inc., which so lustily cheered Narendra Modi’s victory on Friday, has any one demand they want fulfilled as of yesterday, it is a cut in interest rates. Their bitter complaint has been that high interest rates have locked out investment in new factories and projects and their one point demand in repeated meetings with finance ministry mandarins has been steps to reduce interest rates, to help drive back growth. India’s GDP grew by just 4.7 per cent last fiscal after falling to a decade low growth rate of 4.5 per cent in the year before.
However, with inflation still raging high, the country’s central banker, Raghuram Rajan favours continuing using interest rates to combat price rise. The country’s consumer-price inflation quickened in March for the first time in four months to 8.31 per cent from a year earlier, forcing Rajan to leave untouched key policy rates unchanged in the last review on  April 1, this year.
Speculation is already rife that this could lead to a battle royal between Rajan and the new Government.
In the run up to the elections, Rajan had told an audience in Switzerland that he “determine(s) the monetary policy. Ultimately, the interest rate that is set is set by me.” In response,  BJP leader Subramanian Swamy had reportedly lashed out at Rajan and his interest rate management and offered the advice : “We need to immediately drop interest rates.”
The BJP has however in recent days indicated that it would defend the RBI’s autonomy and Rajan’s job was not at risk.
How to manage the monetary policy to tweak growth and at the same time get Rajan to agree with the BJp's priorities, will be a concern for the Modi government. That could spell either the first public `war’ over economic policy-making or the first successful wooing of a `Congress’ econo-crat into the BJP fold.

Golden Goose

Raw Gold Bar

The government had increased the gold import duty and other curbs on the yellow metal to deal with the current account deficit, the difference between inflow and outflow of foreign currency, which had touched $88 billion during 2012-13. The curbs had brought down the yellow metal imports significantly to $32 billion in 2013-14. 
However, high duty of 10 per cent and insistence on minimum export before importing more gold has hit the gems and jewellery industry, which has been stridently seeking review of the policy. One of India's big ticket exports, this sector's sales to the world market have fallen 11 per cent in 2013-2014 to $ 34.79 billion after having grown at an average of 15 per cent over the last  5 years.
The BJP led government by Narendra Modi, coming from Gujarat, which is the epicentre of the gems and jewellery sector, is certain to seek changes in the policy. However, the government is expected to adopt a cautious approach and go in for a staggered duty cut.

Coal Bill

Open Cast Coal Mine
 

Part of India’s growth story dimming is because mines which feed India’s factories have been forced shut by environmental cases. While new mines have been stalled by red tape.
India, which has one of the largest coal reserves in the world, with some 293 billion tonnes of coal under its forests, farmlands and deserts. However, with the mining sector shrinking by nearly 3 per cent during the last two years, India has been forced to import coal worth $ 15 billion last year and is expected to import another $ 17 billion during the current year. Similarly, mining of iron ore, vital to India’s steel mills which seek to ratchet up output to 300 million tonnes over the next ten years, has been stalled in much of the country by environmental and legal activisim.
The Modi Model has long claimed that its problem solving capacity is far greater than the long drawn out consensus approach favoured by Manmohan Singh’s UPA Government. Many say the silent mines will be this Model of Governance’s real test.

The Manifesto Game : Tweedledum & Tweedledee



Tweedledum & Tweedledee
 

 

In the land of Tweedledum and Tweedledee, what can you expect but election manifestos by ( who else? ) Tweedledee and Tweedledum, which read quite alike !

 

The Narendra Modi-led Bharatiya Janata Party, today came out with an economic manifesto seeking an India-wide Goods & Services Tax, which the Congress has been pushing for since when President Pranab Mukherjee was finance minister in the UPA Government.

 

Modi as chief minister of Gujarat had led a cabal of BJP-run state chiefs which had thwarted repeated attempts by Mukherjee, then finance minister and his successor in North Block, P Chidambaram who both sought to introduce the simple single point tax which would replace a plethora of central and state taxes and duties on manufactures, turning India into a single common market.

 

An attempt by Mukherjee, some five years back, to break the deadlock by jetting into Ahmedabad to hold direct talks with Modi did not succeed as the chief minister, while not objecting to the measure being brought in, brought in procedural objections.  Later on, attempts by Chidambaram to reach out to BJP leaders ahead of  Parliament sessions, met with similar objections. 

 

Narendra Modi with his Manifesto

The implementation of the new tax which will snuff out central excise taxes, additional customs duties, surcharges and state taxes such as VAT, entertainment and luxury taxes, lottery and gambling taxes etc., could well add 1-2 per cent to India’s growth rate, according to economists. Hence, the rush to be the author of scheme, and the desire to deny the other side the benefit of having launched it.

 

The on-going General Elections are widely expected by pollsters to yield a hung house, with BJP as the single largest party and Congress as the second largest. Regardless of which party is able to cobble together an alliance capable of forming a ruling coalition, this Government will depend on  other major parties for support in passing important legislation and hence a  consensus on GST is essential as the measure has to be passed by a two third majority in both houses of Parliament.

The original deadline for rolling out the nation-wide tax, of April 1, 2010 as well as several later deadlines have already been missed because of this crazy bit of opportunism and this may not be the end of the story if the Congress decides to do a BJP in case it sits in opposition ! 

The only major issue on which the two manifestos differed was on foreign investment in India’s $ 400 billion retail market. “Barring multi-brand retail, FDI will be allowed in sectors wherever needed for job  and asset creation, infrastructure and acquisition of niche technology and specialised expertise,” the BJP manifesto said.  Congress has already decreed it open, in the teeth of opposition from the BJP, the Communist parties and Trinamool Congress. While the Communists and Trinamool feel opening up retail to foreign investors like Wal-Mart, means selling out the country to global multinationals, BJP has more hard boiled electoral reasons for objecting to it.

 

Analysts pointed out that the 25-million strong small retail community in the country has traditionally been voting BJP and its earlier avatar Jana Sangh, hence it made sense for the party to oppose foreign investment into hyper-markets which challenge their businesses. Local big retailers like Reliance, Godrej and Big Bazaar have however not been opposed by the BJP, though business lobbies were quick to react to BJP’s opposition to FDI in retail terming it as “disappointing.” Said FICCI chairman Sidharth Birla “we feel disappointment on the stand on FDI in Multi-Brand Retail, we hold out hope for a possible review in the future.”

 

The BJP manifesto also blamed UPA for “tax terrorism” and uncertainty for denting the country’s image and creating anxiety among businesses, and promised a “non-adversarial tax environment”. The UPA government had brought in a retrospective tax law amendment after it lost a Supreme Court case against British telecom giant Vodafone from whom it had sought tax deductible at source for contracting purchase of Hutch Whampoa’s stake in its Indian arm at a tax haven. A case, which may have prompted Birla to describe the BJP manifesto as “investment friendly”.

 

The right-wing party’s manifesto also called for rationalising India’s tax system without going into any specifics. This is in sharp contrast to its 2009 manifesto where it sought raising tax free income to Rs 3 lakh a year, a demand which was echoed in a report on a Direct tax Code by a Parliamentary Committee chaired by Yashwant Sinha, former finance minister in the BJP led NDA government of 2001-2004.

 

The Congress-led UPA had  proposed the Direct Tax Code. However, it was unwilling to accept the Committee’s report in full, leading to a parliamentary deadlock on the passage of that vital legislation too. North Block had dismissed the demand for raising the tax ceiling and other sops sought by the committee, stating this could lead to an annual revenue loss of Rs 60,000 crore to the exchequer, which the Government could ill-afford. Some feel that with chances of being able to cobble a ruling coalition becoming brighter, the right-wing party now feels it is best not to make promises which may be difficult to keep.

 

However, this was not the only subtle indication that if voted to power, BJP’s economic agenda would be no different from that of the Congress. Both parties promised in their manifestos to boost India’s manufacturing sector, with BJP calling for turning India into a “Global Manufacturing Hub” and Congress calling for “building India as the world leader in manufacturing ... ensure(ing) 10 per cent growth”.



Rahul Gandhi with the Congress Manifesto
 

 

Both said they want to create a “single-window system” both at the Centre and States to expedite land, environmental, power and other approvals for investors. Both backed food subsidies, despite also calling for fiscal discipline in the same breath.

 

Not surprisingly, both BJP and Congress also promised to build high-speed rail, a project which was first thought of during the Manmohan Singh government’s as India's response to China's high speed tracks. The Government identified some six routes for taking up the high speed project. Said a Railway Board member “like everything else both parties want to take credit for whatever the system throws up which may prove popular and disavow hard decisions like raising fares and cutting subsidies, which prudent economics demand.”

Bugdet Surprises !

Surprise, Surprise !

Finance Minister P Chidambaram

India’s Finance Minister P Chidambaram is a past master of surprises and he certainly lived up to his reputation with his Monday morning interim budget even if it was at the cost of a smart piece of statistical jugglery.

Ignoring MPs trying to shout him down as he read out his 17-page speech, a page shorter than that read out by President Pranab Mukherjee in his interim budget of 2009,   Chidambaram announced he had managed to squeeze Government’s fiscal deficit to 4.6 per cent against a target of 4.8 per cent of GDP, on the back of a successful auction of telecom airwaves and huge spending cuts. “Well below the red line I had drawn last year,” as he glibly told Parliamentarians.

Critics however, point out that what was left unsaid was that the Government would roll-over the fourth quarter oil subsidy bill of around Rs 35,000 crore to the next financial year, in a sleigh of hand described as `routine’ for the past few years, to keep the deficit for this year under a lid. The petroleum subsidy being paid out in 2013-14 is Rs 85,480 crore. If the Rs 35,000 crore bill which has been rolled over to the next financial year is added, the real fuel subsidy bill would have been  Rs 1,20,000 crore !

However, at the same time the finance minister has set a tough target for his successor, of pruning the deficit to 4.1 per cent of GDP for the next fiscal, while drastically reducing the amount of money available as fuel subsidy. In effect, the next Government if it tries to live up to his targets will have to run against popular opinion and cut fuel subsidy drastically or else live beyond its means. The petroleum subsidy allocated for 2014-15 stands at Rs 63,426.95 crore, of which Rs 35,000 crore will be spent on paying back subsidy due this fiscal ! In reality, this will leave the Government with just over Rs 28,000 crore to pay for the fuel subsidy for the whole financial year or about a fourth of what Chidambaram spent in a year on this count.

Stimulus : His and Mine

President Pranab Mukherjee

The finance minister’s other big announcement was of slashing of excise duty or ex-factory taxes on automobiles by a fifth to a third, which could make cars, motorcycles and sports utilities, cheaper. As well as duty cuts on capital and consumer goods from 12 per cent to 10 per cent and a slashing of duty on mobile phones from 6 to 1 per cent, if tax credit for inputs are not sought or 6 per cent with tax credits, was hailed by India’s industrial barons as  a `visionary stimulus’. The duty cuts will be available for a short period till end-June this year, possibly because a new full year budget will have to be presented by a new Government in June this year.

A number of media analysts are now gleefully pointing out that Chidambaram is replicating what his predecessor Pranab Mukherjee, now India’s President, did in 2009 when he cut excise by 4 per cent across the board. Uncomfortable for the finance minister who in the past had slammed “certain decisions that we took during the period 2009 to 2011,” (when Mukherjee was at the helm of affairs in the finance ministry) which he felt pushed the fiscal deficit upwards.

Both were gifting tax-give-aways, in the hope that it would reduce prices, revive demand and in turn bail out a faltering manufacturing sector which has been consistently shrinking for the last eight months.

Populism : Tough to Live Down

Budgets are always as much political statements as they are financial. Chidambaram tried to live up to that maxim with the few sops he announced. But more than that, he also announced sops which may prove to be financial booby-traps for his successor. Chidambaram promised a Rs 2,600 crore interest relief for 9 lakh students who took loans before end-March 2009, with the Government paying interest till end-December 2013. He also promised to to let old soldiers enjoy the benefit of a scheme which calls for `one rank, one pension’.  Some 2.4 million retired defence personnel were paid pension at differing rates depending on when they left service, creating heartburn among older soldiers.  

While this will cost him chicken feed in this financial year (an estimated Rs 500 crore), in coming years this will be a big ticket item in the defence expenditure budget and a source of headaches for Mandarins trying to balance books.

Right-drive Vision

However, the minister did more than lay out fiscal booby-traps for incoming ministers, he also laid out a long term vision for economic development with which his right-wing opponents in the BJP may have few or no quarrels. (Of course India’s Communist parties as well as regional parties would find this vision absolutely unacceptable on many grounds).

Among others, he sought reduction in fiscal deficit to 3 per cent by 2016-2017 obviously through deep subsidy cuts; a policy to encourage foreign investment without too many constraints; a balance in monetary and fiscal policies between price rise-busting and economic growth, which may mean that inflation which hits the poor more should be tolerated to let India grow faster; a slew of fiscal sector reforms which could open up banking and finance to more domestic and foreign investors; a stress on manufacturing and exports with state and central taxes on all exported goods either waived or slashed and tariff walls to incentivise domestic manufactures and most controversially - more centre-state sharing of spending on flagship programmes like job guarantee schemes and literacy. Currently these schemes are almost entirely under-written by the Centre. This move would certainly not win him any brownie points with the likes of Mamata Bannerjee or Nitish Kumar or for that matter even Karunanidhi.

Whether Chidambaram gets a chance to live through with his agenda for the future is however, something which the country would decide in the coming summer. But then the pointers will remain for the next finance minister to wade through.