Pax Indica

While demonetization, the sabre-rattling between India and Pakistan and the rancor filled  spat between India’s current political Goliath – Narendra Modi - and the Gandhi family scion – Rahul Gandhi – oft derided as `Pappu’ in social media, may have been what hogged headlines through the year, a little noticed statistical change underlined a trend that has been going in India’s favour  for the last several decades now.

India’s economy pipped that of its former colonial master Britain on the back of a  spectacular growth story spanning two-and-a-half decades and a drastic fall in the value of the British Pound after a vote in the island nation to exit from the European Union.

This makes India the 6th richest nation in terms of nominal Gross  Domestic Product or GDP, just behind France, though in terms of per capita income, the Asian giant remains at a lowly 149th .  In terms of GDP calculated using a complicated purchasing power parity formula which takes into account how much a dollar buys in a particular country, India is already the third richest nation after the US and China.

A 20 % decline in the value of the Great Britain pound through 2016, saw the former colonial power’s GDP slipping to $ 2.29 trillion, compared to India’s $ 2.30 trillion.  This gap is however expected to widen as India grows at between 6 – 7 % per year compared to Britain’s 2-3 % annual growth.

India was supposed to surpass Britain’s economy by 2020. However the quicker overtake by the former colony happened partly because she grew faster over the last decade or so and partly because of Britain’s own economic woes.

This marks an milestone of sorts for India’s economy which went into a decline after the British invaded the sub-continental nation taking advantage of India’s political disunity after the decline of the Mughal empire.

India in the 18th century produced 22.5 % of the globe’s GDP. In contrast in the same era, Britain accounted for just 1.8 % of world GDP. By 1820, when the British had more or less conquered most of India, the sub-continent’s share of the world economy had started declining and accounted for 16 % of world GDP.

Colonial rule turned India into a market for Britain’s industrial revolution as compared to a net exporter of spices, silks, cotton textiles and luxury goods. At the same time, high taxes which an arrogant  East India Company and afterwards British Queen  imposed on its conquered people  helped transfer India’s silver stock to the wind-swept, previously impoverished British Isles.

History has had many milestones which underline or accentuate a trend. India’s defeat at the hands of the British at Plassey in 1757, is widely considered a symbol of India’s and Asia’s fall from power. Similarly, Japan’s victory over Russia in 1905 is seen as marking the resurgence of Asia, giving revolutionaries in India and China confidence to fight to shake off their respective colonial shackles.

While the US victory in World War II  was seen as the beginning of the end of European dominance and the start of a bi-polar world, where besides the power which the USA emanated and used, America’s icons – jeans, pop music and Coca-Cola along with Hollywood movies - became pan-global symbols.

It may not be correct to place India’s upsetting Britain in the economic rankings at par with these epoch making events,  however, it does mark a trend.

Since 1947, when India won her freedom, economic growth grew at a leisurely 3.5 % annually, dubbed by the economist KN Raj as the `Hindu rate of growth',  as the country tried to cope with the aftermath of partition with its mass migration of millions of people; several wars; an unprecedented refugee crisis triggered by Pakistan’s 1971 civil war; natural calamities;  even as it built up an infrastructure for steel-making and machinery manufacture, harnessed its turbulent rivers to produce hydro-electric power, built colleges to produce one of the largest army of  scientists and engineers.

In the 1980s, a spate of trade and currency reforms ushered in under the tutelage of Pranab Mukherjee, then finance minister quickened the pace of growth to over 5 % for the first time. A burst of reforms which unshackled the economy  in the 1990s, curated by Dr Manmohan Singh saw growth leap to beyond 6 %. Through the last two-and-a-half decades the average GDP growth has averaged between 6-8 % annually, helping India turn into a two trillion dollar plus economy.

India’s ability to win a spectacular military victory in 1971, in just 14 days liberating Bangladesh, a nation the size of Greece, its ability to test a nuclear bomb in 1974 and launch a satellite in the very next year had marked India’s arrival in the global power stage. However, its image as a poor, third world nation with its crowd of motely beggars and snake-charmers and streets where elephants and camels still roamed persisted for decades afterwards.

By the late 1990s, by when the impact of India’s Perestroika were visible and by when the nation had been hailed as the software factory of the world, that image started changing. The overtaking of Britain, its former colonial master, was in a sense a continuation of the new narrative that India had started building for itself.

Psychologically, India overtaking Britain in the GDP rankings underlines an emerging trend, which acknowledges India’s arrival at the head of the table and marks a sea- change in relations’ between a former colony and the rest of the world.

British Prime Minister Theresa May at an Indian temple

This economic strength acquired over decades is what gave  India the ability to tell off British Prime Minister Theresa May when she refused to relent on the tough visa norms her government has adopted against Indians, while seeking a free trade deal with the Asian powerhouse. The new `Iron Lady’ had to fly back to London without a deal. 

However, before our rulers of the day pat themselves on the back and lay claim to this milestone, let us be very clear that the credit for this goes to the hard work put in daily by more than a billion ordinary Indians and their sacrifice of saving nearly a third of their incomes for the betterment of future generations, despite the glitter of consumerism unfolding before their eyes.

Our leaders need rather to remember that India still has a long path to traverse as it strives not only to feed, educate and keep healthy a huge population but to increase their average wealth at a fast pace so that they enjoy the benefits of a standard of living nearer  to that of the first world citizens.

Demonetisation Hiccups

The New Mysore Printed Notes

Mysore’s bank note printing line is of recent vintage, though the press has been around for several decades.  Despite its limited capacity to churn out notes, the Narendra Modi Government decided to use it to churn out the new Rs 2,000 and Rs 500 notes as it was supposed to be one of the most secured printing locations, manned by staff who could be counted upon to keep a secret. Next to it was a security note manufacturing plant set up in collaboration with the European security printing giant De La Rue.

The historical town also had a small, sleepy airport which could be used to fly aircraft to ferry the notes to major centres where RBI had currency chests. However, this need to keep secrecy mean that only 48 crore Rs 2000 notes and an equal number of Rs 500 notes could be manufactured and printed in the four to five months that led up to the sudden demonetisation of the money.

The total value of the new notes printed being just Rs 120,000 crore. The problem that the Government faced was that when it demonetised all Rs 500 and Rs 1000 notes, it sucked out some 86 % of all money in circulation in the country. With some 16 lakh crore rupees worth of money in circulation, this meant that 13.76 lakh crore rupees was being sucked out.

The replacement money was just not in place to take care of the huge demand.

Till now banks have been able to dispense just about Rs 50,000 crore worth of money.  Except a few top officials in North Block, the prime minster,  the finance minister and home minister, as well as the RBI Governor, very few officials were kept in the loop.

Officials who were in the know seemed to have been in a hurry to get the scheme going instead of taking stock of the logistics which needed to be worked out for such a huge operation. Hopefully in the weeks ahead things will improve as more security presses including Bengal’s Salboni are pressed into action.

The secrecy again meant that not too large a stash of extra Rs 100 notes could be printed and kept in storage. Added to that was the imperative of another decision prompted by intelligence inputs that Rs 100 notes too had been counterfeited by the secret service of a neighbouring country. “It has been decided in principle to replace all notes in  a gradual manner,” said officials. Some 6-7 % of all Indian notes in circulation are believed to be counterfeit, and this was probably the driving reason for the note replacement excercise. 

For the ordinary citizen of course to the `pain’ of sudden demonetisation, was the added discomfort of non-functional automatic teller machines. Again secrecy meant banks were not told to recaliberate ATMs which dish out notes to recognise the new notes.

All ATMs in India need to be calibrated afresh to recognise the new notes by  their weight, dimensions, design, and security features. Bankers say this could take over a month to complete as some 2 lakh ATMs will have to be worked on. Finance Ministry is working to a deadline of 3 weeks.

The recaliberation, Which would involve readjusting the cash trays, or cassettes, and the software running the machines, has to be done by technicians and takes about 4 man hours of work on each ATM. This translates to some 8 lakh man hours of work. With security cleared technicians in short supply, this means long work hours and the possibility of the 3 week deadline being missed, admit officials.

Till then, as consumers of money, citizens will have to grin and bear the “pain”. 

The GST Fire

An exhibition of tanks by DRDO coincided with
the passage of the GST BIll in Rajya Sabha

The Goods & Services Tax which India has voted to bring in from April next year,  may while uniting the fragmented Indian market to the delight of India Inc., also exacerbate that `Elephant in the Room’ which the country’s economy has been grappling with for decades now – Inflation.

Global experience has shown that GST brings in its wake a rise in prices all around for at least a year before, prices settle down and even decline. Knowing India, and the way our businesses work, one cannot doubt that it would indeed be a small miracle if prices come down after rising. India Inc., is obviously happy with the tax as it means a uniform tax regime all over the country and an end to the hassles of delayed shipments due to Octroi queues at state borders. However, those who will have to bear the burden of the tax may not be as happy despite the news media trumpeting how the tax structure will make India more competitive.

That dreaded word which every retiree living on a fixed income and every salary earner whose increment is slower than the rate of price rise fears, is inflation. Will this fear which if and when proven true,  turn voter ire into a raging resentment around the time of the 2019 General Election ?

Are we already paying too high a price ?

Malaysia which adopted GST in 2015, saw an increase in retail inflation despite careful planning and leaving out many essential products from the taxation altogether. Australia’s John Howard Government almost lost the general elections after bringing in GST.

Canadian Conservative Prime Minister Kim Campbell actually lost the 1993 elections after the electorate protested price spikes induced by her predecessor Brian Mulroney introduction of the GST.   The Indian example is nearest to Canada with its two stage GST rate – one levied by the state and one by the Centre.

The Congress while demanding a cap on the nation-wide GST tax’s median rate, is possibly taking a leaf out of economic history and trying to position itself for the next General Elections, when it may well look to channel protests against  the initial bout of inflation which GST may usher in.

Former Finance Minister P Chidambaram has already made it clear that the Congress will campaign throughout the country demanding a low GST median rate. In case, (and it looks like they will), the Government chooses a higher median rate  and an even higher rate for luxury and sin goods, rest assured the Congress and other political parties who would include the BJP’s own allies, will lose no time in pillorying the ruling  party for its folly in unleashing the Inflationary monster.   

Goldman Sachs in a research note found that Asian countries which brought in GST between 1977 and 2015, all reported an average increase in inflation of 1.1 %  higher on average in the year of its implementation. Sachs also estimated, based on cross-country evidence and the evidence from state VAT implementation, that retail inflation in India could rise 0.9 percentage points if the GST rate were to be 20 per cent.

With retail food inflation having built up over the years, any further increase in inflation is likely to prove to be an incremental burden on the populace. Consumer price index was just shy of the 6% mark in June. Even more worryingly, Retail inflation in rural areas has consistently outpaced urban areas in the past 18 months, hitting 6.20 per cent in June, well above 5.26 per cent in cities such as Mumbai.

Reserve Bank of India Governor Raghuram Rajan’s harsh inflation targeting, which often led him to refuse to bow down to pressures to ease interest rates had put him at odds with successive finance ministers looking to pep up Indian growth suffering from a global industrial slowdown.

As a response to that `Nay-saying ' by Rajan, a new mechanism which the Government is ushering in may give the Finance Ministry a larger say in setting interest rates. Not so judicious decisions lowering interest rates to unleash growth may well upset the battle against rising prices and with GST fueling the price spiral, it would not give rise to just another academic Growth Vs Price Rise debate but perhaps another political Tsunami which would have the potential to shake not merely Mr Narendra Modi's government but also upset other apple-carts in forthcoming state elections to a number of key states. 

Rockstar Rajan of Mint St

That Reserve Bank Governor Raghuram Rajan would not last much longer as the Rock Star of Mint Street was foretold. However, what Ministers and Mandarins running India from the heights of Raisina Hill had not anticipated was his sudden resignation one June evening, creating shock waves in the bond and money markets as well as on news and social media. Not to speak of the considerable embarrassment for their ilk.

Finance Ministry officials have for long been haranguing the Reserve Bank of India Governor Raghuram Rajan on what they considered to be his obstinate stand on controlling inflation ahead of cutting interest rates.

North Bloc top brass as well as the ruling BJP were impatient to post a rosy picture of the economy, especially of industry given the fact that the Prime Minister had launched a `Make in India’ programme with much fanfare. Despite their reasoning with numbers that industry was not growing and in some months was actually shrinking, Rajan very rightly pointed out that a half percent or a percent cut in lending rates would not really see a rush of investors. Instead he pitched for controlling a runaway inflation which was severely shrinking the Common Man’s ability to buy goods and services needed to have a decent life and to create a demand pull for the economy.

The other issue on which the Government did not see eye to eye with Rajan though they did not have the gumption or courage to talk to him on, was his extremely strict norms for recognizing bad loans and his policy that business houses which had run up large bad loan portfolios would not get any new hand-outs.

The power, finance and transport ministries on the contrary were asking the RBI and banks to consider a regime which would let defaulters access fresh debt to finish what they called pending projects – power plants, highways and ports - stuck in limbo as the economy faltered post the 2008 Wall Street crash which saw  investors dithering on taking fresh risks.  The Reserve Bank’s point was that India's stretched banking sector alone could not be exposed to risks. If projects were to be completed by the promoters who had not paid back loans, then they had to bring some money and guarantees on the table or the Government had to give subsidies. Not a very comfortable situation for an industry and government machinery used to treating banks as their personal piggy bank.

Even after multiple investigations had found several private sector investors guilty of padding costs and siphoning off loans to fund other business or private expenses, precious little had been done to bring them to book. Instead in many cases in the past they had been rewarded with fresh cheap loans, something which Rajan wanted stopped.

In private, top bureaucrats are believed to have warned Rajan that his stand could cost him a second term in office. Rajan however publicly made it clear that the culture of impunity for big business would have to end, stating very aptly in one conference “No one wants to go after the rich and well-connected wrong-doer, which means they get away with even more.”

Rajan is considered one of the brightest young economists, globally, having earlier forecast the coming global financial crisis in a lecture made to the world's central bankers at their annual retreat in Jackson Hole, Wyoming, USA in August 2005. Not something which the central bankers exactly appreciated at that time.

Writing later in his bestseller `Fault Lines: How Hidden Fractures Still Threaten the World Economy’, Rajan described the situation as :  "I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions." Possibly that is exactly how his relationship was with the powers that be in New Delhi.

The academic-turned central banker, who enjoyed almost rock star like status with the media, had not either endeared himself to the Government by his plain speaking on various issues including the hype around `Make in India’, where he had pointed out that the global economic situation was not conducive to an export-led growth strategy and that India would have to carry out hard nosed reforms to pep up its own home markets. Nor was his use of the adage "in the land of the blind, the one-eyed man is king” in the context of much tom-tomming about India’s economy growing at a fast clip, taken kindly. Especially when both the prime minister and finance minster were repeatedly stressing in global forums that India was “the bright spot” in a faltering global economy.

Despite finance minister Arun Jaitley debunking sharp and acerbic criticism of him by BJP MP Subramaniam Swamy, the fact remained that he had angered the powers that be and they wished to see the back of Raghuram Rajan as RBI Governor. Tellingly, a month back Prime Minister Narendra Modi told a Washington Post interviewer that  he did not “think this administrative subject can be an issue for the media. And that issue is only in September, not now,” when questioned on whether Rajan would get a second term.

That the Government had no intentions of giving the RBI Governor a second term was  also made clear in its reaction to his resignation. No calls were made by the finance minister asking him to reconsider his decision. Instead Jaitley chose to put out on his facebook a bland statement : “Dr. Raghuram Rajan has announced his intention to go back to academics at the end of his current assignment.The Government appreciates the good work done by him and respects his decision. A decision on his successor would be announced shortly.”

Former finance minister P.Chidambaram who had helped appoint Rajan to the hot seat, like his successor possibly did not always see eye with him on India’s interest rate regime while still at North block. However, with Rajan delivering a resignation ahead of the BJP saying no to a second term, Chidmbaram came out in his defence. "I am disappointed and profoundly saddened by the decision of Dr Raghuram Rajan to leave the RBI on completion of his term on September 4, 2016, but I hasten to add that I am not surprised at all," he said in his reaction.

"As I had said sometime ago, this government did not deserve Dr Rajan. Nevertheless, India is the loser.”

India-Pakistan : Budget Quirk

Jayanta Roy Chowdhury

If there is one figure which is repeated in every single Indian budget document since the 1948 budget framed by the then finance minister late R.K. Shanmukham Chetty, it is a debt of Rs 300 crore which Pakistan is supposed to owe India.

The figure is never written off nor padded up with supposed interest due as any banker would do if a debtor fails to cough up moolah on time. The current finance minister, Arun Jaitley, will be no exception in mentioning this tiny debt in his Receipts Budget as a liability of the central government.

Old timers in North Block, home to the finance ministry admit that this a sum which India is unlikely to ever recover but say they would not write it off as this could give Pakistan an unfair advantage during any “future financial settlement” as Pakistan too shows a sum Rs 580 crore as dues against the Government of India !

This little quirk in the  history of India’s budget making is a relic of a pact that India signed with her western neighbour and twin soon after Independence in December 1947.  While the legendary Shanmukham Chetty, an economist-turned politician who had served as Diwan of Cochin earlier, signed on behalf of India, lawyer-turned civil servant Malik Ghulam Mohammed signed for Pakistan. 

Independent India's first Cabinet 

Undivided India as on August 14, 1947, had more liabilities than assets. So the two sides decided they would while dividing assets also divide the liabilities and agree to pay each other the difference between the two. 

A complex piece of calculation figured out that all outstanding debt and obligations including Post office deposits, National Savings certificates, Government Provident Fund etc., worked out the princely sum of Rs 3,300 crore. 

While the assets of the Government of Unidivided India which included the Railways and the Posts and Telegraphs, the Security Printing Press, the Central Government’s  irrigation works, the Port of Vizagapatnam and Lutyen’s New Delhi; besides buildings, stores and equipment of the Defence Services as well as cash balance of RBI and subscriptions to the International Monetary Fund and the World Bank, amounted to Rs 2,800 crore.

After much haggling the two sides agreed that Pakistan’s share of this debt would be Rs 300 crore  to be payable to India.  Chetty in his 1948 budget speech made to the Constituent Assembly said :” On a very rough estimate this debt is likely to be of the order of Rs. 300 crores and the rate of interest may be near about 3 per cent. Pakistan’s total debt is to be repaid in Indian rupees in fifty annual equated installments for principal and interest. As a measure of assistance to the new Dominion in its earlier years it has been agreed that the first repayment should commence only in 1952.” 

Though the late C D Deshmukh, another legendary finance minister, claimed a credit of Rs 9 crore in his budget of 1952 as payment from Pakistan towards this debt, no money actually came in. 

Pakistan on its part refuses to pay up and instead has come up with a counter claim that its bigger neighbour owes it Rs 580 crore instead. This claim is similarly reflected in The state Bank of Pakistan's annual documents since July 2, 1948. just a few days after it came into being!   

Pakistani accountants argue that India owes the nation Rs 410 crore in gold bullion, Rs 50.16 crore worth of British Sterling Pounds and the remainder in Indian notes and coins as its share of the money held by Reserve Bank  on August 15, 1947.

Luckily for the two sides, Bangladesh which as a successor state to United Pakistan and who could well claim at least half of whatever notional amount India allegedly owes Pakistan or Pakistan owes India, has not made any counter claims to muddy the waters ! 

Finance Minister Shanmukham Chetty