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.

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.”

India's Iron Ore and China's Growth

India may well reconsider an option it rejected exactly ten years ago - Banning export of iron ore unless it’s converted into a value added metal. A move which Indonesia has endorsed over the weekend, forcing global miners to announce plans to set up refineries in the mineral rich but heavy industry-poor  South East Asian economic powerhouse.  
Top officials in the steel ministry and planning commission who had a decade back argued that allowing Bellary-Hospet’s mineral riches to be exported to China without any value addition, meant losing out on job creation at home besides reducing export incomes which could come when ore is refined into costlier iron pellets or steel, had their ` Vous a dit si’ or `I told you so’ moment.
Top officials who said they would study Indonesia’s move to see how President Susilo B Yudhoyono’s move helps grow investment and export valuations, had ten years back opposed removing a cap on sale of high grade iron ore lumps and fines from Bellary-Hospet and Bailadilla mines. They had, instead, presented the then NDA Government with an alternate note which proposed encouraging those who wish to import ore from India to set up iron pellet making or steel-making capacity here.
Officials had also argued that ore exports, to China, if allowed, should be linked to barter deals for high grade coal from that nation as India was projected to spend huge amounts on import of in future years. Neither of these arguments were paid much heed to, instead the cap was lifted. The result : 1) India 's export of iron ore, sold at a tenth of the price of steel, zoomed by a 100 per cent in just 3 years to 100 million tonnes; 2)  By 2012-2013, India was spending $ 18 billion in importing 137 million tonnes of coal compared to a couple of million dollars, ten years back.

After the Congress-led UPA government took over a rethink on the old policy started. However, once again the mining lobby won the day and ultimately, the government continued with its policy of allowing ores to be exported. Rules said only fines and lumps with low grade iron would be allowed to be exported. However, the reality which later Supreme Court appointed committees exposed was that high grade iron ore kept being shipped out of the country, with 80 per cent of it headed towards China. 
China’s steel-making capacity based on iron ore imports from India, Indonesian, Australia and Brazil, doubled to 800 million tonnes a year in these 10 years. Imports from India and Brazil were especially prized as these were of high grade ore with iron content of near or above 60 per cent.
In sharp contrast, India's steel making capacity increased from 48 million tonnes in 2004 to around 78 million tonnes in 2014, a fraction of the amount of steel churned out by China, a nation with very poor iron ore resources.
Needless to say economists have long been able to trace a direct correlation to steel production and usage to a country's per capita income growth.

When current Himachal Pradesh chief minister Vir Bhadra Singh, took over as steel minister in 2009, he renewed the battle arguing in notes that India is a  “major producer of iron ore, much of which we export at low price  ... we should rather work towards a policy of encouraging value added exports which fetch us better revenues."
This was reiterated again last year by steel minister Beni Prasad Verma who argued that it "makes more sense to push exports of steel valued at $ 800-1000 per tonne rather than raw materials valued at $100-120 per tonne.”
Ultimately, it was the courts which stepped in to stall ore exports, but not on policy considerations but rather to stop rampant, illegal mining which could degrade the environment.  The result, point out steel ministry officials, has been rather good for value-added iron pellet exports. While iron ore shipments declined drastically with total ore exports likely to be less than 30 million tonnes this financial year, compared to 62 million tonnes in 2011-2012. Iron pellet exports witnessed a boom,  with most of it headed towards China. Exports of pellets which are the costlier replacement for ore in steel making, are likely to be nearly 800,000 tonnes in this financial year or 20 times exports in the previous 2012-2013 year.

India's Budget bets on Growth

Who will be the PM?

For a man, whom many see as Congress’s possible Prime Ministerial candidate next year, finance minister Palaniappan Chidambaram’s 8th budget was without what markets call the wow factor – nothing to perk up business, nothing much to make the middle class voters happier.

However, as in any pre-election year budgets, Chidambaram’s budget will try to spend its way out of the mess the Indian economy is in, by splurging on an all time record budget of Rs 16.65 lakh crore, a 16.5 per cent increase over the current year’s spending. In dollar terms India’s budget spend of $ 314 billion equals one and a half times’the entire economy of neighbouring Pakistan.

India is expected to grow by 5 per cent this fiscal year, far lower than the 8-9 per cent GDP growth it posted for most of the last ten years. GDP figures released today for the October-December 2012 quarter were a dismal 4.5 per cent, putting pressure on the government to opt for aq tough budget which aims to grow the economy “out of the trough”. Chidambaram in his budget speech, underlined his plan as one of “unhesitatingly embrac(ing) growth as the highest goal” to manage what he termed as “challenged” Indian economy.

India's Rich will have to pay more tax

New taxes including a `Super Rich’ surcharge on individuals earning more than Rs 1 crore ($185,000) a year and firms earning more than Rs 10 crore ($1.85 million), applied in token deference to an idea floated by Left-wing economist Joseph Stiglitz and nearer home by India’s leading philanthropist Azim Premji, and higher revenues churned out by an economy which the government hopes will grow at a faster pace of over 6 per cent are expected to fund the splurge. As also a record borrowing plan which hopes to raise Rs 5.42 lakh crore from the market.

There were however prudent cues to satisfy global credit rating agencies such as Moody’s and Standard & Poor, who had been threatening to downgrade the slowing down Indian economy beset with widening fiscal deficit, widening trade deficit and falling rupee.

India wants more butter now

Subsidies will be pared from Rs 2.31 lakh crore next year from the bloated subsidy bill of Rs 2.57 lakh crore which the government ran up this year, a compression of 10 per cent on what many see as populist spending on subsidising auto-fuels, food and fertilisers. The main axe will be felled on oil subsidies which is being reduced 26.8 per cent. Even the government’s borrowing plan has been kept `modest’ with an increase of about 4 per cent over amount borrowed this year.

Spending on non-economic activities such as defence will be kept down. For the first time in years, increase in defence spending was kept at just 5 per cent. Defence spending went up to Rs 2.03 lakh crore or $ 38 billion (for comparisons, a fifth of Pakistan's economy), from the Rs.1.93 lakh crore outlay for 2012-13.  

However, the lack of any specific spark in the budget and higher taxes on corporates and MNCs left Chidambaram's cheer-boys in India Inc, not so happy, which they made clear in interviews on television channels.  Bombay Stock market's Sensex fell 1.52 per cent or by 290 points. Markets seemed to have been spooked by the finance minister’s clarificatory amendment introduced as part of the budget, that residency would not be enough to get the benefit of double tax avoidance treaties with tax havens like Mauritius to avoid paying tax in India. Businesses and investors in India would also have to prove that beneficiaries of the investment funds were residents of the tax havens. (Something he said would be addressed the very next day, leading to a modest claw-back in the BSE )

Sensex went down after the budget

India’s leading commodity market, MCX, too reacted negatively to a 0.1 per cent Commodity Transaction Tax, re-introduced after being brought in and rolled back 4 years back, on non-farm products. The metals index went down by 0.3 per cent. Interestingly, perhaps fearing calls for a similar roll-back, the finance ministry has however not budgeted for any tax earnings from this score.

Bringing in more taxes home, is very much part of Chidambaram’s growth plan with revenues expected to grow by 19 per cent, with services tax being most buoyant, growing at 35.7 per cent, possibly on the back of a tax amnesty announced for those evading service tax. 

The government is also betting on more disinvestment earnings. Against this year’s Rs 24,000 crore expected to be realised from disinvestment, the government hopes to earn a a specific rs 55,814 crore from share sales this year, including possibly from selling the government’s rump stake in Hindustan Zinc Ltd. Similarly the government has set an ambitious target of raising Rs 40,000 crore from telecom spectrum auctions and one time spectrum fee despite spectrum auctions having been a flop this year. 

Road Eastwards

To spur investment, the Harvard educated, right-wing finance minister announced that plan spending on large public investments on highways, railways, ports, airports, power transmission lines etc., will be raised to Rs 55.5 lakh crore from Rs 42.91 lakh crore spent this year, an increase of some 29 per cent on actual spending. Firms investing more than Rs 100 crore would get 15 per cent extra tax benefits, infrastructure debt funds would be encouraged to fund ambitious long term plans and the World Bank and ADB roped in to help build an expressway linking India’s North east with Myanmar and thence on to Thailand, Malaysia and Singapore, India’s big markets in the Asean. 

Two new industrial corridors or expressways with industrial zones on either sides, one linking Bangalore with Chennai and another Bangalore with Mumbai, and new mega ports at Sagar in West Bengal and Andhra Pradesh were also among projects with which Chidambaram hopes to spur growth.

The bet will however be on growth and if that does not come about then Chidambaram’s gamble of higher revenue earnings could well fall by the way and the man who gave dream budgets to India Inc., some years back could well be the man who scripted a nightmare for the country’s economy already overburdened by high inflation, slack demand and rising debt.

Reforms & Dismal GDP Forecasts



Amul ad poking fun at the Sensex

India’s dismal early forecast for 2012-2013 financial year’s economic growth, at a decade low of 5 per cent, should have meant glum faces at North Block, home to the country’s finance ministry.

However, strangely, not too many of the Mandarins who work in that cavernous red stand-stone Raj-era building seem too worried, rather they seemed perversely pleased. Probably, because the figures could actually come in handy for finance minister P.Chidambaram and his economist boss, Dr Manmohan Singh, when the duo argue for tough reform measures with cabinet colleagues and Congress party leaders, who ahead of crucial general elections early next year, want to see more populist measures and less of belt-tightening reforms.

Data released by the Central Statistical Organisation places growth forecasts far below an earlier 5.5 per cent prediction by the Reserve Bank and an optimistic 5.7-5.9 per cent target set by the finance minister P.Chidambaram and far average growth rate of 8-9 per cent, achieved through the last decade.

Singh-Chidambaram duo

The Singh-Chidambaram duo will have the advantage of this gloomy picture to force reluctant colleagues into agreeing to slash oil subsidies and fat defence budgets as well as steering opening up of the economy to more foreign investment and cutting red tape in doing business. 

The schism within the cabinet had often spilled out in the open in the last few months, with tough decisions like subsidy cuts being pushed on the backburner several times at cabinet meets, before being finally accepted. Spats over auctioning gas blocks between petroleum and defence ministries and opening up coal mines between steel and environment ministries still remain unresolved despite the Prime Minister chairing meets to sort out such rows.

No wonder Indian industry has been talking of policy paralysis.

To make things tougher for the Congress leadership, BJP’s poster boy and almost certain prime ministerial nominee Narendra Modi, has begun selling the `Gujarat development model’ with slogans like “minimum government and maximum governance” and "inculcate skill, scale and speed to compete with China”.  

Singh and Chidambaram desperately need now to show that they do have a `Delhi  development model’ up their sleeves and that too speedily!

Narendra Modi sells Gujarat Model

Yesterday’s data forecast said farm sector could grow by just 1.8 per cent in 2012-2013, compared with 3.86 per cent in the previous year, while manufacturing could slow down to 1.9 per cent from 2.7. This is the slowest pace of growth for the manufacturing in the past 14 years. Even the services sector which for the better part of the last decade grew in double digits, could grow by 8.6 per cent.

In the first half (April to September) of the financial year, the economy grew at 5.4 per cent, today’s data indicates that the economy may have grown by just 4.2 per cent in the quarter ending December 31, 2012 and may grow by 5 per cent in the current January to march quarter.

This data points to the desperate need to bring in reforms to boost infrastructure and manufacturing growth. Industry chamber Ficci has already flagged: “Quicker implementation of the National Manufacturing Policy, speedier decision making under the aegis of the Cabinet Committee on Investments, ushering in the Goods and Services Tax regime, passage of the insurance and pension bills in the next session of the Parliament and bringing greater competition in the coal mining sector” as ways to get ahead.

The industry wish-list more or less tallies with Chidambaram’s reforms-to-be-taken-up list, with additions like less largesse on populist subsidies and tax reforms which help Indian firms stand up better to foreign competition.

Finance Ministry officials want to redraw duty structure so that domestic capital goods, electrical gear, telecom industries and even steel which have been facing import pressure can again revive.

Proposals in the offing would place higher duties on imports in these sectors, while reducing duties on raw materials such as iron ore, coal as well as components which go into making electrical or telecom gear and having a tax structure which encourages domestic telecom and electric equipment.

India had drawn up a tax structure which imposed high duties on finished cars imported into the country, less taxes on semi-finished cars and far lower taxes on cars which were at least 70 per cent indigenous. A similar structure is being looked at for the telecom equipment industry.

However, what industry captains really want is ground level reforms such as setting up a coal regulator. India has long been debating setting up an independent coal regulator as besides the single monopoly coal producer – Coal India – a large number of firms have been given captive coal blocks and some have been allowed to trade surplus production.

Amul ad on Coal scam

The government is also expected to step up the gas and put up some 54 coal mines up for auction to a limited field of buyers –iron and steel factories and cement and electricity plants - over the next four months. The auctions, speeded up by allegations of scams in earlier allotment of mines, are expected to yield precious revenues to state government coffers and much needed coal to fire coal-burning furnaces and power plants.  

The Government has cut base prices for another round of telecom auctions, which should bring in some more money into government coffers and at the same time give telecom firms more radio-waves to base future mobile connection sales. India has about 935 million mobile connections for 1.2 billion people, and unless better connectivity and services can be ushered in, growth may soon flatten-out after slowing down to just 2.25 per cent on a year-on-year basis.

Officials say Prime Minister Singh is also pushing them to clean up a Direct Tax Code, which could jiggle tax rates, while enlarging the tax base. The DTC is expected to simplify tax laws, lead to less legal disputes over taxes and ultimately bring better compliance. Industry says any tax reform measure always helps business grow and bring more of the `parallel’ economy over-ground, with more businesses declaring their tax liability. 

However, two reform measures promised to industry at large and foreign investors in particular could remain in doldrums unless the government does a better job at floor management inside the parliament.

In the last parliament session, the government was unable to go ahead with voting on the insurance bill as no agreement could be reached in back-room parleys with opposition and supporting parties on a clause which seeks to raise FDI to 49 per cent.

Officially the debate will be shifted to the next session of Parliament. The BJP had earlier agreed to help pass the insurance bill, provided the foreign investment cap was retained at the current level of 26 per cent.

Linked to this is the fate of the pension regulator bill, which gives teeth to the regulator and allows foreign investments into pension funds. The FDI limit in pensions is linked to the limit in insurance firms. It could be taken up separate from the insurance bill and passed, allowing foreign pension funds to buy up to 26 per cent stake in Indian pensions for starters, but a final call on this could depend on how the voting numbers stack up in the coming Parliament session.

Super Thursday Reforms Burst

Manmohan Shining

The Congress-led Government unleashed a Super Thursday  reforms burst – ranging from raising the cap on foreign investment in insurance, allowing foreigners to invest in pension funds, allowing options in commodities markets to clearing a Competition law, a new Companies law which would see more independent directors on corporate boards and clearance to the country’s 12th five year plan.
The rash of cabinet clearances comes on the back of a pull-out by former ally Trinamool Congress which had among other things opposed plans to raise foreign investment in insurance firms to 49 per cent and to allow foreign-held equity in pension funds besides introduction of options in commodity trading. The break had come when the Manmohan Singh
However, passing the twin financial sector bills- Insurance Amendment bill and Pension Regulator’s bill – will be a tough job given the fact that the UPA government does not enjoy a majority in the upper house.
“We will now discuss the passing of the bills with principal opposition parties,”  finance minister P.Chidambaram said cryptically after the reform moves were cleared by the union cabinet today.
The principal opposition party BJP had agreed to help pass the insurance bill, provided the foreign investment cap was retained at the current level of 26 per cent.
With this agreement junked tonight,  BJP made it clear that it would oppose the bill. The UPA holds 95 seats in the upper house which has a strength of 245. If it can ensure the votes of BSP, SP and the RJD together have 27 members, then it can sail through with the bill.
Otherwise, the only way the government can get over this hump is to declare the bill, a money bill which would necessitate passage by just the Lok Sabha. Money bills, which vote in new taxes or cesses or allocate expenses from the Consolidated Fund of India, cannot be held back by the upper house under the Indian constitution.
Officials said as the bill stands today, the Insurance Amendment bill cannot be defined as a money bill, which would mean it would have to be passed by both houses of Parliament. However, the original IRDA Act which the new bill seeks to amend was a money bill as it voted for a cess to be imposed on insurance firms. Law ministry officials said if the new amendment bill is technically declared a money bill because of the cess element, then the Government could hope to by-pass Rajya Sabha, where the UPA is in a minority.
Finance ministry officials clarified that the cap on foreign investment will be raised to 49 per cent, including both foreign direct investors as well as foreign institutional investors.  Officials also said that the foreign investment cap will not apply to PSU insurers where foreign direct investment was not yet allowed.
The pension bill will have a clause which will state that the foreign investment cap in that sector will follow rules in the insurance sector. Which means if the insurance bill is passed by Parliament, then the foreign investment cap in the pension sector would also be 49 per cent, otherwise it would be set at 26 per cent.
“I hope the management of consensus in Parliament is successful … the government is doing its Dharma, now it’s up to Parliament,” said plan panel deputy chairman Montek Singh Ahluwalia.
The IRDA Amendment Act already stands introduced in Parliament and a standing committee has given a report on it which recommended that the FDI cap should not be raised but agreed to go along with other changes. The government was supposed to study the recommendations and re-introduce the bill with changes it thought were needed, but had dithered till now for want of a consensus.
The re-introduction will not necessitate the bill being sent to a standing committee. However, the Lok Sabha could, if it so chooses send it back to the committee for a fresh study. Officials said this was likely to be a last ditch strategy, if the government was unable to muster the majority needed to clear the bill.
The other changes which will be brought to the IRDA ACT, call for allowing Lloyd’s of London to open an insurance trading floor in Mumbai, somewhat akin to a stock market, and to permit foreign reinsurance firms such as Swiss Re and Munich Re to enter India besides giving a green signal to public non-life insurance companies to raise capital by selling minority stakes. Changes which are not being contested by any party except the Left parties.
The pension bill too faces the same situation. The BJP opposed raising the foreign investment cap beyond 26 per cent, but it was the Left and Trinamool which objected to the very bill itself with its ingrained logic of allowing private funds to manage pensions.
Similarly, it was the Trinamool which nixed another step taken by the cabinet today – introduce options trading in the commodity market. A step which is in line with the thinking of the Left front against which it is pitted in West Bengal.
Options trading allows a trader to buy or sell a commodity at a future date at a price which he expects will rule around that time.
In July, Trinamool Congress Supremo Mamata Bannerjee had forced the Prime Minister to defer the move citing fears that it could raise farm produce prices.
Options trading and even trading in commodity exchanges have  in the past been blamed for speculative price spirals but the cause and effect was never clearly established. However, it has always been a popular villain, in Left narrative, something which the Trinamool Congress follows keenly, despite political differences.

Singh - Underachiever or just plain old Hamlet?

A lot of people are unhappy that Prime Minister Manmohan Singh has been described as an `Under-achiever’ by the Time magazine. Well, I think that is an understatement.

The only problem is that Time describes the hapless Prime Minister as an under-achiever because he has not done what the magazine and its backers would like him to do, such as clear  Wal-Mart’s proposal to tap into the $ 600 billion Indian retail market, give American and European banks the rights to buy up Indian banks.   

I believe the poor man is an under-achiever because he can’t make up his mind on most issues.

As long as Pranab Mukherjee was in his cabinet, he would outsource all the fire-fighting such as handling the Telengana mess* or wrestling with a global meltdown, to the older man, once his boss. While Singh took on larger, yet safer roles – talk peace with Pakistan, talk about global geo-strategy with Barack Obama.

Even there he would often backtrack after his ministers told him they could not go along with him. For instance, on Siachen*, Singh wanted a demilitarised peace park. That park went up in smoke, when his ministers and Generals warned him that Siachen was not just an Indo-Pak affair but had a China looking on. One wrong move, they warned, could see the People’s Liberation Army marching in, as the Indian Army pulled out of the strategic icy Himalayan wasteland, in his `misplaced’ enthusiasm to bring peace to the sub-continent.   

When Mukherjee, a man groomed by the Socialist era Premier Indira Gandhi moved on to try his luck as President of India, many expected Singh would come into his own. His aides suggested as much, talking about broad sweeping reforms he might bring.

Well, the problem with that has been that Singh hasn’t yet shown much stomach for hard nosed decision making.

One problem has been that “the Prime Minister and the government as a whole faces the dilemma of Caesar’s wife – everybody knows she is honest but she has to be seen as honest – that means no one wants to take tough decisions such as telecom pricing,” say top officials.

This, saw the government first appointing Agriculture Minister Sharad Pawar as head of the Empowered Group of Ministers on telecom to fix the reserve price for an auction of 2G spectrum. However, the worthy recused himself post haste from the job. Though he claimed that he was excusing himself as allegations had surfaced of his links with telecom firms and he did not wish to give detractors an opportunity to drag him into another controversy, sources said that the Maratha strongman did not fancy being a “fall guy” in the spectrum pricing controversy.

Last week, the home minister has been given the job but asked not to take a final call on spectrum pricing, which will be decided by the full cabinet !

The issue here is that a decision in favour of high reserve prices, set in competition with each other by the department of telecom and Telecom regulator, could kill the `Golden Goose’ and scare off potential foreign investors in the telecom sector, leaving the business in the hands of existing players. While a decision to lower prices is sure to arouse cries of foul from Government auditors and opposition MPs.

The other problem is that the Government wants to address too many constituencies. Just like the man in Aesop's fables, who could not make up his mind whether to let the ass carry his load and be seen as insensitive or to be sensitive and carry the load himself.

 On the Vodafone tax case, the prime minister’s office seems to be signaling that  it is against retrospective taxation. Which should please corporates who are dead against this.

(The Union Budget’s finance bill this year, had a retrospective amendment which clarifies that the Income Tax laws of 1962 meant to tax any deal where the asset underlying the sale or purchase is in India, even if the deal is struck elsewhere.

This was done after Supreme Court had ruled this January, that the Government of India had no jurisdiction to tax the share sale done by a Hong Kong registered shell firm owned by Hutchison to Vodafone conducted in the tax haven of Cayman islands. The government was asked to return  Rs 11,000 crore in presumptive taxes with 4 per cent annual interest.)

However, no formal communication has been sent to North Block to withdraw the legislation or to not serve tax notices based on it, leaving many lawmakers and taxmen, who feel they have a legitimate case in seeking taxes which they feel have been deliberately not paid by using a veil of corporate shells, confused.

The advantage of course goes to the opposition in such a situation. BJP leader and former finance minister Yashwant Sinha took the opportunity to attack the Prime Minister directly, stating Singh was an overrated economist and underrated politician.

 "Manmohan Singh has always acted as a consultant to the government, being a Prime Minister for eight years and a Finance Minister for some years. Who brought this situation? It's absolutely wrong to say it is a global mess, it's a domestic mess created by the government," Sinha said.

Luckily for the ruling Congress Party, the opposition can’t really push home its advantage. Its shop is in such a desperate mess, with bitter in-fighting and trading of charges of corruption, that even Singh playing the role of Hamlet does not kindle much favour for them among Indian voters.

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*Telangana mess - Section of people living in the backward Telegana region of the state of Andhra Pradesh have demanded a separate state carved out of Andhra, within the Union of India. A number of flip-flops on the issue of a separate state,by the ruling Congress Party , have alterternatively raised or dampened hopes for setting up of the state.

*Siachen - A glacier in Northern Kashmir, fortified by the Indian Army since the 1980s after Pakistan gave permission to several expeditions by British, Japanese and other mountaineers to  traverse the glacier in an apparent move to lay claim on the strategic Glacier. Siachen is surrounded on two sides by Pakistan-held Kashmir, Chinese-held Kashmir and on two more by India's Leh district of Jammu & Kashmir. Since 1984, when Pakistan launched its first attack on Indian posts in that icy glacier, dubbed the highest battleground in the world, the two neighbours have been at odds over the glacier and the Saltoro range of mountains, immediately to the west of the glaciers.

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.